2011 Winter GFOA Best Practices & Advisories...Recommendation 1 Recording activity throughout the...

GFOA UpdateGFOA Update

GFOA Best Practices & GFOA Best Practices & AdvisoriesAdvisories

Wisconsin GFOAWisconsin GFOA

December 2, 2011December 2, 2011

TopicsTopics

�� Background on GFOA best practices and Background on GFOA best practices and advisoriesadvisories

�� Specific best practices and advisoriesSpecific best practices and advisories�� Professional standardsProfessional standards�� Professional standardsProfessional standards

�� Financial reportingFinancial reporting

�� Internal controlInternal control

�� AccountingAccounting

�� Independent auditIndependent audit

BackgroundBackground

GFOA Best PracticesGFOA Best Practices

andand

AdvisoriesAdvisories

Recommended practicesRecommended practices

�� Initiative started in 1993Initiative started in 1993

�� Intent = codify best practice Intent = codify best practice

�� Objective = comprehensive guidance for each of Objective = comprehensive guidance for each of the major functional areas of public financethe major functional areas of public finance

Accounting, auditing, and financial reportingAccounting, auditing, and financial reporting�� 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•• 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 Definition –– Best PracticeBest Practice

�� Identifies specific policies and procedures Identifies specific policies and procedures as contributing to improved government as contributing to improved government management. It management. It aims to promote and aims to promote and facilitate positive changefacilitate positive change rather than rather than facilitate positive changefacilitate positive change rather than rather than merely to codify current accepted practice. merely to codify current accepted practice. Partial implementation is encouraged as Partial implementation is encouraged as progress toward a recognized goal. progress toward a recognized goal.

Definition Definition –– AdvisoryAdvisory

�� Identifies specific policies and procedures Identifies specific policies and procedures necessary to necessary to minimize a government’s minimize a government’s exposureexposure to potential loss in connection to potential loss in connection with its financial management activities. It with its financial management activities. It with its financial management activities. It with its financial management activities. It is not to be interpreted as GFOA is not to be interpreted as GFOA sanctioning the underlying activity that sanctioning the underlying activity that gives rise to the exposure. gives rise to the exposure.

CategoriesCategories

�� Professional standardsProfessional standards

�� Financial reportingFinancial reporting

�� PolicyPolicy

Specialized presentation guidanceSpecialized presentation guidance�� Specialized presentation guidanceSpecialized presentation guidance

�� Expanded disclosureExpanded disclosure

�� DisseminationDissemination

�� AnalysisAnalysis

Categories (cont.)Categories (cont.)

�� Internal controlInternal control

�� GeneralGeneral

�� Specific guidanceSpecific guidance

�� AccountingAccounting�� AccountingAccounting

�� GeneralGeneral

�� SpecializedSpecialized

�� Independent auditIndependent audit

Categories (cont.)Categories (cont.)

�� Grants administrationGrants administration

�� Managerial accountingManagerial accounting

�� Costing servicesCosting services

Cost allocation plansCost allocation plans�� Cost allocation plansCost allocation plans

Specific Best PracticesSpecific Best Practicesand Advisoriesand Advisories

Accounting, Auditing, and Accounting, Auditing, and Financial ReportingFinancial Reporting

Best Practices

Internal Control

Financial Reporting

Professional standards

Accounting

Independent Audit

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 system for Maintain adequate accounting system for timely GAAP financial reportingtimely GAAP financial reporting

�� Issue timely GAAP financial statements for Issue timely GAAP financial statements for the entire financial reporting entity as part the entire financial reporting entity as part the entire financial reporting entity as part the entire financial reporting entity as part of a CAFRof a CAFR

�� Obtain audits in accordance with GAAS or Obtain audits in accordance with GAAS or GASGAS

State governments should…State governments should…

�� Mandate timely audited GAAP financial Mandate timely audited GAAP financial reportsreports

Best Practices

Internal Control

Financial Reporting


Accounting

Independent Audit



FinancialReporting

Policy Dissemination AnalysisExpandedDisclosure

SpecializedPresentationGuidance

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 yearsOnly if useful life of at least two years

