GOVERNMENTAL ACCOUNTING, AUDITING AND FINANCIAL REPORTING

1. GOVERNMENTAL ACCOUNTING, AUDITING AND FINANCIAL REPORTING Larry Finney JUNE, 2014

2. OVERVIEW • Introduction • Accounting Principles Generally Accepted in the USA (GAAP)-governmental • Reporting model • Financial Reporting Entities • Annual financial reporting • Basic and Government-wide Financial Statements • CAFR • Compliance

3. OVERVIEW • Financial Audits • Financial Audit Standards • External Financial Audits • The Single Audit • The Auditor’s Reports • Procurement “audit” • Management letter/communication to those charged with governance

4. INTRODUCTION • Types of governments (2012 data-not including territories) • 1 federal • 50 states • 3,031 counties • 12,880 school districts • 35,879 municipalities • 38,266 special purpose districts • 90,107 in total

5. INTRODUCTION • Types of governments in SC (2012 data) • 1 state • 46 counties • 83 school districts • 270 municipalities • 279 special purpose districts • 679 in total

6. INTRODUCTION • Government employment (2012 data)

7. INTRODUCTION • Government finance (2005-06 in thousands)

8. INTRODUCTION • Key concepts • Risk versus reward • Reliable-timeliness, accuracy, completeness, propriety, materiality • Financial information analysis decisions/actions

9. INTRODUCTION • Key concepts • Event/decision = financial consequence

10. INTRODUCTION • Key concepts • Fiscal Accountability-”responsibility of governments to justify that their actions in the current period have complied with public decisions concerning the raising and spending of money in the short term (one year or one budget cycle).”

11. INTRODUCTION • Key concepts • Operational Accountability-”governments responsibility to report the extent to which they have met their operational objectives efficiently and effectively, using all resources available for that purpose, and whether they can continue to meet their objectives for the foreseeable future.”

12. INTRODUCTION • Goal of any organization • Maximize value to stakeholders • Governments-provide required services to users as efficiently and effectively as possible in order to minimize resources needed • Private sector-increase value of stock or business for long-term • Who are stakeholders in government?

13. THE BEGINNING • What was the profession of the man who first developed double-entry bookkeeping?

14. THE BEGINNING • Accounting Principles Generally Accepted in the USA (GAAP) • Minimum standards • MFOA…GFOA • MFOA sponsored the NCMA…NCGA…GASB • FAF oversees FASB and GASB • Independent

15. GAAP • GASB • 7 members • Only chairperson is full-time • Aided by GASAC (Governmental Accounting Standards Advisory Council) • Consultative body of many groups • GFOA, AICPA…. • Only takes majority vote to establish standards

16. GAAP • GASB • Jurisdiction over state and local governments and other entities that meet at least one of: • Officers are popularly elected • Controlling majority of members is appointed by officials of at least one state or local government • Government can dissolve the entity and net assets go back to that government • Has power to enact and enforce a tax levy • Has ability to directly issue federally tax exempt debt

17. GAAP • Hierarchy-Established by SAS 69

18. FUND ACCOUNTING • Fund Accounting and Reporting • fiscal responsibility • Government-wide financial reporting • operational accountability

19. FUND ACCOUNTING • Funds • fiscal and accounting “entity” • self-balancing set of accounts • records cash and other financial resources, related liabilities and equities/balances • and changes (revenues and expenditures) • segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions or limitations

20. FUND ACCOUNTING • Funds • How many funds can you have? • Only minimum number necessary • Guidance • Required by law • Sound financial administration • Accounting fund versus financial reporting fund

21. FUND ACCOUNTING • Funds • Governmental • General • Special revenue • Debt service • Capital projects • Permanent • Proprietary • Enterprise • Internal service • Fiduciary • Pension (and other employee benefit) trust • Investment trust • Private-purpose trust • Agency

22. FUND ACCOUNTING • Measurement focus-describes the types of transactions and events that are reported in a fund’s operating statement • Economic resources-what transactions or events have increased or decreased the fund’s total economic resources during the period (change in net assets)? • Current financial resources-what transactions or events have increased or decreased the resources available for spending in the near future (may or may not change fund balance)?

23. FUND ACCOUNTING • Measurement focus • Governmental funds-current financial resources • Proprietary and fiduciary funds-economic resources • Agency funds-no accounting for operations, so no measurement focus

24. FUND ACCOUNTING • Measurement focus • Examples of differences • Debt issuance • Debt principal payments • Capital asset acquisition or construction • Many others • Note: the long-term net effect is the same!

25. FUND ACCOUNTING • Basis of accounting-the timing of recognition of transactions and events • Tied to a fund’s measurement focus • Full accrual-recognize increases and decreases in economic resources as soon as the underlying transaction or event occurs • Revenues recognized as soon as they are earned • Expenses recognized as soon as a liability is incurred • The timing of the cash flows does not matter

26. FUND ACCOUNTING • Basis of accounting-the timing of recognition of transactions and events • Tied to a fund’s measurement focus • Modified accrual-recognize increases and decreases in financial resources only to the extent that they reflect near-term inflows or outflows of cash • Revenues recognized as soon as they are collectible to pay liabilities of the current period; when they are available to finance expenditures of the current period • Expenditures recognized when they are to be liquidated in the current period with available financial resources • The timing of the cash flows does matter

27. FUND ACCOUNTING • Basis of accounting-the timing of recognition of transactions and events • Governmental funds-modified accrual • Proprietary and fiduciary funds-full accrual

28. FUND ACCOUNTING • Basis of accounting-the timing of recognition of transactions and events • Examples of differences • Revenue recognition • Compensated absences • Long-term liabilities • Many others • Note: the long-term net effect is the same!

