1. LOCAL GOVERNMENT ACCOUNTABILITY FGFOA Annual Conference May 8, 2012

2. Topics for Discussion * Recent Audits * Laws and Rules Update * New Financial Indicators * Suggestions for Improvement Project * Review Questions Most Missed in Desk Reviews * Findings in Local Government Audits 2

3. Recent Audits 3 * Local Government Audits  Required by law  AG’s own authority  Citizen petition – municipalities  Request by local government  Direction by Legislative Auditing Committee * Released Audits  2012-081 – Assessment, Collection, and Remittance of Court-related Fines, Fees, and Other Charges, and Selected Reporting of Court-related Activities by Clerks of the Circuit Courts – AG’s own authority  2012-169– Islamorada, Village of Islands Special Operational Audit – Citizen petition

4. Recent Audits 4 * Audits in Progress  Follow-up on operational audit of Citrus County Hospital Board/Foundation – required by law  City of Lake Worth Sub-regional Sewer System Special Operational Audit – LG request  Northwest Florida Water Management District Operational Audit – required by law  St. Johns River Water Management District Operational Audit – required by law  South Florida Water Management District Audit – required by law  City of Hollywood and Hollywood CRA Special Operational Audit – LAC directed

5. Laws and Rules 5

6. Chapter 2011-144, Laws of Florida 6 * Local Government Accountability  Changed time frame to submit Section 218.39, FS, audit reports to AG from 12 months to 9 months. Effective for 2010-11 FY audits!  As of 4/8/12, we have received 486 2010-11 FY audit reports (about 35%)  All Annual Financial Reports submitted to DFS via LOGER are due no later than 9 months after the end of the fiscal year. (Section 218.32(1)(e), FS) o Same deadline for unaudited entities

7. Chapter 2011-144, Laws of Florida 7 * Local Government Accountability  Requires AG to notify Legislative Auditing Committee (LAC) of any audit report that indicates an entity has failed to take full corrective action in response to a recommendation that was included in the two preceding audit reports. o LAC may direct the governing body to provide a written statement explaining why full corrective action has not been taken or describing the corrective action to be taken and when it will occur. o If LAC determines that written statement is not sufficient, it may require the governing body’s chair or designee to appear before it. o If LAC determines that the entity failed to take action for which there is no justifiable reason for not taking action, or failed to comply with LAC requests, it may act pursuant to Section 11.40(2), FS.

8. Chapter 2011-144, Laws of Florida 8 * Local Government Accountability  Revised Section 218.503(1)(e), FS, to be consistent with GASB 54.  Budgets must include expected expenditures in a similar level of detail required by the annual financial reports - object code level. (Sections 129.01(1); 166.242(2); 189.418(3), FS)  All original budgets and certain amendments must be posted to the government’s Web site. (Sections 129.03 and.06; 166.241; 189.418, FS)

9. AG Rule Changes – 2010-11 FY Audits 9  Changed time frame for submitting audit report.  Added requirement for auditors to include finding reference number in referring to uncorrected prior audit findings, and identify those reported for 3 rd consecutive audit.  Added requirement for Schedule of Prior Audit Findings for Florida Single Audit Act to include fiscal year in which finding originated.  Auditors of water management districts must indicate whether the district is in compliance with transparency requirements.

10. 2012 Legislation 10

11. Local Government Financial Reporting System Performance Audit Report No. 2011-196 11 Financial Emergencies Act – Part V of Chapter 218, FS  Overview of Act: o Section 218.503(1), FS - Specified conditions (shortened version): a)Failure to pay, due to lack of funds, short-term loans/bond or loan payments. b)Failure to pay, due to lack of funds, uncontested claims from creditors within 90 days. c)Failure to transfer, due to lack of funds: (1) withholding taxes of employees or (2) employer and employee contributions for Federal social security or retirement/benefit plan for employees.

