Federal Audit Requirements & Fraud Prevention

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PRESENTED BY: JEAN YOUNG, PARTNER, CPA AND AMANDA L. WARD, ASSOCIATE, [email protected]

[email protected]

FEDERAL AUDIT REQUIREMENTS AND FRAUD PREVENTION

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AGENDA

By the end of the session, we will:

Provide an overview of changes to the single audit requirements and the impact of ARRA

Provide an update on new auditing standards and accounting pronouncements

Provide guidance on how to protect against fraud and other internal control related matters

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SINGLE AUDIT

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OVERVIEW OF SINGLE AUDIT REQUIREMENTS

Applicability: Not-for-profits and Governments (including NFP hospitals)

Audit Requirements Federal expenditures > $500K = AUDIT Federal expenditures < $500K = NO AUDIT Funding of subrecipients

Audit Frequency Annually

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DATA COLLECTION REVISIONS

Revised on-line submission procedures Ensure proper identification of agencies to receive

reports Expenditures need to agree with the SEFA, with

clusters properly identified Findings must be properly identified and agree with

the single audit report

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CONSOLIDATE HEALTH CENTERS – 93.224

The objectives is to provide populations that would ordinarily not have access to health care:

1. Primary and preventive health services

2. Referrals to other service

3. Case management and other services

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CONSOLIDATE HEALTH CENTERS – 93.224

Applicable Compliance Categories Activities allowed or unallowed Allowable cost/cost principles Eligibility Program income Financial reporting Special reporting Special Tests and Provisions

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Overview of ARRA

$787 Billion in Federal Grants to States, Local Municipalities, and Non Profit Organizations

Majority of Grants Subject to Single Audit (A-133) Compliance Testing & Reporting

Grants Provided Through Both Existing Grant Programs/Formulas & New Programs

Mandate to Spend it Quickly!!

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IMPACT ON MICHIGAN

$3.8 Billion in Funding to Date $228 Million in Direct Grants to Local Units More than 50 Separate Funding Programs Over 17,000 Projects 1,700 Local Grant Recipients > $1 Billion in Infrastructure Projects

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GRANT OVERSIGHT

Unprecedented Oversight and Transparency

Michigan Economic Recovery Office Direct GAO Oversight and Monitoring Single Audit Reporting

Increased Quality Control Reviews of Reports Issued

Single Audit Reports and Results of Quality Control Reviews Accessible by Public

Quarterly Reporting of Both Financial and Programmatic Status of Grant on Federal Website

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FEDERAL AGENCIES - OMB

OMB Responsibilities

Publish Compliance Guidance Implementation Guidance to Federal Agencies Compliance Testing Guidance to Auditors &

Recipients Only Interim Testing Guidance Published

Appendix VII of March 2009 A-133 Compliance Supplement

Expect Additional OMB Guidance in future!!

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GRANT ACCOUNTING

All ARRA Grants Must be Accounted for Separately

Both Programmatic and Financial Data Tracked Separately From Other Federal Grants

Federal Agencies Must Identify Award as ARRA Recipients Must Identify ARRA Portion to Sub-

recipients Separate Tracking/Reporting of ARRA Portion vs.

Normal Portion of Existing Grant Programs

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GRANT COMPLIANCE

Recipient Compliance Requirements

General Grant Compliance Requirements Specific Program Compliance – if ARRA Grants Fall

Under an Existing CFDA Number Requirements Specific to Award Document

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SINGLE AUDIT IMPLICATIONS

Large Increase in Grant Dollars Subject to Single Audit

More Entities Required to Have Single Audit More Major Programs to Evaluate for Testing June 2009 Fiscal Year Dollars Expected to be

Minimal (Significant Impact in 2010 and 2011)

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PREPARING FOR ARRA GRANTS

Ensure Internal Control System Has Capacity to: Separately Account for ARRA grants Gather the Data for Quarterly Reports in the

Required Time Frame Adhere to Compliance Requirements Monitor Sub-Recipients and Gather Reporting

Data From Them

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MANAGING ARRA GRANTS

Read the Grant Award Document Get Finance Dept Involved at the Start of the Grant

Process Monitor Changes in Grant Requirements:

OMB Website & Compliance Supplement Updates

State Web Site Reporting Requirements Federal Agencies Recovery Act websites

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WHAT TO EXPECT IN THE FUTURE

Federal and State Monitoring Focus on Preventing Waste, Fraud, & Abuse Increased Scrutiny and Review of Single Audit

Reports Pressure to Expend Promptly High Public Interest and Scrutiny High Political Visibility Changes to Compliance Requirements

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ARRA WEBSITE RESOURCES

State Website – www.michigan.gov/recovery

GAO Website - www.gao.gov/recovery

Federal Website - www.recovery.gov

OMB-www.whitehouse.gov/omb/circulars_a133_compliance_09toc

http://www.michigan.gov/recovery

http://www.michigan.gov/mdot




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SAS 112IMPACT ON SINGLE AUDIT

PREVIOUSLY….. Circular A-133 previously required the auditor to

report REPORTABLE CONDITIONS and MATERIAL WEAKNESSES in internal control over compliance

AFTER SAS 112 Circular A-133 revised to now require internal

control terminology consistent with SAS 112 Definitions of control deficiency, significant

deficiency and material weakness related to internal control over compliance were developed

WHAT’S NEXT….. SAS 115

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DEFINITION – CONTROL DEFICIENCY

A control deficiency exists when the design or operation of a controls does not allow management or employees , in the normal course of performing their assigned functions, to prevent or detect on a timely basis noncompliance with a type of compliance requirement of a federal program.

