Government Webinar Series | Part I

Don McLean: Hey, thanks Freddy. This is Don Cleen and I think it's been a little bit longer than 10 to 15 years, Freddy for both Ronnie and I, but that's good that you kept us young. Today we're going to do the GABS update. We have about 30 minutes to do this. Hopefully we can get through everything we need to cover, but there's going to be mainly two sections, pronouncements being implemented currently and to soon be implemented that actually are out there and subject to being implemented. And then a little bit about other GS B technical agenda projects that are being looked at right now by GASB.

Here's a schedule that we like to show in these presentations. These are the GABS statements that are currently being implemented and soon to be implemented. 99 omnibus 100 accounting changes in error corrections and statement 101. I'm going to cover those three and those are for of those who have a fiscal year end in 12 31 24. These are the three that are applicable right now. And then statements 102, risk disclosures financial reporting model that just recently came out, a statement 103 and 104, Rodney's going to cover those. And then a little bit about the implementation guides that are going to be implemented.

So just to get started, statement 99, this is one that is called omnibus and that basically is everything that needs to be corrected or further guidance. GABS puts in this omnibus statement. It addresses various issues in corrections or clarifications and they had several different effective dates for this particular standard depending on what section was being covered. So the focus here is the ones that are being implemented for 12 31 24. The omnibus covered leases, corrections to leases or further guidance to leases dealing with what happens if you have a purchase option in the middle of the lease. How to handle that clarification or short term leases, financial guarantees that's coming into play this fiscal year end 12 31 24. And with that covered it was exchange or exchange life guarantees. Again, we had not put in their standards that had non exchange financial guarantees, but then they cover exchange guarantees. Other financial, other derivative instruments. There are not investments or hedging derivatives or consider other derivatives. There was no guidance on how to account for other derivatives. There were not investment or hedging derivatives. The extended use of LIBOR was another matter that they covered. And then other technical updates. So if any of these matters are affecting you for your entity or an audit, I encourage you to dive deeper into these matters for the omnibus.

Next GASB, this started to be implemented as county changes and error corrections. This was covered in implementation guide Q and as. So it's nice to see that GABS spend the time to codify what to do in different scenarios. So have one set of practice requirements. The effective date is for 12 31 24. It already became effective for the June year ends. What GABS did is they broke it up into different two different sections, accounting changes or correction of an error. Previous issued financial statements and under accounting changes you have changes in accounting principles, changes in estimates and changes in financial reporting entity.

This slide breaks down what to do in the different scenarios. Change in the accounting principle is reported retro by restating prior period presentative at practicable if not practical goal, restate the beginning balances of the current period and it changes in estimates. That's reported prospectively. Nothing really changed there. Recognizing the current period flows change within then the reporting entity as reported as an adjustment to the current period beginning balances. And they introduce this a concept call a ghost column, although that's not mentioned in the GSB, but whenever you're changing something in the reporting entity, you may have to include this ghost column to demonstrate what happened to the beginning of the year net position or fund balance. And then error corrections is reported retroactively where restating prior was presented and GSB is making this to be more time consuming if you have an error correction to correct errors and correct the financial statements for prior years in the financial statements.

So the disclosures vary depending on the type of prior period adjustment that you have no matter what you have to report. The changes in error in this error correction reason for the change and the effects in the beginning of that position from balance from that position in a tabular format. GSB has some pretty good illustrations in appendix C to GASB 100. So you want to see what those might look like. Two different presentations, but GSB did not show what a ghost column presentation will look like. So that's not in the GSB. It also addresses the statement also addresses what happens for supplemental information or require supplemental information. Of course, changes in the accounting principles is periods earlier than those presented in basic financial statements should not be restated in the RSI. However, error corrections, they really want you to restate the previous periods if presented in the financial statements if practical.

Moving on to compensated absences. Previous standard covered compensated absences was statement 16. That was quite a while ago, probably in the nineties or 1990s is when that one came out. So it's been a long time since GSB has revisited compensated absences. The effective date is for periods beginning after December 15th, 2023. They define what a compensated absence is is either cash payments when leave is used for time off, other cash payments such as payments for unused leave upon termination of employment and non cash settlements such as conversions to post-employment benefit plan. We see that a lot in governments where accumulated leave is not paid to you but it instead is converted to time in a pension plan. Some examples are vacation to sick leave paid time off and the paid time off concept is address in GASB. It was not paid time off was not something that existed back when GA SBY 16 was implemented.

