The Latest from GFOA on Accounting and Budgeting

1
The Latest from GFOA on Accounting and Budgeting

• CSMFO
• Palm Springs, CA
• February 22, 2006

2
Accounting topics

• New and revised recommended practices
• Auditor association
• Audit committees
• Other
• Letter of transmittal
• GFOA guidelines for responding to GASB proposals
• Reporting deficiencies

3
Budgeting topics

• New recommended practices
• Establishment of strategic plans
• Business preparedness and continuity guidelines
• Statistical/supplemental section of the budget
  document
• Pending recommended practices
• Common deficiencies in budget documents

4
Accounting topics
5
Auditor association (2005)

• Background
• Issue use of audited financial statements after
  issuance
• Offering statements
• Web sites
• Auditing standards
• Presumption that auditor is not associated
• Creation of an association
• Actions
• Clause in audit contract

6
Auditor association (cont.)

• If auditor association
• Auditor reads accompanying material
• No material inconsistency in information or
  manner of presentation
• No auditor association with other contents of web
  site
• Not documents

7
Auditor association (cont.)

• Recommendation 1
• Having paid for the independent audit, a
  government owns the audited financial statements
  and should feel free to use them in any
  appropriate manner.
• Same set of financial statements
• Not used in potentially misleading manner
• No material subsequent event

8
Auditor association (cont.)

• Recommendation 2
• 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 governments
  website simply by inserting a clause to that
  effect in the audit contract

9
Auditor association (cont.)

• Expanded guidance on recommendation 2
• Consider including affirmative language in audit
  contract
• No objection to auditor clarification in offering
  statements
• No objection to auditor clarification in
  engagement letter

10
Auditor association (cont.)

• Recommendation 3
• When the independent auditor actually does happen
  to become associated with audited financial
  statements included in an offering statement, a
  state or local government should take steps to
  avoid unwarranted delays and unjustified costs.
• Maximum time
• No additional fee

11
Auditor association (cont.)

• Recommendation 4
• The audit contract should clarify that the
  government is free to post its audited financial
  statements on its website.

12
Audit committees (proposed replacement)

• Background
• Three groups responsible
• Governing body (first among equals)
• Financial management
• Independent auditor
• Audit committee
• Practical tool for governing body oversight
• Forum separate from management

13
Recommendation 1

• The governing body of every state and local
  government should establish an audit committee or
  its equivalent
• Governing body includes other elected officials
  with legal oversight responsibility, provided
  they do not exercise managerial responsibilities
  within the scope of the audit
• Also encompasses appointed bodies such as pension
  boards

14
Recommendation 2 - 1

• The audit committee should be formally
  established by charter, enabling resolution, or
  other appropriate legal means and made directly
  responsible for the appointment, compensation,
  retention, and oversight of the work of any
  independent accountants engaged for the purpose
  of preparing or issuing an independent audit
  report or performing other independent audit,
  review, or attest services

15
Recommendation 2-2

• Likewise, the audit committee should be
  established in such a manner that all accountants
  thus engaged report directly to the audit
  committee

16
Recommendation 2-3

• The written documentation establishing the audit
  committee should prescribe the scope of the
  committees responsibilities, as well as its
  structure, processes, and membership requirements
  

17
Recommendation 2-4

• The audit committee should itself periodically
  review such documentation, no less than once
  every five years, to assess its continued adequacy

18
Recommendation 3-1

• Ideally, all members of the audit committee
  should possess or obtain a basic understanding of
  governmental financial reporting and auditing.

19
Recommendation 3-2

• The audit committee also should have access to
  the services of at least one financial expert,
  either a committee member or an outside party
  engaged by the committee for this purpose

20
Recommendation 3-3

• Such a financial expert should through both
  education and experience, and in a manner
  specifically relevant to the government sector,
  possess an understanding of generally accepted
  accounting principles and financial statements

21
Recommendation 3-3-a

• Specific experience should include
• The preparation or auditing of financial
  statements of comparable entities
• The application of such principles in connection
  with the accounting for estimates, accruals, and
  reserves
• Experience with internal accounting controls, and
  an understanding of audit committee functions

22
Recommendation 4

• All members of the audit committee should be
  members of the governing body. To ensure the
  committees independence and effectiveness, no
  governing body member who exercises managerial
  responsibilities that fall within the scope of
  the audit should several a member of the audit
  committee

