What is the MD&A Report in a Local Government Audit?

Reading and understanding a local government financial statement can be overwhelming and confusing. Although the Uniform Budgeting and Accounting Act may mandate the audit, board members often miss the opportunity to leverage this document’s value in effectively managing their local government.   

The better you understand the elements and information within the audit, the more effectively you can use it to ensure financial transparency, make informed decisions, and uphold your fiduciary responsibilities to your community.  

What is a Local Government Audit?  

Local government audits help ensure accurate and complete financial statements and compliance with laws and regulations, such as state charts of accounts and federal grants. Although not a primary goal, audits can reveal potential fraud, asset misuse, or weak internal controls.   

Additionally, audits help increase transparency and foster public trust by allowing citizens, investors, and other stakeholders to review and better understand the government’s financial management and stewardship.   

Where Does the Information in an Audit Come From?  

It is easy to think that the audit is the auditor’s document, but it is essential to remember that the auditor is simply presenting their opinion on your financial statements. While they provide an opinion on the fair presentation of the financial statements, all the information in the document is yours.   

Your Audit’s MD&A Report  

One section that is easy to overlook is the Management’s Discussion and Analysis (MD&A). For the convenience of the local government, most auditors draft this section and ask that the client review it. A local unit may not understand the purpose of this section, so they accept what the auditor provides.   

What is the MD&A?  

The MD&A provides additional context, analysis, and explanations of the financial statements and other key information outlining the government’s fiscal decisions and rationale. A well-written MD&A presents the entire story, and the remainder of the financial statements support the themes written in the MD&A. The document provides an opportunity to communicate with stakeholders. It is the government’s chance to tell its financial story, justify its budgetary choices, and present its economic outlook. Your MD&A should help achieve the following objectives:  

• Enhancing understanding by providing a narrative that complements the numerical data in the financial statements, offering insights into significant events, trends, and financial indicators.  
• Providing interpretation and analysis to explain the reasons behind the changes in financial position, highlighting notable achievements or challenges, and explaining variations in revenue, expenditures, and fund balances.  
• Assessing the local unit’s financial condition, including its ability to meet its obligations, fund ongoing operations, and invest in necessary infrastructure or services.  
• Providing forward-looking information that the financial statements do not provide about future projects or potential risks that may impact the local government’s financial position.  

How to Approach the MD&A Report 

Once the auditors provide the draft MD&A, the core management team meets to discuss what additional information the report should contain. Standard templates that your auditor provides can serve as a guide to infuse any information and context needed to tell your community’s story.  

The MD&A is your opportunity to highlight your communities’ successes over the past year and to share a vision for the future. For instance, if the local government reduced expenditures by 20% while still paving an additional mile of road, emphasize that achievement. Use this section to inform stakeholders of the positive outcomes and outline the future vision or challenges.  

Improving Transparency with the MD&A  

The MD&A is more than just an audit requirement; it’s a communication tool that can fortify trust in local governance. By combining financial data with a clear, engaging, and forward-thinking narrative, local governments can foster greater community understanding of the complexity of local government and help pave the way for informed decision-making. Don’t miss an opportunity to craft a thoughtful MD&A that communicates the story behind the numbers in your audit.  

Get Help from the Government Audit Experts  

At Maner Costerisan, we understand how valuable an audit can be in building trust with your community and constituents. Our team of governmental auditing experts can help you prepare for your upcoming audit and create a plan for utilizing the information uncovered in your audit, including the MD&A, to improve transparency.   

To learn more, contact us at maner@manercpa.com or 517.323.7500.