APIPA 20091 WEATHERING THE FINANCIAL STORM Jeanne H. Yamamura, CPA, MIM, PHD.

APIPA 2009 1

WEATHERING THE FINANCIAL STORM

Jeanne H. Yamamura, CPA, MIM, PHD

APIPA 2009 2

INTRODUCTION

• Our world at a glance

• Bolstering the economy

• Top Ten Tips for Tough Times

• Resources

APIPA 2009 3

OUR WORLD AT A GLANCE

• Global economic challenges and issuesGlobal economic challenges and issues• U.S. economic growth slowed – recessionU.S. economic growth slowed – recession• Changing regulatory environmentChanging regulatory environment• Financial markets turmoil Financial markets turmoil • Scandals: Madoff, Satyam, etc.Scandals: Madoff, Satyam, etc.• Social Security questionsSocial Security questions• Public pensions at riskPublic pensions at risk• Shrinking workforce and massive layoffsShrinking workforce and massive layoffs• Sustainability and environmental issuesSustainability and environmental issues

APIPA 2009 4

BOLSTERING THE ECONOMY

• The Economy– Stock Market Loss– GDP Loss– Unemployment– Retirement Savings

• Recovery– Financial Stability

Plans– ARRA 2009– Regulatory

Restructuring

APIPA 2009 5

American Recovery and American Recovery and Reinvestment Act of 2009Reinvestment Act of 2009

Tax Relief37%

State & Fiscal Relief18%

Infrastructure & Science

14%

Protecting the Vulnerable

10%

Health Care8%

Education & Training

7%

Energy5%

Other1%

Where the money is going:

APIPA 2009 6

Overview of Financial Overview of Financial Stability PlanStability Plan

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LOCAL GOVERNMENTS IN FISCAL DISTRESS

• Declining revenues

• Property taxes no longer stable source

• State governments unable to assist

• Increasing demand for services

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WHAT IS HAPPENING IN YOUR GOVERNMENT?

• Table discussion topic– Economic problems occurring in your

government– Actions taken– Actions planned– Outlook?

• Report back to the class on the actions taken and/or proposed in response to the economic downturn.

APIPA 2009 9

APIPA 2009 10

TOP TEN TIPS FOR TOUGH TIMES!

1. Understand and manage your revenue sources

2. Do all you can to control costs.

3. Effectively manage employee costs – for the short term and the long term.

4. Understand your cash position.

5. Pay attention to financing sources and developments.

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TOP TEN TIPS

6. Look at long-term opportunities for better asset utilization.

7. Strengthen controls.

8. Beware of ill-advised actions.

9. Focus on fraud prevention.

10.Keep lines of communication open.

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TIP NO. 1 – UNDERSTAND AND MANAGE REVENUES

• Understand your revenue sources.

• Be realistic!

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REVENUE ESTIMATION

• Plan scenarios and look at your risk management philosophies, risk tolerance and mitigation plans

• Make conservative estimates of revenues– Harder to deal with shortfalls later in the year– How far off are we usually?

• Budgeting less than 100% of a grant

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REVENUE SOURCES

• Consider every revenue source– Will it continue? Will it decrease? By how

much?– Can it be increased?– What do others charge for the same

services?• Evaluate reasonableness of fees.• Consider if higher fees are driving customers to

other providers.

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EXPLORE NEW REVENUE SOURCES

• Be innovative. Are there opportunities for new revenue sources?

• Establish clear cost-recovery goals– How are “costs” defined? Direct costs only?

Fully allocated costs?

• Verify fees are meeting cost-recovery goals

APIPA 2009 16

AUDIT REVENUES

• Many revenues based on self-reporting

• Liability may be understated or misreported

• Auditing can increase revenues

• Benefits– Fair, payment of rightful share– Ensures accuracy and consistency

APIPA 2009 17

EVALUATE FEES CHARGED - COMMON AREAS FOR UNDERCHARGING

• Fees to auto and homeowner insurance companies for – Fire calls, especially false alarm, “jaws of life,”

cleanup of hazardous materials, and non-emergency calls

• Fees for services rendered to non-residents or businesses– Title searches, permit records, voter information,

research, “extras” on road construction, tree planting

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EVALUATE FEES CHARGED

• Have departments regularly review their fees to ensure they are kept updated– May need to tie operating budgets to program

revenues to ensure attention paid to fees

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IMPROVE BILLING AND COLLECTION PROCEDURES

• Standardize billing procedures for all receivables– Insurance claims, damage claims, rebates,

fees for service

• Ensure nothing “falls through the cracks” due to lack of communication between departments and staff

• Diagram exceptions procedures– Who has authority to approve exceptions and

under what circumstances?

