Embed Size (px)
Citation preview
The Latest from GFOA on Accounting and Budgeting
CSMFO
Palm Springs, CA
February 22, 2006
Accounting topics
New and revised recommended practices Auditor association Audit committees Other
Letter of transmittal GFOA guidelines for responding to GASB
proposals Reporting deficiencies
Budgeting topics
New recommended practices Establishment of strategic plans Business preparedness and continuity
guidelines Statistical/supplemental section of the budget
document Pending recommended practices Common deficiencies in budget documents
Accounting topics
Auditor association (2005)
Background Issue: use of audited financial statements after
issuance Offering statements Web sites
Auditing standards Presumption that auditor is not associated Creation of an association
Actions Clause in audit contract
Auditor association (cont.)
If auditor association Auditor “reads” accompanying material
No material inconsistency in information or manner of presentation
No auditor association with other contents of web site Not “documents”
Auditor association (cont.)
Recommendation 1: Having paid for the independent audit, a
government owns the audited financial statements and should feel free to use them in any appropriate manner.
Same set of financial statements Not used in potentially misleading manner No material subsequent event
Auditor association (cont.)
Recommendation 2: The independent auditor should not be
permitted to create an essentially artificial “association” with audited financial statements included in offering statements or posted on the government’s website simply by inserting a clause to that effect in the audit contract
Auditor association (cont.)
Expanded guidance on recommendation 2: Consider including affirmative language in
audit contract No objection to auditor clarification in offering
statements No objection to auditor clarification in
engagement letter
Auditor association (cont.)
Recommendation 3: When the independent auditor actually does
happen to become associated with audited financial statements included in an offering statement, a state or local government should take steps to avoid unwarranted delays and unjustified costs.
Maximum time No additional fee
Auditor association (cont.)
Recommendation 4: The audit contract should clarify that the
government is free to post its audited financial statements on its website.
Audit committees (proposed replacement) Background
Three groups responsible Governing body (“first among equals”) Financial management Independent auditor
Audit committee Practical tool for governing body oversight Forum separate from management
Recommendation 1
The governing body of every state and local government should establish an audit committee or its equivalent “Governing body” includes other elected
officials with legal oversight responsibility, provided they do not exercise managerial responsibilities within the scope of the audit
Also encompasses appointed bodies such as pension boards
Recommendation 2 - 1
The audit committee should be formally established by charter, enabling resolution, or other appropriate legal means and made directly responsible for the appointment, compensation, retention, and oversight of the work of any independent accountants engaged for the purpose of preparing or issuing an independent audit report or performing other independent audit, review, or attest services
Recommendation 2-2
Likewise, the audit committee should be established in such a manner that all accountants thus engaged report directly to the audit committee
Recommendation 2-3
The written documentation establishing the audit committee should prescribe the scope of the committee’s responsibilities, as well as its structure, processes, and membership requirements
Recommendation 2-4
The audit committee should itself periodically review such documentation, no less than once every five years, to assess its continued adequacy
Recommendation 3-1
Ideally, all members of the audit committee should possess or obtain a basic understanding of governmental financial reporting and auditing.
Recommendation 3-2
The audit committee also should have access to the services of at least one financial expert, either a committee member or an outside party engaged by the committee for this purpose
Recommendation 3-3
Such a financial expert should through both education and experience, and in a manner specifically relevant to the government sector, possess an understanding of generally accepted accounting principles and financial statements
Recommendation 3-3-a
Specific experience should include The preparation or auditing of financial
statements of comparable entities The application of such principles in
connection with the accounting for estimates, accruals, and reserves
Experience with internal accounting controls, and an understanding of audit committee functions
Recommendation 4
All members of the audit committee should be members of the governing body. To ensure the committee’s independence and effectiveness, no governing body member who exercises managerial responsibilities that fall within the scope of the audit should several a member of the audit committee
Recommendation 5
An audit committee should have sufficient members for meaningful discussion and deliberation, but not so many as to impede its efficient operation. As a general rule, the minimum membership of the committee should be no fewer than three
Recommendation 6
Members of the audit committee should be educated regarding both the role of the audit committee and their personal responsibility as members, including their duty to exercise an appropriate degree of professional skepticism
Recommendation 7
It is the responsibility of the audit committee to provide independent review and oversight of a government’s financial reporting processes, internal controls and independent auditors
Recommendation 8
The audit committee should have access to the reports of internal auditors, as well as access to annual internal audit work plans
Recommendation 9
The audit committee should present annually to the full governing body a written report of how it has discharged its duties and met its responsibilities. It is further recommended that this report be made public and be accompanied by the audit committee’s charter or other establishing documentation
Recommendation 10
The audit committee should establish procedures for the receipt, retention, and treatment of complaints regarding accounting, internal accounting controls, or auditing matters. Such procedures should specifically provide for the confidential, anonymous submission by employees of the government of concerns regarding questionable accounting or auditing matters.
