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GFOA Best Practices in Accounting, Auditing, and Financial Reporting. CSMFO San Francisco, California February 23, 2011. Agenda. Background on GFOA best practices and advisories Specific best practices and advisories Professional standards Financial reporting Internal control Accounting - PowerPoint PPT Presentation
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GFOA Best Practices in GFOA Best Practices in Accounting, Auditing, and Accounting, Auditing, and
Financial ReportingFinancial Reporting
CSMFOCSMFOSan Francisco, CaliforniaSan Francisco, California
February 23, 2011February 23, 2011
AgendaAgenda Background on GFOA best practices Background on GFOA best practices
and advisoriesand advisories Specific best practices and advisoriesSpecific best practices and advisories
• Professional standardsProfessional standards• Financial reportingFinancial reporting• Internal controlInternal control• AccountingAccounting• Independent auditIndependent audit
BackgroundBackground
GFOA Best PracticesGFOA Best Practicesandand
AdvisoriesAdvisories
Recommended practicesRecommended practices Initiative started in 1993Initiative started in 1993 Intent = codify best practice Intent = codify best practice Objective = comprehensive guidance for Objective = comprehensive guidance for
each of the major functional areas of public each of the major functional areas of public financefinance• Accounting, auditing, and financial reportingAccounting, auditing, and financial reporting• Budgeting and fiscal policyBudgeting and fiscal policy• Debt managementDebt management• Economic development and capital planningEconomic development and capital planning• Retirement and benefits administrationRetirement and benefits administration• Treasury and investment managementTreasury and investment management
Recent changesRecent changes Name changeName change
• From From recommended practicesrecommended practices to to best best practicespractices
Better reflect true characterBetter reflect true character Separate new category for Separate new category for advisoriesadvisories
• Not an endorsement of the underlying Not an endorsement of the underlying situationsituation
Definition – Best PracticeDefinition – Best Practice Identifies specific policies and Identifies specific policies and
procedures as contributing to procedures as contributing to improved government management. improved government management. It It aims to promote and facilitate aims to promote and facilitate positive changepositive change rather than merely rather than merely to codify current accepted practice. to codify current accepted practice. Partial implementation is encouraged Partial implementation is encouraged as progress toward a recognized as progress toward a recognized goal. goal.
Definition – AdvisoryDefinition – Advisory Identifies specific policies and Identifies specific policies and
procedures necessary to procedures necessary to minimize a minimize a government’s exposuregovernment’s exposure to potential to potential loss in connection with its financial loss in connection with its financial management activities. It is not to be management activities. It is not to be interpreted as GFOA sanctioning the interpreted as GFOA sanctioning the underlying activity that gives rise to underlying activity that gives rise to the exposure. the exposure.
Current StatusCurrent StatusFunctional AreaFunctional Area Best Best
PracticesPractices AdvisoriesAdvisories
Accounting, auditing, and Accounting, auditing, and financial reportingfinancial reporting 2525 33
Budgeting and fiscal policyBudgeting and fiscal policy 3131 11Debt managementDebt management 2121 88Economic development and Economic development and capital planningcapital planning 2020 00
Retirement and benefits Retirement and benefits administrationadministration 2323 99
Treasury and investment Treasury and investment managementmanagement 2626 55
TotalTotal 146146 2626
CategoriesCategories Professional standardsProfessional standards Financial reportingFinancial reporting
• PolicyPolicy• Specialized presentation guidanceSpecialized presentation guidance• Expanded disclosureExpanded disclosure• DisseminationDissemination• AnalysisAnalysis
Categories (cont.)Categories (cont.) Internal controlInternal control
• GeneralGeneral• Specific guidanceSpecific guidance
