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Agency Risk Management & Internal Control Standards (ARMICS) Commonwealth of Virginia Fiscal Fundamentals.

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Presentation on theme: "Agency Risk Management & Internal Control Standards (ARMICS) Commonwealth of Virginia Fiscal Fundamentals."— Presentation transcript:

1 Agency Risk Management & Internal Control Standards (ARMICS) Commonwealth of Virginia Fiscal Fundamentals

2 2 Department of Accounts Commonwealth of Virginia HISTORY OF ACCOUNTING IN VA 1980 Through Through Through Through Through Present 2002 Through Present

3 3 Department of Accounts Commonwealth of Virginia REVENUES AND EXPENSES Fortune 36 Company Fortune 36 Company 100,000 Employees 100,000 Employees Budgeted Revenues and Expenditures Approximately $37 Billion Each Year of the Biennium Budgeted Revenues and Expenditures Approximately $37 Billion Each Year of the Biennium

4 4 Department of Accounts Commonwealth of Virginia DECENTRALIZED ACCOUNTING 230 Agencies 230 Agencies 15 Major Four Year Colleges and Universities 15 Major Four Year Colleges and Universities 23 Community Colleges 23 Community Colleges 22 Other Component Units 22 Other Component Units

5 5 Department of Accounts Commonwealth of Virginia DECENTRALIZED ACCOUNTING Legacy System CARS 1978 Legacy System CARS 1978 Cash Basis Cash Basis Updated CARS II 1986 Updated CARS II 1986 No Real Change No Real Change Cobol Programming Cobol Programming EA Project EA Project

6 6 Department of Accounts Commonwealth of Virginia CAFR REPORTING Comptroller Directives Comptroller Directives Start With CARS Start With CARS Gather Modified Accruals and Full Accruals Gather Modified Accruals and Full Accruals Word and Excel Word and Excel

7 7 Department of Accounts Commonwealth of Virginia BEST MANAGED STATE Triple A Triple Bond Rating Triple A Triple Bond Rating Unqualified Opinion Unqualified Opinion Certificate of Excellence in Financial Reporting Certificate of Excellence in Financial Reporting

8 8 Department of Accounts Commonwealth of Virginia VIRGINIA COMPTROLLER RESPONSIBILITIES Code of Virginia §§ and Code of Virginia §§ and COMPTROLLER RESPONSIBLE FOR ACCOUNTING AND FINANCIAL REPORTING STATEWIDE COMPTROLLER RESPONSIBLE FOR ACCOUNTING AND FINANCIAL REPORTING STATEWIDE Comptroller Is Responsible For Internal Control Statewide Comptroller Is Responsible For Internal Control Statewide

9 The Sarbanes-Oxley Act 9 Department of Accounts Commonwealth of Virginia Agency Risk Management and Internal Control Standards

10 10 Department of Accounts Commonwealth of Virginia What is SOX? An act to protect investors by improving the accuracy and reliability of corporate disclosures required by securities laws, and for other purposes.

11 11 Department of Accounts Commonwealth of Virginia Why SOX? Scandals, including: WorldCom – Bernie Ebbers (CEO, 63), 25 years prison – $11 billion lost WorldCom – Bernie Ebbers (CEO, 63), 25 years prison – $11 billion lost Dynegy – Jamie Olis (VP Finance, CPA, attorney, 38), 24+ years prison – $105 million lost by 13,000 members in UC Retirement Plan alone Dynegy – Jamie Olis (VP Finance, CPA, attorney, 38), 24+ years prison – $105 million lost by 13,000 members in UC Retirement Plan alone Adelphia – John Rigas (founder, 80) 15 years prison, Timothy Rigas (CFO, 48) 20 years – $100 million stolen Adelphia – John Rigas (founder, 80) 15 years prison, Timothy Rigas (CFO, 48) 20 years – $100 million stolen Tyco – Dennis Kozlowski (CEO, 58) and Mark Swartz (CFO, 44) convicted – 8-1/3 to 25 years prison – pair must pay $134 million in restitution, $105 million in fines – looted Tyco for $547 million (NY state courts) Tyco – Dennis Kozlowski (CEO, 58) and Mark Swartz (CFO, 44) convicted – 8-1/3 to 25 years prison – pair must pay $134 million in restitution, $105 million in fines – looted Tyco for $547 million (NY state courts) Enron – Ken Lay (CEO, 63) – 4,000 lost jobs & pensions, creditors lost $65 billion – trial set for January 2006 Enron – Ken Lay (CEO, 63) – 4,000 lost jobs & pensions, creditors lost $65 billion – trial set for January 2006

