1 by tracy hensley audit partner kpmg llp march 2, 2012 auditing in the public sector a discussion...

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ByTracy HensleyAudit PartnerKPMG LLP

March 2, 2012

Auditing in the Public Sector

A Discussion with the American Association of Accountants

Government and Nonprofit Section

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Who am I?

Jack High School Senior

Kate NYU Senior

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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

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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

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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

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Auditing in the Public Sector

• The Joys

• The Challenges

• The Future

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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

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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

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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

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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

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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!

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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

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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

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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

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Governing Boards

The Joys:

• Great contacts

The Challenges:

• Generally, not knowledgeable of accounting and reporting matters

• Generally not qualified

• Too often, a rubber stamp

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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”

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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

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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

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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

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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

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Questions?