Public Power Auditing and
Governance Update
American Public Power Association
Savannah, Georgia
September 15, 2009
Today’s agenda
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Yellow Book and Related SAS 115 Update
American Recovery and Reinvestment Act (ARRA)
Recent Market Events:
Accounting and reporting considerations
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Sarbanes-Oxley Act Impact in the Public Power Sector
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Public Power Auditing and Governance Update
Yellow Book and Related SAS 115 Update
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Review of Government Auditing Standards
Changes to Government Auditing Standards due to July
2007 Revision
Review of SAS Number 115
Impact of SAS 115 on:
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GAS audits
A-133 audits
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Public Power Auditing and Governance Update
When GAS applies
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The financial statement audit of an entity is performed in
accordance with GAS when subject to the requirements
of:
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OMB Circular A-133
Or other laws, contracts, regulations or agreements
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Public Power Auditing and Governance Update
Additional GAS requirements
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We assume certain responsibilities beyond those of audits
performed in accordance with AICPA Standards
GAS includes the following standards:
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General
AICPA fieldwork and reporting standards
Additional fieldwork and reporting standards
Additional report on internal control over financial
reporting and on compliance and other matters
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Public Power Auditing and Governance Update
What GAS does not require
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An opinion on internal control over financial reporting
Tests of internal control over financial reporting
An opinion on compliance
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Public Power Auditing and Governance Update
Additional GAS standards
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Continuing professional education
Quality control and assurance
Independence
Auditor communication
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Public Power Auditing and Governance Update
Additional GAS standards
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Consideration of the results of previous audits and
attestation engagements
Developing elements of a finding
Guidance on abuse
Reporting
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Restatements
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Public Power Auditing and Governance Update
General standards
Quality control and assurance
► Auditor requested to provide most recent external quality
control review report and any letter of comments to the
party contracting for the audit.
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Public Power Auditing and Governance Update
Auditor required communication
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Communication with management of the audited entity,
those charged with governance, the individuals
contracting for or requesting audit services, and the audit
committee regarding the nature, timing, and extent of
planned testing and reporting and the level of assurance
provided.
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Performed annually during planning
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Public Power Auditing and Governance Update
Abuse-a notion unique to GAS
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Distinct from fraud, illegal acts and violations of provisions
of contracts or grant agreements.
No law, regulation or grant agreement is violated.
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Involves behavior that is deficient or improper when compared with
behavior that a prudent person would consider reasonable and
necessary business practice given the facts and circumstances
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Public Power Auditing and Governance Update
Additional guidance on abuse
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Auditors should be alert for situations or transactions that
could be indicative of abuse.
When information comes to the auditors attention that
abuse may have occurred,
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May have to extend audit procedures in certain circumstances
Example – Travel and Entertainment market
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Public Power Auditing and Governance Update
Restatements – increased transparency –
NEW for July 2007 Revision
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In response to frequent restatements of federal and other
governmental financial statements
Goes beyond AICPA standards
Auditors should advise management to make appropriate
disclosures when they believe it is likely that previouslyissued financial statements are misstated and the
misstatement is or reasonably could be material
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Public Power Auditing and Governance Update
Restatements – additional GAS requirements
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Evaluate the timeliness and appropriateness of
management’s disclosure and actions to determine and
correct misstatements in the previously-issued financial
statements
Report on restated financial statements
Report directly to appropriate officials when the audited
entity does not take the necessary steps
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Public Power Auditing and Governance Update
Restatements – evaluating management’s
disclosure and actions
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Auditors should evaluate the timeliness and
appropriateness of:
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Management’s disclosures to those likely to rely on the financial
statements
Management’s actions to determine and correct misstatements in
previously-issued financial statements
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Public Power Auditing and Governance Update
Restatements – evaluation responsibilities
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Auditors should also evaluate whether management
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Acted in an appropriate time frame after new information was
available
Disclosed the nature and extent of the known or likely material
misstatements
Disclosed whether specified information was in the entity’s
