Transcript GFOA Best Practices at CSMFO

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
• Independent audit
Background
GFOA Best Practices
and
Advisories
Recommended practices
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Initiative started in 1993
Intent = codify best practice
Objective = comprehensive guidance for
each of the major functional areas of
public finance
•
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Accounting, auditing, and financial reporting
Budgeting and fiscal policy
Debt management
Economic development and capital planning
Retirement and benefits administration
Treasury and investment management
Recent changes

Name change
• From recommended practices to best
practices
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Better reflect true character
Separate new category for advisories
• Not an endorsement of the underlying
situation
Definition – Best Practice

Identifies specific policies and
procedures as contributing to
improved government management.
It aims to promote and facilitate
positive change rather than merely
to codify current accepted practice.
Partial implementation is encouraged
as progress toward a recognized
goal.
Definition – Advisory

Identifies specific policies and
procedures necessary to minimize a
government’s exposure to potential
loss in connection with its financial
management activities. It is not to
be interpreted as GFOA sanctioning
the underlying activity that gives rise
to the exposure.
Current Status
Best
Practices
Advisories
Accounting, auditing, and
financial reporting
25
3
Budgeting and fiscal policy
31
1
Debt management
21
8
Economic development and
capital planning
20
0
Retirement and benefits
administration
23
9
Treasury and investment
management
26
5
146
26
Functional Area
Total
Categories
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Professional standards
Financial reporting
• Policy
• Specialized presentation guidance
• Expanded disclosure
• Dissemination
• Analysis
Categories (cont.)
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Internal control
• General
• Specific guidance
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Accounting
• General
• Specialized
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Independent audit
Categories (cont.)
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Grants administration
Managerial accounting
• Costing services
• Cost allocation plans
Specific Best Practices
and Advisories
Accounting, Auditing, and
Financial Reporting
Best Practices
Professional standards
Financial Reporting
Internal Control
Accounting
Independent Audit
Grants Administration
Managerial Accounting
Governmental Accounting,
Auditing, and Financial
Reporting Practices
Every government should…
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Maintain adequate accounting
system for timely GAAP financial
reporting
Issue timely GAAP financial
statements for the entire financial
reporting entity as part of a CAFR
Obtain audits in accordance with
GAAS or GAS
State governments should…
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Mandate timely audited GAAP
financial reports
Best Practices
Professional standards
Financial Reporting
Internal Control
Accounting
Independent Audit
Grants Administration
Managerial Accounting
Financial
Reporting
Policy
Specialized
Presentation
Guidance
Expanded
Disclosure
Dissemination
Analysis
Establishing Appropriate
Capitalization Thresholds
for Tangible Capital Assets
Capitalize…
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Only if useful life of at least two
years
Never for amounts less than $5,000
• Apply capitalization threshold to
individual items rather than to groups of
items
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Exception if effect of doing so would be to
eliminate a significant portion of total capital
assets
Establishing the Estimated
Useful Lives of Capital
Assets
Where to look…
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Best source: own past experience
Alternative: experience of others
• Adjust for particular circumstances
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Quality
Application
Environment
• Circumstances mitigated or exacerbated
by maintenance program
Improving the Effectiveness
of Fund Accounting
Effective fund accounting begins
by…
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Distinguishing “funds” used for
internal purposes from funds used
for financial reporting purposes
Educating elected officials regarding
the proper use of funds
Initially…
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Establish criteria for a “fund” for
financial reporting purposes
Document application of criteria to
individual funds
Then periodically…
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Undertake a comprehensive
evaluation of the fund structure
Possible combination of
individual funds
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Debt service funds
Capital projects funds
Grants for similar purposes
Internal service funds
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Use only if significant difference
between accrual and modified
accrual
Presenting Budget to Actual
Comparisons Within the
Basic Financial Statements
When deciding how to show
budgetary comparisons . . .
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Present as basic financial statements
whenever permitted by GAAP
• Additional cost justified
Financial
Reporting
Policy
Specialized
Presentation
Guidance
Expanded
Disclosure
Dissemination
Analysis
Including Management’s
Discussion and Analysis in
Departmental Reports
In the absence of definitive
guidance…

Present MD&A in separate
departmental statement
• Unaudited supplementary information
• Required supplementary information
(AICPA)
Potential Best Practices
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Contents of separately issued reports
for less than a legal entity
• Fund or departmental reports
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Sources of guidance for performance
measurement reporting
Financial
Reporting
Policy
Specialized
Presentation
Guidance
Expanded
Disclosure
Dissemination
Analysis
Using the Comprehensive
Annual Financial Report to
Meet SEC Requirements
for Periodic Disclosure
SEC Rule 15c2-12
Where to provide annual
information required by SEC?

