CARBIS WALKER LLP & WPHFMA PRESENT ACCOUNTING AND AUDITING STANDARDS UPDATE JANUARY 25, 2013 PRESENTERS • Michael F. Garczynski, CPA, Partner - Health Care Services • Kelly S. Nord, CPA, Senior Manager - Health Care Services • Brandon W. Harlan, CPA, Senior Manager - Health Care Services • James A. Raley, CPA, Manager - Health Care Services • Jack H. Lynn, Supervisor - Health Care Services 2 AGENDA Welcome IFRS Background: Public and private company standard setting FASB Not-for-Profit Advisory Committee (NAC) and projects central to improving NFP GAAP: • - NFP Financial Reporting (two projects) - Disclosure Framework • - Nonpublic Entity Definition • Three EITF issues of note for NFPs Update on major convergence projects: • - Leases • - Revenue Recognition • - Financial Instruments Recent ASUs and other FASB projects of note for NFPs 3 AGENDA Accounting Standards Update • Goodwill and Indefinite – Lived Intangible Assets Health Care Topics • Charity Care • Bad Debts • Malpractice Insurance • Meaningful Use • RAC Audits • ICD – 10 Costs HUD and Governmental Reporting Update Special Considerations of Not-For-Profit Fraud Auditing Standards Board – Clarity Project 4 IFRS FOR THE U.S.? THE LATEST FROM THE SEC On July 13, 2012, the SEC’s Office of the Chief Accountant published its final staff report, “Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers.” • “…the Work Plan did not set out to answer the fundamental question of whether transitioning to IFRS is in the best interests of the U.S. securities markets generally and U.S. investors specifically.” • Summarizes the observations and analyses in six key areas identified for study. 5 GAPS IN IFRS 6 SEC DECISION AND NFPS Even if the SEC decides to adopt IFRS, FASB would likely need to retain specialized industry guidance This would include NFP guidance 7 FINANCIAL REPORTING FOR PRIVATE ENTITIES 8 PRIVATE COMPANY COUNCIL Blue-Ribbon Panel Recommendation FAF Trustee Proposal FAF Creates PCC AICPA Reaction 9 PRIVATE COMPANY COUNCIL Established May 2012 Purpose is to improve the process of setting accounting standards for private companies Two principal responsibilities • Determine whether exceptions or modifications to existing GAAP are needed • Advise FASB on private-company accounting matters during the standard setting process 10 TWO PARALLEL NONPUBLIC ENTITY PROJECTS 11 Definition: Nonpublic Business Entity (Private Company) 12 PRIVATE CO. DECISION-MAKING FRAMEWORK 13 PRIVATE COMPANY COUNCIL Exceptions or modifications to U.S. GAAP advanced by the PCC and endorsed by a simple majority of FASB members will be exposed for public comment. Following the comment process, the PCC will redeliberate the proposed exceptions or modifications and send final decisions to FASB. Upon FASB endorsement, exceptions or modifications will be incorporated into U.S. GAAP. 14 PRIVATE COMPANY COUNCIL FASB already is developing a private entity Decision-Making Framework. Will be a set of criteria for decisions about whether and when to adjust requirements for recognition, measurement, presentation, disclosure, effective dates, and transition methods for private entity standards. FASB will not complete the framework until the PCC provides input. FASB also has a project to provide a consistent, clear definition of a nonpublic entity. 15 PRIVATE COMPANY COUNCIL Inaugural meeting held on December 6, 2012 Identified four areas to research for agenda consideration: • Consolidation of VIEs • Accounting for “plain vanilla” interest rate swaps • Accounting for uncertain tax positions • Recognizing and measuring various intangible assets (other than goodwill) acquired in a business combination at fair value 16 PRIVATE COMPANY FRAMEWORK In conjunction with the private company framework project, part of the project was to define a nonpublic entity FASB has tentatively decided that an entity is not private if: • Files or furnishes F/Ss with a regulatory agency for purposes of issuing securities • Is a for-profit conduit bond obligor • Is an employee benefit plan 17 PRIVATE COMPANY FRAMEWORK Certain entities are not excluded from the definition of a private company unless they meet the previous definition • Financial institution • A consolidated subsidiary of an entity that is a public company • An entity that has a controlled and consolidated subsidiary that is a public company 18 DEFINITION OF A PRIVATE COMPANY FASB has tentatively defined a private company as an entity that: • Does not file or furnish F/Ss with a regulatory agency for purposes of issuing securities in a public market or issuing securities that trade in a public market; and/or • Is not a for-profit conduit bond obligor for conduit debt securities that are traded in a public market 19 PRIVATE COMPANY FRAMEWORK The Private Company Framework and Definition of Nonpublic Company will be addressed by the Private Company Council in future sessions No expected standard issuance date yet announced 20 RELATIONSHIP TO AICPA SPECIAL PURPOSE FRAMEWORK FOR SMES PROJECT 21 FROM FASB TO AICPA WE GO! AICPA will develop an OCBOA framework that it said will provide a less comprehensive and less costly alternative to U.S. GAAP for entities that do not need to comply with U.S. GAAP. AICPA will also use its resources and expertise to develop an enhanced OCBOA financial reporting framework that is objective, relevant, and responsive to the concerns of preparers and users of small and medium private company financial statements where GAAP financial statements are not required. 22 AICPA FINANCIAL REPORTING FRAMEWORK Terry Polly of the FAF stated: “We also believe that the AICPA’s plan to develop a financial reporting framework for smaller private entities, which would be used as a form of OCBOA reporting where appropriate, is an important and complementary undertaking,” she said. “Taken together, these actions demonstrate the commitment of both organizations to the private company financial reporting constituency.” 23 AICPA – QUOTES FROM MELANCON “For owner-managed, small- and medium-sized, for-profit entities that do not use GAAP, the AICPA is working on a self-contained financial reporting framework for release in the first half of 2013” “While its use will be completely voluntary, it promises to be less complex and less costly than following GAAP. FAF publicly supported this project, calling it “important and complementary.” It is a top priority for us. Watch for an exposure draft this fall.” 24 AICPA – FINANCIAL REPORTING FRAMEWORK (FRF) DETAILS Will be a standalone, self-contained other comprehensive basis of accounting intended for use by privately held small to medium sized entities (SMEs) in preparing their financials. The FRF for SMEs will be a less complicated and less costly system of accounting for SMEs that do not need U.S. GAAP F/Ss. Will be a cost-beneficial solution for SMEs and others who need F/Ss that are prepared in a consistent and reliable manner in accordance with a framework that has undergone public comment and professional scrutiny. 25 AICPA – FINANCIAL REPORTING FRAMEWORK (FRF) DETAILS (CONT.) The accounting principles comprising the FRF are intended to be the most appropriate for the preparation of SME F/Ss based on the needs of the F/S users and cost-benefit considerations. Accounting principles in the FRF for SMEs will be responsive to the well documented issues and concerns stakeholders currently encounter when preparing F/Ss for SMEs. FRF for SMEs may be used by every industry group and business structure. AICPA has no authority to require the use of FRF for SMEs. The use will be up to the users. 26 AICPA –FRF FRAMEWORK Not like OCBOA as you have come to know it There will be a separate implementation volume with a full set of illustrative F/Ss No comprehensive income It will have the following sections: • • • • • • • • Financial Statement Concepts General Standards of F/S Presentation Disclosure of Accounting Policies (and Changes) Current Assets and Current Liabilities Statement of Income, Financial Position, and SCF Business Combinations – pre FIN 46R (no VIEs!!!) Goodwill Amortization to Match Federal Tax Purposes Leases – like FASB 13, but match federal tax purposes 27 AICPA – FRF FRAMEWORK Revenue – will not follow FASB ED Income Taxes – allowed to use current taxes or can opt to include deferred taxes, no FIN 48 Risks and Uncertainties – use SOP 94-6 Financial Instruments: use cost and not marked to market, unless held for sale, under 20% = cost, no hedge accounting, consolidation = more than 50% owned No guidance on: Earnings per share, interim reporting, personal financials, segment reporting 28 AICPA – FRF TIMELINE Meeting currently and working on the FRF Expect exposure draft for comment by this fall Will gather responses and issue an updated draft early in 2013 Will issue final document in 2013 AICPA and CPAs will need to tell their clients, bankers, sureties about this FRF in order to get acceptance instead of GAAP financials Will take time for agreements to change for SMEs to be able to use this new framework 29 AICPA – FRF EXPOSURE DRAFT Released on November 1, 2012 Comments requested by January 30, 2013 FRF for SMEs is not proposed as an authoritative document Will have no effective date Management can decide to use it once it is released 30 AICPA – FRF EXPOSURE DRAFT Highly useful and responsive to the financial reporting needs of lenders and other F/S users: • Built upon a foundation of reliable and comprehensive • • • • • accounting principles Historical cost is primary measurement basis Reduced, yet relevant, disclosures Book to tax adjustments/reconciliations reduced Principles-based framework across all industries Will not undergo frequent changes 31 AICPA – FRF EXPOSURE DRAFT Implementation guidance will be provided: • Application examples • Illustrative financial statements • Disclosure checklists • Other tools Stay tuned for further details as it gets released! 32 FASB NOT-FOR-PROFIT ADVISORY COMMITTEE (NAC) Established in October 2009 to serve as a standing resource for the FASB in obtaining input from the NFP sector on existing guidance, current and proposed technical agenda projects, and longer-term issues affecting those organizations 17 members, plus 4 participating observers • NFP financial officers, auditors, foundation and other donors, creditor, watchdog agency, charities regulator, attorney, and academic Also, NFP Resource Group (a standing group of 225+ members) 33 NAC DISCUSSIONS ON ISSUES WITH GAAP: PRIMARY AREAS IN NEED OF ATTENTION The NFP financial reporting model (“FAS 117”) is in need of “refreshing” • Key vehicle: Two new NFP Financial Reporting projects Unlike private companies, no “hue and cry” for different underlying accounting in certain areas, but a more liberal use of practical expedients may be warranted • Area most frequently cited: Fair value measurements Primary general GAAP issue: “Disclosure Overload” (and effectiveness) • Key vehicles: Disclosure Framework project and NFP Financial Reporting projects Important NAC role: advise FASB staff and Board on potential piggybacking opportunities for NFPs with regard to projects of the new Private Company Council • Key project: Nonpublic Entity Definition 34 FASB NFP FINANCIAL REPORTING PROJECTS 35 NET ASSET CLASSES Might the current three classes of net assets based on donor-imposed restrictions be improved? • Are they still relevant and most useful? • Can they be improved to better convey information about liquidity and financial performance? For example: o Should donor-restricted classes be expanded to include restrictions imposed by other sources (for example, limits imposed by statutes, debt covenants, and other contracts)? o Should net asset classes be narrowed to just two (e.g., donor-restricted and other) with use of subclasses and/or notes? 36 LIQUIDITY AND FINANCIAL HEALTH How can we best improve information about an entity’s financial health, particularly the liquidity of its resources and its financial flexibility? • Limits on assets • Demands on assets (e.g., maturity of liabilities and other commitments) • Classifications of net assets, including added emphasis on ability to spend, for example: Unrestricted Restricted Spendable Spendable Designated Limited Nonspendable (e.g., PP&E) Nonspendable 37 FINANCIAL PERFORMANCE How might the statements of activities and cash flows be improved to better convey financial performance? • Should we have one model or two? • Should an operating measure be required? • If yes, should there be a single defined measure or some latitude to select from among a few different measures? • Should there be one statement or two statements (e.g., statement of operations, statement of other changes in net assets)? • Should functional expense reporting still be required for all and a statement of functional expenses for voluntary health & welfare organizations? • How about a spectrum, ranging from functional expense reporting to a functional/ natural expense matrix to functional P&L reporting to “segment-like” reporting? 38 FINANCIAL PERFORMANCE How might the statements of activities and cash flows be improved to better convey financial performance? (cont’d.) • How can we better link the statements of activities and cash flows? At the very least, can we better align “operating”? • Should we require the direct method for reporting operating cash flows? 