What is the objective of financial reporting by state and local governments?

The purpose of financial reporting is to ensure the transparency and accountability of the local government system. Local governments are ultimately accountable to their citizens for how they choose to raise and spend funds.

Financial budgeting

Financial budgeting is a planning tool that enhances local government accountability and service delivery, and sets out their legal expenditure authority. Legislation establishes requirements and deadlines for adoption of financial plans, and a local government may amend its plan during the year for unexpected expenditures.

Financial statements and annual reports

Annual municipal reports

Municipalities are required to produce an annual report which states their goals and objectives for the coming year and demonstrates what progress has been made toward the preceding year's goals and objectives.

The report must be presented at a public meeting before June 29 each year and made available for public inspection at least 14 days prior to that meeting.

Audited financial statements

Audited financial statements provide a consolidated and independently verified overview of a local government's a financial activities over the course of the previous fiscal year and its financial position at the end of that year. This provides enhanced transparency and public accountability of local government financial affairs.

Financial reporting forms

Local governments are required to submit an annual Local Government Data Entry (LGDE) form, which presents a standardized account of assets, liabilities, revenue, expenditures, and other financial indicators to the Ministry of Municipal Affairs and Housing. This information is used to produce the local government financial data, which is made publicly available.

Statement of financial information

All local governments must prepare an annual statement of financial information in accordance with the Financial Information Act. The statement of financial information must be made available for public viewing by June 30 each year and be accessible for the following three years.

GASB Concepts Statement No. 1 establishes the objectives of general purpose external financial reporting by state and local governmental entities and applies to both governmental-type and business-type activities.

Governmental financial reporting objectives are influenced by the characteristics of the state and local governmental operating environment and by the needs of those who use governmental financial reports. The activities of governmental entities have traditionally been divided into two categories—governmental-type activities and business-type activities.

The significant characteristics of the governmental environment that affect financial reporting of governmental-type activities and that need to be considered when establishing financial reporting objectives are:

1. Primary characteristics of government's structure and the services it provides:
   (1)  The representative form of government and the separation of powers
   (2)  The federal system of government and the prevalence of intergovernmental revenues
   (3)  The relationship of taxpayers to services received
   
2. Control characteristics resulting from government's structure:
   (1)  The budget as an expression of public policy and financial intent and as a method of providing control
   (2)  The use of fund accounting for control purposes
   
3. Other characteristics:
   (1)  The dissimilarities between similarly designated governments
   (2)  The significant investment in non-revenue-producing capital assets
   (3)  The nature of the political process.
   

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. Financial reports are used primarily to compare actual financial results with the legally adopted budget; to assess financial condition and results of operations; to assist in determining compliance with finance-related laws, rules, and regulations; and to assist in evaluating efficiency and effectiveness.

Governmental business-type activities frequently operate in an environment that differs to a certain extent from the environment in which governmental-type activities operate. For example, business-type activities are generally characterized by an exchange relationship, manifested by user charges that may be based on the costs of providing a particular service. On the other hand, some business-type activities receive significant operating subsidies, capital grants, or taxes from the general government, diminishing the role of costs in establishing user charges. All governmental business-type activities, whether performed through separate, legally constituted entities or as departments of government, are nevertheless a part of government and are publicly accountable. The Board concluded, therefore, that the financial reporting objectives established for governmental-type activities are generally applicable to business type activities. Environmental and user need differences will be taken into account in developing specific financial reporting standards.

The Board believes that financial reporting plays a major role in fulfilling government's duty to be publicly accountable in a democratic society. Public accountability is based on the belief that the taxpayer has a "right to know," a right to receive openly declared facts that may lead to public debate by the citizens and their elected representatives. Use of financial reporting by citizens and legislative and oversight officials to assess accountability is pervasive and is implied in the uses noted above. The Board also believes that financial reporting should provide information to assist users in assessing interperiod equity by showing whether current-year revenues are sufficient to pay for current-year services or whether future taxpayers will be required to assume burdens for services previously provided.

State and local governmental financial reports should possess these basic characteristics: understandability, reliability, relevance, timeliness, consistency, and comparability.

The financial reporting objectives set forth in this concepts statement (which are best understood in the context of the full Statement) are:

What are the objectives of government financial reporting?

What is the paramount objective of financial reporting by national and local government?

What are the two main types of financial reporting done by state and local governments?

Which of the following is a primary objective of financial reporting by state and local governments?