Recommendation 11
The audit committee should be adequately funded and should be authorized to engage the services of financial experts, legal counsel, and other appropriate specialist, as necessary to fulfill its responsibilities
Recommendation 12
In its report to the governing body, the audit committee should specifically state that it has discussed the financial statements with management, with the independent auditors in private, and privately among committee members, and believes that they are fairly presented, to the extent such a determination can be made solely on the basis of such conversations
Other proposed changes to existing recommended practices Popular reporting
Data should be derived from the CAFR CAFR for SEC requirements
Broad statement on role of CAFR in disclosure Capitalization thresholds
Practical application of materiality principle Internal auditing
Alternatives to a formal internal audit function
Letter of Transmittal
New GFOA recommendations
Basic elements
Formal transmittal Profile of the government Information useful in assessing the
government’s economic condition Awards and Acknowledgements
Formal transmittal
Current recommendation Citation of legal requirements Management’s acknowledgement of
responsibility Discussion of internal controls Discussion of financial statement audit Reference to MD&A
Change – Shorten discussion
Citation of legal requirements
State law requires that every general-purpose local government publish within six months of the close of each fiscal year a complete set of audited financial statements. This report is published to fulfill that requirement for the fiscal year ended December 31, 2015.
Management’s responsibility and internal controlManagement assumes full responsibility for the completeness and reliability of the information contained in this report, based upon a comprehensive framework of internal control that it has established for this purpose. Because the cost of internal control should not exceed anticipated benefits, the objective is to provide reasonable, rather than absolute, assurance that the financial statements are free of any material misstatements.
Financial statement audit
West, Lee, Roberts & Co., Certified Public Accountants, have issued an unqualified (“clean”) opinion on the NAME OF GOVERNMENT’S financial statements for the year ended December 31, 2015. The independent auditor’s report is located at the front of the financial section of this report.
Reference to MD&A
Management’s discussion and analysis (MD&A) immediately follows the independent auditor’s report and provides a narrative introduction, overview, and analysis of the basic financial statements. MD&A complement this letter of transmittal and should be read in conjunction with it.
Profile of the government
Current recommendation Structure of government and types of services Geography, population, and history Component units included Potential component units excluded Budget process, budget calendar, budget
responsibilities Legal level of budgetary control
Profile of government (cont.)
Changes Generic discussion of budgetary process
Exclude budgetary calendar and budget responsibilities
Simplify description of the legal level of control
Budget process, calendar, and responsibilities
The Council is required to adopt a final budget by no later than the close of the fiscal year. This annual budget serves as the foundation for the NAME OF GOVERNMENT’S financial planning and control. The budget is prepared by fund, function (e.g., public safety), and department (e.g., police).
Legal level of budgetary control
Department heads may transfer resources within a department as they see fit. Transfers between departments, however, need special approval from the governing council.
Information on economic condition Current recommendation
Local economy Long-term financial planning Cash management and investments Risk financing Pension benefits Other postemployment benefits
Information on economic condition (cont.) Changes
Expand discussion of local economy to discuss trends over last 5-10 years
Include discussion of relevant financial policies Include a discussion of major initiatives Eliminate separate discussion of individual
topics listed previously
Trends (5-10 years)
During the past ten years, the government’s expenses related to public safety and parks and recreation have increased not only in amount, but also as a percentage of total expenses (7.1 percent and 3.4 percent, respectively). In the case of public safety, much of the increase reflects a regional trend that has seen the salaries and benefits of police and firefighters growing at a much faster rate than those of other categories of public-sector employees. The growth in park and recreation expenses reflects an increase in the number of sponsored programs and events.
Trends (5 to 10 years) – (cont.)
During this same ten-year period, charges for services, while continuing to increase in amount, have actually decreased as a percentage of total revenue (19 percent). The reason for this relative decline is the relative increase in expenses related to services that are not supported by fees and charges (e.g., public safety); thus, as taxes have increased to support these services, so has the proportion of total revenue generated by taxes.
Long-term financial planning
Unreserved fund balance in the general fund (11.7 percent of total general fund revenues) falls within the policy guidelines set by the Council for budgetary and planning purposes (i.e., between 5 and 15 percent of total general fund revenues). Following its recent review of the NAME OF GOVERNMENT’s strategic plan, the Council now plans to raise the target to between 15 and 25 percent of total general fund revenues so as to reduce the amount that will need to be borrowed to finance future construction.
Relevant financial policies
The state supreme court recently held that the state must compensate local governments for the cost of retroactive compliance with the Local Wetlands Protection Act of 2005. It is the NAME OF GOVERNMENT’s policy that “one-time” resource inflows not be used for operating purposes. Accordingly, the Council plans to designate the amount it eventually receives from the state for the acquisition of new park land.
Major initiatives
It is expected that both the state and federal governments will enact new regulations on water quality that could take effect as early as December 2014. The Water and Sewer Authority is developing plans for a substantial upgrade of the water filtration plant, which had its last upgrade in 2009. The project would encompass the expansion of holding tanks for finished water storage and the replace-ment of the original filtration equipment. The overall cost of the project would probably exceed $12 million and would be financed by the issuance of revenue bonds.