39 “TELLING THE STORY” OTHER FINANCIAL COMMUNICATIONS NAC View—Financial Reporting can be enhanced through other narrative communications, such as: • Management commentary that explains financial information provided in financial statements, including trends over time Issues include: • Are standards needed? If not, would they be helpful? • Should such information be required or encouraged? If required, for all NFPs or only certain types? • If standards are to be developed, should a reporting framework require certain components? 40 FASB NFP FINANCIAL REPORTING PROJECTS Have formed project resource groups and completed other detail project planning Deliberations on standards project expected to begin in early 1Q 2013. Current estimated completion date is 2H 2014 • NAC discussion on net asset classes in March 2012 • NAC discussion on liquidity and the proposed ASU on Liquidity Risk Disclosures in September 2012 Work on research project has already begun. Current estimated date for decision on adding standards project: mid-2013 • Progress report at September 2012 NAC meeting 41 DISCLOSURE FRAMEWORK PROJECT 42 FASB DISCLOSURE FRAMEWORK PROJECT Goal: disclosure standard or conceptual framework guidance that helps reduce disclosure overload while making disclosures more comparable and effective Two approaches within project: • “Top down” (development of principles) • “Bottom up” (looking at actual current disclosure requirements) Many view this as a critical project in addressing GAAP complexity for all entities (public companies, private companies, NFPs) 43 DISCLOSURE FRAMEWORK PROJECT 44 FASB DISCLOSURE FRAMEWORK PROJECT Invitation to Comment (ITC) issued in July. Comment period ended November 30 ITC focuses on investors and creditors, but asked for input to help in also focusing on donors and other unique users of NFP financial statements • Discussed by NAC at September 2012 meeting 45 WHAT IS THE DISCLOSURE FRAMEWORK PROJECT? Project began as a response to a December 11, 2007, letter from the Investors Technical Advisory Committee to the FASB FASB issued an “Invitation to Comment” on July 12, 2012 – comment period extended through November 30, 2012 Goal of project is to improve disclosure effectiveness Complaints of cost effectiveness and relevance of disclosures for smaller entities 46 ADDRESSING DISCLOSURE EFFECTIVENESS Notes will address only information that is relevant to primary users of financial statements Relevant information: useful info for investing and credit decisions, which are based upon implicit or explicit assessments of prospects for cash flows to investors or creditors Flexible disclosure requirements that could be adapted by each entity to focus on relevant information to its specific circumstances 47 ADDRESSING DISCLOSURE EFFECTIVENESS (CONT.) FASB also addressed format and organization of notes Disclosures should be entity specific and should identify judgments and assumptions made by management Most relevant info should be given more recognition • Reorder notes by relevance • Use different text fonts or styles to draw attention to most relevant info Potential to group related notes together Not stated goal, but would likely lead to reduced disclosures, which would enhance effectiveness 48 CHANGES TO CODIFICATION? Invitation to Comment does not propose any specific changes, but rather suggests a number of possibilities that could lead to more effective disclosures FASB states that establishing a framework for disclosure is an important first step before any specific changes to existing disclosure requirements are considered FASB plans to apply framework to existing standards by either modifying existing standards or establishing new standards 49 ACHIEVING DISCLOSURE SELECTIVITY Two extremes – 1) FASB takes most responsibility for judgments, or 2) reporting entities take most responsibility for judgments Several alternatives: 1. FASB change wording re: disclosures to be less prescriptive and allow for flexibility. 2. FASB identify one set of potential disclosures for each Topic and require reporting entities to make their own decisions about relevance of each item. 3. FASB set minimum disclosure requirements or set of disclosures and an expanded set of disclosures. Reporting entities use judgment to provide minimum disclosures or some or all of the expanded disclosures. 4. FASB establish tiers of info items or a graduated scale of info requirements for each Topic. Reporting entities use judgment to determine which level applies to them. 50 CONSEQUENCES Convergence with International Standards – currently, IASB is NOT working on a similar project; although the European Financial Reporting Advisory Group is Comparability of financial statements to other entities Depending upon approach selected for achieving disclosure selectivity, increased judgment from reporting entities re: disclosures 51 NFPS AS PUBLIC VS. NONPUBLIC ENTITIES Current FASB project reexamining what is a Nonpublic Entity for standard setting Impacts on accounting and financial reporting • Current disclosures, effective date, transition • Future: potentially greater impact Phase I: Business Entities • Tentative conclusions contained in Appendix to Private Company Framework ITC Phase II, on NFPs, now underway • Current dividing line within NFPs: conduit debt • What should the dividing line(s) be? 52 NAC DISCUSSIONS OF PUBLIC VERSUS NONPUBLIC NAC members have agreed that NFPs share some attributes of nonpublic entities However, they are generally more similar to public entities • Generally, broader user base with less access to management • Public accountability created via donations and tax exemptions • Generally, governing boards are considered part of management, but nonprofit boards have a special role in ensuring public accountability and should be considered as users of financial statements 53 NAC DISCUSSIONS OF PUBLIC VERSUS NONPUBLIC This does not mean that NFPs should be treated like public companies • NFPs have limited resources like private companies • Some information that is important to public company investors is irrelevant to users of NFP financial statements • NFP stakeholders are interested in the entity’s fiscal sustainability and its ability to repay debts, not the value of the entity for the purpose of trading shares • There may be a subset of NFPs that are more like private companies (e.g., local membership clubs) 54 ASU 2012-05 Statement of Cash Flows (Topic 230) Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets on the Statement of Cash Flows – a consensus of the FASB Emerging Issues Task Force Issued October 2012 55 ASU 2012-05 Why issue this ASU? • To address the diversity in practice about how to classify cash receipts arising from the sale of certain donated financial assets on the statement of cash flows of not-for-profit entities. 56 ASU 2012-05 What entities are affected by this? • Any entity within the scope of Topic 958, Not-for-Profit Entities, that accepts donated financial assets. 57 ASU 2012-05 What are the main provisions? • Not-for-profit entities must classify cash receipts from the sale of donated financial assets consistently with cash donations received on the statement of cash flows if there are no spending limitations and the donated financial assets were converted nearly immediately into cash. 58 ASU 2012-05 What are the main provisions? (continued) • No limitations and nearly immediate cash conversion = operating activities • Time limitations (donor intended long-term purposes) and nearly immediate cash conversion = financing activities • No nearly immediate cash conversion = investing 59 ASU 2012-05 Practical Example: • Rupert Player makes the following donation to his favorite charity, Sizzler Village: o $ 1,000 worth of shares of IBM for any purpose. o $ 1,000 worth of shares of Facebook for the purchase of a new van expected to be made five years from now. o $ 1,000 worth of shares of Alcoa for any purpose. 60 ASU 2012-05 Practical Example (continued): • Sizzler Village has the following policy regarding donated securities: o All donated securities less than $ 1,000 are immediately liquidated. o All donated securities $ 1,000 or greater are reviewed by the board and held or liquidated at their discretion. 61 ASU 2012-05 Practical Example (continued): • Sizzler Village decides the do the following with Mr. Player’s donated stocks: o $ 1,000 worth of shares of IBM – convert to cash. o $ 1,000 worth of shares of Facebook – convert to cash. o $ 1,000 worth of shares of Alcoa – hold indefinitely. 62 ASU 2012-05 Practical Example (continued): • Proper statement of cash flows presentation: o $ 1,000 worth of shares of IBM – convert to cash = operating. o $ 1,000 worth of shares of Facebook – convert to cash = financing (restricted for long-term purposes) o $ 1,000 worth of shares of Alcoa – hold indefinitely = investing (upon liquidation) 63 ASU 2012-05 Effective Date: • Effective prospectively for fiscal years, and interim periods within those years, beginning after June 15, 2013. • Retrospective application to all prior periods presented upon the date of adoption is permitted. • Early adoption is permitted with exception. 64 ASU 2012-05 Effective Date (continued): • Exception to early adoption – for fiscal years beginning before October 22, 2012, early adoption is permitted only if the entity’s financial statements for those fiscal years, and interim periods within those years, have not yet been made available for issuance. 65 DONATED SERVICES RECEIVED FROM EMPLOYEES OF AN AFFILIATE (ISSUE 12-B) General Rule: An NFP recognizes “donated services" provided to it at no cost by an independent third-party only if those services "enhance a long-lived asset" or would otherwise need to be paid for by the NFP in the normal course of business Recognized Pro bono audit services provided by a CPA firm (debit accounting fees, credit contribution revenue; measured at fair value based on billing rotes) Not recognized Services of volunteers staffing a call center during a pledge drive 66 DONATED SERVICES RECEIVED FROM EMPLOYEES OF AN AFFILIATE (ISSUE 12-B) Issue Should NFPs apply contributed services guidance for recognizing personnel costs incurred on its behalf by an entity under common control? If not, what recognition and measurement guidance should apply? Views Proposed A - Recipient NFP should not apply contributed services guidance in ASC 958 but recognize personnel services that are regularly performed for recipient NFP on Its behalf by an affiliate at actual cost B - same as view A except measure personnel services that meet contributed services recognition criteria at fair value, otherwise measure at cost C - amend recognition criteria to remove ‘for and under direction of the donee' - then recognize personnel services that meet this amended definition at fair value 67 DONATED SERVICES RECEIVED FROM EMPLOYEES OF AN AFFILIATE (ISSUE 12-B) EITF reached a consensus that the expenses related to all personnel services that are regularly performed for the recipient NFP should be recognized in the NFP’s stand-alone financial statements and should be measured at the actual costs incurred by the affiliate under common control • Contributed services criteria would no longer be applied when reimbursement is not sought • Entities under Topic 954 (health care) would report as equity transfer 60-day comment period for ED ended September 20th; EITF to discuss on January 17, 2013 (November 1 meeting was canceled because of “Superstorm Sandy”) 68 OBLIGATIONS RESULTING FROM JOINT AND SEVERAL LIABILITY ARRANGEMENTS (ISSUE 12-D) Background Under joint and several liability, the total amount of an obligation is enforceable against any of the parties to the arrangement and the obligors cannot refuse to perform on the basis that other parties also are obligated to perform. Joint and several liability may exist for entities under common control or between unrelated parties. Currently there is diversity in practice in how entities recognize and measure obligations with joint and several liability. Issue How should a reporting entity that is jointly and severally liable account for an obligation whose total amount is fixed at the reporting date? 69 OBLIGATIONS RESULTING FROM JOINT AND SEVERAL LIABILITY ARRANGEMENTS (ISSUE 12-D) ABC Health System Hospital A - $200 million Hospital B - $175 million Hospital C - $75 million Fact Pattern Obligated group issued debt totaling $450 million Hospitals are joint and severally liable for repayment of the debt In addition to consolidated financial statements, each subsidiary issues standalone statements Each hospital's standalone statements display its share of the obligation, with note disclosure of the amount contingently owed (e.g., Hospital A's statements show $200 million liability and disclose $250 million contingent obligation) 70 OBLIGATIONS RESULTING FROM JOINT AND SEVERAL LIABILITY ARRANGEMENTS (ISSUE 12-D) Issue Should each hospital reflect the entire $450 million obligation, with a receivable from other parties for their respective “shares”? e.g., should Hospital A record $450 liability and $250 million receivable from Hospitals B and C? View Proposed A ~ Net approach under FAS 5 (treat obligation as contingent liability) B ~ Net approach under FIN 45/FAS 5 (treat obligation as a guarantee) C ~ Gross approach (record the total amount of the obligation) 71 OBLIGATIONS RESULTING FROM JOINT AND SEVERAL LIABILITY ARRANGEMENTS (ISSUE 