AccountingAccounting• GeneralGeneral• SpecializedSpecialized
Independent auditIndependent audit
Categories (cont.)Categories (cont.) Grants administrationGrants administration Managerial accountingManagerial accounting
• Costing servicesCosting services• Cost allocation plansCost allocation plans
Specific Best PracticesSpecific Best Practicesand Advisoriesand Advisories
Accounting, Auditing, and Accounting, Auditing, and Financial ReportingFinancial Reporting
Best Practices
Accounting
Independent Audit
Internal Control
Financial Reporting
Professional standards
Grants Administration
Managerial Accounting
Governmental Accounting, Governmental Accounting, Auditing, and Financial Auditing, and Financial
Reporting PracticesReporting Practices
Every government should…Every government should… Maintain adequate accounting Maintain adequate accounting
system for timely GAAP financial system for timely GAAP financial reportingreporting
Issue timely GAAP financial Issue timely GAAP financial statements for the entire financial statements for the entire financial reporting entity as part of a CAFRreporting entity as part of a CAFR
Obtain audits in accordance with Obtain audits in accordance with GAAS or GASGAAS or GAS
State governments should…State governments should… Mandate timely audited GAAP Mandate timely audited GAAP
financial reportsfinancial reports
Best Practices
Accounting
Independent Audit
Internal Control
Financial Reporting
Professional standards
Grants Administration
Managerial Accounting
FinancialReporting
Policy Dissemination AnalysisExpandedDisclosure
SpecializedPresentation
Guidance
Establishing Appropriate Establishing Appropriate Capitalization Thresholds Capitalization Thresholds
for Tangible Capital Assetsfor Tangible Capital Assets
Capitalize…Capitalize… Only if useful life of at least two Only if useful life of at least two
yearsyears Never for amounts less than $5,000Never for amounts less than $5,000
• Apply capitalization threshold to Apply capitalization threshold to individual items rather than to groups of individual items rather than to groups of itemsitems
Exception if effect of doing so would be to Exception if effect of doing so would be to eliminate a significant portion of total capital eliminate a significant portion of total capital assetsassets
Establishing the Estimated Establishing the Estimated Useful Lives of Capital Useful Lives of Capital
AssetsAssets
Where to look…Where to look… Best source: own past experienceBest source: own past experience Alternative: experience of othersAlternative: experience of others
• Adjust for particular circumstancesAdjust for particular circumstances QualityQuality ApplicationApplication EnvironmentEnvironment
• Circumstances mitigated or exacerbated Circumstances mitigated or exacerbated by maintenance programby maintenance program
Improving the Effectiveness Improving the Effectiveness of Fund Accountingof Fund Accounting
Effective fund accounting Effective fund accounting begins by…begins by…
Distinguishing “funds” used for Distinguishing “funds” used for internal purposes from funds used for internal purposes from funds used for financial reporting purposesfinancial reporting purposes
Educating elected officials regarding Educating elected officials regarding the proper use of fundsthe proper use of funds
Initially…Initially… Establish criteria for a “fund” for Establish criteria for a “fund” for
financial reporting purposesfinancial reporting purposes Document application of criteria to Document application of criteria to
individual fundsindividual funds
Then periodically…Then periodically… Undertake a comprehensive Undertake a comprehensive
evaluation of the fund structureevaluation of the fund structure
Possible combination of Possible combination of individual fundsindividual funds
Debt service fundsDebt service funds Capital projects fundsCapital projects funds Grants for similar purposesGrants for similar purposes
Internal service fundsInternal service funds Use only if significant difference Use only if significant difference
between accrual and modified between accrual and modified accrualaccrual
Presenting Budget to Actual Presenting Budget to Actual Comparisons Within the Comparisons Within the
Basic Financial StatementsBasic Financial Statements
When deciding how to show When deciding how to show budgetary comparisons . . .budgetary comparisons . . .
