BUDGETING AND FINANCIAL REPORTING II

ALABAMA ASSOCIATION OF SCHOOL

BUSINESS OFFICIALS

September 16 – 17, 2014

Tuscaloosa, Alabama

Budgeting & Financial Reporting II

“Keren” Dr. Keren H. Deal, CPA, CGFM Professor of Accounting College of Business Auburn University Montgomery P.O. Box 244023 Montgomery, Alabama 36124-3792 334-244-3971

kdeal@aum.edu

Disclaimer: Some of the materials in this presentation came from the GASB website, presenter research of topics or presentations at past educational events including GFOAA Summer Conference, AGA PDT, GAAF, etc. Materials presented today are for educational purposes only.

Budgeting and Financial Reporting II

Today’s Agenda

• Update on GASB Standards

• Current Audit Standards and Reporting

• Internal and Performance Auditing

• Analysis of Financial Position

Governmental Accounting

• Governmental accounting is fundamentally different from for-profits in a variety of ways including:

• Organizational purpose

• How generate revenues

• Stakeholders

• Budgetary obligations

• Going concern

• Financial management system must allow stakeholders to:

• Assess accountability

• Make political, social and economic decisions

Governmental Accounting Systems

A governmental accounting system must make it possible to do both: • To present fairly and with full disclosure the financial

position and results of financial operations of the funds and activities of the government in conformity with generally accepted accounting principles (GAAP); and

• To determine and demonstrate compliance with finance-related legal and contractual provisions.

Primary Sources of GAAP for Governments and Not-for-Profits

Governmental

Accounting

Standards Board

State and Local

Government

Organizations

Governmental

Not-for-Profit

Organizations

Governmental Accounting Standards Board (GASB)

• Rule 203 of the Code of Professional Conduct for the American Institute of Certified Public Accountants (AICPA) has given GASB the “authority to establish accounting principles” for SLG.

• GASB’s due process activities are designed to encourage broad public participation in the standards setting process (www.gasb.org).

• GASB has issued 71 Statements to date with 19 Statements issued in past 5 years

Governmental GAAP Hierarchy

Category GASB (STATEMENT 55)

State and Local Governments

A. GASB Statements and Interpretations

B.

GASB Technical Bulletins and, if cleared by the GASB, AICPA Industry Audit and Accounting

Guides and Statements of Position

C. AICPA Practice Bulletins that have been cleared by the GASB

D.

Implementation guides (Q&As) published by the GASB staff, and Practices that are widely recognized and prevalent in state and

local governments.

Proposed Governmental GAAP Hierarchy

Comments Due December 15, 2014

Category PROPOSED HIERARCHY

State and Local Governments

A. GASB Statements

B.

GASB Technical Bulletins and Implementation Guides And if cleared by the GASB, AICPA guidance

Under the current proposal, what would be non-authoritative?

• GASB Concepts Statements

• Pronouncements of FASB, FASAB, IPSASB, IASB

• AICPA Issue Papers

• Technical Information Service Inquiries and Replies Included in AICPA Technical Practice Aids

• Practices that are widely recognized and prevalent in SLG

• Pronouncements of other professional associations or regulatory agencies

• Accounting textbooks, handbooks and articles

Update on Current GASB Standards

and Guidance Budgeting and Financial Reporting II

September 2014

GASB Standards Affecting FY14

• GASB 65 – Items Previously Reported as Assets and Liabilities

• GASB 66 – Technical Corrections – 2012, an amendment of GASB 10 and 62

• GASB 67 – Financial Reporting for Pension Plans

• GASB 70 – Accounting and Financial Reporting for Nonexchange Financial Guarantees

GASB Standards Affecting FY15

• GASB 69 – Government Combinations and Disposals of Government Operations

• GASB 68 – Accounting and Financial Reporting for Pensions (amendment of GASB 27)

• GASB 71 – Pension Transition for Contributions Made Subsequent to the Measurement Date – an Amendment of GASB 68

• Early adoption is ALWAYS suggested.