�� Never for amounts less than $5,000Never for amounts less than $5,000

�� Apply capitalization threshold to individual Apply capitalization threshold to individual items rather than to groups of itemsitems rather than to groups of itemsitems rather than to groups of itemsitems rather than to groups of items

•• 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•• QualityQuality

•• ApplicationApplication

•• EnvironmentEnvironment

�� Circumstances mitigated or exacerbated by Circumstances mitigated or exacerbated by maintenance programmaintenance 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 internal Distinguishing “funds” used for internal purposes from funds used for financial purposes from funds used for financial reporting purposesreporting purposes

�� Educating elected officials regarding the Educating elected officials regarding the �� Educating elected officials regarding the Educating elected officials regarding the proper use of fundsproper use of funds

Initially…Initially…

�� Establish criteria for a “fund” for financial Establish criteria for a “fund” for financial reporting purposesreporting purposes

�� Document application of criteria to Document application of criteria to individual fundsindividual fundsindividual fundsindividual funds

Then periodically…Then periodically…

�� Undertake a comprehensive evaluation of Undertake a comprehensive evaluation of the fund structurethe 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 between Use only if significant difference between accrual and modified accrualaccrual and modified accrual

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



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 departmental Present MD&A in separate departmental statementstatement

�� Unaudited supplementary informationUnaudited supplementary information

�� Required supplementary information (AICPA)Required supplementary information (AICPA)�� Required supplementary information (AICPA)Required supplementary information (AICPA)

Potential Best PracticesPotential Best Practices

�� Contents of separately issued reports for Contents of separately issued reports for less than a legal entity less than a legal entity

�� Fund or departmental reportsFund or departmental reports

�� Sources of guidance for performance Sources of guidance for performance �� Sources of guidance for performance Sources of guidance for performance measurement reportingmeasurement reporting

FinancialReporting



Using the Comprehensive Using the Comprehensive Annual Financial Report to Annual Financial Report to Meet SEC Requirements Meet SEC Requirements Meet SEC Requirements Meet SEC Requirements for Periodic Disclosurefor Periodic Disclosure

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 only Undertaking should commit government only to periodic disclosure of required information, to periodic disclosure of required information, not to its inclusion as part of the CAFRnot to its inclusion as part of the CAFRnot to its inclusion as part of the CAFRnot to its inclusion as part of the CAFR

FinancialReporting

Policy Dissemination AnalysisExpandedReporting


Using Websites to Improve Using Websites to Improve Access to Budget Access to Budget

Documents and Financial Documents and Financial 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 updatedupdatedupdatedupdated

�� Prior year documents noted and Prior year documents noted and segregatedsegregated

�� Security from manipulation by external or Security from manipulation by external or unauthorized personsunauthorized 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�� FormattingFormatting

�� Technological infrastructureTechnological infrastructure

�� Electronic financial reporting languageElectronic financial reporting language

�� DistributionDistribution

�� Information disclaimerInformation disclaimer

�� Historical informationHistorical information

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 �� 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 � 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 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 delaydelay

� 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� 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?


�� 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 periodby 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


�� Implementing of new accounting Implementing of new accounting standardsstandards

� Facilitating implementation of new accounting standardsstandards

• 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.


�� Financial report format and distribution Financial report format and distribution

�� Electronic distributionElectronic distribution

•• Initially distribute report electronically Initially distribute report electronically �� WebsiteWebsiteWebsiteWebsite

�� ee--mailmail

�� Mail CDMail CD--ROM ROM


�� Contracting for professional services Contracting for professional services �� Audit procurementAudit procurement

•• The request for proposal (RFP) for the audit should The request for proposal (RFP) for the audit should specify a public release datespecify a public release date

Contracts for professional services other than Contracts for professional services other than �� Contracts for professional services other than Contracts for professional services other than auditingauditing

