Contract Audit Review Updates-Nashville

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Contract Audit Review Updates

CCFO/CMFO Annual TrainingDivision of Local Government Audit

December 2, 2021

Learning Objectives

• Contract Audit Requirements of Tennessee Local GovernmentsJean Suh, Contract Audit Review Manager

• CMFO Policies and Procedures UpdateMatt Piland, Contract Audit Review Specialist

• Audit Review Process and Common Reporting DeficienciesLisa Bellar, Senior Contract Audit Review Specialist

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Contract Audit Review Responsibility

• Contracting audits for all municipalities, four counties, other governmental entities and certain nongovernmental entities receiving grants through/from the State of TN

• Reviewing audit reports in accordance with GASB, GAAS, GAGAS, and other reporting requirements

• Reviewing audit documentation prepared by contracted CPA firms

• Monitoring CMFO Act annual compliance

• Providing technical assistance to auditees and contracted auditors

Contract Audit Review Specialists for Your Area

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Annual AuditTennessee Code Annotated, Section 4-3-304, (4)• (A) Make annually an audit of all the records of the several counties of the state, including the offices of county

trustees, circuit court clerks, criminal court clerks, county clerks and clerks and masters of chancery courts, and all county mayors and judges of the courts of general sessions, specifically including the accounts of all “trust funds” in the hands of clerks and masters, or county clerks, or both, and any other county official, whether elected or appointed;

• (B) In lieu of the audit required under this subdivision (4), the department may accept an audit made by an independent certified public accountant or licensed public accountant, employed at the expense of the county, if the audit made by such independent certified public accountant or licensed public accountant meets the minimum standards for county auditing established by the comptroller of the treasury, and approved by the governor;……

• (E) Beginning July 1, 1974, the department shall prepare the audit required under this subdivision (4) in each county of this state at least once in every five-year period, and shall not accept an audit prepared by a certified public accountant or licensed public accountant in lieu of a state audit for more than four (4) years in every five-year period beginning July 1, 1974, or may, in such manner as the comptroller of the treasury may determine, participate with or monitor the audit with the independent certified public accountant or licensed public accountant;

Annual Audit

Tennessee Code Annotated, Section 6-56-105o The governing body of each municipality shall cause an annual audit to be made

of the accounts and records of all departments, boards, and agencies under its jurisdiction that receive and disburse funds.

o The Comptroller, through the Department of Audit, shall be responsible for; 1. ensuring that audits are prepared in accordance with GAGAS, and2. determining whether the audits meet minimum audit standards, which shall

be prescribed by the comptroller of the treasury. No audit may be accepted as meeting the requirements of this section until such audit has been approved by the comptroller of the treasury.

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Audit Manual

This manual sets forth, for Tennessee local governmental units andnongovernmental entities receiving subrecipient funds from or through thestate, and other organizations:

the standards and requirements for audits; the accounting and internal control framework that should be followed;

and various general compliance matters.

Audit Manual• New Look

• Annually Updated

• Sections A, B, C, D and F

• Appendixes

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Audit Manual, Section A

Awarding Audit ContractsAudit Manual, Section A

Should TN local governments award audit contracts based on competitive bids?

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Awarding Audit ContractsAudit Manual, Section A

• Section 12-3-1209, Tennessee Code Annotated, does not allow counties, municipalities, metropolitangovernments, utility districts, and other municipal and public corporations of this state to award auditcontracts based on competitive bids. The audit contracts must be awarded on the basis of recognized competence and integrity. Although competitive bidding is prohibited, interviews may be conducted to determine the capabilities of eligible persons or groups.

• The Comptroller’s Office encourages all organizations to require audit firms to complete and submit aRequest For Proposal. The Request For Proposal provides information that is extremely beneficial inevaluating whether an audit firm possesses the necessary capabilities to conduct an audit of theorganization. (SAMPLE REQUEST FOR PROPOSAL – APPENDIX E) If an audit organizationneeds to include a basic contract form in the request for proposal, a “sample” fill-in pdf contract can beaccessed on the Comptroller’s website under Helpful Links at• https://apps.cot.tn.gov/CARS/

Awarding Audit ContractsAudit Manual, Appendix E

Audit Procurement Guide oWhat qualifications should an auditor have?oHow important is cost in making a decision?oHow is the auditor selected?oThe Audit CommitteeoWhen to contractoThe audit contract

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FY 2020 Audit Fees for the Municipalities

$0 ‐ $5,000

$5,001 ‐ $15,000

$15,001‐$25,000

$25,001‐$35,000

$35,000‐$45,000

$45,000<

0 20 40 60 80 100 120

https://tncot.cc/lga

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Closing the Books

Tennessee Code Annotated, Section 9-2-102 requires all local governments to close their official accounting records and to have those records available for audit no later than two months after the close of their fiscal year end.