restated financial statements
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Public Power Auditing and Governance Update
Restatements – report on restated financial
statements
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Explanatory paragraph includes
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Disclosure that the previously-issued financial statements have
been restated
Statement that previously issued report should not be relied on
and is replaced by a revised report
Reference to the notes that discuss the restatement
If applicable, reference to the report on internal control
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Public Power Auditing and Governance Update
Restatements – direct reporting
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Auditors should notify those charged with governance:
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If entity management does not act in an appropriate timeframe
Does not restate with reasonable timeliness
To take necessary steps to prevent further reliance on the auditor’s
report and advise them to notify oversight bodies and funding
organizations
If users not notified, auditors should make the notification
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Public Power Auditing and Governance Update
SAS No. 115, Communicating Internal
Control Related Matters Identified in an Audit
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Effective for periods ending after 12/15/09
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Ernst & Young has early implemented
Supersedes SAS No. 112 of same title
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To conform definitions of control deficiency (CD), significant
deficiency (SD), and material weakness (MW) to more closely
align to AS 5
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Public Power Auditing and Governance Update
Main changes in internal control definitions
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No real change to CD or MW definition
SD’s
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Matters that merit the attention of those charged with governance
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Public Power Auditing and Governance Update
Material weakness
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A material weakness is a deficiency, or a combination of
deficiencies, in internal control, such that there is a
reasonable possibility that a material misstatement of the
entity’s financial statements will not be prevented or
detected on a timely basis
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Based on FASB 5 definition of “reasonably possible”
Lack of a material misstatement does not mean that you do not
have a material weakness
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Public Power Auditing and Governance Update
Significant deficiency
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A deficiency, or a combination of deficiencies, in internal
control that is less severe than a material weakness, yet
important to merit attention by those charged with
governance
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Public Power Auditing and Governance Update
SAS 115 indicators
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No longer includes a list of deficiencies that ordinarily
would be considered at least significant deficiencies
Revises the list of deficiencies in internal control that are
indicators of material weaknesses
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Fraud by senior management
Restatements
Auditor found material adjustments
Ineffective oversight by governance
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Public Power Auditing and Governance Update
SAS 115 impact on GAS audits
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GAO has issued guidance allowing use of new SAS 115
definitions in the GAS report on internal control over
financial reporting and on compliance and other matters
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Public Power Auditing and Governance Update
SAS 115 impact on A-133 audits
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Do not use the new SAS 115 definitions in A-133 internal
control and compliance reports
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Until such time as the OMB approves the new definitions and
AICPA adapts them for internal control over compliance
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Public Power Auditing and Governance Update
SAS 115 impact on A-133 audits
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Depending on timing of OMB approval:
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Could have different definitions of CD, SD and MW in the GAS
internal control report and the A-133 internal control and
compliance report within the same reporting package!
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Public Power Auditing and Governance Update
American Recovery and Reinvestment Act
(ARRA)
American Recovery and Reinvestment Act
(ARRA)
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Signed by President Obama in February of 2009
Goals of the Recovery Act
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To preserve and create jobs and promote economic recovery
To assist those most impacted by the recession
To provide investments needed to increase economic efficiency by
spurring technological advances in science, technology and health
To invest in transportation, environmental protection and other
infrastructure that will provide long-term economic benefits
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Public Power Auditing and Governance Update
Facts about ARRA
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No republicans in the House of Representatives voted for
it
Only two current republican senators voted for it
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Spending and accountability for funds likely to be politically
charged
Vice president in charge of Recovery Act aspects
Governors have to certify with respect to the propriety of
its spending
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Public Power Auditing and Governance Update
ARRA Impact
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Total cost of spending is $787 billion
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300 billion in grants
Federal government is funneling billion of dollars to state
and local governments (including public power entities),
much of which will be subject to single audit
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Significant increase in Department of Transportation funding
Environmental Protection Agency funding tripled