So this puts into the standard guidance for paid time off, which could include sick and vacation time, holidays, parental leave, certain types of sabbatical leave particularly on restricted sabbatical leave. For examples, the recognition criteria is leave is attributed to services already rendered. If the employee has performed the services required to earn the leave, leave accumulates, it is carried forward from period to period. So if you lose the leave at the end of the period, that's not going to be as impactful to your liability. Many times that doesn't occur in governments usually the leave accumulates and you can either get it paid at the end or settle or sometimes the sick leave that's not paid. And talk a little bit more about sick leave in a minute. The leave is more likely than not to be used or otherwise paid or settled. And what Gatsby defines this as is likelihood is more than 50%.

So leave that is likely more likely than not to be settled as conversion and defined benefit plan as excluded from the liability. So if it's being converted to a pension plan, you wouldn't include that in your liability leave. That is dependent upon the occurrence of a sporadic event such as jury leave, parental leave or other kind of leave like that is also not recognized. However, sick leave and restricted sabbatical leave would be considered to be part of the liability. Unlimited leave and holiday leaves taken on a specific date is recognized as the liability only one used. So those are also not included in the calculation of compensated leave.

The measurement of the leave is based on the pay rate at the end of the fiscal year exceptions exist. For example, if the rate is adjusted, for example on restricted sabbatical leave, sometimes it's reported at 65% of your salary, then that sabbatical leave liability will be based on that. In addition to that, the liability also needs to include salary related payments that are incremental or directly related to the salary. For example, if F and Medicare, if that applies. In addition to that, if you have contributions to defined benefit pension plan that's related to salaries for that portion that's not getting used for the benefits transferred into the pension plan.

Note disclosures, there's really not a lot of new note disclosure disclosures that came about from this. However, what they did do is they remove the requirement that you have to report the increase and decrease separately in the roll forward. The liability if you do that, you have to put an asterisk by it to say that that was reported in a net amount and you no longer have to disclose which governmental fund is liquidating the liability. What's going to happen with this liability is it's expected that all governments will increase, have an increase in their liability because sick leave is no longer by default because you're not going to pay it when somebody leaves not included in the liability anymore. So you're going to have to determine how much of your sick leave historically you might have to pay on an ongoing basis and identify with that as estimated and report that it is included in your liability.

In addition to that sabbatical leave that's not restricted needs to also be included and incorporated into your liability. So expect that some changes will be made and then you have to visit gasp 100 that we just talked about on implementing this. So likely if you're going to change the liability you have to do it at the beginning of the year also. So some reports for governments might be time sensitive. It's important to report to have those printed out at the beginning of your period so you could determine how much of this liability needs to be adjusted to net position. And with that we have a polling question.

Astrid Garcia: Yes, we have a poll happening right now. It's a pop-up poll so just make sure that you've okay selection and hit the submit button to register your answer. So let's just give it a few more seconds and Don, you could go ahead and keep on with the presentation. I'll take you to the next slide.

Don McLean: Alright, so the question here is what is not considered a compensated absences under GA SB 100? I know I kind of went through it quick, but holidays. PTO is our parental leave. Are those considered compensated absences or is a sabbatical leave where an employee is performing duties of a different nature for the government? And after this question I'm going to turn it over to Rodney. So the question is, the answer was a sabbatical leave where an employee is performing duties of a different nature for the government. Of course parental leave PTO is part of compensated absences. Holiday pay and parental leave are also compensated absences but they're not part of the liability. And with that I'm going to turn it over to Rodney.

Rodney Combs: Good morning. I'm Rodney Combs as mentioned, I'm a partner in the Baton Rouge office in the governmental practice. I'm happy to be with you all today. I apologize we have a number of slides here but I've got to do a summary because there have other presenters that are coming behind me and we want to be sure that we're respectful of the time that is allowed to them. Next we have GSB 102, which requires certain risk disclosures and why was GASB 102 established stakeholders that use the governmental statements asked that this pronouncement be addressed and that therefore that's why it's been put in place. The effective date is for fiscal years beginning after June 15th, 2024 and all reporting periods thereafter. Although earlier application is encouraged Now certain risk disclosures requires governments to assess if they have a known concentration or constraint. Now if the concentration of constraint makes the government vulnerable risks of a substantial impact related to the risk associated with the government, this makes sense that this would take place that governments should consider this because of the financial statements that you're looking at, the representative of the year that the financial statements are being presented.

But also the users of the financial statements would like to know if there's a substantial impact that is beginning to occur or would occur within the next 12 months and so forth. We can give you an example of debt for example, if there's some decreased funding, if the organization wasn't allowed the opportunity to pursue debt and so forth, that would be something that the organization should want to disclose to users of the financial statements.