12. Local Government Financial Reporting System Performance Audit Report No. 2011-196 12 Financial Emergencies Act – Part V of Chapter 218, FS  Overview of Act: o Section 218.503(1), FS - Specified conditions (shortened version): d)Failure to pay for one pay period, due to lack of funds, wages and salaries owed to employees or retirement benefits owed to former employees. e)A fund balance deficit in total or for that portion of a fund balance not classified as restricted, committed, or nonspendable, or a total or unrestricted net assets deficit, as reported on the fund financial statements of entities required to report under governmental financial reporting standards or on the basic financial statements of entities required to report under not-for-profit financial reporting standards, for which sufficient resources of the local governmental entity, charter school, charter technical career center, or district school board, as reported on the fund financial statements, are not available to cover the deficit. (as revised by 2011 legislation)

13. Local Government Financial Reporting System Performance Audit Report No. 2011-196 13 Financial Emergencies Act – Part V of Chapter 218, FS  Condition specified in Section 218.503(1)(e), FS, has not been an effective indicator of a “financial emergency.” o 91 percent of local governments and 92 percent of charter schools reported as meeting a condition specified in Section 218.503(1), FS, met only condition (1)(e) since enactment of Chapter 2004-305, Laws of Florida through 2007-08 fiscal year. o None have been determined to need State assistance (i.e., state of financial emergency). o Meeting condition in (1)(e) may indicate deteriorating financial condition. No State assistance = entity must resolve. o Auditors must notify governing body if deteriorating financial conditions exist.

14. SB 368 (2012) – Financial Emergencies 2012-38, Laws of Florida 14  Eliminates Section 218.503(1)(e), Florida Statutes.  Places the provision currently in Section 218.503(1)(e), Florida Statutes, under Section 218.39(5), Florida Statutes, and requires auditors to notify each member of governing body if the condition exists for that entity.  Effective for audit reports issued July 1, 2012, or later.

15. Local Government Financial Reporting System Performance Audit Report No. 2011-196 15 Financial Emergencies Act – Part V of Chapter 218, FS  Section 218.503(3), FS, requires the Governor or Commissioner of Education (or designee) to contact the local government or district school board to determine what actions have been taken to resolve the condition. o Entities do not always respond timely to Governor’s requests for information. o Law does not provide for a time frame within which entity must respond (or penalties for failure to respond).

16. Chapter 2012-38, Laws of Florida Financial Emergencies 16  Revises Section 218.503(3), Florida Statutes, to: o Require local governments or district school boards to provide information requested by the Governor or Commissioner of Education within 45 days after the date of the request. o If the local government or district school board does not comply, the Governor or Commissioner of Education shall notify the Legislative Auditing Committee, who may take action pursuant to Section 11.40, Florida Statutes.  Provides a mechanism for the Governor to suspend from office members of a governing body that fail to resolve a state of financial emergency.

17. Chapter 2012-126, Laws of Florida Water Management Districts 17  Deletes 2011-12 FY limits on amount of ad valorem tax revenue that may be raised by each WMD and removes provision requiring that the maximum property tax revenue for WMDs revert to the amount authorized in the prior year if the Legislature does not set the amount.  Creates Section 373.535, Florida Statutes, relating to preliminary budgets that must be provided to the Senate President, House Speaker, and chairs of certain legislative committees for review and comment. If legislation is not enacted regarding a WMD’s millage rate or property tax by July 1, the WMD may proceed with budget development.  Budget amendments > $1 million must be approved by the Executive Office of the Governor (EOG).  Removes Legislative Budget Commission’s (LBC) authority to approve budget but authorizes EOG to approve.  LBC can reject certain aspects of budget proposal (e.g., single land purchase > $10 million or cumulative land purchases > $50 million)  Clarifies that the “monthly financial statement” required by Section 373.536(4)(e), Florida Statutes, is to be in a format prescribed by the Department of Financial Services.

18. HB 1089 (2012) – Public Records Exemptions 18  Expands public records exemptions for current and former county tax collectors and investigators or inspectors of the Department of Business and Professional Regulation (DBPR), their spouses, and their children.  Information exempt: o Home address & telephone # of county tax collector. o Home address, telephone #, and photo of current or former DBPR investigator or inspector. o Name, home address, telephone #, and place of employment of spouse and children of tax collector, investigator or inspector. o Name and location of schools and day care facilities attended by the children of tax collector, investigator, or inspector.

