Capital Area SBO. Accounting/Auditing Update. May 24, Kevin B. Stouffer, CPA. Audit Manager

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1 Capital Area SBO Accounting/Auditing Update May 24, 2017 Kevin B. Stouffer, CPA Audit Manager Information and training provided by Smith Elliott Kearns & Company, LLC is intended for reference only. As the information is designed solely to provide guidance to the participants, it is not intended to be a substitute for someone seeking personalized professional advice based on specific factual situations. Although Smith Elliott Kearns & Company, LLC has made every reasonable effort to ensure that the information provided is accurate, Smith Elliott Kearns & Company, LLC and its Members, managers and staff make no warranties, expressed or implied, on the information provided. The participant accepts the information as is and assumes all responsibility for the use of such information.

2 About the Speakers Kevin B. Stouffer, CPA Audit Manager years of experience, including specialization in audits of local governments. Currently manages 8 audits of School Districts. 2

3 Topics GASB Timeline GASB 75 OPEB Standard overview GASB 77 Tax Abatement Disclosures GASB 81 Split Interest Agreements GASB 84 Fiduciary Activities Uniform Grant Guidance Procurement Cyber Security 3

4 GASB Timeline Beginning after December 31, 2015 effective for June 30, 2017 financial statements Statement No. 77 Tax Abatement Disclosures Statement No. 78 Pensions Provided through Certain Multiple Employer Defined Benefit Plans 4

5 GASB Timeline Beginning after June 15, 2016 effective for June 30, 2017 financial statements Statement No. 73 Accounting and Financial Reporting for Pensions and Related Assets that are not within the Scope of GASB No. 68 and Amendments to No. 67 and 68 Statement No. 74 Financial Reporting for Postemployment Benefit Plans other than Pension Plans Statement No. 80 Blending Requirements for Certain Component Units an amendment to GASB No. 14 Statement No. 82 Pension Issues 5

6 GASB Timeline Beginning after December 15, 2016 effective for June 30, 2018 financial statements Statement No. 81 Irrevocable Split Interest Agreements Beginning after June 15, 2017 effective for June 30, 2018 financial statements Statement No. 75 Accounting and Financial Reporting by Employers for Postemployment Benefits Other than Pensions 6

7 GASB Timeline Beginning after June 15, 2018 effective for June 30, 2019 financial statements Statement No. 83 Certain Asset Retirement Obligations Beginning after December 15, 2018 effective for June 30, 2020 financial statements Statement No. 84 Fiduciary Activities To be determined Leases (Exposure Draft) 7

8 GASB 75 Accounting and Financial Reporting for OPEB Remember Pension accounting here comes OPEB Accounting, calculations and reporting essentially mirrors new accounting for pensions under GASB 68 Effective for June 30, 2018 Key Changes compared to current standards (GASB 45) Accounting no longer based on annual required contribution Full Net OPEB liability will now be recorded on government wide statements Also allocated to food service if material 8

9 GASB 75 Accounting and Financial Reporting for OPEB For unfunded plans or partially funded plans lower discount rates Unfunded = 20 year municipal bond rate ~ 4% Lower discount rate = higher liabilities Employers now have to account for their proportionate share of OPEB liabilities for cost sharing plans Similar accounting deferred outflows / inflows and pension expense Significant increase in disclosures and RSI 9

10 GASB 75 Accounting and Financial Reporting for OPEB Districts have two OPEB plans Single employer plan for implicit rate subsidy and possibly some actual OPEB benefits Cost sharing plan for PSERS premium assistance 10

11 GASB 75 Accounting and Financial Reporting for OPEB Information will come from two places PSERS will provide schedules for OPEB similar to pensions for recording of proportionate share of liability Local actuaries will provide necessary information for single employer plan Both will most likely use a measurement date of one year in advance 11