And next, what are concentrations and constraints? And there's some specific definitions that are revealed here. Concentration is a lack of diversity and aspect of significant inflow or outflow of resources. And we have some examples that's listed here, the composition related to employers industries, inflows of resources, workforces by collective bargaining agreements and also the providers of financial resources and supplies and materials and services and so forth. So what are constraints? So limitations imposed by an external party are the government's highest level of decision-making authority and they list those examples of that limitations on raising revenue, limitations on spending limitations on incurrence of debt, which I mentioned before and mandated spending. And one thing we should consider, for example, if there's a passing of a budget that would be a significant deficit related to a budget, that would be something that the organization should consider disclosing in the financial statements as well. Something like that. Just wanted to provide that as an example.

Next slide. There's some disclosures that are required if a government determines there's a concentration or constraint and the government should provide these disclosures because that reveals more information related to the constraint or the concentration that will impact the financial statement. And what are some of those things that should be included in those disclosures? The concentration or constraint that makes the reporting unit vulnerable to the risk of a substantial impact. And those are like an event or events associated with the concentration or constraint that could cause the substantial impact that have occurred that's beginning to occur or more likely to occur within the 12 months of the financial statements of the date of the financial statements being issued. So that disclosures would add more additional information to assist the user of the financial statements of gaining an understanding what is causing that construction or constraint. And there are also some additional disclosures related to that as well that we'll discuss coming forth in the next upcoming slide.

Also the disclosure requirements and requires a description of the concentration of constraint if they occurred. The description of each event. If there are multiple events, there should be a description of each event associated with it in the disclosure and also a description of the actions taken by the government to mitigate the risk. That's provides a full information of the user financial statement can make an assessment of okay, there's a concentration or constraint, well what is the entity doing about that concentration or constraint? And it should be listed for each one so that the user of the financial statement can be made aware of what's transpiring with the organization at the time of issuance.

Next I'll discuss GABS 103. What addresses financial reporting model improvements? And this is improvements to financial reporting remain related to statements 34, 35, 37, 41 and 46 and interpretation of six. Now why was this provided a review of those standards found that they were generally effective but there were aspects that could be significantly improved and that's something that we want to do as an organization, as accountants and the GASB and so forth. They want to take a look and see if there's some improvement to the financial statements to assist the users of the financial statements to assess what's ongoing with the organization. Now this pronouncement is effective for years beginning after June 15 or 2025, but as a course as always, early application is encouraged.

So what are some of these financial reporting models improvements? There's some key improvements to some items that address some of the adoptions related to MDNA improvements, property fund presentation, operating and non-operating revenues and expenses, budgetary information, major component unions and unusual and infrequent items. And that was some items in initial proposals that were not adopted and that had to do with the measurement focus and basis of the accounting for government funds and the format of the financial statements. And there's some illustrations, some good illustrations related to the this pronouncement related to the financial statements that you can find related to GSB 1 0 3 and that we should take a look at those to gain an understanding of those, how the formatting of those financial statements can be changed and improve.

We mentioned management discussion and analysis, there's some overall principles associated with that and users of MDNA, they have certain levels of knowledge and sophistication related to the governments that are being presented and they may not have a detailed understanding of the accounting principles. So these matters should be further detailed and explained in the MDNA to assist the users of the financial statements to gain a thorough understanding of what's transpiring related to the organization and its finances. And also there's an analysis occurring of balances and activity to explain why balances and the results change from prior year. Also, there's some improvements as those of us that work in the governmental field regarding if we think about management discussion and analysis includes some boilerplate information and also some repetitive duplication of information that's mentioned. So those things are trying to, this standard is trying to get rid of those duplications and that boiler plate information so they can provide some useful information to the user of the financial statements. And also there should be a focus on the primary government, although there can be some discussion of the discreetly presented component units, but of course that's a matter of professional judgment and there's addition of deferred outflows and inflows and changes to financial summary that's included in management discussion analysis and the use of terms that are used. They're replaced especially and extraordinary items with the new unusual or infrequent items.

