In recent times, the financial environment is generally fast-paced, stakeholders demand timely and accurate financial information to make informed decisions. Interim financial reports (IFRs), typically issued quarterly or semi-annually, serve this need by providing a snapshot of a company’s financial health between annual reporting periods. This is the same scenario faced by many governmental and not-for-profit entities. However, the condensed nature and limited scope of these reports can raise concerns about their reliability. IFRs are typically unaudited financial statements principally for internal use, covering a period less than the entity’s fiscal year. Unlike annual reports, IFRs provide an almost real-time update on entity performance. In practice, interim financial reports include statements that show the entity’s current financial position and compare the data with budgeted estimates. Interim financial reporting serves as a critical tool for stakeholders seeking up-to-date financial information.
Traditionally, external auditors have focused on year-end audits, while internal auditors have concentrated on operational and compliance audits. However, the evolving regulatory landscape and stakeholder expectations are pushing internal auditors to engage more actively in the interim reporting process. This is because the sharp rise in public company auditor oversight may disproportionately benefit annual reports given the fiscal year-centric nature of audits (
On the governmental and not for profit perspective, due to its associated time constraints, IFRs often use estimates and conditional data, which can increase the risk of errors, misstatements, even unrealistic assumptions. Thus, making the role of auditors even more crucial in ensuring that the while the statements are interim, they capture the financial realities on ground as much as feasible. To this end, one can argue that the current practice, the underlying assumptions, and operational definition that interim financial reports are unaudited may not be sustainable in the long term.
Although the purpose is to offer some direction on the preparation and presentation of interim financial reports by state and local governments, it only applies to those governmental entities that either choose or are required by regulation to issue IFRs. Since interim reports are designed for internal use, one can argue for an increased internal auditing role as entities compile IFRs. This will align directly with the GASB Codification Section 2900 position that internal interim reports are evaluated by their “relevance and usefulness for purposes of management control, which include planning future operations as well as evaluating current financial status and results to date” (section 104).
Within the purview of governmental accounting, the Governmental Accounting Standards Board (GASB) Codification Section 2900 state that:
Appropriate interim financial statements and reports on financial position, operating results, and other pertinent information should be prepared to facilitate management control of financial operations, legislative oversight, and, where necessary or desired, for external reporting purposes. (Interim Financial Reporting)
GASB Codification Section 2900 describes principles and requirements for IFRs in governmental entities. Although the section itself has not undergone major specific modifications recently, it is closely tied to broader improvements in the financial reporting model approved by GASB in April 2024. For example, GASB Statement Number 103-Financial Reporting Model (
While specific financial collapses of governmental entities due to interim reporting failures are often underreported, GASB’s reforms reflect a recognition that interim misstatements can cascade into broader financial failures—especially in entities with complex funding streams or limited oversight.
Interestingly,
Unfortunately, however, there is no discussion specifically about interim financial information in authoritative government accounting or auditing literature (i.e., the GASBC or the “Yellow Book,” respectively), except for the guidance contained in GASBC section 2900.104. This guidance is totally nonprescriptive and discretionary regarding report content and deals primarily with internal-use presentations that “properly serve management control needs,” such as for performance evaluation and future planning purposes. (Government Entities)
Reporting standards for governmental entities and not-for-profit entities arise from the fact that they are governed by different standard-setting bodies and have distinct missions, stakeholders, and accountability requirements. In practice, the GASB provides guidance for governmental entities with an underlying focus on accountability to the public and resource providers. Consequently, financial reports reveal compliance with budgets and legal constraints. The Financial Accounting Standards Board (FASB) provide guidance for not-for-profit entities with an underlying focus on stewardship, donor accountability, and mission effectiveness.
IFRs are typically issued quarterly or semi-annually to provide a snapshot of an organization’s financial health. They are essential for enhancing the accountability function of governmental entities, regulatory compliance, strategic planning, and investor decision-making. However, due to their condensed nature and time constraints, interim reports are more susceptible to errors, omissions, and manipulation. While some writers-from a private sector perspective-have questioned the usefulness of interim financial reports because firms experience a decline in investment following an increase in reporting frequency (
It is practical for internal auditors to play a crucial role in examining interim financial statements, but their involvement depends on the organization’s policies, regulatory requirements, and the nature of the internal audit function. In practice, auditors would conduct reviews of interim financial statements. The process involves limited procedures such as analytical reviews, inquiries of management, and evaluation of consistency with prior periods. One major caveat is that the examination of interim financial reports does not delve deep into the statements and as such, does not provide the same level of assurance as a full audit. Internal auditors uniquely position themselves to add value to IFR through:
Internal auditors’ involvement can bridge the gap between operational realities and financial disclosures. Through this process, the internal auditor can provide early detection of key risk areas in the interim financial reports such as:
At the enterprise level, which comprises the whole entity, internal auditors can enhance the reliability of interim reports through audit reviews. These enhancements include:
Despite the potential benefits described above, several potential challenges exist within the intersection of interim financial reporting and internal auditing operations, these include:
To effectively contribute to IFR, internal auditors can adopt a structured approach:
Planning: Align audit plans with interim reporting cycles.
Risk-based focus: Prioritize high-risk areas such as revenue recognition and expense accruals.
Collaboration: Work closely with finance and compliance teams.
Technology use: Leverage data analytics for continuous monitoring.
Since both GASB and FASB present strong focus on accountability to stakeholders of governmental and not for profit entities, this framework is arguably adaptable under both reporting standards.
While the GASB Codification Section 2900, including its associated broader amendments, provides operational guidance on IFRs, the fast pace of the financial environment indicates that internal auditors need to evolve with times and play an indispensable role in enhancing the reliability of interim financial reports. IFRs typically use estimates and conditional data, potentially increasing the risk of errors and misstatements. Through specific procedures like risk identification, compliance checks, and real time assurances, an enhanced internal auditor role can help detect potential issues early, support strong internal controls, and bolster stakeholder confidence. As financial reporting continues to evolve in response to technological and regulatory changes, the internal auditor’s role in interim reporting will remain a cornerstone of financial transparency and accountability. As financial reporting becomes more dynamic, internal auditors must evolve to meet new demands. By actively participating in interim financial reporting, they can enhance the credibility of financial information and support the evidence of accountability in governmental and not-for-profit entities. This intersection presents a valuable opportunity for internal auditors to reinforce their role as key governance partners.