Closing the books refers to journal entries to close an accounting cycle and prepare the records for a new accounting cycle.

Cooperate with Your Auditors

• Prepare, in Advance, Financial Information/Statements

• Inquiries/Questionnaires

• Management Representation Letter

• Management Discussion and Analysis

• Management’s Responses to Audit Findings

• Corrective Action Plan

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Audit Report Submission

Normally, audit reports should be submitted to our office within 6 months following the entity’s fiscal year end.

Four percent (4%) of the city related audit reports for the fiscal year 2020 have not been submitted to our office as of November 1, 2021.

Why are timely audits important?

Usefulness of information diminishes over time.

Users of an audit report Management Creditors (TN Local Development Authority, TN State School Bond Authority, Banks) Grantors TCRS (especially for the entities that have private DB Pension Plan) Citizens, Press, Researchers (TACIR, Universities.) Office of Research and Education Accountability (OREA) Office of Local Government Finance (LGF) Water and Wastewater Financing Board

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Audit Manual Changes for FY21Section B - Reporting and Auditing Requirements Tennessee Counties

(including related component units)• ACFR – Annual Comprehensive Financial Report• An opinion on whether the accompanying information is fairly stated in all material

respects in relation to the basic financial statements taken as a whole is required for the combining, individual funds, and budgetary schedules as well as the Schedule of Expenditures of Federal Awards and State Financial Assistance.

• Primary governments should present in the Notes to the Financial Statements, all related debt disclosures for discretely presented component units that do not submit a separate audited financial report to our office. Additionally, if a discretely presented component unit does not issue a separately audited financial report, a Schedule of Changes in Long-Term Debt by Individual Issue should also be presented in the primary government’s financial report as described in f. 2. a. below as supplemental information.

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Section C - Reporting and Auditing Requirements Tennessee Municipalities (including related component units)

• ACFR : Annual Comprehensive Financial Report• Primary governments should present in the Notes to the Financial Statements, all related debt disclosures for

discretely presented component units that do not submit a separate audited financial report to our office. Additionally, if a discretely presented component unit does not issue a separately audited financial report, a Schedule of Changes in Long-Term Debt by Individual Issue should also be presented in the primary government’s financial report as described in f. 2. c. below as supplemental information.

• f. Schedules:(2)The following schedules are required, if applicable, whether the municipality issues an ACFR or not (except as otherwise noted). Certain schedules may exceed GASB’s minimum requirements; however, the information provided is used by other state departments. Note that schedules c & d below are used by other state departments and are required to be presented in supplemental information and should not be in the notes. (b)Schedule of Internal (e.g., interfund, interdivisional, etc.) Receivables and Payables (may be omitted if the netting option permitted by the AICPA Audit and Accounting Guide: State and Local Governments, 9.12, March 1, 2021 Edition, is not utilized or if internal activity disclosure in the notes to the financial statements is adequate, i.e., due to/from amounts are disclosed by individual fund for all major and nonmajor funds).

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Section C - Reporting and Auditing Requirements Tennessee Municipalities (including related component units)

• (c) Schedule(s) of Long-Term Debt, Principal, and Interest Requirements (e.g., bonds, notes, and other long-term debt by individual issue and by Fiscal Year–All Funds). Schedules should also be included for all internal (e.g., between divisions within a utility fund) receivables and payables (e.g., telecommunications, cable, water/sewer, gas, general fund, etc.) Note: Long-term internal receivables and payables (i.e., internalloans) must be approved by the Comptroller of the Treasury, Division of Local Government Finance.

• (d) Schedule of Changes in Long-Term Debt by Individual Issue. (See example in Appendix A)

• (g) Unaccounted for Water (See additional information in Appendix A). The American Water Works Association (AWWA) water loss reporting model (Version 5) must be used. For more information regarding the AWWA model you can access the water audit software at:

http://www.awwa.org/resources-tools/water-knowledge/water-loss-control.aspx .

