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Faster CAFRsNSAA/NASC Joint Middle Management

ConferenceApril 10-12, 2006

Indianapolis, Indiana

Presented by:

Herb MaguireCommonwealth of Pennsylvania

Buff CarlsonErnst & Young, LLP

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Faster CAFR’s Where we were:

– ’02 CAFR issued by 12/31/02

– ’03 CAFR issued by 5/31/04• GASB 34 Implementation• SAP implementation

– ’04 CAFR issued by 3/31/05• SAP implementation

– CERTIFICATE OF ACHIEVEMENT ALL 3 YEARS!

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Faster CAFR’s

Where we are:– ’05 CAFR issued by 12/31/05

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Faster CAFR’s

Where we’re going:

1. ’06 CAFR issued by 12/15/06 (5.5 mos.)

2. ’07 CAFR issued by 11/30/07 (5.0 mos.)

3. ’08 CAFR issued by 11/15/08 (4.5 mos.)

4. ’09 CAFR issued by 10/31/09 (4.0 mos.)

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Faster CAFR’s

What are others doing?

Private Industry 75 days, 30 days for quarterly SEC reports

Federal Government – 90 Days

States – Michigan 90 days

IT CAN BE DONE!!

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Faster CAFR’s The Solution:

Expedite the CAFR production and Audit Process

Improve coordination and communication with the Auditors

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Faster CAFR’s

Who’s Opining on What?!?

Let’s look at the Report of the Independent Auditors

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…..present fairly, in all material respects….the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information..….…

Focus is on OPINION UNITS

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Faster CAFR’s

Who’s Opining on What?!?Component Units Seven Major Funds:

General FundMotor License FundTobacco Settlement FundUnemployment Compensation FundState Worker’s Insurance FundState Lottery FundTuition Payment Fund

Aggregate Remaining Funds (ARF’s)

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Analysis of Opinion Units General Fund consists of 57 agencies. Six other Major Funds contain limited

numbers of appropriations. ARF’s consist of 122 funds

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Faster CAFR’s

TOP DOWN

APPROACH!!!

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Faster CAFR’s

FOCUS ON OPINION UNITS NEED 100% COVERAGE – NO!!!!!! GET EARLY AUDITOR BUY-IN TO

APPROACH, INCLUDING UNDERSTANDING OF MATERIALITY

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Faster CAFR’s

THE TOP DOWN APPROACH What’s Material and What’s Not!!

– ARF’s – 114 Different Funds

– General Fund – 57 Agencies

Which of these are significant?

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Faster CAFR’s

Look at 57 agencies in General Fund Compare

– Assets– Liabilities– Fund Balance– Revenues– Expenditures

Use June 30, 2004 audited numbers

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Calculate a 95% coverage:

D O L L A R SAGENCY ASSETS LIABILITY FND BAL REVENUES EXPENSES

% CUM % % CUM %ABCDEFGH

TOTAL

P E R C E N TASSETS LIAB.

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General Fund Results: 17 agencies comprised at least 95% of

General Fund assets (99%), liabilities (97%), fund balance (99%), revenue (98%) and expenditures (95%) and were considered “significant”

The remaining 40 agencies were considered “insignificant.”

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Faster CAFR’s

For the 114 ARF’s: 22 funds made up at least 95% of total

assets (98%), liabilities (97%), fund balance (98%), revenues (97%) and expenditures (96%), and were considered “significant.”

The remaining 92 funds were considered “insignificant.”

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Faster CAFR’s

Focus on: The six major funds The 17 significant agencies in the General

Fund, and The 22 significant funds in the ARF.

A total of 45 key areas.

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Faster CAFR’s

For the 45 Key Areas: Perform rigorous review and audit. Focus on balance sheet accruals and on

accuracy of revenues and expenditures. Prepare and review audit packages for each

key area. Use Comptroller sign-off. Provide training on preparing each type of

audit package – special revenue, enterprise, internal service, agency, etc.

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Faster CAFR’s

For each insignificant agency/fund: Post with any statewide journal entries

which include payroll accruals, non-payroll accruals, federal receivables, investment/security lending adjustment, workers comp accrual, etc

Perform and document variance analyses.

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Faster CAFR’s

Variance Analysis Approach: Establish thresholds for variants. Develop guidance on performing variance

analyses. Train staff on the performance and documentation

of variance analyses. Do year-over-year comparisons along with

differences (in $$ and %). An SAP report . Use SAP’s drilldown capability to quickly

research large variances.

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Faster CAFR’s

General Fund threshold:Assets - $10.5BLiabilities - $7.5BFund Balance – $3.0BRevenues - $38.8BExpenditures - $38.2B

Use a % difference of +/- 25%OR

Use a $$ variance of >$100M

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Faster CAFR’s

ARF Threshold determination: Blended component units make up a

majority of ARF values. Their audited numbers represent:

Assets – 90%Liabilities – 64%Fund Balance – 94%Revenues – 68%Expenditures – 46%

So, threshold can be higher.

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ARF Threshold Determination: % Difference of +/- 50%

OR $$ Difference of >$60M

Auditors reserved the right to perform analytical procedures using lower thresholds and to further explore any exceptions.

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Variance Analyses: Developed procedures on how to conduct

and document variance analyses. Trained staff on the performance and

documentation of variance analyses. Reviewed select variance analyses to

confirm reasonableness before giving to auditors.