Present as basic financial statements Present as basic financial statements whenever permitted by GAAPwhenever permitted by GAAP• Additional cost justifiedAdditional cost justified
FinancialReporting
Policy Dissemination AnalysisExpandedDisclosure
SpecializedPresentation
Guidance
Including Management’s Including Management’s Discussion and Analysis in Discussion and Analysis in
Departmental ReportsDepartmental Reports
In the absence of definitive In the absence of definitive guidance…guidance…
Present MD&A in separate Present MD&A in separate departmental statementdepartmental statement• Unaudited supplementary informationUnaudited supplementary information• Required supplementary information Required supplementary information
(AICPA)(AICPA)
Potential Best PracticesPotential Best Practices Contents of separately issued reports Contents of separately issued reports
for less than a legal entity for less than a legal entity • Fund or departmental reportsFund or departmental reports
Sources of guidance for performance Sources of guidance for performance measurement reportingmeasurement reporting
FinancialReporting
Policy Dissemination AnalysisExpandedDisclosure
SpecializedPresentation
Guidance
Using the Comprehensive Using the Comprehensive Annual Financial Report to Annual Financial Report to Meet SEC Requirements Meet SEC Requirements for Periodic Disclosurefor Periodic Disclosure
SEC Rule 15c2-12SEC Rule 15c2-12
Where to provide annual Where to provide annual information required by SEC?information required by SEC?
Consider using the CAFRConsider using the CAFR• Undertaking should commit government Undertaking should commit government
only to periodic disclosure of required only to periodic disclosure of required information, not to its inclusion as part information, not to its inclusion as part of the CAFRof the CAFR
FinancialReporting
Policy Dissemination AnalysisExpandedReporting
SpecializedPresentation
Guidance
Using Websites to Improve Using Websites to Improve Access to Budget Access to Budget
Documents and Financial Documents and Financial ReportsReports
Everyone should publish CAFR Everyone should publish CAFR on webon web
Specific guidelines:Specific guidelines:• Identical to printed versionsIdentical to printed versions• Notice that information has not been Notice that information has not been
updatedupdated• Prior year documents noted and Prior year documents noted and
segregatedsegregated• Security from manipulation by Security from manipulation by
external or unauthorized personsexternal or unauthorized persons
Web Site Presentation of Web Site Presentation of Official Financial Official Financial
DocumentsDocuments
RecommendationsRecommendations Use web site as a primary means of Use web site as a primary means of
communicating financial informationcommunicating financial information Specific guidelinesSpecific guidelines
• FormattingFormatting• Technological infrastructureTechnological infrastructure• Electronic financial reporting languageElectronic financial reporting language• DistributionDistribution• Information disclaimerInformation disclaimer• Historical informationHistorical information
FormattingFormatting Consistency with hardcopy versionConsistency with hardcopy version Legibility (consistency throughout Legibility (consistency throughout
report)report) Pagination (sequential)Pagination (sequential) File sizeFile size
• Single file for entire documentSingle file for entire document• Individual filesIndividual files
Technological InfrastructureTechnological Infrastructure Security (no unauthorized changes)Security (no unauthorized changes) Placement (easy to locate)Placement (easy to locate) Software compatibilitySoftware compatibility Features (zooming, search)Features (zooming, search) User instructionsUser instructions Linking (ability to click page number Linking (ability to click page number
on table of contents)on table of contents) Testing (operational with different Testing (operational with different
computer operating systems)computer operating systems)
OtherOther Electronic financial reporting Electronic financial reporting
language language Distribution Distribution
• Inform potential users of availabilityInform potential users of availability• Other electronic media (for those Other electronic media (for those
without access to the internet)without access to the internet) Information disclaimer (not updated)Information disclaimer (not updated) Historical information (segregated)Historical information (segregated)
Preparing Popular Preparing Popular ReportsReports
Supplement CAFR with popular Supplement CAFR with popular reportreport
Issue within six months of fiscal year Issue within six months of fiscal year end end
Define scope and refer reader to Define scope and refer reader to CAFRCAFR
The popular report should…The popular report should… Refer to the CAFR Attract and hold interest Be easy to understand Use simple and attractive format Be written clearly and concisely Avoid jargon Make appropriate use of graphics
The popular report should… The popular report should… (cont.)(cont.)
