By Tracy Hensley Audit Partner KPMG LLP March 2, 2012

1. Auditing in the Public Sector • By • Tracy Hensley • Audit Partner • KPMG LLP • March 2, 2012 A Discussion with the American Association of Accountants Government and Nonprofit Section

2. Who am I? Jack High School Senior Kate NYU Senior

3. Twenty Five years and Counting • Audit Partner Focusing on Not-for-Profit Organizations • Began with KPMG LLP in 1986 (Peat Marwick Mitchell & Co., Peat Marwick Main & Co., KPMG Peat Marwick) • Banking, real estate, investment services, health care • Advisory – business process outsourcing • Worked at Hilton Hotels Corp. while taking accounting courses through UCLA Extension (where I later taught) • Economics, UCLA

4. Representative Clients I Serve • J Paul Getty Trust • California State University • Los Angeles Opera • Armand Hammer Museum • California Community Foundation • National LambdaRail, Inc./CENIC • California Foundation Land Trust • Los Angeles Community College District • Whittier College • Soka University

5. Background • Group Partner for Audit Practice in Los Angeles and Orange County • Chair of Employer of Choice Initiatives • Partner Champion – National Academy Foundation • Advisory Board Member – Downtown Magnets High School • Treasurer – Los Compadres Youth Volunteer Group • Team Mom – Peninsula High Varsity Basketball

6. Auditing in the Public Sector • The Joys • The Challenges • The Future

7. What is the Public Sector? • Government • States and Cities • Universities/Community Colleges • Education K-12 • Utilities/Transportation • Joint Powers Authorities • Nonprofit Organizations • Colleges, Universities, K-12 Education • Foundations • Voluntary Health and Welfare • Visual and Performing Arts • Research Institutes • Hospitals • Cemeteries • Churches • Other

8. The People • The Joys: • We get to work with people who are passionate about their mission • We get to meet very interesting people • Those who deal with significant societal issues • Generally, kind and appreciative in their dealings • The Challenges: • Don’t always keep up to date on technical matters or recognize their responsibilities • Don’t bear same risks as those in public companies

9. Mission Driven • The Joys: • We get to play a small part in making the world a better place • Surrounded by good deeds and stories • Not profit oriented • The Challenges: • Working beside them and helping them find a way to both accomplish their missions, while also assisting them in complying with accounting, reporting, grant, and donor requirements • Current accounting doesn’t always reflect their view of intent of transactions

10. Accounting Issues • The Joys: • Issues generally pretty straightforward • The Challenges: • Nonprofits have been exempted from very few accounting and auditing standards • No resources or inclination to make accounting a priority • Complex issues • Fair Value Accounting and Disclosures • Investments • Contributions

11. Auditing Changes • The Joys: • Electronic auditing • The Challenges: • Impact of SOX on what we can and cannot do is biggest challenge and confusion to our nonprofit clients • Can not be an entity’s internal control • Can not provide accounting treatment without the client providing own analysis • Can’t provide many advisory services • We can’t work for free!

12. Audit Resources • The Joys: • The People! • The Challenges: • Hard to attract people • Not glamorous and most don’t believe it will lead to a prosperous career • Not as profitable as other industries, so less attention paid, more difficult to get “good” people on engagements • Knowledge doesn’t easily translate to other industries • Compliance focused • Need to know many industries within this sector • Need to know both FASB and GASB

13. Life as a Public Accountant • The Joys: • The People • Exposure to a wide variety of industries, issues and working styles (both clients and colleagues) • Best accounting education available • The Challenges: • New rules every day • Long hours • Working for inexperienced supervisors • Quality likely higher in smaller offices where fewer people are recruited each year; larger offices are oftentimes an extension of college • Not prepared

14. To Be Better Prepared • Writing, Writing, Writing - To be able to write concisely and clearly and to be able to persuade and motivate in written communications • Interpersonal Skills – can carry an auditor a long way • Research - To know where to find the answers and to propose a solution • Analytical Skills - Key to success in public accounting is to be able to identify an issue or problem • Technical Accounting Skills - Ability to grasp concepts; don’t need to know the answer • Ethics

15. Governing Boards • The Joys: • Great contacts • The Challenges: • Generally, not knowledgeable of accounting and reporting matters • Generally not qualified • Too often, a rubber stamp

16. Receipt of Federal and State Awards • Not prepared for the cost of compliance, period • Little analysis is done as to whether the entity is better off with the grant funds and related “strings”

17. Fraud • Two types: • Financial reporting • Misappropriation • Pressure from internal sources (or bank) to perform as expected • Occurs with opportunity, i.e., lack of controls • Illness, substance abuse, gambling are often the impetus • People you don’t trust rarely steal from you • Doesn’t occur that often, but definitely exists

18. Fraud and Abuse Experiences • Falsifying records to meet accounting treatment • Altered emails and lifted signatures in an attempt to justify recording contributions as unrestricted vs temporarily restricted • Payroll changes without authorization • Personal loans • Pay rate changes • Writing checks to oneself and altering documentation • Borrowing money and repaying it without approval • Private inurement of benefits – out in the open

19. The Future • OMB Circular A-133 Single Audits • Proposed Guidance entitled “Reform of Federal Policies Relating to Grants and Cooperative Agreements; cost principles and administrative requirements (including the Single Audit Act)” • Increasing the audit threshold to $1 million • Creating a focused version for entities that expend between $1 million and $3 million • Maintaining the full Single Audit for entities that expend greater than $5 million, but concentrate the compliance requirements • Strengthening the follow-up by federal agencies • Consolidating the cost and administrative principles • Using flat rates instead of negotiated rates for indirect costs • Exploring alternatives to the effort reporting requirements

20. The Future • Financial Accounting and Reporting • Financial Accounting Foundation created the Blue-Ribbon Panel to address how U.S. accounting standards can better serve users of private-company financial statements. • Recommended that accounting standards for private companies should, at least in the near term, be based on existing U.S. GAAP but include certain exceptions and modifications for private companies • Now being separately addressed for not for profit organizations

21. Questions?