Masquerade--Impersonating Analysis in MD&A.

• Author: Levine, Michele Mark
• Position: ACCOUNTING - Management's discussion and analysis

Management's discussion and analysis, usually referred to by its initials MD&A, is the one element of required supplementary information (RSI) that applies to all governments that issue financial statements prepared in accordance with generally accepted accounting principles (GAAP). MD&A is intended to provide users of government financial statements with some of the insight that managers have into the financial position and results of operations for which they are accountable, and the root causes of changes seen between years.

Analysis answers questions that begin with "why." Discussion precedes analysis in the name MD&A, but only because of the logical imperative of financial statement users first knowing what the financial position and results of operations are before being able to comprehend why they are so. The overriding objective of MD&A is to provide analysis. GAAP states up front that MD&A "should introduce the basic financial statements and provide an analytical overview of the government's financial activities." (1) That two of the ten most frequent comments given to applicants to GFOA's Certificate of Achievement for Excellence in Financial Reporting award program ("COA") are for missing analysis in MD&A speaks to a general scarcity of true analysis. (2)

Keep asking why

Anyone who has spent time with toddlers or young children knows that, to make sense of the astoundingly complex universe of which they gradually become aware, children ask a seemingly unending stream of "why" questions. Just ponder, if you will, how many millions of times an effort to have a 3-year-old don a raincoat may have led, step-by-step, to fervent pleas for what amounts to a meteorological dissertation. Perhaps children so encouraged now populate our universities, storm-tracking services, and newsrooms as adults.

The best MD&As are written by authors who seek out explanations as ardently as children, asking and seeking answers about why their government's financial statements read as they do, by asking "why" often enough to uncover root causes. Take, for example, the question of why a county's net position increased from one year to the next. How many iterations of "why" questions might it take to reach satisfactory, root cause explanations? (See Exhibit 1.)

Following the analysis in Exhibit 1, this county might include an explanation like the following in their MD&A:

Net position of the county's governmental activities increased by 2.5 percent during the...