Other recommendations
Keep letter of transmittal as short as possible
Greater use of charts and graphs
GFOA Guidelines for Responding to GASB Proposals
Principle 1
Accounting is a means to an end, not an end in itself Cost benefit principle vital
Principle 2
Willingness to accept something for free is not evidence of genuine demand Investors and creditors
Principle 3
Less often is more Accounting v. financial reporting
Principle 4
Not every problem has an accounting solution Accounting is not synonymous with
accountability
Principle 5
You cannot be both scorekeeper and coach Goal is to inform rather than drive decisions
Principle 6
The most important users of financial reports are citizens acting through their elected representatives Governments are not just “preparers”
Common reporting deficiencies
MD&A Failure to provide real analysis Failure to address major changes in funds other
than the general fund Failure to address major changes between the
original and final amended budget Failure for detail of fund balance/net assets to
tie back to financial statements
Reporting deficiencies (cont.)
Net assets Negative balances reported Failure to reclassify a portion of fund-level
unrestricted net assets as restricted in the business-type activities column
Failure to properly report debt issued by one activity in support of another
Reporting deficiencies (cont.)
Reporting an excess liability for compensated absences in governmental funds
Reporting most payments-in-lieu-of-taxes within the primary government as revenues and expenditure/expense
Reporting deficiencies (cont.)
Notes Failure to provide detailed columnar
descriptions for major funds and fund-type columns other than the general fund
Failure to report increases in long-term liabilities separately from decreases
Failure to report changes in long-term accrued liabilities
Budgeting topics
Strategic planning (2005)
Every government should use some form of strategic planning Long-term perspective for service delivery and
budgeting 13 steps
Step 1 - initiate
Initiate the strategic planning process CEO (either elected or appointed) should
authorize Also include other stakeholders
Step 2 – draft mission statement
Prepare a mission statement Basis for organizing goals, strategies, programs
and activities
Step 3 – assess environment
Assess environmental factors Internal and external Factors
Economic and financial Demographic trends Legal and regulatory issues Social and cultural trends Physical (e.g., community development) Intergovernmental issues Technological change
Step 3 (cont.)
Mechanisms for identifying stakeholder concerns, needs, and priorities Public hearings Surveys Meetings with leaders and interest groups Meetings with employees Workshops for administrative staff and
legislative body
Step 4 – identify issues
Identify critical issues Reflect stakeholders Reflect environmental factors
Step 5 – set goals
Agree on a small number broad goals Address most critical issues Define priorities
Step 6 – develop strategies
Develop strategies to achieve broad goals A single strategy may relate to more than one
goal Limit number and make specific
Step 7 – plan action
Create an action plan How strategies will be implemented
Activities and services to be performed Associated costs Designation of responsibilities Priority order Time frame
Step 8 – develop objectives
Develop measurable objectives Quantities or verifiable statements Ideally include time frames
Step 9- set performance measures
Incorporate performance measures Important tie to programs and activities funded
in the budget
Step 10 – approve
Obtain approval of plan Formal approval by policy makers Context for policy and budgetary decisions
Step 11 - implement
Implement the plan Strategic plan should drive the operating budget
and capital plan and other financial planning efforts
Step 12 - monitor
Monitor progress Systematic review process
Step 13 - reassess
Reassess the strategic plan External factors New information about stakeholder needs Results
Process for reviewing strategic plan Comprehensive process 5-10 years Interim reviews 1-3 years
Business preparedness and continuity guidelines (2005) Develop , test, and maintain a plan to
continue basic business operations
Plan development
Assess own unique risks Strategy to mitigate risks and control costs
External planning resources Disaster and emergency recovery plan assessment Disaster and emergency recovery plan testing FEMA guidelines
Plan development (cont.)
Strategy to mitigate risks and control costs (cont.) Other planning considerations
Emergency response plan compliance (OSHA, EPA) Risk management (insurance coverage) Administrative support functions (contact information
for all members of the finance team) Outsourced/recovery services (ability to overcome
disruption themselves)
Plan implementation
Record keeping Contemporaneous record-keeping per FEMA
Personnel assignments and communication in wake of a disaster or emergency Formally assignment in each department
Outsourced/recovery services Contingent contracts/emergency procurement
Disaster and emergency plan safeguard Documentation/assembly areas off site
Statistical/supplemental section of budget document Ensure relevance of data
Relate to rest of document Fit to the specific type of government Avoid excessive detail
Organize information by major category Form of government Geography Community profile Demographics and economics
Provide explanations
Pending recommended practices
Budgeting for technology Revenue policies Managed competition Budgeting by goals and objectives
Common deficiencies in budget documents Too detailed and cumbersome
Irrelevant information included Similar topics not juxtaposed Strategic goals are not accompanied by
action plans Overall financial summaries broken out by
fund but not by type of revenue/expenditure
Common deficiencies (cont.)
Emphasis on the past rather than the future Message should be issue-driven and provide
potential solutions Revenue analysis falls short of 75 percent
of total revenue Not enough trend graphs
Synchronic v. diachronic
Common deficiencies (cont.)
Performance measures should include upcoming budget year
Operating impact of capital projects not identified
