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W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e
Washington State Association of County Auditors Finance Conference
April 8, 2015
Kelly Collins, CPADirector of Local Audit
Tina Watkins, CPA Program Manager
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 2
2014 Snapshot: Local Government Audits
Local governments audited annually:
Management letters issued:
20141,391
20131,314
2014236
2013263
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 3
Audit Reports Issued by Government Type
Government TypeReports
Government TypeReports
2014 2013 2014 2013School Districts 444 404 Library District 26 31City/Town 423 402 Park and Recreation District 20 38Fire Protection District 238 226 Regional Planning Council 20 14Water/Sewer District 153 143 Educational Service District (ESD) 19 19Port/Airport District 94 83 Miscellaneous 18 18County 91 93 Health District 18 18Diking/Drainage District 83 36 Transportation Benefit Districts 18 6Cemetery District 75 48 Mosquito/Pest/Weed District 15 14Public Utility District (PUD) 63 65 Economic/Industrial Development 13 6Hospital District 60 49 Area Agency on Aging 10 9Housing Authority 54 62 Local/Regional Trauma Care Councils 8 0Irrigation and Reclamation District 51 56 Regional Support/Community Network 7 6Transportation Authority 46 43 Air Pollution District 6 5Emergency Management Service 32 24 Government Association 6 9Insurance Pool/Risk Management 32 36 Flood Control District 5 10Public Development Authority 30 37 Stadium Authority 2 4Conservation District 28 44 Water Conservancy Board 2 13Public Facilities District 26 23 TV Reception District 1 1
Grand Total 2,237 2,095
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 4
Number of Exceptions by Category
Area of IssueExceptions
Area of IssueExceptions
2014 2013 2014 2013Accounting/Financial Reporting 796 741 Gift of Public Funds 21 21Grants (Federal) 435 481 IT Controls 19 31Cash Receipting 360 313 Insurance/Risk Management 17 12Disbursements/Expenditures 249 283 Investments/Deposits 17 11Procurement/Bid/Prevailing Wage 191 213 Conflict of Interest/Ethics 14 15Safeguarding of Assets/Property 184 208 Grants (State/Local) 14 18Payroll/Personnel 179 161 Misappropriation 12 12Miscellaneous 133 171 Surplus Property 9 8Open Public Meeting/Record 104 130 Taxes/Assessments 9 16Billings/Receivables 100 110 Budget Compliance 8 14Apportionment (Transportation) 95 1 Donations/Fundraising 6 9Contracts/Agreements 91 123 Misuse/Abuse 5 4Financial Condition 87 95 Debt/Covenants 0 9Restricted Funds 55 88 Danger to Public Health/Safety 0 1ASB (Legal Compliance) 53 53 Police/Jail (Legal Compliance) 0 1Apportionment (Staff Mix) 45 18 Authority 0 0Apportionment (Enrollment) 35 37 Courts (Legal Compliance) 0 0Interfund Transactions/Balances 34 47
Note: *Exceptions include all findings, management letters and exit items. Grand Total 3,377 3,455
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 5
Lack of internal controls in key financial systems.
Local governments continue to struggle to comply with federal grant
requirements.
Declining financial conditions – rising costs and constrained revenues.
56 investigations of misappropriation amounting to $682,000.
Largest cases – cash receipts, fuel and the personal use of credit cards.
New SAO resources and tools on our Local Government Performance Center
webpages.
To view the reports and findings or subscribe to our service go to: www.sao.wa.gov
2014 Highlights
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 6
County Treasurer Investing Activities
The County Treasurer is responsible for investment of County funds as well as funds of numerous special purpose districts.
We are currently focusing on reviewing any potential risks associated with investment practices and the effectiveness of monitoring controls (oversight).
Financial Condition
While counties have historically experienced relatively stable finances, many local governments, including counties, have faced a daunting economic environment. We have developed the FIT Tool to help local governments assess their financial condition.
Our audit staff will perform analytical procedures to assess if the government is showing indicators of declining financial condition.
Current Areas of Audit Focus
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 7
It is the responsibility of management to design and follow internal controls that provide reasonable assurance regarding the reliability of financial reporting.
Lack of knowledge and/or training
Insufficient time or available resources for: Preparation Review Research
Frequently Reported: Lack of Internal Controls in Reporting
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 8
Internal control structure for cash receipting locations Counties have multiple systems and locations where cash is
received Strong controls need to be in place at each location Effective Internal Controls
Safeguard public resources
Protect employees
Assist in fraud prevention
Frequently Reported: Cash Receipting Internal Controls
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 9
It is management’s responsibility to: design effective internal controls ensure internal controls are operating as designed
When designing/establishing internal controls break the system into segments and for each consider: Will I be able to identify a loss? Will I identify the entire loss? Will I be able to identify who is responsible?
