Making the Grade: Avoiding Common Deficiencies in AFR and ACFR Reviews

Students aren’t the only ones who receive report cards in Texas. Every school district, charter school and education service center in the state receives an annual evaluation of their annual financial report (AFR) as part of TEA’s AFR financial desk review.

Students aren’t the only ones who receive report cards in Texas. Every school district, charter school and education service center in the state receives an annual evaluation of their annual financial report (AFR) as part of TEA’s AFR financial desk review. Additionally, the Government Finance Officers Association (GFOA) offers a Certificate of Achievement for Excellence in Financial Reporting Program (COA) as an opportunity to further demonstrate financial transparency and full disclosure by going beyond just TEA’s requirements.

Regardless of whether you submit your AFR/ACFR only to TEA or also apply for the GFOA Certificate of Achievement, your annual financial report will be scrutinized based on similar evaluation criteria. Achieving the best outcome on either report card takes attention to detail at every stage of the process and full transparency whenever possible.

As external auditors who must review the annual financial reports before submission with our audit report, we encounter a variety of errors and oversights, including simple, avoidable mistakes.

In this article, we will delve deeper into common deficiencies in AFR/ACFR reviews and present strategies for mitigating them.

Improving Quality

These strategies can help you elevate the quality of your entity’s AFR/ACFR and mitigate deficiencies:

  • Thoroughly review GFOA's comprehensive checklist available on their website as it applies to your annual report – even if your entity is not submitting your report to GFOA. Meticulously address all applicable checklist items, leaving no room for oversight.
  • Leverage internal and external expertise to ensure compliance with evolving accounting standards and best practices.
  • Emphasize continuous improvement and professional development to equip finance officers and staff with the knowledge and skills necessary for comprehensive financial reporting.

Follow these general tips for success:

  • Prepare a reporting checklist. Start with GFOA’s checklist and tailor it to your entity, or develop your own.
  • Identify reviewers in your organization with the best skills, knowledge, and experience (SKEs) to prepare/review the report. Divide and conquer when you can.
  • Create and follow a timeline to allow adequate review for all involved.
  • Remember that you will be taking responsibility for attesting to the fair presentation of the report when signing the Management Representation Letter, even if your auditor assists in the preparation of the report.
  • Access contact information and resources from TEA as needed.

Focus Areas and Common Deficiencies Noted

The following segments break down common deficiencies in each section of your Annual Comprehensive Financial Report (ACFR):

Cover of the Report: The cover serves as the initial impression of the ACFR. Make sure it includes the correct title, entity name, state, and fiscal period to avoid comments before reviewers have even begun to delve into the content of the report.

Introductory Section (applicable for GFOA ACFR submissions only): The introductory letter sets the tone for the ACFR and provides essential contextual information. While you are required to include certain information, such as identifying which governmental funds are annually (or biennially) appropriated (2-001-04-07 on the GFOA checklist) and describing the level of budgetary control (2-001-04-07), also take advantage of this opportunity to briefly identify topics and explain potential interest to the financial statement users. Just be careful not to duplicate information that is required later in the report. In this introductory section you have an opportunity to enhance transparency and demonstrate a commitment to comprehensive reporting, but also limit discussion to more subjective aspects of topics outside the required elements of this section, such as discussions about the local economy, financial planning, major initiatives and accomplishments of the entity.

Management's Discussion and Analysis (MD&A): Often regarded as the heart of the ACFR, the MD&A offers a narrative overview of the entity's financial performance and significant changes. This is one area where management has the opportunity to compare prior year results to current year results and provide explanations and context.

One of the most common comments from GFOA reviewers in this section is that management does not go far enough in explaining the “why”. Providing insightful explanations about significant changes from prior year to current year, or budget to actual, and focusing on the "why" rather than merely the "what," enhances stakeholders' understanding and trust in the financial statements.

For example, instead of “Fund balance increased by $200,000 because property taxes increased,” try: “Fund balance increased by $200,000 primarily due to increased property tax revenue. Property tax grew as a result of a 2% rate increase on all classes of property, as well as an average increase of approximately 3% in the taxable property values, driven by increased local real estate market values.”

Financial Statements: Accuracy and coherence across financial statements are paramount. Addressing discrepancies in balances, as well as ensuring accuracy of key calculations such as net investment in capital assets and classifications of net position, ensures the integrity of the ACFR and instills confidence in stakeholders.

Balances that don’t agree are the most common errors in the AFR/ACFR financial statements section. Examples include:

  • Fund balance does not agree between Statement of Changes and Balance Sheet.
  • Individual line items such as accounts payable do not agree between the fund-level and government-wide financial statements.
  • An amount reported in the financial statements, such as capital assets or long-term debt, does not agree with the respective footnote. Pay particular attention to new line items and footnotes required for the implementation of new GASBS, such as those for leases and SBITAs for example.

