gfoa best practices in accounting, auditing, and financial reporting csmfo san francisco, california...

GFOA Best Practices in GFOA Best Practices in Accounting, Auditing, and Accounting, Auditing, and

Financial ReportingFinancial Reporting

CSMFOCSMFO

San Francisco, CaliforniaSan Francisco, California

February 23, 2011February 23, 2011

AgendaAgenda

Background on GFOA best practices Background on GFOA best practices and advisoriesand advisories

Specific best practices and advisoriesSpecific best practices and advisories• Professional standardsProfessional standards• Financial reportingFinancial reporting• Internal controlInternal control• AccountingAccounting• Independent auditIndependent audit

BackgroundBackground

GFOA Best PracticesGFOA Best Practices

andand

AdvisoriesAdvisories

Recommended practicesRecommended practices

Initiative started in 1993Initiative started in 1993 Intent = codify best practice Intent = codify best practice Objective = comprehensive guidance for Objective = comprehensive guidance for

each of the major functional areas of each of the major functional areas of public financepublic finance• Accounting, auditing, and financial reportingAccounting, auditing, and financial reporting• Budgeting and fiscal policyBudgeting and fiscal policy• Debt managementDebt management• Economic development and capital planningEconomic development and capital planning• Retirement and benefits administrationRetirement and benefits administration• Treasury and investment managementTreasury and investment management

Recent changesRecent changes

Name changeName change• From From recommended practicesrecommended practices to to best best

practicespractices Better reflect true characterBetter reflect true character

Separate new category for Separate new category for advisoriesadvisories• Not an endorsement of the underlying Not an endorsement of the underlying

situationsituation

Definition – Best PracticeDefinition – Best Practice

Identifies specific policies and Identifies specific policies and procedures as contributing to procedures as contributing to improved government management. improved government management. It It aims to promote and facilitate aims to promote and facilitate positive changepositive change rather than merely rather than merely to codify current accepted practice. to codify current accepted practice. Partial implementation is encouraged Partial implementation is encouraged as progress toward a recognized as progress toward a recognized goal. goal.

Definition – AdvisoryDefinition – Advisory

Identifies specific policies and Identifies specific policies and procedures necessary to procedures necessary to minimize a minimize a government’s exposuregovernment’s exposure to potential to potential loss in connection with its financial loss in connection with its financial management activities. It is not to be management activities. It is not to be interpreted as GFOA sanctioning the interpreted as GFOA sanctioning the underlying activity that gives rise to underlying activity that gives rise to the exposure. the exposure.

Current StatusCurrent Status

Functional AreaFunctional Area Best Best PracticesPractices AdvisoriesAdvisories

Accounting, auditing, and Accounting, auditing, and financial reportingfinancial reporting 2525 33

Budgeting and fiscal policyBudgeting and fiscal policy 3131 11

Debt managementDebt management 2121 88

Economic development and Economic development and capital planningcapital planning 2020 00

Retirement and benefits Retirement and benefits administrationadministration 2323 99

Treasury and investment Treasury and investment managementmanagement 2626 55

TotalTotal 146146 2626

CategoriesCategories

Professional standardsProfessional standards Financial reportingFinancial reporting

• PolicyPolicy• Specialized presentation guidanceSpecialized presentation guidance• Expanded disclosureExpanded disclosure• DisseminationDissemination• AnalysisAnalysis

Categories (cont.)Categories (cont.)

Internal controlInternal control• GeneralGeneral• Specific guidanceSpecific guidance

AccountingAccounting• GeneralGeneral• SpecializedSpecialized

Independent auditIndependent audit

Categories (cont.)Categories (cont.)

Grants administrationGrants administration Managerial accountingManagerial accounting

• Costing servicesCosting services• Cost allocation plansCost allocation plans

Specific Best PracticesSpecific Best Practicesand Advisoriesand Advisories

Accounting, Auditing, and Accounting, Auditing, and Financial ReportingFinancial Reporting

Best Practices

Accounting

Independent Audit

Internal Control

Financial Reporting

Professional standards

Grants Administration

Managerial Accounting

Governmental Accounting, Governmental Accounting, Auditing, and Financial Auditing, and Financial

Reporting PracticesReporting Practices

Every government should…Every government should…

Maintain adequate accounting Maintain adequate accounting system for timely GAAP financial system for timely GAAP financial reportingreporting