12 12 Department of Accounts Commonwealth of Virginia Scandals? So what? Like hundreds of pension funds throughout the country, VRS has suffered losses from investments in Enron and WorldCom … VRS provides benefits to more than 104,000 retirees and has 310,000 active members. Virginian-Pilot (August 22, 2002)

13 13 Department of Accounts Commonwealth of Virginia VRS losses? WorldCom $50 million. WorldCom $50 million. Enron $60 million. Enron $60 million. Those losses represent only a sliver of the billions in value erased from VRS by the two-year decline in the stock market. Jeff Shapiro, Richmond Times-Dispatch (July 3, 2002)

14 14 Department of Accounts Commonwealth of Virginia Does SOX Apply to States? Not yet. Not yet. Circular A-123 was revised Dec 2004 to mandate SOX-like standards for Federal agencies. Circular A-123 was revised Dec 2004 to mandate SOX-like standards for Federal agencies. The Federal government is expected to apply A-123 to states in the future. The Federal government is expected to apply A-123 to states in the future. SOX and ARMICS address parallel issues, and both stem from COSO standards. SOX and ARMICS address parallel issues, and both stem from COSO standards.

15 15 Department of Accounts Commonwealth of Virginia A-123 Federal Requirements Federal Managers must take systematic and proactive Measures to: Federal Managers must take systematic and proactive Measures to: Implement Cost Effective I/C Implement Cost Effective I/C Assess Adequacy of I/C In Programs and Operations Assess Adequacy of I/C In Programs and Operations Separately Assess & Document I/C Over Financial Reporting Separately Assess & Document I/C Over Financial Reporting Identify Improvements, Take Corrective Action & Report Annually on I/C Identify Improvements, Take Corrective Action & Report Annually on I/C

16 16 Department of Accounts Commonwealth of Virginia NEW SAS NEW GROUP OF SAS 102 THRU 112 NEW GROUP OF SAS 102 THRU 112 SAS 112 SAS 112 AUDITOR REQUIREMENTS AUDITOR REQUIREMENTS MATERIAL WEAKNESSES IN IC MATERIAL WEAKNESSES IN IC AUDIT OPINION AUDIT OPINION BOND RATING BOND RATING

17 17 Department of Accounts Commonwealth of Virginia SUMMARY SO FAR Antiquated General Ledger System Antiquated General Ledger System Loss of Accounting Staff Within State Agencies Loss of Accounting Staff Within State Agencies New Suite of SAS New Suite of SAS More Emphasis On Internal Control More Emphasis On Internal Control Valuable Reputation To Protect Valuable Reputation To Protect Perfect Storm Perfect Storm

18 18 Department of Accounts Commonwealth of Virginia ARMICS 122 Page Document 122 Page Document Comptrollers Directive Comptrollers Directive Force of Law Force of Law Based on the 1992 COSO Standards Based on the 1992 COSO Standards

19 19 Department of Accounts Commonwealth of Virginia MODEL SIMPLER Simpler model to implement (stepping stone to ERM) Simpler model to implement (stepping stone to ERM) Based on COSO 1992 Internal Control Integrated Framework Based on COSO 1992 Internal Control Integrated Framework Based on the internal control model with some risk management concepts retained Based on the internal control model with some risk management concepts retained Such as tone at the top Such as tone at the top Governs fiscal activities only Governs fiscal activities only

20 20 Department of Accounts Commonwealth of Virginia What is COSO? Committee Of Sponsoring Organizations of the Treadway Commission (formed in 1985)