19. Retirement (FRS) Chapter 2012-146, Laws of Florida: * Establishes employer contribution rates. * Changes amount paid into Investment Plan effective July 1, 2012 – results in a 30% overall reduction in contributions. HB 7079 (2012): * Clarifies that the provisions in chapter 121, FS, are applicable to Parts II and III * Defines normal retirement for Investment Plan members the later of the date under the Pension Plan or date the member is vested in the Investment Plan. * Clarifies that members first hired on or after 7/1/11 may defer joining DROP until age 55 for Special Risk and age 60 for all others. 19

20. New Financial Indicators 20 Target: for 2011-12 audits Some using government-wide data Includes pension and OPEB indicators

21. New AG Procedure 21 AG Requirements Review all local government reports submitted pursuant to Section 218.39, FS. (Section 11.45(7)(b), FS) Completeness reviews – all reports Comprehensive reviews – samples of 60: o Pension note requirements o Florida Single Audit o Federal Single Audit o More comprehensive overall o OPEB (new)

22. New AG Procedure AG Requirements Request any significant items omitted from audit reports submitted. (Section 11.45(7)(b), FS) Letter sent to local government and local government’s auditor. Local government has 45 days to respond. Notification to Legislative Auditing Committee for entities that fail to provide missing items requested. 22

23. New AG Procedure 23 Similar to GFOA’s “Listing of Comments and Suggestions for Improvement” Provided to entities based on selected questions from the prior year’s reviews but includes all items noted in all reviews for entity No response for current year required Suggested for future financial statements/ notes/audits Your feedback is welcomed

24. New AG Procedure 24 Letters sent to entity and entity’s auditor For 2009-10 FY reviews, 129 letters sent to: 20 counties, 79 municipalities, and 30 special districts 84 individual types of suggestions for improvement Suggestions for individual entities ranged from 1 to 9 items

25. New AG Procedure - Review Questions Most Missed in Desk Reviews 25 Notes to Financial Statements U.S. dollar balances for investment exposed to foreign currency risk organized by currency denomination or investment type. (GASB Sections 2300.106c, I50.134) Authority under which the defined benefit plan’s benefit provisions were established or may amended not disclosed. (GASB Section P20.117 a.2) Authority under which the defined benefit plan employer obligations to contribute were established or may amended not disclosed. (GASB Section P20.117 b.1)

26. New AG Procedure - Review Questions Most Missed in Desk Reviews 26 Notes to Financial Statements Post-employment benefit increases used in the actuarial assumptions of a defined benefit plan not disclosed. (GASB Section P20.118d.3.(c)) Actual contributions made to a defined contribution plan by plan members and by employers not disclosed. (GASB Section P20.124d)

27. New AG Procedure - Review Questions Most Missed in Desk Reviews 27 Federal Awards/State Financial Assistance Total amount expended for each Federal award program or SFA project not provided on schedule for those that reported more than one line item per CFDA or CSFA. (OMB Circular A-133 s. __.310 (3); DFS Rule 69I-5.003(1)(c)) 62% of 52 applicable for Federal, and 48% of 46 applicable for State

28. New AG Procedure - Review Questions Most Missed in Desk Reviews Notes to F/S 28

29. New AG Procedure - Review Questions Most Missed in Desk Reviews 29 Auditor’s Reports Schedule of findings and questioned costs does not show the correct dollar threshold used to distinguish Type A and Type B State projects. (OMB Circular A-133 s. ___.520; DFS Rule 69I-5.008) For example, from OMB:

30. New AG Procedure - Review Questions Most Missed in Desk Reviews 30 Auditor’s Reports If a local government’s Schedule of Expenditures of Federal Awards indicates the following: U.S. Dept. of Transportation$10,000,000 U.S. Dept. of Homeland Security 350,000 U.S. Dept. of Environmental Protection 4,650,000 Total$15,000,000 Type A Programs are: a. Those that total or exceed $300,000 b. Those that total or exceed $450,000 c. None of the above

31. New AG Procedure - Review Questions Most Missed in Desk Reviews 31 Auditor’s Reports Report on compliance and internal control cited the Executive Office of the Governor, rather than the Florida Department of Financial Services as the authority for the State projects compliance supplement. (See Section 215.97(2)(c), FS)

32. New AG Procedure – Potential Issues 32 Budgets Florida law applicable to all local governments requires budgets to be prepared and requires that the budget regulate expenditures of the local government. It is unlawful for a local government to expend or contract for expenditures in any fiscal year except in pursuance of budgeted appropriations.

