Opinion ID: 2787659
Heading Depth: 3
Heading Rank: 2

Heading: Independent Audit and Fight Over Contractual

Text: Obligations ¶17. Tann, Brown & Russ produced an “Independent Auditor’s Report,” a “Schedule of Lamar County’s Portion of the Pat Harrison District’s Bonds, Contractual Obligations, and Other Indebtedness and Liabilities,” and “Notes to the Schedule of Lamar County’s Portion 8 of Bonds, Contractual Obligations, and Other Indebtedness and Liabilities.” Lamar County filed these audit reports with the court in December 2012. The audit excluded the District’s perpetual park operating costs from the schedule of contractual obligations.
¶18. In its audit, Tann, Brown & Russ excluded the perpetual park operating costs from its calculation of the portion of the District’s contractual obligations Lamar County was obligated to pay, explaining: As discussed in Note 6 to the schedule, the District has included $146,524,357 as an estimate of the present value of the District’s future costs (net of park user fee revenues) to operate the Okatibbee Creek Park through June 30, 2018, and to perpetually operate its other recreational parks. In our opinion, the estimated future costs to operate the Okatibbee Creek Park through June 30, 2018, and to perpetually operate the District’s other recreational parks should not be included in the schedule because they are not contractual obligations of the District as of September 6, 2011, in accordance with Section 51-15-118 of the Mississippi Code.8 ¶19. The report further explained why the perpetual park operating costs were not contractual obligations: The District’s lease agreement with the U.S. Corps of Engineers for the Okatibbee Creek Park is not a contractual obligation because it is cancelable by the District. In addition, while the District’s agreements with the National Park Service and Natural Resources Conservation Service generally require the continued use of the District’s other parks for outdoor recreational 8 In Note 6 accompanying the schedule, Tann, Brown & Russ explained that it had calculated the perpetual park operating costs using the Gordon Growth Method. The Gordon Growth Method is formula used to calculate the future value of businesses and other assets based on the assumption that future revenues, expenses, and other costs will continue to grow at a constant rate. All expert accountants in this case agreed that the Gordon Growth Method was an appropriate method for calculating the District’s perpetual park operating costs. 9 purposes, these agreements do not require a specific amount of expenditures at the parks. Furthermore, the District’s agreements with the National Park Service, Natural Resources Conservation Service, and U.S. Corps of Engineers allow the District to charge park user fees to offset the park operating costs. Consequently, the amount of the District’s net cost to operate the parks is within the District’s control and is not a contractual obligation in accordance with Section 51-15-118 of the Mississippi Code. ¶20. After explaining its reasoning for excluding the perpetual park operating costs, the Tan, Brown & Russ audit then provided the following conclusion and calculation: If the perpetual park operating costs of $146,524,357 were excluded from the schedule, Lamar County’s portion of the Pat Harrison Waterway District’s bonds, contractual obligations, and other indebtedness and liabilities as of September 6, 2011, would be decreased by $18,648,448, and Lamar County’s portion of the Pat Harrison Waterway District’s bonds, contractual obligations, and other indebtedness and liabilities as of September 6, 2011, in accordance with Section 51-15-118 of the Mississippi Code would be $337,088. ¶21. While Tann, Brown & Russ excluded the perpetual park operating costs as contractual obligations in the schedule, it did consider other future contractual obligations, including the District’s project grant commitments described in Note 4, and the District’s operating lease and service contract obligations described in Note 5. Note 4 explained that: The District awards grants each year for various projects in its member counties. Grant awards generally cover 50% of the eligible project costs up to a maximum grant amount of $25,000. These grant commitments are payable after each project’s completion based upon documentation of the costs incurred by the grant recipient. ¶22. Note 5 explained that “[t]he District has entered into certain equipment operating leases and service contracts with non-cancelable terms.” Both of these future contractual obligations were included in the schedule of contractual obligations.
10 ¶23. The Tann, Brown & Russ audit did not declare the specific accounting standards it used, stating only that it “conducted [the] audit of the schedule in accordance with auditing standards generally accepted in the United States of America.” Relevant to this case are two generally recognized accounting standards, either or both of which provide guidance as to what should and should not be classified as contractual obligations. ¶24. The Financial Accounting Standards provide guidance on analyzing and preparing financial statements for businesses and nonprofits. Under these generalized standards, liabilities are defined as “probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.” ¶25. By contrast, the Governmental Accounting Standards—the District’s CPA used these standards when it performed the District’s 2011 audit—provide guidance on analyzing and preparing the financial statements of state and local governments. These standards provide that,“[f]or an obligation to be a liability, it should be a present obligation,” meaning “[t]he event that created the liability has taken place.” This is distinguishable “from a commitment that may become a liability in the future when the event giving rise to the liability occurs. The government may be able to withdraw from or avoid the commitment until a future event giving rise to the liability occurs.”