The Government Finance Officers Association (GFOA) has long been on record encouraging state and local governments to obtain an annual independent audit of their financial statements.1 Governments desiring to issue debt typically include these audited financial statements in their offering statement. Likewise, GFOA encourages every state and local government to make its annual comprehensive financial report, including the audited financial statements, available on its website.2

It has not always been clear to all parties concerned what the independent auditor’s role should be, if any, when previously audited financial statements are subsequently included in an offering statement. Likewise, some auditors have been reluctant to see financial statements they have audited presented on a website that contains unaudited information.

Under auditing standards generally accepted in the United States of America, the independent auditor is only deemed to be “involved” with an offering statement if two conditions are met: (1) the auditor’s report is included or incorporated by reference in the official statement, and (2) the auditor performs one or more specific activities specified in the auditing standards.3 For example, some audit firms, as a matter of policy, insert a provision in the audit contract that requires the auditor’s prior approval before audited financial statements can be reproduced in an offering statement.

Even when the independent auditor is deemed to be “involved” with an offering statement, the auditor has no obligation to perform any procedures to corroborate unaudited information contained in the offering statement. Rather, the auditor is required only to read any unaudited information contained in the document and consider whether that information, or the manner of its presentation, is materially inconsistent with information appearing in the financial statements, and to consider whether any subsequent events or subsequently discovered facts would require a revision to the auditor’s report in accordance with AU-C Section 945, Auditor Involvement with Exempt Offering Documents.4 In the case of audited financial statements appearing on a website, the auditing standards are quite clear that the independent auditor is not responsible for other information contained on a website.5

1) Having paid for the independent audit, a government owns the audited financial statements and should feel free to use them in any appropriate manner.

GFOA believes that state or local governments, as a general rule, should be free to publish their audited financial statements (including the report of the independent auditor) as they deem appropriate (e.g., incorporated into an offering statement, or posted on the government’s website), without having to obtain prior permission from the auditor, provided that all of the following conditions have been met:

• The independent auditor’s report accompanies the same complete set of financial statements for which an opinion was rendered;
• The financial statements are not used in a potentially misleading manner; and
• No material subsequent event has occurred that might render the financial statements potentially misleading.

2) The independent auditor should not be permitted to create an essentially artificial “involvement” with audited financial statements included in offering statements or posted on the government’s website simply by inserting a clause to that effect in the audit contract.

Auditing standards generally accepted in the United States of America do not require state and local governments to accept a clause in their audit contract requiring prior permission from the independent auditor before the audited financial statements may be included in an offering statement or posted on the government’s website. GFOA urges state and local governments to resist the inclusion of such a clause in their audit contract. Instead, GFOA encourages governments to include language in their audit contracts that explicitly recognizes the government’s ongoing right to use the audited financial statements without first seeking the auditor’s permission.6 GFOA does not object, however, to including a clause in the audit contract that would require  governments to clarify in their offering statements when the auditor is not involved.7 Likewise, GFOA has no objection to the independent auditor inserting similar appropriate clarifying language in the engagement letter.8

3) When the independent auditor actually does happen to become involved with audited financial statements included in an offering statement, a state or local government should take steps to avoid unwarranted delays and unjustified costs.

GFOA recommends that state and local governments and their independent auditors reach a clear understanding during the audit contracting process, from the preparation of the request for proposals for audit services through the final audit contract, regarding the potential for auditor “involvement” with future offering statements. The two key elements of that understanding should be as follows:

• A maximum time should be set during which the independent auditor would be required to read the unaudited material accompanying the audited financial statements, and
• Because the amount of additional work required of the independent auditor would be minimal (i.e., simply reading the material that accompanies the audited financial statements, and performing limited subsequent events testing), the additional fee, if any, should be minimal as well.

4) The audit contract should clarify that the government is free to post its audited financial statements on its website.

GFOA recommends that the audit contract make clear that the government is free to post its audited financial statements on its website without seeking or obtaining permission from the audit firm.

Notes: 

This advisory was previously titled Including Financial Statements in an Offering Statement: The Auditor's Role.

1. GFOA recommended practice on GAAP Financial Reporting as a Base Line for State and Local Governments (2006).
2. GFOA recommended practice on Website Posting of Financial Documents (2009).
3. Those actions are 1) assisting in preparing information included in the official statement, 2) reading a draft of the official statement at the government’s request, 3) issuing a comfort letter or similar letter in accordance with AU-C 920, Letters for Underwriters and Certain Other Requesting Parties, 4) participating in due diligence discussions with underwriters, placement agents, broker-dealers, or other financial intermediaries in connection with the official statement, 5) issuing a practitioner’s attestation report on information relating to the official statement, 6) providing written agreement for the use of the independent auditor's report in the official statement, and 7) updating an auditor’s report for inclusion in the official statement. (AICPA, State and Local Governments (2018), 18.08).
4. AICPA, State and Local Governments (2018), 18.21.
5. AICPA, Professional Standards, AU-C Section 720.A4. “For purposes of GAAS, other information does not encompass, for example… Information contained on the entity’s website.  Websites are a means of distributing information and are not, themselves, documents containing audited financial statements.” Thus, auditors are not required by AU-C section 945 to read information contained in websites, or to consider the consistency of other information (as that term is used in AU-C section 720) in websites with the original documents.
6. For example, “Use of or Reference to Audited Financial Statements. When delivered to the [name of government], the audit reports and financial statements produced under this contract are public records and will be used (a) to fulfill the requirements of continuing disclosure under SEC rule 15c2-12, (b) as inserts or incorporated by reference in offering documents issued by the [name of government], and (c) for any lawful purpose of the [name of government], all without subsequent consent.”
7. For example, “(Name of firm), our independent auditor, has not been engaged to perform and has not performed, since the date of its report included herein, any procedures on the financial statements addressed in that report. (Name of firm) also has not performed any procedures relating to this official statement.” (State and Local Governments (2018), AICPA, Chapter 18.29).
8. For example: “If you decide to include, publish or otherwise reproduce the financial statements and our report thereon at a date subsequent to their original issuance, such as for inclusion in a bond offering, prospectus or similar document, our firm is presumed not to be involved with such document, and we have no obligation to perform any procedures with respect to such document. If, however, management takes certain actions, such as requesting a written consent from us prior to including our audit report in such an offering document, our firm then becomes involved with the offering and in accordance with professional standards, we will be required to perform certain limited procedures with respect to unaudited information contained in the document. Fees for reissuance or inclusion of our audit report in such a document will be based on our standard hourly rates.”