Issue timely GAAP financial Issue timely GAAP financial statements for the entire financial statements for the entire financial reporting entity as part of a CAFRreporting entity as part of a CAFR

Obtain audits in accordance with Obtain audits in accordance with GAAS or GASGAAS or GAS

State governments should…State governments should…

Mandate timely audited GAAP Mandate timely audited GAAP financial reportsfinancial reports

Best Practices

Accounting

Independent Audit

Internal Control

Financial Reporting




FinancialReporting

Policy Dissemination AnalysisExpandedDisclosure

SpecializedPresentation

Guidance

Establishing Appropriate Establishing Appropriate Capitalization Thresholds Capitalization Thresholds

for Tangible Capital Assetsfor Tangible Capital Assets

Capitalize…Capitalize…

Only if useful life of at least two Only if useful life of at least two yearsyears

Never for amounts less than $5,000Never for amounts less than $5,000• Apply capitalization threshold to Apply capitalization threshold to

individual items rather than to groups of individual items rather than to groups of itemsitems

Exception if effect of doing so would be to Exception if effect of doing so would be to eliminate a significant portion of total capital eliminate a significant portion of total capital assetsassets

Establishing the Estimated Establishing the Estimated Useful Lives of Capital Useful Lives of Capital

AssetsAssets

Where to look…Where to look…

Best source: own past experienceBest source: own past experience Alternative: experience of othersAlternative: experience of others

• Adjust for particular circumstancesAdjust for particular circumstances QualityQuality ApplicationApplication EnvironmentEnvironment

• Circumstances mitigated or exacerbated Circumstances mitigated or exacerbated by maintenance programby maintenance program

Improving the Effectiveness Improving the Effectiveness of Fund Accountingof Fund Accounting

Effective fund accounting Effective fund accounting begins by…begins by…

Distinguishing “funds” used for Distinguishing “funds” used for internal purposes from funds used for internal purposes from funds used for financial reporting purposesfinancial reporting purposes

Educating elected officials regarding Educating elected officials regarding the proper use of fundsthe proper use of funds

Initially…Initially…

Establish criteria for a “fund” for Establish criteria for a “fund” for financial reporting purposesfinancial reporting purposes

Document application of criteria to Document application of criteria to individual fundsindividual funds

Then periodically…Then periodically…

Undertake a comprehensive Undertake a comprehensive evaluation of the fund structureevaluation of the fund structure

Possible combination of Possible combination of individual fundsindividual funds

Debt service fundsDebt service funds Capital projects fundsCapital projects funds Grants for similar purposesGrants for similar purposes

Internal service fundsInternal service funds

Use only if significant difference Use only if significant difference between accrual and modified between accrual and modified accrualaccrual

Presenting Budget to Actual Presenting Budget to Actual Comparisons Within the Comparisons Within the

Basic Financial StatementsBasic Financial Statements

When deciding how to show When deciding how to show budgetary comparisons . . .budgetary comparisons . . .

Present as basic financial statements Present as basic financial statements whenever permitted by GAAPwhenever permitted by GAAP• Additional cost justifiedAdditional cost justified

FinancialReporting



Guidance

Including Management’s Including Management’s Discussion and Analysis in Discussion and Analysis in

Departmental ReportsDepartmental Reports

In the absence of definitive In the absence of definitive guidance…guidance…

Present MD&A in separate Present MD&A in separate departmental statementdepartmental statement• Unaudited supplementary informationUnaudited supplementary information• Required supplementary information Required supplementary information

(AICPA)(AICPA)

Potential Best PracticesPotential Best Practices

Contents of separately issued reports Contents of separately issued reports for less than a legal entity for less than a legal entity • Fund or departmental reportsFund or departmental reports

Sources of guidance for performance Sources of guidance for performance measurement reportingmeasurement reporting

FinancialReporting



Guidance

Using the Comprehensive Using the Comprehensive Annual Financial Report to Annual Financial Report to Meet SEC Requirements Meet SEC Requirements for Periodic Disclosurefor Periodic Disclosure

SEC Rule 15c2-12SEC Rule 15c2-12

Where to provide annual Where to provide annual information required by SEC?information required by SEC?

