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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 Mauldin & Jenkins CPA's, LLC Page 1 Augusta, Georgia 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. Mauldin & Jenkins CPA's, LLC Page 2 Augusta, Georgia 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. Mauldin & Jenkins CPA's, LLC Page 3 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. Mauldin & Jenkins CPA's, LLC Page 4 Augusta, Georgia Annual Audit Agenda 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. Mauldin & Jenkins CPA's, LLC Page 5 General Fund Mauldin & Jenkins CPA's, LLC 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: Page 6 Augusta, Georgia 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. Mauldin & Jenkins CPA's, LLC Page 7 Annual Audit Agenda 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. Mauldin & Jenkins CPA's, LLC Page 8 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. Mauldin & Jenkins CPA's, LLC Page 9 Augusta, Georgia 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 Mauldin & Jenkins CPA's, LLC Page 10 Augusta, Georgia 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 Mauldin & Jenkins CPA's, LLC Page 11 Augusta, Georgia 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. Mauldin & Jenkins CPA's, LLC Page 12 Augusta, Georgia 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. Mauldin & Jenkins CPA's, LLC Page 13 6) Proper Collateralization of Cash Accounts Augusta, Georgia 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. Mauldin & Jenkins CPA's, LLC Page 14 Augusta, Georgia Annual Audit Agenda December, 2011 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. Mauldin & Jenkins CPA's, LLC Page 15 Augusta, Georgia Annual Audit Agenda December, 2011 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 Mauldin & Jenkins CPA's, LLC Page 16 Augusta, Georgia Annual Audit Agenda December, 2011 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 Mauldin & Jenkins CPA's, LLC Page 17 J) Augusta, Georgia 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 Mauldin & Jenkins CPA's, LLC Page 18 Augusta, Georgia 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- Mauldin & Jenkins CPA 's, LLC Page 19 Augusta, Georgia 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 Mauldin & Jenkins CPA's, LLC Page 20 2) Yellow Book Standards Augusta, Georgia 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; Mauldin & Jenkins CPA's, LLC Page 21 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. Mauldin & Jenkins CPA's, LLC Page 22 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. Mauldin & Jenkins CPA's, LLC Page 23 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 Mauldin & Jenkins CPA's, LLC Page 24