GASB Concept 4 and GASB 63/65

• Because Concept 4 and GASB 63 “built the process” must discuss those first to give full understanding

• Concept 4 – Elements of Financial Statements

• Introduced and defined elements included in financial statements

• GASB 63 – Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position

• GASB 65 – Items Formerly Reported as Assets and Liabilities

• Net Position = Assets + Def. Outflows – Liabilities – Def. Inflows

Definitions According to Concepts Statement No. 4

• Assets – resources with present service capacity that the government presently controls

• Deferred Outflow – consumption of net position by the government that is applicable to a future reporting period

• Has a positive effect on net position

• Reported in separate section following Assets

• Liabilities – present obligations to sacrifice resources that the government has little or no discretion to avoid

• Deferred Inflow – an acquisition of net position by the government that is applicable to a future reporting period

• Has a negative effect on net position

• Reported in separate section following Liabilities

Statement of Net Position (GASB 63)

• Assessing interperiod equity is a key objective of financial reporting by governments – are current period inflows sufficient to cover current period outflows?

• Formerly called Statement of Net Assets - presents the same information as the balance sheet.

• It assesses the balance of a government’s assets—the resources it can use to provide service and operate the government—against its liabilities—its obligations to turn over resources to other organizations or individuals.

• The difference between a government’s assets and its liabilities is called net position. The name of the statement reflects its emphasis on what a government would have left over after satisfying its liabilities.

• Net position —its financial standing at a given point in time (typically, the end of the fiscal year). Financial position can be tracked over time to assess whether a government’s financial health is improving or deteriorating.

GASB 63 Definitions

• Deferred Outflows – consumption of net assets by the government that is applicable to future reporting period. Has a positive effect on net position, similar to assets.

• Follows assets in a separate section.

• Deferred Inflows – acquisition of net assets by the government that is applicable to future reporting period. Has negative effect on net position, similar to liabilities.

• Follows liabilities in a separate section.

• Net Position – the residual of all elements presented in statement of financial position.

• Includes the effects of deferred outflows and inflows.

• Assets + Deferred Outflows – Liabilities – Deferred Inflows = Net Position

• Only affects government-wide statements

Before and After GASB 63

• Net Assets

• Net Assets Invested in Capital Assets, Net of Related Debt

• Net Assets Restricted

• Net Assets Unrestricted

• Net Position

• Net Investment in Capital Assets*

• Restricted Net Position

• Unrestricted Net Position

• The calculation of net investment in capital assets is similar to the prior calculation of investment in capital assets, net of related debt; however, with the implementation of GASB Statement No. 63, the deferred outflows of resources and deferred inflows of resources that are attributable to the acquisition, construction, or improvement of those assets or related debt also should be included in this component of net position.

• “Net of related debt” is no longer on the face of the financial statement

GASB 65 • Prior to GASB 65, only deferrals identified by GASB were

53 (Derivatives) and 60 (Service Concession Arrangements)

• Clarifies which items retain classification as asset/liability and which items should be considered deferred

• No change in governmental fund revenue recognition – still using modified accrual basis

• Does affect “usage” of terminology for deferred with limitation now on what is defined as “deferred inflows and outflows” in standards

• Limiting use of “deferred” to deferred inflows and deferred outflows only

• For all periods presented in financials, must apply standard retroactively

Major Fund Determination Recap under GASB 65

• Use aggregate assets/deferred outflows and aggregate liabilities/deferred inflows in calculation.

• For example - Total of Assets + Deferred Outflows > 10% of TOTAL for ALL funds of that category AND same element is > 5% of corresponding elements (total) for ALL governmental and enterprise funds combined

• Same test goes for Total Liabilities & Deferred Inflows; or Total Revenues; or Total Expenditures/Expenses.

GASB 65

• Some examples of items that will still be classified as assets:

• Prepayments

• Grants paid in advance of meeting eligibility requirements

• Pension assets

• Initial subscriber installation costs in relation to TV and cable systems within schools

• Some examples of items that will be classified as a deferred outflow of resources:

• Deferred amounts from the refunding of debt

• Deferred loss from sale-leaseback

• Debt issuance costs (other than insurance)

• Loan origination costs

GASB 65

• Some examples of items that will still be classified as liabilities:

• Resources received in advance of an exchange transaction

• Grants received in advance of meeting eligibility requirements

• Refunds imposed by regulation

• Some examples of items that will be classified as a deferred inflow of resources:

• Taxes received in advance

• Deferred amounts from refunding of debt

• Revenue in governmental funds that does not meet 60 day requirement (now called Unavailable Revenue or Unearned Revenue instead of Deferred Revenue)

Accounting changes/restatement

• Accounting changes should be applied retroactively by reclassifying the statement of net position and balance sheet information.

