Transcript Public Company Accounting Oversight Board

Auditor Update
Healthcare Financial
Management Association
Ivan D. Dansereau, CPA
QA Director
Kelly Collins, CPA
Audit Manager
September 23, 2004
Alderbrook Resort, Union, Washington
Overview
GAGAS Independence Standard
 Audit Approach
 Common Audit Problems & Frauds and
How to Avoid Them
 Thoughts for the Future

Financial Fraud & Accounting Failures

Dot.Com – Gone
 By
July 2001: 367 internet companies out of business,
and 83,000 employees laid off

Enron: SPEs used in variety of ways to inflate
revenues and disguise liabilities
 Oct.
2001: $500 mm accounting loss and $1.2 billion
reduction in shareholder equity
 By Aug. 2002: $63 billion loss of market value

Bursting of Telecom Bubble
 Between
Jan-July 2002: at least 112 companies
required to restate prior earnings
 Decline of market value from peak by $2.5 TRILLION
The Story Gets Worse….

Global Crossing
 From
$48 billion market cap to January 2002
bankruptcy and $12.4 billion in debt

Adelphia Communications
 March 2002: $2.7 billion of hidden debt
 June 2002: Overstated cash flows by another

WorldCom
 July

$500 mm
2002: overstated prior earnings by $3.85 billion
Qwest Communication
 July
2002: improperly booked $1.16 billion as profits
instead of capital investments
…And Worse….

Tyco


ImClone


$1.7 billion underreported losses
Merck & Co.


Premature booking of $679 mm in revenue
Kmart


Misbooked revenue and overstated pretax income
Lucent Technologies


Undisclosed post-retirement benefits
Xerox Corporation


Insider trading
General Electric


Criminal indictments
$12.4 billion inflated earnings
Mirant Corporation

$1.1 billion inflated assets
Public Confidence Erodes
There are
bad, but
probably
isolated
instances,
16%
Many other
companies
will be
exposed,
38%
The American Survey, July 2002
Every
company
does this
kind of thing,
but only a
few more will
get caught,
46%
Public Confidence Erodes
Do Top Executives Act Improperly to Benefit
Themselves, at the Expense of Shareholders?
Occasionally
20%
Somewhat
38%
Never
1%
Very
41%
Sarbanes-Oxley:
Seeking a Calm After the Storm

Corporate Conduct

Audit Committees






CEO & CFO Certify Reports (Section 302)
Management Assessment of Internal Controls (Section 404)
Enhanced Financial Disclosures
Independence of Auditor



Hire/fire/compensate/direct the work of the independent auditor
“Independent” directors (Section 301)
Restrictions on non-audit services
Enhanced communication with Audit Committee
Creation of Public Company Accounting Oversight
Board
States Consider Adopting SOX



In 2003, 14 states proposed legislation related to
incorporating all or some of the provisions of SOX.
In 2004, 6 states proposed such legislation.
Washington state now requires:




Work papers be kept for a period of seven years,
Makes altering, destroying, shredding, mutilating or concealing a
record a class B felony or punishable by fine of not more than
$500,000 or both,
Board of Accountancy has power to fine CPAs up to $30,000 for
dishonesty, fraud, negligence or violation of professional conduct.
Several states have either enacted or continue to press for
corporate governance statutes affecting privately-owned
business and not-for-profits to establish audit committees
with protocols similar to SOX
Government Environment In
Washington State

Open government laws, such as:



Open Public Meetings Act
Public Records Retention
Bid Laws

Media Scrutiny

No Profit Motive

Washington State Auditor’s Office
GAO Independence Standard

Auditors should not perform management
functions or make management decisions

Auditors should not audit their own work or
provide non-audit services in situations where
the amounts or services involved are
significant/material to the subject matter of the
audit
Compliance with GAO
Independence Standard

SAO policies require our auditors to:
 Review
the documentation that CPAs prepare in
support of financial statement audits of state and local
governments to determine whether professional
standards and SAO audit quality expectations are
met.
 Evaluate
the professional reputation of CPAs and
obtain representations that CPAs are independent in
accordance with Generally Accepted Government
Auditing Standards (GAGAS).
State Auditor’s Office
Audit Approach
Provide four weeks notice prior to
conducting audit.
 Perform preplanning activities
 Entrance conference
 Perform audit work
 Exit conference
 Issue audit report

Audit Scope

Accountability and Legal Compliance


Federal Single Audit Testing


Review of applicable state and local laws and areas of
identified high risk.
Beginning fiscal year 2004, must expend more then
$500,000 in federal funds to qualify for a single audit.
Financial Statements

Includes evaluation and tests on internal controls over central
accounting systems as well as substantive test of material
accounts.
Accountability and Legal
Compliance
Billings and accounts receivable
 Payroll
 Disbursements/purchases
 Contracts and agreements
 Equipment and inventory
 Bid requirements

Audit Results













Category
Cash receipting
Disbursements
Equipment/Inventory
Contracts
Billings/receivables
Payroll
OPMA
Financial/reporting
Budget/deficit
Bid Laws
Conflict of interest
Investments
Gift of Public Funds
Total
Issues
27
27
10
9
8
6
6
6
5
4
1
1
1
Exit
Items
22
26
9
3
6
5
5
4
1
2
0
0
0
Mgmt
Letters
5
1
1
4
1
1
0
2
4
1
1
0
1
Findings
0
0
0
2
1
0
1
0
0
1
0
1
0
Most Common Areas of Abuse





Type of Fraud
Unlawful investment
Personal use of services
Payroll
Cash receipts
Equipment/inventory
Total
No.
Loss
Cases
Amount
1
$432,000
3
44,762
3
21,540
5
2,754
1
100
13
$ 501,156
== =========
%
86.2
9.0
4.3
0.5
0.0
100.0
====
How to avoid problems?

Establish Internal Controls


Schedule Audits


Preventive and/or Detective
Timely review and feedback
Utilize Available Resources
- www.sao.wa.gov

SAO External Help Desk

Contact Local Audit Managers

Program Manager - Kelly Collins
What to expect in future audits ...

We will review:

Proshare Funds
 Vendor payments

Financial Condition
 Indications of going concern
“… the man whose probity consists in
merely obeying the laws, cannot be
truly virtuous or estimable; for he will
find many opportunities of doing
contemptible and even dishonest
acts, which the laws cannot punish.”
-Stephanie Félicité Genlis “Laws,” Tales
of the Castle (c. 1793)
Washington State Auditor’s Office
Ivan D. Dansereau, CPA
Director of Quality Assurance
360-902-0375
[email protected]
Kelly Collins, CPA
Audit Manager
360-725-5376
[email protected]