HomeMy WebLinkAboutAUGUSTA GEORGIA ANNUAL AUDIT AGENDA PRESENTATION OF FINICIAL & COMPLIANCE AUDIT RESULTS DECEMBER 31, 2011Augusta, Georgia
Annual Audit Agenda Presentation of
Financial & Compliance Audit Results
December 31, 2011
- - •
Presented by:
Miller G. Edwards, CPA
AULDIN
& ENKINS
CERTIFIED PUBLIC ACCOUNTANTS, LLC
Augusta, Georgia
Annual Audit Agenda
December, 2011
PURPOSE OF ANNUAL AUDIT AGENDA
♦ Engagement Team.
♦ Overview of:
o Audit Opinion
o Financial Statements, Footnotes and Supplementary Information
o Compliance Reports.
♦ Required Communications under Government Auditing Standards.
♦ Accounting Recommendations and Related Matters.
♦ Answer Questions
Mauldin & Jenkins.
ENGAGEMENT TEAM
• Founded in 1920, and a large regional firm serving the Southeastern United States.
• Offices located in Macon, Atlanta, Albany, Bradenton, FL and Birmingham, AL with firm
governmental leadership positioned in the Macon (and Atlanta) office(s).
• Serve more governmental entities in Georgia than any other certified public accounting firm
requiring over 60,000 hours of service on an annual basis.
• Approximately 65 professional staff persons with current governmental experience.
• Most recent auditor for approximately 25 counties in Georgia, as well as another 50 cities in
Georgia, and over 185 total governmental entities in the Southeast.
• Serves 67 governments that receive the GFOA's Certificate of Achievement for Excellence
in Financial Reporting.
• Auditor of a substantial part of the State of Georgia including approximately 25% of the
State's general fund, and 13 of the State of Georgia's component units.
Engagement team leaders for Augusta, Georgia include:
• Miller Edwards - Engagement Lead Partner
• Meredith Lipson — Partner in Charge of Fieldwork
• Wade Sansbury - Concurring Review & Quality Assurance Engagement Partner
• David Irwin - Manager
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Annual Audit Agenda
December, 2011
AUDIT OPINION
Government's Responsibility
The financial statements are the responsibility of the Government's management and
Commission members.
Auditor's Responsibility
Our responsibility, as external auditors, is to express an opinion on these financial
statements.
Auditing Standards
We audited the Government's financial statements in accordance with auditing stan-
dards generally accepted in the United States of America and Government Auditing
Standards issued by the Comptroller General of the United States.
Clean Opinion
The financial statements of Augusta, Georgia are considered to present fairly the fi-
nancial position and results of operations as of, and for the year ended December 31,
2011.
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Annual Audit Agenda
December, 2011
REQUIRED COMMUNICATIONS
The Auditor's Responsibility Under Government Auditing Standards
and Auditing Standards Generally Accepted in the United States of America
Our audit of the financial statements of Augusta, Georgia (the "Government ") for the year ended
December 31, 2011 was conducted in accordance with auditing standards generally accepted in the
United States of America and Government Auditing Standards issued by the Comptroller General of
the United States. Those standards require we plan and perform the audit to obtain reasonable as-
surance about whether the financial statements are free of material misstatement, whether caused by
error, fraudulent financial reporting or misappropriation of assets. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by manage-
ment, as well as evaluating the overall financial statement presentation. Accordingly, the audit was
designed to obtain reasonable, rather than absolute, assurance about the financial statements. We
believe our audit accomplishes that objective.
In accordance with Government Auditing Standards, we have also performed tests of controls and
compliance with laws and regulations that contribute to the evidence supporting our opinion on the
financial statements. However, they do not provide a basis for opining on the Government's inter-
nal control or compliance with laws and regulations.
Accounting Policies
Management has the ultimate responsibility for the appropriateness of the accounting policies used
by the Government. Effective January 1, 2011, the Government implemented Governmental Ac-
counting Standards Board Statement No. 54, Fund Balance Reporting and Governmental Fund
Type Definitions. There are also new accounting standards which will be required to be imple-
mented in the coming years. These are discussed later in this document.
In considering the qualitative aspects of the Government's accounting policies, we did not identify
any significant or unusual transactions or significant accounting policies in controversial or emerg-
ing areas for which there is a lack of authoritative guidance or consensus. The Government's poli-
cies relative to the timing of recording of transactions are consistent with GAAP and typical gov-
ernment organizations.
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Accounting estimates are an integral part of the preparation of financial statements and are based
upon management's current judgment. The process used by management encompasses their know-
ledge and experience about past and current events and certain assumptions about future events.
Management has informed us they used all the relevant facts available to them at the time to make
the best judgments about accounting estimates and we considered this information in the scope of
our audit. We considered this information and the qualitative aspects of management's calculations
in evaluating the Government's significant accounting policies. Estimates significant to the financial
statements include such items the estimated lives of depreciable assets, the estimated liability for
claims and judgments payable, and the estimated allowance for uncollectible accounts.
The footnote disclosures to the financial statements are also an integral part of the financial state-
ments. The process used by management to accumulate the information included in the disclosures
was the same process used in accumulating the financial statements, and the accounting policies de-
scribed above are included in those disclosures. The overall neutrality, consistency, and clarity of
the disclosures was considered as part our audit and in forming our opinion on the financial state-
ments.
We had no passed adjustments.
