Finance presentation at the 2009 MPCA Annual Conference.

1. Presented by: Jean Young, Partner, CPA and Amanda L. Ward, Associate, CPAJean.Young@plantemoran.com Amanda.Ward@plantemoran.com FEDERAL AUDIT REQUIREMENTS AND FRAUD PREVENTION 1

2. AGENDA By the end of the session, we will: Provide an overview of changes to the single audit requirements and the impact of ARRA Provide an update on new auditing standards and accounting pronouncements Provide guidance on how to protect against fraud and other internal control related matters 2

3. Single Audit 3

5. Federal expenditures < $500K = NO AUDIT

7. DATA COLLECTION REVISIONS Revised on-line submission procedures Ensure proper identification of agencies to receive reports Expenditures need to agree with the SEFA, with clusters properly identified Findings must be properly identified and agree with the single audit report 5

8. CONSOLIDATE HEALTH CENTERS – 93.224 The objectives is to provide populations that would ordinarily not have access to health care: Primary and preventive health services Referrals to other service Case management and other services 6

10. Allowable cost/cost principles

11. Eligibility

12. Program income

13. Financial reporting

14. Special reporting

15. Special Tests and Provisions7

17. Majority of Grants Subject to Single Audit (A-133) Compliance Testing & Reporting

18. Grants Provided Through Both Existing Grant Programs/Formulas & New Programs

19. Mandate to Spend it Quickly!!8

21. $228 Million in Direct Grants to Local Units

22. More than 50 Separate Funding Programs

23. Over 17,000 Projects

24. 1,700 Local Grant Recipients

25. > $1 Billion in Infrastructure Projects9

27. Direct GAO Oversight and Monitoring

28. Single Audit Reporting

29. Increased Quality Control Reviews of Reports Issued

30. Single Audit Reports and Results of Quality Control Reviews Accessible by Public

31. Quarterly Reporting of Both Financial and Programmatic Status of Grant on Federal Website10

33. Implementation Guidance to Federal Agencies

34. Compliance Testing Guidance to Auditors & Recipients

35. Only Interim Testing Guidance Published

36. Appendix VII of March 2009 A-133 Compliance Supplement

37. Expect Additional OMB Guidance in future!!11

39. Federal Agencies Must Identify Award as ARRA

40. Recipients Must Identify ARRA Portion to Sub-recipients

41. Separate Tracking/Reporting of ARRA Portion vs. Normal Portion of Existing Grant Programs12

43. Specific Program Compliance – if ARRA Grants Fall Under an Existing CFDA Number

44. Requirements Specific to Award Document13

46. More Major Programs to Evaluate for Testing

47. June 2009 Fiscal Year Dollars Expected to be Minimal (Significant Impact in 2010 and 2011)14

49. Gather the Data for Quarterly Reports in the Required Time Frame

50. Adhere to Compliance Requirements

51. Monitor Sub-Recipients and Gather Reporting Data From Them15

53. Get Finance Dept Involved at the Start of the Grant Process

54. Monitor Changes in Grant Requirements:

55. OMB Website & Compliance Supplement Updates

56. State Web Site Reporting Requirements

57. Federal Agencies Recovery Act websites16

59. Focus on Preventing Waste, Fraud, & Abuse

60. Increased Scrutiny and Review of Single Audit Reports

61. Pressure to Expend Promptly

62. High Public Interest and Scrutiny

63. High Political Visibility

64. Changes to Compliance Requirements17

65. ARRA WEBSITE RESOURCES State Website – www.michigan.gov/recovery GAO Website - www.gao.gov/recovery Federal Website - www.recovery.gov OMB-www.whitehouse.gov/omb/circulars_a133_compliance_09toc 18

68. DEFINITION – CONTROL DEFICIENCY A control deficiency exists when the design or operation of a controls does not allow management or employees , in the normal course of performing their assigned functions, to prevent or detect on a timely basis noncompliance with a type of compliance requirement of a federal program. 20

69. DEFINITION – SIGNIFICANT DEFICIENCY A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity’s ability to administer a federal program such that there is more than a remote likelihood that noncompliance with a type of compliance requirement of a federal program, that is more than inconsequential, will not be prevented or detected. 21

70. EXAMPLES OF SIGNIFICANT DEFICIENCIES IN INTERNAL CONTROL OVER COMPLIANCE Policies and procedures which are incomplete, inadequate, or outdated for activities subject to a type of compliance requirement Inadequate segregation of duties over a type of compliance requirement Controls over complex types of compliance requirements IT controls relating to activity subject to the type of compliance 22

71. DEFINITION – MATERIAL WEAKNESS A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that material noncompliance with a type of compliance requirement of a federal program will not be prevented or detected. 23

72. EXAMPLES OF SIGNIFICANT DEFICIENCY, may be a MATERIAL WEAKNESS Lack of operating policies and procedures for a material noncompliance category Ineffective oversight by those charged with governance over compliance with those program requirements Identification by the auditor of material noncompliance for the period under audit that was not initially identified by the entity’s internal control Identification of fraud in the major program of any magnitude. 24

74. REQUIRED FINDING REPORTING A significant deficiency/material weakness/noncompliance on the financial statements is required to be disclosed as a finding in the A-133 report A significant deficiency/material weakness/noncompliance in major federal program is required to be disclosed as a finding in the A-133 report Fraud/questioned costs must be disclosed as a finding if the amount is over $10,000 26

76. Changes are primarily limited to the definitions of deficiency in internal control, significant deficiency, and material weakness

77. Material weakness – is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s F/S will not be prevented, or detected and corrected on a timely basis. In this SAS, a reasonable possibility exists when the likelihood of the event is either reasonably possible or probable as those terms are used in FAS 5, Accounting for Contingencies.