Designing Internal Controls
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 10
Examples of Cash Receipting/revenue Frauds Check for cash substitution (unanticipated receipts) Lapping funds Skimming funds Voids/adjustments Short or missing deposits Two sets of receipts “Negative” cash receipts “Borrowing” funds Funds that disappear from safe or in transit between
locations
Cash Receipting
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e
Study
Cash receiptingJanuary 1, 2005 – January 4, 2011
11
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How was it detected?A County employee was comparing Probation Services transmittal information to the amount recorded by the Treasurer’s Office.
Case Study
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 13
Case Study
What did we find?
Misappropriation totaled at least $62,150
Amount Category (Misappropriation and Questionable)
$51,816 Fees not deposited (M)
$10,334 Checks substituted for cash removed from the deposit (M)
$30,772 Unsupported voids and cash shortages (Q)
$734,894 Adjustments to customer accounts (Q)
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 14
How was the fraud concealed? One employee was responsible for both collecting
and reconciling daily cash receipts as well as making bank deposits
Bank deposits were not made within 24 hours as required by state law (RCW 43.09.240)
Destruction of records
Case Study
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 15
Lessons Learned: Trusted employee, with complete access to key
systems, including cash-receipting, bank deposits and account adjustments.
No one independently monitored cash/check composition or adjustments.
No one reconciled the system transactions, manual receipts or collection agency payments with the bank deposits.
Case Study
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 16
What happened to the employee?Found guilty by a jury verdict of nine counts of second-degree theft and one count of misappropriation of accounts by a public officer.
Case Study
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 17
Were there any red flags? Trusted employee with complete
access and very little monitoring Modes did not agree Lack of supporting records High volume of voids/adjustments Deposits not made timely
Case Study
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e
The Association of Certified Fraud Examiners
18
OPPORTUNITYMOTI
VATI
ON
RATIONALIZATION
Fraud Triangle
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 19
A third or more of local governments did not report as requiredIn both 2011 and 2012, more than 700 of 1,956 local governments did not file their reports as required for each year. Due to increased outreach by the Auditor’s Office in 2013, about 100 more local governments filed their required annual reports.However, in 2013, 611 local governments still did not report as required. The highest percentage of these are fire protection, water/sewer and diking/drainage districts.
Local Governments: Promoting Transparency and Accountability
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 20
Some local governments have missed the deadline or failed to file for three consecutive yearsAlmost three hundred local governments have, for three years in a row, not filed annual reports as required. The largest percentage of these are fire, diking/drainage, and water/sewer districts.
Missed deadlines and failure to file
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 21
Local governments may encounter a range of consequences including: Denial of grant funding: Local governments have been denied emergency
federal funding due to not filing annual reports as required. Poor bond ratings: An absence of up-to-date financial data can lead to poor
bond ratings. Legislature: The lack of financial data inhibits the Legislature’s ability to
assess the needs of different governments for funding. Trouble arranging credit and loans: It can become much harder for a local
government to obtain loans, lines of credit, and credit cards if banks or lenders cannot access annual report information.
Constituent dissatisfaction: Local government elected and appointed officials may face criticism from taxpayers and the media for this lack of transparency and accountability.
More than $2.2 million that remains unaudited
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 22
The most commonly faced obstacles to filing reports arise from the very nature of local governments: tight budgets, part-time staff or volunteers, and inadequate oversight by elected or appointed officials.Problems include:
Why do local governments fail to file these reports?
Lack of resources Lack of experienceInadequate oversight Inadequate technologyLack of trained financial personnel
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 23
The Auditor’s office provides resources to local governments
Since taking office in 2013, State Auditor Troy Kelley prioritized promoting transparency in local government and increasing accountability for the use of public resources.We contact local governments throughout the year to ensure annual reports are filed on time. However, in 2014, Auditor Kelley dedicated additional resources for outreach to local governments, including trainings, workshops, improved processes for online annual financial report filing, and improved website navigation to necessary documents, templates, and manuals.
The State Auditor’s Office reaches out
Local Government Performance CenterNeed to eliminate waste, improve program results and save money? Our Local Government Performance Center (LGPC) can help, thanks to their expertise in Lean processes and productivity.For more information about the LGPC visit us online at:http://www.sao.wa.gov/local/Pages/LGPC.aspx
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 24
Emerging Issue: Change to the Open Public Meeting Act
During the 2014 legislative session, the Legislature added regular meeting agenda posting requirements to Chapter 42.30 RCW. The new section requires public agencies subject to the OPMA to "make the agenda of each regular meeting available online no later than 24 hours in advance of the published start time of the meeting." Entities that have no web site or those that employ less than 10 full-time equivalent employees are not subject to this new requirement. The effective date of this new section of RCW 42.30 was June 12, 2014.