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Public Power Auditing and Governance Update
ARRA Impact
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70 billion has been obligated by the federal government
so far
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18 to 20 billion so far
70% of grant funding expected to be disbursed by the end of the
summer of 09
Speed of awarding funds
Many entities not subject to OMB Circular A-133 in the
past may now be subject to it
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Public Power Auditing and Governance Update
ARRA oversight and transparency
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Unprecedented oversight and transparency mandated
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www.Recovery.gov ( announcements, agreements, program
managers, governors, mayors)
Formation of the Recovery Act Accountability and
Transparent Board
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Created to review management of recovery dollars and to provide
early warning of problems
Seven member board includes federal agency inspector generals
and federal deputy cabinet secretaries
Coordinating and conducting oversight of federal spending under
the ARRA
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Public Power Auditing and Governance Update
ARRA oversight and transparency
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The GAO and the federal agency inspector generals have
been provided additional funds and access for reviews of
the act funds and spending
The Recovery Act tasks GAO with a range of
responsibilities to help promote accountability and
transparency and ensure that these funds are used as
specified
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Public Power Auditing and Governance Update
GAO Recovery Act Activities
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Conducting on site bi-monthly reviews on how funds are
used by 16 states and the District of Columbia which
contain 65% of the grant funds available through the
Recovery Act
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Review specific areas such as trade, education, small business
and health care
Commenting on reports filed by fund recipients
GAO’s oversight work on the Recovery Act will be
published on its web site at http://www.gao.gov/recovery/
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Public Power Auditing and Governance Update
ARRA oversight and transparency
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A-133 audit is an important part of the Recovery Act’s
accountability mechanisms
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Significant federal scrutiny via Quality Control Reviews (QCR’s) of
A-133 audits performed on entities receiving Recovery Act money
(primarily in 2010-2011 time frame)
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Results of QCR’s to be placed on recovery.gov
A-133 audit reporting packages to be made available at the federal
audit clearinghouse web site
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Public Power Auditing and Governance Update
ARRA Oversight and Transparency
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Federal OIG’s will use risk assessment techniques where
data is available to identify high risk programs and nonfederal entities to be targeted for priority audits and
investigations with faster turnarounds
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A-133 audits not performed until nine months after the end of the
recipient’s fiscal year
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Public Power Auditing and Governance Update
ARRA Implementation Guidance
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Initial implementing guidance issued on February 18,
2009 at
http:www.recovery.gov/files/initial%20Recovery%20Act%
20Implementing%20Guidance.pdf
Follow-up implementing guidance issued on April 3, 2009
at http://www.recovery.gov/sites/default/files/m09-15.pdf
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Public Power Auditing and Governance Update
ARRA Compliance Requirements
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As required by section 1512, each direct recipient federal
funds under ARRA must report the following information
10 days after each calendar quarter beginning on July 10,
2009
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Total amount of recovery funds received from each federal agency
Amount of funds received that were obligated (encumbered) and
expended to projects or activities
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Public Power Auditing and Governance Update
ARRA Reporting Elements ( cont.)
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A detailed list of all projects or activities for which recovery
funds were obligated and expended including:
The name of the project or activity
A description of the project or activity
An evaluation of the project status of the project or activity
An estimate of the number of jobs created and the
number of jobs created and the number of jobs retained
by the project or activity
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Public Power Auditing and Governance Update
ARRA Reporting Elements ( cont.)
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For infrastructure investments made by state and local
governments, the purpose, total cost, justification for use
of ARRA funds, and the name of a contact person
Detailed information on any subcontracts or sub-grants
awarded by the recipient, including the data elements
required to comply with the Federal Funding
Accountability and Transparency act of 2006 (P.L. 109282), allowing aggregate reporting on awards below
$25,000 or to individuals.
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Public Power Auditing and Governance Update
Other ARRA Reporting Issues
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Subrecipients may need to report information to enable
direct recipients to report up to recovery.gov
Accounting system capabilities
Resources
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Act provides no funding for recipients to administer the awards
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Public Power Auditing and Governance Update
Recovery Act Risks
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Many entities spending federal funds who have never
gotten them before
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Do they have the internal controls to properly expend these funds
Many programs will significantly increase the amount of
the federal funding they expend
Are these entities equipped for such an increase in
funding?