Section F - Reporting and Auditing Requirements Internal School Funds and Centralized Cafeteria FundsCentralized Cafeteria Systems (County School Systems)Centralized systems account for the operations of the cafeterias in a central location (at the board of education) and not at the individual schools. Therefore, they are not defined as internal school funds. Normally, a separate audit report is not issued for a centralized cafeteria system. These systems are generally audited as a part of the board of education audit. However, because the documentation related to compliance with federal program requirements is maintained by the individual schools, the auditor for the school system’s internal school funds is required to contract for and perform certain compliance procedures, generally referred to as USDA Procedures, as a subcontract auditor for the Division of Local Government Audit. These procedures may be found in Appendix C. Documentation related to these procedures must be completed and available for review by September 30th

following the fiscal year being audited (e.g., procedures related to the June 30, 2021 fiscal year would be due September 30, 2021). A separate report on these procedures is not required; however, local government auditors will review the audit documentation to ensure that sufficient work was performed and adequately documented. The Division of Local Government Audit will rely on the contracted work as a basis for their opinion. As a rule, audit contracts should be executed before the end of the fiscal year to be audited. However, contracting for the audit of internal

school funds (i.e., activity funds, noncentralized cafeteria funds, and other internal school funds) and for additional audit procedures for centralized cafeteria systems in counties is different. Because some of the audit procedures conducted on behalf of the Division of Local Government Audit must be conducted while school is still in session, all schools should contract by September 30 of the fiscal year to be audited (nine months prior to the end of the fiscal year). The contract to audit accounts should address the additional audit procedures related to centralized cafeteria funds in the special provisions section of the contract.

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Appendixes

Appendix A – Example Schedules

Appendix B - Current Development and Other Matters

Appendix C – Audit Procedures

Appendix D – Laws, Regulations, and Attorney General Opinions

Appendix E – Miscellaneous (Audit Procurement Guide – RFP)

Appendix F – Audits for State of Tennessee Financial Report

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CMFO Policies and Procedures Update

Matt Piland, CMFODivision of Local Government Audit, Contract Audit Review

Statistical Data for CMFOs

• 793 have completed the CMFO program since launch

• Certificate number 1 was issued to Lynn McClurg of Sevierville in January of 2011.

• Approximately 80 candidates have completed the program each year since 2011.

• Current active CMFOs 634

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Statistical Data for CMFOs

• 713 CMFO’s have a college degree

• 387 hold a degree in a business-related field

• 134 CMFO’s hold a Master’s degree or higher

• 54 CMFO’s also hold a CPA or CGFM certificate

Penalty Hours Forgiven!

• Delinquent accounts up-to-date

• Penalty hours will be removed

• Fresh start going forward

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Section 6-56-404, Tennessee Code Annotated To maintain certification, a certifiedmunicipal finance officer (CMFO) must earn at least sixteen (16) hours of continuingprofessional education (CPE) of financial education each calendar year after receivingthe designation. CPE hours in excess of sixteen (16) hours are not carried over to thenext calendar year. CPE hours must be filed with and maintained by the comptroller ofthe treasury's office, which must keep individual records on CMFOs and CMFOcandidates. The comptroller may allow exceptions to the continuing educationrequirement for good cause shown.

Old• 16 hours of financial

• 8 hours of other type hours

• Total of 24 hours CPE

• Carryover hours in excess of 24

New• 16 hours of financial

• No more other type hours

• Total of 16 financial hours

• No more carryover hours

Section 6-56-406(d), Tennessee Code Annotated, Notwithstanding this section, amunicipality may contract with a certified public accountant to perform the duties of aCMFO. The contracted CMFO shall devote a minimum of sixteen (16) hours permonth to financial oversight on behalf of the municipality.

Old• Contracted CPAs •No requirement for amount

of time spent with city.

New• Contracted CPAs•Minimum 16 hours for

financial oversight.•Waivers

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Waiver Request Requirements

Submit a request in memo to [email protected]

• Identify the CPA providing oversight

•Number of hours needed to provide the service each month

• Services being provided on monthly basis

CMFO Policies & Procedures Update

Registry of CMFO Candidates.

1. Be sure to complete your online application for a new account.https://apps.cot.tn.gov/CARS/CMFOWelcome.aspx

2. Wait for confirmation email before enrolling

3. Enroll in CMFO program training with MTAS

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CMFO Policies & Procedures UpdateCurriculum (10 Courses)

1. The Government Environment

2. Municipal Budgeting

3. Intro to Governmental Accounting

4. Governmental Accounting - Fund Financials

5. Government-Wide Financials and the Annual Comprehensive Financial Report

6. Internal Control and Auditing

7. Cash and Grants Management

8. Debt Management

9. Payroll, Benefits, and Pensions

10. Purchasing and Risk Management


Eligibility Period

• 2 years from the date of the first successful completion of the first course

• If eligibility runs out, then you will reapply as a new candidate and pass all the examinations during your new eligibility period

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Extensions

Extensions of eligibility may be granted for the following:

• Childbirth, adoption, severe health issues, sickness, or death of immediate family member, military leave, other matters approved by Comptroller of the Treasury.