• If restatement is not practical, cumulative effect should be reported as restatements of beginning net position or fund balance.

• Paragraph 34 of GASB 65

• Should apply to all prior periods presented

Examples Current presentation

GASB 63 and 65

Advance receipt of income tax revenue

Deferred Revenue

Deferred inflow of resources

Current refunding and advance refunding in defeasance of debt

Difference between the reacquisition price and the net carrying amount of the old debt should be reported as deferred outflow/inflow.

Transactions subject to time requirements: fines, penalties, property forfeitures(resources to be spent only subsequent to a specified date or only during specified period)

If payment is received prior to the exchange – deferred inflow must be recognized

Underwriter Fees associate with issuance of long-term bonds

Asset Current-period outflows of resources (expenses)

Examples Current presentation

GASB 63 and 65

Assets recorded in Governmental funds but the revenue is not available for spending

Government should report deferred inflow of resources

Loan Origination fees – Points

Points received by the lender should be reported as deferred inflow of resources

Changes in fair value of hedging instrument

Deferred outflow

State aid to Local Government (Government mandated costs) ex. State mandating school district to provide bilingual education, pre-kindergarten education

Any payments received before the eligibility requirements or time requirements have been met should be reported as deferred inflow

GASB 65 Suggested Note Disclosures

• In addition to assets, the Statement of Net Position and/or the balance sheet will sometimes report a separate section for deferred outflows of resources. This separate financial statement element represents a consumption of resources that applies to a future period(s) and therefore will not be recognized as an outflow of resources (expense/expenditure) until then. The Board of Education has ____ items that qualifies for reporting in this category. Insert explanation here.

• In addition to liabilities, the Statement of Net Position and/or the balance sheet will sometimes report a separate section for deferred inflows of resources. This separate financial statement element represents an acquisition of resources that applies to a future period(s) and therefore will not be recognized as an inflow of resources (revenue) until that time. The Board of Education has ___ items, which arises only under a modified accrual basis of accounting that qualifies for reporting in this category Insert explanation here.

• Taken from other states LEA information.

GASB 65 Suggested Note Disclosures

If Restatement Needed • For fiscal year 2014, the Board of Education made several prior

period adjustments due to the adoption of GASB 65, as described in the MD&A and Notes “New Accounting Pronouncements” which require the restatement of the September 30, 2013 net position in Governmental Activities. The result is an increase/decrease in Net Position at October 1, 2013 of $ _________. This change is in accordance with generally accepted accounting principles.

• Net Position, September 30, 2013 as previously reported $XXXX

• Reclassification of XXXX

• Net Position, October 1, 2013 as restated $XXXXX

Need more information?

•GASB 65 Paragraphs • 8 – 10 Nonexchange Transactions

• 11 – 13 – Sales of future revenues and intra-entity transfers of future revenues

• 16 – 18 – accounting for leases

• 30 – pertains to revenue recognition in governmental funds

• 31 – pertaining to use deferred being limited to deferred inflows and outflows only.

• 32-33 – criteria for major fund determination

GASB 66

• Amends Statements No. 10, 54 and 62

• Effective for periods beginning after 12/15/12

• Which means FY14 for Alabama LEAs

• Leases - continues to allow a lessor government that enters into an operating leases with scheduled rent increases to recognize operating lease payments on a straight-line basis over the lease term or based on the estimated fair value of the rental

• Servicing Fees - continues to require a transferor government to recognize a gain or loss on the difference between the proceeds and the carrying value of receivables sold

• Risk Financing - special revenue funds can be used for self-insurance if they meet GASB 54 requirements

• If government has dedicated tax levy for prospective liabilities

GASB 67/68

• Replaces GASB 25/27 respectively

• GASB 67 is effective for periods beginning after 6/15/13

• GASB 68 is effective for periods beginning after 6/15/14

• Will affect FY15 for Alabama LEA

• Objective to improve financial reporting of state and local government pension plans – i.e. how BIG is pension liability????