12-D) EITF reached a consensus that an entity should measure obligations resulting from joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date using Loss Contingencies guidance (unless primary role is as guarantor) • Certain disclosures would also be required 60-day comment period for ED ended September 20th; EITF to discuss on January 17, 2013 72 LEASES PROJECT – TIMETABLE 73 LEASES PROJECT: LESSEES Proposed right-of-use model for lessees Feedback: general agreement for on-balance-sheet treatment but concerns about complexity: • Measurement (renewal options, contingent rents, short-term leases) • Expense pattern / categorization (front-loading, cost recovery, allowability) Redeliberations: • Measurement simplifications; short-term lease exception • Reconsidered subsequent expense categorization and expense pattern on income statement (statement of operations): Next slide 74 REDELIBERATIONS – LESSEE MODEL 75 REDELIBERATIONS – LESSOR MODEL 76 RECEIVABLE & RESIDUAL APPROACH Balance Sheet Income Statement Right to receive lease payments1 X Profit on transfer of right-of-use (gross or net based on business model) X Residual asset2 X Interest income – on receivable & residual3 X 1 Present value of lease payments, plus initial direct costs 2 Measured at an allocation of carrying amount of leased asset 3 Interest on residual based on estimated residual value – any profit on the residual asset is not recognized until asset sold or re-leased at end of lease term 77 LEASES PROJECT: TIMEFRAME Redeliberations still ongoing Revised ED now expected in 1H 2013 Likely 120-day comment period Final standard now expected to be issued in late 2013 or early 2014 Effective date for public entities likely 2016 or later Likely incremental deferral for nonpublic entities for one or two years beyond the public entity effective date 78 PREPARING FOR THE (EVENTUAL) NEW LEASES STANDARD Inventory all leases Assess capitalization threshold Monitor the continued developments in the project at fasb.org Depending on final decisions: • Understand any potential impact on debt financial covenants (debt/equity ratios) and any other key financial metrics by which the organization is measured • Understand any potential impact on cost recovery agreements (primarily equipment leases). The FASB is very aware of these issues for NFPs, as well as other government contractors, etc. 79 REVENUE RECOGNITION PROJECT: OVERVIEW OF MODEL 80 REVENUE RECOGNITION PROJECT Contracts with customers Excluded: • Donations • Collaborative arrangements May significantly change recognition pattern for some industries, but probably not for most NFPs New disclosures (next slide) • Exemptions for nonpublic entities 81 REVENUE RECOGNITION: DISCLOSURES Objective: To enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers • Redeliberations (in December) to consider costs and benefits of annual and interim disclosures • Users – level of disclosure is appropriate (or more is required) • Preparers and others – disclosure proposals are excessive, overly prescriptive and require information not used by management 82 REVENUE RECOGNITION PROJECT: TIMEFRAME Other issues being redeliberated • Onerous performance test has now been removed • Bad debts now back in expenses (original ED: contrarevenue) • Distinction from collaborative arrangement expected to be clarified further Standard expected to be issued in 1H 2013 Effective date for public entities TBD (no earlier than 2015, perhaps later) Likely incremental deferral for nonpublic entities for one or two years beyond that 83 FINANCIAL INSTRUMENTS PROJECT Classification and Measurement: • For the most part, changes no longer significant for NFPs • Loans receivable and liabilities remain at cost • NFPs already at FV for debt securities (these will generally now be at FV for business entities too) • Practical expedient to FV for nonmarketable equity securities • Nonpublic entities: Not required to present parenthetically or disclose fair value amounts for financial assets and financial liabilities measured at amortized cost. (i.e., “FAS 107” disclosures would no longer be required) 84 FINANCIAL INSTRUMENTS PROJECT Impairment: • FASB now proposing a Current Expected Credit Loss model, which would apply to loans receivable, as well as trade and lease receivables • Differs somewhat from the IASB’s current proposed model Hedge Accounting: • FASB and IASB are currently in very different places here Revised ED for Impairment to be issued later this month. Revised ED for Classification & Measurement to be issued in 1H 2013. Final standard(s) on these areas expected be issued in late 2013 or early 2014. Effective date TBD. 85 LIQUIDITY RISK DISCLOSURES PROJECT Spin-off from Accounting for Financial Instruments project Developed in part in response to concerns about irrelevance/non-cost-effectiveness of FV information for certain financial assets and liabilities Key proposed disclosures: (1) obligations, by expected maturity; (2) available funds • Financial institutions: different liquidity risk disclosures, plus interest rate risk disclosures Comment period ended September 25th 86 LIQUIDITY RISK DISCLOSURES PROJECT NAC discussed these at its September 2012 meeting, focusing on both (1) appropriateness/ cost-effectiveness and (2) sufficiency (given the NFP Financial Reporting Project objective of improving information about liquidity in NFP financial statements) Many constituents have been highly critical of the proposal FASB is reassessing the objectives and scope of project and nature of disclosures 87 GOING CONCERN PROJECT 88 GOING CONCERN Price pressures General lack of work and backlog Increased competition for fewer jobs Will companies be able to keep revenue at a sufficient level? • Profitable jobs? • Cover overhead? • Anything left? 89 GOING CONCERN Banks hesitant with financing • Bankruptcies • Loan defaults • Busted loan covenants 90 GOING CONCERN AICPA – AU-C Section 570, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern Effective for audits of financial statements for periods ending on or after December 15, 2012 91 GOING CONCERN AICPA – AU-C Section 570, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern Continuation of an entity as a going concern is assumed in financial reporting in the absence of significant information to the contrary. Auditor has a responsibility to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time. This evaluation is based on knowledge of relevant conditions and events obtained from the auditing procedures performed during a FS audit. The absence of any reference to substantial doubt in an auditor’s report cannot be viewed as a guarantee to the entity’s ability to continue as a going concern. 92 GOING CONCERN AICPA - AU-C Section 570 (Continued) Consider conditions and events such as: • • Negative trends o Recurring operating losses o Working capital deficiencies o Negative cash flows from operating activities o Adverse key financial ratios Other indications of financial difficulties o Default on loan or similar agreements o Denial of usual trade credit from suppliers o Restructuring of debt o Need to seek new sources or methods of financing or to dispose of substantial assets 93 GOING CONCERN AICPA - AU-C Section 570 (Continued) Consider conditions and events such as: • • Internal matters o Work stoppages and/or labor difficulties o Substantial dependence on success of particular project o Need to significantly revise operations External matters o Legal proceedings, legislation, or similar matters that might jeopardize an entity's ability to operate o Loss of principal customer or supplier o Uninsured or underinsured catastrophe (earthquake, flood, etc.) 94 GOING CONCERN AICPA - AU-C Section 570 (Continued) Consider management’s plans • Plans to dispose of assets • Plans to borrow money or restructure debt • Plans to reduce or delay expenditures • Plans to increase ownership equity • Plan and perform auditing procedures to obtain audit evidence on those elements that are particularly significant to overcoming the adverse conditions 95 GOING CONCERN AICPA - AU-C Section 570 (Continued) Disclosure and/or Explanatory Paragraph? • If the auditor's conclusion is that substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time is alleviated, the auditor should consider the need for disclosure of the principal conditions and events that initially caused the belief that there was substantial doubt. The auditor's consideration of disclosure should include the possible effects of such conditions and events, and any mitigating factors, including management's plans. 96 GOING CONCERN AICPA - AU-C Section 570 (Continued) Disclosure and/or Explanatory Paragraph? • If auditor’s conclusion is that substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time remains, the audit report should include an explanatory paragraph. • If auditor concludes that the entity's disclosures with respect to the entity's ability to continue as a going concern for a reasonable period of time are inadequate, a departure from GAAP exists. This may result in either a qualified (except for) or an adverse opinion. 97 GOING CONCERN The FASB decided that guidance related to the going concern assumption should reside in the accounting literature established by the FASB and decided to undertake this project (2007). Because this project may overlap with rules and standards of other agencies, the FASB directed its staff to obtain input from the staffs at the SEC, AICPA, and PCAOB on the revised draft and any conflict with existing and/or pending guidance related to this topic. Focused on disclosures aimed at earlier identification of circumstances that might lead to going concern issues Should there be some sort of explicit positive or negative assertion? If so, who should be making it (management vs. auditor)? The FASB is expecting to issue an exposure draft on going concern during the first half of 2013. 98 RISKS AND UNCERTAINTIES (GOING CONCERN) PROJECT 99 GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS 100 ASU 2011-08 AND ASU 2012-02 Relates to impairment testing of goodwill and indefinite-lived intangible assets ASU 2011-08 relates to goodwill – issued in September 2011 ASU 2012-02 relates to indefinite-lived intangible assets Main provision of both – allows entities to first assess potential for impairment using qualitative factors 101 ASU 2011-08: GOODWILL Issued in September 2011 Issued due to complaints that performing the two-step impairment test was too costly for many entities Allows for entities to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test Effective for annual and interim periods beginning after December 15, 2011. Early adoption is permitted. 102 ASU 2011-08: GOODWILL (CONTINUED) Qualitative factors that may indicate potential impairment: 1. Macroeconomic conditions (e.g., deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, etc.) 2. Industry and market conditions (e.g., deterioration in the environment in which an entity operates, increased competitive environment, change in the market for an entity’s products or services, etc.) 3. Cost factors (e.g., increases in raw materials, labor, or other costs that have a negative effect on earnings and/or cash flows, etc.) 4. Overall financial performance (e.g., negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual or projected results of relevant prior periods, etc.) 103 ASU 2011-08: GOODWILL (CONTINUED) Qualitative factors that may indicate potential impairment (cont): 5. Other relevant entity-specific events (e.g., change in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation) 6. Events affecting a reporting unit (e.g., change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing all, or a portion, of a reporting unit, etc.) 7. If applicable, a sustained decrease in share price (consider in both absolute terms and relative to peers) 104 ASU 2011-08: GOODWILL (CONTINUED) FASB does NOT intend for the identification of one factor to automatically trigger the two-step impairment test Entity should consider the extent to which each of the adverse events and circumstances identified could affect the comparison of a reporting unit’s fair value with its carrying amount and place more weight on the events or circumstances that most affect the reporting unit’s fair value or carrying amount of its net assets Additionally, an entity shall evaluate the existence of any positive or mitigating events and circumstances If entity determines that it is more-likely-than-not that an impairment may exist, entity should perform the first step and, if necessary, the second step of the two-step impairment test 105 ASU 2012-02: INDEFINITE-LIVED INTANGIBLE ASSETS Provisions similar to those of ASU 2011-08 Effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. 106 ASU 2012-02: INDEFINITE-LIVED INTANGIBLE ASSETS (CONTINUED) Events or circumstances to consider qualitatively that may indicate impairment of indefinite-lived intangible assets: 1. Cost factors that have a negative effect on future expected earnings and cash flows that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset 2. Financial performance 3. Legal, regulatory, contractual, political, business, or other facts, including asset-specific factors that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset 107 ASU 2012-02: INDEFINITE-LIVED INTANGIBLE ASSETS (CONTINUED) Events or circumstances to consider qualitatively that may indicate impairment of indefinite-lived intangible assets (cont.): 4. 