It is a common practice for local government agencies like parish governing authorities, municipalities, and housing authorities to create special service districts and quasi-public organizations to facilitate certain public services, subject to the oversight of the local government agency that created them.
These legally separate entities may be determined to be component units of the oversight or primary government if at least one of the following criteria set forth in Governmental Accounting Standards Board (GASB) Statement Number. 14, The Financial Reporting Entity, as amended, applies:
- The primary government appoints a voting majority of the entity’s governing body, and is either able to impose its will on the entity or there is a potential financial benefit/burden to the primary government
- The entity is fiscally dependent upon the primary government and there is a potential financial benefit/burden to the primary government
- The nature and significance of the relationship between the primary government and the entity is such that exclusion of the entity from the primary government’s financial statements would cause the primary government’s financial statements to be misleading.
Other entities that were not created by a local government may nonetheless be a component unit of that local government if the government determines that the entity meets the above criteria.
If a local government has component units, it needs to make a decision as to whether the financial activity of the component units will be included in the primary government’s annual financial report.
Some component units prefer to provide an annual financial report to the Louisiana Legislative Auditor (LLA) that is separate from the annual financial report of their primary government. Other component units want to be included in their primary government’s annual financial report so they won’t have to provide or pay for a separate audit, review/attestation, or compilation report.
While many primary governments allow their component units to report as the component wishes, generally accepted government auditing standards require a CPA firm to modify the auditor’s opinion or accountant’s review or compilation report of a primary government if the primary does not report all of its component units. And, the primary government may be required to report all of it component units in order to receive certain certifications for excellence in financial reporting.
A local government that has component units, or that believes it may have component units, should discuss the impact of these component units on its financial statements with the CPA firm that performs their audit. If a local government, in consultation with their CPA firm, determines that a certain entity is a component unit, they should either ensure the component unit is reporting with the primary government; or is providing a separate annual financial report to LLA.
A primary government should include information about its component units in the first note to its financial statements, normally referred to as the Summary of Significant Accounting Policies. The information should include:
- A brief description of each of the primary government’s component units
- The relationship of each of the component units to the primary government
- If any of the component units issue separate financial statements, how the separate financial statements for the individual component units may be obtained.
Some housing authorities enter into partnerships with non-governmental entities to develop housing projects. As defined under the audit law (Louisiana Revised Statue (R.S.) 24:513 A. (1) (b) (ii)), any of these partnerships that is determined to be a component unit of a housing authority is a quasi-public body or agency. These partnerships are required to report their financial activity to LLA; either with the related housing authority, or in a stand-alone report. If the tax credit partnership chooses to provide for a stand-alone audit report, the audit must be performed in accordance with generally accepted government auditing standards; and is due no later than six months after the agency’s fiscal year end.
- Where can I get the list of all of the component units of a certain local government?
- I see that some parish governments list elected officials like the assessor, coroner, clerk of court, district attorney, and sheriff as component units, and others do not. What is the reason for this inconsistency?
- I am the president of the board of a sewer district. I believe that the district is a component unit of the parish government, and I want to be included in the parish government’s report so that we can save money on audit costs. However, the sewer district is not listed as a component unit in the parish government’s report. How can I change this?
- Does LLA prefer that a component unit reports with its primary government or submits a separate report?
- Is there an instance in which a component unit would be required to provide an audit or other report separately from the primary government?
- I am the parish president of a parish government that does not include all of its component units in its audit report. The CPA firm renders an adverse opinion on the financial statements because of this. Is this a cause for concern?