Consider using the CAFR
• Undertaking should commit government
only to periodic disclosure of required
information, not to its inclusion as part
of the CAFR
Financial
Reporting
Policy
Specialized
Presentation
Guidance
Expanded
Reporting
Dissemination
Analysis
Using Websites to Improve
Access to Budget
Documents and Financial
Reports
Everyone should publish CAFR
on web

Specific guidelines:
• Identical to printed versions
• Notice that information has not been
updated
• Prior year documents noted and
segregated
• Security from manipulation by
external or unauthorized persons
Web Site Presentation of
Official Financial
Documents
Recommendations
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Use web site as a primary means of
communicating financial information
Specific guidelines
• Formatting
• Technological infrastructure
• Electronic financial reporting language
• Distribution
• Information disclaimer
• Historical information
Formatting
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Consistency with hardcopy version
Legibility (consistency throughout
report)
Pagination (sequential)
File size
• Single file for entire document
• Individual files
Technological Infrastructure
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Security (no unauthorized changes)
Placement (easy to locate)
Software compatibility
Features (zooming, search)
User instructions
Linking (ability to click page number
on table of contents)
Testing (operational with different
computer operating systems)
Other
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Electronic financial reporting
language
Distribution
• Inform potential users of availability
• Other electronic media (for those
without access to the internet)
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Information disclaimer (not updated)
Historical information (segregated)
Preparing Popular
Reports
Supplement CAFR with popular
report
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Issue within six months of fiscal year
end
Define scope and refer reader to
CAFR
The popular report should…
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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…
(cont.)
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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
Financial Reports
Background
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Timeliness essential
• Balance against reliability
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Minor gains in precision cannot justify
indefinite delay
• Balance costs and benefits
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Minimum objective
• Legislative deadlines
• Award programs
Recommendation 1
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Recording activity throughout the year
• Transactions processing
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At least quarterly
• Reconciliations
• Financial analysis of interim management reports
• Accounting policies and procedures
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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 2
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Closing and financial statement
preparation processing
• Annual closing process
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Items related to budgetary expenditures
recorded by the end of the period
• Component units
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Early and ongoing communication
• No substitute for one or more face-to-face
meetings
• Unforeseen circumstances
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Better to proceed based upon estimates
Recommendation 3
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Implementing of new accounting
standards
• Facilitating implementation of new
accounting standards
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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 4
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Financial report format and
distribution
• Electronic distribution
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Initially distribute report electronically
• Website
• e-mail
• Mail CD-ROM
Recommendation 5
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Contracting for professional services
• Audit procurement
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The request for proposal (RFP) for the audit
should specify a public release date
• Contracts for professional services other
than auditing
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RFPs for nonaudit services should specify
the public release date of the financial
statements and expressly mention that
those services need to be completed in time
to allow the government to meet deadline
Financial
Reporting
Policy
Specialized
Presentation
Guidance
Expanded
Disclosure
Dissemination
Analysis
Appropriate Level of
Unrestricted Fund Balance
in the General Fund
When setting a policy…
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Focus on unrestricted fund balance
Address both
• Specific plans to increase or decrease level if
inconsistent with policy
• Time framework
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Set target at no less than two
months
• Regular operating revenues or
• Regular operating expenditures
In setting a target, consider…
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Predictability/volatility
• Special application to America’s largest
governments
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Exposure to significant one-time
outlays
Other funds (potential source/drain)
Liquidity
Commitments and assignments
The Use of Trend Data and
Comparative Data for
Financial Analysis
When evaluating trends…
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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
constant dollars…
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Disclose basis
Also provide unadjusted data
In making comparisons
consider…
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Level and type of government
Scope and quality of service
Number served
Definitions of categories
Inter-regional comparability
Potential effect of depreciation
Using trend data
Potential Best Practices
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Replenishment of unrestricted fund
balance of the general fund
Appropriate level of unrestricted fund
balance in other governmental fund
types
Appropriate level of working capital