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• Establish consistent and fair collections efforts– Cannot ignore debt one year and expect

collection success in the following year

• Collections procedures– Clearly stated– Publicly available– Consistently applied

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• Coordinate collections efforts between agencies– Different levels of government have overlapping

revenue streams, e.g., property and income taxes• Reconcile filings with related agencies• Local income tax records to state records and IRS

filings• Property tax records to utility bills, other agency

property tax records, and court records

• Consider amnesty program

APIPA 2009 22

TIP NO. 2 – CONTROL COSTS

• Look at incremental cost reductions– Small things can add up!– For example – electronic distribution instead

of paper?– Also more environmentally sound!

• Explore opportunities to consolidate back office operations at smaller agencies– With larger agency in same functional area,or– In a central service agency

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REDUCE COSTS

• Evaluate the possibility of partnering with other governments– Buying collaboratives– Systems– Functions

• Consider contingent-fee based cost avoidance audits– Vendors find ways to cut costs

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OTHER COST REDUCTION STRATEGIES

• Consider revenue maximization– Vendors find new sources of revenue

• Publicize what you are doing for savings– Solicit creative ideas

• Remember public perception is important– Be conservative with travel and meeting

arrangements– NO PRIVATE PLANES!!!– Look at travel reimbursement policies

APIPA 2009 25

ENHANCE PURCHASING PRACTICES

• Identify bulk purchases– Identify items that make up bulk of purchasing– See if new quotes or suppliers can lower

costs– Encourage or require joint purchasing of

similar items by departments (e.g., office, janitorial, communications supplies)

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• Standardize– Develop standard specifications for

commodity items– Will aid in obtaining better terms from vendors– For example: standardizing desktop personal

computers

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• Investigate prompt payment discounts– Find out if available– Take advantage!!– May require contacting suppliers and

apologizing for past behavior!– Institute practices to ensure late payment

penalties avoided

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• Inspect incoming purchases– Hold suppliers accountable for delivering the

right goods in the right quantity and in good quality

• Long-term contracts– Develop multiyear contracts with vendors if

they will offer and/or guarantee lower prices– For example: Construction-related activities,

landscape, printing, mid and heavy equipment

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• Just-in-time purchasing– Use JIT purchasing for readily available

products to reduce or eliminate warehousing and inventory costs

– May be possible to obtain vendor-supplied ordering software

• Maintain competition– Evaluate vendors frequently to verify value

and accuracy– Professional services as well as commodities

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• P-cards– Significant advancements in individualized

controls for purchases– Will support JIT purchasing environment as

well as reduce purchasing costs– IF PROPERLY CONTROLLED

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• Adopt “Winning Compliance” strategies– Reduce purchasing costs by

• Simplifying processes• Posting simplified procedure manuals on an intranet• Using technology to speed up the procurement

process– Enables purchasing staff to focus on

• Honing negotiating skills• Working with departments to narrow bid

specifications• Looking for ways to save money and to make it

easier and faster for departments to get what they need

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TIP NO. 3 – MANAGE EMPLOYEE COSTS

• Effectively manage employee costs – for the short and long term

• One of, if not THE, major costs for any government

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BOTTOM-UP APPROACH

• Take bottom-up approach to your budget– Why are you in a particular program? – Is it necessary to the core mission of your

entity?

• Careful analysis will enable better FTE management

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NEEDED REFORMS

• Use crisis as opportunity to propose and pursue needed reforms– For example: Restructuring pensions and

retirement benefits

• Important to long-term financial health and viability

• May be best chance for sustainable benefit levels going forward

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UNION AGREEMENTS AND LABOR LAWS

• Review all union agreements and labor laws– What is in negotiated agreements?– What is practiced with regard to employee

benefits?

• Seek opportunities to make adjustments that will benefit present and future

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VACANT POSITIONS

• Examine every vacant position before refilling– Is it necessary?– Can you reorganize to distribute duties

differently and eliminate any positions?

• Consider impact on internal control– How do layoffs and vacancies affect internal

controls, especially in areas over assets susceptible to misappropriation and fraud?

APIPA 2009 37

OVERTIME• Evaluate overtime use

– What is the ratio of overtime to regular wages or wages and benefits?

– Can overtime be reduced by different patterns for scheduling or expanded use of PT personnel?

• Make managers manage overtime– For example: In one county, all OT drawn

from a central account, shared by all departments. Withdrawals require justification.