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DEFINITION – SIGNIFICANT DEFICIENCY

A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity’s ability to administer a federal program such that there is more than a remote likelihood that noncompliance with a type of compliance requirement of a federal program, that is more than inconsequential, will not be prevented or detected.

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EXAMPLES OF SIGNIFICANT DEFICIENCIES IN INTERNAL CONTROL OVER COMPLIANCE

Policies and procedures which are incomplete, inadequate, or outdated for activities subject to a type of compliance requirement

Inadequate segregation of duties over a type of compliance requirement

Controls over complex types of compliance requirements

IT controls relating to activity subject to the type of compliance

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DEFINITION – MATERIAL WEAKNESS

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that material noncompliance with a type of compliance requirement of a federal program will not be prevented or detected.

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EXAMPLES OF SIGNIFICANT DEFICIENCY, may be a MATERIAL WEAKNESS

Lack of operating policies and procedures for a material noncompliance category

Ineffective oversight by those charged with governance over compliance with those program requirements

Identification by the auditor of material noncompliance for the period under audit that was not initially identified by the entity’s internal control

Identification of fraud in the major program of any magnitude.

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INTERRELATIONSHIP BETWEEN INTERNAL CONTROL AND NONCOMPLIANCE

Presumption that a material finding of noncompliance is at least a significant deficiency Section III noncompliance finding will almost

always translate into a significant deficiency or material weakness

Internal control deficiency possible even when noncompliance is not present

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REQUIRED FINDING REPORTING

A significant deficiency/material weakness/noncompliance on the financial statements is required to be disclosed as a finding in the A-133 report

A significant deficiency/material weakness/noncompliance in major federal program is required to be disclosed as a finding in the A-133 report

Fraud/questioned costs must be disclosed as a finding if the amount is over $10,000

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REVISED SAS 112 (COMMUNICATING INTERNAL CONTROL RELATED MATTERS IDENTIFIED IN AN AUDIT)

CHANGES ARE PRIMARILY LIMITED TO THE DEFINITIONS OF DEFICIENCY IN INTERNAL CONTROL, SIGNIFICANT DEFICIENCY, AND MATERIAL WEAKNESS Material weakness – is a deficiency, or combination of deficiencies,

in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s F/S will not be prevented, or detected and corrected on a timely basis. In this SAS, a reasonable possibility exists when the likelihood of the event is either reasonably possible or probable as those terms are used in FAS 5, Accounting for Contingencies.

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

LIST OF MATERIAL WEAKNESS INDICATORS UPDATED COMMUNICATION EFFECTIVE FOR PERIODS ENDING ON OR AFTER DECEMBER 15,

2009

AICPA – SAS 115

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ACCOUNTING & AUDITING UPDATE

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ACCOUNTING AND AUDITING UPDATE

SFAS 157, Fair Value Measurements FSP FAS 117-a, Endowments of NPOs: Net Asset

Classification of Funds Subject to an Enacted Version of the UPMIFA, and Enhanced Disclosures

SFAS 161, Disclosures about Derivative Instruments and Hedging Activities

SFAS 164, Not-for-Profit Entities: Mergers and Acquisitions

SFAS 165, Subsequent Events

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SFAS No. 157 Fair Value Measurements Defines fair value Establishes a framework for measuring fair value

Requires new disclosures about fair value measurements in the financial statements and their effects on earnings

Does not address what should be measured at fair value, but rather how to measure fair value

Effective 2008 for financial assets and liabilities

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SFAS No. 157 Disclosure

Fair Value Hierarchy Level 1 – Observable inputs that reflect quoted

prices for identical assets or liabilities in active markets Example – publicly traded securities; U.S. agencies;

treasuries

Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with observable market data Example – Municipal bonds that are rated by a

bonding agency; auction rated securities; receive-fixed, pay-variable interest rate swap based on LIBOR swap rate; 3 year option on exchange traded shares

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SFAS No. 157 Disclosure

Fair Value Hierarchy (Continued) Level 3 – Unobservable inputs that cannot

be corroborated by observable market data

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FSP FASB 117-1 – NFP Endowments Subject to UPMIFA

Applies to all NFP Applies to donor-restricted endowment funds

(funds that cannot be wholly expended on a current basis under terms of gift instrument)

Also applies to board designated endowments Effective for fiscal years ending on December 31,

2008 Currently, Michigan does not follow UPMIFA,

however, bill pending with Governor for signature Disclosure provisions still apply

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FSP FASB 117-1 – NFP Endowments Subject to UPMIFAMinimum requirements: Description of governing board’s interpretation of relevant law underlying net

asset classification

Description of endowment spending (distribution) policy(ies)

Description of endowment investment policy(ies) Return objectives and risk parameters How the objectives relate to spending policy(ies) Strategies for achieving objectives

Composition of endowment by net asset class (would present for each date for which a balance sheet is presented)

Endowment roll-forward by net asset class (would present for each period for which a statement of activities is presented)

Planned endowment distribution for next year (if known)

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SFAS No. 161 Disclosures about Derivative Instruments and Hedging Activities Amends FASB Statement No. 133 Two tabular disclosures for derivatives

Balance sheet – Where derivatives are recorded and what is the fair value?