Specifically, the most common comment in the financial statements section of the annual report is checklist question 6-002-10 – It is unclear why the government reports restricted assets but not restricted net position. Please clarify.

Remember, at the fund level you can have nonspendable, restricted, committed, assigned and unassigned fund balances. At the government-wide level you have only Net Investment in Capital Assets, Restricted Net Position and Unrestricted Net Position. What is classified as “restricted” (by a third party typically through grants or debt service) is going to be restricted at both the fund level and government wide. The differences are mainly going to be in the balances themselves due to the modified accrual basis of accounting at the fund level versus the full accrual basis of accounting at the government-wide level. An example of this would be the restricted for debt service classification at the fund level and the government wide. While this classification will typically be on both sets of financial statements, the numbers should not be the same in most cases. To get to the restricted for debt services calculation on the Statement of Net Position, you start with the debt service restriction on the fund level, plus deferred inflows of resources for the debt service at the fund level, less accrued interest on the government-wide statements.

Lastly, the calculation of Net Investment in Capital Assets calculation remains one of the top 20 comments from fiscal year 2023 reviews.

For the Net Investment in Capital Assets calculation the GFOA provides a formula and requires the calculation to be submitted with the ACFR for review. Common errors in the calculation are:

  • Including assets that do not wholly belong to the reporting unit.
  • Including non-capital related liabilities, such as bonds used for purposes other than capital projects or including pension/OPEB liabilities.
  • Omitting unspent bond proceeds.
  • Omitting deferred inflows and outflows of resources from refinancing those capital-related liabilities.
  • Omitting short-term capital-related liabilities, such as capital-related accounts payable and retainage payable.

Financial Statement Footnotes: Aside from amounts disclosed in footnotes not agreeing to amounts recorded in the financial statements, the most common errors identified in the footnotes are related to pension and OPEB plans, due to the complexity of these disclosures.

Pension and OPEB disclosures should include all required elements, including details by plan type. The Teacher Retirement System (TRS) provides suggested pension and OPEB note disclosures annually to assist in this area.

Another area of frequent comments relates to budgets. The notes to the financial statements should disclose which funds have legally adopted annual budgets, the legal level on control, and any violations of the budget.

Budgetary comparison schedules are required to be presented for all governmental funds with a legally adopted annual budget, which for ISDs should include General Fund, National School Breakfast & Lunch Program and Debt Service Fund.

Required Supplementary Information (RSI): Most RSI comments are focused on pension and OPEB schedules. The Schedule of the District’s Proportionate Share of the Net Pension Liability of TRS Pension Plan (Exhibit G-2) should report activity for the Plan’s fiscal year end, Aug 31 of the prior year, while the Schedule of the District’s Contributions to the TRS Pension Plan (Exhibit G-3) should report activity for the district’s fiscal year end. This means that the two schedules will report different periods. Therefore, the covered payroll amounts should not be the same.

Be sure to include notes to the schedules that discuss changes in assumptions and benefit terms, if any. This information can be obtained from the TRS website. These rules also apply to the OPEB Schedules as well.

Statistical Section (applicable for GFOA ACFR submissions only): Two frequent comments in the statistical section relate to the table that provides information on changes in fund balances of the governmental funds. Both are related to the calculation of debt service as a percentage of noncapital expenditures.

First, debt services expenditures should include only principal and interest (no bond issuance costs). Second, when determining noncapital expenditures, be sure to deduct the related reconciling item from the fund level to government-wide financial statements, not the capital outlay line item from the statement of revenues, expenditures, and changes in fund balance.

Another area of frequent comment is the debt capacity tables. Outstanding debt in these tables should reconcile to the related footnotes to the financial statements and be reported net of unamortized premium/discounts on bonds.

Specific TEA Reporting Requirements to Consider

  • Before you finish, whether you are a school district, charter school or education service center, remember that the TEA requires that every TEA AFR submittal includes: Your Certificate of Board which is signed, approved, and dated on or after the Auditor’s Report date.
  • A PDF file in basic searchable text format that is printable, not password protected, and smaller than the maximum file size of 50 MB
  • The required data feed file with amounts that are consistent within the data feed schedules and the PDF AFR.


In the realm of public finance, achieving excellence in financial reporting is not merely a goal but a responsibility. By embracing the principles of transparency, accuracy, and compliance with established standards, school business finance officers can elevate the quality of their annual financial reports and uphold the integrity of their institutions. Through proactive measures, continuous improvement, and a commitment to best practices, making the best grade on the AFR/AFCR review becomes not just an aspiration, but a tangible demonstration of financial stewardship and excellence.

Consider the strategies and tips above the next time you are going through your annual financial reporting process and focus on the common errors noted above if you need a place to start. The devil is in the details, but whether you are a seasoned pro or first-time reviewer/preparer, there are tools and resources available to ace the test!

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