5. 6. Other relevant entity-specific events Industry and market considerations Macroeconomic conditions Similar to goodwill, no one specific event or circumstance should automatically trigger the two-step impairment test Weight should be placed on most significant events and circumstances 108 ASU 2010-24 Health Care Entities (Topic 954) Presentation of Insurance Claims and Related Insurance Recoveries – a consensus of the FASB Emerging Issues Task Force Issued August 2010 109 ASU 2010-24 Why issue this ASU? • To address current diversity in practice related to the accounting by health care entities for medical malpractice claims and similar liabilities and their related anticipated insurance recoveries. • Most health care entities present at net although some have presented at gross. 110 ASU 2010-24 Why issue this ASU? (cont.) • It better reflects that health care entities generally remain liable for payment of, and retain risk associated with, such claims. • It better reflects that the health care entity is exposed to credit risk from the insurer. 111 ASU 2010-24 What entities are impacted by this? • Entities within the scope of Topic 954 • Consistent with the guidance on netting receivables and payables, Subtopic 210-20, Balance Sheet – Offsetting, that are more broadly applicable for entities in other industries. 112 ASU 2010-24 Entities affected are required to present insurance claim liabilities at a gross amount, excluding any expected insurance recoveries. Claim liability amount should be determined without consideration of insurance recoveries. 113 ASU 2010-24 Amounts subject to deductibles should also be considered. Insurance receivable should be measured on the same basis as liability . Allowance for uncollectable amounts should be considered. 114 ASU 2010-24 Items to consider • Method of calculating liability • Insurance layers • Deductibles by claim and in aggregate • Collectability of receivable 115 ASU 2010-24 Understand the elements of the actuary’s calculations • Consideration and assumptions of insurance recoveries by actuary, if any • Test understanding • Evaluate assumptions for reasonableness and consistency • Actuary should not assume claims made policy renews every year 116 ASU 2010-24 Practical Example: • Hospital X currently has three layers of insurance: o Self insured up to $500K o MCARE insurance from $500k - $1 million o Commercial insurance policy from $1 million to $3 million • Hospital X has an outstanding claim expected to settle for $2 million. 117 ASU 2010-24 Before: Cash Accounts receivable Inventory Prepaid expenses After: 1,000,000 5,000,000 500,000 500,000 Cash Accounts receivable Inventory Prepaid expenses 1,000,000 5,000,000 500,000 500,000 Property and equipment Other assets 15,000,000 2,000,000 Property and equipment Other assets Insurance receivable 15,000,000 2,000,000 1,500,000 Total assets 24,000,000 Total assets 25,500,000 Current maturities of debt Accounts payable Accrued expenses 500,000 500,000 500,000 Current maturities of debt Accounts payable Accrued expenses 500,000 500,000 500,000 Long-term debt Medical malpractice liability Other liabilities 10,000,000 500,000 1,000,000 Long-term debt Medical malpractice liability Other liabilities 10,000,000 2,000,000 1,000,000 Net assets 11,000,000 Net assets 11,000,000 Total liabilities and net assets 24,000,000 Total liabilities and net assets 25,500,000 118 ASU 2010-24 Effective Date: • Public entity - Fiscal years and interim periods beginning after December 15, 2010 • Nonpublic - Fiscal years beginning after December 15, 2010 • Retrospective application is permitted for all prior periods presented • Early adoption is permitted 119 TPAS ISSUED RELATED TO NEW INSURANCE ASU TIS 6400.49 Presentation of Claims Liability and Insurance Recoveries—Contingencies Similar to Malpractice - Similar contingent liabilities within the scope of ASU 2010-24 include liabilities of a similar nature • Workers Compensation • Directors and Officers claims • Others 120 TPAS ISSUED RELATED TO NEW INSURANCE ASU TIS 6400.50 Accrual of Legal Costs Associated with Contingencies Other Than Malpractice - For Malpractice ASC 954-450 requires health care entities to estimate and accrue the legal cost expected in connection with litigating malpractice claims in the period the malpractice incident arises - Other than Malpractice Prior policy election (expense when incurred or accrue for expected costs) should not be affected by adoption of ASU 2010-24 121 TPAS ISSUED RELATED TO NEW INSURANCE ASU TIS 6400.51 Presentation of Insurance Recoveries When Insurer Pays Claims Directly (Insurer handles all aspects of claims handling and settlement for covered claims; provider neither pays claims or receives recoveries) - Unless health care org. has a valid right of offset (not common), the org. should report gross amount of claims liability (incl. legal cost) and record a receivable as if it were entitled to receive insurance recoveries to offset obligations • In most cases, the receivable will mirror estimated losses in these contracts 122 TPAS ISSUED RELATED TO NEW INSURANCE ASU TIS 6400.52 Insurance Recoveries From Certain Retrospectively-Rated Insurance Policies - Such policies may not transfer risk Is a deposit (financing) arrangement Follow ASC 720-20 Expenses-Insurance, and ASC 340-30 Insurance Contracts That Do Not Transfer Insurance Risk - Policies may be more complex (e.g., maximum premium provisions) Considerations are discussed more fully 123 ASU 2011-07 Health Care Entities (Topic 954) Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and Allowance for Doubtful Accounts for Certain Health Care Entities – a consensus of the FASB Emerging Issues Task Force Issued July 2011 124 ASU 2011-07 Why issue this ASU? • Some Health Care entities recognize patient service revenue at the time the services are rendered regardless of whether the entity expects to collect that amount. • Concerns over “grossed-up” F/S presentation. • Need for greater transparency in a health care entity’s F/S about net patient service revenue and the allowance for doubtful accounts. 125 ASU 2011-07 What entities are impacted by this? • Entities within the scope of Topic 954 • Entities that recognize significant amounts of patient service revenue at the time the services are rendered even though they don’t assess collectability at that time • No impact for other entities 126 ASU 2011-07 Entities affected are required to reclassify bad debt expense from operating expenses to a deduction from net patient service revenue (net of contractual allowances and discounts). Bad debt expense continuing to be reported as operating expense: - Relating to revenue that is not patient service revenue (e.g., Foundation) - Receivables from patient service revenue if the entity only recognized revenue to the extent it expects to collect that amount (e.g., physician practice) 127 ASU 2011-07 New disclosure requirements: • Enhanced disclosures about policies for recognizing revenue and assessing bad debts: o Disclosure by major payor types o Consistent with how entity manages its business (e.g., by credit risk) o How does accounting system track receivables and revenue? 128 ASU 2011-07 New disclosure requirements: • Qualitative and quantitative information about changes in the allowance for doubtful accounts: o Changes in estimates and underlying assumptions o Amount of self-pay write-offs o Amount of third-party payor write-offs o Any other unusual transactions impacting the allowance for doubtful accounts o Major payor sources identified o Illustrations are provided in the ASU (Codification 954-310-55-1 through 3) 129 ASU 2011-07 BEFORE: AFTER: Revenues, Gains, and Other Support: Net patient service revenue Other revenue 50,000,000 2,000,000 Total 52,000,000 Expenses: Salaries and wages Supplies and expenses Employee benefits Depreciation and amortization Provision for bad debts Professional fees Insurance Contracted services Interest 21,000,000 15,000,000 5,000,000 3,000,000 3,000,000 2,000,000 1,000,000 500,000 500,000 Total 51,000,000 Revenues in excess of expenses Revenues, Gains, and Other Support: Net patient service revenue Provision for bad debts Net patient service revenue less provision for bad debts Other revenue 50,000,000 (3,000,000) 47,000,000 2,000,000 Total 49,000,000 Expenses: Salaries and wages Supplies and expenses Employee benefits Depreciation and amortization Provision for bad debts Professional fees Insurance Contracted services Interest 21,000,000 15,000,000 5,000,000 3,000,000 2,000,000 1,000,000 500,000 500,000 Total 48,000,000 1,000,000 Revenues in excess of expenses 1,000,000 130 ASU 2011-07 Entity A recognizes patient service revenue associated with services provided to patients who have thirdparty payor coverage on the basis of contractual rates for the services rendered. For uninsured patients that do not qualify for charity care, Entity A recognizes revenue on the basis of its standard rates for services provided (or on the basis of discounted rates, if negotiated or provided by policy). On the basis of historical experience, a significant portion of Entity A’s uninsured patients will be unable or unwilling to pay for the services provided. Thus, Entity A records a significant provision for bad debts related to uninsured patients in the period the services are provided. Patient service revenue, net of contractual allowances and discounts (but before the provision for bad debts), recognized in the period from these major payor sources, is as follows. Third-Party Payors Patient service revenue (Net of contractual allowances and discounts) $ 50,000 Total All Payors Self-Pay $ 10,000 $ 60,000 131 ASU 2011-07 Effective Date: • Public entity - Fiscal years and interim periods beginning after December 15, 2011 • Nonpublic - Fiscal years ending after December 15, 2012 • Presentation should be retrospective for all prior periods presented, disclosures for the period of adoption, and subsequent periods • Early adoption is permitted 132 TIS 6400.47 Application of ASU 2011-07 in Consolidated Financial Statements In determining how to present bad debts in Health System’s consolidated statement of operations, should the assessment of significance be made at the consolidated reporting entity level (regardless of the presentation in the separate subsidiary financial statements), or should the determinations made at the separate subsidiary reporting level be retained in consolidation? A. Application should be made as a policy decision with disclosure of the policy election. 133 TIS 6400.48 ACCOUNTING FOR ICD-10 IMPLEMENTATION COSTS Expected to require changes to both business processes and information systems Follow guidance in FASB-ASC 720-45 - Segregate project costs among— • Process reengineering activities o • Activities that develop or modify software o • Expensed as incurred Capitalized or expensed based on FASB internal-use software guidance Costs associated with acquisition of fixed assets o Accounted for in accordance with policy for capitalizing longlived productive assets 134 TIS 6400.48 ACCOUNTING FOR ICD-10 IMPLEMENTATION COSTS (CONT.) All training costs should be expensed as incurred Costs related to acquisition of new ICD-10 compliant systems or modification of existing software to become ICD-10 compliant—follow ASC 350-40 - Do modifications result in “additional functionality”? (enable software to perform tasks that it was previously incapable of performing) TPA presents factor to be considered in this assessment. Modifications that do not result in additional functionality - expensed as maintenance costs Modifications that result in additional functionality - expensed or capitalized in accordance with parag. 1-6 of ASC 350-40-25 135 TIS 6400.48 ACCOUNTING FOR ICD-10 IMPLEMENTATION COSTS (CONT.) ASC 350-40-25, parag. 1-6 Preliminary Project Stage 25-1 Internal and external costs incurred during the preliminary project stage shall be expensed as they are incurred. Application Development Stage 25-2 Internal and external costs incurred to develop internal-use computer software during the application development stage shall be capitalized. 25-3 Costs to develop or obtain software that allows for access to or conversion of old data by new systems shall also be capitalized. 136 TIS 6400.48 ACCOUNTING FOR ICD-10 IMPLEMENTATION COSTS (CONT.) 25-4 Training costs are not internal-use software development costs and, if incurred during this stage, shall be expensed as incurred. 25-5 Data conversion costs, except as noted in paragraph 350-40-25-3, shall be expensed as incurred. Postimplementation-Operation Stage 25-6 Internal and external training costs and maintenance costs during the postimplementation-operation stage shall be expensed as incurred. 137 MEDICARE INCENTIVE PAYMENTS FOR MEANINGFUL USE OF ELECTRONIC HEALTH RECORDS The American Recovery and Reinvestment Act of 2009 (ARRA) established incentive payments under the Medicare and Medicaid programs for certain professionals and hospitals that “meaningfully use” certified electronic health record (EHR) technology. Final rule issued in the July 28, 2010, Federal Register starting on page 44314. Provisions of the ARRA together with certain other provisions are referred to as the Health Information Technology for Economic and Clinical Health (HITECH) Act. 138 MEDICARE INCENTIVE PAYMENTS FOR MEANINGFUL USE OF ELECTRONIC HEALTH RECORDS Goal – Promote effective (quality) and efficient health care delivery reducing overall cost of health care. $19 billion has been set aside to be allocated over a four year period to hospitals implementing the technology by 2014 who are considered “meaningful users.” Hospitals must attest that they have met the criteria. Meaningful use has been defined by CMS in three stages. 