Government Finance OfficersAssociation of Louisiana

2009 Fall ConferenceOctober 8, 2009

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COMMON CAFR FINDINGS

Background

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Use of GFOA materials todayGAAP or CAFR--Certificate of Achievement for

Excellence in Financial ReportingEstablished by GFOA in 1945Almost 4,000 participating governments nationwideAmong cities over 50,000 population, 74%

participation up to 96% for cities over 200,000Among counties over 50,000 population-49%

participation rising to 84% for those over 200,000 Among states, 84% participation.

Background

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The certificate program has been responsible for standardizing the format for the CAFR and establishing the required content outside the basic financial statements.

GFOA continuously updates checklists for changes in GAAP

Five checklistsGeneral Purpose GovernmentsSchool DistrictsStand-Alone Business-Type ActivitiesPension and OPEB SystemsCash & Investment Pools

Eligibility

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Must be a State or Local GovernmentMust publish a CAFRMust comply with GAAPMust have Clean Audit Opinion of at least BFS with a

“in relation to” for remaining contentsMust respond to prior year commentsMust submit within 6 months of year end

CAFR Review

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Submissions are reviewed by three reviewers, one staff and two volunteers from the Special Review Committee

Volunteer cannot be from the same state as the CAFR or be employed by the same audit firm.

Must have consensus to receive the awardWatch for the * as it indicates a potentially

disqualifying itemNotification of results

CAFR Contents

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• Letter of Transmittal• Independent Auditor’s Report• Management’s Discussion and Analysis• Component Units• Government-wide Statements• Fund Financial Statements – general

– Government Funds

– Proprietary Funds

– Fiduciary Funds

• Notes to the Financial Statements• Required Supplementary Information• Combining and Individual Fund Statements• Statistical Section

General Comments

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Amounts disclosed throughout the CAFR must agree with the financial statements

‘Boilerplate Language’ should be eliminated as much as possible disclosures should cover the requirements but should be specific and

unique to each government

Spreadsheet errors (mathematical errors and non-articulation of amounts between statements and schedules)

All financial statement disclosures must be consistent with the proper basis of accounting

Any reconciliation provided throughout the CAFR must have sufficient detail so that the reader may clearly identify the reconciling item

Letter of Transmittal

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Inappropriate dateDate its letter of transmittal to reflect when the CAFR was first

made available (i.e., transmitted) to its intended usersEarlier date allowed

Provided that it was no earlier than the date of the independent auditor’s report

Failure to reference MD&AThe same users are likely to take an interest in both the letter of

transmittal and management’s discussion and analysis (MD&A)Reference MD&A in their letter of transmittal

In practice, this reference is frequently missing

Independent Auditor’s Report

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Failure to adequately describe audit coverageIndependent auditor’s report should describe the audit coverage

provided for all of the contents of the financial section of the CAFRTwo common failures:

Include schedules other than combining and individual fund statements in the various subsections of the financial section of the CAFR The independent auditor’s report should state, at a minimum, that those

schedules are fairly presented “in relation to” the basic financial statements GFOA encourages governments to present mandated budgetary

comparisons for the general fund and major special revenue funds as part of the basic financial statements rather than as required supplementary information (RSI) The independent auditor must render an opinion on the fair presentation of the

budgetary comparison

Management Discussion & Analysis

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Scope of analysis is too narrowMD&A must provide needed analysis for both the government-

wide financial statements and the individual major fund financial statements Governments address one at the expense of the other If the same transaction or event affects both, the analysis should be

crafted in a manner that minimizes duplicationAnalysis in MD&A also should cover both revenues and

expenses/expenditures Expenses/expenditures often neglected

Statement of Net Assets

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Calculation of a component of net assetsErrors continue to occur in the calculation of the various

components of net assets, especially invested in capital assets net of related debt

The most common are as follows: Wrongly treat debt as capital-related before capital acquisition has

actually occurred. Do not include debt proceeds nor the debt that gives rise to those

proceeds, until the proceeds have actually been expended Net unamortized bond issuance costs against bonds payable Incorrectly including accrued liabilities Erroneously excluding intangible assets used in operations from

the calculation of invested in capital assets net of related debt The specific reasons why a portion of net assets is classified as

restricted need to be presented

Statement of Activities

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Contributions of capital assets incorrectly classifiedContributions of capital assets qualify it for classification as

program revenue - capital grants and contributions. Improperly classifying such contributions as general revenue

Internal movement of capital assets incorrectly reportedCapital asset associated with activities reported in a

governmental fund (e.g., general fund) is moved to a fund included in business-type activities Effect is asymmetrical in the fund financial statements (i.e., the general

fund cannot report the surrender of the capital asset, which it never reported to begin with, but the enterprise fund must report its receipt)

The recipient fund should report a capital contribution (rather than a transfer) Incorrectly reporting movement of a capital asset as a capital grant

(revenue)

Statement of Activities

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Special itemsGASB Statement No. 34, specifically limits the use of the

special items category to “significant transactions or other events” Because of the disparity in measurement focus between the

governmental fund financial statements and the government-wide financial statements, it is possible for the same transaction or event to be significant to one, but not to the other

