Mr. Alan Skelton
Director of Research and Technical Activities
Project No. 3-41
Governmental Accounting Standards Board
401 Merritt 7
P.O. Box 5116
Norwalk, CT 06856-5116
Dear Mr. Skelton:
Thank you for the opportunity to comment on Project No. 3-41, Certain Risk Disclosures. This is an important project, and we applaud that you are addressing the issue. Truth in Accounting is always concerned with issues of adequate disclosure on government spending, dependency of revenue streams and debt obligations.
There are two points which we would like to address:
Estimates
1. Paragraph, B7 page 7, the Draft posits, “The Board believes that a government disclosing that it uses estimates in the preparation of its financial statements does not align with the description of users of government financial statements because users are expected to be aware that the preparation of financial statements involves a certain amount of estimation.” This statement is presumptuous. GASB Concepts Statement No. One states, “The Board has identified three groups as the primary users of external state and local governmental financial reports: the citizenry, legislative and oversight bodies, and investors and creditors.” Based on the list provided by the GASB, it should not be assumed that the users of government financial statements understand the vulnerability caused by estimates. Estimates can cause relevant financial statement misstatement. There is no better example of this than the valuation of pension funds.
Estimates are one of the primary areas of audit concerns and are often mentioned in the Critical Audit Matters section of publicly traded company reports, as well as in Other-matters or Emphasis-of-Matter in governmental and private companies. Estimates are a key factor in management manipulation of data. These estimates often cause auditors great concern and the need to use professional judgment as is detailed in AU-C Section 706. Thus, it should not be assumed that users of these financial statements will understand the use of estimates when one of the anticipated users is the general citizenry. Estimates should be addressed, disclosed and discussed as potential risk.
Alternative View
2. Generally, we concur with the points in the Alternative View beginning on page 19. The threshold standards of 12 months or three years are infrequent and may be too late. Paragraph B54 reflects our concerns,
The Board members that express the alternative view are concerned that with a degree of likelihood of more likely than not, disclosures related to those risks will not be reported until a similar point in time that disclosures related to severe financial stress or going concern uncertainty will be reported.
Furthermore, beyond the fear of late reporting, defining the criterion of “more likely than not or reasonably possible” in such a stringent manner may cause confusion with auditors and lawyers who have standards that may not align to the proposed government standard. Careful consideration must be given for consistency in use of these terms as not to cause more confusion on such an important matter.
Stringent definition of these criteria may allow government officials to delay reporting. Paragraph B56 states this succinctly:
The specified degree of likelihood and the magnitude of the effect serve to screen the population of potential disclosures related to the two risk categories such that the host of risks that potentially affect every government and might be disclosed are limited to only specific matters of importance to a particular government. However, if the criteria make the disclosure requirements so selective that the resulting disclosures no longer are an early warning sign but, rather, a companion disclosure with severe financial stress or going concern uncertainty, the disclosure has lost much of its value and this Statement will not achieve optimal results related to its objective.
The final paragraph, B6 concludes and mimics our sentiment:
If an event that could have a substantial effect on a government’s ability to continue to provide services at the level provided in the current reporting period or to meet its obligations as they come due is more likely than not to begin to occur, the Board members that express the alternative view believe the government already will be displaying characteristics of going concern uncertainty or severe financial stress, and the warning will arrive too late to be essential information for financial statement users. A degree of likelihood that an event’s occurrence is at least reasonably possible would provide the early warning sign, which is the Board’s objective, and when combined with the substantial effect criterion, would result in the appropriate amount of disclosure at the most opportune time.
Thank you for your consideration of our opinion.
Sincerely,
Truth in Accounting