33. New AG Procedure – Potential Issues 33 Budgets GASB Section 2300.106h requires that significant violations of finance-related legal or contractual provisions and actions taken to address such violations be disclosed in the notes to the financial statements. Therefore, significant violations of law for material overexpenditures at the legal level of budgetary control, including actions taken to address the violations, must be disclosed in the notes to the financial statements. 12 of 60 reports reviewed reported significant overexpenditures – no mention in notes

34. Selected types of problems noted in Auditor General local government audits? 34

35. Inadequate separation of duties Insufficient expertise to perform duties competently Training not provided as necessary High turnover, exit interviews 35

36. Lack of written policies and procedures Should clearly define responsibilities Help ensure: Adequate internal controls Compliance with applicable laws Assists in training new employees 36

37. Fraud Budgets Collections Capital Assets Payroll Processing Personnel Administration Risk Assessment Procurement Disbursements Grant and Contracts Administration Travel Vehicle Usage 37

38. Budget adoption Ordinance or Resolution? All funds included? Prior year balances included? Budget amendment Budgetary control 38

39. Legal level of budgetary control Adopted Budget Statutory or Other Legal Requirements Governing Board Policy Budget comparison 39

40. Untimely bank account reconciliations Inadequate bank account reconciliations Checks used out of sequence Unexplained/unsupported reconciling items Stale-dated checks not reported/remitted Unclaimed property per Chapter 717 Must report, remit moneys, to FDFS by May 1 each year for checks outstanding over 12 months Penalty 40

41. Bank transfers No written contract No approvals necessary No dollar amount limit on transfers No limit as to where funds can be transferred 41

42. No G/L control accounts Not reconciled to subsidiary records No subsidiary records Often kept by audit firm Inadequate Capital Assets records Sufficient information missing (property #, serial #, location, etc.) Some property not included on TPP records Records not updated for deleted items 42

43. TPP items not tagged or marked Noncompliance with Chapter 274, FS or Department of Financial Services Rule 43

44. No written policies and procedures Did not determine amount needed Did not explore various financing options Pay-back period Financing costs Did not consider refinancing when advantageous Exceeded debt capacity 44

45. Grants Grant funds not expended within term of grant Failure to timely apply for extensions Failure to Separately Account for Grant Expenditures Donations Not recorded Not recorded at fair value 45

46. Bond covenant restrictions Use of proceeds contrary to authorizing documents Required reserves not maintained Dedicated taxes, fees and assessments Undocumented use of employee time Loaned for other purposes Expenditures of interest did not follow principal uses 46

47. Receipts control No prenumbered receipts Untimely Deposits No reconciliation of receipts to deposits/licenses or permits issued No security over cash collections Charges to customers Contrary to State Law Not approved by governing body – Utility rate changes Not timely collected 47

48. Hiring practices No verification of employment history & education No background checks Compensation No legal authorization Employee Compensation Plan Salary advances (article VII, s. 10, constitution) Employee bonuses Severance pay 48

49. Compensation (continued) Independent contractor vs. employee Council/Commission Members are employees 24-hour use of vehicles Moving expenses Travel allowances 49

50. Legal Not in accordance with purchasing policies Public purpose Food/entertainment Flowers Employee Christmas celebrations Retirement gifts Adequacy of documentation Invoices/receipts missing Lack of proper approvals prior to purchase 50

51. Credit card payments Inadequate controls over use Unreasonable credit limits No credit limits physically set on card Personal charges not reimbursed Cost Allocations Methodology used not systematic or rational Inadequate documentation to support methodology used Estimates used not adjusted based on actual (e.g., costs, time) 51

52. Solicitation or acceptance of gifts Doing business with one’s agency (related parties) Unauthorized compensation Misuse of public position Conflicts of employment or contractual relationship Employees/advisory board members as independent contractors Hiring relatives Supervising relatives Internal Audit reporting to management Audit Committee members 52

53. Noncompliance with s. 112.061, FS or established policy Inadequate documentation No indication of departure/arrival times No receipts for out-of-pocket expenses Reimbursement for meals provided at conferences Travel allowances not supported by typical travel 53

54. Competitive selection procedures not used Auditing services Legal services Engineering services Bond-related services No written contracts 54

55. Inadequate contracts Lack of specificity as to services to be provided Lack of specificity as to how costs for services will be calculated No due date for services to be provided Payment terms not dependent on receipt of services Inadequate payment documentation Receipt of deliverables not documented Out-of-pocket expenses not supported Amounts paid not in accordance with contract terms 55