Augusta, Georgia
Annual Audit Agenda
December, 2011
Management Judgments and Accounting Estimates
Financial Statement Disclosures
Significant Difficulties Encountered in Performing the Audit
We encountered no difficulties in dealing with management relating to the performance of the audit.
Audit Adjustments
During our audit of the Government's basic financial statements as of and for the year ended De-
cember 31, 2011, there were several adjustments, including prior period adjustments, proposed to
the funds of the Government. The detail of all proposed adjustments for each fund are included
with our Audit Agenda package of information for your review and discussion. All adjustments
have been discussed with management.
Uncorrected Misstatements
Disagreements with Management
We encountered no disagreements with management over the application of significant accounting
principles, the basis for management's judgments on significant matters, the scope of the audit or
significant disclosures to be included in the financial statements.
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December, 2011
Representation from Management
We requested written representations from management relating to the accuracy of information in-
cluded in the financial statements and the completeness and accuracy of various information re-
quested by us, during the audit. Management provided those written representations without a prob-
lem.
Management's Consultations with Other Accountants
We are not aware of any consultations management had with other accountants about accounting or
auditing matters.
Significant Issues Discussed with Management
There were no significant issues discussed with management related to business conditions, plans,
or strategies that may have affected the risk of material misstatement of the financial statements. We
are not aware of any consultations management had with us or other accountants about accounting
or auditing matters. No major issues were discussed with management prior to our retention to per-
form the aforementioned audit.
Independence
We are independent of the Government, and all related organizations, in accordance with auditing
standards promulgated by the American Institute of Public Accountants and Government Auditing
Standards, issued by the Comptroller General of the United States.
Other Information in Documents Containing Audited Financial Statements
We are not aware of any other documents that contain the audited basic financial statements. If such
documents were to be published, we would have a responsibility to determine that such financial in-
formation was not materially inconsistent with the audited statements of the Government.
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General Fund
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Augusta, Georgia
Annual Audit Agenda
December, 2011
OVERVIEW OF FINANCIAL STATEMENTS
The Government's basic financial statements include three components: (1) government -wide fi-
nancial statements; (2) fund financial statements; and (3) notes to the financial statements.
The government -wide financial statements provide a broad overview of all of the Government's
funds, as well as its discretely presented component units — the Richmond County Department of
Health, the Augusta Canal Authority, the Downtown Development Authority, the Urban Redeve-
lopment Authority, and the Augusta - Richmond County Coliseum Authority. The Statement of Net
Assets presents information on all assets and liabilities of the Government, with the difference be-
tween the two reported as net assets. The Statement of Activities presents information showing how
the Government's net assets changed during the most recent fiscal year. Revenues are categorized
as program revenues or general revenues. Expenses are categorized by function.
The fund financial statements more closely resemble the financial statements as presented prior to
the adoption of GASB Statement No. 34. All of the funds of the Government can be divided into
three categories: governmental funds, business -type funds, and fiduciary funds.
Of primary interest to the Government is the General Fund, which accounts for the majority of rev-
enues received and funds expended in the operations of the Government, including general govern-
ment activities, judicial, public safety, public works, health and welfare, culture and recreation, and
housing and development. Additionally, the Government reports capital outlays and debt service as
separate line items in the financial statements. The following charts present the sources of revenues
and the expenditures of the General Fund for the fiscal year ended December 31, 2011:
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Annual Audit Agenda
December, 2011
Total General Fund revenues for the fiscal year ended December 31, 2011 were $123,542,964.
Revenues of the prior year were $120,243,212. The most significant variances were an increase in
intergovernmental revenues of $1,641,185, and an increase in other taxes of $2,437,803.
Total expenditures during the year ended December 31, 2011 were $125,709,655. Expenditures of
the prior year were $120,654,629. The most significant variances were an increase in general gov-
ernment expenditures of $3,289,076 and an increase in public works expenditures of $1,525,647.
More detailed explanations of variances can be found in the Management's Discussion and Analysis
section of the financial statements. An analysis of General Fund revenues and expenditures for each
of the last five fiscal years is as follows. It should be noted that other financing sources, such as
transfers in and proceeds of debt, are included with the revenues. Other financing uses, such as
transfers out, are included with the expenditures.
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December, 2011
Augusta, Georgia
General Fund Revenues and Expenditures
140,000,000
135,000,000
130,000,000
125,000,000
120,000,000
115,000,000
110,000,000
105,000,000
2007
2008
2009
2010
Fiscal Years Ending December 31st
2011
■Revenues and Other Financing Sources •Expenditures and Other Financing Uses
Fund balance of the General Fund at December 31, 2011 was $35,064,488, an increase from the
prior year of $1,693,204. It is important to note that fund balance does not necessarily equate to
funds on hand available to spend. Fund balance is the difference between assets and liabilities, only
some of which is cash and investments. Additionally, certain amounts of fund balance are nonspen-
dable (1.3 %) or assigned by the Government for specific purposes (13.4 %). This leaves the remain-
ing 85% of the Government's fund balance at December 31, 2011 available for spending.
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Other Governmental Funds
Business -Type Funds
Fiduciary Funds
Augusta, Georgia
Annual Audit Agenda
December, 2011
The Government also maintains twenty -three (23) special revenue funds. These funds account for
revenues derived from specific sources which are legally restricted to finance particular functions or
activities. Debt service funds are used to account for the accumulation of resources for payment of
the Government's long -term debt. The Government maintains four (4) debt service funds. Capital
projects funds are used to account for revenues and expenditures related to the renovation and/or
construction of major capital assets. Nine (9) capital projects funds are maintained by the
Government.
