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WEATHERING THE FINANCIAL STORM APIPA 2009 Jeanne H. Yamamura, CPA, MIM, PHD 1 INTRODUCTION • • • • Our world at a glance Bolstering the economy Top Ten Tips for Tough Times Resources APIPA 2009 2 OUR WORLD AT A GLANCE • • • • • • • • • Global economic challenges and issues U.S. economic growth slowed – recession Changing regulatory environment Financial markets turmoil Scandals: Madoff, Satyam, etc. Social Security questions Public pensions at risk Shrinking workforce and massive layoffs Sustainability and environmental issues APIPA 2009 3 BOLSTERING THE ECONOMY • The Economy – – – – Stock Market Loss GDP Loss Unemployment Retirement Savings • Recovery – Financial Stability Plans – ARRA 2009 – Regulatory Restructuring APIPA 2009 4 American Recovery and Reinvestment Act of 2009 Where the money is going: Education & Training Health Care 7% 8% Energy 5% Other 1% Tax Relief 37% Protecting the Vulnerable 10% Infrastructure & Science APIPA 2009 14% State & Fiscal Relief 18% 5 Overview of Financial Stability Plan Troubled Assets Relief Program Homeowner Affordability and Stability Plan • 10/3/2008 - $700 billion • 3/4/2009 - $75 billion Capital Assistance Program • 2/25/2009 –“Stress Test” Term Asset-Backed Lending Facility • 3/3/2009 - $1 trillion American Recovery and Reinvestment Act Small Business and Community Lending Initiative APIPA 2009 • 2/17/2009 - $787 billion • 3/16/2009 - $15 billion 6 LOCAL GOVERNMENTS IN FISCAL DISTRESS • Declining revenues • Property taxes no longer stable source • State governments unable to assist • Increasing demand for services APIPA 2009 7 WHAT IS HAPPENING IN YOUR GOVERNMENT? • Table discussion topic – Economic problems occurring in your government – Actions taken – Actions planned – Outlook? • Report back to the class on the actions taken and/or proposed in response to the economic downturn. APIPA 2009 8 APIPA 2009 9 TOP TEN TIPS FOR TOUGH TIMES! 1. Understand and manage your revenue sources 2. Do all you can to control costs. 3. Effectively manage employee costs – for the short term and the long term. 4. Understand your cash position. 5. Pay attention to financing sources and developments. APIPA 2009 10 TOP TEN TIPS 6. Look at long-term opportunities for better asset utilization. 7. Strengthen controls. 8. Beware of ill-advised actions. 9. Focus on fraud prevention. 10. Keep lines of communication open. APIPA 2009 11 TIP NO. 1 – UNDERSTAND AND MANAGE REVENUES • • Understand your revenue sources. Be realistic! APIPA 2009 12 REVENUE ESTIMATION • Plan scenarios and look at your risk management philosophies, risk tolerance and mitigation plans • Make conservative estimates of revenues – Harder to deal with shortfalls later in the year – How far off are we usually? • Budgeting less than 100% of a grant APIPA 2009 13 REVENUE SOURCES • Consider every revenue source – Will it continue? Will it decrease? By how much? – Can it be increased? – What do others charge for the same services? • • APIPA 2009 Evaluate reasonableness of fees. Consider if higher fees are driving customers to other providers. 14 EXPLORE NEW REVENUE SOURCES • • Be innovative. Are there opportunities for new revenue sources? Establish clear cost-recovery goals – How are “costs” defined? Direct costs only? Fully allocated costs? • Verify fees are meeting cost-recovery goals APIPA 2009 15 AUDIT REVENUES • Many revenues based on self-reporting • Liability may be understated or misreported • Auditing can increase revenues • Benefits – Fair, payment of rightful share – Ensures accuracy and consistency APIPA 2009 16 EVALUATE FEES CHARGED - COMMON AREAS FOR UNDERCHARGING • Fees to auto and homeowner insurance companies for – Fire calls, especially false alarm, “jaws of life,” cleanup of hazardous materials, and nonemergency calls • Fees for services rendered to non-residents or businesses – Title searches, permit records, voter information, research, “extras” on road construction, tree planting APIPA 2009 17 EVALUATE FEES CHARGED • Have departments regularly review their fees to ensure they are kept updated – May need to tie operating budgets to program revenues to ensure attention paid to fees APIPA 2009 18 IMPROVE BILLING AND COLLECTION PROCEDURES • Standardize billing procedures for all receivables – Insurance claims, damage claims, rebates, fees for service • Ensure nothing “falls through the