12 GASB 75 Accounting and Financial Reporting for OPEB With implementation of standard, financial statements will increase significantly in length and complexity. What to do now Communicate with staff, employer actuary, PSERS and auditors Prepare for upcoming changes to financial statements Management is responsible for financial statements 12

13 GASB 77 Tax Abatement Disclosures Effective June 30, 2017 financial statements Tax Abatement for Financial Reporting Purposes the result of an agreement between a government and a taxpayer where the government promises to forgo tax revenues that the government is entitled and the taxpayer promises to take a specific action that contributes to economic development or provides some type of benefit to the government or its citizens. Typically issued to promote economic growth or development. 13

14 GASB 77 Tax Abatement Disclosures Disclosure Requirements Description of the agreement Tax being abated The authority under which tax abatements are provided Eligibility criteria The mechanism by which taxes are abated Provisions for recapturing abated taxes Types of commitments made by tax abatement recipients 14

15 GASB 77 Tax Abatement Disclosures Gross amount of taxes abated during the period Amounts received or receivable from other governments Commitments made by the government (other than to abate taxes) as part of the agreement 15

16 GASB 77 Tax Abatement Disclosures Disclosure Requirements for those agreements with Other Governments Disclosure Requirements Names of the governments that entered into the agreements Specific taxes being abated Gross dollar amount of taxes abated during the period Disclosed separately from the government s own tax abatements Disclosures should be organized by the government and specific tax abated 16

17 GASB 77 Tax Abatement Disclosures Practical Considerations This information is currently not reported in the financial statements Unlike most disclosures, this information will not come from the general ledger, as the abated taxes are not recorded as revenue The auditor will not be able to determine this information must come from management 17

18 GASB 77 Tax Abatement Disclosures Example 1 Small Government with Few Abatements Facts and Assumptions Sample Village negotiates property tax abatement agreements on an individual basis. The Village has tax abatement agreements with five entities as of June 30, 2017: 18

19 GASB 77 Tax Abatement Disclosures Example 1 Small Government with Few Abatements Each agreement was negotiated under a state law (the Economic Development Opportunity Act of 2001) allowing localities to abate property taxes for a variety of economic development purposes, including business relocation retention, and expansion. The abatements may be granted to any business located within or promising to relocate to local government s geographic area. Localities may grant abatements of up to 50% of annual property taxes through a direct reduction of the entity s property tax bill. The state law does not provide for the recapture of abated taxes in the event of an abatement recipient does not fulfill the commitment it makes in return for the tax abatement. The Village has not made any commitments as part of the agreements other than to reduce taxes. The Village is not subject to any tax abatement agreements entered into by other governmental entities. The Village has chosen to disclose information about some of its tax abatement agreements individually. It established a quantitative threshold of 10% of the total dollar amount of taxes abated during 19 the year.

20 GASB 77 Tax Abatement Disclosures Illustrative Disclosure Note X. Tax Abatements The Village enters into property tax abatement agreements with local businesses under the state Economic Development Opportunity Act of Under the Act, localities may grant property tax abatements of up to 50 percent of a business property tax bill for the purpose of attracting or retaining businesses within their jurisdictions. The abatements may be granted to any business located within or promising to relocate to the Village. For the fiscal year ended June 30, 2017, the Village abated property taxes totaling $146,480 under the program, including the following tax abatement agreements that each exceeded 10 percent of the total amount abated. A 40 percent property tax abatement to a grocery store chain for purchasing and opening a new store in an empty storefront in the business district. The abatement amounted to $97,500. A 50 percent property tax reduction for a local restaurant increasing the size of its restaurant and catering facility and increasing employment. The abatement amounted to $21,

21 GASB 81 Split Interest Agreements Effective June 30, 2018 Split Interest Agreements are donor agreements that provide resources to more than one beneficiary. Sometimes the resources are transferred to an intermediary, to administer the terms of the agreement. Typically associated with charitable trusts or life interests in real estate, intermediary may be a beneficiary of the agreement or a third party, such as a bank. 21

