Will this ever end? New developments regarding Going Concern

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1 2:40 3:30 May 6, 2018 Room th Annual Conference May 6-9, 2018 St. Louis, Missouri Moderator/Speakers: Shirley Hughes City Administrator, City of Liberty, SC Jim Lanzarotta Partner, Moss Adams LLP Irfan A. Bora Masters Program in Governmental Accounting, Rutgers Business School Will this ever end? New developments regarding Going Concern #GFOA2018

2 Shirley has served in a CFO role for many cities, towns, and state agencies and is currently the City Administrator for City of Liberty, SC. She has a BS in Accounting from the University of Southern Maine, and an MBA from the University of New Hampshire. She has served on the GFOA Executive Board and several GFOA committees, several State GFOA groups, and currently serves as the ICMA representative to the Government Accounting Standards Advisory Council. Jim serves as Moss Adams National Practice leader for the Firm s governmental services group. He has specialized in providing accounting, audit, and consulting services to governments for over 20 years. Jim is in his third two year term of service as the AICPA representative to the Government Accounting Standards Advisory Council after serving two three year terms as a member of the AICPA State and Local Government Expert Panel the last term as chair. He is a frequent speaker at GFOA, NACUBO, OGFOA, and many State CPA Society governmental conferences. Jim received his BBA in accounting from the University of Oregon GO DUCKS! Professor Irfan Bora, CPA, CMA, CGFM, currently serves as the Program Director of the Rutgers Master s Degree Program in Governmental Accounting. The Program which is the first of its kind in the nation, offers an advanced degree in government financial management, accounting and auditing through a unique online 30 credit program. Irfan teaches courses in Governmental Accounting, Auditing and in the area of Design and Development of Information Systems. Irfan received his undergraduate and MBA degrees from Rutgers. 2

3 What we ll cover Red flag indicators of fiscal distress A discussion of current challenges in reporting fiscal distress A potential going concern case study A review of current Accounting Standards (GASB 56) A review of current Audit Standards (AU-C 570) 3

4 4 Red Flag Indicators signs that point to fiscal distress

5 Going Concern Multiple years of General Fund deficits Borrowing cash from other funds Small City signs of fiscal distress Restricted Funds in General Fund instead of Special Revenue Funds 5

6 Going Concern MASKS THE PROBLEM Capital Assets minus depreciation = -0- and/or declines in net book values GO Bond required to obtain $160,000 to fund Utility Fund project Small City signs of fiscal distress 6

7 Going Concern NO BOND RATING Funding of bare minimum operational expenses Small City signs of fiscal distress Employees see multiple years of net decrease in base pay due to increases in employee paid benefits and no wage increases 7

8 Challenges in Reporting Fiscal Distress 8 [ to edit Footer; go "Insert" (tab) > "Header & Footer" ]

9 Going Concern Auditor says there are issues however all is well : DOES NOT POINT OUT THAT THE GENERAL FUND IS IN A DEFICIT POSITION DOES NOT TALK ABOUT GOING CONCERN Challenges in Reporting Fiscal Distress ABLE TO PAY BILLS, HAVEN T REFINANCED DEBT, HAVEN T SOLD OFF ASSETS SO STILL OK When questioned states that: ABLE TO PAY BILLS, HAVEN T REFINANCED DEBT, HAVEN T SOLD OFF ASSETS SO STILL OK Ignores: BORROWING FROM OTHER FUND (900K) IGNORES THE GO BOND REQUIREMENT FOR FUNDING UTILITY PROJECT 9

10 What should an Auditor (and finance management too!) do: Going Concern BE CLEAR ABOUT THE PROBLEMS TELL IT LIKE IT IS DO NOT SUGAR COAT COUNCILS DO NOT GET IT UNLESS IT IS POINTED OUT TO THEM BETTER TO LOSE A CLIENT THAN TO LET THEM FAIL BY NOT BEING UP FRONT AND CLEAR AS TO THE POTENTIAL END RESULT. MAKE RECOMMENDATIONS AS TO OPTIONS TO CORRECT EDUCATE Challenges in Reporting Fiscal Distress 10

11 Going Concern A Case Study 11

12 12 [ to edit Footer; go "Insert" (tab) > "Header & Footer" ]

13 Case Study additional factors Road fund holds $20M in resources (restricted to roads and bridges) Cash flow analysis prepared by management revealed The general fund would need to borrow to pay bills in July to October in the ensuing year, and the following year The general fund would run out of cash 18 months after year end and likely before the ensuing year s audited financial statements would be issued Multiple property tax levy increase measures failed 13 Elected board members not getting along, and not in unison as to future financial plans

14 Case Study additional factors County has outsourced health and human service functions to local NFP organizations that were incurring expenses in excess of revenues Public safety personnel cut No longer able to meet two-deep policy to attend calls No longer able to meet minimum response times to all locations within the County Releasing inmates due to limited jail-bed capacity caused by reductions in staff Property tax assessors office unable to meet state required timelines for assessment of properties located in the County 20-year rotation of property valuations compared to 6-year requirement Unable to retain key employees given years with no salary adjustments 14 [ to edit Footer; go "Insert" (tab) > "Header & Footer" ]

