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An External Auditor’s Perspective on Key Components to a Smooth AuditSarah A. Utsch, CPA – manager at CliftonLarsonAllen LLPKristen A. Houle, CPA – senior at CliftonLarsonAllen LLP

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At the end of this session, you will be able to:- Learn about opportunities where fraud can occur within your department and

hear ways to help prevent and detect such instances- Understand some procedures to assist in preparing for the annual audit including

some tools to summarize and review your data- Understand the key changes coming up relating to federal single audit

requirements and have resources available to review your specific program changes

- Understand the tools provided to assist in preparing your section of the Schedule of Expenditures of Federal Awards (SEFA) for your Auditors

- Be aware of key findings relating to federal awards and have some ideas on how to avoid them

Objectives

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Fraud in Local Governments Compared to Other Industries

Source – 2012 Report to the Nation on Occupational Fraud and Abuse

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Anti-Fraud Measures – How it was Detected

Source – 2012 Report to the Nation on Occupational Fraud and Abuse

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Factors that Contribute to/Allow Fraud

Source – 2012 Report to the Nation on Occupational Fraud and Abuse

Primarily internal control weaknesses:

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Newsworthy Story

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Takeaways from Story• Evaluate invoice review and payment approval process• Restricted system access to add/modify vendors• Anonymous tip hotline• Financial analytical review analysis (periodic budget to actual

and prior period to current period comparisons)

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Newsworthy StoryHealth and Human Services Medical Assistance Estate

Recovery Scam- One person filed all documents and received

notification of estate recoveries- She opened an account at the bank in the County’s

name for those funds to be deposited and only she knew about the account

- It was discovered when the auditors confirmed all accounts held at that bank with the County’s federal ID number

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Other Likely Scenarios • Fictitious Vendors• Skimming• Kiting• Estate Recovery Scam• Reimbursement Claims for Ineligible Expenditures• Employee Expense Reimbursements• Misuse of Credit Cards and Gift Cards• Misuse/Theft of Petty Cash

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Skimming and Kiting• Skimming – taking a

little cash off the top of daily receipts/deposits– Social Welfare/Money

Management accounts– Front Desk collections– Immunization clinics

• Kiting – taking advantage of non-existent funds then replacing it with the next receipt. It’s like “robbing Peter to pay Paul”– Social Welfare account

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Reimbursement for Ineligible Expenditures• Ensure proper training in grant reporting

requirements by staff preparing reports and reviewing

• Ensure review of IFS detail of expenditures prior to submitting the reports

• Reconcile grant funds received back to reports filed to ensure the program’s revenues and expenditures make sense with the funding sources

• Ask questions of the funding agencies!

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Employee Expense Reimbursements• Employee Expense Reimbursements

– Must have receipts for all purchases being reimbursed– Mileage should be recalculated by a reviewer– Ensure County duties are being performed with mileage

being requested– Have a standard form to be filed and signed by employee

as well as direct supervisor– Written policy of allowable items to be reimbursed for

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Misuse of Credit Cards/Gas Cards• Have statements sent to a centralized location, not to

the employee directly• Have all employees turn in receipts to that central

person who will reconcile the statements to eligible receipts– When not provided with a detailed receipt, provide a

declaration form to be signed by the employee stating they weren’t provided with a detailed receipt

• If gas cards, require employees to log the clients they are serving and turn that in to be reviewed

• If gas cards, have odometer readings turned in at timing of each statement (if used for county vehicles)

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Misuse of Credit Cards/Gas Cards (Continued)• Have a detailed credit card policy, approved by your

Board, that dictates authorized users, authorized purchases and spending limits

• Check into the limits on each credit card to ensure they do not have outrageous limits

• Further guidance on items to include in a credit card policy and general statute information can be found on the Minnesota State Auditor’s website under Auditing/Statements of Position/Internal Controls

http://www.osa.state.mn.us/other/Statements/creditcardusepolicies_0703_statement.pdf

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Misuse of Gift Cards• The giving of gift cards to clients is not allowed with local

county dollars. It could be allowed under grants if the grant specifically allows for purchase of gift cards as an eligible expenditure.

• These are as good as cash so good internal controls is KEY!• Ensure a centralized log is kept of cards purchased and who

they were issued to as well as under what program. • A check from the County’s account should be used to make

the purchase, supported by a receipt. Do not use petty cash to make this purchase!

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Misuse/Theft of Petty Cash• Define proper use of petty cash

– Petty cash is DIFFERENT than change fund. Change fund always has the same amount in it and is used solely to make change.