The Government maintains seven (7) enterprise funds, which are used to account for operations in a
manner similar to private business enterprises. The enterprise funds maintained are the Water and
Sewer Fund, the Augusta Regional Airport Fund, the Waste Management Fund, the Municipal Golf
Course Fund, the Transit Fund, the Daniel Field Airport Fund, and the Garbage Collection Fund.
The Government also maintains six (6) internal service funds which are used to account for various
programs and services for the benefit of the employees of the Government. The internal service
funds maintained are the Risk Management Fund, the Fleet Operations Fund, the Employee Health
Benefits Fund, the Unemployment Fund, the Long -Term Disability Insurance Fund, and the GMA
Leases Fund.
The Government maintains two (2) pension trust funds, which account for the activities of the
employees' pension plan. The two pension trust funds maintained are the 1945 Plan Fund and the
General Retirement Fund.
The Government maintains one (1) private purpose trust fund, which accounts for resources legally
held in trust to finance awards for children attending Joseph R. Lamar School.
The Government also maintains the following agency funds - Tax Commissioner, Sheriff's Office,
Probate Court, Clerk of Court, and Magistrate /Civil Court — which are used to account for the
collection and disbursement of funds by the Government on behalf of other governments and
individuals.
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Annual Audit Agenda
December, 2011
ACCOUNTING RECOMMENDATIONS AND RELATED MATTERS
Recommendations for Improvement and Other Matters
During our audit of the financial statements as of and for the year ended December 31, 2011, we
noted some areas within the accounting and internal control systems that we believe can be
improved. Additionally, we noted certain items management should consider as part of its
decision making process. Further, we noted other matters which we wish to communicate to you in
an effort to keep the Government abreast of accounting matters that could present challenges in
financial reporting in future periods. Our recommendations and proactive thoughts and
communications are presented in the following paragraphs.
Item Cited in the Government's Financial Statements as Material Weaknesses
1) Revenue Recognition
Generally accepted accounting principles require revenues to be recognized in the accounting period
in which they become both measurable and available to finance expenditures of the current period.
As a part of these processes, the Government should review all revenue transactions to determine
reporting in the proper period. Prior to fiscal year 2011, the Government did not properly record
revenue collected by the Sheriff for bench warrant fees in the General Fund. Additionally, the
Government did not properly record current year insurance premium tax revenue in the Fire
Protection Fund and passenger facilities revenue in the Airport Fund as of December 31, 2011. A
prior period adjustment was required to be recorded to increase fund balance and increase cash in
the amount of $585,746 in the General Fund, for revenues which have historically been included in
an Agency Fund. In addition, a prior period adjustment to decrease insurance premium tax revenue
and increase fund balance in the amount of $1,321,093 was required to be reported within the Fire
Protection Fund as of December 31, 2011. An audit adjustment to increase accounts receivable and
increase passenger facilities revenue in the amount of $111,983 was required to be reported within
the Airport Fund as of December 31, 2011. We recommend the Government establish procedures to
review all revenue transactions after year -end to determine reporting in the proper period.
2) Certificates of Participation — Fair Market Hedge Derivatives
The Governmental Accounting Standards Board (GASB) Statement No. 53, Accounting and
Financial Reporting for Derivative Instruments, requires derivative instruments to be measured at
fair value. Changes in the fair value are to be reported as a component of investment income.
Changes of effective hedging derivative instruments, however, are to be reported as deferred inflows
or outflows. Prior to the implementation of GASB Statement No. 53, the Government was not
required to record the fair value of the interest rate swap agreement related to the certificates of
participation of the GMA Lease Pool in accordance with GASB 53. However, with the
implementation of GASB 53, the Government was required to record the fair value. A prior period
adjustment was required to be recorded to increase the deferred interest rate swap in the amount of
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Annual Audit Agenda
December, 2011
$1,958,977, decrease fund balance in the amount of $583,900, and increase deferred revenue in the
amount of $2,542,877 in the GMA Leases Fund. In addition, an audit adjustment to increase the
deferred interest rate swap in the amount of $3,231,327, increase deferred revenue in the amount of
$3,186,411, and decrease related expenses in the amount of $44,916 was required to be reported
within the GMA Leases Fund as of December 31, 2011. We recommend that the Government
obtain the information necessary each year to properly record the fair value of the interest rate swap
related to the GMA Lease Pool program.
3) Management of Inventory Accounts
Internal controls and effective procedures should be in place to ensure that inventory records are
being updated in a timely manner and accurate detail listings are being maintained. The
Government did not have sufficient controls and procedures in place to ensure the accuracy of the
detail inventory listing in the Water and Sewer Fund as of December 31, 2011. Additionally, the
Government does not have an effective perpetual inventory system or perform periodic physical
counts to properly adjust the accounting records. An audit adjustment to increase inventory and
decrease expense in the amount of $293,872 was required to be recorded within the Water and
Sewer Fund as of December 31, 2011. We recommend the Government implement procedures to
ensure that inventory is being adequately controlled and reported.