cracks” due to lack of communication between departments and staff • Diagram exceptions procedures – Who has authority to approve exceptions and under what circumstances? APIPA 2009 19 IMPROVE BILLING AND COLLECTION PROCEDURES • Establish consistent and fair collections efforts – Cannot ignore debt one year and expect collection success in the following year • Collections procedures – Clearly stated – Publicly available – Consistently applied APIPA 2009 20 IMPROVE BILLING AND COLLECTION PROCEDURES • Coordinate collections efforts between agencies – Different levels of government have overlapping revenue streams, e.g., property and income taxes • Reconcile filings with related agencies • Local income tax records to state records and IRS filings • Property tax records to utility bills, other agency property tax records, and court records • Consider amnesty program APIPA 2009 21 TIP NO. 2 – CONTROL COSTS • Look at incremental cost reductions – Small things can add up! – For example – electronic distribution instead of paper? – Also more environmentally sound! • Explore opportunities to consolidate back office operations at smaller agencies – With larger agency in same functional area,or – In a central service agency APIPA 2009 22 REDUCE COSTS • Evaluate the possibility of partnering with other governments – Buying collaboratives – Systems – Functions • Consider contingent-fee based cost avoidance audits – Vendors find ways to cut costs APIPA 2009 23 OTHER COST REDUCTION STRATEGIES • Consider revenue maximization – Vendors find new sources of revenue • Publicize what you are doing for savings – Solicit creative ideas • Remember public perception is important – Be conservative with travel and meeting arrangements – NO PRIVATE PLANES!!! – Look at travel reimbursement policies APIPA 2009 24 ENHANCE PURCHASING PRACTICES • Identify bulk purchases – Identify items that make up bulk of purchasing – See if new quotes or suppliers can lower costs – Encourage or require joint purchasing of similar items by departments (e.g., office, janitorial, communications supplies) APIPA 2009 25 ENHANCE PURCHASING PRACTICES • Standardize – Develop standard specifications for commodity items – Will aid in obtaining better terms from vendors – For example: standardizing desktop personal computers APIPA 2009 26 ENHANCE PURCHASING PRACTICES • Investigate prompt payment discounts – Find out if available – Take advantage!! – May require contacting suppliers and apologizing for past behavior! – Institute practices to ensure late payment penalties avoided APIPA 2009 27 ENHANCE PURCHASING PRACTICES • Inspect incoming purchases – Hold suppliers accountable for delivering the right goods in the right quantity and in good quality • Long-term contracts – Develop multiyear contracts with vendors if they will offer and/or guarantee lower prices – For example: Construction-related activities, landscape, printing, mid and heavy equipment APIPA 2009 28 ENHANCE PURCHASING PRACTICES • Just-in-time purchasing – Use JIT purchasing for readily available products to reduce or eliminate warehousing and inventory costs – May be possible to obtain vendor-supplied ordering software • Maintain competition – Evaluate vendors frequently to verify value and accuracy – Professional services as well as commodities APIPA 2009 29 ENHANCE PURCHASING PRACTICES • P-cards – Significant advancements in individualized controls for purchases – Will support JIT purchasing environment as well as reduce purchasing costs – IF PROPERLY CONTROLLED APIPA 2009 30 ENHANCE PURCHASING PRACTICES • Adopt “Winning Compliance” strategies – Reduce purchasing costs by • Simplifying processes • Posting simplified procedure manuals on an intranet • Using technology to speed up the procurement process – Enables purchasing staff to focus on • Honing negotiating skills • Working with departments to narrow bid specifications • Looking for ways to save money and to make it easier and faster for departments to get what they need APIPA 2009 31 TIP NO. 3 – MANAGE EMPLOYEE COSTS • Effectively manage employee costs – for the short and long term • One of, if not THE, major costs for any government APIPA 2009 32 BOTTOM-UP APPROACH • Take bottom-up approach to your budget – Why are you in a particular program? – Is it necessary to the core mission of your entity? • Careful analysis will enable better FTE management APIPA 2009 33 NEEDED