Consider using the CAFRConsider using the CAFR• Undertaking should commit government Undertaking should commit government

only to periodic disclosure of required only to periodic disclosure of required information, not to its inclusion as part information, not to its inclusion as part of the CAFRof the CAFR

FinancialReporting

Policy Dissemination AnalysisExpandedReporting


Guidance

Using Websites to Improve Using Websites to Improve Access to Budget Access to Budget

Documents and Financial Documents and Financial ReportsReports

Everyone should publish CAFR Everyone should publish CAFR on webon web

Specific guidelines:Specific guidelines:• Identical to printed versionsIdentical to printed versions• Notice that information has not been Notice that information has not been

updatedupdated• Prior year documents noted and Prior year documents noted and

segregatedsegregated• Security from manipulation by Security from manipulation by

external or unauthorized personsexternal or unauthorized persons

Web Site Presentation of Web Site Presentation of Official Financial Official Financial

DocumentsDocuments

RecommendationsRecommendations

Use web site as a primary means of Use web site as a primary means of communicating financial informationcommunicating financial information

Specific guidelinesSpecific guidelines• FormattingFormatting• Technological infrastructureTechnological infrastructure• Electronic financial reporting languageElectronic financial reporting language• DistributionDistribution• Information disclaimerInformation disclaimer• Historical informationHistorical information

FormattingFormatting

Consistency with hardcopy versionConsistency with hardcopy version Legibility (consistency throughout Legibility (consistency throughout

report)report) Pagination (sequential)Pagination (sequential) File sizeFile size

• Single file for entire documentSingle file for entire document• Individual filesIndividual files

Technological InfrastructureTechnological Infrastructure Security (no unauthorized changes)Security (no unauthorized changes) Placement (easy to locate)Placement (easy to locate) Software compatibilitySoftware compatibility Features (zooming, search)Features (zooming, search) User instructionsUser instructions Linking (ability to click page number Linking (ability to click page number

on table of contents)on table of contents) Testing (operational with different Testing (operational with different

computer operating systems)computer operating systems)

OtherOther

Electronic financial reporting Electronic financial reporting language language

Distribution Distribution • Inform potential users of availabilityInform potential users of availability• Other electronic media (for those Other electronic media (for those

without access to the internet)without access to the internet) Information disclaimer (not updated)Information disclaimer (not updated) Historical information (segregated)Historical information (segregated)

Preparing Popular Preparing Popular ReportsReports

Supplement CAFR with popular Supplement CAFR with popular reportreport

Issue within six months of fiscal year Issue within six months of fiscal year end end

Define scope and refer reader to Define scope and refer reader to CAFRCAFR

The popular report should…The popular report should…

Refer to the CAFR Attract and hold interest Be easy to understand Use simple and attractive format Be written clearly and concisely Avoid jargon Make appropriate use of graphics

The popular report should… The popular report should… (cont.)(cont.)

Explain items of special importance Offer comparative data to help

identify trends Be distributed appropriately Be creative Invite feedback Be balanced and objective

Improving the Timeliness of Improving the Timeliness of Financial ReportsFinancial Reports

BackgroundBackground

Timeliness essential• Balance against reliability

Minor gains in precision cannot justify indefinite delay

• Balance costs and benefits Minimum objective

• Legislative deadlines• Award programs

Recommendation 1Recommendation 1 Recording activity throughout the yearRecording activity throughout the year

• Transactions processingTransactions processing At least quarterly

• Reconciliations • Financial analysis of interim management reports

• Accounting policies and proceduresAccounting policies and procedures Items that may need to be estimated

• Specific steps and assumptions, and whether: During the year? As part of the initial year end closing process? In the adjustment and analysis process

immediately prior to final year end closing?

Recommendation 2Recommendation 2

Closing and financial statement Closing and financial statement preparation processingpreparation processing• Annual closing processAnnual closing process

Items related to budgetary expenditures recorded by the end of the period

• Component unitsComponent units Early and ongoing communication

• No substitute for one or more face-to-face meetings

• Unforeseen circumstancesUnforeseen circumstances Better to proceed based upon estimates


Implementing of new accounting Implementing of new accounting standardsstandards• Facilitating implementation of new

accounting standards Monitor the issuance of final guidance Determine implementation date

• Schedule prior to and during the year of implementation

Attempt to implement by at least the period before implementation is mandated.


