Federal Audit Requirements & Fraud Prevention

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

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

Single Audit
3

OVERVIEW OF SINGLE AUDIT REQUIREMENTS
Applicability: Not-for-profits and Governments (including NFP hospitals)
Audit Requirements
Federal expenditures > $500K = AUDIT
Federal expenditures < $500K = NO AUDIT
Funding of subrecipients
Audit Frequency
Annually
4

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

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

CONSOLIDATE HEALTH CENTERS – 93.224
Applicable Compliance Categories
Activities allowed or unallowed
Allowable cost/cost principles
Eligibility
Program income
Financial reporting
Special reporting
Special Tests and Provisions
7

Overview of ARRA
$787 Billion in Federal Grants to States, Local Municipalities, and Non Profit Organizations
Majority of Grants Subject to Single Audit (A-133) Compliance Testing & Reporting
Grants Provided Through Both Existing Grant Programs/Formulas & New Programs
Mandate to Spend it Quickly!!
8

IMPACT ON MICHIGAN
$3.8 Billion in Funding to Date
$228 Million in Direct Grants to Local Units
More than 50 Separate Funding Programs
Over 17,000 Projects
1,700 Local Grant Recipients
> $1 Billion in Infrastructure Projects
9

GRANT OVERSIGHT
Unprecedented Oversight and Transparency
Michigan Economic Recovery Office
Direct GAO Oversight and Monitoring
Single Audit Reporting
Increased Quality Control Reviews of Reports Issued
Single Audit Reports and Results of Quality Control Reviews Accessible by Public
Quarterly Reporting of Both Financial and Programmatic Status of Grant on Federal Website
10

FEDERAL AGENCIES - OMB
OMB Responsibilities
Publish Compliance Guidance
Implementation Guidance to Federal Agencies
Compliance Testing Guidance to Auditors & Recipients
Only Interim Testing Guidance Published
Appendix VII of March 2009 A-133 Compliance Supplement
Expect Additional OMB Guidance in future!!
11

GRANT ACCOUNTING
All ARRA Grants Must be Accounted for Separately
Both Programmatic and Financial Data Tracked Separately From Other Federal Grants
Federal Agencies Must Identify Award as ARRA
Recipients Must Identify ARRA Portion to Sub-recipients
Separate Tracking/Reporting of ARRA Portion vs. Normal Portion of Existing Grant Programs
12

GRANT COMPLIANCE
Recipient Compliance Requirements
General Grant Compliance Requirements
Specific Program Compliance – if ARRA Grants Fall Under an Existing CFDA Number
Requirements Specific to Award Document
13

SINGLE AUDIT IMPLICATIONS
Large Increase in Grant Dollars Subject to Single Audit
More Entities Required to Have Single Audit
More Major Programs to Evaluate for Testing
June 2009 Fiscal Year Dollars Expected to be Minimal (Significant Impact in 2010 and 2011)
14

PREPARING FOR ARRA GRANTS
Ensure Internal Control System Has Capacity to:
Separately Account for ARRA grants
Gather the Data for Quarterly Reports in the Required Time Frame
Adhere to Compliance Requirements
Monitor Sub-Recipients and Gather Reporting Data From Them
15

MANAGING ARRA GRANTS
Read the Grant Award Document
Get Finance Dept Involved at the Start of the Grant Process
Monitor Changes in Grant Requirements:
OMB Website & Compliance Supplement Updates
State Web Site Reporting Requirements
Federal Agencies Recovery Act websites
16

WHAT TO EXPECT IN THE FUTURE
Federal and State Monitoring
Focus on Preventing Waste, Fraud, & Abuse
Increased Scrutiny and Review of Single Audit Reports
Pressure to Expend Promptly
High Public Interest and Scrutiny
High Political Visibility
Changes to Compliance Requirements
17

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

SAS 112IMPACT ON SINGLE AUDIT
PREVIOUSLY…..
Circular A-133 previously required the auditor to report REPORTABLE CONDITIONS and MATERIAL WEAKNESSES in internal control over compliance
AFTER SAS 112
Circular A-133 revised to now require internal control terminology consistent with SAS 112
Definitions of control deficiency, significant deficiency and material weakness related to internal control over compliance were developed
WHAT’S NEXT…..
SAS 115
19

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

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

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

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

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

INTERRELATIONSHIP BETWEEN INTERNAL CONTROL AND NONCOMPLIANCE
Presumption that a material finding of noncompliance is at least a significant deficiency
Section III noncompliance finding will almost always translate into a significant deficiency or material weakness
Internal control deficiency possible even when noncompliance is not present
25

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

Revised SAS 112 (Communicating Internal Control Related Matters Identified in an Audit)
Changes are primarily limited to the definitions of deficiency in internal control, significant deficiency, and material weakness
Material weakness – is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s F/S will not be prevented, or detected and corrected on a timely basis. In this SAS, a reasonable possibility exists when the likelihood of the event is either reasonably possible or probable as those terms are used in FAS 5, Accounting for Contingencies.
Significant deficiency – is a deficiency, or combination of deficiencies, in internal control that is less than a material weakness, yet important enough to merit attention by those charged with governance.
List of material weakness indicators
Updated communication
Effective for periods ending on or after December 15, 2009
AICPA – SAS 115
27

