Merritt Research Services recently released its 2013 municipal audit timing report, revealing that, on the whole, municipal bond issuers continue to substantially lag their corporate counterparts in completing their annual audited financial statements. As in the past, this year's audit timing study also continued to show a significant variance among municipal bond sectors - and among individual issuers within each sector.
While relatively slow audit times among municipal bond issuers has been a longstanding complaint in the municipal bond market, the concern is being echoed in even wider circles due to the increased attention on local government financial problems and Chapter 9 bankruptcy filings. Change may be on the horizon in light of recent comments made and actions taken by the Securities and Exchange Commission (SEC). While the Tower Ammendment prevents direct regulation of state and local borrowers, the SEC has the power to oversee dealer requirements that set forth underwriting standards pertaining to documentation. Earlier this year, the SEC charged the City of Harrisburg with securities fraud for misleading public statements, implying that its financial information was outdated and incomplete.
"Although the SEC announcement came late in the game for municipal entities preparing their 2012 financial audits, its findings in the case of Harrisburg might be considered 'a shot across the bow' for municipal issuers with a tendency to take their time in releasing secondary market disclosure materials," said Richard Ciccarone, President and Chief Executive Officer of Merritt Research Services.
Highlights of this year's study include:
- Governmental bodies that issue general obligation bonds were generally the slowest to turn in their 2012 financial audits.
- States and territories, which have more complicated governmental structures and financial ledgers, took the longest between the close of their fiscal year and the completion of their annual audits. The median audit time for states was 174 days in 2012, a notable 8-day improvement over the prior year, yet still far behind the recommended 120 days after the close of the fiscal year.
- The median audit time for Cities and Counties was slighly shorter than for States and Territories, but still well above the median across all sectors.
- Among cities, Salisbury, Massachusetts completed its annual audited financial statements within 54 days of the close of its fiscal year.
- Three revenue bond sectors - Wholesale Electric Power, Hospitals, and Private Higher Education - which have traditionally ranked among the fastest to complete their annual audits, continued the trend in 2012.
- Size was not a consistent factor in determining the length of time it took for an issuer to complete its annual financial audit. Rapid River Public Schools, Michigan was among the smallest school districts in the study, but completed its annaul audit within a mere 18 days after the close of its fiscal year.
- Credit quality, while not a determining factor in audit timing, did reveal some patterns in some sectors - namely, Cities, Counties, Hospitals, Airports, and to a a lesser extent, States.
The full report, entitled Focus on Credit Quality Puts Sharper Spotlight on Municipal Bond Audit Times, can be accessed by clicking on this link: Merritt 2013 Municipal Bond Audit Timing Study.