Financial report format and Financial report format and distribution distribution • Electronic distributionElectronic distribution

Initially distribute report electronically Initially distribute report electronically • WebsiteWebsite• e-maile-mail• Mail CD-ROM Mail CD-ROM


Contracting for professional services Contracting for professional services • Audit procurementAudit procurement

The request for proposal (RFP) for the audit The request for proposal (RFP) for the audit should specify a public release dateshould specify a public release date

• Contracts for professional services other Contracts for professional services other than auditingthan auditing

RFPs for nonaudit services should specify RFPs for nonaudit services should specify the public release date of the financial the public release date of the financial statements and expressly mention that statements and expressly mention that those services need to be completed in time those services need to be completed in time to allow the government to meet deadline to allow the government to meet deadline

FinancialReporting



Guidance

Appropriate Level of Appropriate Level of Unrestricted Fund Balance Unrestricted Fund Balance

in the General Fundin the General Fund

When setting a policy…When setting a policy…

Focus on Focus on unrestricted fund balanceunrestricted fund balance Address bothAddress both

• Specific plans to increase or decrease Specific plans to increase or decrease level if inconsistent with policylevel if inconsistent with policy

• Time framework Time framework Set target at no less than two monthsSet target at no less than two months

• Regular operating revenues Regular operating revenues or or • Regular operating expendituresRegular operating expenditures

In setting a target, consider…In setting a target, consider…

Predictability/volatilityPredictability/volatility• Special application to America’s largest Special application to America’s largest

governmentsgovernments Exposure to significant one-time Exposure to significant one-time

outlaysoutlays Other funds (potential source/drain)Other funds (potential source/drain) LiquidityLiquidity Commitments and assignmentsCommitments and assignments

The Use of Trend Data and The Use of Trend Data and Comparative Data for Comparative Data for

Financial AnalysisFinancial Analysis

When evaluating trends…When evaluating trends…

Consider Consider percentage relationship among data elements over time

Use no less than five and no more than ten years of data

Take into account items that might distort trends

If presenting trends using If presenting trends using constant dollars…constant dollars…

Disclose basisDisclose basis Also provide unadjusted dataAlso provide unadjusted data

In making comparisons In making comparisons consider…consider…

Level and type of governmentLevel and type of government Scope and quality of serviceScope and quality of service Number servedNumber served Definitions of categoriesDefinitions of categories Inter-regional comparabilityInter-regional comparability Potential effect of depreciationPotential effect of depreciation Using trend data Using trend data

Potential Best PracticesPotential Best Practices Replenishment of unrestricted fund Replenishment of unrestricted fund

balance of the general fundbalance of the general fund Appropriate level of unrestricted fund Appropriate level of unrestricted fund

balance in other governmental fund typesbalance in other governmental fund types Appropriate level of working capital in Appropriate level of working capital in

enterprise fundsenterprise funds Use of a management dashboard to Use of a management dashboard to

monitor trends and spikes during the yearmonitor trends and spikes during the year

Best Practices

Accounting

Independent Audit

Internal Control

Financial Reporting




Part 4Part 4

Internal Control

General Specific Guidance

Enhancing Management Enhancing Management Involvement with Internal Involvement with Internal

ControlControl

Explain ethical duty to…Explain ethical duty to…

“…“…exercise prudence and exercise prudence and integrity in the management of integrity in the management of funds in their custody and in all funds in their custody and in all financial transactions”financial transactions”

“…“…not knowingly sign, subscribe not knowingly sign, subscribe to, or permit the issuance of any to, or permit the issuance of any statement or report which statement or report which contains any misstatement or contains any misstatement or which omits any material fact.”which omits any material fact.”

Competence essentialCompetence essential

ManagementManagement• Training and information needed on Training and information needed on

comprehensive framework of internal comprehensive framework of internal control as defined by COSOcontrol as defined by COSO

StaffStaff

Management should… Management should…

Document controlsDocument controls• Include method to avoid circumvention Include method to avoid circumvention

by managementby management Periodically evaluate controlsPeriodically evaluate controls Evaluate resolution of exceptionsEvaluate resolution of exceptions Adopt corrective action planAdopt corrective action plan Follow up on corrective action planFollow up on corrective action plan

Establishing an Internal Establishing an Internal Audit FunctionAudit Function

Especially consider separate Especially consider separate function if…function if…

High degree of riskHigh degree of risk• Complex accounting systemComplex accounting system• Contracts with outside partiesContracts with outside parties• Rapidly changing environmentRapidly changing environment

If separate function not feasible:If separate function not feasible:

