New guidance on the letter of transmittal.
The Governmental Accounting Standards Board's Statement No. 34, Basic" Financial Statements--and Management's Discussion and Analysis--for State and Local Governments, introduced management's discussion and analysis into the CAFR. Since MD&A and the letter of transmittal share many similarities, the introduction of the former created the potential for redundancy. To mitigate this risk, the GASB took pains to discourage governments from duplicating in the letter of transmittal information already provided in MD&A. (2) Likewise, GFOA modified its recommendations concerning the contents of the letter of transmittal in the 2001 edition of the GAAFR.
Recently, GFOA's Committee on Accounting, Auditing, and Financial Reporting reviewed the recommendations in the 2001 GAAFR in the light of the experience gained by governments that have already implemented GASB Statement No. 34. As a result of that review, the Committee decided both to modify and expand those recommendations.
The 2001 GAAFR proposed that the letter of transmittal contain four basic elements:
* Formal transmittal
* Profile of the government
* Information useful in assessing the government's economic condition
* Awards and acknowledgements
The Committee continues to believe that it is appropriate to organize the letter of transmittal based on these four elements. At the same time, it believes certain modifications and clarifications would be helpful for each of the first three elements.
Formal Transmittal. The 2001 GAAFR recommended that the letter of transmittal, consistent with its title, begin by formally transmitting the CAFR to its intended users. It was recommended that formal transmittal include each of the following items:
* Citation of relevant legal requirements fulfilled by issuing the CAFR
* Management's acknowledgement that it is responsible for the contents of the CAFR
* Mention of the comprehensive framework of internal controls that allows management to meaningfully assume responsibility for the contents of the CAFR
* Discussion of the role of the independent auditor in providing reasonable assurance that the information contained in the financial statements can be relied upon
* Reference to MD&A
The Committee still believes that the letter of transmittal should begin by formally transmitting the CAFR to its intended recipients, and that this discussion should contain all five of the items just mentioned. At the same time, the Committee voiced real concern that excessive "boilerplate" at the beginning of the letter of transmittal could easily discourage potential users from reading the rest of the letter. Accordingly, the Committee has decided to urge financial statement preparers to intensify their efforts to streamline this initial portion of the letter of transmittal.
Profile of the Government. The 2001 GAAFR recommended that the formal transmittal of the CAFR be followed by a brief profile of the government. That profile was to include:
* A description of the government's structure and of the types of services it provides
* A discussion of the government's geography, population, and history
* A brief mention of any component units included in the report
* A brief mention of any potential component units excluded from the report
* A description of the budget process, including the budget calendar and budgetary responsibilities
* A description of the legal level of budgetary control.
The Committee has come to believe that a detailed description of the budget process is not germane to an understanding of the information presented in the CAFR. Therefore, it recommends that financial statement preparers limit themselves to a generic discussion of the budget process that would not include a discussion of either the budget calendar or budgetary responsibilities.
In addition, the Committee is troubled that the description of the legal level of budgetary control often is presented in a highly technical fashion that makes it difficult to understand for many potential readers of the letter of transmittal. Consequently, the Committee plans to urge financial statement preparers to greatly simplify their description of the legal level of budgetary control.
Information Useful in Assessing a Government's Economic Condition. The third element of the letter of transmittal is the presentation of information useful for assessing a government's economic condition. As explained in the Blue Book, "the concept of financial position focuses on a government's existing resources and claims on those resources," whereas the concept of economic condition "focuses on both existing and future resources and claims on those resources." (3)
The 2001 GAAFR mentioned six specific topics that might be relevant in assessing a government's economic condition:
* The local economy
* Long-term financial planning
* Cash management and investments
* Risk financing
* Pension benefits
* Other postemployment benefits
The Committee chose to modify this recommendation in several significant ways, as follows:
By expanding the discussion on the local economy to encompass financial trends. The Committee believes that the best way to provide useful information on the local economy is to focus on financial trends over the last five to 10 years.