139 MEDICARE INCENTIVE PAYMENTS FOR MEANINGFUL USE OF ELECTRONIC HEALTH RECORDS Stage 1 • Electronically capture health information in coded format • Use technology to meet 14 required core objectives • Meet 5 objectives from a menu of 10 Stage 2 • Focus on continuous quality improvement at point of care, greater use of physician order entry, and more exchange of information Stage 3 • Focus on promoting improvements in quality, safety, and efficiency with an emphasis on decisions support, patient access to self-management tools, access to comprehensive patient data, and improving population health 140 MEDICARE INCENTIVE PAYMENTS FOR MEANINGFUL USE OF ELECTRONIC HEALTH RECORDS Hospitals could first qualify for meaningful use for 2011 through 2013 and still received four years of incentive payments. After federal fiscal year 2013, smaller incentive payments will be received. Failure to demonstrate meaningful use in a later payment year will be treated as a skipped year and amounts cannot be recaptured. There will be lower future reimbursement for those who do not meet criteria by fiscal year 2015. 141 MEDICARE INCENTIVE PAYMENTS FOR MEANINGFUL USE OF ELECTRONIC HEALTH RECORDS Calculation: Initial Amount X Medicare Share X Transition Factor • Initial Amount o 2 million + 200 for discharges 1,150 - 23,000 o Discharges < 1,150 and > than 23,000 are excluded • Medicare Share o (Part A IP + Part C IP days) / Total IP Days X ((Total Charges – Charity Care)/Total Charges) • Transition Factor o See next slide 142 MEDICARE INCENTIVE PAYMENTS FOR MEANINGFUL USE OF ELECTRONIC HEALTH RECORDS The transition factors for obtaining meaningful use are as follows for the outlined years. • Fiscal Years 2011, 2012, or 2013: o o o o • Fiscal Year 2014: o o o o • Transition factor for year 1 - 0.75 Transition factor for year 2 - 0.50 Transition factor for year 3 - 0.25 Transition factor for year 4 - 0.00 Fiscal Year 2015 : o o o Transition factor for year 1 - 1.00 Transition factor for year 2 - 0.75 Transition factor for year 3 - 0.50 Transition factor for year 4 - 0.25 Transition factor for year 1 - 0.50 Transition factor for year 2 - 0.25 Transition factor for year 3 - 0.00 Provisions of the program are applied differently to Critical Access Hospitals and eligible professionals. 143 MEDICARE INCENTIVE PAYMENTS FOR MEANINGFUL USE OF ELECTRONIC HEALTH RECORDS CMS will employ discharge and other data from the Hospital’s most recently filed 12 month cost report as the basis for determining the Hospital’s preliminary incentive payment once they have attested as a meaningful user. • Medicare Cost Report (CMS - 2552-10) Worksheet S-2, Part I, Question 167 asks, “Is the provider a meaningful user under Section 1886(n)?” CMS will determine the final incentive payment at the time of settling the 12 month cost report for the Hospital’s fiscal year that begins after the beginning of the payment year, and to be settled on the basis of the Hospital’s discharge and other data in that cost reporting period. 144 MEDICARE INCENTIVE PAYMENTS FOR MEANINGFUL USE OF ELECTRONIC HEALTH RECORDS – CASE STUDY Organization attested on 9/15/12 Organization’s cost report year end is 6/30 What cost report did they use to estimate the payment received? What cost report should they indicate that they have attested on? What cost report will be used to calculate the actual settlement? 145 MEDICARE INCENTIVE PAYMENTS FOR MEANINGFUL USE OF ELECTRONIC HEALTH RECORDS Contingency Model • Identify the contingencies to be satisfied o Did the Organization meet the meaningful use criteria during the EHR reporting period 90 consecutive days in the first payment year and 365 during the remaining 3 years o What impact will discharges, total charges, charity care charges, and patient days have upon the final incentive payment? o What impact will the timing of these items have since the Organization’s fiscal year is most likely June 30th and the EHR reporting period is based on the federal fiscal year which runs from October 1st through September 30th? (i.e., a portion of the discharges used in the payment calculation may occur after the reporting period ends) • The contingency model would not permit income from the incentive payments to be recognized until the criteria has been met by the Organization. 146 MEDICARE INCENTIVE PAYMENTS FOR MEANINGFUL USE OF ELECTRONIC HEALTH RECORDS Grant Accounting Model • Follows International Accounting Standard 20, Accounting for Government Grants and Disclosures of Government Assistance (IAS 20) • Not authoritative guidance under GAAP • Has been used for situations where government provides resources to a business entity in return for past or future compliance with specified conditions relating to the operating activities of the entity, including situations where the purpose of the assistance is to encourage a course of action by the entity which it would not have taken otherwise. • EHR purpose is to encourage an accelerated pace of adopting EHR technology. 147 MEDICARE INCENTIVE PAYMENTS FOR MEANINGFUL USE OF ELECTRONIC HEALTH RECORDS IAS 20 defines two types of grants: • Grants related to assets (primary condition that an entity qualifying for grant should purchase, construct, or acquire long-term assets) • Grants related to income (grants other than those related to assets) EHR incentive payments would be considered an income grant since the compliance objective is “meaningful use” rather than to make the purchase of the long-term assets. 148 MEDICARE INCENTIVE PAYMENTS FOR MEANINGFUL USE OF ELECTRONIC HEALTH RECORDS When should the income be recognized? • When there is reasonable assurance that (1) the entity will comply with the conditions set forth; and (2) the grants will be received. Reasonable assurance may exist at the beginning of the reporting period and could be recognized ratably over the EHR reporting period. o Reasonable assurance may exist at mid-term date and a catch-up adjustment could be recorded. o Reasonable assurance may not be known until after the EHR reporting period with all income recognized at once. o • If a previously recognized payment will be recouped, a provision for repayment should be recorded and accounted for as a change in accounting estimate. • In the event that it is determined that meaningful use objectives will not be met, previously recognized income should be reversed and accounted for as a change in accounting estimate. 149 MEDICARE INCENTIVE PAYMENTS FOR MEANINGFUL USE OF ELECTRONIC HEALTH RECORDS Considerations for reasonable assurance • How long has the EHR system been operating? • How long has the Hospital been working to meet criteria? • How far along is the Hospital with implementing computerized physician order entry (CPOE)? • How reliable are the processes and controls around data entry? • How comfortable is the Hospital that the processes and controls are working properly? • Is the hospital going above and beyond to qualify for meaningful use? Estimates and revisions of estimates will have to be considered (i.e., discharges, charity care) 150 MEDICARE INCENTIVE PAYMENTS FOR MEANINGFUL USE OF ELECTRONIC HEALTH RECORDS Statement of Operations considerations • Hospitals should evaluate the presentation that best fits their facts and circumstances within the parameters of existing GAAP. o Privately-held-investor owned entities o Not-for-profit entities o Government entities • Look to AICPA Health Care Organization guidance o Patient service revenue, other revenue, and non-operating income • Would not be appropriate to report grant income from incentive payments as an offset of expense since the payments are not earned to reimburse specific expenses. 151 MEDICARE INCENTIVE PAYMENTS FOR MEANINGFUL USE OF ELECTRONIC HEALTH RECORDS IAS 20 requires the following disclosures: • The accounting policy adopted for the grant, including methods of presentation adopted in the financial statements • The nature and extent of grants recognized in the financial statements and an indication of other forms of government assistance from which the entity has directly benefited • Unfulfilled conditions and other contingencies attaching to government assistance that has been recognized 152 MEDICARE INCENTIVE PAYMENTS FOR MEANINGFUL USE OF ELECTRONIC HEALTH RECORDS It would be appropriate for all hospitals to disclose the following: • • • • • The recognition policy applied to the grant income, including the method of recognition of income related to the incentive payments and the location of the income on the statement of operations, if not apparent from details disclosed on the face of the statement. A general description of the incentive program, including the nature of the incentive payments, how the incentive payments are calculated, and the attestation process. A discussion of the fact that the amount of the grant income is recognized based on management’s best estimate and that amounts recognized are subject to change, with such changes impacting operations in the period in which they occur. The nature and amounts of material changes in accounting estimates related to grant income. The fact that its attestation is subject to audit by the federal government or its designee. 153 ACCOUNTING FOR HITEC EHR INCENTIVES Where are we now? Task force recommends grant accounting model - For general hospitals: • Medicare revenue would be recognized ratably over the demonstration period beginning with initial compliance with Meaningful Use criteria • Amounts should be estimated based on expected payments to be received • Concept to be applied each year based on achieving Meaningful Use criteria for that year 154 ACCOUNTING FOR HITEC EHR INCENTIVES SEC rejects grant model • Under the contingency model, revenue would not be recognized until both of the following criteria are met: o In compliance for the required period o Discharges for the funding reporting period have been incurred 155 ACCOUNTING FOR HITEC EHR INCENTIVES Application to providers: SEC registrants must follow gain contingency model Others have a policy election to choose - Grant model - Gain contingency model See HFMA Issues Analysis MEDICARE INCENTIVE PAYMENTS FOR MEANINGFUL USE OF ELECTRONIC HEALTH RECORDS: Accounting and Reporting Developments www.hfma.org under the HFMA Initiatives tab, Principles & Practices Board 156 ACCOUNTING FOR HITEC EHR INCENTIVES Other EHR Funds: - Medicaid Specific to each state May or may not follow Medicare program Accounting methodology should be consistent with the Medicare method elected Provisions of the incentive program are applied differently for the following: - Community access hospitals - Physician practices 157 MEDICARE INCENTIVE PAYMENTS FOR MEANINGFUL USE OF ELECTRONIC HEALTH RECORDS Please consult your independent auditors to discuss the desired accounting treatment for the incentive payments 158 HFMA ISSUE ANALYSIS ACCOUNTING FOR RAC AUDIT ADJUSTMENTS AND EXPOSURES SUMMARY Provides accounting guidelines for responding to RAC audits and adjustments in the following situations: • Entity receives notification of RAC audit adjustments • Entity suspects it may be billed or been paid for services that are potentially non-reimbursable • Entity is concerned about potential RAC adjustments for issues that have not yet been identified • Entity receives notification of an RAC audit adjustment recovery 160 NOTIFICATION OF RAC ADJUSTMENTS Receipt of notification is persuasive evidence the criteria for revenue recognition has not been met Entity must evaluate whether findings represent: • Change prior period estimate o If so, entity should accrue for amount of take-back o Should be recorded as a Medicare contractual adjustment o Record upon receipt of RAC adjustment notification • Correction of period error Should consider RAC adjustment that will be successfully appealed 161 BILLED OR PAID FOR NON-REIMBURSABLE SERVICES Implement changes to clinical operations and billing practices to address issues identified Seek assistance from legal and/or compliance experts to determine obligation to self-report and re-bill claims or refund overpayments Evaluate whether revenue recognition criteria have been met and whether findings constitute changes to prior period estimates or a correction of prior period error 162 RAC ADJUSTMENTS FOR ISSUES NOT YET IDENTIFIED General reserves should not be recorded Should not extrapolate another hospital’s RAC experience when determining reserves unless it can be demonstrated that operating procedures and billing practices are essentially identical • There may be circumstances for a hospital to support specific RAC reserves (for specific issues such as 3-day window, coding error, etc.) • o Hospital may be able to consider relevant historical experience related to specific issue Once a hospital has relevant experience with RAC audits, this experience should be incorporated into monthly AR reserve process. 