Consider assigning responsibilities to Consider assigning responsibilities to regular employeesregular employees

Consider outsourcingConsider outsourcing

If separate function is If separate function is established…established…

Use charter, enabling resolution, or Use charter, enabling resolution, or other legal meansother legal means

Adopt Adopt Government Auditing Government Auditing StandardsStandards (“Yellow Book”) (“Yellow Book”)

Require that responsible party has Require that responsible party has college degree (certification a “plus”)college degree (certification a “plus”)

Make materials available to audit Make materials available to audit committeecommittee

Encouraging and Encouraging and Facilitating the Reporting of Facilitating the Reporting of

Fraud and Questionable Fraud and Questionable Accounting and Auditing Accounting and Auditing

PracticesPractices

Begin by…Begin by…

Formally approving ethics policy Widely distributing and publicizing

that policy• Basis for identifying fraud, abuse, and

questionable practices

Be sure to provide for…Be sure to provide for…

Practical means for Practical means for confidential, anonymous reporting• Regularly publicize• Minimize cost

Separate mechanism for employees• Outside vendor has advantage of enhanced

credibility and the possibility of reporting outside of office hours

Potential Best PracticePotential Best Practice

Elements of a comprehensive Elements of a comprehensive internal control frameworkinternal control framework

Internal Control

General Specific Guidance

Ensuring Control over Ensuring Control over Noncapitalized ItemsNoncapitalized Items

Which particular items need to Which particular items need to be controlled?be controlled?

Object of legal complianceObject of legal compliance Potentially detrimental to public Potentially detrimental to public

safetysafety Heightened risk of theft (“walk away” Heightened risk of theft (“walk away”

items)items)

Who should control:Who should control:

Primary control in departmentPrimary control in department• Individual assigned to prepare and Individual assigned to prepare and

update list of controlled items update list of controlled items annuallyannually

• Annual departmental certification Annual departmental certification that information updated available for that information updated available for inspectioninspection

Accounting (or other designated Accounting (or other designated finance) function to periodically finance) function to periodically verify dataverify data

The Need for Periodic The Need for Periodic Inventories of Tangible Inventories of Tangible

Capital AssetsCapital Assets

Physical inventories . . .Physical inventories . . .

Always neededAlways needed No less than once every five yearsNo less than once every five years


Technology securityTechnology security

Best Practices

Accounting

Independent Audit

Internal Control

Financial Reporting




Accounting

General Specialized

Documentation of Documentation of Accounting Policies and Accounting Policies and

ProceduresProcedures

Documentation of policies Documentation of policies should be . . . should be . . .

Promulgated at appropriate level to Promulgated at appropriate level to emphasize importance and authorityemphasize importance and authority

Updated on predetermined scheduleUpdated on predetermined schedule• Changes also made as they occurChanges also made as they occur• Employee assigned for this purposeEmployee assigned for this purpose

Management to oversee performanceManagement to oversee performance

Good documentation should . . . Good documentation should . . .

Be readily available (e.g., electronic)Be readily available (e.g., electronic) Delineate authority and responsibilityDelineate authority and responsibility Present actual v. ideal controlsPresent actual v. ideal controls Explain design and purpose of Explain design and purpose of

controlscontrols

Technology Disaster Technology Disaster Recovery PlanningRecovery Planning

A disaster-recovery policy A disaster-recovery policy should…should…

Be formally establishedBe formally established Be Regularly updatedBe Regularly updated Formally assign coordinators for each Formally assign coordinators for each

agency or department to form a agency or department to form a disaster recovery teamdisaster recovery team

Require the creation and Require the creation and preservation of back-up datapreservation of back-up data

A disaster-recovery policy A disaster-recovery policy should… (cont.)should… (cont.)

Make provision for the alternative Make provision for the alternative processing of data following a processing of data following a disasterdisaster

Provide detailed instructions for Provide detailed instructions for restoring disk filesrestoring disk files

Establish guidelines for the Establish guidelines for the immediate aftermath of a disasterimmediate aftermath of a disaster

A disaster-recovery policy A disaster-recovery policy should… (cont.)should… (cont.)

