The purpose and focus of a
local government agency or quasi-public organization (local auditee) 
is to take in enough revenue to fund its operations, and to maintain a modest reserve in case of emergencies. If a local auditee, particularly a local government, is able to consistently maintain a large unreserved equity balance in relation to its revenue, this may be an indication that the local auditee is charging too much for its services.
On the other hand, a local auditee that consistently reports a deficit in its equity accounts may have difficulty meeting its current obligations; including payroll and related taxes, or vendor accounts payable. It may borrow money from its restricted funds, board members or executive director to fund its operations. It may not be able to pay its bonded debt.
Significant deficits are one of the indicators that Louisiana Legislative Auditor (LLA) staff look for in their desk review of local auditee reports, to determine if a local auditee is experiencing financial hardship. LLA may take action regarding deficits, up to and including referral to the Fiscal Review Committee to determine if appointment of a
fiscal administrator is advisable.
LLA classifies a deficit as significant if it meets the following criteria:
Ø For local governments – in the fund financial statements, are any governmental funds reporting an unassigned fund balance deficit that is greater than 5% of the revenue reported in the fund?
Ø For local governments – are any proprietary funds reporting an unrestricted net position deficit that is greater than accumulated depreciation plus net pension liability plus 5% of the revenue reported in the fund?
Ø For nonprofits – is the nonprofit reporting a deficit in net assets without donor restrictions that is greater than accumulated depreciation plus 5% of reported revenue?
LLA requires a local auditee that is reporting a significant deficit, as defined above, to include in their annual financial report an explanation of what is causing the deficit; and management’s plan of corrective action to eliminate the deficit. This information is usually included in the notes to the financial statements. This information is over and above what is required by
generally accepted accounting principles or GAAP, but LLA believes that it is beneficial information for the users of local auditee reports.
QUESTIONS:
Q. What authority allows LLA to require information in a report that is over and above what is required by GAAP or Louisiana law?
A. LLA has been given broad authority in
the audit law (
Louisiana Revised Statutes 24:513) to prescribe the terms and conditions of the engagements of local auditees; including the form and content of the reports that it receives.
Because of the public interest in local auditees that report deficits, LLA has found it beneficial to the users of local auditee reports to include the cause of any reported significant deficit, and management’s plan to eliminate it.
Q. If a local auditee is reporting a significant deficit, is the CPA required to report a going concern condition in the auditor’s opinion?
A. A CPA is required by auditing standards (AU-C Section 570) to evaluate an entity’s ability to continue as a going concern in every audit performed. Recurring losses from operations is named in AU-C Section 570 as an indicator, but not the sole indicator, that there is a substantial doubt about an entity’s ability to continue as a going concern. A CPA should consider the existence of any deficits as an indicator of a going concern condition, in accordance with AU-C Section 570, but the existence of a significant deficit alone does not mean that the CPA is required to report a going concern condition in the auditor’s opinion.
Q. Does a CPA need to include a finding in a report when a significant deficit exists?
A. No. Significant deficits are not good, but are not against the laws of the state of Louisiana.
Q. Does the existence of a significant deficit mean that a local government agency is noncompliant with the
Local Government Budget Act?
A. A local government agency may not budget a deficit – meaning, they are not legally allowed to adopt a budget in which anticipated revenues plus available fund balance is less than anticipated expenditures.
And, if a significant deficit exists in Year 1, the local government will need to adopt a budget in Year 2 that allows for the elimination of the deficit; through either an increase in revenues or a reduction in expenditures, or both.
However, the existence of an actual significant deficit does not necessarily mean that the local government adopted a budget that was not in compliance with the Local Government Budget Act.