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Omitting the MD&A in Governments
By Charles Hall | Auditing
Omitting the MD&A in governments is not common, but it does occur.
According to AU-C 730, the auditor’s report on the financial statements should include an other-matter paragraph that refers to the required supplementary information (RSI). In governmental financial statements, the management, discussion, and analysis (MD&A) is considered RSI. Though the MD&A is “required” supplementary information, governments can–strangely enough–exclude it from the financial statements.
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If the required supplementary information is omitted, the auditor should include an other-matter paragraph in the opinion such as the following:
Management has omitted the management, discussion, and analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information.
Notice the omission of the MD&A does not affect the opinion rendered (in other words, it does not result in a modified report).
AU-C 730 is the audit standard for required supplementary information. Click here for an overview of the supplementary information audit standards. The former supplementary information standards were SASs 118, 119 and 120; those standards are now–under the Clarity Standards–AU-C sections 720, 725, and 730.
The MD&A is sometimes omitted in financial statements subject to a compilation report.
In compilation reports, the relevant language when omitting the MD&A is as follows:
Management has omitted the management, discussion and analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board which considers it to be an essential part of financial reporting and for placing the basic financial statements in an appropriate operational, economic, or historical context.
Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty-five years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention, The Why and How of Auditing, Audit Risk Assessment Made Easy, and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles consults with other CPA firms, assisting them with auditing and accounting issues.
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Sorry, I don’t do any public company work, so I can’t say.
What about public companies? is the MD&A also considered FSI so it can be omitted?
Good point Chuck. I have the same experience. The problem is some small governments don’t have the ability (knowledge) to prepare the MD&A.
I feel that the reason most smaller govt. entities I audit, do not prepare the MD&A, is simply that I am precluded from preparing it because of impairment of Independence. The financial statement can be prepared from software and roll forward of footnotes, and the client normally has the SKE to understand or prepare them. Even a quick book file can change headings and formats so that the statements are really the client’s but the MD&A is really their document.
MOCPA, I just read my comment from November 14, 2014; not sure what I was thinking that day, but my response is not correct. You are correct. An OCBOA presentation does not include a requirement for RSI (and the MD&A is of course RSI); so, there would be no opinion paragraph pointing out an omission since there is no MD&A requirement. Thanks for the additional comment.
Just to follow-up. I believe they are pointing to AU-C Section 800 Special Purpose Frameworks to eliminate the GASB required MD&A (RSI). Since the MD&A is not required for an OCBOA presentation neither would an other-matter paragraph be required. The MD&A would only be encouraged to be presented as SI. I think the AICPA has published a practice aid Applying OCBOA in SLG Financial Statements (non-authoritative of course). Not saying I agree but there seems to be a push in that direction for OCBOA presentations.
I agree. GAAP vs Cash Basis makes no difference in regard to the opinion paragraph for omission of the MD&A. If the MD&A is omitted, the paragraph concerning the omission must be in the opinion. Nothing has changed.
I have noticed recently that some cash basis school districts in Missouri have omitted the MD&A but have not included an other-matter paragraph in the opinion. These school districts presented MD&A’s in the prior year but not for YE 06/30/14. Has something changed that this other-matter paragraph can be omitted even if the MD&A is omitted? I don’t believe a GAAP vs Cash Basis presentation matters in regards to MD&A presentation.
Thank you Armando. I run into issue often with small cities that either don’t desire to prepare the MD&A or they’d rather not bear the expense of paying someone to prepare it.
Good instructive information. Thanks Charles