Ensure that a copy of policies and Ensure that a copy of policies and procedures is kept off siteprocedures is kept off site

Provide for periodic testing (both Provide for periodic testing (both restoration and processing of data)restoration and processing of data)• Similar assurance needed for Similar assurance needed for

outsourced servicesoutsourced services

Accounting

General Specialized

Ensuring Adequate Ensuring Adequate Documentation of Costs to Documentation of Costs to

Support Claims For Support Claims For Disaster Recovery Disaster Recovery

Assistance Assistance

Part 1Part 1

Establish Formal Policies and Establish Formal Policies and Procedures for the Procedures for the

documentation of disaster-documentation of disaster-related costsrelated costs

Policies and proceduresPolicies and procedures

Set written policies and procedures on disaster-related reimbursable costs• Include in overall disaster recovery plan• Review and test annually• Update at least once every three years

Train both financial and nonfinancial staff Train both financial and nonfinancial staff

on FEMA requirements and guidelines

Policies and Procedures (cont.)Policies and Procedures (cont.)

Have finance staff review and approve costs before assignment to emergency account

Put an “emergency disaster” clause in contracts that might be needed in the event of a disaster• Require vendors to supply the necessary level of

detail in their billing to support reimbursement Review bids and contracts in advance for

compliance with relevant requirements


Set in place controls for emergency supplies

Obtain approval for and document any provision for changes in compensation levels for salaried staff

Seek audit as soon as possible (e.g., separate audit of immediate response costs) to minimize possibility of disallowance because documentation no longer available


If planning to use nonprofits, consider obligating government by contract to using their services

Part 2Part 2

Ensure Adequate Detail to Ensure Adequate Detail to Support ClaimsSupport Claims

DetailDetail

Establish a supplemental chart of accounts• Classify projects based on categories

used for reimbursement • Track costs, at a minimum, at the

project worksheet level • For staff hours, specify name, title,

dates, times, and rates;

Detail (cont.)Detail (cont.)

Educate program staff on the level of detail on costs required to substantiate claims

Collect and maintain appropriate nonfinancial data to support claims • “Before and after” photographs of each

repair, labeled by location and date • Relevant correspondence • Precise information on materials used

(e.g., number of bricks v. square footage);

OtherOther

Track volunteer hours • Applicable to local share

Track local equipment usage • By hours actually used

Best Practices

Accounting

Independent Audit

Internal Control

Financial Reporting




Audit CommitteesAudit Committees

Why an audit committee is Why an audit committee is needed . . . needed . . .

Practical means for governing body Practical means for governing body to meet its responsibilityto meet its responsibility

Needed to ensure direct Needed to ensure direct communication between governing communication between governing body and auditorsbody and auditors

GFOA specifically recommends GFOA specifically recommends that . . . that . . .

Every government formally establish Every government formally establish an audit committeean audit committee• DocumentDocument• Periodically reviewPeriodically review

Auditors report directly to the audit Auditors report directly to the audit committeecommittee

Committee members…Committee members…

Should be members of the governing Should be members of the governing bodybody

Need only a basic understanding of Need only a basic understanding of accounting and auditingaccounting and auditing

Should be educated as to Should be educated as to responsibilitiesresponsibilities

Should have support of a “financial Should have support of a “financial expert”expert”

The audit committee should . . .The audit committee should . . .

Have adequate fundingHave adequate funding Review and oversee financial Review and oversee financial

reporting processes, internal reporting processes, internal controls and independent auditorscontrols and independent auditors• Access needed to internal audit workAccess needed to internal audit work• Documentation for management Documentation for management

overrideoverride Make an annual reportMake an annual report

• Reference to basis for conclusionReference to basis for conclusion

Audit ProcurementAudit Procurement

Audit coverageAudit coverage

Extend to combining and individual Extend to combining and individual fund presentationsfund presentations• Professional judgment consistent with Professional judgment consistent with

legal requirementslegal requirements

Audit contract should…Audit contract should… Always use “Yellow Book” standards Always use “Yellow Book” standards

of independenceof independence Be of at least 5 years durationBe of at least 5 years duration

• No automatic renewalsNo automatic renewals• Problem with mandatory auditor rotationProblem with mandatory auditor rotation

Ensure that price is not ultimate Ensure that price is not ultimate criterioncriterion

Nonaudit services . . .Nonaudit services . . .