22 GASB 81 Split Interest Agreements Terms: Lead Interest periodic disbursements Remainder Interest final disbursement When a government is the intermediary for an irrevocable split interest agreement, the government recognizes the following at inception: Assets received (or receivable) Liability for lead or remainder interest to other beneficiaries Deferred Inflow of Resources for unconditional lead or remainder interest 22

23 GASB 81 Split Interest Agreements The following table summarizes recognition of transactions during the agreement: Activity Lead Interest Remainder Interest Subsequent changes in asset measurement Periodic asset disbursements Subsequent changes in lead interest measurement Final asset disbursement Liability increased or decreased Revenue recognized and deferred inflow of resources decreased Deferred inflow of resources and liability increased or decreased Liability and deferred inflow of resources increased or decreased Deferred inflow of resources increased or decreased Liability decreased Liability and any deferred inflow of resources eliminated Deferred inflow of resources recognized as revenue and any liability recognized as revenue/gain 23

24 GASB 81 Split Interest Agreements When a third party is the intermediary of an irrevocable split interest agreement and certain specified criteria are met, the government recognizes an asset at fair value and related deferred inflows of resources. Subsequent changes in fair value of the asset increase or decrease the related deferred inflow of resources. Revenue is recognized as periodic benefits are disbursed at the termination of the agreement. 24

25 GASB 81 Split Interest Agreements What to do now? Determine if the School District has any split interest agreements? If so, obtain a copy of the agreement to determine who is administering the agreement/assets. Appropriately account for the assets and the related activity based on GASB

26 GASB 84 Fiduciary Activities Effective June 30, 2020 financial statements Early application is encouraged 26

27 GASB 84 Fiduciary Activities An activity is a fiduciary activity if all of the following criteria are met: Government controls the assets associated with the activity Assets are not derived from the government s own source revenues, government mandated nonexchange, or voluntary nonexchange transactions Assets match at least one of the following: Assets administered through a trust committed to providing benefits to recipients. The government is NOT a beneficiary of the trust, and the assets are protected from the government s creditors. The assets are for the benefit of individuals, and the government does not have administrative or direct financial involvement with the assets nor are the assets derived from the government providing goods or services to those individuals. The assets are for the benefit of other entities (not part of the financial reporting entity) and are not derived from the government providing good or services to those entities. 27

28 GASB 84 Fiduciary Activities Fiduciary Fund Types Pension Trust Funds Investment Trust Funds Private Purpose Trust Funds Custodial Funds Required to report: Statement of Net Position Statement of Changes in Fiduciary Net Position Display investment earnings, investment costs, and net investments, separately, if applicable. 28

29 Uniform Grant Guidance 29

30 Procurement Highlights Time is now grace period is almost over Procurement policies and procedures must be functioning as of JULY 1, More documentation Bidding in more circumstances such as services Layering of requirement between PA school code and federal uniform grant guidance 30

31 Procurement Claw (Section ) 31

32 Procurement Document policies which reflect federal law, standards of UGG, and any state regulations Which set of rules you are using must be documented Rules required for all purchases with federal dollars goods and services Purchases must comply with your policy/procedure Written conflict of interest policies required Purchase must be necessary Must have open competition Documentation of procurement activities/steps required 32

33 Procurement Must take steps to include minority business, women s business enterprises and labor surplus area firms For compliance with the new procurement standards only, the federal government is providing a grace period of two full fiscal years after the effective date of the Uniform Guidance for Federal Awards Through June 30, 2017, must implement for purchases after July 1,

34 Procurement 1. Micro Purchase Section A. Aggregate dollar amount does not exceed $3,500 (currently can be adjusted in the future) B. No competitive quotes required if management determines price is reasonable C. When practical, distribute equitably among qualified suppliers 34