Continue going on here. Management discussion analysis. There's some components that provides for the overview of the financial statements, a financial summary of condensed financial statements and some detailed analysis that is listed here, but I'll keep moving on in the interest of time. Next, there's MDNA does come on as related to significant capital assets and long-term financing activities and includes capital asset activities includes intangible capital assets and discussions of significant additions and disposals as well. And some long-term financial activity, discuss new agreements and changes to credit rating and debt limits, those types of things. And as you can see, this discussion of capital conditions of capital access using the modified approach on infrastructure assets is now required in a separate required supplemental information schedule. Just wanted to provide a summary. I'm going to keep moving forth in the use of time for the make time for other users to other presenters. The management discussion analysis components also includes currently known facts, decisions and conditions that are expected to have a significant effect on the financial position or results of the operations in the subsequent year. And it list those components could be some factors used to develop subsequent years budgets, those types of things, expected changes and budget net position of fund balance and some other items. I just listed those because those are the most significant at this point in time.

And also changes to proprietary fund operating and non-operating. Operating proprietary funds related to activities other than non-operating activities and the non-operating subsidies received and provided revenues and expenses related to financing and resources from disposal of capital assets and inventory and other items listed here as well in the proprietary fund subsidies, they're listed here. I'll cover a few of these resources received from another party of fund for which the proprietary fund does not provide goods or services to the other party and it listed some others as well and they'll also added a new subtotal for operating income and loss and non-capital subsidies.

And the next slide you see is an example of a schedule of the statement of revenues, expenses and changes and fund net position related to proprietary funds. And as you can see it's listed here and you can find this information in the exhibits that we previously mentioned. So I'll keep moving on and won't cover these just for your information purposes to see how those presentations will look. Okay, and this is the second portion of it I'll keep moving forward. Also, there's some, as mentioned, there's some budgetary comparisons and major component unit presentations and it lists those specific items by bullet points that's listed here that will be presented as required supplemental information and some variances from budget to actual comparisons and some analysis of significant variation that will be included in the notes and also related to major component unit presentations. And I won't go into detail about that for the sake of time as well. And as I mentioned, the unusual or infrequent items they'll present be presented separately, separate present inflows and outflows related to those and also some additional disclosure, additional information about those inflows and outflows. Next we have a polling question, what is your favorite GASBs? 34 68 87. 1442. As you can see, there's a lot of things that's mentioning regarding this new pronouncement and I think it will improve the information that's provided and give the user of the financial statements a better understanding of what's transpiring with the organization and more useful information to make decisions regarding the financial status of the organization. Still have a little more time.

Astrid Garcia: Let's make sure you submit your answer. Just select an answer, hit the submit button and we have the results. Now

Rodney Combs: I have the results listed here. Of course there's no wrong or right answer. Most of you all went with yes, be 34. I can't imagine life without it. Boy, I tell you that's my favorite one as well. What can, boy, I tell you, we really provide some assistance as public accountants with helping organizations with the implementation of that standard because as you know, a lot of our organizations that we assist, they don't have the financial understanding to prepare those financial statements from the modified accrual, convert them from the modified accrual basis to the full accrued basis. And that's a good service that we provide. So I continue moving forward.

Next we have GSB 104 disclosure of certain capital assets and it was used to provide guiding requirements, disclose certain capital assets that did not exist when GSB 34 was implemented. And why was it? Why was this ance put forward is to include specifies to include separately within capital assets disclosure rights of use of assets under gas 87 94 and 96 and some other intangible assets. And it's scheduled to be implemented by in the years beginning after June 15th, 2025. And of course straw always encouraged to early implement. I'm going to move pretty quickly on this one for the sake of time. There's some separate disclosures of certain capital assets and you can see those as broken out GS B 87, 94 96 and some of those intangible assets. And as mentioned, they should be disclosed separately by major class of assets.

And the big component related to this is capital assets held for sale that was not previously addressed by GASB had some entities that had capital assets held for sale. So in the past and I implement, I scheduled them, presented them as according to the Fs B because GASB didn't address them, didn't address capital assets held for sale. But now it specifically does and it's going to be presented separately. And what qualifies as a capital asset held for sale. The sale is being pursued, it is more probably likely to occur that the sale would be finalized within one year, the financial statements and there's some other things to consider. Factors to consider when evaluating if a sale would occur within one year. You can find them listed A through D. What are some finance statement disclosures related to that? Continue to report within appropriate major class of capital asset include in the notes L for sale assets with separate disclosures on historical costs and accumulated depreciation or amortization and a carry amount of any debt which the assets for assets held for sale is pledged.

That's collateral and separately disclose governmental activities from business type activities. That's continues on. That's how we present them at the current time. So that's also related to capital assets health for sale as well. And there's some other implementation guides of 2021 and 2023 dash one. I won't go into a lot of detail regarding needs for the sake of time it is the need for updates to these related to q and a implementation guidance is considered annually and these are effective for periods beginning after June 15, 21 through periods beginning after June 15th, 2023. And the next slides list some questions on capital assets and some of the answers related to those, but you can look at that when time permits, when your schedule permits time for you to do so, but want to let you know that it is present here.