REFORMS • Use crisis as opportunity to propose and pursue needed reforms – For example: Restructuring pensions and retirement benefits • Important to long-term financial health and viability • May be best chance for sustainable benefit levels going forward APIPA 2009 34 UNION AGREEMENTS AND LABOR LAWS • Review all union agreements and labor laws – What is in negotiated agreements? – What is practiced with regard to employee benefits? • Seek opportunities to make adjustments that will benefit present and future APIPA 2009 35 VACANT POSITIONS • Examine every vacant position before refilling – Is it necessary? – Can you reorganize to distribute duties differently and eliminate any positions? • Consider impact on internal control – How do layoffs and vacancies affect internal controls, especially in areas over assets susceptible to misappropriation and fraud? APIPA 2009 36 OVERTIME • Evaluate overtime use – What is the ratio of overtime to regular wages or wages and benefits? – Can overtime be reduced by different patterns for scheduling or expanded use of PT personnel? • Make managers manage overtime – For example: In one county, all OT drawn from a central account, shared by all departments. Withdrawals require justification. APIPA 2009 37 ADDRESS HEALTH CARE COSTS • Health care costs – large and rapidly growing • Reduction tactics – Identify cost drivers, especially for health care and disability claims • Prescriptions? Increase co-pays, switch to generic brands • Common on-the-job (OTJ) injuries? Increase preventive training APIPA 2009 38 ADDRESS HEALTH CARE COSTS • Seriously consider wellness options – Health system promotions – Health club memberships at a discount • Verify participants – Conduct eligibility audit • Dependents who no longer qualify? • Former employees? • Spouses with coverage from another employer plan designate other plan as primary APIPA 2009 39 TIP NO. 4 – UNDERSTAND CASH POSITION • Cash is king!! • Local governments cannot “print” money like the federal government • Borrowing ability may be reduced or very expensive • Bank reconciliations need to be current!!! APIPA 2009 40 FORECAST YOUR CASH • Cash flow reporting essential in financial crisis. • Prepare daily, weekly, monthly, and quarterly forecasts – Review forecasts annually – Compare to actual on day-to-day basis • Evaluate risks that might affect your cash forecast APIPA 2009 41 REVIEW TRUSTS AND OTHER DORMANT ACCOUNTS • Consider sweeping cash into the general fund • If possible, do it! APIPA 2009 42 INTERCEPT CASH • For example – offset tax refund against amount owed on student loan • See if possible to join state refund setoff programs that allow local government to collect on unpaid utility bills or other customer AR by filing claims with state tax refund departments APIPA 2009 43 ABANDONED PROPERTY AND CREDIT MEMOS • Search abandoned property (unclaimed property) at least monthly to see what can be reclaimed with state tax refund departments • Perform vendor credit memo searches. Do not pay vendors with whom you have credit until the situation is resolved. APIPA 2009 44 TIP NO. 5 – FINANCING SOURCES • Pay attention to financing sources and developments • Keep abreast of developments in the various stimulus packages • Pay special attention to expected federal funding for infrastructure projects • Maximize opportunities to make lasting infrastructure improvements APIPA 2009 45 CAPITAL MARKETS • Be aware of capital market developments and structure (or re-structure) major financings – To increase access – To reduce borrowing costs APIPA 2009 46 INVESTMENT MANAGERS AND CUSTODIANS • Perform due diligence on financial institutions and other fiduciaries that hold your investment portfolio – If it sounds too good to be true, BEWARE!! – Remember Madoff – Ponzi schemes are rampant! APIPA 2009 47 EARN HIGHER YIELDS SAFELY • Look for opportunities to earn higher yields on excess cash with relatively low risk investments – Governments are usually allowed to invest in variable rate municipal securities, issued by credit-worthy governments – In most cases, these remain safe investments APIPA 2009 48 TIP NO. 6 – ASSET UTILIZATION • Look at long-term opportunities for better asset utilization APIPA 2009 49 ASSET UTILIZATION STRATEGIES • Consider leasing or renting assets like cars and trucks for motor pool • Look at stranded or little-used assets that could be leased to someone else – Don’t sell!!! • Review tax abatement and economic development incentives for updating or modification – For example: Payment In Lieu of Taxes (PILOT) agreements APIPA 2009 50 TIP NO. 7 – STRENGTHEN INTERNAL CONTROLS • Internal controls key to effective operations • Strong role in preventing fraud • Increased risk – Employee layoffs increase vulnerability – Staff morale low • 20 question diagnostic over payment controls – answer each question YES or NO APIPA 2009 51 ARE YOUR INTERNAL CONTROLS GOOD ENOUGH? 