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Auditor Update

Auditor Update. Healthcare Financial Management Association September 23, 2004 Alderbrook Resort, Union, Washington. Ivan D. Dansereau, CPA QA Director Kelly Collins, CPA Audit Manager . Overview. GAGAS Independence Standard Audit Approach

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Auditor Update

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  1. AuditorUpdate Healthcare Financial Management Association September 23, 2004 Alderbrook Resort, Union, Washington Ivan D. Dansereau, CPA QA Director Kelly Collins, CPA Audit Manager

  2. Overview • GAGAS Independence Standard • Audit Approach • Common Audit Problems & Frauds and How to Avoid Them • Thoughts for the Future

  3. Financial Fraud & Accounting Failures • Dot.Com – Gone • By July 2001: 367 internet companies out of business, and 83,000 employees laid off • Enron: SPEs used in variety of ways to inflate revenues and disguise liabilities • Oct. 2001: $500 mm accounting loss and $1.2 billion reduction in shareholder equity • By Aug. 2002: $63 billion loss of market value • Bursting of Telecom Bubble • Between Jan-July 2002: at least 112 companies required to restate prior earnings • Decline of market value from peak by $2.5 TRILLION

  4. The Story Gets Worse…. • Global Crossing • From $48 billion market cap to January 2002 bankruptcy and $12.4 billion in debt • Adelphia Communications • March 2002: $2.7 billion of hidden debt • June 2002: Overstated cash flows by another $500 mm • WorldCom • July 2002: overstated prior earnings by $3.85 billion • Qwest Communication • July 2002: improperly booked $1.16 billion as profits instead of capital investments

  5. …And Worse…. • Tyco • Criminal indictments • ImClone • Insider trading • General Electric • Undisclosed post-retirement benefits • Xerox Corporation • Misbooked revenue and overstated pretax income • Lucent Technologies • Premature booking of $679 mm in revenue • Kmart • $1.7 billion underreported losses • Merck & Co. • $12.4 billion inflated earnings • Mirant Corporation • $1.1 billion inflated assets

  6. Public Confidence Erodes

  7. Public Confidence Erodes Source: CNN/USA Today/Gallup Poll, July 2002

  8. Sarbanes-Oxley: Seeking a Calm After the Storm • Corporate Conduct • Audit Committees • Hire/fire/compensate/direct the work of the independent auditor • “Independent” directors (Section 301) • CEO & CFO Certify Reports (Section 302) • Management Assessment of Internal Controls (Section 404) • Enhanced Financial Disclosures • Independence of Auditor • Restrictions on non-audit services • Enhanced communication with Audit Committee • Creation of Public Company Accounting Oversight Board

  9. States Consider Adopting SOX • In 2003, 14 states proposed legislation related to incorporating all or some of the provisions of SOX. • In 2004, 6 states proposed such legislation. • Washington state now requires: • Work papers be kept for a period of seven years, • Makes altering, destroying, shredding, mutilating or concealing a record a class B felony or punishable by fine of not more than $500,000 or both, • Board of Accountancy has power to fine CPAs up to $30,000 for dishonesty, fraud, negligence or violation of professional conduct. • Several states have either enacted or continue to press for corporate governance statutes affecting privately-owned business and not-for-profits to establish audit committees with protocols similar to SOX

  10. Government Environment In Washington State • Open government laws, such as: • Open Public Meetings Act • Public Records Retention • Bid Laws • Media Scrutiny • No Profit Motive • Washington State Auditor’s Office

  11. GAO Independence Standard • Auditors should not perform management functions or make management decisions • Auditors should not audit their own work or provide non-audit services in situations where the amounts or services involved are significant/material to the subject matter of the audit

  12. Compliance with GAO Independence Standard • SAO policies require our auditors to: • Review the documentation that CPAs prepare in support of financial statement audits of state and local governments to determine whether professional standards and SAO audit quality expectations are met. • Evaluate the professional reputation of CPAs and obtain representations that CPAs are independent in accordance with Generally Accepted Government Auditing Standards (GAGAS).

  13. State Auditor’s OfficeAudit Approach • Provide four weeks notice prior to conducting audit. • Perform preplanning activities • Entrance conference • Perform audit work • Exit conference • Issue audit report

  14. Audit Scope • Accountability and Legal Compliance • Review of applicable state and local laws and areas of identified high risk. • Federal Single Audit Testing • Beginning fiscal year 2004, must expend more then $500,000 in federal funds to qualify for a single audit. • Financial Statements • Includes evaluation and tests on internal controls over central accounting systems as well as substantive test of material accounts.

  15. Accountability and Legal Compliance • Billings and accounts receivable • Payroll • Disbursements/purchases • Contracts and agreements • Equipment and inventory • Bid requirements

  16. Audit Results Total Exit Mgmt CategoryIssuesItems LettersFindings • Cash receipting 27 22 5 0 • Disbursements 27 26 1 0 • Equipment/Inventory 10 9 1 0 • Contracts 9 3 4 2 • Billings/receivables 8 6 1 1 • Payroll 6 5 1 0 • OPMA 6 5 0 1 • Financial/reporting 6 4 2 0 • Budget/deficit 5 1 4 0 • Bid Laws 4 2 1 1 • Conflict of interest 1 0 1 0 • Investments 1 0 0 1 • Gift of Public Funds 1 0 1 0

  17. Most Common Areas of Abuse No. Loss Type of FraudCasesAmount% • Unlawful investment 1 $432,000 86.2 • Personal use of services 3 44,762 9.0 • Payroll 3 21,540 4.3 • Cash receipts 5 2,754 0.5 • Equipment/inventory 1 100 0.0 Total 13 $ 501,156 100.0 == ======== = ====

  18. How to avoid problems? • Establish Internal Controls • Preventive and/or Detective • Schedule Audits • Timely review and feedback • Utilize Available Resources - www.sao.wa.gov • SAO External Help Desk • Contact Local Audit Managers • Program Manager - Kelly Collins

  19. What to expect in future audits ... • We will review: • Proshare Funds • Vendor payments • Financial Condition • Indications of going concern

  20. “… the man whose probity consists in merely obeying the laws, cannot be truly virtuous or estimable; for he will find many opportunities of doing contemptible and even dishonest acts, which the laws cannot punish.” -Stephanie Félicité Genlis “Laws,” Tales of the Castle (c. 1793)

  21. Washington State Auditor’s Office Ivan D. Dansereau, CPA Director of Quality Assurance 360-902-0375 danserei@sao.wa.gov Kelly Collins, CPA Audit Manager 360-725-5376 collinsk@sao.wa.gov

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