163 RECEIPT OF NOTIFICATION OF AN RAC RECOVERY If appeal decision is final: • Record receivable and gain (offset to contractual adjustments) upon receipt of written notification o Receivable should be recorded in current period o Will be offset when cash is received from CMS or MAC If CMS can contest decision: • No receivable should be recorded If cash received related to a recovery prior to expiration of time for CMS to file an appeal: • Record as deferred revenue until time expires 164 HUD AND GOVERNMENTAL REPORTING UPDATE 165 2011 REVISION OF GOVERNMENT AUDITING STANDARDS In December 2011 the Government Accountability Office (GAO) issued the 2011 revision of Government Auditing Standards – commonly referred to as the “Yellow Book” • • • • Supersedes the 2007 revision Effective for financial audits and attestation engagements for periods ended on or after December 15, 2012, which is the same effective date as the clarified auditing standards recently issued by the AICPA Effective for performance audits beginning on or after December 15, 2011 Early implementation was not permitted 166 2011 REVISION OF GOVERNMENT AUDITING STANDARDS Summary of major changes: • Conceptual framework for independence was added o o • Assess auditor independence to activities that are not expressly prohibited Requires auditors to make independence determination based on facts and circumstances that are often unique to specific audit environments Specific reference to personal, external, and organizational impairments, and overarching independence principles have been removed o The underlying concepts related to these categories have been retained in the new conceptual framework for independence 167 2011 REVISION OF GOVERNMENT AUDITING STANDARDS Summary of major changes (continued): • Requirements for auditors performing nonaudit services at entities they audit o Includes a requirement that auditors assess whether management possesses suitable skill, knowledge, or experience to oversee the nonaudit service and to document that assessment o Revised guidance on nonaudit services that always impair an auditor’s independence with respect to audited entities and on certain nonaudit services that may be permitted under appropriate conditions Summary of requirements on documentation necessary to support adequate consideration of auditor independence was added o 168 2011 REVISION OF GOVERNMENT AUDITING STANDARDS Summary of major changes (continued): • Certain SAS and SSAE requirements that were repeated have been removed • Three categories of attestation engagements, (1) examination, (2) review, and (3) agreed-upon procedures engagements are now separately discussed o • Auditors are not permitted to deviate from the reporting elements prescribed by the AICPA The reporting requirement for fraud now includes only those occurrences that are significant within the context of the audit objectives for performance audits 169 2011 REVISION OF GOVERNMENT AUDITING STANDARDS Auditor’s Report: • Auditor’s reports will be affected by the 2011 revision of the Yellow Book as well as the clarified auditing standards o The GAS/A-133 AICPA Audit Guide has not been updated with illustrative reports for use in Yellow Book and OMB Circular A-133 audits o Illustrative reports are expected to be available by the end of January 2013 170 OVERALL CHANGES FOR FINANCIAL AUDITS Considered clarity project/standards Streamlined language to harmonize with AICPA No new requirements were added for financial audits and attestation engagements 171 REQUIREMENTS BEYOND AICPA Additional GAS requirements relate to Auditor communication Previous audits and attestation engagements Noncompliance with provisions of contracts or grant agreements, or abuse Developing elements of a finding Documentation For attestation engagements, this applies only at the examination level 172 REQUIREMENTS BEYOND AICPA (CONT.) Additional GAS requirements relate to Reporting auditors’ compliance with GAGAS Reporting on internal control, compliance with provisions of laws, regulations, contracts, and grant agreements, and other matters Reporting views of responsible officials Reporting confidential or sensitive information Distributing reports 173 REMOVED DUPLICATIVE REQUIREMENTS Financial Audits • Restatements • Internal control deficiency definitions • Communication of significant matters • Consideration of fraud and illegal acts Attestation Engagements • Internal control deficiency definitions 174 DELETED REQUIREMENTS Covered by the Quality Control System • Develop policies to address requests by outside parties to obtain access to audit documentation Covered by AICPA Standards • Document terminated engagements o Retained requirement for performance audits 175 ATTESTATION ENGAGEMENTS Separated attest requirements • Examination • Review • Agreed-Upon Procedures Update considerations • Identified practice issue • Clarified distinctions between engagement types • Emphasized AICPA reporting requirements 176 INDEPENDENCE 177 CHAPTER 3 – GENERAL STANDARDS: INDEPENDENCE Defines independence of mind and in appearance Emphasizes the importance of considering individual threats to independence both individually and in aggregate 178 CHAPTER 3 – GENERAL STANDARDS: INDEPENDENCE Conceptual Framework • Allows the auditor to assess unique circumstances • Adaptable • Consistent with AICPA and IFAC frameworks Significant differences from AICPA Int. 101-3 • Entry point for use of the framework • Emphasis on services “in aggregate” • Documentation requirement 179 FRAMEWORK New approach combines a conceptual framework with certain rules (prohibitions) • Balances principle and rules-based standards • Serves as a hybrid framework Certain prohibitions remain • Generally consistent with Rule 101 AICPA • Paragraphs 3.45 through 3.58 Beyond a prohibition • Apply the conceptual framework • Will be used more often than AICPA 180 CHAPTER 3 – GENERAL STANDARDS: INDEPENDENCE Threats could impair independence • Do not necessarily result in an independence impairment But… Safeguards could mitigate threats • Eliminate or reduce to an acceptable level 181 GAGAS CONCEPTUAL FRAMEWORK FOR INDEPENDENCE 182 INDEPENDENCE CATEGORIES OF THREATS 1. Management participation threat 2. Self-review threat 3. Bias threat 4. Familiarity threat 5. Undue influence threat 6. Self-interest threat 7. Structural threat 183 ASSESSING SIGNIFICANCE IN THE CONCEPTUAL FRAMEWORK FOR NONAUDIT SERVICES The framework requires the auditor to assess the significance of threats Threats related to non-audit services often include • Management participation threat • Self review threat Indicators of a significant threat include: • Level of services provided (aggregation assessment) • Significance to the audit objective • Basic understanding of the service enough to recognize material errors • Facts and circumstances that increase the perception that the auditor is working as part of management 184 DOCUMENTATION REQUIREMENT CONCEPTUAL REQUIREMENT New documentation requirement Must document when safeguards have been applied • Beyond the threat level • Only once safeguards are applied • Document how safeguards sufficiently mitigate the threats 185 AICPA 101-3 DOCUMENTATION REQUIREMENTS In connection with non-audit services, an auditor should establish and document in writing their understanding with the audited entity’s management or those charged with governance, as appropriate, regarding the following: • Objectives of the non-audit service engagement, • Services to be performed, • Audited entity's acceptance of its responsibilities, • The auditor’s responsibilities, and • Any limitations of the non-audit service engagement 186 ADDITIONAL YELLOW BOOK DOCUMENTATION REQUIREMENTS New audit documentation requirements include: • Documentation of the conceptual framework for issues requiring application of safeguards o Under AICPA, documentation required but only applicable when circumstances not addressed in Code • For any non-audit service there is an additional documentation requirement o Assessing management’s skill, knowledge, or experience o Note: The assessment is required by the AICPA; GAGAS requires documentation of that assessment 187 SUITABLE SKILL, KNOWLEDGE, AND/OR EXPERIENCE Individual designated to oversee the nonattest service has the ability to understand the nature, objective, and scope of the nonattest service Does not require the designated individual to supervise the member in the day-to-day rendering of the services • Make all significant judgments, • Evaluate the adequacy and results of the service, • Accept responsibility for the service results, and • Ensure that the resulting work product meets the agreed-upon specifications 188 ASSESSING MANAGEMENT’S SKILL, KNOWLEDGE, OR EXPERIENCE Considerations to include in documentation • Understanding of the nature of the service • Knowledge of the business • Knowledge of the industry • General business knowledge • Education • Position at the client Some factors may be given more weight GAGAS does not require re-performance 189 FAILURE TO DOCUMENT INDEPENDENCE CONSIDERATIONS Insufficient documentation does not automatically impair independence Appropriate documentation required by GAGAS and AICPA 101-3 Lack of documentation would be noncompliance with both standards ALERT – Internal and Peer reviewers and regulatory reviewers will be explicitly looking for this documentation. Lack of documentation would result in findings. 190 INDEPENDENCE Q&A GUIDE Government Auditing Standards: Questions and Answers to Independence Standard Questions guidance 191 PRECONDITIONS TO PERFORMING NON-AUDIT SERVICES Management should take responsibility for nonaudit services performed by the auditors Auditors should document their understanding with management regarding the non-audit service Auditors should assess (AICPA) and document (GAGAS) whether management possesses suitable skill, knowledge, or experience (SKE) to oversee the non-audit service 192 SAFEGUARDS – NON-AUDIT SERVICES Auditors should document safeguards when significant threats are identified. Auditor has responsibility to perform the assessment; this cannot be a management assertion Assessment should be in writing and indicate actions the auditor has taken to mitigate the threat Assessment should include a conclusion Auditor should document actions taken to mitigate the threat • Examples may include: 1. 2. Actions taken by the client to gain an understanding of the non-audit service and detect any errors Actions taken by the auditor to preserve independence such as an extra level of review or secondary review 193 SAFEGUARD EXAMPLES Safeguards in the work environment • Select non-impaired auditor • Separate engagement teams • Secondary reviews Non-audit services • Management responsibility • Sufficient skills, knowledge, or experience Safeguards created by the profession, legislation, or regulation • External review by a third party • Monitoring and disciplinary procedures 194 SAFEGUARD EXAMPLES Preparation by personnel not involved in the audit team Emphasis of the risks of self review to the engagement team Detailed discussion of the schedule with client personnel Do not forget documentation of above, as well as SKE and understanding/arrangements for non-audit service 195 ROUTINE AUDIT SERVICES AND NONAUDIT SERVICES Routine audit services pertain directly to the audit and include: • Providing advice related to an accounting matter • Researching and responding to an audited entity’s technical questions • Providing advice on routine business matters • Educating the audited entity on technical matters Other services not directly related to the audit are considered non-audit services 196 ROUTINE AUDIT SERVICES AND NONAUDIT SERVICES Services that are considered non-audit services include: • Financial statement preparation • Bookkeeping services • Cash to accrual conversions (a form of bookkeeping) • Other services not directly related to the audit o Preparation of tax filings Unless specifically prohibited, non-audit services MAY be permissible but should be documented • In relation to the conceptual framework • In relation to the auditor’s assessment of management’s skill, knowledge, or experience 197 BOOKKEEPING SERVICES May be performed provided the auditor does not Determine or change journal entries, account codes or classifications for transactions, or other accounting records without obtaining client approval Authorize or approve transactions Prepare source documents Make changes to source documents without client approval Consistent with AICPA Int. 101-3 198 PROHIBITIONS WITHIN INTERNAL AUDIT Services provided by external auditors Setting internal audit policies or the strategic direction - e.g., Functioning as the internal auditor Deciding which recommendations resulting from internal audit activities to implement Taking responsibility for designing, implementing, and maintaining internal control 199 PROHIBITIONS WITHIN IT SERVICES External auditors may not Design or develop an IT system that would be subject to or part of an audit Make significant modifications to an IT system’s source code Operate or supervise an IT system Installation of packaged system not specifically prohibited 200 PROHIBITIONS RELATED TO INTERNAL CONTROL MONITORING Management is responsible for designing, implementing, and maintaining internal control External auditors May not provide ongoing monitoring services or procedures May not design the system of internal controls and then assess its effectiveness May evaluate the effectiveness of controls 201 PROHIBITIONS WITHIN VALUATION SERVICES External auditors may not provide valuation services that: Would have a material effect, Involve a significant degree of subjectivity, and Are the subject of an audit 202 FINANCIAL STATEMENT PREPARATION Auditors may prepare financial statements Considered by GAGAS a non-audit service Must apply the conceptual framework Two additional documentation requirements Document application of safeguards • Document assessment of management’s skill, knowledge, or experience • Consistent with AICPA Int. 101–3 Otherwise no safeguard could reduce the threat to an acceptable level 203 ASSESSING SIGNIFICANCE FOR BOOKKEEPING AND FINANCIAL STATEMENT PREPARATION Relative significance is a continuum Indicators of significant threats for bookkeeping and financial statement preparation may include: • Financial statement preparation with other non-audit services such as bookkeeping or cash to accrual conversions • Condition of client prepared books and records • Level of anticipated “correction” or adjustments to client prepared schedules and documents • Condition of the general ledger/trial balance Less significant may be: • Purely mechanical calculations 204 GAO INDEPENDENCE STANDARDS VERSUS AICPA STANDARDS What are the major differences? 