1. Do you require all employees who have anything to do with the payment process to take at least 5 consecutive days of vacation? 2. Do you prohibit the ability to both approve invoices and enter invoice data? APIPA 2009 52 ARE YOUR INTERNAL CONTROLS GOOD ENOUGH? 3. Do you prevent one or more of your managers/executives from having access to all phases of the payment process, even though it might make training and managing more difficult? 4. Do you have a strong policy prohibiting the return of checks to requisitioners? APIPA 2009 53 ARE YOUR INTERNAL CONTROLS GOOD ENOUGH? 5. Are all changes made to the master vendor file periodically checked, no less frequently than once a month, but ideally every week? 6. Do you periodically (at least once a year) deactivate inactive accounts in your master vendor file? APIPA 2009 54 ARE YOUR INTERNAL CONTROLS GOOD ENOUGH? 7. Do you have an anonymous tip hotline? 8. Do you periodically check that your processors are not writing their passwords down where anyone can see them? APIPA 2009 55 ARE YOUR INTERNAL CONTROLS GOOD ENOUGH? 9. If you have a petty cash box, do you make sure that the location of the key is not common knowledge? 10.Do you wait until the end of the day to deliver checks to the mailroom for mailing? APIPA 2009 56 ARE YOUR INTERNAL CONTROLS GOOD ENOUGH? 11.Are unsigned checks always left in a secure location while waiting for signature – and not on someone’s desk in an empty office? 12.Is the positive pay file uploaded only when checks are mailed? APIPA 2009 57 ARE YOUR INTERNAL CONTROLS GOOD ENOUGH? 13.Are checks only printed only when they are going to be mailed – not earlier so they will reflect a date that matches your payment terms? 14.Are open receivers and POs always extinguished when an invoice is paid even if the invoice is paid outside accounts payable? APIPA 2009 58 ARE YOUR INTERNAL CONTROLS GOOD ENOUGH? 15. Is access to the master vendor file for entering vendor changes or changing vendor information severely limited? 16. When an employee making electronic payment transfers is terminated or leaves voluntarily, is the bank and procurement card administrator immediately notified and passwords changed? APIPA 2009 59 ARE YOUR INTERNAL CONTROLS GOOD ENOUGH? 17. When a new vendor is to be entered into the master vendor file, do you require at least two signatures or approvals before adding them? 18. When a new vendor is to be entered into the master vendor file, do you do some checking to make sure the vendor is legitimate before adding them? APIPA 2009 60 ARE YOUR INTERNAL CONTROLS GOOD ENOUGH? 19.If you have a petty cash box, do you hold surprise audits and does everyone know you do that? 20.Do you have a written fraud policy, signed by a top-level executive, indicating zero tolerance for employee fraud? APIPA 2009 61 ARE YOUR INTERNAL CONTROLS GOOD ENOUGH? • • • • Preferred response – YES! No perfect organization NO indicates vulnerability Look into NOs and determine if possible to tighten controls • If cannot tighten, plan to regularly audit problem areas APIPA 2009 62 TIP NO. 8 – ILL-ADVISED ACTIONS Beware of taking ill-advised actions in a rush to just do something! APIPA 2009 63 UNDERFUNDING • Don’t underfund accrued liabilities like pensions – Sticks tomorrow’s generations with today’s bills – Can negatively impact bond ratings, public perception, and employee relations APIPA 2009 64 COST-SHIFTING • Don’t shift operational costs into capital budgets. – Distorts true cost of capital investments – Usually not allowable! APIPA 2009 65 ACCOUNTING MANIPULATIONS • Don’t be tempted to use accounting manipulations to improve your results – For example: • Delaying deliveries, payrolls, and payments to next fiscal year • Manipulating or distorting estimations or forecasts • Recognizing anticipated (or worse, speculative) savings or revenues APIPA 2009 66 TIP NO. 