• Require initials/documentation on use of petty cash and require receipts

• Ensure reconciliation performed on regular basis (daily or weekly) by someone other than custodian

• Ensure County Board approval on use and amount held in either petty cash or change fund

• Additional information on State Auditor’s website under Auditing/Statements of Position/Internal Controls http://www.osa.state.mn.us/Other/statements/pettyCashFunds_0807_statement.pdf

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Summary of Fraud Prevention• Written policies are a necessity to provide

guidelines and expectations to County personnel on proper procedures

• Documentation of reviews and reconciliation is key to prove the review is occurring

• Helpful resources in developing policies are the State Auditor’s website and your neighboring counties!

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Switching Gears!

Time to talk about preparing for your annual audit!

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Top Findings Relating to Financial Information• Lack of supporting documentation and approval for

social welfare and other department checking account disbursements

• No monthly bank reconciliation performed for departmental checking accounts

• Lack of timely deposits to bank or County Auditor/Treasurer

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Top Findings Relating to Financial Information (Continued)

• Carry forward balances in asset and liability accounts that should zero out at year-end

• No listing of receipts received after 60 day cut-off period

• Errors in account coding for grant revenues (comingling state and federal grants into same IFS accounts)

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• All checks made on behalf of clients need to have supporting documentation and client worker approval– Annual email or signature on amounts for personal needs, etc are

sufficient• Signer on checking account should not be same person that

approves/initiates payments• There should be a monthly bank reconciliation performed by

someone other than the check signer and it should balance to the total of client balances.– The reconciliation needs to be signed by preparer and reviewer in

order to document it occurred.

Social Welfare

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• Segregation of duties on these outside checking accounts are key!

• To prepare for your external auditor:– Summarize each month’s activity in the bank accounts in excel file

Social Welfare (Continued)

Beginning EndingBalance Additions Deletions Balance

January 15,193 15,728 21,301 9,620 February 9,620 17,521 15,739 11,402 March 11,402 17,967 19,704 9,665 April 9,665 15,567 16,587 8,645 May 8,645 24,055 17,168 15,532 June 15,532 8,689 15,549 8,672 July 8,672 23,295 14,852 17,115 August 17,115 22,468 15,406 24,177 September 24,177 9,436 19,482 14,131 October 14,131 21,981 26,117 9,995 November 9,995 21,420 14,358 17,057 December 17,057 15,115 16,158 16,014

213,242 212,421 Reconciling

items (1,320)

Book Balance 12/31/13 14,694

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• Cash and checks collected over the counter and in the mail should be deposited with the bank in a timely manner (daily is recommended)

• Some counties have a county-wide policy on their depositing policy which sets a threshold for when deposits must be made (example: daily if over $1,000)

Timely Deposits

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• Examples include:– MMIS holding accounts– Refund liability accounts

• To prepare for your external auditor:• Print Account Activity report for 1000 and 2000 object codes and

review for unusual items and miscoding. • Ensure the year-end balance represents an amount owed to or from

someone.• Provide necessary entries to zero out MMIS holding account to

auditor

Asset and Liability Carry forward Balances

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• It is important to match up revenues to expenditures in the same calendar year

• DHS and other agencies do not always get reimbursement to the Counties before the cut-off period to use accrual codes

• It’s necessary to capture those receipts so you or the auditor can make the necessary entries• Options include: • Use of report code and print a “Transaction Listing by Report Code”• Summarize within a spreadsheet

Revenues Received after Cut-off

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• The annual financial statements require reporting of federal grants and state grants separately– They also require reporting separate BY grant and funding

agency• Ensuring that these grants are separated into their

own accounts is key for proper reporting!• IFS users should be using 5300 object codes for state grants and 5400

object codes for federal grants

Miscoding of Grant Revenues

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Example Intergovernmental Revenue ReportREIMBURSEMENT FOR SERVICES STATE

Minnesota Department of Human Services 678,182

STATE GRANTS MINNESOTA DEPARTMENT OF

Human Services 377,624 Natural Resources 106,973 Peace Officers (POST) - Public Safety 21,445 Pollution Control Agency 27,975 Veteran's Affairs 9,798 Water and Soil Resources 64,366

Total State Grants 608,181

FEDERAL GRANTS FEDERAL DEPARTMENT OF

Agriculture 90,208 Commerce 57,452 Interior 532 Justice 8,442 Transportation 658,596 Health and Human Services 729,277 Homeland Security 44,220

Total Federal Grants 1,588,727

Total State and Federal Grants 2,196,908

• Note how there is Reimbursement for Services, State Grants, and Federal Grants all relating to Department of Human Services