• GASB 67 expands note disclosures and Required Supplementary Information to be reported, including Net Pension Liability which is actuarially determined based on the Total Pension Liability less the plan’s net position

• GASB 68 requires employers to recognize a liability as employees earn their pension benefits. Those employers participating in cost-sharing plans will recognize their proportionate share of the collective pension amounts for all benefits provided through the plan. Pension amounts to be recognized by employers include the net pension liability, deferred outflows of resources, deferred inflows of resources, and pension expense.

Cost Sharing Pension Plan

• The TRS, a cost-sharing multiple-employer public employee retirement plan, was established as of September 15, 1939, under the provisions of Act 419 of the Legislature of 1939 for the purpose of providing retirement allowances and other specified benefits for qualified persons employed by State-supported educational institutions. The responsibility for the general administration and operation of the TRS is vested in its Board of Control.

• Benefits are paid to retirees of multiple employers from a common pool of assets.

State pension funds in general

Cities with highest pension costs as a percent of revenue

City, State Pension Costs/Revenue

Little Rock City, AR 17.6

Chicago City, IL 17.0

Aurora City, IL 16.1

Charleston City, WV 15.7

Reno City, NV 15.5

Springfield City, MA 15.0

Bakersfield City, CA 14.5

Stockton City, CA 14.1

Saginaw City, MI 13.8

New York City, NY 12.9

GASB 67/68 • Statements do not apply to post-employment healthcare benefits

• GASB 45

• Pension plans must meet certain criteria

• Contributions and earnings are irrevocable

• Assets are dedicated to providing benefits to plan participants

• Assets are protected from creditors of the employer

• Immediate recognition of more pension expense than is currently required to fund.

• To the extent that a long-term obligation to provide pension benefits (that is, total pension liability) is larger than the value of the assets available in the plan to pay pension benefits, there is a collective net pension liability for which each employer will need to report its proportionate share in their financial statements.

GASB 68 Net Pension Liability (NPL)

• Pre GASB 68, employers reported a pension liability only to extent they failed to pay their contractually required contributions

• GASB 68 – a pension liability is required to be reported as employees earn their pension benefits

• Amount of liability will be product of calculations by actuary that involve:

• Projecting future benefit payments

• Discounting those payments to value today

• Identifying the portion of the value that has already been earned through past employee service

• Total Pension Liability – Plan’s Fiduciary Net Position = NPL

From RSA Presentation at GFOAA

Note Disclosures Under GASB 68

• Included in RSI

• Actuarially determined or contractually/statutorily required contribution amounts

• Actual contributions in relation to the actuarially determined or contractually/statutorily required contributions

• Contribution deficiency or excesses

• Payroll of employees covered by plan

• Ratio of contribution amounts to covered payroll

• RSA staff will be helping with some of these items!

According to analysts, where are pensions headed

• GASB 67/68 - for FY 15, it:

• Doesn’t change what governments owe – but will bring underfunding to light.

• Bond ratings will most likely be affected.

• According to one estimate, state and municipal governments across the country have a total unfunded pension liability of $4.1 trillion.

• How will local governments be hit?

• In Chicago alone, the estimate is that each household will need to contribute $61,000 to fully fund their city employee pensions and OPEB.

• For 2007 – 2009, Chicago only contributed 43% of ARC

• Approximately 5.6% of local government revenues raised from taxpayers will go towards pension costs for local government employees.

Where to find further guidance from GASB on GASB 68

• Guide to Implementation of GASB 68 on Accounting and Reporting for Pensions

• AICPA State and Local Government Expert Panel Whitepaper Series – Governmental Employer Participation in Cost-Sharing Multiple Employer Plans: Issues Related for Employer Reporting

• GASB 68 (268 pages) – for cost sharing employers - paragraphs 48−82, 92−96, or 120−122

GASB 69

• Government Combinations and Disposal of Government Operations

• Effective for periods beginning after 12/15/13

• FY15 for Alabama LEA

• Mergers (Consolidations) – combination of legally separate entities without the exchange of significant consideration: • Use carrying value to measure the assets and liabilities.

• Acquisition – transaction in which a government acquires another entity, or its operations, in exchange for significant consideration: • Measurement of assets acquired and liabilities assumed at acquisition

value (i.e. costs).

• Transfers of Operations – between two or more separate legal entities and no significant consideration exchanged: • Use carrying value to measure the assets and liabilities.