Explain items of special importance Offer comparative data to help
identify trends Be distributed appropriately Be creative Invite feedback Be balanced and objective
Improving the Timeliness of Improving the Timeliness of Financial ReportsFinancial Reports
BackgroundBackground Timeliness essential
• Balance against reliability Minor gains in precision cannot justify
indefinite delay• Balance costs and benefits
Minimum objective• Legislative deadlines• Award programs
Recommendation 1Recommendation 1 Recording activity throughout the yearRecording activity throughout the year
• Transactions processingTransactions processing At least quarterly
• Reconciliations • Financial analysis of interim management reports
• Accounting policies and proceduresAccounting policies and procedures Items that may need to be estimated
• Specific steps and assumptions, and whether: During the year? As part of the initial year end closing process? In the adjustment and analysis process
immediately prior to final year end closing?
Recommendation 2Recommendation 2 Closing and financial statement Closing and financial statement
preparation processingpreparation processing• Annual closing processAnnual closing process
Items related to budgetary expenditures recorded by the end of the period
• Component unitsComponent units Early and ongoing communication
• No substitute for one or more face-to-face meetings
• Unforeseen circumstancesUnforeseen circumstances Better to proceed based upon estimates
Recommendation 3Recommendation 3 Implementing of new accounting Implementing of new accounting
standardsstandards• Facilitating implementation of new
accounting standards Monitor the issuance of final guidance Determine implementation date
• Schedule prior to and during the year of implementation
Attempt to implement by at least the period before implementation is mandated.
Recommendation 4Recommendation 4 Financial report format and Financial report format and
distribution distribution • Electronic distributionElectronic distribution
Initially distribute report electronically Initially distribute report electronically • WebsiteWebsite• e-maile-mail• Mail CD-ROM Mail CD-ROM
Recommendation 5Recommendation 5 Contracting for professional services Contracting for professional services
• Audit procurementAudit procurement The request for proposal (RFP) for the audit The request for proposal (RFP) for the audit
should specify a public release dateshould specify a public release date• Contracts for professional services other Contracts for professional services other
than auditingthan auditing RFPs for nonaudit services should specify RFPs for nonaudit services should specify
the public release date of the financial the public release date of the financial statements and expressly mention that statements and expressly mention that those services need to be completed in time those services need to be completed in time to allow the government to meet deadline to allow the government to meet deadline
FinancialReporting
Policy Dissemination AnalysisExpandedDisclosure
SpecializedPresentation
Guidance
Appropriate Level of Appropriate Level of Unrestricted Fund Balance Unrestricted Fund Balance
in the General Fundin the General Fund
When setting a policy…When setting a policy… Focus on Focus on unrestricted fund balanceunrestricted fund balance Address bothAddress both
• Specific plans to increase or decrease Specific plans to increase or decrease level if inconsistent with policylevel if inconsistent with policy
• Time framework Time framework Set target at no less than two monthsSet target at no less than two months
• Regular operating revenues Regular operating revenues or or • Regular operating expendituresRegular operating expenditures
In setting a target, consider…In setting a target, consider… Predictability/volatilityPredictability/volatility
• Special application to America’s largest Special application to America’s largest governmentsgovernments
Exposure to significant one-time Exposure to significant one-time outlaysoutlays
Other funds (potential source/drain)Other funds (potential source/drain) LiquidityLiquidity Commitments and assignmentsCommitments and assignments
The Use of Trend Data and The Use of Trend Data and Comparative Data for Comparative Data for
Financial AnalysisFinancial Analysis
When evaluating trends…When evaluating trends… Consider Consider percentage relationship
among data elements over time Use no less than five and no more
than ten years of data Take into account items that might
distort trends
If presenting trends using If presenting trends using constant dollars…constant dollars…
Disclose basisDisclose basis Also provide unadjusted dataAlso provide unadjusted data