in enterprise funds
Use of a management dashboard to
monitor trends and spikes during the
year
Best Practices
Professional standards
Financial Reporting
Internal Control
Accounting
Independent Audit
Grants Administration
Managerial Accounting
Part 4
Internal Control
General
Specific Guidance
Enhancing Management
Involvement with Internal
Control
Explain ethical duty to…
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“…exercise prudence and integrity
in the management of funds in
their custody and in all financial
transactions”
“…not knowingly sign, subscribe
to, or permit the issuance of any
statement or report which
contains any misstatement or
which omits any material fact.”
Competence essential
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Management
• Training and information needed on
comprehensive framework of internal
control as defined by COSO
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Staff
Management should…
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Document controls
• Include method to avoid circumvention
by management
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Periodically evaluate controls
Evaluate resolution of exceptions
Adopt corrective action plan
Follow up on corrective action plan
Establishing an Internal
Audit Function
Especially consider separate
function if…
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High degree of risk
• Complex accounting system
• Contracts with outside parties
• Rapidly changing environment
If separate function not feasible:
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Consider assigning responsibilities to
regular employees
Consider outsourcing
If separate function is
established…
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Use charter, enabling resolution, or
other legal means
Adopt Government Auditing
Standards (“Yellow Book”)
Require that responsible party has
college degree (certification a “plus”)
Make materials available to audit
committee
Encouraging and
Facilitating the Reporting of
Fraud and Questionable
Accounting and Auditing
Practices
Begin by…
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Formally approving ethics policy
Widely distributing and publicizing
that policy
• Basis for identifying fraud, abuse, and
questionable practices
Be sure to provide for…
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Practical means for confidential,
anonymous reporting
• Regularly publicize
• Minimize cost
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Separate mechanism for employees
• Outside vendor has advantage of enhanced
credibility and the possibility of reporting outside
of office hours
Potential Best Practice
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Elements of a comprehensive
internal control framework
Internal Control
General
Specific Guidance
Ensuring Control over
Noncapitalized Items
Which particular items need to
be controlled?
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Object of legal compliance
Potentially detrimental to public
safety
Heightened risk of theft (“walk away”
items)
Who should control:
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Primary control in department
• Individual assigned to prepare and
update list of controlled items
annually
• Annual departmental certification
that information updated available
for inspection
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Accounting (or other designated
finance) function to periodically
verify data
The Need for Periodic
Inventories of Tangible
Capital Assets
Physical inventories . . .
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Always needed
No less than once every five years
Potential Best Practice
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Technology security
Best Practices
Professional standards
Financial Reporting
Internal Control
Accounting
Independent Audit
Grants Administration
Managerial Accounting
Accounting
General
Specialized
Documentation of
Accounting Policies and
Procedures
Documentation of policies
should be . . .
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Promulgated at appropriate level to
emphasize importance and authority
Updated on predetermined schedule
• Changes also made as they occur
• Employee assigned for this purpose
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Management to oversee performance
Good documentation should . . .
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Be readily available (e.g., electronic)
Delineate authority and responsibility
Present actual v. ideal controls
Explain design and purpose of
controls
Technology Disaster
Recovery Planning
A disaster-recovery policy
should…
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Be formally established
Be Regularly updated
Formally assign coordinators for each
agency or department to form a
disaster recovery team
Require the creation and
preservation of back-up data
A disaster-recovery policy
should… (cont.)
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Make provision for the alternative
processing of data following a
disaster
Provide detailed instructions for
restoring disk files
Establish guidelines for the
immediate aftermath of a disaster
A disaster-recovery policy
should… (cont.)
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Ensure that a copy of policies and
procedures is kept off site
Provide for periodic testing (both
restoration and processing of data)
• Similar assurance needed for
outsourced services
Accounting
General
Specialized
Ensuring Adequate
Documentation of Costs to
Support Claims For
Disaster Recovery
Assistance
Part 1
Establish Formal Policies and
Procedures for the
documentation of disasterrelated costs
Policies and procedures
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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
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Train both financial and nonfinancial staff
Train both financial and nonfinancial staff
on FEMA requirements and guidelines
Policies and Procedures (cont.)
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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
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Review bids and contracts in advance for
compliance with relevant requirements
Policies and Procedures (cont.)
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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.)