Income statement – Where is the change in fair value recorded and what is the change?

Hedged items are not part of the tabular disclosures

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SFAS No. 161 Disclosures about Derivative Instruments and Hedging Activities Other disclosures

Qualitatively discuss, by underlying risk, objectives for holding or issuing derivatives

Provide information that would enable users to understand an entity’s volume of derivative activity

Existence and nature of credit-risk related contingent features embedded in derivative instruments

Effective periods beginning after 11/15/2008

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SFAS 164, Not-for-Profit Entities: Mergers and Acquisition

Would eliminate the pooling of interest method in recording mergers between NFP organizations. The acquiring NFP would recognize either goodwill of the acquired business or nonprofit activity or the contribution inherent in the merger or acquisition as follows: Measure goodwill as the amount by which the value of

the consideration transferred exceeds the net of the amounts assigned to identifiable assets acquired and liabilities assumed

Measure the contribution inherent in the transaction as the amount by which the values assigned to the identifiable assets acquired exceeds the consideration transferred and the liabilities assumed

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NFP Goodwill and Other Intangibles Acquired in a Merger or Acquisition Amend the effective date and transition provisions of

Statement 142, making them effective for a NFP organization

Statement 142 requires an organization to make certain assessments about the nature of intangible assets acquired in a merger or acquisition as of the acquisition date, such as whether an intangible asset has an indefinite life. Goodwill, therefore, would be tested for impairment periodically, rather than amortized.

Effective for mergers occurring on or after December 15, 2009, and for acquisitions occurring in fiscal years beginning on or after December 15, 2009

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SFAS 165, Subsequent Events Establish general standards of accounting for and

disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued

New disclosure in financial statement Effective for periods after June 15, 2009

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IRS FORM 990

Redesigned based on three guiding principles: Enhancing transparency Promoting tax compliance Minimizing the burden on the filing organization

Some major changes A governance section that requires the

organization to answer several questions related to policy and procedures

Reported officer and key employee compensation using calendar year-end reporting (i.e., W-2) versus fiscal year-end amounts

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IRS FORM 990

Schedule H – Hospitals Includes charity care and community benefit,

billing, operations, related entities, locations, etc.

For 2008, only Part V, Facilities Information, must be completed

For 2009, all parts must be completed (Parts I – VI)

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Employee Retirement Income Security Act (ERISA)403(b) PLANS – NEW AUDIT REQUIREMENTS

Audit requirements: > 100 eligible participants

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INTERNAL CONTROLS

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INTERNAL CONTROL - DEFINITION

Internal control is a process - effected by an entity’s board, council, management, and other personnel - designed to provide reasonable assurance regarding the achievement of the internal control objectives.

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INTERNAL CONTROL OBJECTIVES

Reliability of financial reportingEffectiveness and efficiency of operationsCompliance with applicable laws and regulationsReduce risk that errors would not be detected in a

timely period

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INHERENT LIMITATIONS

Human errorDeliberate circumventionCollusionManagement overrideCost/benefit considerations

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COMPONENTS OF INTERNAL CONTROL

Control environment Sets the tone of the organization Provides discipline and structure Generated by the management

Control activities Physical controls Segregation of duties Independent checks on performance

Monitoring

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INTERNAL CONTROLS OVER CASH

Collection of cash receiptsCash disbursementsBank reconciliations

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COLLECTION OF CASH RECEIPTS

Prompt depositsSegregation of dutiesControlled by a registerUse of lock box systemBonding the cash custodianRestrictive endorsementsLimited remote site collections of cash

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CASH DISBURSEMENTS

Segregation of dutiesChecks never signed in blankControl over blank checksControls over mechanical check signing processesPetty cash controlsPurchase requisitionsPre-numbered purchase ordersRecording of payable and approval for paymentBudget system

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BANK RECONCILIATIONS

Receipt of unopened bank statementsPerformed timelyReconciliation between the bank statement

and the general ledgerReviewed by independent party

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INTERNAL CONTROLS OVER INVESTMENTS

Prompt depositsSubstantiation of all purchasesMaintenance of a detailed listing of all

investments and reconciliation to the general ledger

Established investment policiesIndependent review of the investment

portfolio

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DOCUMENTATION OF INTERNAL CONTROLS

Written handbookChecklistPeriodic meetings with staff

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QUESTIONS?

Economy & Finance

Federal Audit Requirements & Fraud Prevention