Getting Prepared to Prepare Your Own Financial Statements

1
Getting Prepared to Prepare Your Own Financial
Statements

• Presented by
• Donna Collins
• Milestone Professional Services

2
Why are we even talking about this?

• Internal Control
• Independence

?
3
Technical Guidance Issued

• Statement on Auditing Standard (SAS) No. 112
  (Communication of Internal Control Related
  Matters Identified in an Audit)
• Ethics Interpretation 101-3 (Performance of
  Nonattest Services)

4
SAS 112 Major Provisions

• Defines significant deficiencies and material
  weaknesses
• Provides guidance on evaluating control
  deficiencies
• Requires written communication to management
• Effective for periods ending on or after 12/15/06

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Significant Deficiency

• control deficiency
• adversely affects ability to initiate,
  authorize, record, process or report financial
  data reliably in accordance with GAAP
• more than remote likelihood that misstatement of
  financial statements that is more than
  inconsequential
• will not be prevented or detected

6
Material Weakness

• a significant deficiency or combination of
  significant deficiencies
• results in more than remote likelihood that
  material misstatement of financials will not be
  prevented or detected

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The Bottom Line

• Many governments may have a material weakness in
  internal control due to lack of internal controls
  over the preparation of their financial
  statements.

8
The complicating impact of Independence Standards

• Auditors must be independent to issue an opinion
  on financial statements
• Material weakness in internal control over
  financial reporting creates independence issues
  under Ethics Interpretation 101-3
• Auditors may not be able to opine on governments
  financials

9
What are my options?

• Have auditors prepare financials
• Hire an outside firm to prepare financials
• Prepare financial statements ourselves
• Hybrid of the above

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Have the Auditors prepare

• The auditors can prepare financials if they meet
  certain guidelines governing their independence.

• There are issues I may want to consider even if
  my auditors can meet the over arching principles.

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Other Factors to Consider

• Public perception
• Analytical advantage of preparing your own
  financial statements
• Cost factors

12
Hire an outside firm

• My choices include another audit firm, a
  consulting firm, or an individual that works for
  the government on a contractual basis
• Cost is still a factor
• Availability to meet our entitys deadlines
  should be a consideration

13
Prepare the financial statements ourselves

• Consider the time involved
• Evaluate whether our entity has the technical
  expertise required
• What is the availability of my auditors to comply
  with my timetable

14
Use a Hybrid of the above

• Prepare my own financial statements with as
  needed assistance
• Prepare my own financial statements but hire a
  firm to perform a technical review (for adequacy
  of disclosure and correctness of implementation
  of new standards)

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Preparing my own financial statements Where do
I start?

• Things to Remember
• Things to Plan for
• Things to Gather
• Things to Coordinate

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Things to Remember

• They are your financial statements
• Dont be afraid to ask for help (but do it early)
• Leave an audit trail (know what documentation the
  auditor will require)

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Things to Plan for

• Financial Statement Format
• Annual Financial Statements versus CAFR
• Participation in the Certificate of Achievement
  for Excellence in Financial Reporting program
• Political Environment
• Others that should be included in the process
• Major fund determination issues

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Things to Plan for (continued)

• Clean starting point
• Distinct cut-off for accounts payables
• Inclusion of all journal entries necessary for
  closing the year
• Posting of all accruals and estimates
• Recording of any audit entries

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Things to Plan for (continued)

• Realistic timetable for financial statement
  preparation
• Include specific tasks
• Clearly identify individuals responsible for each
  task
• Identify an expected completion date
• Incorporate deadlines for Auditor General,
  grantor agencies, etc.
• Remember that many things can be done before
  year-end

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Things to Plan for (continued)

• List of tasks that can be accomplished prior to
  year-end
• Develop a template for your financial statements
• Draft footnote wording for new pronouncements
• Draft descriptions for new funds
• Design cover and dividers and go ahead and order
  them
• Begin gathering statistical information

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Things to Plan for (continued)

• Open communication throughout entity and with
  third parties regarding
• Budget schedules
• Grant information (if single audit is applicable)
• Component Unit information

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Things to Plan for (continued)

