Municipal Audit Law 101

July 15, 2022

By Amy John, CPA

Oregon Secretary of State Audits Division

What is Municipal Audit Law?

Annual audits of municipal corporations have been required by law since 1913. The Municipal Audit Act of 1941 brought all local governments under the present-day Municipal Audit Law, which is overseen by Oregon’s Secretary of State. The law provides instructions for annual reports that local governments are required to submit to the Secretary (Oregon Revised Statutes 297.405 to 297.990). The law requires the Secretary, in cooperation with the Oregon Board of Accountancy and the Oregon Society of Certified Public Accountants, to prescribe the minimum standards for the conduct of each audit; these standards are published in Oregon Administrative Rule Chapter 162. Independent accountants must also follow professional auditing standards promulgated by the American Institute of Certified Public Accountants (AICPA) and issue financial reports in accordance with generally accepted accounting principles. The reports are a mechanism to help governments be transparent and accountable to the people.

Who is subject?

There are about 1,800 local governments in Oregon, including counties, cities, school districts, fire districts, and other special districts.

While all local governments are subject to annual reporting requirements, not all are subject to an audit. Municipal Audit Law employs a three-tiered reporting responsibility:

  • All counties, school districts, and public charter schools are required to have their financial statements audited each year.
    • Local governments with total annual expenditures exceeding $500,000 are also required to be audited. Most local governments operate on a July 1 to June 30 fiscal year to align with property tax collections and budgeting. Audits are performed by local CPA firms and reports are to be filed with the Secretary of State by December 31.
  • Local governments with total annual expenditures between $150,000 and $500,000 are not required to have an audit; instead, they may have a financial statement review performed by an independent accountant.
  • Municipalities with total annual expenditures of $150,000 or less may submit reports in lieu of audit where they self-report expenditures on forms prescribed by the Secretary of State.

To be exempt from the audit requirement, reports must be filed on time, and the principal official of the municipal corporation — or the official responsible for receiving and disbursing moneys on behalf of the municipal corporation — must be covered by a fidelity or faithful performance bond sufficient to protect the government from loss.

Financial reports filed with the Secretary of State can be accessed through the Secretary of State’s website on the municipal audit search page.

Do all states have this requirement?

Most states have a mechanism for local governments to report financial information to the state or otherwise make reports available to the public. Some states, such as Washington, have a central audit function that performs local government audits. Others require local governments to use a chart of accounts and report on forms created by the state.

Oregon requires annual reports and allows local CPA firms to perform the work, like most other states. What sets Oregon apart is the requirement that CPAs conducting audits of our local governments maintain a municipal auditor license. A test is no longer required, but applicants for the license must be a CPA in good standing and apply to the Oregon Board of Accountancy after having obtained the required education hours and courses. The Oregon Municipal Roster is maintained by the board and can be viewed on their website.

While other states ask local governments to comply with state laws and rules, Oregon goes a step further — auditors must comment on compliance within the annual report. Minimum standards require auditors to perform procedures and comment on compliance with a number of factors, as they apply to the local government being audited. This includes local budget law, procurement and contracting rules, the investment of public funds, the use of highway funds, and a school district’s calculation and reporting of factors used to compute the State School Fund distribution, among others.

Municipal audit program mission

Municipal Audit Law exists to promote transparency and accountability of governments to their constituents. There is even a provision in the law for residents to request a financial statement audit when one is not otherwise required.

As the administrator of the law, the Audits Division of the Secretary of State crafted the following program mission used to set priorities and guide our work.

In the interest of transparency and accountability, the Audits Division assists municipalities and auditors with understanding and complying with Municipal Audit Law. This is accomplished through:

  1. Adopting and maintaining minimum standards for audits and reviews of Oregon’s local governments;
  2. Ensuring adequate education, resources, and oversight exist to help local governments and their auditors comply with Oregon Statutes and professional accounting and auditing standards; and
  3. Ensuring public access to, and interpretation of, accurate and complete local government financial information.

In short, the Audits Division regulates, educates, and promotes access to information.

Filing requirements and annual summary report

The 2015 Legislature revised Municipal Audit Law to promote accountability. When an auditor communicates deficiencies, they are required to file a copy of the letter or report with the Audits Division of the Secretary of State. The governing body of the local government must then adopt a plan of action addressing those deficiencies. The plan must include the estimated period of time necessary to complete the actions and be filed with the Audits Division within 30 days of filing their audit report.

The Secretary of State also has reporting requirements. An annual summary report of audits is prepared for the Legislature each year on or before March 1. The report includes information about each local government that filed an audit, a list of governments required to obtain an audit, information about the timeliness of filings and whether an extension was received, the number and type of deficiencies reported, and whether the entity filed the required plan of action.

