GFOA Best Practices in Accounting, Auditing, and Financial Reporting

1. GFOA Best Practices in Accounting, Auditing, and Financial Reporting CSMFO San Francisco, California February 23, 2011

2. Agenda • Background on GFOA best practices and advisories • Specific best practices and advisories • Professional standards • Financial reporting • Internal control • Accounting • Independent audit

3. Background GFOA Best Practices and Advisories

4. Recommended practices • Initiative started in 1993 • Intent = codify best practice • Objective = comprehensive guidance for each of the major functional areas of public finance • Accounting, auditing, and financial reporting • Budgeting and fiscal policy • Debt management • Economic development and capital planning • Retirement and benefits administration • Treasury and investment management

5. Recent changes • Name change • From recommended practices to best practices • Better reflect true character • Separate new category for advisories • Not an endorsement of the underlying situation

6. Definition – Best Practice • Identifies specific policies and procedures as contributing to improved government management. It aims to promote and facilitate positive change rather than merely to codify current accepted practice. Partial implementation is encouraged as progress toward a recognized goal.

7. Definition – Advisory • Identifies specific policies and procedures necessary to minimize a government’s exposure to potential loss in connection with its financial management activities. It is not to be interpreted as GFOA sanctioning the underlying activity that gives rise to the exposure.

8. Current Status

9. Categories • Professional standards • Financial reporting • Policy • Specialized presentation guidance • Expanded disclosure • Dissemination • Analysis

10. Categories (cont.) • Internal control • General • Specific guidance • Accounting • General • Specialized • Independent audit

11. Categories (cont.) • Grants administration • Managerial accounting • Costing services • Cost allocation plans

12. Specific Best Practicesand Advisories Accounting, Auditing, and Financial Reporting

14. Governmental Accounting, Auditing, and Financial Reporting Practices

15. Every government should… • Maintain adequate accounting system for timely GAAP financial reporting • Issue timely GAAP financial statements for the entire financial reporting entity as part of a CAFR • Obtain audits in accordance with GAAS or GAS

16. State governments should… • Mandate timely audited GAAP financial reports

19. Establishing Appropriate Capitalization Thresholds for Tangible Capital Assets

20. Capitalize… • Only if useful life of at least two years • Never for amounts less than $5,000 • Apply capitalization threshold to individual items rather than to groups of items • Exception if effect of doing so would be to eliminate a significant portion of total capital assets

21. Establishing the Estimated Useful Lives of Capital Assets

22. Where to look… • Best source: own past experience • Alternative: experience of others • Adjust for particular circumstances • Quality • Application • Environment • Circumstances mitigated or exacerbated by maintenance program

23. Improving the Effectiveness of Fund Accounting

24. Effective fund accounting begins by… • Distinguishing “funds” used for internal purposes from funds used for financial reporting purposes • Educating elected officials regarding the proper use of funds

25. Initially… • Establish criteria for a “fund” for financial reporting purposes • Document application of criteria to individual funds

26. Then periodically… • Undertake a comprehensive evaluation of the fund structure

27. Possible combination of individual funds • Debt service funds • Capital projects funds • Grants for similar purposes

28. Internal service funds • Use only if significant difference between accrual and modified accrual

29. Presenting Budget to Actual Comparisons Within the Basic Financial Statements

30. When deciding how to show budgetary comparisons . . . • Present as basic financial statements whenever permitted by GAAP • Additional cost justified

32. Including Management’s Discussion and Analysis in Departmental Reports

33. In the absence of definitive guidance… • Present MD&A in separate departmental statement • Unaudited supplementary information • Required supplementary information (AICPA)

34. Potential Best Practices • Contents of separately issued reports for less than a legal entity • Fund or departmental reports • Sources of guidance for performance measurement reporting

36. Using the Comprehensive Annual Financial Report to Meet SEC Requirements for Periodic Disclosure SEC Rule 15c2-12

37. Where to provide annual information required by SEC? • Consider using the CAFR • Undertaking should commit government only to periodic disclosure of required information, not to its inclusion as part of the CAFR

39. Using Websites to Improve Access to Budget Documents and Financial Reports

40. Everyone should publish CAFR on web • Specific guidelines: • Identical to printed versions • Notice that information has not been updated • Prior year documents noted and segregated • Security from manipulation by external or unauthorized persons

41. Web Site Presentation of Official Financial Documents

42. Recommendations • Use web site as a primary means of communicating financial information • Specific guidelines • Formatting • Technological infrastructure • Electronic financial reporting language • Distribution • Information disclaimer • Historical information

43. Formatting • Consistency with hardcopy version • Legibility (consistency throughout report) • Pagination (sequential) • File size • Single file for entire document • Individual files

44. Technological Infrastructure • Security (no unauthorized changes) • Placement (easy to locate) • Software compatibility • Features (zooming, search) • User instructions • Linking (ability to click page number on table of contents) • Testing (operational with different computer operating systems)

45. Other • Electronic financial reporting language • Distribution • Inform potential users of availability • Other electronic media (for those without access to the internet) • Information disclaimer (not updated) • Historical information (segregated)

46. Preparing Popular Reports

47. Supplement CAFR with popular report • Issue within six months of fiscal year end • Define scope and refer reader to CAFR

48. The popular report should… • Refer to the CAFR • Attract and hold interest • Be easy to understand • Use simple and attractive format • Be written clearly and concisely • Avoid jargon • Make appropriate use of graphics

49. The popular report should… (cont.) • Explain items of special importance • Offer comparative data to help identify trends • Be distributed appropriately • Be creative • Invite feedback • Be balanced and objective

50. Improving the Timeliness of Financial Reports