• Communication issues (continued)
• Constitutional Officer Statements roll in and
  information needed for footnotes (counties)
• Long-term debt (compensated absences and capital
  leases)
• Capital Assets
• Retirement Contributions
• Information for Statistical Section (CAFRs)

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Things to Gather

• Technical Resources
• Blue Book (GAAFR 2004 or later)
• Codification of GASB pronouncements
• New GASBs not yet in codification
• Implementation Guides
• AICPA Accounting and Reporting Guides
• Copy of prior year financials (and those of other
  governments for reference)

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Things to Gather (continued)

• Disclosure Checklist
• GFOA checklists if applying for the Certificate
  program
• Others such as PPC (ask auditors)
• Original and Final Amended Budget
• Prior year GFOA comments and auditor comments (if
  applicable)

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Things to Coordinate

• Actuarial reports (pensions, post-employment
  benefits, etc.)
• Arbitrage rebate calculations (if applicable)
• Landfill estimates from engineers (if applicable)
• Timetable with auditors
• For audit wrap-up (no more adjustments)
• Financial statement review (auditor comments)

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The nitty gritty of financial statement
preparation

• Developing your template
• Dont forget to add any new funds and delete
  funds that have been closed
• Determine your major funds
• Use prior year as starting point (remember to
  check at completion)

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Calculation of major funds

• Total assets, liabilities, revenues, or
  expenditures/expenses must equal 10 of
  corresponding total for funds of that category
  (governmental or enterprise) AND
• Total assets, liabilities, revenues, or
  expenditures/expenses must be at least 5 of
  total for all governmental and enterprise funds
  combined.

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Developing your template (continued)

• Determine your major funds (continued)
• Calculation reminders
• Do not include other financing sources and uses
• Use governmental and enterprise funds only in
  total no internal service or fiduciary funds
• You can remove interfund and advances
• Guidance is found at paragraph 75 and 76 of GASB
  34, 2005 GAAFR page 177, etc.
• Templates available

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Developing your template (continued)

• Determine your major funds (continued)
• General fund always a major fund
• Internal Service funds are never major
• Consider other factors
• Political constraints
• Funds that require opinion specifically
• Funds important due to public interest or
  consistency of presentation

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Developing your template (continued)

• Format issues should be decided early
• Font
• Page layouts including indentions and
  capitalization
• Underlines, dollar signs and continued
• Proper titles for statements and schedules
• Consistency of phrasing (ie. Interest income
  versus investment income)
• Classification of line items (classified or
  liquidity order)

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Developing your template (continued)

• Linking documents is efficient
• Consider the impact of multiple users
• Most common documents to link include
• Combining statements to budget schedules
• Combining statement totals to fund level
  statements in the basic financial statements
• MDA, notes and statistical sections to basic
  financial statements (excel spreadsheets to word
  documents)

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Linking examples - MDA

• Net Assets
• Changes in Net Assets
• Expenses and Program Revenues
• Revenues by Source
• Capital Assets
• Bonds and Notes

33
Linking examples Statistical Section

• Link all tables that have information that comes
  from the Basic Financial Statements
• Net Assets by Component
• Changes in Net Assets
• Fund Balances of Governmental Funds
• Changes in Fund Balance of Governmental Funds

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Developing your template (continued)

• Make sure beginning net asset and fund balance
  numbers agree to the prior year issued financial
  statements
• DONT USE PENNIES!
• Consider rounding to thousands for larger
  entities but be consistent throughout the
  document

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Populating your template

• Consider starting with the combining statements
  in the back and moving forward
• Budget to actual schedules can be linked to the
  combining schedules already input
• Use total columns to verify that established
  links are bringing correct information forward

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Populating your template (continued)Combining
Statements

• Begin with trial balance for each fund that is
  grouped in accordance with the State Chart of
  Accounts
• Consider your source documents because the
  auditors will have to verify your groupings
• Remember that major funds will have to be pulled
  out of any grouped reports for inclusion in the
  basic financial statements

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Populating the Combining Statements (continued)

• Some items should not be grouped via the State
  Chart of Accounts
• Examples
• Interfund transfer activity in internal service
  funds becomes recharacterized as revenue/expense
• Unamortized bond costs are assets but should be
  netted with the corresponding liability
• Negative cash balances should be classified as a
  liability

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Populating the Combining Statements (continued)

• Remember to add any blended component units
  (often reflected as special revenue funds)
• For counties, constitutional officers need to be
  incorporated into combining statements
• Special revenue funds
• Agency funds
• General fund usually rolls into general fund for
  the Board

39
Populating your template (continued)Budget
Presentations

• When are budget schedule versus budget statements
  appropriate?
• What makes a budget presentation a schedule?
• When do I include both original and final budget
  numbers?
• Do I include budget information for all funds?