Open Government Training Act, Effective July 1, 2014
Every member of a governing body of a public agency must complete training requirements on the Open Public Meetings Act.
Every local elected official and every local government Public Records Officer must receive records training concerning the Public Records Act and Records Management and Retention laws
Training must be completed within 90 days of assuming office, assuming their duties or taking the oath of office.
In addition, every member of a governing body and the Public Records Officer must complete “refresher” training at intervals of no more than four years as long as they remain in office.
Training resources are available on our website at: http://www.sao.wa.gov/generalinfo/Pages/Open-Government.aspx
Additional information and on-line training is available at the Office of the Attorney General’s website at http://www.atg.wa.gov/OpenGovernmentTraining.aspx
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 25
GASB Statement No. 67, Financial Reporting for Pension Plans (Replaces Statement No. 25)
Effective for the year ended December 31, 2014
Standards for financial reporting of pension plans that issue their own reports, as well as, for plans that are reported as fiduciary funds by a government
Fiduciary fund financial statements remain unchanged from prior standards
BARS manual will be updated to include guidance and suggested disclosures
GASB Statement No. 68, Accounting and Financial Reporting for Pensions (Replaces Statement No. 27)
Effective for the year ended December 31, 2015
Establishes standards of financial reporting for governments that provide pension benefits including those provided through the State’s plans
Net pension liability moves from a note disclosure to being reporting in the financial statements (Schedule 9 for cash basis reporters)
Department of Retirement Systems is working to provide member employers in the State’s plans with the information they will need
BARS manual will be updated to include guidance and suggested disclosures
Emerging Issue: New GASB Pension Standards
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 26
Significant changes have been made to grant administrative requirements, cost principles and audit requirements. The effective date is December 26, 2014. (audits of 2015 calendar year)
Single audit threshold increases to $750,000
New requirements apply to new awards and additional funding to existing awards made after December 26, 2014 (contract your grantor for additional information)
Resources: https://cfo.gov/COFAR/ 3 free you tube videos and PowerPoint presentations
Emerging Issue: Grant Reform
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 27
Reporting inconsistencies have been noted related to law libraries.
We have determined they are not separate legal entity therefore, their financial activity should be included as a part of the County’s financial reports.
If a law library has a separate MCAG number they may have been receiving a separate audit. Our Local Government Support Team has contacted representatives of the law libraries and notified them of the changes in their reporting requirements.
There is no statutory requirement to account for the Law Libraries in a separate fund so it is the County’s decision to use either a general or special revenue fund to account for this activity.
Accounting for Law Libraries
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 28
What is our prediction for largest scheme type in 2015???
Procurement and credit cardsPreview of lessons learned
The next big thing?
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 29
Develop a written policy Allowable uses Prohibited uses No personal use Responsibilities What happens if policy is not followed Have everyone with card responsibilities sign off on
policy
How to avoid credit/purchase card fraud?
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 30
Records Require original, itemized receipts Think about who will be responsible for retaining them Where are they stored?
Banking controls Consider setting a monthly limit Consider limiting allowable vendors Ask if supervisors/AP can have read-only access into
credit card account
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 31
Review—Who is responsible for what? Employee Supervisor knowledgeable of activities Accounts payable Documentation of review
Step back analysis Who actually needs a card? Is the volume of transactions necessary and reasonable? Does the credit card holder ask for personal
reimbursements?
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 32
April 7 BARS GAAP Basis in Lynnwood
April 14 BARS Cash Basis in Okanogan
May 18 District and Municipal Court Management Association Spring Conference, Audit Information Panel
June 18 BARS GAAP Basis in Spokane
July 16th Ethics for CPAs in Lynnwood
August 6 BARS GAAP Basis in Vancouver
October 1 BARS Cash Basis in Pasco
October 7 BARS GAAP Basis in Ellensburg
October 15 BARS Cash Basis in Olympia
To be scheduled, at least four classes: Federal Grant Requirements and Management
See www.WFOA.org for BARS and Grant Management classes
Upcoming Training
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 33
?Questions?
W a s h i n g t o n S t a t e A u d i t o r ’ s O ffi c e 34
Contacts
State Auditor Troy Kelley
(360) [email protected]
Tina Watkins, CPAProgram Manager
(360) 260-6408 Ext. [email protected]
Kelly Collins, CPADirector of Local Audit
(360) [email protected]