4) Management of Retainage Payable
Generally accepted accounting principles require reporting of all current liabilities whose liquidation
is expected to require the use of current assets when the goods have been received or services have
been performed. The Government did not properly address these criteria as of December 31, 2011
as it relates to retainage payable within the Airport Fund and the Water and Sewer Fund. An audit
adjustment to increase construction in progress and increase retainage payable in the amount of
$1,469,129 was required to be recorded within the Airport Fund as of December 31, 2011.
Additionally, an audit adjustment to increase construction in progress and increase retainage payable
in the amount of $105,652 was required to be recorded within the Water and Sewer Fund as of
December 31, 2011. We recommend the Government begin recognizing and recording retainage
payable as required, and record the necessary adjustments to reflect the retainage payable balances at
the conclusion of each financial reporting cycle.
5) Management of Capital Assets
Generally accepted accounting principles generally require the reporting of all capital assets at their
historical cost, which is written off periodically, or depreciated, in a systematic and rational manner
Prior to fiscal year 2011, the Government did not properly depreciate certain governmental capital
assets. In addition, the Government did not properly record capital assets within the Airport Fund as
of December 31, 2011. A prior period adjustment was required to decrease the beginning balance of
governmental activities net assets and decrease capital assets, net of accumulated depreciation, in
the amount of $1,641,213. In addition, an audit adjustment to increase capital assets in the amount
of $395,549, increase due to other funds in the amount of $354,779, and decrease interest expense
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Annual Audit Agenda
December, 2011
in the amount of $40,770 was required to be recorded within the Airport Fund as of December 31,
2011. We recommend the Government review all capital asset activity and capitalize and depreciate
assets based on the Government's capitalization policy.
6) Debt Transactions
Proprietary funds use the economic resources measurement focus, which requires those funds to
report all assets and liabilities, including long -term debt. The Government did not appropriately
record debt transactions in the Waste Management Fund or for the Urban Redevelopment Authority
as of December 31, 2011. The Government has been recording the amortization of bond issuance
costs using the straight line method instead of the more appropriate effective interest method. The
Government recorded the debt service payment at the budgetary level and did not properly adjust the
long term debt. An audit adjustment to increase deferred charges in the amount of $81,648, increase
fund balance in the amount of $285,630, decrease long -term debt in the amount of $907,871, and
decrease respective expenses in the amount of $703,889 was required to be recorded within the
Waste Management Fund as of December 31, 2011. In addition, an audit adjustment to increase
interest expense in the amount of $114,413, increase accrued interest payable in the amount of
$57,125, and decrease bond issuance cost in the amount of $57,288 was required to be recorded
within the Urban Redevelopment Authority as of December 31, 2011. We recommend the
Government record all debt transactions appropriately as they occur during the year.
7) Management of Due To/From (Internal) Accounts
Generally accepted accounting principles require consideration of the collectability of receivables of
all kinds, whether external or internal to the Government. Prior to fiscal year 2011, The
Government did not appropriately record amounts due to other funds within the Capital Outlay
Fund. The amount due to other funds is related to the outstanding leases under the GMA Lease
Pool, which is reported as an internal service fund. A prior period adjustment to decrease fund
balance and increase due to other funds in the amount of $1,070,201 was required to be recorded
within the Capital Outlay Fund. We recommend all interfund activity be properly recorded through
the due to /from accounts as appropriate.
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Annual Audit Agenda
December, 2011
Management Points for Communication to the Board
1) Review of Bank Reconciliations
During our testing of the Sheriffs Department, Civil and Magistrate Courts, and the Tax Commis-
sioner's office, we noted that there was no formal review of bank reconciliations. In addition, we
noted that individuals responsible for reconciling bank statements also have the ability to investigate
discrepancies and make necessary corrections. We recommend the above elected officials imple-
ment a formal review of bank reconciliations in order to mitigate the opportunity for fraud.
2) Segregation of Duties
During our testing of the Civil and Magistrate Courts, we noted that the individual responsible for
reconciling the bank statements also has the ability to sign checks and prepare deposits. We rec-
ommend the Courts implement proper controls to segregate the check signing, deposit preparation,
and bank reconciliation duties.
3) Old Outstanding Checks
During our testing of the Tax Commissioner and Clerk of Courts offices, we noted a number of old
outstanding checks. We recommend these offices determine why some of these checks have not
cleared and, where necessary, reissue the checks. If these offices cannot locate the payee of the
checks, we recommend they work with the Government's attorney to determine whether the un-
claimed funds should be turned over to the State of Georgia or if they should be remitted to the
General fund. It is also recommended that the Government routinely monitor outstanding check
lists to ensure that items do not remain uninvestigated for several months.
4) Sheriffs Department Tracking of Cash Bonds
During our testing of the accounts at the Sheriffs Department, we noted that no perpetual cash bond
listing is being maintained. As such, the Sheriffs clerks must count the individual cash bond cards
in order to reconcile the cash bond liability. We recommend the Sheriffs Department implement
an accounting system which would allow for electronic tracking and processing of cash bonds.
5) Clerk of Court Registry Accounts Report
During our testing of the Clerk of Court's office, we noted that the Clerk's accounting software is
unable to generate a report detailing to whom the registry accounts are due at any given point in
time. We recommend the Clerk's office work with their accounting software provider to ensure
they are able to run a detailed report of amounts due, and that the bank accounts are reconciled to
this detailed listing on a monthly basis. As of the issuance of this letter, it is our understanding that
this recommendation is currently being implemented and the new accounting software will have the
desired capabilities.
