Comprehensive Annual Financial Report Briefing Essay

The purpose of this brief is to educate the newly elected board members on government accounting. Because the new board members are businesspeople from the community, they need to understand why government accounting is not the same as for-profit financial accounting. The brief will compare government accounting to for-profit financial accounting, describe the basic government reporting entity, and evaluate the Management Discussion and Analysis section of the Comprehensive Annual Financial Report (CAFR) for the State of Alabama. The State of Alabama’s fiscal year ended September 30, 2011 will be used in the evaluation of the MD&A section (Office of the State Comptroller, 2011). Governmental Accounting vs. For-Profit Financial Accounting Governmental accounting is not the same as for-profit financial accounting. Therefore, it is necessary that individuals employed in government entities have a good understanding of budgeting and accounting. Governments and for-profits have different purposes, activities that generate revenues, stakeholders, financial objectives, and desire to survive. Separate accounting and financial reporting standards are necessary because users of financial reports of governments and for-profits do not have the same needs (GASB, 2012). Governments are required to be accountable for the use of resources in their operating environment, unlike for-profit businesses. Governmental resources are acquired from the guaranteed payment of taxes paid by individual taxpayers. The taxes paid have no direct relationship to the services the taxpayer received. Therefore, taxpayers assess the value received from the resources they have provided to government. As a result, governmental accounting and financial reporting standards strive to help stakeholders evaluate if public resources are properly expensed and if the capacity of services improved or worsened from the previous year (GASB, 2012). Government Reporting Entity Identifying the accounting entity is one of the most important  accounting issues. The financial reporting entity is the primary government and its component units. The primary government can be either a state, local, or special government. Component units are official separate organizations in which elected officials of the primary government are held financially accountable. A component unit and a primary government are dependent to one another. Their relationship is necessary to ensure that the reporting entity’s financial statements are not misleading or incomplete (Copley & Engstrom, 2011). State and local governments are advised to prepare a Comprehensive Annual Financial Report (CAFR). A CAFR should cover all funds and activities of the primary government and its component units. The CAFR consists of three parts: introductory, financial, and statistical. The Introductory Section of the CAFR includes the table of contents, letter of transmittal from the government’s Finance Director, list of government officials, and an organizational chart (Copley & Engstrom, 2011). The financial section includes an independent auditor’s report, management’s discussion and analysis, government-wide financial statements, fund financial statements, financial statements notes, and any other required supplementary financial information. Last, the statistical section includes additional financial, economic, and demographic information (Office of Financial Management, 2012). By combining all three sections into one comprehensive report, the CAFR reveals the state government’s financial and operating activities that define its financial condition. Management’s Discussion and Analysis In June 1999, the GASB issued a statement requiring government entities to include the Management Discussion and Analysis (MD&A) within the CAFR. The MD&A discusses issues related to government entities, such as financial performance, capital resources, and budget trends, in regard to its financial position. The MD&A gives the government an opportunity to present an overview of its financial activities. This section contains most of the basic financial statements. Auditors are responsible for reviewing the financial material to verify that the information is correct (Copley & Engstrom, 2011). The State of Alabama’s MD&A provides useful financial highlights to CAFR users and the public. At the end of September 30, 2011, Alabama’s net assets increased by $335 million and exceeded liabilities by  $24.1 billion at the end of the fiscal year. By reviewing the financial highlights, a user can gather information about the state’s six major funds that operate the government for Alabama. The General Fund and Education Trust fund were prorated by 15 and 3 percent, respectively because collection did not meet the projections outlined in the budget. Users also can access the state’s basic financial statements, which consist of government-wide financial statements, fund financial statements, and notes to the financial statements. Because the MD&A performs its analysis using financial conditions based on the balance sheet, statement of revenues, expenditures, and changes in the funds balance, the CAFR is more understandable to its users (Department of Finance: Office of the State Comptroller, 2011). Conclusion The CAFR is an annual financial statement issued by a state or local government to represent its financial position. There are noteworthy differences between for-profit and governmental accounting. Understanding these differences is fundamental when measuring management’s performance and the financial success or failure of the entity. The organization is accountable for its success or failures because of the information presented in the organization’s CFAR. Furthermore, the MD&A provides a more comprehensible outline of management’s breakdown and impacts of governmental activities on the financial situation of the organization. References Copley, P., & Engstrom, J. (2011). Essentials of accounting for governmental and not-for-profit organizations (10th ed.). New York, NY: McGraw-Hill. Department of Finance: Office of the State Comptroller. (2011). Comprehensive Annual Financial Report for the Fiscal Year ended September 30, 2011. Retrieved from http://comptroller.alabama.gov/pdfs/CAFR/CAFR.Ala.2011.pdf GASB. (2012). Why Government Accounting and Financial Reporting is – and should be- Different. Retrieved from http://www.gasb.org/white_paper_full.pdf Granof, M. H., & Wardlow, P. S. (2011). Core Concepts of Government and Not-for-Profit Accounting (2nd ed.). New York, NY: Wiley & Sons. Office of Financial Management. (2012). Comprehensive Annual Financial Report. Retrieved from http://www.ofm.wa.gov/cafr/