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Populating your template (continued)Budget
Presentations

• Budget Statements
• Included in Basic Financial Statements
• Auditors opinion includes these statements
• Presented for general fund and major special
  revenue funds only
• Includes original and final budget
• Other non-major funds have budget presentation in
  Other Supplemental Information section with final
  budget only

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Populating your template (continued)Budget
Presentations

• Budget Schedules
• Presented outside the Basic Financial Statements
• Auditors opinion is in relation to
• Presentation most often used
• General fund and all major special revenue funds
  included in RSI with both original and final
  budget

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Populating your template (continued)Budget
Presentations

• Budget Schedules (continued)
• Other major governmental funds (debt service and
  capital projects funds) and non major
  governmental funds included in Other Supplemental
  Information with final budget only
• Presentation is only included if legally binding
  budget is adopted

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Populating your template (continued)Budget
Presentations

• Helpful Hints
• Link where appropriate to combining or fund level
  statements
• Coordinate with budget department
• Proprietary funds do not report budgetary
  comparisons

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Populating your template (continued)Budget
Presentations

• Helpful Hints (continued)
• Presentation should be at the legal level of
  control
• Variance column should have neutral terminology
  (over/under not favorable/unfavorable)
• If included in RSI, add footnote to indicate if
  prepared on GAAP basis

45
Populating your template (continued)Basic
financial Statements

• Basic Financial Statements include
• Government-wide financial statements
• Fund Level statements
• Footnotes

46
Populating your template (continued)Fund Level
Statements

• Governmental
• All major funds shown in individual columns
• Non major funds grouped into one aggregate column
  that should agree to combining statement
• Total column for governmental funds included
• Fund balance must agree between Balance Sheet and
  Statement of Revenues, Expenditures and Changes
  in Fund Balance

47
Populating your template (continued)Fund Level
Statements

• Proprietary
• All major funds shown in individual column
• Non major funds grouped into one aggregate column
  that should agree to combining statement
• Total column for proprietary funds included

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Populating your template (continued)Fund Level
Statements

• Proprietary (continued)
• Net assets must agree between Statement of Net
  Assets and Statement of Revenues, Expenses and
  Changes in Net Assets
• Statement of Activities is divided into operating
  (charges for services and direct expenses) and
  non-operating revenues/expenses (grants, interest
  income and expense, gain/loss on capital assets)
• Statement of Cash Flows is required

49
Populating your template (continued)Fund Level
Statements

• Statement of Cash Flow issues
• Separated into four distinct sections
• Common mistakes
• Failure to back out fixed asset transactions from
  account payable change in balance
• Misclassification of grants operating versus
  capital
• Reporting transaction as net rather than gross
• Non-cash transaction
• Contributed capital
• Change in fair value of investment

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Populating your template (continued)Fund Level
Statements

• Other reminders
• Fiduciary funds will have Statement of Net Assets
  and Statement of Changes in Net Assets (except
  for Agency funds)
• Component units may also have Statement of Net
  Assets and Statement of Activities in Fund Level
  presentation
• Insurance recoveries are shown as Other Financing
  Sources
• Negative net investment activity is shown as a
  negative revenue

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Populating your template (continued)Basic
Financial Statements

• Fund Balance Reservations and Net Asset
  Restrictions
• Fund Balance reservations
• Prepaid balances
• Inventory balances
• Debt Services
• Building department resources unexpended
• Encumbrances

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Populating your template (continued)Basic
Financial Statements