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6) Proper Collateralization of Cash Accounts
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Annual Audit Agenda
December, 2011
During our testing of the Government's cash accounts, we noted that the Government is not request-
ing collateral statements from their respective banks to ensure that a sufficient amount of securities
are pledged as collateral for their deposits in excess of Federal Depository Insurance Corporation
(FDIC) coverage. The State of Georgia requires collateral to be pledged at 110% for all public de-
posits in excess of the FDIC's insured limits We recommend the Government implement internal
controls to ensure proper collateral is pledged by all banking institutions where deposits exceed the
FDIC's coverage and that those reports are reconciled on a monthly basis.
7) Excess Funds in the Magistrate and Civil Court and Probate Court
All constitutional offices have a function of receiving funds through fines and fees and remitting
such funds to the appropriate parties upon their disposition. During our testing of the Magistrate
and Civil Court and Probate court offices, we noted excess funds in the amounts of $57,837 and
$16,518, respectively, for which no determination can be made as to who the funds are owed. We
recommend the respective offices make every effort to determine who the proper payee(s) are for
those funds and disburse the monies as quickly as possible. If the payee cannot be determined, we
recommend consultation with the Government's attorney as to how the funds should be disbursed.
8) Water & Sewer Customer Billing
During our testing of the Government's Water and Sewer Fund receivables, we noted that there is a
two month lag from the initial read date on the meters to the final due date to the customer. We
recommend the Government implement a billing system that reduces the lag time to ensure a more
timely collection of receivables. It is our understanding that the Government is aware of this and is
currently working on a solution.
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Other Matters for Communication to the Board and Management
During our audit of the financial statements as of and for the year ended December 31, 2011, we
noted other matters which we wish to communicate to you in an effort to keep the Government
abreast of accounting matters that could present challenges in financial reporting in future periods.
1) New GASB Standards
As has been the case for the past 10 years, GASB has issued several other new pronouncements
which will be effective in future years. The following is a brief summary of the new standards:
a) Statement No. 56, Codification of Accounting and Financial Reporting Guidance Con-
tained in AICPA Statements on Auditing Standards which is currently effective and at-
tempts to incorporate into GASB's literature certain accounting and financial reporting guid-
ance that is currently included in the AICPA's Statements on Auditing Standards. Subjects
include: related party transactions; subsequent events; and going concern considerations.
The Government was not significantly affected by the implementation of this statement.
b) Statement No. 57, OPEB Measurements by Agent Employers and Agent Multiple Em-
ployer Plans is effective the year ending December 31, 2012. The Government was not sig-
nificantly affected by the implementation of this statement.
c) Statement No. 58, Accounting and Financial Reporting for Chapter 9 Bankruptcies. This
statement is currently effective and addresses financial reporting issues for governments who
have declared bankruptcy. The Government was not significantly affected by the implemen-
tation of this statement.
d) Statement No. 59, Financial Instruments Omnibus is currently effective and deals with
certain financial instruments and external investment pools. The Government was not sig-
nificantly affected by the implementation of this statement.
e) Statement No. 60, Accounting and Financial Reporting for Service Concession Ar-
rangements will be effective for the Government's fiscal year ending December 31, 2013.
This statement addresses arrangements where a transferor conveys to an operator the right,
and related obligation, to provide public services through the use and operation of a capital
asset in exchange for significant consideration. The Government should: apply certain due
diligence to addressing the potential for restatements relative to the pronouncements; review
various agreements previously entered into by the Government; and, determine the potential
effects from adopting the requirements of this pronouncement.
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1) Statement No. 61, The Financial Reporting Entity: Omnibus (An Amendment to GASB
No.'s 14 and 34) is effective for the Government's fiscal year ending December 31, 2013.
This standard addresses the concept and definition of a component unit. This new statement
raises the bar for an entity to be included in another primary government's financial state-
ments. This statement also addresses the recognition of joint venture arrangements with
other governmental units. The Government should apply certain due diligence to addressing
the potential effects from adopting the requirements of this pronouncement.
g)
Statement No. 62, Codification of Accounting and Financial Reporting Guidance Con-
tained in Pre - November 30, 1989 FASB and AICPA Pronouncements is effective for the
Government's fiscal year ending December 31, 2013. FASB has adopted a new codification
and its original pronouncements are considered to be non - authoritative. This standard iden-
tifies those provisions in FASB Statements & Interpretations, APB Opinions, ARB's, and
AICPA Accounting Interpretations issued before November 30, 1989 that are applicable to
state and local governmental entities and incorporated into the GASB's literature. GASB
Statement No. 20 is superseded by this statement. Matters of significance to the Govern-
ment that are specifically addressed in this new standard include:
• Capitalization of interest costs
• Statement of net asset's classifications
• Special and extraordinary items
• Comparative financial statements
• Related party activities, transactions and relationships
• Prior period adjustments and restatements
• Accounting changes and error corrections
• Contingencies
■ Extinguishment of debt
■ Troubled debt restructuring
• Inventory
• Leases (capital, operating, etc.)
• Sales of real estate
• Real estate projects
■ Research and development arrangements
• Broadcasters
• Cable television systems
• Insurance enterprises
• Lending activities
• Mortgage banking activities
• Regulated operations
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h) Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred In-
flows of Resources, and Net Position which is effective the Government's fiscal year ending
December 31, 2013.