GASB 71

• Pension Transition for Contributions Made Subsequent to the Measurement Date – an amendment to GASB 68

• Effective for periods beginning after 6/15/14

• FY16 for Alabama LEA

• Needed to amend reporting of deferred outflows of resources and deferred inflows of resources as pertains to GASB 68

• Determined that it was not practical for a government to determine all applicable deferred inflows of resources and deferred outflows of resources

• Only recognize a beginning deferred outflow of resources for pension contributions, if any, made subsequent to the measurement date of the beginning net pension liability but before the start of the government’s fiscal year.

• No other beginning balances for the deferred inflows of resources and deferred outflows of resources should be recognized.

GASB Current Projects

• Conceptual Framework

• Economic Condition Reporting

• Fair Value Measurement and Reporting

• Leases

• OPEB

• www.gasb.org

Current Audit Standards and Reporting

Budgeting and Financial Reporting II

September 2014

• Local boards of education are required to be audited in accordance with state laws, federal laws and regulations, and the audit standards issued by the State Department of Education (SDE). The State Superintendent shall issue audit standards requiring a single audit of local school funds, federal funds, state funds, local funds, and other funds under the control of school officials. • Taken from “Audit Standards for Alabama School Boards” (https://docs.alsde.edu)

• The books, records, vouchers and accounts of every state and county office, officer, bureau, board, commission, corporation, institution, department and agency shall be examined and audited at least once in every period of two years and more frequently or continuously if that is deemed necessary or desirable by the Chief Examiner. The books, records, vouchers and accounts of municipal boards of education may be examined and audited upon request. • Code of Alabama 41-5-14

Audit of Local Education Agencies

• (a)(1) The yearly business and financial transactions of a local board of education shall be audited as early as possible after the end of the fiscal year.

• (2) The audits of the books and accounts of local boards of education shall be conducted by the Department of Examiners of Public Accounts. The Department of Examiners of Public Accounts shall audit, review, and otherwise investigate the receipts and disbursements of funds of each local board in the same manner as audits are performed on other agencies and departments of the State of Alabama.

• (3) Any local board of education governing a city school system, other than those city systems required by law to be audited by the Department of Examiners of Public Accounts on June 1, 2006, may employ a certified public accounting firm or firms or use the Department of Examiners of Public Accounts to perform its yearly financial audit of its books and accounts including a legal compliance audit and program compliance audit. The foregoing to the contrary notwithstanding, a city system which has had any financial form of intervention by the State Superintendent of Education shall be audited by the Department of Examiners of Public Accounts, or if any such intervention should become necessary at any future date, such city system shall be audited for three future years by the Department of Examiners of Public Accounts. The Department of Examiners of Public Accounts or the certified public accounting firm or firms shall perform a yearly legal compliance audit in accordance with Chapter 5 of Title 41, and if the compliance audit results in adverse findings by the Department of Examiners of Public Accounts or the certified public accounting firm or firms, the adverse findings shall be reported to the State Superintendent of Education. If the adverse findings involve misappropriation or theft, such findings shall also be reported to the appropriate district attorney and the Attorney General.

• (b) Legal compliance audits and program compliance audits performed by a private certified public accounting firm shall adhere to the standards of the Department of Examiners of Public Accounts for each respective type of audit. The Department of Examiners of Public Accounts shall provide these standards to the private certified public accounting firms. Any adverse findings shall be noted in the audit report and reported to the State Superintendent of Education. Such adverse findings shall, upon request, be provided to any member of the public.

• (c) A local board of education may request an audit of system funds under control of the same local board by the Department of Examiners of Public Accounts whenever there is a permanent change in the position of local superintendent of education or chief school financial officer.

• (d) A local board of education by majority vote may unilaterally request an audit of any school or school system account under control of the same local board by the Department of Examiners of Public Accounts, if the board deems such action is in the best interest of the school system.

• (e) The findings of audits conducted pursuant to this section shall be presented to the local board of education in a board meeting. The State Superintendent of Education shall be sent a copy of the audit to review and shall be notified of the time, place, and location of the meeting at which the findings will be presented to the local board of education. Audits are public records.

