Tag Archives for " Government "

omission of management, discussion and analysis
Mar 27

Omission of MD&A from Governmental Financial Statements

By Charles Hall | Auditing , Local Governments

Can a government exclude the management, discussion, and analysis from its financial  statements? This article answers that question.

According to AU-C 730, the auditor’s report on the financial statements should include an other-matter paragraph that refers to the required supplementary information (RSI). In governmental financial statements, the management, discussion, and analysis (MD&A) is considered RSI. Though the MD&A is “required” supplementary information, governments can–strangely enough–exclude it from the financial statements.

omission of management, discussion and analysis

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Omitting the MD&A – Effect on an Audit Opinion

If the required supplementary information is omitted, the auditor should include an other-matter paragraph in the opinion such as the following:

Management has omitted the management, discussion, and analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information.

Notice the omission of the MD&A does not affect the opinion rendered (in other words, it does not result in a modified report).

RSI Audit Standard

AU-C 730 is the audit standard for required supplementary information. Click here for an overview of the supplementary information audit standards. The former supplementary information standards were SASs 118, 119 and 120; those standards are now–under the Clarity Standards–AU-C sections 720, 725, and 730.

Omitting the MD&A – Effect on a Compilation Report

In compilation reports, the language is as follows:

Management has omitted the management, discussion and analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board which considers it to be an essential part of financial reporting and for placing the basic financial statements in an appropriate operational, economic, or historical context. 

Jun 29

How a Tax Commissioner Walks Away with $800,000

By Charles Hall | Asset Misappropriation

The Theft

Some twenty years ago, I was working on an audit of a county tax commissioner’s office. We were noticing differences in the receipts and the cash collections.

Theft of cash

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So one day I walk into the Tax Commissioner’s office. As I step in, I see several thousand dollars of cash laying on her desk. So, I remarked to her, “Haven’t made a deposit lately?” She laughed and said, “No, I’ve been too busy lately.”

I thought to myself, “Strange. She knows we’re here for the annual audit, and she has all this undeposited cash in open view. It’s as though she has no fear.”

The next day a gentleman comes into the room where we (the auditors) were working and whispers to me, “The Commissioner has a cocaine habit.” I did not know the fellow, so I wondered if the assertion had any merit. Regardless, this was shaping up to be an interesting audit.

Our audit disclosed unaccounted-for funds of over $300,000 in the year one. Year two, the differences continued and exceeded $500,000. After three years, the unaccounted-for amount was in the $800,000 range.

Why was she not removed? Tax Commissioners are elected in Georgia, so the only person that could remove her was the governor. The local county commissioners could not dismiss her.

Finally, the FBI was brought in. But even they could not prove who was stealing the money. Why? The tax office had two cash drawers and eight clerks. All eight worked out of both drawers. So when cash went missing, you could not pin the differences on any one person.

In addition, the books were a disaster, postings were willy-nilly. There was no rhyme or reason–what I call “designed smoke.”

The tax commissioner eventually went to prison for tax evasion. She made the mistake of depositing some of the stolen cash into her personal bank account, and the Feds were able to prove she had not reported the income.

The Weakness

The primary weakness was the lack of design in the collection process. Two or more people should never work from one cash drawer. Deposits were not timely made (and in many cases, not made at all). And then the books (mainly the tax digest) was not appropriately posted as collections were received.

The Fix

The primary fix was to remove the tax commissioner.

Next, each cash drawer should be assigned to only one person at a time.

Cash receipts should be written and the tax digest should be posted as tax payments are received.

Finally, deposits should be made daily.

OCBOA Financial statements
Jan 05

Governmental OCBOA Financial Statements

By Charles Hall | Accounting and Auditing , Local Governments

The AICPA recently provided a webcast titled: The New AICPA OCBOA Publications: What They Are and How They Apply to Governments and Not-for-Profits Using Cash, Modified Cash, and Regulatory Frameworks.

I was surprised to see the number of governments that present financial statements in accordance with an other comprehensive basis of accounting (OCBOA). The webcast did not provide an exact percentage of governments using OCBOA, but it looks like you can easily conclude that over 33% of governments use OCBOA. 

Governmental OCBOA financial statements

Why Issue Governmental OCBOA Financial Statements?

As I said in my prior OCBOA post, the short answer is: Cost. If you’ve created GAAP basis governmental financial statements, you know how complicated these statements are. OCBOA statements—whether cash basis, modified cash basis or tax basis—are simpler to create. 

Many governments require GAAP basis statements so make sure, before making any changes, that OCBOA statements are permissible in your locale.

Modified Cash Basis of Accounting

The modified cash basis is the pure cash basis with modifications having substantial support. (A pure cash basis of accounting would reflect only cash inflows and outflows with beginning and ending cash.)

A common modification to the cash basis is the capitalization of assets purchased and recognition of depreciation over estimated useful lives. Though using the modified cash basis, impaired capital assets may also be written down. In addition, the related long-term debt would normally also be recorded. 

Another common modification is the deferral of revenue recognition for governments receiving cash that will be used in future periods; the deferral would be shown as a liability.

OCBOA Presentation Issues

GAAP basis governmental financial statements reflect government-wide and fund-level presentations. OCBOA statements will normally include the same type of presentation – government-wide and fund-level statements – though you are using different recognition criteria. A general rule for OCBOA statements is: follow GAAP guidelines where you can; this includes disclosures (though the notes are amended in accordance with the framework used).

While not required for OCBOA statements, you may include supplementary information.

Required supplementary information (RSI) is not required under the modified cash basis, but can be provided; if provided, the information is not considered RSI but supplementary information or additional information. RSI can only be “required” by GAAP.

While certain disclosures are not required in OCBOA statements (e.g., fair value of investments or the funded status of a defined benefit plan), such information can be provided in the notes. 

Use of the AICPA Financial Reporting Framework for Small- and Medium-Sized Entities 

Governments should not use the AICPA small- and medium-sized entity framework.

Updated AICPA Guidance

If you are issuing governmental OCBOA statements, I strongly recommend that you purchase the AICPA’s updated book: Applying OCBOA in State and Local Governmental Financial Statements. Mike Crawford and Mike Glynn have done a fine job in preparing this publication.

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