If planning to use nonprofits,
consider obligating government by
contract to using their services
Part 2
Ensure Adequate Detail to
Support Claims
Detail

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.)
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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);
Other
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Track volunteer hours
• Applicable to local share

Track local equipment usage
• By hours actually used
Best Practices
Professional standards
Financial Reporting
Internal Control
Accounting
Independent Audit
Grants Administration
Managerial Accounting
Audit Committees
Why an audit committee is
needed . . .
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Practical means for governing body
to meet its responsibility
Needed to ensure direct
communication between governing
body and auditors
GFOA specifically recommends
that . . .
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Every government formally establish
an audit committee
• Document
• Periodically review

Auditors report directly to the audit
committee
Committee members…
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Should be members of the
governing body
Need only a basic understanding of
accounting and auditing
Should be educated as to
responsibilities
Should have support of a “financial
expert”
The audit committee should . . .
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Have adequate funding
Review and oversee financial
reporting processes, internal
controls and independent auditors
• Access needed to internal audit work
• Documentation for management
override
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Make an annual report
• Reference to basis for conclusion
Audit Procurement
Audit coverage

Extend to combining and individual
fund presentations
• Professional judgment consistent with
legal requirements
Audit contract should…
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Always use “Yellow Book” standards
of independence
Be of at least 5 years duration
• No automatic renewals
• Problem with mandatory auditor
rotation
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Ensure that price is not ultimate
criterion
Nonaudit services . . .
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Should be approved in advance by
audit committee
• Routinely explore possibility of
alternative service providers
Mitigating the Negative
Effects of Statement on
Auditing Standards No. 112
Provide evidence of sound
internal control
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Document comprehensive framework
of control per COSO
Anti-fraud program and controls
Internal audit/risk assessment
• Commensurate with size and complexity
Minimize audit adjustments
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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
auditor
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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
Second accounting firm just to
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
Professional standards
Financial Reporting
Internal Control
Accounting
Independent Audit
Grants Administration
Managerial Accounting
Potential Best Practice

Grant administration, monitoring,
and reporting
Best Practices
Professional standards
Financial Reporting
Internal Control
Accounting
Independent Audit
Grants Administration
Managerial Accounting
Managerial
Accounting
Costing
Services
Cost Allocation
Plans
Application of Full-Cost
Accounting to Municipal
Solid Waste Management
Activities
A government should . . .
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Use an enterprise fund to account for
landfills
Collect data both by path and activity
Distinguish fixed from variable costs
Justify allocation used to determine
full cost
Consider cash flows for rate setting
Managerial
Accounting
Costing
Services
Cost Allocation
Plans
Potential Best Practice

Preparing indirect cost allocation
plans under the re4quirements of
Federal Circular A-87.
Advisories
Auditor Association with
Financial Statements Included
in Offering Statements or
Posted on Web Sites
Basic position of GFOA

Having paid for the independent audit, a
government owns the audited financial
statements and should feel free to use
them in any appropriate manner.
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Same set of financial statements
Not used in potentially misleading manner
No material subsequent event
Avoid creating auditor
association in contract

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
If auditor association…

Take steps to avoid unwarranted delays
and unjustified costs.

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Maximum time
No additional fee
Web site posting

The audit contract should clarify that the
government is free to post its audited
financial statements on its website.
Considerations on the Use
of the Modified Approach to
Accounting for
Infrastructure Assets
Before selecting, first
consider…
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Usefulness of data to management
Potential impact of prospective
depreciation
Inherent capital bias
Unmatched debt
Reliance upon interested parties
Presenting Securities
Lending Transactions in
Financial Statements
Avoid potential
misunderstandings by…


Reporting cash received as collateral
separately from other cash
Reporting securities lending income
and related expenses together
Illustrative presentation
Potential Advisory

Fiscal sustainability reporting