Accounting & Auditing Update
28

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

SFAS No. 157 Fair Value Measurements
Defines fair value
Establishes a framework for measuring fair value
Requires new disclosures about fair value measurements in the financial statements and their effects on earnings
Does not address what should be measured at fair value, but rather how to measure fair value
Effective 2008 for financial assets and liabilities
30

SFAS No. 157 Disclosure
Fair Value Hierarchy
Level 1 – Observable inputs that reflect quoted prices for identical assets or liabilities in active markets
Example – publicly traded securities; U.S. agencies; treasuries
Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with observable market data
Example – Municipal bonds that are rated by a bonding agency; auction rated securities; receive-fixed, pay-variable interest rate swap based on LIBOR swap rate; 3 year option on exchange traded shares
31

SFAS No. 157 Disclosure
Fair Value Hierarchy (Continued)
Level 3 – Unobservable inputs that cannot be corroborated by observable market data
32

FSP FASB 117-1 – NFP Endowments Subject to UPMIFA
Applies to all NFP
Applies to donor-restricted endowment funds (funds that cannot be wholly expended on a current basis under terms of gift instrument)
Also applies to board designated endowments
Effective for fiscal years ending on December 31, 2008
Currently, Michigan does not follow UPMIFA, however, bill pending with Governor for signature
Disclosure provisions still apply
33

FSP FASB 117-1 – NFP Endowments Subject to UPMIFA
Minimum requirements:
Description of governing board’s interpretation of relevant law underlying net asset classification
Description of endowment spending (distribution) policy(ies)
Description of endowment investment policy(ies)
Return objectives and risk parameters
How the objectives relate to spending policy(ies)
Strategies for achieving objectives
Composition of endowment by net asset class (would present for each date for which a balance sheet is presented)
Endowment roll-forward by net asset class (would present for each period for which a statement of activities is presented)
Planned endowment distribution for next year (if known)
34

SFAS No. 161 Disclosures about Derivative Instruments and Hedging Activities
Amends FASB Statement No. 133
Two tabular disclosures for derivatives
Balance sheet – Where derivatives are recorded and what is the fair value?
Income statement – Where is the change in fair value recorded and what is the change?
Hedged items are not part of the tabular disclosures
35

SFAS No. 161 Disclosures about Derivative Instruments and Hedging Activities
Other disclosures
Qualitatively discuss, by underlying risk, objectives for holding or issuing derivatives
Provide information that would enable users to understand an entity’s volume of derivative activity
Existence and nature of credit-risk related contingent features embedded in derivative instruments
Effective periods beginning after 11/15/2008
36

SFAS 164, Not-for-Profit Entities: Mergers and Acquisition
Would eliminate the pooling of interest method in recording mergers between NFP organizations. The acquiring NFP would recognize either goodwill of the acquired business or nonprofit activity or the contribution inherent in the merger or acquisition as follows:
Measure goodwill as the amount by which the value of the consideration transferred exceeds the net of the amounts assigned to identifiable assets acquired and liabilities assumed
Measure the contribution inherent in the transaction as the amount by which the values assigned to the identifiable assets acquired exceeds the consideration transferred and the liabilities assumed
37

NFP Goodwill and Other Intangibles Acquired in a Merger or Acquisition
Amend the effective date and transition provisions of Statement 142, making them effective for a NFP organization
Statement 142 requires an organization to make certain assessments about the nature of intangible assets acquired in a merger or acquisition as of the acquisition date, such as whether an intangible asset has an indefinite life. Goodwill, therefore, would be tested for impairment periodically, rather than amortized.
Effective for mergers occurring on or after December 15, 2009, and for acquisitions occurring in fiscal years beginning on or after December 15, 2009
38

SFAS 165, Subsequent Events
Establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued
New disclosure in financial statement
Effective for periods after June 15, 2009
39

IRS FORM 990
Redesigned based on three guiding principles:
Enhancing transparency
Promoting tax compliance
Minimizing the burden on the filing organization
Some major changes
A governance section that requires the organization to answer several questions related to policy and procedures
Reported officer and key employee compensation using calendar year-end reporting (i.e., W-2) versus fiscal year-end amounts
40

IRS FORM 990
Schedule H – Hospitals
Includes charity care and community benefit, billing, operations, related entities, locations, etc.
For 2008, only Part V, Facilities Information, must be completed
For 2009, all parts must be completed (Parts I – VI)
41

Employee Retirement Income Security Act (ERISA)403(b) PLANS – NEW AUDIT REQUIREMENTS
Audit requirements:
> 100 eligible participants
42

Internal controls
43

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

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

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

COMPONENTS OF INTERNAL CONTROL
Control environment
Sets the tone of the organization
Provides discipline and structure
Generated by the management
Control activities
Physical controls
Segregation of duties
Independent checks on performance
Monitoring
47

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

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

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

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

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

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

QUESTIONS?
54

Federal Audit Requirements & Fraud Prevention

by MPCA on Sep 30, 2009

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