From Act 2006-196

General Standards • Independence • Professional Judgment • Competence • Quality Control and Assurance

Performing Financial Audits • AICPA Standards • Auditor Communication • Previous Audits and Attest Engagements • Fraud, Noncompliance with Provisions of Laws, Regulations, Contracts, Grant

Agreements and Abuse • Developing Elements of Finding • Audit Documentation

Reporting Financial Audits • AICPA Standards • Compliance with GAGAS • Reporting on Internal Control and Compliance with Provisions of Laws, Regulations,

Contracts and Grant Agreements • Communicating Deficiencies on Internal Control, Illegal Acts, and Noncompliance with

Provisions of Laws, Regulations, Contracts, Grant Agreements and Abuse • Reporting Views of Responsible Officials • Reporting Confidential or Sensitive Information • Distributing Reports

Generally Accepted Accounting Standards (GAGAS) – 2011 Yellow Book

• Unqualified Opinion – now called an Unmodified Opinion

• The auditor should express an unmodified opinion when the auditor concludes that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

• The auditor should modify the opinion in the auditor's report if the auditor:

• Concludes that, based on the audit evidence obtained, the financial statements as a whole are materially misstated or

• Is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement.

• Modified report would include qualified, adverse or disclaimer.

• Qualified – material but not pervasive

• Adverse or Disclaimer (depending on circumstances) – material and pervasive

Update on Audit Terminology

• Report on the Financial Statements – identification of which financial statements audited

• Management’s Responsibilities for the Financial Statements – indicates that the financial statements are prepared by management of government unit and management also has responsibility of internal controls

• Auditor’s Responsibility – indicates that the auditors are responsible for stating an opinion and describes the nature of procedures performed to support the opinion

• The Opinion(s) – separate paragraph and states whether financial statements present fairly in accordance with GAAP financial statements discussed in #1

• Other Matters – describe any procedures applied to other areas of financial report and whether auditor is expressing an opinion on those other areas

Audit Report Organization – AICPA 2013

• Identify, in its accounts, all federal funds received and expended and the federal programs under which received

• Maintain internal controls over federal programs

• Comply with laws, regulations, and the provisions of contracts or grant agreements related to each of its federal programs

• Prepare appropriate financial statements including the schedule of expenditures of Federal awards

• Ensure that the audits required are properly performed and submitted when due

• Follow up and take corrective action on audit findings, including preparation of summary schedule of prior audit findings and a corrective action plan

Specific responsibilities of school board as auditee (ALSDE)

• Four main responsibilities in regards to audits: • Prepare financial statements

• Maintain and monitor effective internal controls

• Cooperate with auditors

• Follow up on audit findings, ensuring that any deficiencies are corrected on a timely manner

• During audit, managers are expected to allow auditors reasonable access to computerized accounting systems as well as provide documentation of internal controls

• If auditor identifies misstatements in financial statements, management should consult with auditor on necessary adjusting entries

Management Responsibilities (Yellow Book)

• Report containing the opinion on the financial statements

• Report discussing the evaluation and testing of internal controls and compliance with laws and regulations

• Report discussing significant deficiencies in internal controls

• Report describing situations of fraud, illegal acts, or other material noncompliance

• Report containing the view of responsible officials of the audited organization regarding any reported significant deficiencies

Possible Audit Reports

• A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis.

• A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.

• A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

Internal Controls

• If auditors have reported fraud, illegal acts, noncompliance or abuse to school board and it does not report them to ALSDE, the auditors may have to report these to the ALSDE and/or Attorney General.

• If the auditee does not take timely action to remedy the fraud, illegal acts, noncompliance, or abuse that is likely to have a material effect on the financial statements, and involves funding received directly or indirectly from a government agency, the auditors should report these to ALSDE and/or Attorney General.

Reporting to Outsiders

• Auditors may, but are not required by law, regulation, grant or contract provisions, report on: • Significant concerns or uncertainties about the fiscal

sustainability of a government or program significant to the financial condition or operations

• Unusual or catastrophic events that will likely have a significant ongoing or future impact on the entity’s financial conditions or operations

• Significant uncertainties

• Any other matters the auditor considers significant for communication to users and oversight bodies

Significant Matters

• Ensure uniformity among federal agencies for the audit of nonfederal entities expending federal awards

• Requires audits to be made on an organization-wide basis rather than grant-by-grant basis.

