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Auditing in the Public Sector

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Presentation on theme: "Auditing in the Public Sector"— Presentation transcript:

1 Auditing in the Public Sector
A Discussion with the American Association of Accountants Government and Nonprofit Section By Tracy Hensley Audit Partner KPMG LLP March 2, 2012

2 Who am I? Jack High School Senior Kate NYU Senior

3 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

4 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

5 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

6 Auditing in the Public Sector
The Joys The Challenges The Future

7 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

8 The People The Joys: The Challenges:
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

9 Mission Driven The Joys: The Challenges:
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

10 Accounting Issues The Joys: The Challenges:
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

11 Auditing Changes The Joys: The Challenges: Electronic auditing
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!

12 Audit Resources The Joys: The Challenges: The People!
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

13 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

14 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

15 Governing Boards The Joys: Great contacts The Challenges:
Generally, not knowledgeable of accounting and reporting matters Generally not qualified Too often, a rubber stamp

16 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”

17 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

18 Fraud and Abuse Experiences
Falsifying records to meet accounting treatment Altered s 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

19 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

20 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

21 Questions?

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