205 YELLOW BOOK VS. AICPA - SIMILARITIES Specific threats & safeguards • Except GAO “structural threat” is unique to governments Prohibitions on non-audit services AICPA Int. 101-3 general requirements • Audited entity must: o o o o Assume all management responsibilities Designate an individual to oversee the services who has suitable skill, knowledge, or experience Evaluate adequacy and results of services performed Accept responsibility for the results of the services Documentation of – • • Understanding with the audited entity Significant threats to independence that require the application of safeguards 206 YELLOW BOOK VS. AICPA - DIFFERENCES Conceptual framework approach • Yellow Book requires all circumstances/relationships that may result in threats to undergo threats/safeguards analysis • AICPA only requires threats/safeguards analysis if circumstance/relationship not specifically addressed in Code Permitted Non-audit services • Yellow Book requires all permitted non-audit services to undergo threats/safeguards analysis which may result in need for safeguards • If non-audit service is permitted under AICPA Int. 101-3, additional safeguards are generally not required Documentation of management’s skills, knowledge, or experience 207 LOOKING FORWARD 208 AICPA PRACTICE AID AICPA, 2011 Yellow Book Independence – Non-audit Services Documentation Practice Aid • Significant threats to independence • Application of safeguards • Evaluation of the skills, knowledge, or experience • Management responsibilities 209 AICPA PRACTICE AID Appendices provide detailed guidance and examples, including: • Evaluation of significance of threats • Determination of applicable and appropriate safeguards • Evaluation of skills, knowledge, or experience • Completed example practice aid Available free through the AICPA Governmental Audit Quality Center (GAQC) to AICPA members. Unlocked version available for purchase. 210 WHERE TO FIND THE YELLOW BOOK The Yellow Book is available on GAO’s website at: www.gao.gov/yellowbook For technical assistance, contact the GAO at: yellowbook@gao.gov 211 QUESTIONS???? 212 SPECIAL CONSIDERATIONS OF NOT-FOR-PROFIT FRAUD AGENDA • Statistics on fraud • Why the risk for fraud in not-for-profit organizations is often greater than in other types of organizations • Common not-for-profit fraud schemes • Special considerations in not-for-profit fraud investigations 214 LEARNING OBJECTIVES • Identify key areas that may leave a NFP vulnerable to fraud • Understand common NFP fraud schemes • Understand how to respond to a fraud issue • Help prevent fraud at NFPs 215 PRESENTATION RESOURCE • Association of Certified Fraud Examiners Report to the Nations on Occupational Fraud and Abuse 2012 Global Study • Report is available at acfe.com under “Fraud Resources” 216 2012 REPORT TO THE NATIONS • Introduction Based on data compiled from a study of 1,388 cases of occupational fraud that occurred worldwide between January 2010 and December 2011. All information was provided by the Certified Fraud Examiners (CFEs) who investigated the cases. Case studies came from 94 nations. 217 FRAUD TRIANGLE 218 STATISTICS ON FRAUD • An annual 2012 ACFE survey estimated, on average, organizations lose 5% • • • • • of revenues to fraud annually The median loss was $140K, with 20% of fraud incidents being in excess of $1 million Most occupational fraudsters are first time offenders with clean employment histories The majority of fraud is discovered by a tip from an employee, or by chance The median loss at not-for-profits in 2012 was $100K Not-for-profits represented approximately 10% of fraud victims Source: Association of Certified Fraud Examiners 2012 Global Fraud Study 219 STATISTICS ON FRAUD (CONT.) • Financial statement fraud schemes made up just 8% of the cases studied, but caused the greatest median loss at $1 million. • The primary reasons why fraud took place was: lack of internal controls, the ability to override existing internal controls, and lack of management review • Perpetrators with higher levels of authority tend to cause much larger losses. The median loss among frauds committed by owner/executives was $573,000; the median loss caused by managers was $180,000; and the median loss caused by employees was $60,000. • The longer a perpetrator has worked for an organization, the higher fraud losses tend to be. Perpetrators with more than ten years of experience at the victim organization caused a median loss of $229,000. By comparison, the median loss caused by perpetrators who committed fraud in their first year on the job was only $25,000. 220 STATISTICS ON FRAUD (CONT.) • • • Most occupational fraudsters are first-time offenders with clean employment histories. Approximately 87% of occupational fraudsters had never been charged or convicted of a fraud-related offense, and 84% had never been punished or terminated by an employer for fraud-related conduct. In 81% of cases, the fraudster displayed one or more behavioral red flags that are often associated with fraudulent conduct. Living beyond means (36% of cases), financial difficulties (27%), unusually close association with vendors or customers (19%), and excessive control issues (18%) were the most commonly observed behavioral warning signs. Nearly half of victim organizations do not recover any losses that they suffer due to fraud. As of the time of our survey, 49% of victims had not recovered any of the perpetrator’s takings; this finding is consistent with our previous research, which indicates that 40–50% of victim organizations do not recover any of their fraud-related losses. 221 CURRENT STATE OF OCCUPATIONAL FRAUD – FRAUD TYPE IN NOT-FOR-PROFIT ORGANIZATIONS Percentage of Type of Fraud in Not-For-Profits 222 CURRENT STATE OF OCCUPATIONAL FRAUD – BEHAVIORAL INDICATORS 223 CURRENT STATE OF OCCUPATIONAL FRAUD – HOW FRAUD IS DETECTED 224 TYPES OF FRAUD • Three categories of frauds at not-for-profits: internal, external, and fraud committed by the organization Internal frauds are committed by persons inside, such as employees, officers, and directors. External frauds are committed by persons outside, such as vendors, grant applicants, and program participants. Frauds committed by the organization typically involve multiple individuals; fraudulent fund-raising by not-for-profits is one example. • Internal, external, and fraud by the organization can be subdivided into two categories: Asset misappropriations Fraudulent financial reporting 225 INTERNAL FRAUD: ASSET MISAPPROPRIATIONS 226 INTERNAL FRAUD CATEGORIES Revenue and cash receipts Skimming: theft of cash before the funds have been recorded in the books. Usually committed by one who opens mail, handles donations, or prepares the bank deposits. Theft of donated merchandise: theft of non-cash merchandise. Internal controls are often poorly designed at not-for-profits regarding protection of donated merchandise. Purchasing and cash disbursement Credit card abuse: improper use of organization issued credit card, or theft of numbers from donors. Fake vendor: submitting fraudulent invoices for payment on services or items that were not received. 227 INTERNAL FRAUD CATEGORIES (CONT.) Payroll and employee expense reporting Ghost employees: either terminated employees or fake employees remain on the payroll Overstated hours: getting paid for hours not worked Fraudulent expenses: submission of fraudulent invoices for expenses that did not take place Most of these frauds can be corrected at not-for profits by having adequate internal controls, as well as having accounting and process flow procedures in place – that are enforced. (more on this later) 228 EXTERNAL FRAUD: FRAUDS AGAINST THE NOT-FOR-PROFIT 229 EXTERNAL FRAUD CATEGORIES Fraudulent billings by the vendor: charging for goods or services not delivered Fraud by service organizations: involve false transactions and receiving kick-backs Fraud by recipients: reporting fraudulent data to the not-for-profit that made the grant or award Financial assistance fraud: individuals who falsely receive financial aid 230 FRAUDS COMMITTED BY NOT-FOR-PROFITS 231 FRAUDS COMMITTED BY NOT-FORPROFITS: ASSET MISAPPROPRIATIONS • Fraudulent fund raising Improper expense ratios communicated to donors Failure to comply with IRS requirements related to housing allowances or compensation reporting Misclassifying employees, for example classifying employees as volunteers • Failure to comply with donor-imposed restrictions Misrepresenting portion of donations that will be used for stated cause Selling donor data to market research companies 232 FRAUDS COMMITTED BY NOT-FORPROFITS: FRAUDULENT FINANCIAL REPORTING • Fraudulent financial reporting Failure to disclose significant related party transactions Failure to disclose non-compliance with debt requirements Misclassifying restricted donations Holding records open beyond the period end to inflate revenues Misclassifying expenses to mislead donors Failure to report trade payables Failing to correctly report debt obligations 233 CONSIDERATIONS WHEN A FRAUD IS SUSPECTED • The organization should have a fraud response plan already in place Who will lead the investigation Who will be on the team • Assessing whistleblower complaints and tips • When do you contact inside or outside counsel? • Consider that a case may eventually end up in court Civil Criminal 234 CONSIDERATIONS WHEN A FRAUD IS SUSPECTED (CONT.) • Secure documents in a controlled, static environment: Paper files Computer files Hard drives Backups Emails Chain of custody must be maintained Document hold is communicated early and enforced • What to do with the accused? Poorly handled investigations can cause employment issues or litigation Allow to work, put on leave, or terminate relationship 235 CONSIDERATIONS WHEN A FRAUD IS SUSPECTED (CONT.) • Notification of law enforcement • Notification of insurance carrier • Does the organization have individuals capable of performing the investigation? • Characteristics of the internal investigative team - do they have the specialized knowledge required to conduct an effective investigation? Experience in investigating accounting irregularities Computer forensics skills Interview skills Data analysis techniques and abilities 236 CONSIDERATIONS WHEN A FRAUD IS SUSPECTED (CONT.) • Consideration for not-for-profit organizations - impact on public relations • Can the organization afford to hire an external forensic team of accountants/investigators? • Consideration of partnering with internal and external resources • What is the relevant scope of the investigation? 