APIPA 2009 38

ADDRESS HEALTH CARE COSTS

• Health care costs – large and rapidly growing

• Reduction tactics– Identify cost drivers, especially for health care

and disability claims• Prescriptions? Increase co-pays, switch to generic

brands• Common on-the-job (OTJ) injuries? Increase

preventive training

APIPA 2009 39

ADDRESS HEALTH CARE COSTS

• Seriously consider wellness options– Health system promotions– Health club memberships at a discount

• Verify participants– Conduct eligibility audit

• Dependents who no longer qualify?

• Former employees?

• Spouses with coverage from another employer plan designate other plan as primary

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TIP NO. 4 – UNDERSTAND CASH POSITION

• Cash is king!!

• Local governments cannot “print” money like the federal government

• Borrowing ability may be reduced or very expensive

• Bank reconciliations need to be current!!!

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FORECAST YOUR CASH

• Cash flow reporting essential in financial crisis.

• Prepare daily, weekly, monthly, and quarterly forecasts– Review forecasts annually– Compare to actual on day-to-day basis

• Evaluate risks that might affect your cash forecast

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REVIEW TRUSTS AND OTHER DORMANT ACCOUNTS

• Consider sweeping cash into the general fund

• If possible, do it!

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INTERCEPT CASH

• For example – offset tax refund against amount owed on student loan

• See if possible to join state refund setoff programs that allow local government to collect on unpaid utility bills or other customer AR by filing claims with state tax refund departments

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ABANDONED PROPERTY AND CREDIT MEMOS

• Search abandoned property (unclaimed property) at least monthly to see what can be reclaimed with state tax refund departments

• Perform vendor credit memo searches. Do not pay vendors with whom you have credit until the situation is resolved.

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TIP NO. 5 – FINANCING SOURCES

• Pay attention to financing sources and developments

• Keep abreast of developments in the various stimulus packages

• Pay special attention to expected federal funding for infrastructure projects

• Maximize opportunities to make lasting infrastructure improvements

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CAPITAL MARKETS

• Be aware of capital market developments and structure (or re-structure) major financings– To increase access– To reduce borrowing costs

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INVESTMENT MANAGERS AND CUSTODIANS

• Perform due diligence on financial institutions and other fiduciaries that hold your investment portfolio– If it sounds too good to be true, BEWARE!!– Remember Madoff– Ponzi schemes are rampant!

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EARN HIGHER YIELDS SAFELY

• Look for opportunities to earn higher yields on excess cash with relatively low risk investments– Governments are usually allowed to invest in

variable rate municipal securities, issued by credit-worthy governments

– In most cases, these remain safe investments

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TIP NO. 6 – ASSET UTILIZATION

• Look at long-term opportunities for better asset utilization

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ASSET UTILIZATION STRATEGIES

• Consider leasing or renting assets like cars and trucks for motor pool

• Look at stranded or little-used assets that could be leased to someone else– Don’t sell!!!

• Review tax abatement and economic development incentives for updating or modification– For example: Payment In Lieu of Taxes (PILOT)

agreements

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TIP NO. 7 – STRENGTHEN INTERNAL CONTROLS

• Internal controls key to effective operations

• Strong role in preventing fraud• Increased risk

– Employee layoffs increase vulnerability– Staff morale low

• 20 question diagnostic over payment controls – answer each question YES or NO

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ARE YOUR INTERNAL CONTROLS GOOD ENOUGH?

1. Do you require all employees who have anything to do with the payment process to take at least 5 consecutive days of vacation?

2. Do you prohibit the ability to both approve invoices and enter invoice data?

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3. Do you prevent one or more of your managers/executives from having access to all phases of the payment process, even though it might make training and managing more difficult?

4. Do you have a strong policy prohibiting the return of checks to requisitioners?

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5. Are all changes made to the master vendor file periodically checked, no less frequently than once a month, but ideally every week?

6. Do you periodically (at least once a year) deactivate inactive accounts in your master vendor file?

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7. Do you have an anonymous tip hotline?

8. Do you periodically check that your processors are not writing their passwords down where anyone can see them?

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9. If you have a petty cash box, do you make sure that the location of the key is not common knowledge?

10.Do you wait until the end of the day to deliver checks to the mailroom for mailing?

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11.Are unsigned checks always left in a secure location while waiting for signature – and not on someone’s desk in an empty office?

12.Is the positive pay file uploaded only when checks are mailed?

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13.Are checks only printed only when they are going to be mailed – not earlier so they will reflect a date that matches your payment terms?

14.Are open receivers and POs always extinguished when an invoice is paid even if the invoice is paid outside accounts payable?

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15. Is access to the master vendor file for entering vendor changes or changing vendor information severely limited?