23
Recommendation 5

• An audit committee should have sufficient members
  for meaningful discussion and deliberation, but
  not so many as to impede its efficient operation.
  As a general rule, the minimum membership of the
  committee should be no fewer than three

24
Recommendation 6

• Members of the audit committee should be educated
  regarding both the role of the audit committee
  and their personal responsibility as members,
  including their duty to exercise an appropriate
  degree of professional skepticism

25
Recommendation 7

• It is the responsibility of the audit committee
  to provide independent review and oversight of a
  governments financial reporting processes,
  internal controls and independent auditors

26
Recommendation 8

• The audit committee should have access to the
  reports of internal auditors, as well as access
  to annual internal audit work plans

27
Recommendation 9

• The audit committee should present annually to
  the full governing body a written report of how
  it has discharged its duties and met its
  responsibilities. It is further recommended that
  this report be made public and be accompanied by
  the audit committees charter or other
  establishing documentation

28
Recommendation 10

• The audit committee should establish procedures
  for the receipt, retention, and treatment of
  complaints regarding accounting, internal
  accounting controls, or auditing matters. Such
  procedures should specifically provide for the
  confidential, anonymous submission by employees
  of the government of concerns regarding
  questionable accounting or auditing matters.

29
Recommendation 11

• The audit committee should be adequately funded
  and should be authorized to engage the services
  of financial experts, legal counsel, and other
  appropriate specialist, as necessary to fulfill
  its responsibilities

30
Recommendation 12

• In its report to the governing body, the audit
  committee should specifically state that it has
  discussed the financial statements with
  management, with the independent auditors in
  private, and privately among committee members,
  and believes that they are fairly presented, to
  the extent such a determination can be made
  solely on the basis of such conversations

31
Other proposed changes to existing recommended
practices

• Popular reporting
• Data should be derived from the CAFR
• CAFR for SEC requirements
• Broad statement on role of CAFR in disclosure
• Capitalization thresholds
• Practical application of materiality principle
• Internal auditing
• Alternatives to a formal internal audit function

32
Letter of Transmittal

• New GFOA recommendations

33
Basic elements

• Formal transmittal
• Profile of the government
• Information useful in assessing the governments
  economic condition
• Awards and Acknowledgements

34
Formal transmittal

• Current recommendation
• Citation of legal requirements
• Managements acknowledgement of responsibility
• Discussion of internal controls
• Discussion of financial statement audit
• Reference to MDA
• Change Shorten discussion

35
Citation of legal requirements

• State law requires that every general-purpose
  local government publish within six months of the
  close of each fiscal year a complete set of
  audited financial statements. This report is
  published to fulfill that requirement for the
  fiscal year ended December 31, 2015.

36
Managements responsibility and internal control

• Management assumes full responsibility for the
  completeness and reliability of the information
  contained in this report, based upon a
  comprehensive framework of internal control that
  it has established for this purpose. Because the
  cost of internal control should not exceed
  anticipated benefits, the objective is to provide
  reasonable, rather than absolute, assurance that
  the financial statements are free of any material
  misstatements.

37
Financial statement audit

• West, Lee, Roberts Co., Certified Public
  Accountants, have issued an unqualified
  (clean) opinion on the NAME OF GOVERNMENTS
  financial statements for the year ended December
  31, 2015. The independent auditors report is
  located at the front of the financial section of
  this report.

38
Reference to MDA

• Managements discussion and analysis (MDA)
  immediately follows the independent auditors
  report and provides a narrative introduction,
  overview, and analysis of the basic financial
  statements. MDA complement this letter of
  transmittal and should be read in conjunction
  with it.

39
Profile of the government

• Current recommendation
• Structure of government and types of services
• Geography, population, and history
• Component units included
• Potential component units excluded
• Budget process, budget calendar, budget
  responsibilities
• Legal level of budgetary control

40
Profile of government (cont.)

• Changes
• Generic discussion of budgetary process
• Exclude budgetary calendar and budget
  responsibilities
• Simplify description of the legal level of
  control

41
Budget process, calendar, and responsibilities

• The Council is required to adopt a final budget
  by no later than the close of the fiscal year.
  This annual budget serves as the foundation for
  the NAME OF GOVERNMENTS financial planning and
  control. The budget is prepared by fund,
  function (e.g., public safety), and department
  (e.g., police).

42
Legal level of budgetary control

• Department heads may transfer resources within a
  department as they see fit. Transfers between
  departments, however, need special approval from
  the governing council.