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Staffing and controls
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Public Power Auditing and Governance Update
Recovery Act Risks
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A-133 audits are not due until nine months after year end
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Thus for the fiscal year ending June 30, 2010, the A-133 audit is
not due until March 30, 2011
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Half of the states are also late with their reports
This timing may not result in timely accountability for
Recovery Act Funds
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Public Power Auditing and Governance Update
Addressing Recovery Act Risks-Timing of A133 Audits-Potential Solutions
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Reduce the deadline from nine months after year end
Quarterly recovery act compliance audits
Internal control reviews of entities spending Recovery Act
funds in a timely fashion after their receipt of recovery act
funds
Potential solutions applicable to all entities spending
recovery act funds including second and third tier
subrecipients
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Public Power Auditing and Governance Update
Recovery Act-Impact on All Programs
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Separate CFDA numbers for ARRA funding
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Including separate CFDA numbers for ARRA funding that
supplements pre-existing programs
Pass-through entities must provide this CFDA number to
each entity they pass funds through
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Public Power Auditing and Governance Update
Recovery Act Impact on OMB Circular A-133
Audit
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Use of A-133 audit for risk assessment
Use for monitoring program
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Assignment of separate ARRA CFDA
Evaluate high risk programs and grantees
Separate reporting on SEFA and data collection form
Federal audit clearinghouse to display all ARRA findings
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Public Power Auditing and Governance Update
Recovery Act Impact on OMB Circular A-133
Compliance Supplement
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The 2009 OMB Circular A-133 Compliance Supplement
includes a high level Appendix on the ARRA
The OMB will issue interim updates to the Compliance
Supplement to keep ARRA requirements current
Stay plugged in on upcoming updates to the Compliance
Supplement
OIG’s will also provide training on ARRA requirements
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Public Power Auditing and Governance Update
Other A-133 audit impacts due to ARRA
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The A-133 reporting package will be publicly available in
the federal audit clearinghouse for fiscal years ending on
or after June 30, 2009
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This includes the financial statements
Does not matter if the entity did not spend ARRA funds
Keep social security numbers, check routing numbers and
individual’s names out of the findings and corrective
action plans to avoid privacy violations
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Public Power Auditing and Governance Update
Impact of Recovery Act Going Forward
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Some June 30, 2009 audits impacted
Bigger impact on June 30, 2010, audits
Changes that could impact major program determination
process
Non-static Compliance Supplement
Watch communications for further updates and
developments
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Public Power Auditing and Governance Update
Recovery Act Internal Control
Considerations
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Consider whether control procedures in place over federal
expenditures are appropriate, working properly, and
designed to prevent unallowable expenditures
Consider whether additional controls and system
requirements will be needed to ensure that Recovery Act
funds are able to be separately identified and tracked
If applicable consider whether new controls are needed to
meet the stringent reporting requirements back to federal
agencies
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Public Power Auditing and Governance Update
Recovery Act Internal Control
Considerations
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If Recovery Act funds will be passed down to
subrecipients, controls should be in place to ensure
appropriate subrecipient monitoring and also whether any
new controls will need to be established related to new
subrecipient reporting responsibilities
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Public Power Auditing and Governance Update
Recent market events:
Accounting and reporting considerations
Overall economic conditions
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Steep adjustments in real estate values
Restricted criteria for obtaining capital
Liquidity concerns of financial institutions
Deterioration in consumer spending
These conditions create challenges for many companies,
including public power organizations
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Public Power Auditing and Governance Update
Internal control
Issue: Maintaining effective internal control
► Are existing controls sufficient:
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New material risks to operations, financial reporting, compliance or
new fraud risk
Changes in significance of risks
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Public Power Auditing and Governance Update
Valuation of investments
Issue: Measuring fair value of assets
► Fair value is intended to convey the current value of an
asset or liability and not the potential value at some future
date
► Understand sources of valuation
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Quoted prices in active markets
Broker quotes
Methods and inputs used
Are market participant assumptions used
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Public Power Auditing and Governance Update
Derivatives
Issue: Impact of counterparty creditworthiness
► Severe deterioration could indicate a hedge is no longer
“highly effective” = loss of hedge accounting
► Credit deterioration and bankruptcy could terminate a
derivative = receivable or payable on balance sheet
► Possible ineffectiveness for continuing hedges;
particularly fair value hedges
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Public Power Auditing and Governance Update
Postretirement benefits
Issue: Plan assets valuation and assumptions
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Fair value of plan assets affected by market conditions
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Discount rates used to measure the benefit obligation at the
measurement date should be based on high quality fixed income
instruments
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Hard to value assets (e.g., alternative investments)
Not investments that have been downgraded as a result of the credit crisis
below the “high-quality” rating level
Customized portfolios and use of spot curves require analysis
Assumed returns on plan assets for next year should reflect current
expectations of asset returns
Recognition of an underfunded plan may have implications for debt
covenant compliance
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Public Power Auditing and Governance Update
Debt
Issue: Debt covenants and financing concerns
► Review for compliance with all provisions and covenants
(financial and non-financial)
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Covenants that were met solely by amendment
Ability to comply in next 12 months
Waivers must be for at least 1 year plus 1 day
Intent and demonstrated ability to refinance maturing debt
long term should be documented to classify long term
Lender concessions may be a troubled debt restructuring
Debt service securities may need to be replaced.