9 – FRAUD PREVENTION • In best of times, fraud expensive • In worst of times, fraud could be disastrous! • A few questions to check your knowledge of fraud prevention, detection, and investigation APIPA 2009 67 WHAT’S YOUR FRAUD IQ? 1. Under the concept of ______________, corporations can be held criminally responsible for the acts of their employees if those acts were done in the course and scope of their employment and for the apparent benefit of the corporation. A. Connected accountability B. Civil responsibility C. Imputed liability APIPA 2009 68 WHAT’S YOUR FRAUD IQ? C. Imputed liability • Corporations can be held legally responsible for the criminal acts of their employees in certain circumstances For example – company could be criminally liable for controller committing financial statement fraud • • APIPA 2009 Even if supervisors unaware of his actions! 69 WHAT’S YOUR FRAUD IQ? 2. Stephen Latimer is the lead auditor for Island Power, a component unit providing energy. With the economic downturn, company management has been under increased pressure for profitable operations, and the company is in danger of violating its loan covenants. APIPA 2009 70 WHAT’S YOUR FRAUD IQ? 2. Stephen is concerned that management may be fraudulently concealing liabilities and expenses to improve the company’s financial statements. He performs his preliminary analytical procedures with these factors in mind. Which of the following is a red flag that might reaffirm Stephen’s suspicions? APIPA 2009 71 WHAT’S YOUR FRAUD IQ? A. The company’s gross margin is significantly lower than industry average. B. The company has experienced an unusual increase in the number of days’ purchases in accounts payable. C. The financial statements reflect an unusual change in the relationship between fixed assets and depreciation. D. The company shows a significant reduction in accounts payable, even though its competitors are stretching out payments to vendors. APIPA 2009 72 WHAT’S YOUR FRAUD IQ? D. Concealing operating expenses and related payables reduces AP - Unusual given other companies in industry APIPA 2009 73 WHAT’S YOUR FRAUD IQ? 3. Which of the following is considered a fraud preventive control? A. B. C. D. APIPA 2009 Employee support programs Segregation of duties Employee background checks All of the above 74 WHAT’S YOUR FRAUD IQ? D. ALL, if properly implemented, will help prevent fraud - Employee support programs - Financial, drug, and family counseling - Assist employees in dealing with pressures - Segregating incompatible duties - Eliminates opportunity - Background checks - Prevents hiring mistakes APIPA 2009 75 WHAT’S YOUR FRAUD IQ? 4. The concept of the fraud triangle states that, for a fraud to occur, three factors generally are present. Which of the following is NOT one of the three sides of the fraud triangle? A. B. C. D. APIPA 2009 Criminal predisposition Incentive or pressure Perceived opportunity Rationalization 76 FRAUD TRIANGLE Correct answer = A Pressure (Motive) Opportunity APIPA 2009 FRAUD TRIANGLE Rationalization 77 WHAT’S YOUR FRAUD IQ? 5. In general, the best way to prevent fraud is to: A. Implement harsh penalties for perpetrators. B. Outsource all possible functions. C. Increase the perception of detection. D. Conduct covert audits. APIPA 2009 78 WHAT’S YOUR FRAUD IQ? C. Most fraud perpetrators commit fraud ONLY when they perceive an opportunity to be present. So increasing in employees’ minds the perception that illegal acts will be detected can significantly deter fraud APIPA 2009 79 WHAT’S YOUR FRAUD IQ? 6. __________ is defined as “the totality of circumstances that would lead a reasonable, professionally trained, and prudent individual to believe a fraud has occurred, is occurring, and/or will occur.” A. B. C. D. APIPA 2009 Proof Evidence Suspicion Predication 80 WHAT’S YOUR FRAUD IQ? D. Predication is the basis for a fraud examination. It is the set of circumstances that leads a reasonable professional to believe that a fraud has, is or will occur. Example: While conducting an audit, an auditor overhears purchasing agent bragging about substantial discount on new car from company’s supplier of fleet cars. Predication for fraud examination. If auditor only witnessed purchasing agent in expensive car, would only have suspicion (insufficient for fraud examination) APIPA 2009 81 WHAT’S YOUR FRAUD IQ? 7. Which of the following is NOT an