237 CONDUCTING THE FRAUD INVESTIGATION • Consider that every suspected fraud may end up in the courts • Key preliminary work should be to narrow the focus of the investigation as • • • • • much as possible Determine the work areas involved, key employees, and systems used Consider who you will interview and in what sequence Consider a preliminary interview with non-suspects to narrow the focus of the investigation Perform a thorough analysis of the processes and work flows potentially impacted by the fraud Consider how data collection and analysis can be used to look for unusual transactions 238 CONDUCTING THE FRAUD INVESTIGATION (CONT.) • Perform financial analysis, if applicable • Prepare a detailed work plan involving each step in the fraud investigation • The work plan Lays out areas of investigation Determines necessary analysis Flows naturally from the allegations Refine the work plan, hypothesis, and testing steps as necessary as the investigation continues Changes areas of emphasis depending on the results Considers accounting entries that may point to an issue • Perpetrators are often adept at hiding their schemes 239 CONDUCTING THE FRAUD INVESTIGATION (CONT.) • Consider steps to test the fraud hypothesis • Determine access to relevant systems and, if possible, when the suspect made such access • Perform public records searches to determine assets and affiliations of suspects • Consider social media and internet queries to obtain information on suspect, suspect’s family, affiliations, and friends • Considerations of when to interview the suspect 240 CONDUCTING THE FRAUD INVESTIGATION (CONT.) • Consider possible ways the suspect could have personally benefited from the scheme and test those areas • Always consider how the suspect could have converted the transactions to cash 241 THE DIFFERENCE BETWEEN A “PERFECT” INVESTIGATION AND A “REAL” INVESTIGATION • Interviewing the suspect early in the investigation • Inability to interview the suspect at all • The time to review documents and reach conclusions may be limited • Dealing with budget limitations • Dealing with scope considerations • Working with law enforcement 242 SPECIAL CONSIDERATIONS FOR NOT-FORPROFIT ORGANIZATIONS • The smaller size of many not-for-profits makes segregation of duties/internal controls more difficult • Not-for-profit organizations sometimes place higher trust in their leaders, founders, and fund raisers • The finance, bookkeeping, and accounting functions are often concentrated in a few individuals • Not-for-profits often have volunteer boards of directors which may not provide adequate financial oversight • Many not-for-profits lack an audit committee or a robust internal audit function • The nature of charitable contributions makes them easier to steal, mismanage, or use for non-intended purposes 243 PREVENTING FRAUD AT NOT-FOR-PROFITS: FINANCIAL CONTROLS • Financial controls • Reconcile bank accounts • Reconcile fundraising assets such as raffle tickets and cash receipts • Review any general ledger or other accounting entry adjustments • Routinely complete a ratio analysis as it relates to donors vs. donations and employees vs. payroll. A trend will emerge, and it will be easier to spot potential fraud. • Job rotation policy • Complete surprise, non-routine audits • Important that a person(s) not directly involved with the above complete these tasks 244 PREVENTING FRAUD AT NOT-FOR-PROFITS: NON-FINANCIAL CONTROLS • Non-Financial Controls Implement an accounting policy and procedures manual as it relates to all activities related to accounting, with specific attention to fundraising, treatment of cash, and the chain of custody regarding cash and check deposits Employees, as well as volunteers, should sign and acknowledge understanding of the policies in place Conduct anti-fraud training for employees and managers Pre-screen employees Establish an audit committee 245 PREVENTING FRAUD AT NOT-FOR-PROFITS: THE ROLE OF THE AUDIT COMMITTEE • Primary role is independent oversight • The board should evaluate management’s fraud risks, and how management responds to those risks • Identify and review transactions appearing as an anomaly • Review management expenses and unusual financial transactions • Identify non-standard journal entries and adjustments to entries • Establish a fraud hotline, or other anonymous reporting mechanism • Take the lead in investing fraud • Purchase insurance to protect against fraud • Oversee internal audit functions, or perform internal audit functions The 2012 ACFE concluded that approximately 72% of frauds were discovered by tips, management review, and internal audit. 246 REACTING TO FRAUD • Notify the audit committee; the committee should be responsible • • • • • for conducting the investigation Preserve documents and evidence If necessary, engage certified fraud examiners to preserve evidence and establish a record of what transpired Consult legal counsel and, if deemed appropriate, notify law enforcement authorities Repair the breach, and ensure that it could not repeat itself If necessary, make appropriate management and employee changes 247 ?Questions? 248 ASB’S CLARITY PROJECT 249 CLARITY PROJECT Goals of Auditing Standards Board (ASB) • Address concerns over length and complexity of existing audit standards • Make standards easier to read, understand, and apply • Will lead to enhancements in audit quality 250 CLARITY PROJECT - IMPACTS No substantive changes to requirements for: • Audit Documentation • Auditor’s Communication With Those Charged With Governance • Risk Assessment Standards • External Confirmations • Analytical Procedures • Audit Sampling • Auditing Accounting Estimates • Written Representations • Subsequent Events 251 CLARITY PROJECT - IMPACTS Clarity Project was not intended to create additional requirements, but… • Some revisions have resulted in Substantive Changes • Primarily Clarifying Changes that may require auditors to make adjustments in their practices 252 CLARITY PROJECT – SUBSTANTIVE CHANGES Consideration of Laws and Regulations Communication of Internal Control Related Matters Related Parties Group Audits Auditor’s Reports 253 CLARITY PROJECT – PRIMARILY CLARIFYING CHANGES Intended to explicitly state what may have been implicit in the previous standards • Over time, diversity in practice from implicit requirements • Some requirements may already be performed • Making requirements explicit may not have substantial effect but may result in adjustments to the timing and responsibilities of the auditor 254 CLARITY PROJECT – PRIMARILY CLARIFYING CHANGES Terms of Engagement (Preconditions) Quality Control for Audit Engagements Use of a Service Organization Audit Evidence – Specific Considerations External Confirmations Opening Balances on Initial and Re-Audit Engagements Using the Work of a Specialist Consistency of Financial Statements Special Purpose Frameworks 255 CLARITY PROJECT – LEGAL & REGULATORY Requires performance of procedures to identify instances of noncompliance with those laws and regulations that have a direct and material effect on the FS • Inquire of management and, when appropriate, those charged with governance about whether the entity is in compliance with such laws and regulations • Inspect correspondence, if any, with the relevant licensing or regulatory authorities 256 CLARITY PROJECT – LEGAL & REGULATORY Obtain an understanding of the legal and regulatory framework. Obtain an understanding of how the entity is complying with that framework. Determine whether the auditor has a responsibility to report suspected noncompliance to parties outside the entity. Document identified or suspected noncompliance, including the results of any discussions about such items. 257 CLARITY PROJECT – CONTROL MATTERS Added 2 new requirements for communicating internal control related matters • Now required to include in the written communication an explanation of the potential effects of identified significant deficiencies and material weaknesses Condition (what is) Criteria (what should be) Cause Potential effects • Communicate only to management, orally or in writing, deficiencies other than material weaknesses and significant deficiencies which merit management’s attention 258 CLARITY PROJECT - PRECONDITIONS Determine that financial reporting framework is acceptable • No abuse of special purpose frameworks Obtain management’s acknowledgement of its responsibility for • Preparing FS • Designing and implementing internal control • Providing the auditor access to information and capable staff 259 CLARITY PROJECT – AUDIT EVIDENCE More principles-based approach to attorney letters • Attorney letters required if RMM regarding litigation/claims or if audit procedures indicate material litigation/claims • Requires auditor to document basis for determination not to seek direct communication with the entity's legal counsel 260 CLARITY PROJECT - CONFIRMATIONS Auditor required to obtain written confirmations • Oral responses to confirmation requests do not meet clarified definition of an external confirmation • Guidance provided on how oral response may be considered part of alternative procedures Definition of external confirmation includes audit evidence obtained by electronic or other medium • Auditor must consider the risk that the electronic confirmation process is not secure or is improperly controlled 261 CLARITY PROJECT – INITIAL AUDITS Requires auditor to obtain sufficient appropriate audit evidence about whether • Opening balances contain misstatements which materially affect current period FS • Accounting policies reflected in opening balances have been consistently applied • Any changes in accounting policies have been properly accounted for, presented, and disclosed 262 CLARITY PROJECT – INITIAL AUDITS Necessary but not sufficient procedures • Talk with predecessor • Review workpapers and client documents not in workpapers Additional procedures to achieve sufficiency • Test material carryover opening balances • Evaluate predecessor’s risk assessment documentation o “Where is the material misstatement?” 263 CLARITY PROJECT - MATERIALITY “Performance Materiality” • Defined – Amount or amounts set by the auditor at less than materiality for the FS as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the FS as a whole. • If applicable, performance materiality also refers to the amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions, account balances, or disclosures. • Performance materiality is to be distinguished from tolerable misstatement. 264 CLARITY PROJECT - MATERIALITY “Performance Materiality” • The determination of performance materiality is not a simple mechanical calculation and involves the exercise of professional judgment. • It is affected by the auditor's understanding of the entity, updated during the performance of the risk assessment procedures, and the nature and extent of misstatements identified in previous audits and, thereby, the auditor's expectations regarding misstatements in the current period. 265 CLARITY PROJECT – SPECIAL CONSIDERATIONS Audits of Smaller, Less Complex Entities • “An Audit is An Audit” (but Scalable) • No differential audit standards for small entities, but guidance provided on how to apply on smaller, less complex entities o Not all smaller entities less complex o Not all less complex entities small Audits of Governmental Entities Accounting standards neutrality • Financial reporting framework not necessarily GAAP 266 CLARITY PROJECT - REPORTING Independent Auditors’ Report is Changing! Headings for each paragraph / section of report • Introductory Paragraph • Management’s Responsibility for Financial Statements • Auditors’ Responsibility • Auditors’ Opinion • Other Reporting Responsibilities (if applicable) o Generally titled “Report on Other Legal & Regulatory Matters” Yellow Book • Emphasis-of-Matter Paragraph (if applicable) • Other-Matter Paragraph (if applicable) 267 CLARITY PROJECT - REPORTING Management’s Responsibility for FS • Use standard language to describe management's responsibilities for o Preparation of FS o Design, implementation, and maintenance of relevant internal controls • Prohibits elaboration on management’s responsibilities and/or reference to any other document that does so 268 CLARITY PROJECT - REPORTING Auditors’ Responsibility • Should state that audit was conducted in accordance with GAAS and should identify United States as origin of standards • Additional auditor responsibilities should be discussed in this section as well o Government Auditing Standards o OMB Circular A-133 269 CLARITY PROJECT - REPORTING Modified Opinions • If modified opinion is required, additional paragraph should be inserted immediately before “Opinion” paragraph to provide a description of matter(s) giving rise to the modification o “Basis for Qualified Opinion” o “Basis for Adverse Opinion” o “Basis for Disclaimer of Opinion,” as appropriate 270 CLARITY PROJECT - REPORTING Other Reporting Responsibilities • Title as appropriate for circumstances o Possibly “Other Auditor Reporting Requirements” in government entity audits o Think of…all the things we did that weren’t part of our plain-vanilla audit but were required for this particular audit 271 CLARITY PROJECT - REPORTING The term explanatory paragraph is no longer to be included in GAAS. Instead, additional communications in the auditors’ report are labeled as either • Emphasis-of-matter, or • Other-matter paragraphs 272 CLARITY PROJECT - REPORTING Emphasis-of-matter paragraph Any paragraph added to the auditors’ report that relates to a matter that is appropriately presented or disclosed in the FS. Some of these paragraphs are required by certain standards, whereas others are added at the discretion of the auditor, consistent with current practice. All such paragraphs are to be considered emphasis-ofmatter paragraphs because they are intended to draw the FS users' attention to a particular matter. 273 CLARITY PROJECT - REPORTING Emphasis-of-Matter examples: • Going concern • Subsequent events • Litigation uncertainty • Significant related party transactions • Contractual or regulatory reporting frameworks • Consistency (or lack thereof) • Major catastrophe 274 CLARITY PROJECT - REPORTING Other-matter paragraph Refers to a matter other than those presented or disclosed in the FS that, in the auditor's judgment, is relevant to the FS users' understanding of the audit, the auditor's responsibilities, or the auditor's report Emphasis-of-matter or other-matter paragraph required to always follow the opinion paragraph and to be included in a separate section of the auditor's report 275 CLARITY PROJECT - REPORTING Other-Matter examples: • Supplementary Information • Required Supplementary Information • Audit reports of prior periods presented o Change in opinion o Prior period not audited • Thought…probably rarely used when not required 276 ?Questions? 277