Bonds

Public finance is still figuring out repercussions of accountant shortage

The shortage of qualified accountants has affected nearly every organization in both the public and private sector.

And it’s definitely not helping a public finance sector that has long struggled to supply audited financial information in a timely manner.

“In terms of audit findings, we haven’t seen an uptick in incorrect audits, though we will be keeping a close eye on that going forward,” said Jaime Blansit, an S&P Global Ratings associate director.

“The shortage of accountants is not a brand new issue, but it seems to be more thematic this year,” said Richard Ciccarone, president emeritus of Merritt Research Services.

Alan Klehr

But late and/or absent audits are another story.

S&P has seen the number of issuers being placed on negative watch and then have ratings withdrawn for lack of up-to-date financials more than quadruple since 2018.

California has become the poster child for putting out a late annual comprehensive financial report. It published its fiscal year 2022 ACFR in March, marking the fifth year in a row the state’s ACFR has been significantly delayed.

Neither California Treasurer Fiona Ma nor Controller Malia Cohen responded to requests for comment as to whether the shortage of accountants has affected their offices.

But the data around the shortage of accountants both now and in the future pipeline is well-documented.

“The shortage of accountants is not a brand new-issue, but it seems to be more thematic this year,” said Richard Ciccarone, president emeritus of Merritt Research Services. “This year it has been brought to a head, because the issue is not going away, it’s getting worse.”

He added that everyone is now realizing it’s not just a temporary issue that can be chalked up to the so-called “Great Resignation” of 2022 as the nation started to exit the worst of the COVID-19 pandemic. It’s a problem that is here to stay, he said.

Accounting degree completions fell nearly 11% to 67,372 in 2021-22 from 75,153 in 2017-2018, according to a May draft report created for the American Institute of CPAs by the National Pipeline Advisory Group.

The problem isn’t limited to the number of people obtaining accounting credentials. A 2023 survey for the Institute of Management Accountants found what it termed in the summary “an alarming number of professionals intending to leave their current employer or the profession.”

The IMA survey reported that as many as 8% of the accountants in the 38-and-under age bracket are considering leaving the accounting and finance profession in the next 12 months.

That will make it harder to fill the 126,500 additional job openings expected for accountants and auditors each year over the next decade, according to the U.S. Bureau of Labor Statistics.

There are also 30,000 fewer state and local public finance workers than in 2019, according to a report produced by Lightcast for the Government Finance Officers Association in September 2022.

Simultaneously, demand growth in state and local public finance as measured by unique online job postings was up 92% for state and local public finance in the first half of 2022 compared to the same period in 2019, according to the report.

The issue could become exponentially worse in coming years, the GFOA report said, because nearly one-third of the incumbent workforce is expected to hit retirement age in the next 10 years.

The shortage of workers has resulted in mergers among accounting firms and the outsourcing of work overseas, Ciccarone said.

Public finance could face a greater problem than private companies, because fewer accountants are trained in the Governmental Accounting Standard Board’s accepted principles than are trained in the Financial Accounting Standard Board’s principles that guide private industry. Accountants who work in public finance need to know both, because public accounting uses both, he said.

Ciccarone has been beating the drum for more than a decade on how late or missing audited financials can damage government transparency and circumvent an early warning system on potential insolvencies. He created a database years ago to track the issue and now works with Deborah Caroll, director of the University of Illinois Chicago Government Finance Research Center, to put out a report tracking delays in government ACFRs annually.

His hope, he said, is that the market, taxpayers and the rating agencies come to the conclusion that audits are important enough to make their timing and release a higher priority.

The accounting shortages “are not the root cause of the delay, I will attribute that more to complacency,” Ciccarone said. “But it’s becoming a more convenient rationale for audits being late.”

He added that he’s glad the rating agencies are taking notice of both issues.

The number of municipalities at risk of having their credit ratings downgraded or withdrawn by S&P has grown substantially.

S&P placed 186 local government, public utility and transportation issuers on Credit Watch with negative implications on March 6, because it has yet to receive fiscal 2022 financial statements from those issuers, Blansit said. That number has grown by 37 from the 149 it placed on credit watch last year, she said.

The number of issuers that have had ratings withdrawn because analysts lack sufficient information on which to base a rating has grown to roughly 91 issuers from 64 last year — and the number of ratings withdrawn last year is double the number dropped by S&P in 2018, she said.

Moody’s Ratings also put out a report this week noting that it had placed the ratings of several issuers on watch, warning that it could withdraw the ratings, and also citing the shortage of public finance accountants as an issue.

Moody’s puts out the reports incrementally in “smaller batches,” but Lisa Washburn, chief credit officer and managing director for Municipal Market Analytics, noted Moody’s has probably put out a dozen such reports over the past 12 months warning it could be withdrawing ratings.

California, a frequent issuer, provides a variety of information to the market regularly, and hasn’t seen downgrades or an impact on bond pricing despite years of releasing its annual comprehensive financial report late.

But the growing number of smaller issuers losing their ratings could be denied market access, she said, because investors don’t want to take the risk on issuers with missing disclosure documents that also lack third-party verification from rating agencies. The issuers also may simply not be able to afford the higher price of issuing as an unrated credit.

It also means investors who hold bonds sold by issuers that lack current financials may be unable to resell them in the secondary market, Washburn said.

Smaller issuers may not frequently issue debt and they tend to issue fixed rated debt, when they do, Washburn said. “So the impact of being late, in terms of your filings or your audit, that risk gets borne by the investor.”

Once an infrequent issuer sells its bonds, its debt service requirements are set, and late filings or audits don’t change that, and thus what happens in the second markets has less of an impact on smaller issuers, Washburn said.

“For investors, it makes the bonds incrementally less liquid, and it makes pricing those bonds accurately more difficult, because they don’t have necessary information available,” she said.

The growing desert of local journalism compounds the problem, because smaller cities and rural areas aren’t covered in the way they once were, she said.

“We have a shortage of journalists covering smaller issuers now,” Washburn said. “So the information flow on those credits is so much less than on larger bond issuers.”

The concern for investors is they may not know what is going on with that credit, and the information is not there from an audit perspective.

Smaller borrowers make up the bottom 10% of the market, but they comprise almost 30,000 borrowers, Washburn said. It shows how concentrated the muni market is in larger issuers.

“For those who have billions of dollars or even hundreds of billions of dollars, they are active participants,” Washburn said. “When they come to market, their official statements provide additional information and they are being covered extensively by the press. There is just a greater flow of information.”

She added that any concerns in this regard are always balanced by the fact the muni market — excluding Puerto Rico — has a default rate that is only .41% of par.

“That is a super low rate of par currently in default,” Washburn said.

“In thinking about a way to address the accounting shortage and the impact on lateness, maybe there is a role for states to play in terms of providing/disseminating relevant information on their local governments in an organized way to the Municipal Securities Rulemaking Board for posting on EMMA,” Washburn said.

And the number of issuers who have had ratings withdrawn or downgraded because of lack of timely information is a small portion of S&P’s portfolio overall, said Blansit, adding it’s less than 10%.

“We do receive timely audits for the vast majority of our portfolio,” she said.

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