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Municipal audits may not be glamorous or exciting, but they offer taxpayers crucial insights into the financial operations of Massachusetts cities and towns.
According to Massachusetts General Law (M.G.L.) Part I, Title VII, Chapter 44, Section 40, the accounts of all municipalities should be audited annually. Those of regional school districts must be audited annually or biennially (though this M.G.L. indicates regional school audits must be annual).
MA Division of Local Services (DLS) recommends annual financial audits but notes that smaller municipalities may opt for audits only every other or every three years. In the latter cases, auditors will likely charge higher fees due to the increased complexity of these audits. To comply with the federal Single Audit Act, any non-federal entity expending $750,000 or more of federal funding during the previous fiscal year must submit to an audit.
Here is a quick overview of the financial audit process for cities and towns, including some highlights from Shutesbury’s fiscal year (FY) 2019 and 2021 financial audits, which I requested from the Shutesbury Town Clerk.
What Happens During a Municipal Financial Audit?
A municipal financial audit independently assesses a community’s financial performance and standing. The municipality engages a Certified Public Accountant firm to examine its “financial records, accounts, business transactions, accounting practices and internal controls” and ensure adequate controls are used to protect public assets. Financial documents included in audits are balance sheets, revenue and expenditures statements, and fund balances.
The municipality’s audit committee (Shutesbury does not have one) should be responsible for hiring the auditing firm and should not be comprised of town officials whose activities or performance may be audited.
The three basic segments of an audit are:
The auditor’s opinion certifies that the audit used documents prepared under generally accepted accounting principles (GAAP). An unqualified opinion denotes an audit where the financial statements fairly reflect the local government’s standing and the auditor found no problems with the documents. A qualified opinion is the opposite and means that the auditor lacks confidence that one or more transactions followed GAAP.
Basic financial statements including all government financials, fund financials, notes to the financial statements, and supplementary information and schedules.
A management letter. This document, prepared by the auditor, points out any deficiencies encountered during the audit and makes suggestions for improvement. Not all audits contain a management letter, which must be separately included in the scope of services. The DLS Guide to Financial Management for Town Officials recommends including such a letter so weaknesses may be rectified immediately.
Why Audits are Necessary
Regular municipal audits are essential for several important reasons. As mentioned earlier, a primary motivator is ensuring that checks and balances exist to protect the community's assets and that all financial statements, transactions, and controls are fair and reliable. Audits can point out minor problems that can be corrected before they become major issues.
Shutesbury’s Municipal Finance Guidelines delve deeper in its "Audit Policy" section, emphasizing that regular audits ensure the integrity of departmental policies, increase public confidence in local government, and provide evidence to credit rating agencies of the town’s financial health. It also states, “The Town will put forward its best efforts to address, with corrective action, comments, and issues presented in the auditor’s management letter.”
DLS recommends that audits be presented by the auditor to the town council or select board during an open meeting. Many municipalities post their audits and management letters (if available) on their websites.
If a community needs help with its financial controls or wants a more thorough financial review of its procedures, it can ask for assistance from the Massachusetts Department of Revenue.
Shutesbury’s Most Recent Audits
Shutesbury contracts for an audit every two years, and these Select Board minutes from 12/19/2017 contain the presentation of the FY2017 audit by auditor Tom Scanlon. During that discussion, the Management Letter was referenced and Mr. Scanlon suggested the town develop an “internal controls manual” to document these procedures. The Town Administrator agreed with this suggestion. It is unknown whether this occurred since a thorough search of Shutesbury.org did not turn up such a document.
Neither the FY2019 nor FY2021 audits contain a Management Letter, despite the directive in the Municipal Finance Guidelines. Both audits received an unqualified opinion from the auditor regarding the integrity of the documents presented. I found no Select Board minutes indicating either audit was discussed at an open meeting.
Audit Focus and Highlights
Before we get to the notable aspects of the audits, here are some relevant definitions taken directly from the Scanlon & Associates audit reports:
Deferred Outflows: This represents the usage of net position applicable for future period(s) and will not be recognized as expenditures until the future period to which it applies.
Deferred Inflows: Represents an acquisition of net position that applies to a future period and so will not be recognized as an inflow of resources (revenue) until that time.
Net Position: The difference between all assets and deferred outflow of resources and all liabilities and deferred outflows of resources. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position is improving or deteriorating. Put simply,
Net position = all assets + deferred outflows - liabilities
Net position represents the difference between resources and the claims against them and can be positive or negative.
Governmental Funds: Governmental fund statements focus on near-term inflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating a government’s near-term financial requirements.
General Fund: The General Fund is the Town’s primary operating fund and the largest source of day-to-day operations. NOTE: This corresponds to the last line of a given fiscal year’s budget, titled “Total Operating Expenses” and “Total Revenue Projections”. In a balanced budget, the two lines should be equal.
The financial highlights and changes between audits as stated by Shutesbury Town Management are shown below.
Shutesbury’s assets and deferred outflows of resources exceeded its liabilities and deferred inflows of resources by $6,473,807 in FY2019 and by $7,908,530 for FY2021 [Amanda’s note: This shows that Shutesbury’s net position increased between FY2019 and FY 2021 by $1,434,723, a positive indicator of the town’s financial position].
Governmental funds reported an ending fund balance of $2,896,621 for FY2019 and $4,729,293 for FY2021;
The General Fund balance for FY2019 was $2,360,482 and $2,824,940 for FY2021;
Certified Free Cash for FY2019 totaled $1,389,680 and $1,173,772 for FY2021.
Audit Costs
The FY2021 budget document lists the cost for the FY2017 audit as $12,500 and the FY2019 audit as $25,000. The FY2021 audit cost $12,500 according to the budget for FY2023.
This post is a simplified overview of the audit process and two specific audit reports for Shutesbury. For those who would like more detail and don’t mind wading through 70 pages of text and figures, I encourage you to obtain your own copies from the Shutesbury Town Clerk at townclerk@shutesbury.org.