This statement is intended to improve financial reporting by providing citizens and other us-
ers of state and local government financial reports with information about how past transac-
tions will continue to impact a government's financial statements in the future. This state-
ment provides a new statement of net position format to report all assets, deferred outflows
of resources, liabilities, deferred inflows of resources, and net position (which is the net resi-
dual amount of the other elements). This statement requires that deferred outflows of re-
sources and deferred inflows of resources be reported separately from assets and liabilities.
A deferred outflow of resources is a consumption of net assets that is applicable to a future
reporting period. An example of a deferred outflow of resources is a government's hedging
interest rate swap agreement in which the fair value becomes negative. If the hedge is de-
termined to be effectively offsetting the changes in fair value of the debt, the decrease in the
fair value of the derivative instrument would be reported as a liability with a corresponding
deferred outflow of resources to reflect the fact that this decrease is not expected to be rec-
ognized in investment income in future periods.
A deferred inflow of resources is an acquisition of net assets that is applicable to a future re-
porting period. An example of a deferred inflow of resources is a service concession ar-
rangement that involves a public toll road. If the government receives an up -front payment
from an operator, the revenue associated with that payment will be recognized in future
years because the arrangement that generated the up -front payment relates to those periods.
Statement No. 63 also amends certain provisions of Statement No. 34, Basic Financial
Statements —and Management's Discussion and Analysis —for State and Local Govern-
ments, and related pronouncements to reflect the residual measure in the statement of finan-
cial position as net position, rather than net assets.
i) Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination
Provisions (An Amendment of GASB Statement No. 53) is effective for the Government's
fiscal year ending December 31, 2012. This statement is intended to improve financial re-
porting by state and local governments by clarifying the circumstances in which hedge ac-
counting continues to be applied when a swap counterparty, or a swap counterparty's
credit support provider, is replaced. This statement clarifies that when certain conditions
are met, the use of hedge accounting should not be terminated. Hedge accounting entails re-
porting fair value changes of a hedging derivative as either deferred outflows of resources or
deferred inflows of resources, rather than recognizing those changes in investment income.
When a hedging derivative is terminated, Statement 53 requires that hedge accounting cease
and all accumulated deferred amounts be reported in investment income.
As Statement 53 was being implemented, questions had arisen regarding situations in which
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Annual Audit Agenda
December, 2011
a government has entered into a hedging interest rate swap or a hedging commodity swap
and the swap counterparty (or the swap counterparty's credit support provider) commits or
experiences an act of default or a termination event under the swap agreement through no
fault of the government. When a swap counterparty (or a swap counterparty's credit support
provider) is replaced through an assignment or an in- substance assignment, the GASB con-
cluded that the government's financial position remains unchanged.
Statement No. 65, Items Previously Reported as Assets and Liabilities is effective for the
Government's fiscal year ending December 31, 2013. GASB Concepts Statement No. 4,
Elements of Financial Statements, specifies that recognition of deferred outflows and de-
ferred inflows should be limited to those instances specifically identified in authoritative
GASB pronouncements. Consequently, guidance was needed to determine which balances
being reported as assets and liabilities should actually be reported as deferred outflows of re-
sources or deferred inflows of resources, according to the definitions in Concepts Statement
4. Based on those definitions, Statement 65 reclassifies certain items currently being re-
ported as assets and liabilities as deferred outflows of resources and deferred inflows of re-
sources. In addition, this Statement recognizes certain items currently being reported as as-
sets and liabilities as outflows of resources and inflows of resources.
k) Statement No. 66, Technical Corrections — 2012 is effective for the Government's fiscal
year ending December 31, 2013. This pronouncement amends Statement No. 10, Account-
ing and Financial Reporting for Risk Financing and Related Insurance Issues, by removing
the provision that limits fund -based reporting of a state and local government's risk financ-
ing activities to the general fund and the internal service fund type. As a result, governments
would base their decisions about governmental fund type usage for risk financing activities
on the definitions in Statement No. 54, Fund Balance Reporting and Governmental Fund
Type Definitions.
This Statement also amends Statement No. 62, Codification of Accounting and Financial
Reporting Guidance Contained in Pre- November 30, 1989 FASB and AICPA Pronounce-
ments, by modifying the specific guidance on accounting for: (1) operating lease payments
that vary from a straight -line basis; (2) the difference between the initial investment (pur-
chase price) and the principal amount of a purchased loan or group of loans; and, (3) servic-
ing fees related to mortgage loans that are sold when the stated service fee rate differs signif-
icantly from a current (normal) servicing fee rate. These changes would eliminate any un-
certainty regarding the application of Statement No. 13, Accounting for Operating Leases
with Scheduled Rent Increases, and result in guidance that is consistent with the require-
ments in Statement No. 48, Sales and Pledges of Receivables and Future Revenues and In-
tra- Entity Transfers of Assets and Future Revenues, respectively.
1) Statement No. 67, Financial Reporting for Pension Plans is effective for the Govern-
ment's fiscal year ending December 31, 2014. This pronouncement replaces the require-
ments of Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note
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Annual Audit Agenda
December, 2011
Disclosures for Defined Contribution Plans and Statement 50 as they relate to pension plans
that are administered through trusts or similar arrangements meeting certain criteria.
Statement No. 67 builds upon the existing framework for financial reports of defined benefit
pension plans, which includes a statement of fiduciary net position (the amount held in a
trust for paying retirement benefits) and a statement of changes in fiduciary net position.