15 Current Going Concern reporting guidance 15 [ to edit Footer; go "Insert" (tab) > "Header & Footer" ]

16 Going Concern Reporting Guidance GASB 56 (par 16-19) CODIFICATION OF ACCOUNTING AND FINANCIAL REPORTING GUIDANCE FORMERLY CONTAINED IN AICPA STANDARDS AICPA (AU-C 570) THE AUDITOR S CONSIDERATION OF AN ENTITY S ABILITY TO CONTINUE AS A GOING CONCERN 16

17 Going Concern GASB 56 par 16: GASB 56 (par 16) contradiction of going concern assumption a governmental entity s inability to continue to meet its obligations as they become due without substantial disposition of assets outside the ordinary course of governmental operations, restructuring of debt, submission to the oversight of a separate fiscal assistance authority or financial review board, or similar actions. 17

18 Management has a responsibility under GAAP: Financial statement preparers have a responsibility to evaluate whether there is substantial doubt about a government s ability to continue as a going concern for 12 months beyond the financial statement date. Moreover, if there is information that is currently known to the government that may raise substantial doubt shortly thereafter (for example, within an additional three months), it also should be considered. Going Concern GASB 56 (par 16) - management responsibilities 18

19 Going Concern a. Pertinent conditions and events giving rise to the assessment of substantial doubt about the government s ability to continue as a going concern for a reasonable period of time, as discussed in paragraph 16 b. The possible effects of such conditions and events GASB 56 (par 19) disclosure requirements c. Government officials evaluation of the significance of those conditions and events and any mitigating factors d. Possible discontinuance of operations e. Government officials plans (including relevant prospective financial information) f. Information about the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities 19

20 Auditors responsibility (AU-C 570, par 10) a. To obtain sufficient appropriate audit evidence regarding, and to conclude on, the appropriateness of management s use of the going concern basis of accounting, when relevant, in the preparation of the financial statements b. To conclude, based on the audit evidence obtained, whether substantial dount about an entity s ability to continue as a going concern for a reasonable period of time exists c. To evaluate the possible financial statement effects, including the adequacy of disclosure regarding the entity s ability to continue as a going concern for a reasonable period of time d. To report in accordance with this section 20

21 Audit Procedures (AU-C 570, par 16) a. Request management to make an evaluation when management has not yet performed an evaluation b. Evaluating management s plans in relation to its going concern evaluation, with regard to whether it is probable that management s plans can be effectively implemented, and, the plans would mitigate the relevant conditions or events for a reasonable period of time c. When the entity has prepared a cash flow forecast, and analysis of the forecast is a significant factor in evaluating management s plans, evaluating the reliability of the underlying data generated to prepare the forecast and determining whether there is adequate support for the assumptions d. Considering whether any additional facts or information have become available since the date on which management made its evaluation 21

22 Auditor reporting requirements Substantial doubt exists Include emphasis of a matter paragraph addressing the entity s ability to continue as a going concern Substantial doubt exists but not disclosed by management Auditor should express a qualified or adverse opinion Management unwilling to perform evaluation Auditor should consider whether qualified or adverse opinion would be appropriate 22

23 GASBs current Pre-Agenda Research project Going Concern Disclosures Reexamination of Statement 56 23

24 Status of GASBs going concern project Objectives of GASBs research project: Are the current going concern indicators presented in note disclosure guidances appropriate for state and local governments, in light of the fact that, even under severe financial stress, few governments cease to operate? What other criteria might better achieve the objective of disclosing severe financial stress uncertainties with respect to governments? What information do financial statement users need with respect to the disclosure of severe financial stress uncertainties? 24

25 Status of GASBs going concern project Three grants awarded auditor experience government dissolutions statistical analysis of predictive indicators GASAC members consistently rank going concern disclosures as top 10 issue for GASB to address Discussion with AICPA State and Local Government Expert Panel on inconsistencies found in practice 25

26 GASBs going concern project work plan January 2018 January 2019 February 2019 March - June 2019 July 2019 Continue data entry for, and evaluation of, financial stress measures Meet with consultative group Conclude analysis of results of research and draft research memorandum Conclude analysis of results of research and draft research memorandum 26

27 GFOA fiscal stress resources GFOA Significant content related to Fiscal Distress How to recognize, and move forward when there appears to be an issue 27

28 The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although this information may have been prepared by professionals, it should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought. Assurance, tax, and consulting offered through Moss Adams LLP. Investment advisory offered through Moss Adams Wealth Advisors LLC. Investment banking offered through Moss Adams Capital LLC. 28

29 Speaker Contact Information: Shirley Hughes Phone: Jim Lanzarotta Phone: Irfan Bora Phone: th Annual Conference May 6-9, 2018 St. Louis, Missouri Questions: Speakers will take questions and comments. This session is being recorded, please utilize the microphone in the aisle to ask all questions. Provide Feedback: Please take a few minutes to provide your feedback at Discuss/Comment: Join the discussion at #GFOA2018 Contact GFOA: To contact GFOA about session topics please research@gfoa.org #GFOA2018