• Mandates that audits be performed in accordance with Government Auditing Standards

• Nonfederal entities expending $500,000 or more annually in federal awards fall under Single Audit Act which covers BOTH entity’s financial statements and its federal awards

Single Audit Act

Report on Financial Statements

Reports on internal controls and

compliance specifically related to each major program; Reports on

the schedule of questioned costs

Reports on Entity’s Internal

Control Structure

Report on Entity’s

compliance with laws and

regulations

Single Audits – OMB A-133

Single Audit – conducted in accordance with OMB Circular A-133 ◦ School boards must: Identify, in its accounts, all federal funds received and expended and

the federal programs under which they were received

Maintain internal control over federal programs

Comply with laws, regulations, and the provisions of the contracts or grant agreements related to each of its federal programs

Prepare appropriate financial statements, including the Schedule of Expenditures for Federal Awards

Ensure the audits required are properly performed and submitted when due

Follow up and take corrective action on audit findings, including preparation of a summary schedule of prior audit findings and a corrective action plan

School Board Responsibilities

• Auditor is to perform audit in accordance with GAGAS and an audit of its federal programs.

• Auditor will: ◦ Obtain an understanding of internal controls, perform tests of

internal controls over federal programs and report on internal controls

◦ Perform procedures to determine whether the auditee has complied with laws, regulations, and the provisions of contracts and grant agreements that could have a direct and material effect on the federal programs and report on compliance

◦ Follow up on prior audit findings and assess the reasonableness of the summary schedule of prior audit findings prepared by the auditee

Scope of Single Audit

• An opinion as to whether financial statements are fairly presented in accordance with GAAP and an opinion as to whether the federal awards is presented fairly

• Reports on internal controls related to the financial statements and major programs, including major weaknesses

• Opinion as to whether the organization complied with laws, regulations, and provisions of contracts or grant agreements

• A schedule of findings and questioned costs

Under Single Audit Act, auditor must provide four reports

• Single Audit Act supplements the requirements of the Yellow Book that auditors review for noncompliance.

• Requires a significant effort in conducting tests to determine whether the entity under audit complied with program requirements

• Compliance testing shall include tests of transactions and other auditing procedures necessary to provide sufficient evidence to support the opinion of compliance

Reviewing for Program Compliance

• Includes 3 components: ◦ Summary of the auditor’s results

◦ Findings related to the financial statements which are required to be reported in accordance with GAGAS

◦ Findings and questioned costs for federal awards including

Significant deficiencies in internal controls over major programs

Material noncompliance with the provision of laws, regulations, contracts, or grant agreements related to major program

Known questioned costs that are greater than $10,000 for compliance requirements of major programs

An explanation if the auditor’s report on compliance for major programs is other than an unqualified opinion

Known fraud affecting a federal award

Schedule of Findings and Questioned Costs

• Auditors must follow up on prior audit findings and perform procedures to assess the reasonableness of the summary schedule of prior audit findings prepared by the LEA.

• Auditor will report, as a current year audit finding, when the auditor concludes that the summary schedule materially misrepresents the status of prior audit findings.

• Auditor will conduct follow-up procedures regardless of whether a prior-year audit finding relates to a major program in the current year.

Single Audit Follow-Up

• One individual in high school responsible for:

• Admission to basketball games

• Basketball concession receipts

• Pays rental of court and officials from gate receipts

• Paid miscellaneous fees from gate receipts

• Paid for food for concessions from past gate receipts “petty cash”

• Unused athletic tickets were not available at time of audit – sometimes recycle tickets

What do you think?

• Teachers within school system do not always submit money daily to bookkeeper

• Some collections take 1 – 2 months to get to bookkeeper

• Finance charges were incurred because of late payments of invoices/bills

• Some purchases had proper documentation – others were missing documentation

• Purchase orders were prepared after date of invoice because wanted to get it right

• Teachers were purchasing items using daily cash collections and giving rest to bookkeeper

What do you think?

• Several clubs have cash deficits.

• Several clubs are quite prosperous.

• To teach students financial literacy, school principal allowed prosperous clubs to loan monies to other clubs with a nominal rate of interest.

• No documentation in place since it’s by shake of hands

What do you think?