Statement No. 67 enhances note disclosures and RSI for both defined benefit and defined
contribution pension plans. Statement No. 67 also requires the presentation of new informa-
tion about annual money- weighted rates of return in the notes to the financial statements and
in 10 -year RSI schedules.
The changes noted above by Statement No. 67 are significant to pension plans, and we
strongly encourage Government officials to review the actual pronouncement and consider
the potential effects on the financial reporting of the Government.
m) Statement No. 68, Accounting and Reporting for Pensions is effective for the Govern-
ment's fiscal year ending December 31, 2015. This pronouncement replaces the require-
ments of Statement No. 27, Accounting for Pensions by State and Local Governmental Em-
ployers and Statement No. 50, Pension Disclosures, as they relate to governments that pro-
vide pensions through pension plans administered as trusts or similar arrangements that meet
certain criteria.
Statement No. 68 requires governments providing defined benefit pensions to recognize their
long -term obligation for pension benefits as a liability for the first time, and to more com-
prehensively and comparably measure the annual costs of pension benefits. The Statement
also enhances accountability and transparency through revised and new note disclosures and
required supplementary information (RSI).
Defined Benefit Pension Plans. Statement No. 68 requires governments that participate in
defined benefit pension plans to report in their statement of net position a net pension liabili-
ty. The net pension liability is the difference between the total pension liability (the present
value of projected benefit payments to employees based on their past service) and the assets
(mostly investments reported at fair value) set aside in a trust and restricted to paying bene-
fits to current employees, retirees, and their beneficiaries.
Statement No. 68 calls for immediate recognition of more pension expense than is currently
required. This includes immediate recognition of annual service cost and interest on the
pension liability and immediate recognition of the effect on the net pension liability of
changes in benefit terms. Other components of pension expense will be recognized over a
closed period that is determined by the average remaining service period of the plan mem-
bers (both current and former employees, including retirees). These other components in-
clude the effects on the net pension liability of: (1) changes in economic and demographic
assumptions used to project benefits; and, (2) differences between those assumptions and ac-
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Annual Audit Agenda
December, 2011
tual experience. Lastly, the effects on the net pension liability of differences between ex-
pected and actual investment returns will be recognized in pension expense over a closed
five -year period.
Statement No. 68 requires cost - sharing employers to record a liability and expense equal to
their proportionate share of the collective net pension liability and expense for the cost -
sharing plan. The Statement also will improve the comparability and consistency of how
governments calculate the pension liabilities and expense. These changes include:
• Projections of Benefit Payments. Projections of benefit payments to employees
will be based on the then - existing benefit terms and incorporate projected salary
changes and projected service credits (if they are factors in the pension formula), as
well as projected automatic postemployment benefit changes (those written into the
benefit terms), including automatic cost -of- living- adjustments (COLAs). For the first
time, projections also will include ad hoc postemployment benefit changes (those not
written into the benefit terms), including ad hoc COLAs, if they are considered to be
substantively automatic.
• Discount Rate. The rate used to discount projected benefit payments to their present
value will be based on a single rate that reflects (a) the long -term expected rate of re-
turn on plan investments as long as the plan net position is projected under specific
conditions to be sufficient to pay pensions of current employees and retirees and the
pension plan assets are expected to be invested using a strategy to achieve that return;
and (b) a yield or index rate on tax- exempt 20 -year, AA -or- higher rated municipal
bonds to the extent that the conditions for use of the long -term expected rate of return
are not met.
• Attribution Method. Governments will use a single actuarial cost allocation me-
thod — "entry age," with each period's service cost determined as a level percentage
of pay.
Note Disclosures and Required Supplementary Information. Statement No. 68 also re-
quires employers to present more extensive note disclosures and RSI, including disclosing
descriptive information about the types of benefits provided, how contributions to the
pension plan are determined, and assumptions and methods used to calculate the pension
liability. Single and agent employers will disclose additional information, such as the com-
position of the employees covered by the benefit terms and the sources of changes in the
components of the net pension liability for the current year. A single or agent employer will
also will present RSI schedules covering the past 10 years regarding:
• Sources of changes in the components of the net pension liability
• Ratios that assist in assessing the magnitude of the net pension liability
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2) Yellow Book Standards
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Annual Audit Agenda
December, 2011
• Comparisons of actual employer contributions to the pension plan with actuarially
determined contribution requirements, if an employer has actuarially determined con-
tributions.
Cost - sharing employers also will present the RSI schedule of net pension liability, informa-
tion about contractually required contributions, and related ratios.
Defined Contribution Pensions. The existing standards for governments that provide de-
fined contribution pensions are largely carried forward in this new statement. These gov-
ernments will recognize pension expenses equal to the amount of contributions or credits to
employees' accounts, absent forfeited amounts. A pension liability will be recognized for
the difference between amounts recognized as expense and actual contributions made to a
defined contribution pension plan.
Special Funding Situations. Certain governments are legally responsible for making con-
tributions directly to a pension plan that is used to provide pensions to the employees of
another government. For example, a state is legally required to contribute to a pension plan
that covers local school districts' teachers. In specific circumstances called special funding
situations, the Statement requires governments that are non - employer contributing entities to
recognize in their own financial statements their proportionate share of the other governmen-
tal employers' net pension liability and pension expense.
The changes noted above by Statement No. 68 are significant to Governments who sponsor
retirement plans, and we strongly encourage Government officials to review the actual pro-
nouncement and consider the potential effects on the financial reporting of the Government.