And also implementation guys ask new questions on standards regarding leases, sida and changes to or within the financial reporting entity statement 100 and also those associated with leases as well. I'll continue moving forward. There's some current GASB technical agenda projects, we'll cover those very shortly. There's some comprehensive projects, some major projects and practical issues. This is a technical plan overview as of January of 2025. Of course that is subject to change. So this presents on DON and I'S presentation. If you all have any questions, let us know or you can list them here and we'll be sure to address them. I think Tiffany DAR is up next.

Aaron Harris: Well thank you Rodney.

Rodney Combs: I, oh, sorry, I saw SEFA and I just assumed it was Tiffany. Sorry about that.

Aaron Harris: Tiffany, and I'll be covering this. Yes, I am Aaron Harris. I am a audit manager out of the Dallas office of EisnerAmper and we're going to cover the schedule of expenditures of federal awards. It is pre pretty much seems to be mandatory if you have any type of governmental update, CPE that you have to talk about the SEFA. So we're going to kind of cover quickly the who, what, when, where, and how of SEFA preparation. Along with giving a little bit of advice and guidance on how to prepare it, we're going to talk about, of course, who should be preparing the SEFA, what type of information should you be gathering to include within the SEFA? What expenditures get reported on there? Give a little bit of guidance on where to start and where should I find this information that I need to complete the SEFA. And within the schedule, you basically need to make sure it keys off of one thing, which is the assistance listing number.

That number is there for each individual federal awarding agency. It is there for each individual award program that is the key to it. And of course nothing has changed here as far as who must prepare it. The auditee needs to prepare it. We'll talk a little bit later about why it's critical to make sure that they prepare it accurately. It is mandatory that the auditee prepare it under the uniform guidance. The SEFA is also going to cover the same period as your audited financial statements. And it is also as far as organization, you need to remember that if you have a cluster of programs, those need to be put in together within the SEFA, even if there are different CFDA numbers within that cluster.

If you've incurred expenditures under only one program within those clusters, be sure to include the name of the cluster programs because that is required to be provided along with the program name and you need to make sure that you have any of the listing. If you are a sub-recipient, you need to have the name of the awarding agency that is the pass through entity or the PTE. That is who you need to have on there. Of course there needs to be a total there for each assistance listing number. There is some guidance out there about our, well, I guess generally accepted practices that you should have a subtotal for each federal agency. That is not an explicit requirement from the uniform guidance, but it is basically generally considered some generally good practice to do that. And also a reminder that if you have still any remaining COVID-19 programs to make sure that you have that COVID-19 specific prefix designation there on the listing, you also need to make sure that any awards expended where you are giving it out to a sub-recipient are specifically separated on the schedule. The schedule also includes your loan and loan guarantee programs. Nine times out of 10, which you're going to end up putting, there is loans awarded and not the loan balances for those programs or outstanding loan balances. Rather, those outstanding loan balances will go into the footnotes to the schedule of expenditures of federal awards. That is also within that schedule of the footnotes. You will have your significant accounting policies if you are elected to use the de minimus cost rate. That is also a required footnote to your schedule.

If you have reports prepared on the cash basis, those are what you need to put in there for as an expenditure. Basically an expenditure is any direct cost you put out to meet the requirements of the award or slash grant. There are also certain instances where you may be not expending any direct expenditures. That's where you are receiving some non-cash items, any type of donations of food commodities you are required to put in there or any other donations of property you are required to put in there. There are some other things with insurance, annuities and items like that. Those need also need to be included.

I think we covered a little bit already of what is a federal award, anything that is any assistance received from directly from the federal agency, our pass through entity, those kind of costs from report reimbursement contracts under far the federal acquisition regulations. And also we need to know generally for-profit entities do not have a SEFA because they are the final sub-recipient of our benefit of those federal awards. If anybody, and usually it's an individual that is the beneficiary of a federal award, that's generally the way to look at that. But yeah, for-profit entities, they generally will not be receiving a federal award. Oh, we're, I'm pulling question number four. Who is responsible for ultimately responsible? Is it the auditor who's ultimately responsible? The auditee, who is ultimately responsible? What is a SEFA or do you simply not care?

Astrid Garcia: And we'll give it a few more seconds for everyone to submit their answer and then we'll move along with our presentation.

