Financial audits for issuers of municipal bonds continue to significantly lag the turnaround time for audits of companies in the private sector, according to Merritt Research Services, LLC, which recently completed its second annual audit timing study.
Merritt Research Services, a municipal bond credit database and research company, found little change in the results from this year’s audit timing study compared to last year’s study.
Based on medians for 16 municipal credit sectors, it took an average of 141.3 days from the end of the 2010 fiscal year to the time the audit report was completed, compared to an average turnaround time of 141.6 days for fiscal 2009.
According to the report, entitled, Timing of Municipal Bond Financial Audits Leaves Room for Improvement, public power wholesale electric borrowers are the fastest to complete their annual audits, with a median turnaround time of 90 days from the end of fiscal year 2010 to the completion of the audit.
States and territories are the slowest reporting credit sector in the market, with a median turnaround time of 178 days from the end of the fiscal year.
General obligation bond borrowers backed by governmental entities such as states, cities and counties have consistently lagged municipal enterprise entities that use revenue bonds to complete their reports over the past four years. Very few of these entities would currently pass a 90- day audit test – no less the 120-day guideline set by the Municipal Securities Rulemaking Board (MSRB).
Neither the complexity of the credit nor the size of issuer appeared to influence how quickly an entity was able to complete its audit.
Despite the slow median timing for the state and city sectors, the State of New York and New York City, two obvious complex credits, were able to make the 120-day audit time guideline for the past two years. In fact, the State of New York completed its audit in less than 120 days in all four years of the study, and New York City was able to do so in three of the last four years.
Being a small municipal borrower does not seem to inherently handicap an issuer’s ability to get its audits signed in a timely manner, either. Many smaller entities were among the fastest to have their audits completed (although others were among the slowest).
The four fastest audit times in 2010 were all linked to relatively small entities. Pulaski Electric Division, Tennessee, for example, was able to complete its audit within only 16 days of the close of its fiscal year. Titus County Fresh Water Supply District #1 in Mount Pleasant, Texas had its audit signed in 22 days, while two school districts, Newaygo Public Schools, Michigan and Maple Shade School District, New Jersey, both completed their audits in 23 days.
At the same time, many large municipal bond issuers also were able to have their audits signed within the 60-day window required by the Securities & Exchange Commission (SEC) for large, public corporate borrowers. A sample of those entities included Sacramento Power Authority (49 days), Indiana Municipal Power Agency (56 days), Port Authority of New York & New Jersey (56 days), Syracuse University (29 days), Mayo Clinic (48 days) and Santa Barbara County, California (55 days).
While there was some suggestion in the numbers that credit quality might be correlated with faster or slower audit times, Merritt did not do a complete analysis of this relationship to make a conclusive determination. A number of slower reporting credits appeared to have weaker financial situations or held lower ratings from the bond rating agencies. By the same token, a large number of AA or Aa2 rated borrowers took 250 days to complete their audits.
Merritt examined the 2010 audits for 6,673 municipal bond issuers, representing nearly all municipal credit sectors. This year’s study was expanded to include substantially more audits for the most recent audit period in its analysis this year than last year. In addition, a broader base of borrowers was added for the historical period 2007 to 2009 to assess the trend in financial reporting times.
Merritt Research Services, LLC (MRS) is an independent municipal bond data and research provider, focused on credit information related to municipal bonds.
For a complete copy of the 2010 Audit Timing Study, please contact Mardee Alvaro.
Median Audit Timing by Sector
How do municipal bond sectors stack up when it comes to timing of their municipal audits?
The following table illustrates median number of days from the end of fiscal year 2010 to the completion of audit for municipal bond sectors, ranked in order of timeliness.
| Sector | Median Audit Timing |
| Wholesale electric utilities | 90 |
| Hospital and healthcare | 110 |
| Private higher education | 112 |
| Tollways | 119 |
| Retail electric utilities | 133 |
| Other revenues | 138 |
| Public higher education | 138 |
| School districts | 142 |
| Airports | 145 |
| Special districts | 148 |
| Water and sewer systems | 153 |
| Land districts | 155 |
| Dedicated tax | 161 |
| Cities | 167 |
| Counties | 172 |
| States and territories | 178 |