• Fund Balance Reservations and Net Asset
  Restrictions (continued)
• Net Asset Restrictions follow GASB 46
• Must be legally enforceable due to statue or
  ordinance
• Examples
• Some grant funds
• Federal and State Police Forfeiture Fund

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Populating your template (continued)Government-wi
de statements

• Set up a conversion spreadsheet that begins with
  the governmental fund financial statements and
  reflects all adjustments necessary to arrive at
  the Statement of Net Assets and Statement of
  Activities
• Can be separate spreadsheet linked to source and
  destination documents
• Can be notations on the side of the governmental
  fund statements

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Populating your template (continued)Government-wi
de statements

• Note that many reconciling items between the fund
  level and government-wide statements affect both
  the Statement of Net Assets and the Statement of
  Activities
• Most common examples are
• capital assets and long-term liabilities
• Interfund activity is eliminated so that only
  internal balances remain

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Populating your template (continued)Government-wi
de statements

• Interfund activity can result in out of balance
  position at fund level statements that is
  resolved only at the government-wide level
• Transfer of capital assets from enterprise fund
  to governmental fund
• Remember that interfund activity between agency
  funds and governmental and business-type funds
  must be reclassified

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Populating your template (continued)Government-wi
de statements

• Indirect costs are removed from functional
  expense in the government-wide statements
• Except for general government activities
• Indirect cost allocations are reversed for
  government-wide reporting

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Populating your template (continued)Government-wi
de statements

• Internal service funds can be combined with
  governmental activities or business-type
  activities
• It is generally safe to assume consolidation with
  government activities
• If service is provided solely to enterprise
  funds, then group with business-type activities
• If service is provided to both government and
  business-type activities, consolidate with
  predominant customer of services ( cannot split
  between activities)

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Populating your template (continued)Government-wi
de statements

• Conversion spreadsheet example separate
  spreadsheet
• Begins with governmental balances
• Reflects column for each type of adjustment
  showing both impact on Statement of Net Assets
  and Statement of Activities
• Final column can be linked directly into the
  Government-wide statements

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Populating your template (continued)Government-wi
de statements

• Conversion spreadsheet example directly on
  governmental statements
• All significant adjustments from governmental
  fund statements to arrive at government-wide
  statements are included in properly labeled
  calculations outside the print area
• Disadvantage is that it is more difficult to see
  impact on both top level statements of each type
  of reconciling item

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Populating your template (continued)Government-wi
de statements

• Statement of Net Assets
• Includes column for governmental activities,
  business-type activities, a total column and then
  an aggregated column for all component units no
  matter what type of fund
• Conversion from fund level statements generally
  involves capital assets, long-term liabilities,
  internal service fund net assets and the impact
  of deferred revenue transactions

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Populating your template (continued)Government-wi
de statements

• Statement of Activities
• Separately reflects activities of the primary
  government (including governmental activities and
  business-type activities) from those of component
  units
• Expenses by function or activity are shown first
• Program revenues are reflected next to arrive at
  a net revenue (expense) from each function or
  activity

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Populating your template (continued)Government-wi
de statements

• Statement of Activities (continued)
• General revenues are shown separate from program
  expenses and revenues
• Transfers are then added to general revenues to
  arrive at subtotal
• After adding beginning net assets, the end result
  should be net assets per the Statement of Net
  Assets

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Populating your template (continued)Government-wi
de statements

• Statement of Activities (continued)
• Conversion from fund level statements generally
  involves capital purchases, long-term liability
  activity, internal service fund change in net
  assets, and the impact of grant revenues or other
  deferred revenue items.

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Populating your template (continued)Government-wi
de statements

• Statement of Activities (continued)
• General revenues versus program revenues?
• Operating special assessments are charges for
  services while capital special assessments are
  capital contributions
• All taxes are general revenues
• Charges for services reported as program revenue
  of function which generated the revenue rather
  than where it will be spent

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Populating your template (continued)Government-wi
de statements

• Statement of Activities (continued)
• General revenues versus program revenues?
• Grant contributions that can be used for both
  capital or operating purposes should be
  classified as operating grants and contributions
• Pass through grants used to finance capital
  acquisitions should be treated as operating
  grants and contributions by the primary recipient

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Populating your template (continued)Footnotes