Subjective acceleration clauses may impact classification
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Public Power Auditing and Governance Update
Going concern
Issue: Declining operations and liquidity concerns could
affect an organization’s ability to continue as a going
concern
► Evaluate conditions or events that may cast significant
doubt on an organization’s ability to continue as a going
concern
► Management evaluates its sources of financing and
liquidity
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Circumstances may impact management’s plans and assumptions
regarding refinancing, rolling over existing debt, and other credit
arrangements
Management develops plan to mitigate going concern risk
(e.g. improving operating results, financing strategies,
increasing balance sheet liquidity)
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Public Power Auditing and Governance Update
Disclosures
Issue: What to disclose
► Take a fresh look at financial statement disclosures
addressing risks, uncertainties and concentration of risks
► Evaluate the sufficiency of MD&A, including liquidity plans
and how a rating change and/or increased funding costs
might affect future earnings, the ability to enter into new
business, ability to fund collateral calls or repurchase
requests, etc.
► Challenge whether previously disclosed market risks
should be updated to reflect current conditions
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Public Power Auditing and Governance Update
Sarbanes-Oxley Act Impact on the
Public Power Sector
Objectives
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Review the S-O requirements
Learn what various industry and professional
organizations are doing
What are public sector organizations and municipal
utilities doing?
Auditor responses
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Public Power Auditing and Governance Update
The Act - Highlights
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Title II – Auditor Independence
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Prohibition from certain non-audit services
Rotate lead and ind. partners every five years
Report various matters to the audit committee
Rules related to hiring from CPA firm
GAO to study mandatory rotation of firms
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Issued November 2003
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Public Power Auditing and Governance Update
The Act - Highlights
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Title III
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Audit committee appoints/compensates auditor
Independent audit committee members
CEO/CFO certifications
Title IV
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Reporting on internal control (404)
Disclosures about code of ethics
At least one AC member is a financial expert
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Public Power Auditing and Governance Update
Industry Activities
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GAO –
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Mandatory Rotation Study
June 2003 Yellow Book introduction references S-O
Various comment letters to PCAOB
Testimony in support of SOX (SEC, PCAOB)
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Public Power Auditing and Governance Update
Industry Activities
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AICPA A&A Guide
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Audit risk alert covers S-O briefly
AICPA Government Audit Quality Center
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Audit Committee Best Practices
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Example charters
Qualifications
Meeting guidelines
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Public Power Auditing and Governance Update
Industry Activities
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GFOA – Recommended Practices
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“Enhancing Management Involvement with Internal Control (2004)
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Information and training of finance managers
Documentation of IC procedures
Periodic evaluations of controls
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Public Power Auditing and Governance Update
Industry Activities
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GFOA – Recommended Practices (cont.)
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“Establishment of Audit Committees”
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Not new, but updated
Formally established (appropriate legal means)
Expertise and experience
Selected from outside the government
Oversee the independent audit
Selection of audit firm
Written reports to governing board
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Public Power Auditing and Governance Update
Industry Activities
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Ratings agency questions around governance
Risk management organizations (e.g., ERM initiatives –
especially in utilities)
Underwriters expectations
Page 70
Public Power Auditing and Governance Update
Marketplace Responses to S-O
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Improvements to existing audit committees
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New/amended charters
Ensuring financial expertise
Formation of audit committees
Changes in reporting of internal audit
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Public Power Auditing and Governance Update
Marketplace Responses to S-O
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Adoption of code of ethics
Whistle-blower mechanism
CEO/CFO certification
Requests for auditor to review selected processes
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Public Power Auditing and Governance Update
Marketplace Responses to S-O
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Establish/out-source internal audit function
Use of IA to implement 404-like internal review
ERM – linking risk management with governance
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Public Power Auditing and Governance Update
E&Y Response
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More audit committee disclosure, particularly about
accounting policies
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Discuss estimates and related assets and liabilities
Discuss firm QCR processes
Recommendations to:
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Establish/strengthen audit committees
Adopt ethics policies
Establish/reorganize internal audit
CEO/CFO certifications
Periodic IC evaluations by management
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Public Power Auditing and Governance Update
Thank you!
Thank you for attending this learning session.
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Public Power Auditing and Governance Update