The MBTA’s chief administrator has directed the staff to resume including a key section of its annual financial audit that has been omitted since 2008.
Known as “management discussion and analysis,” the section is meant to be a plain-English summary of the data included in financial statements. It is a required supplement to basic financial reports, and the T’s outside auditor, KPMG, disclosed for seven straight years that the authority failed to provide the information.
Kip Betz, a spokesman for the Government Accounting Standards Board, said the management discussion is meant to be a narrative that explains an entity’s health.
“If you’re not reporting that, it’s more difficult for people to get a good sense of those important things,” he said. “That’s a red flag. It just raises questions.”
Officials at the Massachusetts Bay Transportation Authority could not say why the section had been omitted all these years. In response to a Globe inquiry, the authority’s chief administrator, Brian Shortsleeve, has directed the T’s new financial staff to include the section in the financial statements for 2016.
T spokesman Joe Pesaturo said Shortsleeve ordered the change “after learning of the omission.”
Mary Z. Connaughton, director of government transparency at the Pioneer Institute, a Boston think tank that has been critical of the T, said the purpose of the management discussion section of financial reports “is to put the T’s finances into a context where you don’t need an accounting degree to understand them. Discontinuing the practice marks a breakdown in transparency that is, frankly, mindboggling.”
The audit for fiscal 2015 is expected to omit the narrative section. In a January update to the T’s Fiscal Management and Control Board, KPMG said the T’s fiscal 2015 financial statements and audit, for the year ended last June, have been delayed because of KPMG’s difficulties auditing the MBTA’s pensions and other issues.
In one instance, KPMG said it had discovered an $80 million pension liability that was unfunded and overseen separately from the T’s $1.6 billion retirement fund.
The T has been in financial straits, with aging equipment, a heavy debt load, and deficits for years. Last winter’s crippling snowstorms pushed the authority’s financial and operational troubles to the top of the Baker administration’s to-do list.
KPMG has been the T’s auditor since fiscal 1990, Pesaturo said. In 2002, the T started including several pages of management discussion in its annual audit, adopting a new standard required by the Governmental Accounting Standards Board at that time. But starting in the year that ended June 30, 2008, KPMG’s annual audit said management had omitted the section.
While the auditor’s opinion on the financial statements was still valid, the narrative is considered part of US generally accepted accounting principles. KPMG said in its disclosure on page 2 of the latest T audit that the missing information is considered “an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context.”
Betz, the GASB spokesman, said such disclosures generally raise questions in the minds of investors and bond underwriters.
“It may cost you more to borrow money if you aren’t in compliance” with US accounting standards, he said.
A spokesman for KPMG declined to comment on the T’s failure to file the supplemental reports since 2008.
Pesaturo, the T spokesman, said in an e-mail, “Apparently there was a consensus at the time that the ‘management discussion and analysis’ was information already found within the core financial statements” and that “there was no absolute requirement to include it.”
It’s unclear why the narrative section was dropped in 2008. It was a time of stress for the authority, with particularly dire budget warnings by then-financial chief Jonathan Davis. It was also the run-up to the financial crisis, and the T was struggling with costly swaps to hedge against rising interest rates, which backfired.
Shortsleeve was appointed in July to oversee the T’s finances last July, as part of Governor Charlie Baker’s overhaul of its leadership. Davis, the longtime financial chief, retired in October.