• Division of Local Government Audit before the expiration of your eligibility period at 615.401.7841 or via email at [email protected].


Receiving the CMFO Certificate

• apply for the certification on CMFOA System

• certificates mailed March and December

• be sure your email is updated and to preferred email

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Remaining Active

• Complete a minimum of 16 hours of CPE annually in financial related subjects

• Maintain documentation of CPE hours obtained for a minimum of three years

• Submit detailed information and documentation on CPE hours by December 31 in CMFOAS


Inactive Status• may not present themselves as CMFOs

• Submitting CPE documentation showing at least 16 CPE hours earned in financial related subjects within the last 12 months

• CMFO can remain in an inactive status for up to two consecutive years

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Comptroller of the Treasury reserves the right to revoke

• found to have made false statements in the application

• found to have submitted certification(s) for CPE which they did not attend

• found to have committed ethics violations and/or actions discreditable to the CMFO Program such as conviction of a felony or conviction of theft from their employer


New CPE Requirements

• All CPE must be live events unless preapproved

• Self-study not permitted

• Documentation requirement

• National Association of State Board of Accountancy (NASBA) Registry

• CPE Audit

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Municipal Requirements

• Annual Compliance Reporting in CARS

• Change of Finance Oversight Designee

• Civil Penalties

• No more Organizational Chart or Job Description


Monitoring compliance with the Act

• Time and resources allocated to obtain CPE

• CPE consistent with these policies and procedures

• Possesses and maintains certificate

• Completes the annual compliance in a timely manner

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• CMFO may provide oversight to other municipalities

• Workload cannot interfere with the CMFO’s primary duties

• Obtain approval from the Comptroller’s office

• Revocation of the CMFO’s certificate

Ethics

• Association of Government Accountants (AGA)

• Ethical violation if CMFO is not Active

• Other regulators notified

• Revocation of Certification

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Questions?

Mark Fawver 615-747-8851

[email protected]

Common Reporting Deficiencies

Lisa Bellar, CPASenior Contract Audit Review Specialist

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Jason MumpowerTN Comptroller of the Treasury

Jim Arnette, CISA, CGFMDirector, Local Government Audit

Jerry Durham, CPA, CGFM, CFEAssistant Director

Research, Compliance, Contract Review Local Government Audit

Jean Suh, CPA, CGFM, CFEContract Audit Review Manager

Lisa Bellar, CPA - Timothy Hardy, CPA, CFESenior Contract Audit Review Specialists

Tammy SteeleProject Assistant

Marcee Burnett, CPA - Mark Fawver Sue Ann Odom - Matt Piland

Sara Pope, CPA - Bethany Wilson, CPA Contract Audit Review Specialists

Contract Audit

Review Structure

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Contract Audit Review Process

• Audited Financial Reports – Fiscal Year June 30, Due Dec 31• Reports are publicly available on our website

• Reviewed by Contract Audit Review Specialist• Letter issued acknowledging review of the audited financial report• A response to this letter is not required• Letter may include items which should be addressed in future reporting

• Sometimes current year revisions may be required• Letter will clearly state what revisions are required• Auditor is responsible for submission of revised financial report

Contract Audit Review Process

• Common resources utilized for review process:• GASB Codification• Government Auditing Standards (Yellow Book)• AICPA Audit and Accounting Guide – State and Local Governments• Governmental Accounting, Auditing, and Financial Reporting (Blue Book)• Tennessee Code Annotated (TCA)• Audit Manual

• https://www.comptroller.tn.gov/office-functions/la/resources/manuals.html

• Contact us for questions regarding specific references, if needed.

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Items most commonly noted during audit report reviews


• Management’s Discussion & Analysis (MD&A)

• Note Disclosure• Summary of Significant

Accounting Policies • Incomplete Debt Disclosures

• OPEB Errors

• Pension Errors

• Supplementary Information• Delinquent Tax Schedule

Missing• Long-Term Debt Schedule

Missing

• Incomplete Management’s Corrective Action Plan

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Management’s Discussion & Analysis(GASB Codification, Sections 2200.106 - .109)

• Condensed Financial Information • Amounts not agreeing to basic financial statements• Components not in manner required by GASB Codification

• Incomplete Financial Analysis • Present only amounts and percentages of change• “The analysis should address both governmental and business-type

activities as reported in the government-wide financial statements and should include reasons for significant changes from the prior year, not simply the amounts or percentages of change.” (Section 2200.109c)

Management’s Discussion & Analysis(GASB Codification, Sections 2200.106 - .109)