43
Information on economic condition

• Current recommendation
• Local economy
• Long-term financial planning
• Cash management and investments
• Risk financing
• Pension benefits
• Other postemployment benefits

44
Information on economic condition (cont.)

• Changes
• Expand discussion of local economy to discuss
  trends over last 5-10 years
• Include discussion of relevant financial policies
• Include a discussion of major initiatives
• Eliminate separate discussion of individual
  topics listed previously

45
Trends (5-10 years)

• During the past ten years, the governments
  expenses related to public safety and parks and
  recreation have increased not only in amount, but
  also as a percentage of total expenses (7.1
  percent and 3.4 percent, respectively). In the
  case of public safety, much of the increase
  reflects a regional trend that has seen the
  salaries and benefits of police and firefighters
  growing at a much faster rate than those of other
  categories of public-sector employees. The
  growth in park and recreation expenses reflects
  an increase in the number of sponsored programs
  and events.

46
Trends (5 to 10 years) (cont.)

• During this same ten-year period, charges for
  services, while continuing to increase in amount,
  have actually decreased as a percentage of total
  revenue (19 percent). The reason for this
  relative decline is the relative increase in
  expenses related to services that are not
  supported by fees and charges (e.g., public
  safety) thus, as taxes have increased to support
  these services, so has the proportion of total
  revenue generated by taxes.

47
Long-term financial planning

• Unreserved fund balance in the general fund
  (11.7 percent of total general fund revenues)
  falls within the policy guidelines set by the
  Council for budgetary and planning purposes
  (i.e., between 5 and 15 percent of total general
  fund revenues). Following its recent review of
  the NAME OF GOVERNMENTs strategic plan, the
  Council now plans to raise the target to between
  15 and 25 percent of total general fund revenues
  so as to reduce the amount that will need to be
  borrowed to finance future construction.

48
Relevant financial policies

• The state supreme court recently held that the
  state must compensate local governments for the
  cost of retroactive compliance with the Local
  Wetlands Protection Act of 2005. It is the NAME
  OF GOVERNMENTs policy that one-time resource
  inflows not be used for operating purposes.
  Accordingly, the Council plans to designate the
  amount it eventually receives from the state for
  the acquisition of new park land.

49
Major initiatives

• It is expected that both the state and federal
  governments will enact new regulations on water
  quality that could take effect as early as
  December 2014. The Water and Sewer Authority is
  developing plans for a substantial upgrade of the
  water filtration plant, which had its last
  upgrade in 2009. The project would encompass the
  expansion of holding tanks for finished water
  storage and the replace-ment of the original
  filtration equipment. The overall cost of the
  project would probably exceed 12 million and
  would be financed by the issuance of revenue
  bonds.

50
Other recommendations

• Keep letter of transmittal as short as possible
• Greater use of charts and graphs

51
GFOA Guidelines for Responding to GASB Proposals
52
Principle 1

• Accounting is a means to an end, not an end in
  itself
• Cost benefit principle vital

53
Principle 2

• Willingness to accept something for free is not
  evidence of genuine demand
• Investors and creditors

54
Principle 3

• Less often is more
• Accounting v. financial reporting

55
Principle 4

• Not every problem has an accounting solution
• Accounting is not synonymous with accountability

56
Principle 5

• You cannot be both scorekeeper and coach
• Goal is to inform rather than drive decisions

57
Principle 6

• The most important users of financial reports are
  citizens acting through their elected
  representatives
• Governments are not just preparers

58
Common reporting deficiencies

• MDA
• Failure to provide real analysis
• Failure to address major changes in funds other
  than the general fund
• Failure to address major changes between the
  original and final amended budget
• Failure for detail of fund balance/net assets to
  tie back to financial statements

59
Reporting deficiencies (cont.)

• Net assets
• Negative balances reported
• Failure to reclassify a portion of fund-level
  unrestricted net assets as restricted in the
  business-type activities column
• Failure to properly report debt issued by one
  activity in support of another

60
Reporting deficiencies (cont.)

• Reporting an excess liability for compensated
  absences in governmental funds
• Reporting most payments-in-lieu-of-taxes within
  the primary government as revenues and
  expenditure/expense

61
Reporting deficiencies (cont.)

• Notes
• Failure to provide detailed columnar descriptions
  for major funds and fund-type columns other than
  the general fund
• Failure to report increases in long-term
  liabilities separately from decreases
• Failure to report changes in long-term accrued
  liabilities

