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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?