78. Significant deficiency – is a deficiency, or combination of deficiencies, in internal control that is less than a material weakness, yet important enough to merit attention by those charged with governance.

79. List of material weakness indicators

80. Updated communication

81. Effective for periods ending on or after December 15, 2009AICPA – SAS 115 27

82. Accounting & Auditing Update 28

83. Accounting and Auditing Update SFAS 157, Fair Value Measurements FSP FAS 117-a, Endowments of NPOs: Net Asset Classification of Funds Subject to an Enacted Version of the UPMIFA, and Enhanced Disclosures SFAS 161, Disclosures about Derivative Instruments and Hedging Activities SFAS 164, Not-for-Profit Entities: Mergers and Acquisitions SFAS 165, Subsequent Events 29

85. Establishes a framework for measuring fair value

86. Requires new disclosures about fair value measurements in the financial statements and their effects on earnings

87. Does not address what should be measured at fair value, but rather how to measure fair value

88. Effective 2008 for financial assets and liabilities30

90. Example – publicly traded securities; U.S. agencies; treasuries

91. Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with observable market data

92. Example – Municipal bonds that are rated by a bonding agency; auction rated securities; receive-fixed, pay-variable interest rate swap based on LIBOR swap rate; 3 year option on exchange traded shares31

95. Applies to donor-restricted endowment funds (funds that cannot be wholly expended on a current basis under terms of gift instrument)

96. Also applies to board designated endowments

97. Effective for fiscal years ending on December 31, 2008

98. Currently, Michigan does not follow UPMIFA, however, bill pending with Governor for signature

99. Disclosure provisions still apply33

101. Description of endowment spending (distribution) policy(ies)

102. Description of endowment investment policy(ies)

103. Return objectives and risk parameters

104. How the objectives relate to spending policy(ies)

105. Strategies for achieving objectives

106. Composition of endowment by net asset class (would present for each date for which a balance sheet is presented)

107. Endowment roll-forward by net asset class (would present for each period for which a statement of activities is presented)

108. Planned endowment distribution for next year (if known)34

110. Two tabular disclosures for derivatives

111. Balance sheet – Where derivatives are recorded and what is the fair value?

112. Income statement – Where is the change in fair value recorded and what is the change?

113. Hedged items are not part of the tabular disclosures35

115. Qualitatively discuss, by underlying risk, objectives for holding or issuing derivatives

116. Provide information that would enable users to understand an entity’s volume of derivative activity

117. Existence and nature of credit-risk related contingent features embedded in derivative instruments

118. Effective periods beginning after 11/15/200836

120. Measure goodwill as the amount by which the value of the consideration transferred exceeds the net of the amounts assigned to identifiable assets acquired and liabilities assumed

121. Measure the contribution inherent in the transaction as the amount by which the values assigned to the identifiable assets acquired exceeds the consideration transferred and the liabilities assumed37

123. Amend the effective date and transition provisions of Statement 142, making them effective for a NFP organization

124. Statement 142 requires an organization to make certain assessments about the nature of intangible assets acquired in a merger or acquisition as of the acquisition date, such as whether an intangible asset has an indefinite life. Goodwill, therefore, would be tested for impairment periodically, rather than amortized.

125. Effective for mergers occurring on or after December 15, 2009, and for acquisitions occurring in fiscal years beginning on or after December 15, 200938

127. New disclosure in financial statement

128. Effective for periods after June 15, 200939

130. Promoting tax compliance

132. Reported officer and key employee compensation using calendar year-end reporting (i.e., W-2) versus fiscal year-end amounts40

134. For 2008, only Part V, Facilities Information, must be completed

135. For 2009, all parts must be completed (Parts I – VI)41

137. Internal controls 43

138. INTERNAL CONTROL - DEFINITION Internal control is a process - effected by an entity’s board, council, management, and other personnel - designed to provide reasonable assurance regarding the achievement of the internal control objectives. 44

139. INTERNAL CONTROL OBJECTIVES Reliability of financial reporting Effectiveness and efficiency of operations Compliance with applicable laws and regulations Reduce risk that errors would not be detected in a timely period 45

140. INHERENT LIMITATIONS Human error Deliberate circumvention Collusion Management override Cost/benefit considerations 46

142. Provides discipline and structure

144. Segregation of duties

145. Independent checks on performanceMonitoring 47

146. Internal Controls over cash Collection of cash receipts Cash disbursements Bank reconciliations 48

147. Collection of cash receipts Prompt deposits Segregation of duties Controlled by a register Use of lock box system Bonding the cash custodian Restrictive endorsements Limited remote site collections of cash 49

148. Cash disbursements Segregation of duties Checks never signed in blank Control over blank checks Controls over mechanical check signing processes Petty cash controls Purchase requisitions Pre-numbered purchase orders Recording of payable and approval for payment Budget system 50

149. Bank Reconciliations Receipt of unopened bank statements Performed timely Reconciliation between the bank statement and the general ledger Reviewed by independent party 51

150. Internal controls over investments Prompt deposits Substantiation of all purchases Maintenance of a detailed listing of all investments and reconciliation to the general ledger Established investment policies Independent review of the investment portfolio 52

151. Documentation of internal controls Written handbook Checklist Periodic meetings with staff 53

152. QUESTIONS? 54