While GASB has been issuing new financial reporting pronouncements affecting governmental
units, the Government Accountability Office (GAO) has been issuing revised standards relative to
the audits of state and local governments. An exposure draft was issued in August 2010 by the
GAO amending and revising Government Auditing Standards (the Yellow Book). Finally, it has
now been finalized. The more significant items addressed by the GAO in this revision of auditing
standards include:
a) Actions required if an impairment to auditor independence is identified;
b) Definition of those charged with governance consistent with other AICPA audit guidelines;
c) Definition of internal control deficiencies to be consistent with other AICPA audit guide-
lines;
d) Promoting modernization of auditing standards consistent with technologies of today;
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Annual Audit Agenda
December, 2011
e) Added requirements for reporting restatements of previously issued financial statements;
f) Addressed standards related to 1) performance audits, and 2) internal audits; and,
g)
Augusta, Georgia
Changed and emphasized continuing education requirements of auditors in the governmental
sector to obtain a minimum of 80 hours of continuing education every two (2) years. The
GAO emphasized a significant component of these hours must be directly relevant to go-
vernmental auditing. Further, audit team specialist (actuaries, engineers, etc.) have specific
guidelines as well.
3) Sales Tax Collections and Remittances by the State of Georgia's Department of Revenue
During April and May 2009, the Georgia Department of Revenue (DOR) upgraded to a new system
for distributing sales taxes and also changed their method of distribution. Previously, sales taxes
collected were not substantially disbursed by the DOR to the local governments until two (2)
months subsequent to the month that the sales taxes were collected. The DOR now claims the speed
of remittances to local governments to substantially take only one (1) month as compared to their
old system.
One last thought on this subject - the DOR has created a new Sales Tax Distribution Report on its
website which allows every local government the ability to identify its monthly sales tax distribution
amounts from January 1999 to the present. In an effort to better manage the recognition of
revenues, we recommend the Government consider utilizing the information as part of its ongoing
budget process.
Summations of Thoughts Noted Above
We believe the implementation of these suggestions will enhance both the control environment and
the financial reporting process, making both more effective. We also believe these
recommendations can be easily implemented, and all problems resolved quite timely should
management elect to employ the corrective measures.
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Augusta, Georgia
Annual Audit Agenda
December, 2011
FREE QUARTERLY CONTINUING EDUCATION
AND NEWSLETTERS FOR GOVERNMENTAL CLIENTS
Free Continuing Education. We provide free quarterly continuing education for all of our go-
vernmental clients. Each quarter we pick a couple of significant topics tailored to be of interest to
governmental entities. In an effort to accommodate our entire governmental client base, we offer
the sessions several times per quarter at a variety of client provided locations resulting in greater
networking among our governmental clients. We normally see approximately 100 people per quar-
ter. We obtain the input and services of experienced outside speakers along with providing the in-
struction utilizing our in -house professionals. We hope Government staff and officials will be able
to participate in this opportunity, and that it will be beneficial to you. Examples of subjects ad-
dressed in the past few quarters include:
1. American Recovery & Reinvestment Act (ARRA) information and issues;
2. GASB updates (several sessions);
3. Internal Controls Over Revenue and Cash Receipting;
4. Collateralization of Deposits and Investments;
5. SPLOST Accounting, Reporting and Compliance;
6. Internal Controls Over Accounts Payable, Payroll and Cash Disbursements;
7. Capital Asset Accounting Processes and Controls;
8. Grant Accounting Processes and Controls;
9. American Recovery & Reinvestment Act (ARRA) Updates;
10. Policies and Procedures Manuals;
11. Segregation of Duties;
12. GASB No. 51 — Intangible Assets;
13. Single Audits for Auditees;
14. GASB No. 54 — Governmental Fund Balance (subject addressed twice);
15. Best Budgeting Practices, Policies and Processes;
16. Internal Revenue Service (IRS) Compliance Issues, Primarily Payroll Matters;
17. CAFR Preparation.
Governmental Newsletters. We produce newsletters tailored to meet the needs of governments.
The newsletters have addressed a variety of subjects and are intended to be timely in their subject
matter. The newsletters are authored by Mauldin & Jenkins partners and managers, and are not pur-
chased from an outside agency. The newsletters are produced and delivered periodically {approx-
imately ten (10) times per year }, and are intended to keep you informed of current developments in
the government finance environment.
Communication. In an effort to better communicate our free continuing education plans and new-
sletters, please email Lauren Payne at LPayne @mjcpa.com (send corresponding copy to med-
wards @mjcpa.com), and provide to her individual names, mailing addresses, email addresses and
phone numbers of anyone you wish to participate and be included in our database.
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Augusta, Georgia
Annual Audit Agenda
December, 2011
CLOSING
We believe the implementation of these suggestions will enhance both the control environment and
the financial reporting process, making both more effective. We also believe these
recommendations can be easily implemented, and all problems resolved quite timely should
management elect to employ the corrective measures. If you have any questions regarding any
comments, suggestions or recommendations set forth in this memorandum, we will be pleased to
discuss it with you at your convenience.
This information is intended solely for the use of the Government's management, and others within
the Government's organization and is not intended to be and should not be used by anyone other
than these specified parties.
We appreciate the opportunity to serve Augusta, Georgia and look forward to serving the
Government in the future. Thank you.
Certified Public Accountants
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