The Future of Governmental Accounting

1. The Future of Governmental Accounting Presented by Corey Arvizu, CPA Heinfeld, Meech & Co. 2006 GFOAz Summer Training Tucson, Arizona August 10-11, 2006

2. GASB – New Statistical Section • Prospective reporting – no requirement to report prior years information • Focus on main “own-source” revenues for revenue capacity section. • Compilation of capital assets and employee schedules should not cause “undue burden” • GASB Q&A on Statement 44 issued – includes enhanced and specific examples • Statistical section not within scope of audit opinion

3. GASB – Net Assets Restricted by Enabling Legislation • Enabling legislation authorizes new revenue that contains an enforceable restriction • Does not include the earmarking of existing revenues • Enforceable means an external party can compel the government to abide by the restriction • Matter of professional judgment • Restrictions must be disclosed in the notes if not evident on the face of the financials

4. GASB – Other Postemployment Benefits • Implementation follows GASB No. 34 format • Phase one governments - fiscal year 2008 • Phase two governments - fiscal year 2009 • Phase three governments - fiscal year 2010 • Perform an actuarial study of postemployment benefits prior to required implementation • Study may be performed up to two years prior to the beginning of the implementation year • Plan and budget for costs of actuarial study • Ensure governing body and other parties are aware of the financial impact of benefits plans

5. GASB – Other Postemployment Benefits

6. GASB – Other Postemployment Benefits • Implicit Rate Subsidy: • Employer provides healthcare benefits to active employees and retirees • Blended premium rate of $240 for all participants • Employer pays 100% of premium for active employees • Employer pays 0% of premium for retirees • Group based (age adjusted) premiums – • $200 for active employees, $400 for retirees • The employer has committed to subsidize the retiree benefit with an indirect cash outlay • $400 actual group rate - $240 paid by retiree = $160 subsidy

7. GASB – Other GASB Projects • Current exposure drafts • Derivatives • Pollution remediation • Sales and pledges of receivables • Fund balance reporting • Intangible Assets • Recognition criteria and measurement attributes • Economic condition reporting – Phase III • New definition of economic condition includes the service capacity component

8. AICPA – Communication of Audit Matters • New terminology for audit findings • Threshold for reporting items has been lowered • Examples of potential material weaknesses include - • The identification of a material AJE by the auditor • The preparation of financial statements by the auditor • Audit report will disclaim on management’s response to audit findings • OMB and Federal agencies may respond to this new SAS with additional guidance • Effective for fiscal year 2007 audits

9. AICPA – Communicating Internal Control Matters

10. AICPA – Risk Assessment Standards • Significant changes to the auditor's responsibility to document risk assessment for an audit • More in-depth understanding of entity • Linkage between risks and audit procedures • Testing of controls is encouraged • Greater emphasis on testing of disclosures • Effective for fiscal year 2008 audits

11. AICPA – Other Audit Standards • Audit Documentation • Draws from previous GAO guidance • Oral explanations do not represent sufficient audit evidence • Dating of auditor’s report • Effective for fiscal year 2007 audits • Other projects • Revisions to compliance auditing • Reviewing quality control standards • Improving auditor’s reports - • What is an audit, what it isn’t

12. OMB - Single Audit Update • National Project to Measure the Quality of Single Audit • May result in additional guidance for both auditors and program coordinators • Data collection form issues • DUNS number will be optional • High-risk auditee if the Single Audit is not submitted within 9 months • Progress towards electronic filing – similar to HUD reporting requirements • HUD completing a complete revision to its audit guide

13. GAO – “Yellow Book” Update • Incorporates many of the AICPA audit standards discussed previously • Material restatements require detail disclosure and reference in the auditor’s report • Effective for fiscal year 2008 audits • GAO plans to revise the “Yellow Book” again in 2008 • Expect to see SOX related guidance

14. Auditor General • Expenditure limitation reports • Recognition of internal activity expenses • HURF reporting and related requirements of allowable expenditures • Performance audits • Investigative audits

15. Audit Committees • Increasing emphasis on the importance of audit committees for governments • SOX “creep” to governments • AICPA “pushing” more responsibility to auditees • Both the AICPA and GFOA have issued guidance on the development of committees • AICPA website has an audit committee toolkit specifically for governmental entities • H&M has begun including the evaluation of audit committees in management letters

16. Audit Committees • Each member should be appointed by the governing body • Should have at least three members • One member should have financial experience • GFOA recommends that only members of the governing body should serve on the audit committee • Should meet at least four times a year

17. Audit Committees Responsibilities and duties include: Oversight function of the internal control system Manage the financial reporting process Participate in the selection of the external auditor as well as monitor their performance Review the results of the audit and evaluate the corrective action proposed by management Serve as the direct report of the internal auditor, if applicable If necessary, initiate and monitor special investigations Facilitate the communication between management, the auditors, and the governing body

18. Procurement Cards • Typical financial institution controls – • Purchase limits – single, weekly/monthly • Block or limit cash transactions • Merchant category blocking • Government controls – • Clear written policies and training on the issuance and use of procurement cards • Use of a “cardholders” agreement • Random audits of procurement card purchases • Timely disciplinary action for misuse of card

19. Ethics Rulings and Interpretations • If an auditor accepts a gift or entertainment from audit client it must be clearly insignificant to avoid an independence violation • If an auditor offers a gift or entertainment to an audit client independence would not be impaired if it is reasonable in the circumstances • Client records must be returned whether or not fees have been paid

20. Peer Review Transparency • Initial push from the state boards of accountancy for licensing purposes • AICPA monitoring development - may implement requirements to satisfy states • New timeframes for review may be considered • Current requirement of the AICPA’s Government Audit Quality Center

21. Thank You! Corey Arvizu (520) 742-2611 ext. 101 carvizu@heinfeldmeech.com