By enhancing the discussion of long-term financial planning. The Committee believes that governments should explain how various types of long-term financial planning (capital budgeting, for example) may shed light on specific aspects of their current and future financial position. For example, a government may wish to explain that it is deliberately building up fund balance in the general fund because its capital budget calls for future construction to be advance funded rather than financed by debt. Similarly, a government could refer to its long-term revenue and expenditure forecast to explain how it plans to deal with an unusually low level of unreserved fund balance in the general fund. Also, the Committee plans to encourage governments to describe the anticipated long-term operating impact of capital construction currently in progress (such as increased costs to operate and maintain a new facility).
By including a discussion of relevant financial policies. In 2001, GFOA issued a recommended practice on financial policies. That recommended practice encouraged governments to establish a comprehensive set of financial policies as guidelines for the budget process. The Committee believes that the letter of transmittal should describe situations directly affected by one or another of those policies, such as the application of one-time revenues of the current period.
By including a discussion of major initiatives. The budget document typically highlights major initiatives of the fiscal year. The Committee believes that these initiatives also should be addressed in the letter of transmittal to the extent that they are expected to affect future financial position.
By eliminating cash management, risk financing, pension benefits, and other postemployment benefits as topics in their own right. The Committee believes that specific topics such as cash management, risk financing, pension benefits, and other postemployment benefits should be discussed in the context of one of the previously mentioned topics rather than as separate topics in their own right. For example, a government sponsoring a pension plan that is significantly underfunded could address the potential future impact of this under-funding as part of its discussion of long-term financial planning. Likewise, an unusually high exposure to risk might be best dealt with as part of a discussion of the government's financial policies. Furthermore, there would be no reason to address any of these specific topics unless they were expected to have a significant impact on financial position. Thus, a significantly underfunded pension plan would likely merit discussion, whereas a well-funded plan probably would not.
Other Recommendations. In addition to the recommendations just described, the Committee reiterated its position that the letter of transmittal as a whole should be kept as short as possible consistent with its intended purpose. The Committee also is of the opinion that most governments could profit from making greater use of charts and graphs to communicate financial information to readers.
The changes described in this article will be incorporated into the next edition of the GAAFR. At that time they also will be incorporated into the checklists used for the GFOA's Certificate of Achievement for Excellence in Financial Reporting Program. Until then, governments are encouraged to modify the letter of transmittal to reflect the new guidelines, but are not required to do so by Certificate Program policy.
GFOA Recommendations on the Contents of the Letter of Transmittal Basic Elements of a Letter of Transmittal Recommended Change Formal Transmittal * Streamline discussion without altering basic contents Profile of the Government * Eliminate discussion of the budget calendar and budgetary responsibilities * Simplify the discussion of the legal level of budgetary control Information Useful in * Expand the discussion of the local Assessing Economic economy to encompass financial trends Condition during the past five to 10 years * Enhance the discussion of long-term planning to explain how it may shed light on current and future financial position * Include a discussion of relevant financial policies * Include a discussion of major initiatives from the budget document * Eliminate separate discussions of cash management, risk financing, pensions, and other postemployment benefits Awards and acknowledgements * No change recommended
(1.) NCGA Statement 1. Governmental Accounting and Financial Reporting Principles, paragraph 138.
(2.) GASB Statement No. 34. Basic Financial Statements--and Management's Discussion and Analysis--for State and Local Governments, footnote 7.
(3.) Stephen Gauthier, Governmental Accounting, Auditing, and Financial Reporting (Chicago: GFOA, 2001): 247.
STEPHEN GAUTHIER is director of GFOA's Technical Services Center, and author of Governmental Accounting, Auditing, and Financial Reporting.
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|Title Annotation:||The Accounting Angle; Government Finance Officers Association's Governmental Accounting, Auditing, and Financial Reporting|
|Publication:||Government Finance Review|
|Date:||Apr 1, 2004|
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