56. Evaluating financial condition Trend analysis Benchmark comparison Contributing factors to deteriorating financial condition Lack of cash flow analysis or forecasting Lack of short and long-term plans Control deficiencies Lack of interim reports 56

57. CRA issues addressed during local governing authority meetings City Commission did not designate a Chair and Vice Chair of the CRA Board CRA Plan not sufficiently detailed Expenditures Not in accordance with the CRA Plan Not supported by documentation (invoices, receipts) Shared time between primary government duties and CRA duties not documented Public purpose not documented 57

58. Promotional Activities - Attorney General Opinion 2010-40 CRA asked the Attorney General if CRA could expend funds for festivals or street parties designed to promote tourism and economic development, advertisements for such events, and grants to entities which promote tourism and economic development, and grants to nonprofit entities providing socially beneficial programs. Promoting the use of the CRA area appears to fall within the purposes of the CRA act; however, use of CRA funds to pay entities promoting tourism or providing socially beneficial programs does not have apparent nexus to carrying out the purposes of the CRA act. www.myfloridalegal.com 58

59. Contracts for unnecessary professional services Project management Real estate appraisal Budgets not adopted by resolution Budgets overexpended CRAs not reported as component units. CRAs with multiple designated areas not reported as one CRA in notes to F/S 59

60. Department of Economic Opportunity Special District Information Program Web Site: http://dca.deo.myflorida.com/fhcd/sdip/OfficialListdeo/ Director: Jack Gaskins Jack.Gaskins@deo.Jack.Gaskins@deo.myflorida.com (850) 717-8430 60

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62. Background Info- Husband, Superintendent Wife, Adult Education Coordinator 62

63. March 2009. Potential fraud was revealed to AG by the District Finance Director at the conclusion of the FY 08 audit when she refused to sign the Management Rep Letter, which states: We have no knowledge of any fraud or suspected fraud affecting the District involving management, employees who have significant roles in internal control, or others where the fraud could have a material effect on the financial statements. 63

64. Some of Coordinator’s DSB-issued P-card purchases included: a chandelier, clothes, shoes, outdoor furniture, six swivel stools, dog food, sunglasses, spear gun accessories, airlines tickets with passenger names obscured, and a satellite radio subscription. P-card purchases made by the wife in August 2008 were identical to expenses reported in the superintendent’s (husband’s) re-election campaign treasurer report. 64

65. Coordinator(Wife) : Collected $101,754 in cosmetology and other class fees of which only $8K was deposited into District accounts Requested reimbursement for purchases without a District or public purpose: $25,443 Vendor payments without a District or public purpose: $20,012 Made questioned purchasing card purchases, totaling $72,642 Handled funds for a 2008 high school dance which were questioned. 65

66. Pressures/Incentives: Greed Opportunities: Weak internal controls Rationalizations: It’s okay 66

67. No/limited fraud policies Weak controls in multiple areas No oversight of coordinator’s Adult Ed activities When charges were questioned by P-card accountant, coordinator provided plausible explanations Cashiers turned collections over to coordinator with no paperwork and no one ever questioned if collections were not submitted to Finance for deposit Employees were friends and relatives, lived in the same neighborhoods, and liked the Superintendent 67

68. Vendor / P-card payments were made without proper documentation Descriptions in accounting records didn’t match receipt Supplies for literacy program = landscaping plants Supplies for ESOL = Oakley sunglasses Receipts were altered (deletions, white out) Purchased goods not received by department Delivery location was employee’s home Travel expenses but no travel voucher 68

69. Reimbursement requests were submitted for payment without supervisory approval Use of P-card by someone other than the cardholder P-card charges were not appropriate to the area of responsibility P-card statements not submitted timely to finance Procedure changed to require students to pay cash for Adult Ed classes No written evidence of transfer of cash receipts Cash receipts not deposited/used to purchase supplies 69

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72. Marilyn Rosetti marilynrosetti@aud.state.fl.usmarilynrosetti@aud.state.fl.us David Ward: davidward@aud.state.fl.usdavidward@aud.state.fl.us Web site: www.myflorida.com/audgen E-mail: flaudgen_localgovt@aud.state.fl.us Headquarters: 111 West Madison Street Room 401Pepper Building Tallahassee, FL 32399-1450 Phone: (850) 487-9031 Fax: (850) 487-4403 72