In making comparisons In making comparisons consider…consider…
Level and type of governmentLevel and type of government Scope and quality of serviceScope and quality of service Number servedNumber served Definitions of categoriesDefinitions of categories Inter-regional comparabilityInter-regional comparability Potential effect of depreciationPotential effect of depreciation Using trend data Using trend data
Potential Best PracticesPotential Best Practices Replenishment of unrestricted fund Replenishment of unrestricted fund
balance of the general fundbalance of the general fund Appropriate level of unrestricted fund Appropriate level of unrestricted fund
balance in other governmental fund typesbalance in other governmental fund types Appropriate level of working capital in Appropriate level of working capital in
enterprise fundsenterprise funds Use of a management dashboard to Use of a management dashboard to
monitor trends and spikes during the yearmonitor trends and spikes during the year
Best Practices
Accounting
Independent Audit
Internal Control
Financial Reporting
Professional standards
Grants Administration
Managerial Accounting
Part 4Part 4
Internal Control
General Specific Guidance
Enhancing Management Enhancing Management Involvement with Internal Involvement with Internal
ControlControl
Explain ethical duty to…Explain ethical duty to…
“…“…exercise prudence and exercise prudence and integrity in the management of integrity in the management of funds in their custody and in all funds in their custody and in all financial transactions”financial transactions”
“…“…not knowingly sign, subscribe not knowingly sign, subscribe to, or permit the issuance of any to, or permit the issuance of any statement or report which statement or report which contains any misstatement or contains any misstatement or which omits any material fact.”which omits any material fact.”
Competence essentialCompetence essential ManagementManagement
• Training and information needed on Training and information needed on comprehensive framework of internal comprehensive framework of internal control as defined by COSOcontrol as defined by COSO
StaffStaff
Management should… Management should… Document controlsDocument controls
• Include method to avoid circumvention Include method to avoid circumvention by managementby management
Periodically evaluate controlsPeriodically evaluate controls Evaluate resolution of exceptionsEvaluate resolution of exceptions Adopt corrective action planAdopt corrective action plan Follow up on corrective action planFollow up on corrective action plan
Establishing an Internal Establishing an Internal Audit FunctionAudit Function
Especially consider separate Especially consider separate function if…function if…
High degree of riskHigh degree of risk• Complex accounting systemComplex accounting system• Contracts with outside partiesContracts with outside parties• Rapidly changing environmentRapidly changing environment
If separate function not feasible:If separate function not feasible: Consider assigning responsibilities to Consider assigning responsibilities to
regular employeesregular employees Consider outsourcingConsider outsourcing
If separate function is If separate function is established…established…
Use charter, enabling resolution, or Use charter, enabling resolution, or other legal meansother legal means
Adopt Adopt Government Auditing Government Auditing StandardsStandards (“Yellow Book”) (“Yellow Book”)
Require that responsible party has Require that responsible party has college degree (certification a “plus”)college degree (certification a “plus”)
Make materials available to audit Make materials available to audit committeecommittee
Encouraging and Encouraging and Facilitating the Reporting of Facilitating the Reporting of
Fraud and Questionable Fraud and Questionable Accounting and Auditing Accounting and Auditing
PracticesPractices
Begin by…Begin by… Formally approving ethics policy Widely distributing and publicizing
that policy• Basis for identifying fraud, abuse, and
questionable practices
Be sure to provide for…Be sure to provide for… Practical means for Practical means for confidential,
anonymous reporting• Regularly publicize• Minimize cost
Separate mechanism for employees• Outside vendor has advantage of enhanced
credibility and the possibility of reporting outside of office hours
Potential Best PracticePotential Best Practice Elements of a comprehensive Elements of a comprehensive
internal control frameworkinternal control framework
Internal Control
General Specific Guidance
Ensuring Control over Ensuring Control over Noncapitalized ItemsNoncapitalized Items
Which particular items need to Which particular items need to be controlled?be controlled?
