Did your state receive a clean audit opinion? Maybe not

Christine Kuglin  |  May 13, 2023

"Isn't it reasonable to expect that state governments' financial reporting have full accountability and thus, receive clean audit reports? The fact is that often, they do not. There are many reasons this happens, and this article explains those which occurred in the 2021 Annual Comprehensive Financial Reports of the 50 states. The reason 2021 is used for this review is that not all states have released their 2022 reports. A follow-up article will be written when this occurs.

Types of audit reports

Let's start with an explanation of why audit reports are important and explain the different types of reports that may be issued. An audit report is an independent review of an entity's financial records by a CPA firm. Corporate reports are also required to express an opinion on internal controls, but governments are not yet required to do this. However, you will see auditors did comment on the internal controls for several of the states whose internal controls did not rise to the standard needed for an "unmodified" opinion. If the auditor's assessment of the financial information is that management is fairly presenting the information, then an unmodified opinion may be given.

This is a typical statement found in an unmodified government audit report: "In our opinion, based on our audit and the reports of the other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information, as well as the budgetary comparison schedule."

This language is used if the auditor determines they have collected "sufficient, appropriate" evidence to put their reputation on the line and give an attestation that the public can depend on this information or that it is "presented fairly." In other words, the financial statements do not need modification — thus an unmodified opinion.

These rules can be found under Auditing Standards 3105 describing sufficient appropriate evidence. If the auditor cannot obtain a sufficient quantity of information, they may issue a qualified or disclaimer opinion. This can happen if the client limits the audit procedures or does not provide enough details to the auditor. The decision to either qualify or disclaim the opinion is based on the scope of the problem. This decision comes down to the nature of the magnitude according to AS 3105.

If an auditor cannot obtain the second part of the "sufficient appropriate" information — appropriate — the auditor may either qualify the opinion or even offer an opinion that is adverse if the information is in violation of GAAP rules. 

The language in AS 3105 describes the departure in this manner: "This assessment will be affected by the nature and magnitude of the potential effects of the matters in question and by their significance to the financial statements. If the potential effects relate to many financial statement items, this significance is likely to be greater than if only a limited number of items are involved."

Whether a qualified, disclaimer or adverse opinion is offered will depend again on the nature and scope of the problem.

So now that an understanding of the different opinions is clear, the fact that nine states received either qualified or disclaimer opinions in 2021 is more interesting. A couple of states received both disclaimer and qualified opinions over sections of their financial reports.

What happened in  these states to lead the auditors to give less-than unmodified opinions? 

The nine states

So where did the less-than unmodified audit opinions land?  In 2021, three states received disclaimer opinions for sections of the audit opinions, four states received qualified opinions, and two states received both; these states received a disclaimer for one section and a qualified opinion on another section.


1. Georgia: Georgia received a disclaimer opinion over its unemployment compensation fund. The auditor reported they could not gather sufficient appropriate audit evidence for the balances, receivables and payables of this fund. Furthermore, they found a lack of internal controls over these funds. Management had overpaid certain claims. The auditors determined that different or extended audit procedures would help resolve the issue at the time of the audit report.

2. Illinois: Illinois received a disclaimer opinion in 2021. As in Georgia, this was for its unemployment compensation fund. The auditor did not elaborate other than to state they could not obtain sufficient appropriate evidence concerning this fund.

3. Nebraska: Nebraska had numerous issues which led to a disclaimer opinion for the 2021 report:

  • The auditors proposed over 110 adjustments to the financial statements for a total of over $4.3 billion, suggesting controls were not in place.
  • The Nebraska Department of Labor was unable to provide timely and accurate records of the unemployment insurance fund. Monies are maintained outside of the Nebraska State Treasurer in separate bank accounts. The auditor's testing noted numerous errors and required multiple proposed adjustments to the financial statements.
  • Due to the inability of the department to provide accurate and complete accounting records, they were unable to determine whether any further adjustments that may have been necessary were needed.

4. California: California suffered from the same problems as the states above. The Employment Development Department and the unemployment fund had issues. The auditors made mention of these issues:

  • The department could not estimate fraudulent claim amounts, thus accurate accounting information could not be determined.
  • This problem caused $19.8 billion in material misstatement of the loans payable.
  • This also led to a disclaimer opinion for the unemployment programs fund.

Disclaimers for the states primarily occurred due to the prevalence of fraud surrounding unemployment claims during the COVID pandemic. The website Pandemic Oversight presents this as an estimated statistic: "While the total amount of fraud is unknown, since April 2021, 22 states have reported estimates that total $59.1 billion." This explanation of the pervasive fraud during the pandemic helps to explain the onerous problems states faced in this matter. It should not be considered an excuse, but it provides one possible explanation.

Qualified opinions

1.  Alaska: The Alaska auditor states that the state of Alaska's General Fund rents and royalties are not reported in accordance with generally accepted accounting principles, and management declined to correct these issues. The auditor found millions of dollars through multiple funds that were affected by this disagreement in reporting, thus leading to a qualified opinion. The Alaska ACFR goes into detail about the millions, if not billions, of dollars that are subject to this audit report concern.

2. Florida: The auditors found that Florida had internal control issues. According to the report, "The Florida Department of Economic Opportunity management continued to bypass a key Reemployment Assistance Claims and Benefits Information System internal control, thereby increasing the risk of improper employment insurance benefit payments and undetected material misstatements."

Due to this, the department was unable to estimate or record receivables or revenues for fraudulent claims. This led the auditors to report they were  unable to obtain sufficient appropriate evidence to attest that the material misstatements did not exist.

3. Missouri: The Missouri auditor made a very simple statement concerning the qualified opinion for Missouri. Simply, they were not allowed access to tax returns and related source documents. The reason given by the state was an interpretation of the law in this matter.

4. Nevada: The qualified audit opinion for Nevada concerned obtaining sufficient appropriate audit evidence for the statewide governmental activity as to the general funds beginning of the year donated personal equipment. The opinion also could not confirm the beginning or ending stockpile inventory for the highway funds. This lack of information deterred the auditors from suggesting necessary adjustments.

5. Ohio: Ohio auditors issued a qualified opinion for the issue that plagued states with disclaimers. Ohio outsources unemployment benefit claims. The state could not provide sufficient appropriate evidence about the processing of federal pandemic claims. The state reports the claims represent 30% of the expenses reported in business-type activities and 53 percent of the expenses reported within the unemployment compensation fund. The auditors were concerned that since this amount was outsourced, the internal controls on the funds cannot be reasonably determined.

6. California: The auditors for California issued a qualified opinion on business-type activities due to the problems with unemployment programs. The qualified opinion talked about these matters:

  • They were unable to obtain sufficient appropriate evidence about the unemployment programs that represent 72% of noncurrent receivables, 100% of benefits payable and 100% of unemployment program revenues within the business-type activities.
  • They also noted a $19.8 billion misstatement in the loans payable balance.
  • It was noted the internal controls were inadequate.
  • The report listed many other issues representing millions of dollars in federal fund accounts.

A need for accuracy and accountability

The dollar amounts mentioned in these audit reports are in the millions and even billions of dollar ranges.

It should surprise most reading this article that there are these types of issues in our state government reporting. While public accounting focuses on profit-making, the government should focus on accuracy and accountability of the use of taxpayer funds. The auditors' reports of these states demonstrate accountability is not always up to the standards taxpayers should expect. It will be interesting to review the 2022 auditors' reports to determine if these issues were resolved to the auditors' satisfaction."

Read the full article on: Accounting Today

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