• When revenues aren’t clearly separated by account it is difficult to prepare this schedule

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Federal Grantor Federal

Pass Through Agency CFDA

      Grant Program Title Number Expenditures

U.S. Department of Health and Human Services

Passed Through XYZ County

Temporary Assistance for Needy Families (Part of TANF Cluster) 93.558 $ 36,701

Passed Through Minnesota Department of Human Services

Promoting Safe and Stable Families 93.556 4,155

Temporary Assistance for Needy Families (Part of TANF Cluster) 93.558 28,792

Title IV-D Child Support 93.563 194,945

Refugee and Energy Assistance Grant 93.566 241

Child Care and Development Block Grant (Part of Child Care Cluster) 93.575 3,032

Child Welfare Services State Grants 93.645 2,077

Foster Care Title IV-E 93.658 70,437

Social Services Block Grant Title XX 93.667 87,853

Chafee Foster Care Independent Living 93.674 1,190

State Children's Insurance Program 93.767 43

Medical Assistance 93.778 377,912

Total Department of Health and Human Services 807,378

Example Schedule of Expd of Federal Awards• This is just for

federal grants– Note how each

grant needs to be identified separately

– Also note that this reports EXPENDITURES!

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• Reconcile MMIS Confirmation reports to IFS revenue accounts

• Summarize each revenue account and where it should be reported in both the IGR Schedule and SEFA

• Review activity in the grant revenue accounts prior to auditor arrival to ensure proper account coding of all receipts

• Don’t forget to take into account timing of receipts (accruals)!

So – What Can You Do To Help?

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• We’ll show you a nice spreadsheet used by one of our counties to assist in preparing her audit schedules!

Template to Assist you

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Single Audit Time!All you care to know and more!

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• The OMB (Office of Management and Budget) has set requirements that all entities that receive over $500,000 in federal funding are required to have a federal single audit.– Threshold to increase to $750,000 for 2015.

• When a County receives over $500,000 in TOTAL federal awards then the external auditor is required to select specific federal programs to test for compliance and controls.– Selection of programs is based on set of criteria including

risk, complexity, and dollar value compared to total grant dollars.

What is Single Audit?

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• Once the programs to be tested are identified (termed “major programs”) the auditors must test both compliance and controls over that program.

• Compliance tests are driven by a “compliance supplement” which is available on the following website:

http://www.whitehouse.gov/sites/default/files/omb/assets/OMB/circulars/a133_compliance/2013/hhs.pdf

Audit Requirements for Major Programs

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• Compliance & Control areas typical for Human Service grant programs include:– Activities Allowed and Unallowed– Cash Management and Reporting– Procurement, Suspension, Debarment– Eligibility

Compliance Requirements

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Activities Allowed and Unallowed– Random Moment Studies (RMS) listing not up to date for

employees working on the programs– Expenditures charged to the grant do not have supporting

documentation readily available.

Cash Management and Reporting– Ensure there is someone reviewing the reports and

support for all expenditures for which reimbursement is being requested

◊ This includes electronic reports!

Common Compliance & Control Findings

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Procurement, Suspension, Debarment– Federal requirements state that Counties must ensure

that vendors that they enter into a contract with are not suspended or debarred from doing business with government agencies.

– Counties should check the website “sam.gov” and print the screen showing that the vendor they are contracting with is not on the list

– In addition, there is “self certification” language that should be included in the contract signed by the vendor stating that they are not suspended or debarred.

Common Compliance & Control Findings

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Eligibility– CLA very often sees a lack of controls overall with too

much reliance on the system. We recommend a documented case file review by a supervisor on a regular basis (maybe 5 per quarter)

– Missing documentation is the source of several findings, these items include:

◊ Lack of documentation of citizenship◊ No application on file or lack of annual renewal application◊ Lack of proof of income verification (pay stubs, etc)

Common Compliance & Control Findings

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• Ensure casefiles are organized and have all required documentation. – If casefile is electronic, ensure documents are readable

and organized.• Have available all reports with supporting

documentation attached.• Have a knowledgeable staff available for the

Auditor’s to ask questions when onsite.

Helpful Hints to Prepare for Federal Program Audit

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QUESTIONS?

Contact Information:Sarah A. Utsch, CPAManager, St. Cloud officePhone: 320-203.5536Sarah.utsch@claconnect.com

Kristen A. Houle, CPASenior, St. Cloud officePhone: 320-203.5539Kristen.houle@claconnect.com

Thank You for Your Time and Participation!