Object of legal complianceObject of legal compliance Potentially detrimental to public Potentially detrimental to public
safetysafety Heightened risk of theft (“walk away” Heightened risk of theft (“walk away”
items)items)
Who should control:Who should control: Primary control in departmentPrimary control in department
• Individual assigned to prepare and Individual assigned to prepare and update list of controlled items annuallyupdate list of controlled items annually
• Annual departmental certification that Annual departmental certification that information updated available for information updated available for inspectioninspection
Accounting (or other designated Accounting (or other designated finance) function to periodically finance) function to periodically verify dataverify data
The Need for Periodic The Need for Periodic Inventories of Tangible Inventories of Tangible
Capital AssetsCapital Assets
Physical inventories . . .Physical inventories . . . Always neededAlways needed No less than once every five yearsNo less than once every five years
Potential Best PracticePotential Best Practice Technology securityTechnology security
Best Practices
Accounting
Independent Audit
Internal Control
Financial Reporting
Professional standards
Grants Administration
Managerial Accounting
Accounting
General Specialized
Documentation of Documentation of Accounting Policies and Accounting Policies and
ProceduresProcedures
Documentation of policies Documentation of policies should be . . . should be . . .
Promulgated at appropriate level to Promulgated at appropriate level to emphasize importance and authorityemphasize importance and authority
Updated on predetermined scheduleUpdated on predetermined schedule• Changes also made as they occurChanges also made as they occur• Employee assigned for this purposeEmployee assigned for this purpose
Management to oversee performanceManagement to oversee performance
Good documentation should . . . Good documentation should . . . Be readily available (e.g., electronic)Be readily available (e.g., electronic) Delineate authority and responsibilityDelineate authority and responsibility Present actual v. ideal controlsPresent actual v. ideal controls Explain design and purpose of Explain design and purpose of
controlscontrols
Technology Disaster Technology Disaster Recovery PlanningRecovery Planning
A disaster-recovery policy A disaster-recovery policy should…should…
Be formally establishedBe formally established Be Regularly updatedBe Regularly updated Formally assign coordinators for each Formally assign coordinators for each
agency or department to form a agency or department to form a disaster recovery teamdisaster recovery team
Require the creation and Require the creation and preservation of back-up datapreservation of back-up data
A disaster-recovery policy A disaster-recovery policy should… (cont.)should… (cont.)
Make provision for the alternative Make provision for the alternative processing of data following a processing of data following a disasterdisaster
Provide detailed instructions for Provide detailed instructions for restoring disk filesrestoring disk files
Establish guidelines for the Establish guidelines for the immediate aftermath of a disasterimmediate aftermath of a disaster
A disaster-recovery policy A disaster-recovery policy should… (cont.)should… (cont.)
Ensure that a copy of policies and Ensure that a copy of policies and procedures is kept off siteprocedures is kept off site
Provide for periodic testing (both Provide for periodic testing (both restoration and processing of data)restoration and processing of data)• Similar assurance needed for Similar assurance needed for
outsourced servicesoutsourced services
Accounting
General Specialized
Ensuring Adequate Ensuring Adequate Documentation of Costs to Documentation of Costs to
Support Claims For Support Claims For Disaster Recovery Disaster Recovery
Assistance Assistance
Part 1Part 1
Establish Formal Policies and Establish Formal Policies and Procedures for the Procedures for the
documentation of disaster-documentation of disaster-related costsrelated costs
Policies and proceduresPolicies and procedures Set written policies and procedures on
disaster-related reimbursable costs• Include in overall disaster recovery plan• Review and test annually• Update at least once every three years
Train both financial and nonfinancial staff Train both financial and nonfinancial staff
on FEMA requirements and guidelines
Policies and Procedures (cont.)Policies and Procedures (cont.) Have finance staff review and approve costs
before assignment to emergency account Put an “emergency disaster” clause in
contracts that might be needed in the event of a disaster• Require vendors to supply the necessary level of
detail in their billing to support reimbursement Review bids and contracts in advance for
compliance with relevant requirements
Policies and Procedures (cont.)Policies and Procedures (cont.) Set in place controls for emergency
supplies Obtain approval for and document any
provision for changes in compensation levels for salaried staff
Seek audit as soon as possible (e.g., separate audit of immediate response costs) to minimize possibility of disallowance because documentation no longer available
Policies and Procedures (cont.)Policies and Procedures (cont.) If planning to use nonprofits,
consider obligating government by contract to using their services
Part 2Part 2
Ensure Adequate Detail to Ensure Adequate Detail to Support ClaimsSupport Claims
DetailDetail Establish a supplemental chart of
accounts• Classify projects based on categories
used for reimbursement • Track costs, at a minimum, at the
project worksheet level • For staff hours, specify name, title,
dates, times, and rates;
Detail (cont.)Detail (cont.) Educate program staff on the level of
detail on costs required to substantiate claims
Collect and maintain appropriate nonfinancial data to support claims • “Before and after” photographs of each
repair, labeled by location and date • Relevant correspondence • Precise information on materials used
(e.g., number of bricks v. square footage);
OtherOther Track volunteer hours
• Applicable to local share Track local equipment usage
• By hours actually used
Best Practices
Accounting
Independent Audit
Internal Control
Financial Reporting
Professional standards
Grants Administration
Managerial Accounting
Audit CommitteesAudit Committees
Why an audit committee is Why an audit committee is needed . . . needed . . .