62
Budgeting topics
63
Strategic planning (2005)

• Every government should use some form of
  strategic planning
• Long-term perspective for service delivery and
  budgeting
• 13 steps

64
Step 1 - initiate

• Initiate the strategic planning process
• CEO (either elected or appointed) should
  authorize
• Also include other stakeholders

65
Step 2 draft mission statement

• Prepare a mission statement
• Basis for organizing goals, strategies, programs
  and activities

66
Step 3 assess environment

• Assess environmental factors
• Internal and external
• Factors
• Economic and financial
• Demographic trends
• Legal and regulatory issues
• Social and cultural trends
• Physical (e.g., community development)
• Intergovernmental issues
• Technological change

67
Step 3 (cont.)

• Mechanisms for identifying stakeholder concerns,
  needs, and priorities
• Public hearings
• Surveys
• Meetings with leaders and interest groups
• Meetings with employees
• Workshops for administrative staff and
  legislative body

68
Step 4 identify issues

• Identify critical issues
• Reflect stakeholders
• Reflect environmental factors

69
Step 5 set goals

• Agree on a small number broad goals
• Address most critical issues
• Define priorities

70
Step 6 develop strategies

• Develop strategies to achieve broad goals
• A single strategy may relate to more than one
  goal
• Limit number and make specific

71
Step 7 plan action

• Create an action plan
• How strategies will be implemented
• Activities and services to be performed
• Associated costs
• Designation of responsibilities
• Priority order
• Time frame

72
Step 8 develop objectives

• Develop measurable objectives
• Quantities or verifiable statements
• Ideally include time frames

73
Step 9- set performance measures

• Incorporate performance measures
• Important tie to programs and activities funded
  in the budget

74
Step 10 approve

• Obtain approval of plan
• Formal approval by policy makers
• Context for policy and budgetary decisions

75
Step 11 - implement

• Implement the plan
• Strategic plan should drive the operating budget
  and capital plan and other financial planning
  efforts

76
Step 12 - monitor

• Monitor progress
• Systematic review process

77
Step 13 - reassess

• Reassess the strategic plan
• External factors
• New information about stakeholder needs
• Results
• Process for reviewing strategic plan
• Comprehensive process 5-10 years
• Interim reviews 1-3 years

78
Business preparedness and continuity guidelines
(2005)

• Develop , test, and maintain a plan to continue
  basic business operations

79
Plan development

• Assess own unique risks
• Strategy to mitigate risks and control costs
• External planning resources
• Disaster and emergency recovery plan assessment
• Disaster and emergency recovery plan testing
• FEMA guidelines

80
Plan development (cont.)

• Strategy to mitigate risks and control costs
  (cont.)
• Other planning considerations
• Emergency response plan compliance (OSHA, EPA)
• Risk management (insurance coverage)
• Administrative support functions (contact
  information for all members of the finance team)
• Outsourced/recovery services (ability to overcome
  disruption themselves)

81
Plan implementation

• Record keeping
• Contemporaneous record-keeping per FEMA
• Personnel assignments and communication in wake
  of a disaster or emergency
• Formally assignment in each department
• Outsourced/recovery services
• Contingent contracts/emergency procurement
• Disaster and emergency plan safeguard
• Documentation/assembly areas off site

82
Statistical/supplemental section of budget
document

• Ensure relevance of data
• Relate to rest of document
• Fit to the specific type of government
• Avoid excessive detail
• Organize information by major category
• Form of government
• Geography
• Community profile
• Demographics and economics
• Provide explanations

83
Pending recommended practices

• Budgeting for technology
• Revenue policies
• Managed competition
• Budgeting by goals and objectives

84
Common deficiencies in budget documents

• Too detailed and cumbersome
• Irrelevant information included
• Similar topics not juxtaposed
• Strategic goals are not accompanied by action
  plans
• Overall financial summaries broken out by fund
  but not by type of revenue/expenditure

85
Common deficiencies (cont.)

• Emphasis on the past rather than the future
• Message should be issue-driven and provide
  potential solutions
• Revenue analysis falls short of 75 percent of
  total revenue
• Not enough trend graphs
• Synchronic v. diachronic

86
Common deficiencies (cont.)

• Performance measures should include upcoming
  budget year
• Operating impact of capital projects not
  identified