1 By Tracy Hensley Audit Partner KPMG LLP March 2, 2012 Auditing in the Public Sector A Discussion with the American Association of Accountants Government.

1

ByTracy HensleyAudit PartnerKPMG LLP

March 2, 2012

Auditing in the Public Sector

A Discussion with the American Association of Accountants

Government and Nonprofit Section

2

Who am I?

Jack High School Senior

Kate NYU Senior

3

Twenty Five years and Counting

• Audit Partner Focusing on Not-for-Profit Organizations

• Began with KPMG LLP in 1986 (Peat Marwick Mitchell & Co., Peat Marwick Main & Co., KPMG Peat Marwick)

• Banking, real estate, investment services, health care

• Advisory – business process outsourcing

• Worked at Hilton Hotels Corp. while taking accounting courses through UCLA Extension (where I later taught)

• Economics, UCLA

4

Representative Clients I Serve

• J Paul Getty Trust

• California State University

• Los Angeles Opera

• Armand Hammer Museum

• California Community Foundation

• National LambdaRail, Inc./CENIC

• California Foundation Land Trust

• Los Angeles Community College District

• Whittier College

• Soka University

5

Background

• Group Partner for Audit Practice in Los Angeles and

Orange County

• Chair of Employer of Choice Initiatives

• Partner Champion – National Academy Foundation

• Advisory Board Member – Downtown Magnets High

School

• Treasurer – Los Compadres Youth Volunteer Group

• Team Mom – Peninsula High Varsity Basketball

6

Auditing in the Public Sector

• The Joys

• The Challenges

• The Future

7

What is the Public Sector?

• Government• States and Cities• Universities/Community Colleges• Education K-12• Utilities/Transportation • Joint Powers Authorities

• Nonprofit Organizations • Colleges, Universities, K-12 Education• Foundations• Voluntary Health and Welfare• Visual and Performing Arts• Research Institutes• Hospitals• Cemeteries • Churches• Other

8

The People

The Joys:• We get to work with people who are passionate about their

mission

• We get to meet very interesting people

• Those who deal with significant societal issues

• Generally, kind and appreciative in their dealings

The Challenges:• Don’t always keep up to date on technical matters or

recognize their responsibilities

• Don’t bear same risks as those in public companies

9

Mission Driven

The Joys:• We get to play a small part in making the world a better place

• Surrounded by good deeds and stories

• Not profit oriented

The Challenges:• Working beside them and helping them find a way to both

accomplish their missions, while also assisting them in complying with accounting, reporting, grant, and donor requirements

• Current accounting doesn’t always reflect their view of intent of transactions

10

Accounting Issues

The Joys:• Issues generally pretty straightforward

The Challenges:• Nonprofits have been exempted from very few accounting and

auditing standards

• No resources or inclination to make accounting a priority

• Complex issues

• Fair Value Accounting and Disclosures

• Investments

• Contributions

11

Auditing Changes

The Joys:

• Electronic auditing

The Challenges:• Impact of SOX on what we can and cannot do is biggest

challenge and confusion to our nonprofit clients

• Can not be an entity’s internal control

• Can not provide accounting treatment without the client providing own analysis

• Can’t provide many advisory services

• We can’t work for free!

12

Audit Resources

The Joys:

• The People!

The Challenges:• Hard to attract people

• Not glamorous and most don’t believe it will lead to a prosperous career

• Not as profitable as other industries, so less attention paid, more difficult to get “good” people on engagements

• Knowledge doesn’t easily translate to other industries

• Compliance focused

• Need to know many industries within this sector

• Need to know both FASB and GASB

13

Life as a Public Accountant

The Joys:

• The People

• Exposure to a wide variety of industries, issues and working styles (both clients and colleagues)

• Best accounting education available

The Challenges:

• New rules every day

• Long hours

• Working for inexperienced supervisors

• Quality likely higher in smaller offices where fewer people are recruited each year; larger offices are oftentimes an extension of college

• Not prepared

14

To Be Better Prepared

• Writing, Writing, Writing - To be able to write concisely and clearly and to be able to persuade and motivate in written communications

• Interpersonal Skills – can carry an auditor a long way

• Research - To know where to find the answers and to propose a solution

• Analytical Skills - Key to success in public accounting is to be able to identify an issue or problem

• Technical Accounting Skills - Ability to grasp concepts; don’t need to know the answer

• Ethics

15

Governing Boards

The Joys:

• Great contacts

The Challenges:

• Generally, not knowledgeable of accounting and reporting matters

• Generally not qualified

• Too often, a rubber stamp

16

Receipt of Federal and State Awards

• Not prepared for the cost of compliance, period

• Little analysis is done as to whether the entity is better off with the grant funds and related “strings”

17

Fraud

Two types:

• Financial reporting

• Misappropriation

• Pressure from internal sources (or bank) to perform as expected

• Occurs with opportunity, i.e., lack of controls

• Illness, substance abuse, gambling are often the impetus

• People you don’t trust rarely steal from you

• Doesn’t occur that often, but definitely exists

18

Fraud and Abuse Experiences

• Falsifying records to meet accounting treatment

• Altered emails and lifted signatures in an attempt to justify recording contributions as unrestricted vs temporarily restricted

• Payroll changes without authorization

• Personal loans

• Pay rate changes

• Writing checks to oneself and altering documentation

• Borrowing money and repaying it without approval

• Private inurement of benefits – out in the open

19

The Future

OMB Circular A-133 Single Audits

• Proposed Guidance entitled “Reform of Federal Policies Relating to Grants and Cooperative Agreements; cost principles and administrative requirements (including the Single Audit Act)”

Increasing the audit threshold to $1 million

Creating a focused version for entities that expend between $1 million and $3 million

Maintaining the full Single Audit for entities that expend greater than $5 million, but concentrate the compliance requirements

Strengthening the follow-up by federal agencies

Consolidating the cost and administrative principles

Using flat rates instead of negotiated rates for indirect costs

Exploring alternatives to the effort reporting requirements

20

The Future

Financial Accounting and Reporting

• Financial Accounting Foundation created the Blue-Ribbon Panel to address how U.S. accounting standards can better serve users of private-company financial statements.

• Recommended that accounting standards for private companies should, at least in the near term, be based on existing U.S. GAAP but include certain exceptions and modifications for private companies

• Now being separately addressed for not for profit organizations

21

Questions?