21 21 Department of Accounts Commonwealth of Virginia COSO Defines Internal Control Internal control is a process, effected by an entitys board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: Internal control is a process, effected by an entitys board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: Effective and efficient operations Effective and efficient operations Reliable financial reporting Reliable financial reporting Compliance with laws and regulations Compliance with laws and regulations

22 22 Department of Accounts Commonwealth of Virginia Responsibility for Internal Control? Governing Boards Governing Boards Executive Management (Agency Heads) Executive Management (Agency Heads) Senior and Line Management (including CFOs and Fiscal Officers) Senior and Line Management (including CFOs and Fiscal Officers) Supervisors and Staff Supervisors and Staff EVERYONE IS RESPONSIBLE! EVERYONE IS RESPONSIBLE!

23 23 Department of Accounts Commonwealth of Virginia ARMICS INTERNAL CONTROL DEFINITION Ongoing Process Led by Agency Head To Design and Provide Reasonable Assurance that these types of Objectives Will Be Achieved: Ongoing Process Led by Agency Head To Design and Provide Reasonable Assurance that these types of Objectives Will Be Achieved: Effective and Efficient Operations Effective and Efficient Operations Reliable Financial Reporting Reliable Financial Reporting Compliance With Laws and Regulations Compliance With Laws and Regulations Stewardship and Safeguarding of Assets Stewardship and Safeguarding of Assets

24 24 Department of Accounts Commonwealth of Virginia First COSO Internal Control Model Monitoring Control Activities Risk Assessment Information and Communication Control Environment

25 25 Department of Accounts Commonwealth of Virginia Control Environment The foundation on which everything rests: The tone of the agency The tone of the agency Managements philosophy Managements philosophy Integrity and ethics Integrity and ethics Commitment to competence Commitment to competence Accountability Accountability Policies and procedures Policies and procedures

26 26 Department of Accounts Commonwealth of Virginia ARMICS Basis For ARMICS Covered In Pages 3-7 of the Document Basis For ARMICS Covered In Pages 3-7 of the Document Background Background Vision Statement Vision Statement Long-Term Objective Long-Term Objective

27 27 Department of Accounts Commonwealth of Virginia ARMICS Internal Control Basics Covered in Pages 8-12 Internal Control Basics Covered in Pages 8-12 Glossary Of Terms Glossary Of Terms Best Practices Best Practices Control Activities Control Activities Control Environment and Risk Assessment Control Environment and Risk Assessment Information and Communication Information and Communication Monitoring Monitoring

28 28 Department of Accounts Commonwealth of Virginia ARMICS Pages Address the Heart of the ARMICS Standards Control Environment is extremely Important and has major impact –positive or negative on internal Control Top management Attitude

29 29 Department of Accounts Commonwealth of Virginia ARMICS Important Concepts Important Concepts Reasonable Risks Reasonable Risks Integrity and Ethical Values Integrity and Ethical Values

30 30 Department of Accounts Commonwealth of Virginia ARMICS The ARMICS Document addresses the Internal Control Assessment on page 36 and provides an Internal Control Assessment Guide As Appendix A on Pages Appendix A is further broken down into Three Reporting Stages The ARMICS Document addresses the Internal Control Assessment on page 36 and provides an Internal Control Assessment Guide As Appendix A on Pages Appendix A is further broken down into Three Reporting Stages

31 31 Department of Accounts Commonwealth of Virginia ARMICS Stage 1 (pages 40-59) Agency Level Assessment Stage 1 (pages 40-59) Agency Level Assessment Stage 2 (pages 60-67) Process or Transaction Level Assessment Stage 2 (pages 60-67) Process or Transaction Level Assessment Appendix A-1 (pages ) Process or Transaction Level Control Questionnaires Appendix A-1 (pages ) Process or Transaction Level Control Questionnaires Appendix A-2 (pages ) Process Control Assessment Example Appendix A-2 (pages ) Process Control Assessment Example Stage 3 simply list the requirements for an effective corrective action plan on page 68. Stage 3 simply list the requirements for an effective corrective action plan on page 68.