Aaron Harris: And while you think about that, I want to say that it is important at the very beginning of the audit to make sure that you have a complete and accurate SEFA for us auditors to look at. It's obviously we plan all of our audit work off of that SEFA. I had an instance where a very large county left off $1.5 million of expenditures and these actually were not really expenditures, it was donated equipment. Their sheriff's department received a surplus helicopter and the preparer of the SEFA obviously was in the finance department of the county. And so that's sort of a warning that sometimes if you have separate divisions are areas within your governmental body to make sure you coordinate with them what those awards are. And of course that ended up actually creating a lot of extra work for us auditors because we actually ended up having to audit that specific program even though there was no expenditures and there was just one transaction of a donation of a helicopter. We even had to go to the airport to look at this helicopter. And I remember that because I looked at this helicopter and I believe it was a Huey helicopter from 1974 and my only thought was I would never get in and fly in that helicopter, but I think somehow the county got it up to snuff and ended up using it for 10 years.

Tiffani Dorsa: Okay, so it looks like Aaron, that most of our audience got that right. The auditee is ultimately responsible, although I can tell you that some of my governmental entities, maybe they think the auditor is responsible for that document. So we're going to talk a little bit more. My name's Tiffany Dorsa. I'm an audit partner of Baton Rouge office. I just wanted to go ahead and follow up with that about when actually do expenditures get reported. So sometimes it's always not as clear when expenditures get to be put on the SEFA. And of course SEFA is the acronym for schedule of expenditures of federal awards. So there were two ways we talked about whether or not there was a cash, if you report as cash expenditures or accrual based expenditures. So depending on which method and a government utilizes for initially reporting its schedule of expenditures of federal awards, it does have the option to report awards on a cash basis or accrual basis.

And for most of our governments, that's the modified accrual basis because most of the funds are, most of the entities use modified accrual basis accounting. So when they say accrual, that's when the cost is incurred. If you use the cash basis, it's when it's paid, so depending on the option that the government elects. And then once you make that election, you cannot change that election. So if you begin to report your schedule of expenditures on a cash basis, you cannot elect to then move it to accrual basis or vice versa in order for you not to meet the threshold for having a single audit. So when do expenditures get reported amounts when they're expended, either paid or incurred and under a federal award? So what does it mean to have a federal award? In order to have a federal award, you need to have notification that is signed by a federal warning agency that you've been given an award.

In most cases, there is a notice of award. That's our typical and a perfect world and we see a lot of that in our school boards where there's that actually a notice of an award that's passed through and they get a lot of pass through federal money through the State Department of Education here. So in our perfect world, we'd have a notice of award that is signed by an authorizing official and we have expended cost related to that federal award. Now this may not be as simple and I'll give you an example from a FEMA perspective. So FEMA oftentimes you may have a hurricane that is down here in Louisiana. We have 'em quite often. And so there may be costs that are expended related to hurricane, hurricane expenses.

It may take a while before FEMA approved your project. So until that project is approved, you do not have an expenditure under a federal award program. So approval of the project has to occur and then you have to have the expenses incurred. So oftentimes costs are incurred maybe in the current year, but maybe that approval doesn't happen until the subsequent fiscal year of a government and that instance, the amounts that are reported on the SEFA may not be just current expenditures related to that award. They may have occurred in a prior fiscal period. So I just want to give that heads up there. So once the project is approved, you're going to have costs that have may been occurred in the prior year and you would have a note disclosure explaining the information and reconciling that information back to your current expenditures or revenues.

How do I determine what's included? The basis for determining federal awards is when the activity related to a federal war occurs. What does that mean? That means when a government has to comply with federal statutes or regulations and the terms and conditions of a federal award at that point in time when the activity has actually occurred and you are now required to comply with federal regulations, they give some examples in uniform guidance. These include the expenditure transactions associated with the grants or cooperative endeavor and grievance, the disbursement of funds to sub-recipients the use of loan proceeds under a loan and loan guarantee program. And we're going to talk a little bit about loan and loan guarantees. The receipt of property including surplus property as Aaron mentioned, the information about surplus property, although it was non-cash. So the receipt or use of program income, the distribution or use of food commodities and the disbursements amount entitled in a non-federal interest subsidy.