Should be approved in advance by Should be approved in advance by audit committeeaudit committee• Routinely explore possibility of Routinely explore possibility of

alternative service providersalternative service providers

Mitigating the Negative Mitigating the Negative Effects of Statement on Effects of Statement on

Auditing Standards No. 112Auditing Standards No. 112

Provide evidence of sound Provide evidence of sound internal controlinternal control

Document comprehensive framework of control per COSO

Anti-fraud program and controls Internal audit/risk assessment

• Commensurate with size and complexity

Minimize audit adjustmentsMinimize audit adjustments

Review cutoff procedures and the method used to uncover unrecorded liabilities at the end of the fiscal period

Special care to ensure the timely and effective implementation of new accounting standards

Review assistance provided by Review assistance provided by auditorauditor

Document that a staff member with requisite skills has reviewed all of the work performed by the auditor • If management does not have the

skills to prepare GAAP financial statements and desires the assistance of its independent auditors to help it do so, consider the services of a consultant or some other outside party to review the auditor’s work on the government’s behalf.

Second accounting firm just to Second accounting firm just to avoid deficiency?avoid deficiency?

Not recommended• Not likely to be cost effective• Not necessarily effective

Alert the governing body as early as possible to explain decision• If Single Audit, explore possibility of

obtaining a waiver so as not to jeopardize the audit’s “low risk” status.

Best Practices

Accounting

Independent Audit

Internal Control

Financial Reporting





Grant administration, monitoring, Grant administration, monitoring, and reportingand reporting

Best Practices

Accounting

Independent Audit

Internal Control

Financial Reporting





CostingServices

Cost AllocationPlans

Application of Full-Cost Application of Full-Cost Accounting to Municipal Accounting to Municipal

Solid Waste Management Solid Waste Management ActivitiesActivities

A government should . . .A government should . . .

Use an enterprise fund to account for Use an enterprise fund to account for landfillslandfills

Collect data both by path and activityCollect data both by path and activity Distinguish fixed from variable costsDistinguish fixed from variable costs Justify allocation used to determine Justify allocation used to determine

full costfull cost Consider cash flows for rate settingConsider cash flows for rate setting


CostingServices

Cost AllocationPlans


Preparing indirect cost allocation Preparing indirect cost allocation plans under the re4quirements of plans under the re4quirements of Federal Circular A-87.Federal Circular A-87.

AdvisoriesAdvisories

Auditor Association with Auditor Association with Financial Statements Included Financial Statements Included

in Offering Statements or in Offering Statements or Posted on Web SitesPosted on Web Sites

Basic position of GFOABasic position of GFOA

Having paid for the independent audit, a Having paid for the independent audit, a government owns the audited financial government owns the audited financial statements and should feel free to use them in statements and should feel free to use them in any appropriate manner.any appropriate manner.

Same set of financial statementsSame set of financial statements Not used in potentially misleading mannerNot used in potentially misleading manner No material subsequent eventNo material subsequent event

Avoid creating auditor Avoid creating auditor association in contractassociation in contract

The independent auditor should not be The independent auditor should not be permitted to create an essentially artificial permitted to create an essentially artificial “association” with audited financial “association” with audited financial statements included in offering statements or statements included in offering statements or posted on the government’s website simply by posted on the government’s website simply by inserting a clause to that effect in the audit inserting a clause to that effect in the audit contractcontract

If auditor association…If auditor association…

Take steps to avoid unwarranted delays and Take steps to avoid unwarranted delays and unjustified costs.unjustified costs.

Maximum timeMaximum time No additional feeNo additional fee

Web site postingWeb site posting

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

Considerations on the Use Considerations on the Use of the Modified Approach to of the Modified Approach to

Accounting for Accounting for Infrastructure AssetsInfrastructure Assets

Before selecting, first Before selecting, first consider…consider…

Usefulness of data to managementUsefulness of data to management Potential impact of prospective Potential impact of prospective

depreciationdepreciation Inherent capital biasInherent capital bias Unmatched debtUnmatched debt Reliance upon interested partiesReliance upon interested parties

Presenting Securities Presenting Securities Lending Transactions in Lending Transactions in

Financial StatementsFinancial Statements

Avoid potential Avoid potential misunderstandings by…misunderstandings by…

Reporting cash received as collateral Reporting cash received as collateral separately from other cashseparately from other cash

Reporting securities lending income Reporting securities lending income and related expenses togetherand related expenses together

Illustrative presentationIllustrative presentation

Potential AdvisoryPotential Advisory

Fiscal sustainability reportingFiscal sustainability reporting

gfoa best practices in accounting, auditing, and financial reporting csmfo san francisco, california...

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