Deficiencies in Financial Reporting

and Other Interesting Accounting Topics

Bill Purnell, PartnerKPMG LLP

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Topics for Discussion

• Pension Mortality Rates – Updated • Internal Controls over Financial Reporting

– Review controls over consolidation• The process of preparing and reviewing consolidated reporting

– Controls over the budgeting process• Budget vs. actual review and documentation

– IT Controls• Access Controls• Data Base Controls

• Income Taxes – Deferred Tax Asset Valuation• Acquisition Accounting Reminders

– Fair Value – Valuation with asset allocation schedule

• Securities Market Activity• Grant Accounting – Schedule of Expenditures of Federal Awards

– Controls over the preparation of the schedule– Accrual accounting

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Pension Mortality Rates

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Pension Mortality Rates

• New mortality rates were approved and issued by the actuarial association

• Rates project longer expected lives

• Expect a one time increase in pension liabilities of approximately 10%

• Corresponding expense increase in Fiscal year beginning July 1, 2015

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Internal Controls over Financial Reporting

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Internal Controls over Financial Reporting

Background

• Areas for discussion:

– Review controls over the consolidating process

– Budget vs. Actual

– Internal Controls of IT Systems

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Internal Controls over Financial Reporting

Consolidation process:• Observation on consolidating process

• Lack of proper review or lack of documentation of review• Review and documentation of elimination entries• Process is many-times manual by nature

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Internal Controls over Financial Reporting

Controls over the budgeting process:• One of the comments we here from companies is the review of Actual Results vs.

Budgeted results is our review control over reporting

• Documentation of the review process• Understanding of the level of errors uncovered by the process• Follow-up of variances

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Internal Controls over Financial Reporting

IT controls:

– Data base controls• If spread sheets are used to maintain account reconciliations / support access should be controlled

– Regular review of Access controls should be performed

• Use a quarterly process• Department heads review the list of employees with access and at what level• Document the process

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Income Taxes – Deferred Tax Asset Valuation

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Income taxes – Deferred tax asset valuation

Review genesis of deferred tax assets:

– Understand how the DTA is computed and the continued need of a Valuation Allowance

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Acquisition Accounting Reminders

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Acquisition Accounting Reminders

Fair Value – Assets acquired must be accounted for at fair value. The acquisition requires a valuation which includes an asset allocation of the purchase price or fair value of the entity

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Municipal Securities Market

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Municipal Securities Market

• Provides funding to build and maintain the infrastructure of the USA• Provides a funding source to non-governmental private projects, through

‘conduit’ financings• Growth in the market:

1945 – approximately $20 billion of outstanding municipal debt securities 1981 – approximately $360 billion of outstanding municipal debt securities Today – approximately $3.7 trillion of outstanding municipal debt securities

• Increase in number of defaults, and several high-profile bankruptcies, including several cities in California, Jefferson County Alabama, and even Harrisburg, Pennsylvania

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SEC Study

• To protect investors, maintain fair, orderly, and efficient markets• SEC began inquiries into municipal market failures• Field hearings across the U.S., participant panels, conference calls, and

open public comment• 165 page report issued July 31, 2012

http://www.sec.gov/news/studies/2012/munireport073112.pdf

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Areas of Focus• Timeliness of financial information• Comparability of financial information• Disclosures by conduit borrowers• Pension funding obligations and other post-employment benefits• Exposure to derivatives• Disclaimers of responsibility for information included in Official Statements• Disclosure of conflicts of interest

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Recommendations – Market Structure

• Most investors tend to be ‘buy-and-hold’, and most trades occur through municipal bond dealers, with limited access to information by retail investors

• Combination of legislative, regulatory, and industry-based initiatives, with consideration of any costs that might be passed along to investors

• Improve pre-trade transparency – public dissemination of bid-ask prices• Improve post-trade transparency• Require bond dealers to report ‘yield spreads’• Enhancement of EMMA website to provide retail investors with better

access to pricing information

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Grant Accounting - SEFA

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Grant Accounting - SEFA

– Schedule of Expenditures of Federal Awards

• Preparation of the schedule

• Accrual Basis Accounting

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Questions

William Purnell, Partner

KPMG – Baltimore

410-949-8428

wpurnell@kpmg.com