29. FUND ACCOUNTING • What is considered “available” or “collectible within the current period or soon enough thereafter to be used pay liabilities of the current period”? • There is some discretion, but it should be consistent year to year and reasonable • Should not be too rigid that it distorts normal revenue patterns • Usually see either 30 or 60 days

30. FINANCIAL REPORTING ENTITY • Primary government • State and general-purpose local governments (county, municipality, and most school districts)

31. FINANCIAL REPORTING ENTITY • Primary government • Special purpose if: • Elected governing body • Separate legal status • Fiscal independence • Budget • Tax levy or setting of rates or charges • Issuance of debt

32. FINANCIAL REPORTING ENTITY • Component unit • Legal separate entity that a primary government must include in its financial statements to be GAAP compliant • Entity can only be component unit of one government • Three tests-any one of following: • Board appointment • Fiscal dependence • Nature and significance of relationship

33. FINANCIAL REPORTING ENTITY • Component unit • Board appointment-all three criteria • Substance over form • Appointed members must exercise operational control (at least voting majority) • Any one of following: • Primary government impose its will • Financial benefit through access to assets • Financial burden-finance deficits or debt obligation

34. FINANCIAL REPORTING ENTITY • Component unit • Fiscal dependence • Primary government board may arbitrarily override the financial decisions of the other entity regarding its • Budget • Tax levy or setting of rates or charges • Issuance of bonded debt

35. Financial Reporting Entity-GASB #61 Fiscal Dependency • GASB #61: • Fiscal dependency based on the current guidance PLUS: • Ongoing relationship of financial benefit or burden also necessary: • PG entitled to or can otherwise access resources. • PG obligated to finance deficits or provide financial support. • PG obligated in some manner for debt.

36. FINANCIAL REPORTING ENTITY • Component unit • Nature/significance of relationship • Omission of the second entity’s financial statements from the primary government’s would render the primary government’s financial statements misleading • GASB #61 clarified that the nature/significance of the relationship is meant to be financial in nature

37. FINANCIAL REPORTING ENTITY • Component unit • Blended vs. discretely presented • Blended criteria: • Shared governing body • Substantially the same; voting majority of component unit makes up voting majority of primary government • additionally requires that (1) the primary government and the component unit have a financial benefit or burden relationship or (2) management (below the level of the elected officials) of the primary government have operational responsibility for the activities of the component unit

38. FINANCIAL REPORTING ENTITY • Component unit • Blended criteria: • An obligation (other than secondary) to repay a component unit’s debt entirely, or almost entirely, from a resource stream of the primary government. • Exclusive or almost exclusive benefit to the primary government • Provides services/other almost entirely to primary gov’t • Otherwise should be discretely presented

39. FINANCIAL REPORTING ENTITY • Component unit • Presentation in financial statements • If separately issued financials, explain how to obtain in primary government notes • Blended • Funds become as those of primary gov’t • General fund of component unit?

40. Financial Reporting Entity-GASB #61 Blending for Single-Column BT Activities • Two options: • Consolidate the component unit data into a single column presentation, while including combining information in the notes to the financial statements. • Display the blended component unit as a separate column and then provide a combined primary government total column.

41. FINANCIAL REPORTING ENTITY • Component unit-Presentation in financial statements • Discretely presented-one of three ways • Separate columns for major individual component units with aggregate column for nonmajor • One single column for component units on government wide statements and detail in combining section • Condensed financial statements included in notes of primary government

42. GOVERNMENT FINANCIAL REPORTING • Financial statements • Comprehensive annual financial report (CAFR) • Popular annual financial reports

43. GOVERNMENT FINANCIAL REPORTING STANDARD FINANCIAL STATEMENTS

44. GOVERNMENT FINANCIAL REPORTING • CAFR • Add following to standard financial statements • Introductory section • Statistical section • CAFR checklist

45. GOVERNMENT FINANCIAL REPORTING • Popular Reports • Voluntary • Simple • Highlights • Creative • If want to include auditor opinion, it must be different opinion

46. Combining and individual fund statements and schedules • The first level-most detailed • All fund types and all funds • These are the financial statement and schedule categories to which most of the trial balance accounts are coded • Governmental funds are modified accrual • Proprietary and fiduciary funds are full accrual

47. Combining and individual fund statements and schedules • Balance sheets/Statements of net assets • Order of liquidity • Unrestricted versus restricted • Revenue and expenditure/expense statements • Operating versus non-operating • Other financing sources • Contributions • Extraordinary and special items

48. Combining and individual fund statements and schedules • Revenue and expenditure/expense statements • Extraordinary Items are transactions or other events that are both unusual in nature and infrequent in occurrence. • Special Items are significant transactions or other events within the control of management that are either unusual in nature or infrequent in occurrence

49. Combining and individual fund statements and schedules • Budgetary comparison schedules for all other governmental funds with legally adopted annual budgets (other than the general fund and major special revenue funds) • These statements and schedules ultimately “roll up” to the basic financial statements (so make sure there are totals that tie to the BFS)

50. THE BASIC FINANCIAL STATEMENTS • Basic fund financial statements • This is where Boards/Councils and Commissions generally pay the most attention • Still modified accrual for governmental and full accrual for proprietary and fiduciary • Separate statement for governmental versus proprietary versus fiduciary • Individual columns for major funds • Non-major are combined into one column • Internal service funds are combined into one column