Public Company Accounting Oversight Board
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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]