32 32 Department of Accounts Commonwealth of Virginia ARMICS DELIVERABLES Certification by September 30, 2007 That the Agency Level Internal Control Assessment Has Been Completed Certification by September 30, 2007 That the Agency Level Internal Control Assessment Has Been Completed Certification by March 31, 2008 That the Process and Transaction Level Has Been Completed Certification by March 31, 2008 That the Process and Transaction Level Has Been Completed Certification by June 30, 2008 That Corrective Action Plans Have Been Completed Certification by June 30, 2008 That Corrective Action Plans Have Been Completed

33 33 Department of Accounts Commonwealth of Virginia AICCO Accounting and Internal Compliance Oversight Unit Accounting and Internal Compliance Oversight Unit Mission: To Evaluate and Report On Agency Financial Accountability, Compliance and Internal Control With The Goal of Assisting Agencies In Meeting Their Responsibilities For Providing Reliable And Accurate Financial Information, For Protecting Commonwealth Resources and For Supporting And Enhancing The Recognition Of Virginia As The Best Managed State Mission: To Evaluate and Report On Agency Financial Accountability, Compliance and Internal Control With The Goal of Assisting Agencies In Meeting Their Responsibilities For Providing Reliable And Accurate Financial Information, For Protecting Commonwealth Resources and For Supporting And Enhancing The Recognition Of Virginia As The Best Managed State

34 34 Department of Accounts Commonwealth of Virginia AICCO Objectives Objectives To Improve Financial Accounting and Reporting In The Commonwealth of VA To Improve Financial Accounting and Reporting In The Commonwealth of VA To Improve the Internal Control Structure Over General Ledger Accounting, Financial Reporting, Safe Guarding of Assets, and Compliance with Laws and Regulations To Improve the Internal Control Structure Over General Ledger Accounting, Financial Reporting, Safe Guarding of Assets, and Compliance with Laws and Regulations To Provide Training and Assistance to all State Agencies With the Goal of Helping State Agencies Meet Their General Accounting and Financial Reporting Responsibilities To Provide Training and Assistance to all State Agencies With the Goal of Helping State Agencies Meet Their General Accounting and Financial Reporting Responsibilities To Provide Services That will help the Commonwealth Retain its Triple A Triple Bond Rating and Remain the Best Managed State in The Union. To Provide Services That will help the Commonwealth Retain its Triple A Triple Bond Rating and Remain the Best Managed State in The Union.

35 35 Department of Accounts Commonwealth of Virginia AICCO UNIT MAKEUP Director and Two Assistant Directors Director and Two Assistant Directors 5 ARMICS Quality Assurance Analysts 5 ARMICS Quality Assurance Analysts 6 Financial Reporting Quality Assurance Analysts 6 Financial Reporting Quality Assurance Analysts 2 General Ledger Reconciliation Quality Assurance Analysts 2 General Ledger Reconciliation Quality Assurance Analysts 2 Training Specialists 2 Training Specialists 2 Decentralized Review Specialists 2 Decentralized Review Specialists

36 36 Department of Accounts Commonwealth of Virginia Funding Business Case Business Case Secretary of Finance, Chief of Staff and The Governor, and the General Assembly Secretary of Finance, Chief of Staff and The Governor, and the General Assembly 14 New Positions 14 New Positions Additional General Funds Approximately $2 Million Additional General Funds Approximately $2 Million

37 37 Department of Accounts Commonwealth of Virginia Hiring Strategy Recruit at Colleges and Universities Recruit at Colleges and Universities Advertise Advertise Mix of Experienced and Inexperienced Mix of Experienced and Inexperienced Training In-House Training In-House

38 38 Department of Accounts Commonwealth of Virginia Work-plan Risk Based Approach Risk Based Approach Standard Programs Standard Programs 3 yr. Cycle 3 yr. Cycle

39 39 Department of Accounts Commonwealth of Virginia References The Comptrollers Directive and Agency Risk Management & Internal Control Standards are available from _main._main.cfm _main.

40 40 Department of Accounts Commonwealth of Virginia Contacts Ron Necessary – voice – facsimile


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