35 Procurement 2. Small Purchase Section A. Purchases up to the Simplified Acquisition Threshold (currently $150,000) school code requires bidding over 19,400 for purchases of equipment and supplies, or services for construction, maintenance or repairs on school facilities B. Informal procedures acceptable C. Price or rate quotes must be obtained from an adequate number of sources 35

36 Procurement 3. Sealed Bids Section A. Purchases over the Simplified Acquisition Threshold (currently $150,000) B. Formal public solicitation required C. Fixed price (lump sum or unit price) awarded to responsible bidder who conformed with all material terms and is the lowest in price D. Most common for construction contracts E. Cost or price analysis is required for every procurement 36

37 Procurement 4. Competitive Proposals Section A. Purchases over the Simplified Acquisition Threshold (currently $150,000) B. Formal public solicitation required C. Fixed price or cost reimbursement contracts D. Used when sealed bids not appropriate E. Must have written method for technical evaluation of proposals F. Awarded to responsible firm whose proposal is most advantageous to the program, with price being one of various factors G. Cost or price analysis is required for every procurement Must have make estimates prior to receiving bids and proposals 37

38 Procurement 5. Noncompetitive Proposals / Sole Source Section May be used only when one or more of the following apply: A. The item is available only from a single source B. The public exigency or emergency for the requirement will not permit a delay resulting from competitive solicitation C. The Federal awarding agency (or pass through entity) expressly authorizes this method in response to a written request from the non Federal entity D. After solicitation of a number of sources, competition is determined inadequate Document! 38

39 Procurement Procurement Records to Maintain: A. Rationale for method of procurement B. Selection of contract type C. Contractor selection or rejection D. Basis of contract price including cost or price analysis E. Verification contractor is not suspended or debarred 39

40 Cyber Security In today s world, cyber security is of the utmost importance. Consider the following: Written information security policies, addressing encryption needs Periodic audits to detect threats Periodically testing backup and recovery plans Responsibility for losses and the need for cyber security insurance; Training policies to reinforce data security 40

41 Cyber Security Training Examples Websites to host the training Facilitate a presentation regarding cyber security Remote Access Duo Mobile (two factor authentication service) Passwords Automatically expire every 90 days Require complex passwords 41

42 Cyber Security Examples of Fraud Schemes Scam Vendor ACH Scam 42

43 Graphical Analysis of Fraud Frequency of Anti Fraud Measures 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% External Audit of F/S Code of Conduct Internal Audit Management Certification of F/S Management Review Independent Audit Committee Hotline Employee Support Program Fraud Training Anti Fraud Policy Surprise Audits Job Rotation/Mandatory Vacation Rewards for Whistleblowers 10.2% 18.6% 39.5% 54.9% 53.1% 59.4% 51.9% 49.4% 70.3% 69.9% 86.3% 84.6% 80.9% Percent of Cases 43

44 Graphical Analysis of Fraud Initial Detection of Fraud 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% Tip Internal Audit Management Review By Accident Account Reconciliation Other Document Examination External Audit Notified by Law Enforcement Surveillance/Monitoring IT Controls Confession 5.6% 5.5% 5.5% 3.8% 3.8% 2.4% 1.9% 1.3% 1.3% 16.5% 13.4% 39.1% Percent of Cases 44

45 Graphical Analysis of Fraud Percent of Fraud Cases 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% Corruption Billing Non Cash Expense Reimbursement Skimming Cash on Hand Check Tampering Financial Statement Fraud Payroll Cash Larceny Register Disbursements 1.7% 14.8% 15.7% 14.0% 10.5% 9.2% 7.9% 13.5% 7.9% 25.3% 38.4% Percent of Cases 45

46 Graphical Analysis of Fraud Reason for Declining to Prosecute 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% Fear of Bad Publicity Internal Discipline Sufficient 33.3% 38.3% Private Settlement 20.5% Too Costly 14.5% Lack of Evidence 8.1% Civil Suit 3.3% Perp Disappeared 0.7% Percent of Cases 46

47 Questions? 47