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Use of Estimates for Liabilities Plotted liability categories for each key

area and then analyzed the basis for each liability.

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Faster CAFR’s

Liability categories:– Accounts Payable– Invoices Payable– Accrued Payable – Goods Receipt– Due to Other Funds– Due to Political Subdivisions– Due to Other Governments– Due to Fiduciary Funds– Due to Component Units– Payroll Payable– Deferred Revenue– Security Lending– Tax Refund Payable– Advance from Other Funds

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Faster CAFR’sCategory - General Fund Total DPWAccounts Payable and Accrued Liabilities 2,745 2,040Invoices Payable 462 241Accounts payable Good Receipt 21 9Due to Other Funds 66 21Due to Political Subdivisions 790 399Due to other Governments 16 3Due to Fiduciary Funds 4 1Due to Component Units 1 0Payroll Payable 1 0Deferred Revenue 1,518 9Security Lending 1,319 0Tax Refund Payable 565 0Advances from Other Funds 100 0

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What we found: Of DPW’s $2.721B total liabilities:

– $1.706B (63%) was supported by an actuarial valuation!

– $.358B (13%) was estimable.

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Estimating Liabilities Developed a white paper on Using Estimates Met with each Comptroller to discuss our

approach and identify those liabilities that could be estimated

Developed preliminary estimates for review and refinement

Presented approach to auditors for their information and acknowledgement

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Approach to Estimating Liabilities:– Availability of historical data:

• 3-5 years of liabilities

• 3-5 years of expenditures

– Trend analysis of data - % change from month to month, qtr to qtr and year to year.

– Recent program activities:• Legislation

• Regulation

• Funding or process changes

• Agency knowledge of program

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Faster CAFR’s

Approach to Estimating Liabilities (cont’d) Established a “Comfort Level” for each liability

estimate. For General Fund:#10 25% #8 40%

#9 28% #5 7%

A “lookback” in September tested the accuracy of each estimate. Of 24 estimates made, only 3 had significant variances.

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Faster CAFR’s

Use of Entity Wide Entries: Ensured consistency in approach Leveraged SAP to extract support for entries such

as:– Accrued payroll– Accounts payable accruals– Accounts receivable accruals– Federal receivables accruals– Internal activity eliminations– Due to/due from accruals– Compensated absences accruals– Workers’ compensation accrual– And others.

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Faster CAFR’s

Summary Top Down Approach Use of Estimates Better Variance Analyses Entity-Wide entries

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Faster CAFR’s(Amount Expressed in Thousands) Amount % Amount %

Total Liabilities 100% 7,457,312 100% 2,721,010 100%

Sourced Info: -

Accounts Payable and Accrued Liabilities 2,774,983 37% 2,039,731 75%

Invoices Payable 462,050 6% 240,615 9%

Due to other funds 66,287 1% 20,930 1%

Due to political subdivisions 789,557 11% 398,559 15%

Due to Other Governments 15,782 0% 3,295 0%

Summary of Estimable Accounts:

SAP system supported amounts 3% 227,733 7% 0%

Non-SAP system supported amounts 0% 0 0% 0%

Actuarially Supported Amounts 23% 1,705,617 49% 1,705,617 83%

Amounts to be Estimated: 20% 1,513,601 44% 358,339 17%

Comfort level 10 382,895 25% 358,339 100%

Comfort level 9 423,793 28% 0%

Comfort level 8 602,817 40% 0%

Comfort level 7 - 0% 0%

Comfort level 6 - 0% 0%

Comfort level 5 104,096 7% 0%

Total Accounts w /Estimates 46% 3,446,951 100% 2,063,956 100%

Public WelfareGRAND TOTAL

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Faster CAFR’s

HOW DID WE DO IT IN 2005? Two-way communication with Auditors –

Weekly teleconferences and monthly meetings, focusing on each major fund and key audit issues

Reached out to Component Units early in the process and got their buy-in

Met with material business areas at an interim date, conveying expectations and discussing potential real and and potential issues

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Faster CAFR’s

HOW DID WE DO IT IN 2005? Maximized interim testing Maximized use of Internal Audit (SAS 65

considerations) Timely receipt and review of Specialist Reports

SAS 70’s (18 reports were needed) Don’t forget User Control Consideration issues!

Actuarial Reports (9 reports were needed) CAFR Sheriffs Project Management Teamwork

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Faster CAFR’s

What will enable us to get faster? A year-round effort. Discuss/Critique audit issues/problems/delays

with relevant personnel immediately after audit and agree on resolution process

Detailed analysis of audit adjustments with plan to eliminate

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What will enable us to get faster? Prompt analysis and correction of Reportable

Conditions and Management Letter Comments An effective control environment to maximize

testing prior to year end Continued refinement and expansion of estimates Interim GAAP Reporting TRAINING,TRAINING, TRAINING!!!!! COMMUNICATION!

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Faster CAFR’s

Obstacles to a faster CAFR System updates – degree of

customization – forced migration New GASB pronouncements. Also

impact on component units, not just primary government!

Ineffective estimates Change of auditors, or current auditor

personnel

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Faster CAFR’s

Obstacles to a faster CAFRPersonnel turnover – the graying of the

American work forceNew Major FundsDependence on others – specialists,

component units

PLAN!! PLAN! PLAN!! then EXECUTE

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Thanks!