In that case, the classification special item should be reserved for the financial statements where the transaction or event is, in fact, significant

Some governments classify an insignificant transaction or event as a special item, solely because it is so classified in another set of financial statements where it is, in fact, significant

Fund Financial Statements - General

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Missing major fundsMany governments are failing to present as major funds

governmental funds and enterprise funds that clearly meet both the 10 percent test and the 5 percent test for mandatory major fund reporting Major initiatives, especially capital projects, can alter the results of

applying the 10 percent test and the 5 percent test from one year to the next

Important that governments reapply these tests each year

External reporting of intrafund transfersProper to report transfers between departments reported in

the same fund for internal accounting purposes Intrafund transfers must be eliminated from general purpose

external financial reporting

Governmental Funds

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Excessive balance for compensated absencesGASB Interpretation No. 6, Recognition and Measurement of

Certain Liabilities and Expenditures in Governmental Fund Financial Statements, paragraph 14, limits the liability reported in a governmental fund to just the portion due to employees separated from service as of the end of the fiscal period Governments continue to report a fund liability well in excess of this

amount

Failure to report unreserved fund balance by fund typeGovernments report nonmajor governmental funds in a single

column in the governmental fund balance sheet, regardless of fund type GASB Statement No. 34 requires that unreserved fund balance for

nonmajor funds be classified by fund type

Governmental Funds

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Failure to report other financing source for debt at face valueGASB Statement No. 34 directs that the amount of the other

financing source that governmental funds report upon the issuance of long-term debt be equal to the “face amount” of the debt Incorrect reporting of an other financing source equal to the amount of the

proceeds received for debt issued at a discountReport the discount as either an expenditure (for an underwriter’s

discount) or as an other financing use (for an original issue discount)Incorrect reporting of a single other financing source equal to the

face amount of the debt plus an original issue premium Latter ought to have been treated as a separate other financing source

Governmental Funds

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Inappropriate expansion of other financing sources and uses categoryOther financing sources and uses category was intended to

isolate certain one-time inflows or outflows of current financial resources that might otherwise distort revenue and expenditure trends

Only items specifically designated by authoritative standards as other financing sources or uses may be classified as such

Mischaracterization of loan repayments as revenueGovernmental funds should handle the collection of principal

on a loan receivable as a purely “balance sheet” transaction (i.e., a reduction of the related receivable)

Number of instances where such cash receipts have been miscategorized as revenue

Proprietary Funds

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Failure to classify certain restricted assets as current GASB Statement No. 34 requires that governments present the

proprietary fund statement of net assets using a classified format (i.e., current v. long-term)

Restricted assets that are available to liquidate current liabilities (e.g., resources in a current debt service reserve account associated with a revenue bond issue) should be classified as current despite their restricted character Should not be included as part of long-term assets, Should not be reported in a separate category between current

and long-term assets Inadequate detail for a classified presentation

Not enough to distinguish current assets and liabilities from long term assets and liabilities in a classified presentation

Necessary to furnish appropriate totals and labels (e.g., total current assets). CAFR reviewers frequently find totals or labels missing from

classified presentations

Proprietary Funds

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Misclassification of compensated absencesInappropriate reporting of the entire balance of compensated

absences as a current liability (Misapprehension that the entire balance is due inasmuch as all employees theoretically could use their accumulated vacation leave within the next 12 months)

Normally should not classify the entire balance of compensated absences as a current liability

Inconsistent classification of items as capitalCapital contribution in the statement of revenues, expenses, and

changes in net assets should also be reported as cash flows from capital and related financing activities in the statement of cash flows

Failure to provide a reconciliationGovernments have failed to provide a reconciliation when amounts

have differed between the government-wide and proprietary fund financial statements

Proprietary Funds

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Missing look-back adjustmentsInternal service funds typically are consolidated into governmental

activities in government-wide financial reporting For purposes of consolidation, internal service funds are presumed to

operate on a strictly “break even” basis Profit or loss on operations is treated as an adjustment to the amount

reported as expenditure/expense by the internal service fund’s customers (i.e.,“look-back” adjustment)

When a customer fund is reported as a business-type activity, this adjustment necessitates the reporting of a receivable/payable between governmental activities and business-type activities

Asset or liability has not been reported in such circumstances

Component Units

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Incorrect classificationGASB Statement No. 14 calls for component units to be blended

only if: Component unit's governing body is substantively the same as the

governing body of the primary government

OR Component unit provides services entirely, or almost entirely, to the

primary government or otherwise exclusively, or almost exclusively, benefits the primary government

Frequently blending of component units that should be discretely presented because of a misapplication of the second of these criteria. Criteria #2 intended for situations where the component unit functions

essentially as an internal service fund (i.e., rather than providing services to citizens)

Notes to the Financial Statements

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Insufficient information for component unitsDisclosure requirements for component units have remained

unchanged since the issuance of GASB Statement No. 14Still common for governments to fail to provide all of the

information called for by paragraph 61To comply with this requirement, a government should

provide information in sufficient detail to justify both the inclusion of a given entity as a component unit and the decision to use blending or discrete presentation

