The Texas State Board of Public Accountancy has Rules of Professional Conduct that all Texas CPAs must follow. One of those rules prohibits CPAs from issuing a report claiming financial statements are in conformity with GAAP if they are not. Read the rule.
GASB Statement No, 45 requires governments to recognize the cost of providing postemployment benefits while the employee is working and record any liability for those future benefits. House Bill 2365 passed by the legislature and signed into law by the governor gives governments an option to disregard GASB Statement No. 45.
Financial statements of governments that disregard the statement, while being acceptable pursuant to state law, will likely not be prepared in accordance with generally accepted accounting principles (GAAP). Since CPAs must express an opinion as to whether or not financial statements follow GAAP, Texas CPAs may be faced with the necessity of expressing an adverse opinion on government financial statements which they audit.
While the state’s new law would likely be construed as providing an “Other Comprehensive Basis of Accounting (OCBOA)” as defined in accounting and auditing principles, auditing standards do not allow a CPA to report on an OCBOA basis for general purpose financial statements. Instead the auditor must opine as to whether or not the statements conform in all material respects with GAAP. If they do not, the auditor must either disclaim an opinion or issue a modified or adverse opinion.
In many if not most cases, the omitted GASB Statement No. 45 information will be sufficiently material that the CPA must opine that the financial statements are not fairly presented in accordance with GAAP.
The Texas legislation does provide that governments may disclose information in footnotes and supplemental schedules that is substantially the same as that required by GASB Statement No. 45.
However, the disclosure is optional and even if made will likely not mitigate the fact that the statements themselves, on which the auditor is expressing the opinion, are omitting a material obligation and understating expenses.
During the legislative session, TSCPA was active in explaining to legislators the likely result that governments following the new law would not be receiving clean opinions from their auditors. During that process, AICPA President Barry Melancon furnished TSCPA with a letter setting out AICPA’s view on how an auditor’s opinion might read for a government that does not follow GASB Statement No. 45. Read the letter. (.PDF)