• Much of the information needed is already in
  audit schedules that have been prepared.
• Use the prior year as a starting point but
  consider
• Changes in major funds
• Changes in governmental policies
• New pronouncements
• Subsequent events such as debt issuance, capital
  leases or legal settlements

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Populating your template (continued)Footnotes

• Most common challenges
• Amounts that dont agree to the face of the
  financial statements
• Exclusion of constitutional officer information
  (counties)
• Missing or insufficient note disclosures
  especially in the area of pensions
• Inclusion of negative disclosure
• Distinction of major versus non-major not present

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Populating your template (continued)Supplementary
information

• Required supplementary information
• Managements Discussion and Analysis (MDA)
  comes before the basic financial statements
• Must be consistent with information in financial
  statements, notes and statistical section
• Include only allowable information
• Many tables can be linked to financial statements
• Must provide comparative data
• Budget comparisons (if not already in the Basic
  Financial Statements)

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Populating your template (continued)Supplementary
Information

• Trend data on funding of pension and Other post
  employment benefits in certain circumstances
• Trend data on infrastructure condition if using
  the modified approach

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Populating your template (continued)Statistical
Section (CAFRS only)

• GASB 44 is the source of technical guidance
• Templates are available from those who have
  implemented
• A narrative explaining the schedules in this
  section is required
• Dont forget to indicate the source of the
  information

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Populating your template (continued)Other
Introductory Section Items

• Most of these items can be prepared early
• Required items are
• Cover page
• List of officials
• Table of contents
• Transmittal letter
• Organizational chart
• Certificate of Achievement for Excellence in
  Financial Reporting from prior year
• Required for CAFRs only

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Reviewing your financial statements

• Basics of financial statement review
• Consistency throughout document
• Financial amounts
• Descriptions
• Format presentations
• Information flows and is logical in format
• Presentation is easy to read and understand
• Document is technically complete with all
  required sections and disclosures
• Relationships within the document make sense

73
Reviewing your financial statements (continued)

• Consistency throughout document
• Individual schedules to combining
• Combining to combined
• Combined to basic financial statements
• Footnotes to basic financial statements
• MDA to basic financial statements
• Statistical section to statements, notes and MDA

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Reviewing your financial statements (continued)

• Information flows and is logical in format
• Note one incorporates the governments
  significant accounting principles
• Certain items are required use disclosure
  checklist to make sure required elements are
  present
• Order generally follows account presentation in
  statements
• Information generally follows the order in the
  statements
• After note one, cash and deposits are generally
  next followed by investments..

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Reviewing your financial statements (continued)

• Presentation is easy to read and understand
• Add totals that tie to the face of the financial
  statements (where appropriate)
• Check for correct grammar and punctuation
• Consider the readers of your financial statements
• Standard is a person with knowledge

76
Reviewing your financial statements (continued)

• Document is technically complete with all
  required sections and disclosures
• Utilize the information gathered during the
  planning stage
• Ensure new standards are addressed
• Complete a disclosure checklist

77
Reviewing your financial statements (continued)

• Relationships within the document make sense
• Perform top level analytic to see if the change
  from the prior year reflects what really happened
  
• Do the capital asset numbers on the
  reconciliations for the government-wide
  statements supported by additions per the capital
  asset footnote
• For proprietary fund level statements, are there
  restricted assets identified that are at least
  equal to liabilities payable from restricted
  assets

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Reviewing your financial statements (continued)

• Problem areas
• Dollar differences (DONT INPUT PENNIES)
• GFOA prior year comments not addressed
• Different terminology for same item (funds, line
  items, etc.)
• New requirements not met

79
Reviewing your financial statements (continued)

• Tools available
• Disclosure checklists (GFOA, PPC, etc.)
• Other financials from similar entities
• Auditors
• GAAFR examples

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Wrapping up the process

• Send your financial statements to
• Auditor General within 12 months of year end
• Copy is filed with Annual Financial Report to the
  Department of Financial Services
• Grantor agencies may required copy and the
  Federal Clearing House if single audit is
  applicable
• Lendors
• Others involved in interlocal agreements with our
  government

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Wrapping up the process (continued)

• Clean up documentation immediately!