16.When an employee making electronic payment transfers is terminated or leaves voluntarily, is the bank and procurement card administrator immediately notified and passwords changed?

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17.When a new vendor is to be entered into the master vendor file, do you require at least two signatures or approvals before adding them?

18.When a new vendor is to be entered into the master vendor file, do you do some checking to make sure the vendor is legitimate before adding them?

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19.If you have a petty cash box, do you hold surprise audits and does everyone know you do that?

20.Do you have a written fraud policy, signed by a top-level executive, indicating zero tolerance for employee fraud?

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• Preferred response – YES!

• No perfect organization

• NO indicates vulnerability

• Look into NOs and determine if possible to tighten controls

• If cannot tighten, plan to regularly audit problem areas

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TIP NO. 8 – ILL-ADVISED ACTIONS

Beware of taking ill-advised actions in a rush to just do something!

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UNDERFUNDING

• Don’t underfund accrued liabilities like pensions– Sticks tomorrow’s generations with today’s

bills– Can negatively impact bond ratings, public

perception, and employee relations

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COST-SHIFTING

• Don’t shift operational costs into capital budgets.– Distorts true cost of capital investments– Usually not allowable!

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ACCOUNTING MANIPULATIONS

• Don’t be tempted to use accounting manipulations to improve your results– For example:

• Delaying deliveries, payrolls, and payments to next fiscal year

• Manipulating or distorting estimations or forecasts• Recognizing anticipated (or worse, speculative)

savings or revenues

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TIP NO. 9 – FRAUD PREVENTION

• In best of times, fraud expensive

• In worst of times, fraud could be disastrous!

• A few questions to check your knowledge of fraud prevention, detection, and investigation

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WHAT’S YOUR FRAUD IQ?1. Under the concept of ______________,

corporations can be held criminally responsible for the acts of their employees if those acts were done in the course and scope of their employment and for the apparent benefit of the corporation.

A. Connected accountabilityB. Civil responsibilityC. Imputed liability

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WHAT’S YOUR FRAUD IQ?

C. Imputed liability• Corporations can be held legally responsible

for the criminal acts of their employees in certain circumstances

• For example – company could be criminally liable for controller committing financial statement fraud• Even if supervisors unaware of his actions!

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2. Stephen Latimer is the lead auditor for Island Power, a component unit providing energy. With the economic downturn, company management has been under increased pressure for profitable operations, and the company is in danger of violating its loan covenants.

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2. Stephen is concerned that management may be fraudulently concealing liabilities and expenses to improve the company’s financial statements. He performs his preliminary analytical procedures with these factors in mind. Which of the following is a red flag that might reaffirm Stephen’s suspicions?

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A. The company’s gross margin is significantly lower than industry average.

B. The company has experienced an unusual increase in the number of days’ purchases in accounts payable.

C. The financial statements reflect an unusual change in the relationship between fixed assets and depreciation.

D. The company shows a significant reduction in accounts payable, even though its competitors are stretching out payments to vendors.

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D. Concealing operating expenses and related payables reduces AP

- Unusual given other companies in industry

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3. Which of the following is considered a fraud preventive control?

A. Employee support programs

B. Segregation of duties

C. Employee background checks

D. All of the above

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D. ALL, if properly implemented, will help prevent fraud- Employee support programs

- Financial, drug, and family counseling - Assist employees in dealing with

pressures- Segregating incompatible duties

- Eliminates opportunity- Background checks - Prevents hiring mistakes

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WHAT’S YOUR FRAUD IQ?4. The concept of the fraud triangle states

that, for a fraud to occur, three factors generally are present. Which of the following is NOT one of the three sides of the fraud triangle?

A. Criminal predisposition

B. Incentive or pressure

C. Perceived opportunity

D. Rationalization

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FRAUD TRIANGLE

FRAUDTRIANGLE

Pressure (Motive)

Opportunity Rationalization

Correct answer = A

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5. In general, the best way to prevent fraud is to:

A. Implement harsh penalties for perpetrators.

B. Outsource all possible functions.

C. Increase the perception of detection.

D. Conduct covert audits.

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C. Most fraud perpetrators commit fraud ONLY when they perceive an opportunity to be present.

So increasing in employees’ minds the perception that illegal acts will be detected can significantly deter fraud

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6. __________ is defined as “the totality of circumstances that would lead a reasonable, professionally trained, and prudent individual to believe a fraud has occurred, is occurring, and/or will occur.”