• https://docs.alsde.edu • 69 examples of audit findings and management response to audit

findings published in April 2012 • Covers audit finding examples for: • Attendance • Athletics • Classroom Supplies Budget • Deficits • Deposits • Documentation • Fund Raising • Illegal Acts • Internal Controls • Policies and Procedures • Receipts

Example of Audit Findings on ALSDE

Internal and Performance Auditing

Budgeting and Financial Reporting II

September 2014

• Several states have incorporated internal and performance auditing within their organization structure.

• Includes internal reviews and audits on a continuous basis to ensure accuracy and prevent fraud.

• Internal audits – system of checks and balances designed to ensure ongoing accountability within school system.

• Performance audit – addresses the economy and efficiency of the board by examining internal controls for weaknesses as well as performing tests on other areas of financial management.

External Vs Internal Audits

Improper Payments – Federal - $100B - 2014

• Identifies controls and control deficiencies;

• Identifies regulatory requirements and compliance therewith;

• Provides recommendations on internal control and governance improvements;

• Determines adherence with company policy and procedures; and

• Assists with channeling effective solutions for controls improvement.

From the IIA – What an internal auditor does

• The OIG reports directly to the Board of Education.

• Independent audits, reviews and investigations of District operations, contracts and vendors in order to:

• Find ways to improve processes, programs, functions and activities

• Provide information that supports effective decision making

• Identify real or potential misuse of District resources

• Prevent and detect waste, fraud and abuse within the District

OIG for Los Angeles School District

OIG for Los Angeles School District

• Purposes or goals prescribed by law or regulation or set by officials of the audited entity

• Policies and procedures established by officials of audited entity

• Prior period’s performance to consider

• Performance of other entities (LEAs) to be used as defined benchmarks • Must establish in the beginning while in the planning stage

• No specific format for performance or internal audit reports • Should be appropriate for intended use

Internal Differences from External

Analysis of Financial Condition Budgeting and Financial Reporting II

September 2014

• No generally accepted set of financial ratios for financial analysis of governments

• Ratios may be computed from government-wide and/or fund level statements

• GASB identifies 4 categories in Analyst’s Guide:

1. Financial Position

2. Liquidity

3. Solvency

4. Ability to Pay

Financial Analysis of Government

• Government Wide • Unrestricted Net Position/Total Expenses for Govt Activities

• Measure of availability of resources to meet expenses

• Larger value indicates stronger financial condition

• General Fund • Unassigned Fund Balance/Total Expenditures + OFU

• Measure of availability of resources to meet expenses

• Larger value indicates stronger financial condition

Financial Position

• Government Wide Current Ratio

• Current Assets/Current Liabilities

• Greater than 1.0 is preferable

Quick Ratio

• Cash + Current Investments/Current Liabilities

• Greater than 1.0 is preferable

Higher values indicate greater liquidity – ability to pay bills as they come due.

Liquidity

Debt to Assets Ratio

• (Total Liabilities – Total Def Outflows)/(Total Assets – Tot Def Inflows)

• Small values indicate greater solvency

Debt to Net Position Ratio

• (Total Liabilities – Total Def Outflows/Total Net Position

• Small values indicate greater solvency

Debt Service to Total Expenditures

• Principal and Interest Expenditure/Total Expenditures for GF and DSF

• Measures degree to which government expenditures are committed to debt service.

• Lower value indicates greater flexibility and ability to manage additional debt.

Solvency

Debt Per Capita

• (Total Liabilities – Total Def Outflows)/Population

• Low values indicate greater flexibility and ability to manage debt

Debt Per Pupil

• (Total Liabilities – Total Def Outflows)/Student Enrollment

• Low values indicate greater flexibility and ability to manage debt

Debt to Assessed Value of Property

• (Total Liabilities – Total Def Outflows)/Total Assessed Property Value

• Low values indicate greater flexibility and ability to manage debt

Ability to Pay

Instructional and School Leadership Expenses Per Capita:

• Total Expenses/Population

• Benchmark with other school districts or over time

Annual Cost Per Pupil

• Total Expenses/Student Enrollment

• Benchmark with other school districts or over time

Maintenance and Operations Cost Per Square Foot

• Maintenance and Operations Expenses/Total Square Footage of Schools and Buildings

• Benchmark with other school districts or over time

Ability to Pay

Questions? Comments?

THANK YOU FOR YOUR ATTENTION!