APRIL 3-6, 2013, LONG BEACH, CA

1. APRIL 3-6, 2013, LONG BEACH, CA Facilities Accounting Audits and Arbitrage APRIL 3-6, 2013, LONG BEACH, CA

2. Audits & Arbitrage • History and Context • And late breaking developments CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 2013

3. First…some history • SAB vs. Department of General Services • Authority to “cause the audits” • SAB Sub-Committee on Audits • Established Audit Working Group Audit Working Group SAB Sub-Committee Audit process discussed Recommendations Presented State Allocation Board Recommendations received Discussion and the recommendations to the SAB Adopt new audit process Required legislation to be carried by SAB members

4. But it became… …Without the spin off to implementation at the OPSC level

5. However… • OPSC did change their audit process back to primarily desk audits • OPSC did clarify some guidance • OPSC did review their audit guide • They did not rewrite the manual or provide a coordinated audit guidance

6. Now… • We are all waiting • If we have a new program, then why spend the time and effort now • Be diligent to assure the efforts of the Working Group are considered in the requirements of the new program

7. Current Legislation • SB 581 (Wyland) • SB 584 (Wyland)

8. Audits & Arbitrage • Audits • District Fiscal • Performance • OPSC CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 2013

9. THE FISCAL AUDIT • How does the Fiscal Audit relate to the Facilities Projects? • Journal Entries • Status of Project – Value in place • Retention held is a liability • Ensure all liabilities are booked at year-end • Internal Controls • High dollar, high risk for fraud, public contract code, and other significant issues • Process must cross departments, adding complexity

10. Proposition 39 Overview • Financial and Performance Audits • A financial audit gives an opinion on the financial statements of the fund where the bond proceeds are deposited – the Building Fund (21) • A performance audit is a broad term, which can encompass many difference areas. Minimally, auditors test bond expenditures and review internal controls.

11. The Performance Audit • Yellow Book states that performance audit objectives range from narrow to very broad in scope. • Article 13 requires an “annual, independent performance audit to ensure that the funds have been expended only on the specific projects listed”

12. Audit Risk Areas & Controls • Key Internal Controls • Purchasing • Cash disbursement cycle • Year-end closing and accruals • Compliance with laws and regulations

13. Audit Risk Areas & Controls • Purchasing Controls • Established written policy for purchasing • Use and approval of purchase orders and contracts • Segregation of duties • Conflict of interest policies with vendors • Compliance with laws and regulations • PCC – bid requirements

14. Audit Risk Areas & Controls • Cash disbursements controls • Expenditures are compared to budget • Invoices matched to P.O. and receiving report or “OK to pay” • Segregation of duties • Supporting documentation approval

15. Audit Risk Areas & Controls • Year-end Closing Controls • Accruals for accounts payable are set up based upon invoices for work done or goods received by June 30 • Open purchase orders are investigated for amounts that should be accrued • Journal Entries have supporting documentation and represent bona fide business transactions. • When recording bond sales or refundings follow CSAM Procedure 705

16. Audit Risk Areas & Controls • Compliance with laws & regulations • Monitoring projects bids • Ensuring bid openings • Board approval of change orders • Change orders > 10% and re-bid requirements

17. Common Audit Findings to Avoid • What are high-risk audit areas? • Bid process lacking • Segregation of duties weak • Purchase order approval not sufficient or timely • Accrual of accounts payable at year-end incomplete • Budget overruns (usually outside of the audit scope but COC and public will demand to know why!)

18. The OPSC Audit • Board Fraud Policy (CSBA 3400) • Flow charts and any related narratives or procedure documents

19. Flow Charts & Procedures • Provide Board Fraud Policy • (CSBA 3400) • Provide flow charts and any related narratives or procedure documents 19

20. The OPSC Audit • Documentation Required • Annual Audit reports for each year of your project • Construction Bid Announcement (DVBE) • Bid Summary for all bids received • Notice to Proceed & Notice of Completion for all contractors

21. The OPSC Audit • Documentation (cont’d) • Evidence of Architect, Engineer and Construction Manager Selection Process • All DIR letters approving LCP • Prop. 39 Bond Oversight Committee Reports • List of LCP expenditures (?)

22. The OPSC Audit • Documentation (cont’d) • Architect Agreement(s) • Main Contractor’s Agreement(s), addendum(s), and final billing(s) • DSA Approved Change Orders • Construction Manager Agreement(s)

23. The OPSC Audit • Documentation (cont’d) • Budget Summary (Form 01 or Form J01) for total general fund expenditures • Transaction Ledger for Routine Restricted Maintenance Account • Chart of Accounts (object code list)

24. The OPSC Audit • Documentation (cont’d) • General Ledger for all facilities funds • Project inception to completion • Deposits • Expenditures • Interest documentation • Force Account Labor – legal statement complied with laws and regulations

25. The OPSC Audit • Documentation (cont’d) • Certificate of Occupancy (?) • Interest reported • Fund 35 Inter-fund transfer list • Invoices & Warrants (~20-25)

26. The OPSC Audit

27. The OPSC Audit • OPSC Verifications • Verify 50-06 to GL Expenditures • Verify contracts to expenditures • Verify eligible expenditures (F&E) • Verify Contract with Initial Invoice • Verify Contract + Changes = Final Invoice

28. The OPSC Audit • OPSC Verifications • Classroom Count or square footage = approval • 50% contracted prior to 50-05 • 50-05 to occupancy date • 50-06 to hard costs (60% rule) • RRMA 3% Verification (for years prior to sweep enabling change)

29. The OPSC Audit

30. The OPSC Audit Helpful Tips: • Read all correspondence from OPSC • Verify References • Regulations vs. Advisories such as Building Blocks • SAB Items • Is it applicable and why? • Do not assume it is correct

31. The OPSC Audit Helpful Tips cont’d: • Request more time to respond • Have a single point of contact • Talk with other districts or your consulting team • Put it in writing • Use confirming emails for all conversations, “My understanding of what we discussed today is…if that is not correct please respond to this email.”

32. The OPSC Audit Helpful Tips cont’d: • Keep documentation organized and easily accessible • Keep track of your item • How long is it taking? • Escalate to a higher level • Stay tuned for any changes…

33. Audits & Arbitrage • Arbitrage • Requirements • Monitoring CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 2013

34. Arbitrage • Defined • Not excluded from tax if an “arbitrage bond” (ref. IRS code section 103(b)(2)) • Earnings on investment proceeds in excess on investment yield (.125% or more) • Exemptions: • Placing the proceeds in a construction fund and spending the funds within two years • Small issuers’ exemption applies when the issue is $5 million or less and total tax-exempt debt is $10 million or less.

35. Arbitrage • Monitored - IRS form 8038T • Methodology - performed at five year intervals, hire an expert! • Don’t be late in submitting any rebates due as heavy penalties apply • Record any unpaid liabilities in the financial statements • Reimbursement of bond funds with OPSC funds • Questions about arbitrage potential and Prop 39 requirements

36. Presenter contact information: • Lettie Boggs • Colbi Technologies, Inc. • 714-505-9544 • leboggs@colbitech.com • Andrea Sullivan • Dolinka Group, LLC • (949) 250-8300 • asullivan@dolinkagroup.com • Christy White • Christy White Accountancy • 619-270-8222 • cwhite@cwacpa.com CASBO ANNUAL CONFERENCE & SCHOOL BUSINESS EXPO 2013