Practical means for governing body Practical means for governing body to meet its responsibilityto meet its responsibility
Needed to ensure direct Needed to ensure direct communication between governing communication between governing body and auditorsbody and auditors
GFOA specifically recommends GFOA specifically recommends that . . . that . . .
Every government formally establish Every government formally establish an audit committeean audit committee• DocumentDocument• Periodically reviewPeriodically review
Auditors report directly to the audit Auditors report directly to the audit committeecommittee
Committee members…Committee members…
Should be members of the governing Should be members of the governing bodybody
Need only a basic understanding of Need only a basic understanding of accounting and auditingaccounting and auditing
Should be educated as to Should be educated as to responsibilitiesresponsibilities
Should have support of a “financial Should have support of a “financial expert”expert”
The audit committee should . . .The audit committee should . . .
Have adequate fundingHave adequate funding Review and oversee financial Review and oversee financial
reporting processes, internal reporting processes, internal controls and independent auditorscontrols and independent auditors• Access needed to internal audit workAccess needed to internal audit work• Documentation for management Documentation for management
overrideoverride Make an annual reportMake an annual report
• Reference to basis for conclusionReference to basis for conclusion
Audit ProcurementAudit Procurement
Audit coverageAudit coverage Extend to combining and individual Extend to combining and individual
fund presentationsfund presentations• Professional judgment consistent with Professional judgment consistent with
legal requirementslegal requirements
Audit contract should…Audit contract should… Always use “Yellow Book” standards Always use “Yellow Book” standards
of independenceof independence Be of at least 5 years durationBe of at least 5 years duration
• No automatic renewalsNo automatic renewals• Problem with mandatory auditor rotationProblem with mandatory auditor rotation
Ensure that price is not ultimate Ensure that price is not ultimate criterioncriterion
Nonaudit services . . .Nonaudit services . . . Should be approved in advance by Should be approved in advance by
audit committeeaudit committee• Routinely explore possibility of Routinely explore possibility of
alternative service providersalternative service providers
Mitigating the Negative Mitigating the Negative Effects of Statement on Effects of Statement on
Auditing Standards No. 112Auditing Standards No. 112
Provide evidence of sound Provide evidence of sound internal controlinternal control
Document comprehensive framework of control per COSO
Anti-fraud program and controls Internal audit/risk assessment
• Commensurate with size and complexity
Minimize audit adjustmentsMinimize audit adjustments Review cutoff procedures and the
method used to uncover unrecorded liabilities at the end of the fiscal period
Special care to ensure the timely and effective implementation of new accounting standards
Review assistance provided by Review assistance provided by auditorauditor
Document that a staff member with requisite skills has reviewed all of the work performed by the auditor • If management does not have the
skills to prepare GAAP financial statements and desires the assistance of its independent auditors to help it do so, consider the services of a consultant or some other outside party to review the auditor’s work on the government’s behalf.