Now with respect to loan loan guarantees and all of these things are specifically documented within uniform guidance or an explanation of what do you really include on the SEFA if it meets that definition of a federal award with respect to loan guarantees, it's when the federal government is at risk for the loan to be repaid until the debt is repaid. So the federal government's on the hook until the loan is actually repaid. And typically these federal war expended or include the value of the new loans or received that were received during your audit period plus the balance of loans for previous year at the beginning of the audit period for which the government imposes continuing compliance requirements. If there are no continuing compliance requirements and just the repayment of the debt, there is no requirement for that to remain on the SEFA. So that's one of the very specific things in uniform guidance.

So if there's only a repayment of the debt and there's no continuing compliance requirements, and I'll give you an example of those. Continuing compliance requirement when you have debt is if you're provided a loan to support public housing and low income housing, most of the time there is a compliance requirement that individuals and tenants that are within that whatever that project was that was loan the money, so it's multifamily project, then they would have to have low income individuals living in that unit. That's a continuing compliance requirement as they have the loan outstanding. As long as those continuing compliance requirements exist or the loan is paid off, it remains a part of the SEFA. There are specific requirements to loans and loan guarantees as it relates to institutions of higher education. When loans are made to students of a higher institute of higher education itself in itself does not include compliance requirements, compliance, compliance requirements of the loans by the Institute of Higher Education, then only the values of those loans made during the year or considered federal awards expended with respect to endowment funds. Federal reward for endowment funds are federally restricted. As long as they're federally restricted, they continue to stay on the SEFA free rent. So free rent by itself is not considered a federal award. However, if free rent is received as part of the federal award program that you have, then it would be included and considered as part of your expenditures of your federal ward.

So Aaron talked about non-cash assistance a little bit in his example. So value in non-cash assistance, it has to be at the fair market value at the time of receipt. Non-cash can see mostly we see in commodities, but it can be the free rent we just talked about. So making sure that the value of your non-cash assistance is at fair market value at the time that you received the value, the property or rent, et cetera that you receive. And in this instance, I guess his helicopter, what is the fair market value of that helicopter that they received? Medicare and Medicaid are a little bit different. Medicare, some people think, well that's definitely a federal award, right? It's federal assistance. However, Medicare payments to a non-federal entity for providing patient services, that's a service contract and it is not considered a federal award with respect reporting that on your CA Medicaid, the same thing. Medicaid payments to sub-recipients for providing patient care services are not considered federal reward for reporting on your SEFA. And then there's one other certain loans that are provided by the National Credit Union Administration.

So they're in the central liquidity facility funded by contributions from insured. Non-federal entities are not considered federal awards. So just understanding where those loans may come from. This is one very specific under uniform guidance. So what information do you need to gather? Our first presentation said this was new information. However, this is not new information. This is just important information with respect to gathering information related to your schedule of expenditures of federal awards. For best practice, say make an Excel spreadsheet with a list. What type of federal assistance is this grant that you have or this cooperative agreement that you have? What is the grant number? What is the assistance listing number? What is the federal awarding agency name? What is the grant award period? The grant award number and amount, the importance of the grant award period is specifically going to be important for this year coming up as federal awards that are on or after October 1st, 2024, follow the new uniform guidance and not the old uniform guidance.

So understanding when you have an amendment to a federal award, what the data that federal award is and what requirements you need to follow are specifically really important one for you as administrating grants and for the auditors to understand as well the requirements for your federal program and how that impacts what we're going to audit and how we audit it. You want to have your federal awarding agency name any cluster information. Aaron mentioned clusters. So even if you have one program that's under a cluster and part five of the compliance supplement lists all of the clusters that are out there. So if your assistance listing falls underneath those clusters, you want to make sure you document which cluster and put that on your schedule of expenditures of federal awards, any pass through award entity information. So if an award is passed through at you or the government as a direct recipient would be loaded from the direct, you would list the direct federal program from which it comes through.

And if it's indirect and you are a recipient, a subrecipient of that award through a state agency or other organization, you want to have that information available to pull together your schedule of expenditures of federal wards. If you are a government that passes through additional information to another not-for-profit or other government as a administrator of this program, then you want to also have that information available, the information you're providing to a sub-recipient that is sub-recipient of your organization. So what is the grant number and what is the sub-award amount? You want to make sure that non-cash assistance is a footnote disclosure and any loan and loan guarantees you've identified those on your spreadsheet.

Okay, so here's our next polling question. Expenditures report on the CIFA include the following loan and loan guarantees, Medicare, non-cash assistance, both A and B, A, B, and C. So hopefully You'all are all gathering your information to pull your seat together and you have this all nice and documented for your auditor. As Aaron mentioned, having the schedule of expenditures is always good to ensure that you have all the information correct and pulled together. We're going to go through some best practices here in just a minute as far as how to maintain that information and some other resources that may be available to you all.