•• RFPs for nonaudit services should specify the RFPs for nonaudit services should specify the public release date of the financial statements and public release date of the financial statements and expressly mention that those services need to be expressly mention that those services need to be completed in time to allow the government to meet completed in time to allow the government to meet deadline deadline

FinancialReporting



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 level if Specific plans to increase or decrease level if inconsistent with policyinconsistent with policyinconsistent with policyinconsistent 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 oneExposure to significant one--time outlaystime outlays�� Exposure to significant oneExposure to significant one--time outlaystime outlays

�� Other funds (potential source/drain)Other funds (potential source/drain)

�� LiquidityLiquidity

�� Commitments and assignmentCommitments and assignment

The Use of Trend Data and The Use of Trend Data and Comparative Data for Comparative Data for

Financial AnalysisFinancial AnalysisFinancial 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 dataten 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�� Number servedNumber served

�� Definitions of categoriesDefinitions of categories

�� InterInter--regional comparabilityregional 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 typesbalance 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

Internal Control

Financial Reporting


Accounting

Independent Audit



Part 4Part 4

Internal Control

General Specific Guidance

Enhancing Management Enhancing Management Involvement with Internal Involvement with Internal

ControlControlControlControl

Explain ethical duty to…Explain ethical duty to…

�� “…exercise prudence and integrity in “…exercise prudence and integrity in the management of funds in their the management of funds in their custody and in all financial custody and in all financial transactions”transactions”transactions”transactions”

�� “…not knowingly sign, subscribe to, or “…not knowingly sign, subscribe to, or permit the issuance of any statement permit the issuance of any statement or report which contains any or report which contains any misstatement or which omits any misstatement or which omits any material fact.”material fact.”

Competence essentialCompetence essential

�� ManagementManagement

�� Training and information needed on Training and information needed on comprehensive framework of internal control comprehensive framework of internal control as defined by COSOas defined by COSOas defined by COSOas defined by COSO

�� StaffStaff

Management specifically should Management specifically should . . .. . .

�� Document controlsDocument controls

�� Include method to avoid circumvention by Include method to avoid circumvention by managementmanagement

�� Periodically evaluate controlsPeriodically evaluate controls�� 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�� 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 StandardsGovernment Auditing Standards�� Adopt Adopt Government Auditing StandardsGovernment Auditing Standards(“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

PracticesPracticesPracticesPractices

Begin by…Begin by…

� Formally approving ethics policy

� Widely distributing and publicizing that policy

Basis for identifying fraud, abuse, and � 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� 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 internal Elements of a comprehensive internal control frameworkcontrol 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 safetyPotentially detrimental to public safety

�� Heightened risk of theft (“walk away” Heightened risk of theft (“walk away” items)items)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 annuallyupdate 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 verify finance) function to periodically verify datadata

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


�� Technology securityTechnology security

Best Practices

Internal Control

Financial Reporting


Accounting

Independent Audit



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�� 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 controlsExplain design and purpose of controls�� Explain design and purpose of controlsExplain design and purpose of controls

Technology Disaster Technology Disaster Recovery PlanningRecovery Planning

A disasterA disaster--recovery policy 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 disaster agency or department to form a disaster agency or department to form a disaster agency or department to form a disaster recovery teamrecovery team

�� Require the creation and preservation of Require the creation and preservation of backback--up dataup data

A disasterA disaster--recovery policy recovery policy should… (cont.)should… (cont.)

�� Make provision for the alternative Make provision for the alternative processing of data following a disasterprocessing of data following a disaster

�� Provide detailed instructions for restoring Provide detailed instructions for restoring disk filesdisk filesdisk filesdisk files

�� Establish guidelines for the immediate Establish guidelines for the immediate aftermath of a disasteraftermath of a disaster

A disasterA disaster--recovery policy 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)restoration and processing of data)restoration and processing of data)

�� Similar assurance needed for outsourced Similar assurance needed for outsourced servicesservices

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 Assistance Assistance

Part 1Part 1

Establish Formal Policies and Establish Formal Policies and Procedures for the documentation Procedures for the documentation

of disasterof 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 disasterthat 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


� Set in place controls for emergency supplies

� Obtain approval for and document any provision for changes in compensation levels for salaried stafffor 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


� 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 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 � 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� By hours actually used

Best Practices

Internal Control

Financial Reporting


Accounting

Independent Audit



Audit CommitteesAudit Committees

Why an audit committee is Why an audit committee is needed . . . needed . . .

