Subsequent event reporting and audit quality among U.S. state and local governments

Abstract

We examine subsequent event reporting and audit quality among state and local governments. We find that ten percent of governments report at least one matter in the subsequent event note that does not appear to meet the criteria for subsequent events under GASB No. 56 and that twenty-nine percent of governments omit presumptively material bond-related events from the subsequent event note. Using a sample of audit work-papers for 150 audit engagements, we find that governments have weak internal controls surrounding subsequent events and their auditors experience difficulty identifying and classifying the severity of these internal control deficiencies. Two-thirds of subsequent events detected through the auditor’s search procedures are judged to be immaterial and are not reported in the financial statements. These findings suggest that governments and their auditors experience difficulty implementing financial reporting and auditing standards surrounding subsequent events and support the need for further guidance from standard-setters.