Audits and Local Government Finance Report submissions are key aspects of the financial reporting that municipal governments must complete each year.
A municipality’s annual audit includes all its financial records and transactions, as well as those of any agency it funds in whole or in part. The city or town engages an independent auditor to create the audit by gathering appropriate evidence. The auditor then tests, compares and confirms its information so that it can provide greater confidence to stakeholders — such as residents and creditors — in the city’s financial statements.
Audit and compilation of financial statement requirements
SC Code Section 5-7-240 creates numerous audit requirements for municipalities with total recurring revenue greater than $500,000. Within 30 days of the beginning of the city’s fiscal year, the council must designate an independent certified public accountant or accounting firm to audit all its financial statements.
The city is not required to seek competitive bids for this work. However, using a request for proposals process is valuable in defining expectations for the auditor, including their qualifications, knowledge of governmental auditing standards and the timeframe of the auditing process.
The city may not designate an accountant for a period any longer than four years, although it may renew the designation with a particular accountant after the four-year period. Even so, rotating auditors helps ensure that the municipality’s finances are examined from multiple perspectives.
Because the cost of an audit was unfeasible for the budgets of some small municipalities, the General Assembly passed Act 71 in 2023. The law allowed cities and towns with recurring revenue of less than $500,000 to provide a compilation of financial statements instead of a full audit. This new rule is effective for fiscal years beginning no earlier than January 1, 2024. Municipalities with a court system must submit these compilations of financial statements annually, and those without a court system must do so every three years.
Each year when the council reviews and accepts the audit or compiled financial statement, it must make this document available for public inspection. Cities with websites often post them there.
Cities must also submit the annual audit or compiled financial statement to the Office of the State Treasurer by the 13th month after the end of the city’s fiscal year, or the city’s share of state revenues may be withheld, including funding through the Local Government Fund and any local option sales tax funds. The State Treasurer posts a list of municipal delinquent audits online.
Cities also must submit the annual audit to any creditors, banking institutions and other agencies that require continuing financial disclosures.
Audits versus regular bookkeeping
City councils have the ultimate responsibility for their financial controls, such as making sure that monthly financial statements are prepared, and the information is accurate. They engage the independent auditor to give an opinion on whether financial statements are presented correctly and free of significant misstatements.
Auditors cannot prepare statements themselves, as this would interfere with their independence. City staff and officials must be the ones to initially enter data, reconcile bank statements and prepare financial statements, and if they do not, then the city must engage another accountant to do so.
Local Government Finance Report requirements
Cities and towns must also submit the Local Government Finance Report to the SC Department of Revenue and Fiscal Affairs, due by March 15. The report is available online. Municipalities that do not submit this report on time face the penalty of losing 10% of the municipality’s share of the Local Government Fund.
Learn about municipal financial administration, including budgeting, audits, cash flow and debt, in the Handbook for Municipal Officials in South Carolina online.