�� Practical means for governing body to Practical means for governing body to meet its responsibilitymeet its responsibility

�� Needed to ensure direct communication Needed to ensure direct communication between governing body and auditorsbetween governing body and auditorsbetween governing body and auditorsbetween governing body and auditors

GFOA specifically recommends GFOA specifically recommends that . . . that . . .

�� Every government formally establish an Every government formally establish an audit committeeaudit committee

�� DocumentDocument

�� Periodically reviewPeriodically review�� 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 �� Need only a basic understanding of Need only a basic understanding of accounting and auditingaccounting and auditing

�� Should be educated as to responsibilitiesShould be educated as to responsibilities

�� 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 reporting Review and oversee financial reporting processes, internal controls and processes, internal controls and processes, internal controls and processes, internal controls and independent auditorsindependent auditors

�� Access needed to internal audit workAccess needed to internal audit work

�� Documentation for management overrideDocumentation for management override

�� 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 fund Extend to combining and individual fund presentationspresentations

�� Professional judgment consistent with legal Professional judgment consistent with legal requirementsrequirementsrequirementsrequirements

Audit contract should…Audit contract should…

�� Always use “Yellow Book” standards of Always use “Yellow Book” standards of independenceindependence

�� Be of at least 5 years durationBe of at least 5 years duration

No automatic renewalsNo automatic renewals�� No automatic renewalsNo automatic renewals

�� Problem with mandatory auditor rotationProblem with mandatory auditor rotation

�� Ensure that price is not ultimate criterionEnsure that price is not ultimate criterion

Nonaudit services . . .Nonaudit services . . .

�� Should be approved in advance by audit Should be approved in advance by audit committeecommittee

�� Routinely explore possibility of alternative Routinely explore possibility of alternative service providersservice providersservice providersservice 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� 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 � 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 � 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 � 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

Internal Control

Financial Reporting


Accounting

Independent Audit




�� Grant administration, monitoring, and Grant administration, monitoring, and reportingreporting

Best Practices

Internal Control

Financial Reporting


Accounting

Independent Audit




CostingServices

Cost AllocationPlans

Application of FullApplication of Full--Cost Cost Accounting to Municipal Accounting to Municipal

Solid Waste Management Solid Waste Management ActivitiesActivitiesActivitiesActivities

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�� Distinguish fixed from variable costsDistinguish fixed from variable costs

�� Justify allocation used to determine full Justify allocation used to determine full costcost

�� Consider cash flows for rate settingConsider cash flows for rate setting


CostingServices

Cost AllocationPlans


�� Preparing indirect cost allocation plans Preparing indirect cost allocation plans under the re4quirements of Federal under the re4quirements of Federal Circular ACircular A--87.87.

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 statements and should feel free to use them in any appropriate manner.them in any appropriate manner.them in any appropriate manner.them in 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 statements included in offering statements statements included in offering statements statements included in offering statements or posted on the government’s website or posted on the government’s website simply by inserting a clause to that effect simply by inserting a clause to that effect in the audit contractin the audit contract

If auditor association…If auditor association…

�� Take steps to avoid unwarranted delays Take steps to avoid unwarranted delays and unjustified costs.and unjustified costs.

•• Maximum timeMaximum time

•• No additional feeNo additional fee•• 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 government is free to post its audited financial statements on its website.financial 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�� 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 and Reporting securities lending income and related expenses togetherrelated expenses togetherrelated expenses togetherrelated expenses together

Illustrative presentationIllustrative presentation

2011 Winter GFOA Best Practices & Advisories...Recommendation 1 Recording activity throughout the...

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Transcript of 2011 Winter GFOA Best Practices & Advisories...Recommendation 1 Recording activity throughout the...