A. ProofB. EvidenceC. SuspicionD. Predication

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WHAT’S YOUR FRAUD IQ?D. Predication is the basis for a fraud

examination. It is the set of circumstances that leads a reasonable professional to believe that a fraud has, is or will occur.Example: While conducting an audit, an auditor overhears purchasing agent bragging about substantial discount on new car from company’s supplier of fleet cars. Predication for fraud examination.If auditor only witnessed purchasing agent in expensive car, would only have suspicion (insufficient for fraud examination)

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7. Which of the following is NOT an element generally included as part of a fraud risk assessment?

A. Risk identification

B. Formal fraud policy development

C. Assessment of likelihood and significance of risks

D. Risk response

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WHAT’S YOUR FRAUD IQ?B. Formal fraud policy not one of steps in fraud

risk assessment

Fraud risk assessment involves• Identifying fraud risks inherent to the

organization• Assessing the likelihood and significance of the

fraud risks identified• Deciding on the appropriate responses to the

identified risks

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WHAT’S YOUR FRAUD IQ?8. The three primary categories of

occupational fraud are:A. Corruption, financial statement fraud, and

asset misappropriationB. Skimming, money laundering, and bid

riggingC. Asset misappropriation, identity theft, and

fictitious revenuesD. Financial statement fraud, inventory theft,

and cash larceny

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WHAT’S YOUR FRAUD IQ?A. Occupational fraud = fraud committed by an

employee against an employer

Three primary categories of occupational fraud

• Corruption = Use of influence for self-benefit, e.g., bribes

• Financial statement fraud = Intentional misstatement or omission of material information from FS

• Asset misappropriation = Theft or misuse of company resources

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9. Jason Aubuchon is conducting an investigation into a possible accounts receivable lapping scheme at Micronesian Visitors Bureau. If Jason plans to interview all of the following parties, whom should he interview first?

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A. Frank, the primary suspect.

B. Martha, an accounts payable clerk who filled in for Frank when he was on vacation

C. Evan, a regular customer of the company whose complaint about his account balance prompted the investigation

D. Sarah, Frank’s supervisor, who is suspected of helping Frank cover the fraud in exchange for a portion of the proceeds

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WHAT’S YOUR FRAUD IQ?C. Collection of evidence should progress from

general to specific

Investigator proceeds in order from witnesses least likely to be involved to those most culpable

1. Neutral third-party witnesses (Evan)2. Corroborative witnesses (Martha)3. Co-conspirators (Sarah)4. Suspect (Frank)

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10.Most employees who commit fraud have a history of fraudulent misconduct.

A. True

B. False

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FALSE

2008 Report to the Nation on Occupational Fraud and Abuse

87% first-time fraud offenders

83% never punished or terminated for fraudulent behavior

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TIP NO. 10 – OPEN COMMUNICATION LINES

• A difficult problem in the best of times

• Solution will be a group effort– Employees– Constituencies– Managers– Vendors– All affected parties

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COMMUNICATION

• Build credibility with frequent, clear, and honest communication

• Manage perceptions– Speak up – frame the situation for others– Be honest about what is achievable

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COMMUNICATION

• Sharing information can help– To avoid rigid reactions– May keep everyone open to different options

for solutions

• Employees take their cues from the leaders

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CULTURE OF THRIFT

• Establish a culture of thrift– Every dollar counts!– Terminate temporary help and redeploy existing staff

to fill gaps– Cutback sharply on office equipment– Delay replacement of vehicles– Control travel and expenses– Engage employees in auditing small expenditures– Take action on very big items or very visible issues

such as management vehicles and other perks

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CULTURE OF THRIFT

• Management must set an example for everyone to follow. Remember the “tone at the top.”

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OPPORTUNITIES

• Recognize opportunities within crisis– Organizations often do not change until a

major event occurs– This may be a “game-changing” time that can

be used to break free of constraining past practices and habits

– May have to spend money to save money

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EMPLOYEES’ ASSISTANCE

• Employees will respond with creativity and ingenuity IF– They believe that their suggestions will be

heard and valued

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RESOURCES

• AICPA– Government Accountability Brief – January 2009 &

March 2009– Navigating the Current Economic Crisis: What It

Means for Businesses – March 2009

• GFOA– Fiscal First Aid

• Andi McNeal, What’s Your Fraud IQ?• Mary Schaeffer, Are Your Internal Controls Good

Enough?

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QUESTIONS?

APIPA 20091 WEATHERING THE FINANCIAL STORM Jeanne H. Yamamura, CPA, MIM, PHD.

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Transcript of APIPA 20091 WEATHERING THE FINANCIAL STORM Jeanne H. Yamamura, CPA, MIM, PHD.