The annual summary report for 2021 was released in March 2022 and can be found on the Oregon Secretary of State website.

Since that first report in 2015, we have noticed encouraging trends. More entities are filing on time; about 75% of entities filed on time or with an approved extension. More entities with reported deficiencies are filing the required plan of action; about 75% of the entities with deficiencies are filing their plan of action, compared to just over 30% in 2015.

Yet not all the trends are favorable. More entities are reporting more audit findings. I suspect this is due, in part, to more of the smaller entities crossing the threshold to require audits rather than self-prepared financial reports. In addition, many smaller entities don’t have volunteers or employees who are able to prepare financial statements or don’t have enough staff to properly segregate duties for optimal internal controls. These two issues are the most common deficiencies noted.

Often, the governing body accepts the risks associated with these deficiencies and submits a plan of action stating they do not plan to make corrections. The law does not require a government to correct all deficiencies; the law is there to ensure elected officials take responsibility for addressing the risk and that the decision is transparent to the public.

More entities are filing extension requests. This is indicative of the challenges of the past two and a half years, including COVID-19, wildfires, ice storms, and other events. This doesn’t seem to be letting up any time soon.

There are increasing accounting and audit standards, staffing challenges, and more local governments subject to the audit requirements as their spending increases. A significant influx of federal funding to address the natural catastrophes mentioned has created more regulation and more work for everyone. The municipal audit community is over capacity and contributes to later filings. Everyone is doing their best to keep up and comply with requirements.

How to stay in compliance

The Audits Division fields a lot of calls from governments worried they may not be able to find an auditor and file a timely report. While there are challenges in finding and retaining an auditor, there are several things that governments can do to be successful.

  1. Know what the requirements are and keep an eye on your budget.
  2. Start early. When you prepare next year’s budget, be aware of planned spending. If you’re getting close to a reporting threshold ($150,000 or $500,000), consider contracting with a licensed municipal auditor. If your current audit contract is in the last year, begin the renewal or RFP process sooner rather than later. Likely, if you’re reading this and don’t have an auditor engaged for the 2022 filing year, you’re already late. Don’t assume your current auditor will automatically renew your engagement the next year.
  3. Maintain current policies and procedures that reflect actual operations.
  4. Keep your books current and complete timely account reconciliations.
  5. Be ready when your auditors have scheduled to be onsite or conduct fieldwork remotely. Good communication and clear expectations between the audit firm and government client can help the audit move along smoothly.

How to stay current

There are many resources for local governments and auditors; it can be challenging to know where to start. If you’re reading this article, chances are you’re off to a good start as a member of the OSCPA. The OSCPA has resources available, including suggested audit programs for minimum standards procedures, and funnels related projects through the Governmental Accounting & Auditing Strategic Committee.

Auditors and finance professionals can use AICPA practice aids, reference GASB implementation guides or the GASB technical hotline, network with similar firms or government types, and utilize resources such as the GFOA checklist or the Governmental Accounting, Auditing, and Financial Reporting Blue Book.

Resources are also available through other membership organizations such as the League of Oregon Cities, Special Districts Association of Oregon, and the Oregon Government Finance Officers Association (OGFOA).

Lastly, the Audits Division maintains resources and communications. The Municipal Audit Law webpage has resources that are periodically updated as needed or requested. We communicate with subscribers using an email list, informing them about changes in Municipal Audit Law, administrative rules, financial reporting requirements, audit standards, or changes to program forms or processes. The list is also used to communicate reminders or other items of interest related to municipal audits and annual reporting. Subscribe to “Municipal Audit Program” emails on our website.

Looking ahead

Don’t hesitate to contact me if you have questions about the Municipal Audit Program or need help understanding and navigating the audit process. Our office is also interested in hearing any suggestions for improving our information, processes, and forms.

Contact Information:

Amy John, CPA
Oregon Secretary of State, Audits Division
(503) 986-5160
Municipalfilings.sos@oregon.gov

 

About the author

Amy John joined the Secretary of State Audits Division in 2000 as a staff auditor and has spent 20 years leading financial and federal compliance audits for a variety of state agencies and programs. During that time, she spent several years as the in-charge auditor for the Municipal Audit Program and has been managing the program since 2017. Amy is a CPA and licensed municipal auditor. Amy has participated in the OSCPA since 2005 when she joined the Governmental Accounting and Auditing Committee and served as Committee Chair in 2012. She also served on the OSCPA Board of Directors from 2013 through 2020, serving as Chair in 2018-2019.

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