Level of detail is lacking from the component units note

Notes to the Financial Statements

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Inadequate disclosure of investment policiesGASB Statement No. 40 requires that governments disclose their policy

(or the fact that they do not have a policy) for each of the following investment-related risks (as relevant) Custodial credit risk Credit risk Concentration risk Interest-rate risk Foreign currency risk

Only a policy formally adopted by the governing board qualifies as a policy for this purpose

Governments have presented as policy positions that have not been formally adopted (e.g., past practice)

Others have made no disclosure, even though their circumstances make clear that a policy would be relevant to them

Notes to the Financial Statements

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Incorrect disclosure of interest-rate risk for positions in investment poolsDisclosure of interest-rate risk focuses on the maturity of

investmentsBond fund or external investment pool

Measure of maturity would be the average maturity of the fund’s or pool’s investments

The fact that a participating government could withdraw funds on short notice would not alter that fact

A number of governments are understating their interest rate risk by reporting positions in funds or pools as maturing immediately based on their ability as a participant to withdraw funds on short notice

Notes to the Financial Statements

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Incorrect disclosure of interest-rate risk for investments in variable rate debtInterest-rate risk results from a disparity between the rate of interest

on an investment in a debt security and the market rate of interestIn the case of variable-rate debt securities, the disparity in rates

normally will cease as of the next reset date (e.g., quarterly). Thus, interest-rate risk ends as of the next reset date

Number of governments are overstating their interest-rate risk by presenting variable-rate debt based on when the securities ultimately mature, rather than on the next reset date

Notes to the Financial Statements

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Improper combining of short- and long-term debt disclosuresGASB Statement No. 34 sets disclosure requirements for long-

term liabilitiesGASB Statement No. 38, Certain Financial Statement Note

Disclosures sets similar disclosure requirements for short-term debt

Both disclosures involve presenting a schedule of changesSome governments have inappropriately combined the two

presentations into a single table Failure to disclose on-behalf benefit payments

GASB Statement No. 24 has long required government employers to provide certain disclosures in connection with payments of fringe benefits or salaries by legally separate entities on behalf of their employees—missing disclosure

Required Supplementary Information

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Inclusion of nonmandated budgetary comparisonsAs a rule, generally accepted accounting principles (GAAP)

set the minimum standard for presentation and disclosure Financial statement preparers normally are free, and

sometimes are even encouraged, to provide information beyond what is mandated by GAAP

Contents of required supplementary information (RSI), as the term itself indicates, cannot be expanded to include information that is not required Incorrect presentations of budgetary comparisons in RSI for funds

other than the general fund and major special revenue funds

Required Supplementary Information

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Improper placement of RSI-related disclosures Required supplementary information falls outside the scope of the

independent auditor’s opinion on the fair presentation of the financial statements

Supporting disclosures related to RSI should be presented as notes to RSI rather than as part of the notes to the financial statements

A number of governments have presented budget-related disclosures in the notes to the financial statements, even when the budgetary comparisons themselves are presented as RSI Disclosure is always required, in the notes to the financial statements

themselves, of any budget-related significant violations of finance-related legal or contractual provisions, even if budgetary comparisons are presented as RSI

Failure to reconcile the basis of budgeting and GAAP Basis of budgeting and GAAP must be reconciled

Face of the budgetary comparison Notes to the financial statements/RSI

Combining and Individual Funds

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Inappropriate negative balancesGovernments sometimes have reported negative balances in

accounts where a negative balance is either illogical or prohibited by GAAPReserved fund balanceDesignated unreserved fund balancePooled cash and investments

Deficit should be reported as a liability rather than as a negative asset balance

Statistical Section

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Missing per capita information GASB Statement No. 44 requires governments to present both a per

capita ratio of total outstanding debt and a per capita ratio of total general bonded debt Some governments have provided one but not the other

Miscalculation of debt service as a percentage of noncapital expenditures The amount of debt service used for purposes of calculating the ratio

of debt service as a percentage of noncapital expenditures should be limited to principal and interest payments Other amounts (e.g., fiscal charges) are being included

Statistical Section

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Failure to provide all information required on own-source revenueGovernments are only required to provide information on

revenue capacity for their single most significant own-source revenue If they voluntarily choose to provide information on multiple own-

source revenues, they must furnish all of the required information for each such source

Some governments that are voluntarily providing information on property taxes (when they are not the major own-source revenue) are failing to provide all of the information required (e.g., property tax collections)

Statistical Section

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Failure to provide adequate detail on significant fees and chargesStatistical schedule of changes in net assets typically presents a

single amount for each of the three categories of program revenue, with one important exception Within the charges for services category the most significant charges

must be broken out separately by function, program, or identifiable activity

Common to find governments that have failed to provide the required detail for significant charges

Failure to explain anomaliesGASB Statement No. 44, requires explanations of atypical trends

and anomalous data that the users of the financial report would not otherwise understand

Trend data clearly shows a significant change between years, but the government has failed to offer an explanation of why this change occurred

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