Slow, then slower: municipal bond issuer audit delays hit 12-year high


The median audit time for all municipal bond sectors rose nearly 10.5% from 2011 to 2022, according to a new report from the University of Illinois-Chicago and Merritt Research Services. 

The report also found a direct correlation between audit timeliness and credit rating for all governmental bond sectors and a majority of revenue bond sectors.

The median municipal bond audit time slowed by 16 days over that 11-year period, reaching a 12-year high in 2022, according to the report, “Credit Rating and Geography: Examining the Timeliness of Municipal Bond Audits.” 

“If this gets fixed,” said Richard Ciccarone, president emeritus of Merritt Research, “it gets fixed because there’s another crisis. And that’s not the way we think it should be done.”

Alan Klehr

Timely audit reporting “is critical for credit evaluation and proper pricing in the municipal bond market,” noted the report’s authors, Deborah Carroll, director of the UIC Government Finance Research Center, and Richard Ciccarone, president emeritus of Merritt Research. They contrasted the average audit time in the corporate bond market — 60 to 90 days — with the municipal bond market’s 140 to 180 days.

“We did expect a slowdown around the time of COVID… but we anticipated, because this information is so important to the market, for that to shift back downward to pre-COVID levels,” Carroll told The Bond Buyer. “And unfortunately, the trends are still moving upwards.”

Ciccarone called timely audits “crucial for an understanding of the credit.”

“Certainly the market is aware of it,” he said of the deteriorating audit times. “But everybody has been complacent about that. And there’s no reason to be complacent about that… I think that complacency goes to the fact that municipals have a low default rate. Some of them have very high ratings — probably higher than some of them deserve. I think that the market does not apply the pressure.

“If this gets fixed,” he added, “it gets fixed because there’s another crisis. And that’s not the way we think it should be done… We want to get ahead of it.”

Both authors noted that there’s a shortage of accountants, and that has impacted timing in recent years. But there are also disparities in state requirements — some states require state auditor oversight and approval before audits can get released, for example. New York, whose issuers have the fastest median audit time, requires a timely submission of audits.

“There’s some responsibility for the market here. But regulators… and government officials should do the right thing, too,” Ciccarone said. “There’s no question in my mind that California, which is two years in sending out their audit, is irresponsible. And there’s no excuse for a government to do that. … Are they capable as a government? Fix it.”

The fact that the weaker credits are prone to slow audits presents a greater danger to investors, he added, because when the late audits do come in, they’re more likely to contain negative surprises.

In the Midwest, South Dakota — the third-slowest state in the nation — Indiana and Iowa had the longest median audit times in 2022, while Michigan, which ranked third-fastest in the U.S., had the most rapid turnaround. Nationwide, Mississippi came in last, followed by Washington state.

Mentioned by Carroll and Ciccarone as a model for the rest of the nation was Columbus, Ohio, which has been at the top of the timely governmental bond audit list for the last five years. 

“Here’s our recipe: create a year-round financial statement preparation and audit plan, and get your outside auditors to contractually agree to a timeline,” said Megan Kilgore, auditor for the city of Columbus. 

She added that financial reporting is “the compass that guides decisions — it informs our city’s management just as it informs our outside investors.” The city has invested in technology aimed at building an ecosystem of data “that will empower us to plan for and respond to the dynamic forces of the economy,” she said.

The report’s authors decided to illustrate audit timing by geography because they thought there would be clear regional trends, according to Carroll. But “I cannot discern any geographical trends in the map,” she said.

“Here’s our recipe: create a year-round financial statement preparation and audit plan, and get your outside auditors to contractually agree to a timeline,” said Megan Kilgore, auditor for Columbus Ohio, lauded for its timely financials.

Donna Alberico

Overall, however, “there really is a systematic difference in audit timeliness between public and private auditors,” she noted. 

Governmental bond sector issuers tended to lag the revenue bond sectors. In fact, every governmental bond sector saw a deterioration in median audit times between 2011 and 2022.

Within that governmental category, school districts saw the largest increase in their median audit time in the 11-year period, by more than 14%, or 21 days. At 167 days, that was still the fastest median among the six sectors the report tracked; county governments, at 201 days, were the slowest, taking 11% longer than in 2011.

In the revenue bond sectors, retirement community issuers, at 117 days, had the second fastest audit turnaround times for 2022, the first year they were included in the report. That was because they’re considered a risky sector and market participants are more careful to demand a timely financial statement in order to consider investing, Ciccarone said.

The wholesale electric sector, at 104 days, was the fastest, as it has been since 2011. Water and sewer was the worst revenue bond sector, at 172 days, almost 9% slower than 2011, when it was also the slowest at 158 days.

“If the market demands timely audits, it’s more likely to move that sector in that direction,” Ciccarone noted. “The fact that the market is lax on this issue provides an easy [out] for the issuers that are slow. And the taxpayers are not demanding it, either, because they’re not in tune with what a timely audit means.”

Ciccarone said regulators like the Securities and Exchange Commission and Municipal Securities Rulemaking Board claim they can’t do much about audit times other than post the information. But that doesn’t mean there are no potential remedies. 

He pointed to the Tower Amendment, a 1975 change to the Securities Exchange Act spearheaded by then-Sen. John Tower of Texas. The amendment bars the SEC and MSRB from requiring municipal bond issuers to give them financial information before selling securities. That left it up to the states to regulate audits.

But the federal regulators oversee issuers indirectly through SEC Rule 15c2-12, which states that underwriters must get financial disclosures from issuers for the securities they plan to sell. Ciccarone said if the Tower Amendment can’t be repealed — as the SEC itself has previously advocated — then Rule 15c2-12 should be modified to include a provision that says underwriting and trading can’t occur unless an audit is produced within a certain amount of time. 

“This is a sovereignty issue; the states should be doing it,” he said. “But if the states don’t do it, somebody has to do it, and that would leave it up to the federal government.”

Regulatory changes or no, Carroll argued that municipal issuers should not lose sight of why transparency matters. 

“Right now, broadly speaking, we are certainly at a point where there is a lot of distrust in government, and especially distrust in the way in which government spends its precious resources from taxpayers,” Carroll said. “For years, we’ve been talking about greater transparency in government finances… When things are happening that are not transparent, it just perpetuates that feeling that government has something to hide.”

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