element generally included as part of a fraud risk assessment? A. Risk identification B. Formal fraud policy development C. Assessment of likelihood and significance of risks D. Risk response APIPA 2009 82 WHAT’S YOUR FRAUD IQ? B. Formal fraud policy not one of steps in fraud risk assessment Fraud risk assessment involves • • • APIPA 2009 Identifying fraud risks inherent to the organization Assessing the likelihood and significance of the fraud risks identified Deciding on the appropriate responses to the identified risks 83 WHAT’S YOUR FRAUD IQ? 8. The three primary categories of occupational fraud are: A. Corruption, financial statement fraud, and asset misappropriation B. Skimming, money laundering, and bid rigging C. Asset misappropriation, identity theft, and fictitious revenues D. Financial statement fraud, inventory theft, and cash larceny APIPA 2009 84 WHAT’S YOUR FRAUD IQ? A. Occupational fraud = fraud committed by an employee against an employer Three primary categories of occupational fraud • • • APIPA 2009 Corruption = Use of influence for self-benefit, e.g., bribes Financial statement fraud = Intentional misstatement or omission of material information from FS Asset misappropriation = Theft or misuse of company resources 85 WHAT’S YOUR FRAUD IQ? 9. Jason Aubuchon is conducting an investigation into a possible accounts receivable lapping scheme at Micronesian Visitors Bureau. If Jason plans to interview all of the following parties, whom should he interview first? APIPA 2009 86 WHAT’S YOUR FRAUD IQ? A. Frank, the primary suspect. B. Martha, an accounts payable clerk who filled in for Frank when he was on vacation C. Evan, a regular customer of the company whose complaint about his account balance prompted the investigation D. Sarah, Frank’s supervisor, who is suspected of helping Frank cover the fraud in exchange for a portion of the proceeds APIPA 2009 87 WHAT’S YOUR FRAUD IQ? C. Collection of evidence should progress from general to specific Investigator proceeds in order from witnesses least likely to be involved to those most culpable 1. 2. 3. 4. APIPA 2009 Neutral third-party witnesses (Evan) Corroborative witnesses (Martha) Co-conspirators (Sarah) Suspect (Frank) 88 WHAT’S YOUR FRAUD IQ? 10.Most employees who commit fraud have a history of fraudulent misconduct. A. True B. False APIPA 2009 89 WHAT’S YOUR FRAUD IQ? FALSE 2008 Report to the Nation on Occupational Fraud and Abuse 87% first-time fraud offenders 83% never punished or terminated for fraudulent behavior APIPA 2009 90 TIP NO. 10 – OPEN COMMUNICATION LINES • A difficult problem in the best of times • Solution will be a group effort – Employees – Constituencies – Managers – Vendors – All affected parties APIPA 2009 91 COMMUNICATION • Build credibility with frequent, clear, and honest communication • Manage perceptions – Speak up – frame the situation for others – Be honest about what is achievable APIPA 2009 92 COMMUNICATION • Sharing information can help – To avoid rigid reactions – May keep everyone open to different options for solutions • Employees take their cues from the leaders APIPA 2009 93 CULTURE OF THRIFT • Establish a culture of thrift – Every dollar counts! – Terminate temporary help and redeploy existing staff to fill gaps – Cutback sharply on office equipment – Delay replacement of vehicles – Control travel and expenses – Engage employees in auditing small expenditures – Take action on very big items or very visible issues such as management vehicles and other perks APIPA 2009 94 CULTURE OF THRIFT • Management must set an example for everyone to follow. Remember the “tone at the top.” APIPA 2009 95 OPPORTUNITIES • Recognize opportunities within crisis – Organizations often do not change until a major event occurs – This may be a “game-changing” time that can be used to break free of constraining past practices and habits – May have to spend money to save money APIPA 2009 96 EMPLOYEES’ ASSISTANCE • Employees will respond with creativity and ingenuity IF – They believe that their suggestions will be heard and valued APIPA 2009 97 RESOURCES • AICPA – Government Accountability Brief – January 2009 & March 2009 – Navigating the Current Economic Crisis: What It Means for Businesses – March 2009 • GFOA – Fiscal First Aid • Andi McNeal, What’s Your Fraud IQ? • Mary Schaeffer, Are Your Internal Controls Good Enough? APIPA 2009 98 QUESTIONS? APIPA 2009 99