• Missing Sections• Significant Budget Variations

• Only General Fund required

• Capital Asset Activity• Long-Term Debt Activity• Economic Factors

Required Sections:• Brief discussion of basic financial

statements• Condensed financial information• Financial statement analysis• Analysis of individual funds• General Fund budgetary information• Capital Asset & Long-Term Debt Activity• Modified approach - infrastructure• Economic Factors

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Note Disclosures:Summary of Significant Accounting Policies

(GASB Codification, Section 2300.106a)

• Policy for eliminating internal activity in government-wide Statement of Activities

• Policy regarding whether to first apply restricted or unrestricted resources when an expense is incurred for purposes for which both restricted and unrestricted net position are available

Note Disclosures:Incomplete Debt Disclosures

(GASB Codification, Section 1500.129)

• Separately display direct borrowings and direct placements in principal and interest schedules

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Note Disclosures:Incomplete Debt Disclosures

• Disclose terms specified in debt agreements related to significant:1. Events of default with finance-related consequences2. Termination events with finance-related consequences3. Subjective acceleration clauses• GASB Codification, Section 1500.130

• Disclose which governmental funds typically have been used to liquidate other long-term liabilities in prior years• Such as compensated absences and pension liabilities• GASB Codification, Section 2300.120

OPEB Errors

• Inconsistencies• Statement of Net Position• Net OPEB Liability (Asset) and OPEB Deferrals

• Note Disclosure - OPEB• Required Supplementary Information – OPEB• ALL of these items should agree

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OPEB Errors• Failure to disclose, “There are no assets accumulating in a trust

that meets the criteria in paragraph 4 of GASB Statement No. 75.”• Must be included in:

• Notes to the financial statements (GASB Codification, Section P52.134d)

• Required Supplementary Information schedule (GASB Codification, Section P52.140)

• Failure to update amounts and/or dates from prior year reporting

OPEB Errors• Tennessee Department of Finance & Administration provides

reporting information for participating entities• https://www.tn.gov/finance/rd-doa/opeb22121.html• Select appropriate tab:• Local Education Agencies – includes school/teacher plans• Local Government – includes primary government plans

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Pension Errors

• Inconsistencies• Statement of Net Position• Net Pension Liability (Asset) and Pension Deferrals

• Note Disclosure - Pension• Required Supplementary Information – Pension• ALL of these items should agree

Pension Errors

• Restricted net position not calculated correctlyNet Pension AssetLess: Related LiabilityLess: Deferred Inflows of Resources – PensionRestricted Net Position - Pension(GASB Codification, Section 2200.119)

• Failure to update amounts and/or dates from prior year reporting

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Pension Errors – Contribution Inconsistencies

Pension Errors• Tennessee Department of Treasury provides reporting information

for participating entities• https://publicreports.treasury.tn.gov/Home• Select appropriate tab:

• Local Education Agencies – includes school/teacher plans• Political Subdivision – includes primary government plans

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Pension Errors

•Hybrid Pension Plan• Defined contribution plan disclosures omitted

GASB Codification, Section P21.112 or P24.111

• Stabilization Reserve Trust (SRT):• SRT asset not reported on Balance Sheet • Should be on BOTH Statement of Net Position and Balance Sheet

• Not reported as Restricted Net Position or Restricted Fund Balance

Pension Errors• Required Supplementary Information

• Notes to Schedule of Contributions – Hybrid pension plan• Omitted or incorrect notation describing contribution into the SRT

• Stabilization Reserve Trust Contribution (SRT) • The difference between the statutory employer contribution rate of 4% and the

Actuarially Determined Contribution (ADC) for the year.

Total Employer Rate 4.00%Less ADC Rate (determined each year)SRT Rate X.XX%

Example – FY2020:Total Employer Rate 4.00%Less ADC Rate (2.03%)SRT Rate – FY2020 1.97%

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Missing Supplementary Information

• Uncollected Delinquent Taxes filed in accordance with applicable laws • Can be a footnote to property tax schedule• (Audit Manual, pages C-11, APP.A-3)

• Schedule of Changes in Long-Term Debt by Individual Issue• (Audit Manual, pages B-3 to B-4, C-11, APP.A-2)

Incomplete Management’s Corrective Action Plan

• Name(s) of contact person(s) responsible for corrective action

• Corrective action taken or planned

• Anticipated completion date

• Included in separate section of audit report

• On client’s letterhead

• Labeled, “Management’s Corrective Action Plan”

• Signed by client and include all departments (no separate plans for each division/department)

• Include comments related to material discrete component units with significant findings to the audit

TC

A, S

ecti

on 9

-3-4

07

(Audit Manual, page A-20)

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Questions

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Contract Audit Review Updates-Nashville

Documents

Transcript of Contract Audit Review Updates-Nashville