Second accounting firm just to Second accounting firm just to avoid deficiency?avoid deficiency?
Not recommended• Not likely to be cost effective• Not necessarily effective
Alert the governing body as early as possible to explain decision• If Single Audit, explore possibility of
obtaining a waiver so as not to jeopardize the audit’s “low risk” status.
Best Practices
Accounting
Independent Audit
Internal Control
Financial Reporting
Professional standards
Grants Administration
Managerial Accounting
Potential Best PracticePotential Best Practice Grant administration, monitoring, Grant administration, monitoring,
and reportingand reporting
Best Practices
Accounting
Independent Audit
Internal Control
Financial Reporting
Professional standards
Grants Administration
Managerial Accounting
Managerial Accounting
CostingServices
Cost AllocationPlans
Application of Full-Cost Application of Full-Cost Accounting to Municipal Accounting to Municipal
Solid Waste Management Solid Waste Management ActivitiesActivities
A government should . . .A government should . . . Use an enterprise fund to account for Use an enterprise fund to account for
landfillslandfills Collect data both by path and activityCollect data both by path and activity Distinguish fixed from variable costsDistinguish fixed from variable costs Justify allocation used to determine Justify allocation used to determine
full costfull cost Consider cash flows for rate settingConsider cash flows for rate setting
Managerial Accounting
CostingServices
Cost AllocationPlans
Potential Best PracticePotential Best Practice Preparing indirect cost allocation Preparing indirect cost allocation
plans under the re4quirements of plans under the re4quirements of Federal Circular A-87.Federal Circular A-87.
AdvisoriesAdvisories
Auditor Association with Auditor Association with Financial Statements Included Financial Statements Included
in Offering Statements or in Offering Statements or Posted on Web SitesPosted on Web Sites
Basic position of GFOABasic position of GFOA Having paid for the independent audit, a Having paid for the independent audit, a
government owns the audited financial government owns the audited financial statements and should feel free to use them in statements and should feel free to use them in any appropriate manner.any appropriate manner.
Same set of financial statementsSame set of financial statements Not used in potentially misleading mannerNot used in potentially misleading manner No material subsequent eventNo material subsequent event
Avoid creating auditor Avoid creating auditor association in contractassociation in contract
The independent auditor should not be The independent auditor should not be permitted to create an essentially artificial permitted to create an essentially artificial “association” with audited financial “association” with audited financial statements included in offering statements or statements included in offering statements or posted on the government’s website simply by posted on the government’s website simply by inserting a clause to that effect in the audit inserting a clause to that effect in the audit contractcontract
If auditor association…If auditor association… Take steps to avoid unwarranted delays and Take steps to avoid unwarranted delays and
unjustified costs.unjustified costs. Maximum timeMaximum time No additional feeNo additional fee
Web site postingWeb site posting The audit contract should clarify that the The audit contract should clarify that the
government is free to post its audited financial government is free to post its audited financial statements on its website.statements on its website.
Considerations on the Use Considerations on the Use of the Modified Approach to of the Modified Approach to
Accounting for Accounting for Infrastructure AssetsInfrastructure Assets
Before selecting, first Before selecting, first consider…consider…
Usefulness of data to managementUsefulness of data to management Potential impact of prospective Potential impact of prospective
depreciationdepreciation Inherent capital biasInherent capital bias Unmatched debtUnmatched debt Reliance upon interested partiesReliance upon interested parties
Presenting Securities Presenting Securities Lending Transactions in Lending Transactions in
Financial StatementsFinancial Statements
Avoid potential Avoid potential misunderstandings by…misunderstandings by…
Reporting cash received as collateral Reporting cash received as collateral separately from other cashseparately from other cash
Reporting securities lending income Reporting securities lending income and related expenses togetherand related expenses together
Illustrative presentationIllustrative presentation
Potential AdvisoryPotential Advisory Fiscal sustainability reportingFiscal sustainability reporting