But knowing what and when to put on there is obviously key. That number is driven, drives the number of programs, what's determined to be a major program to be audited in a current fiscal year. The last thing we want to do is audit the wrong programs in accordance with the guidance and then we're having to go back and re-audit and more expensive all the things. Alright, so the answer A, B and C is what everybody put. So that is not correct or sorry, both A and C is correct. Most of you got it right. A, B and C is not correct because as I mentioned Medicare is not included on the schedule expenditures of federal awards. I could see picking loan and loan guarantees because it's kind of maybe, so I appreciate everyone's answers. Alright, so what are the most common deficiencies we see in the SEFA preparation?

One of the bigger ones is the incorrect to transpose assistance listing numbers, ensuring you have those right in the description of what those assistance listing programs, assistance listing numbers represent. If you go to sam.gov, you can put in the assistance listing number and you can see the actual name of the federal program. So ensuring that you have the actual name of the federal program, oftentimes we see where perhaps we're using the name of the grant that was provided through a sub-recipient and not the actual name of a federal program. You want to have that sub-grant award numbers, sometimes those are missing. So ensuring you can gather those up and have that on that spreadsheet. So even if you have to reach out to your awarding agency and if you're the one passing through that you have that on there, not having the pass through entity missing.

So if you're a subrecipient of an award that's passed through a state agency or another not-for-profit organization, ensuring that you have that pass through entity information listed, a federal agency name, we talked about not having assistance listing number, but if you have the assistance listing, you should have the federal agency name. So just ensure you match those two together. The clusters of programs, like I said, the biggest one is when you have one program within a cluster, we see that oftentimes that's clusters not identified, but it is a requirement to do so. Not showing non-cash awards, missing references to the notes to the SEFA. So on the face of the SEFA you should say, see the notes to the schedule of extended reward and also ensuring that you have all the notes that are required, including whether or not you receive the, if you're elected to have the de minimus cost rate applied and expenditure is not totaled by assistant listing number. That is one of the requirements that expenditures need to be totaled by assistance, listing number and then by cluster of programs.

Alright, so from a best practice perspective, we want to make sure we maintain a nice spreadsheet. That spreadsheet should include all the things we talked about when you're gathering that information, you want to make sure you're reconciling your expenditures to your general ledger on a regular basis to ensure you've incurred at least the costs that are incurred are included. Now we do have those other items we talked about, especially with FEMA where you may not have expenditures in a current period but may be outside the period, but that's just one of those items that'll be below the line, reconciling back to your cifa. So making sure that your expenditures are being reconciled back to your general ledger, especially when there's accruals happening. And need reporting on an accrual basis ensure you have proper controls over the spreadsheet for the completeness and accuracy of that. Comparing amounts on the prior year schedule of expenditures of federal awards to the current year.

So that would be one nice way to review ensure completeness as well as looking through the recording within the general ledger because typically it's by program or project. So you're able to see the funding source for an agency. So ensuring that you are identifying those and if there's questionable ones that you are looking through your accounting GL to ensure if you put revenue in a certain place and you're not sure what it's for, that you've thoroughly researched that. So the person preparing, put all the information together and there should be a proper control to review that information and putting the right procedures in place. Talk with your auditors. We're not scary people, but we try real hard to ensure we're helping our clients obtain the right information. And if you have questions about what you think should be reported on the schedule of expenditures of federal awards and you're not sure, have a conversation.

So we'd be happy to have that conversation in order to make sure you're having the correct information presented. And here's some helpful links to some information, a link there to uniform guidance and all the things we talked about today, a lot about definitions. And the GAQC actually has a practice aid from the auditee's perspective as well as the auditor's perspective. So if you're trying to identify whether or not there are some good resources there, they're a little outdated. I will tell you they haven't updated from the uniform guidance and some of the new things, but the checklist is pretty good if you're just trying to get a general overview, completeness and accuracy and what you should do to prepare the GFOA also has a best practices checklist if you're looking for additional information. So here's some good resources for you, look for that. And I'm going to turn it over to the next speaker to talk about fraud and abuse and government please.

Louise Gannuch: Great, thanks Tiffany. Hello everyone. My name is Louise Gannuch and I'm a partner in our risk and compliance service area within the firm's advisory practice. Thanks for joining us today. We're going to be sharing some insights related to fraud and abuse in the government sector, and we will spend some time, we will cover what occupational fraud is, what it isn't. Then we'll look at the current fraud environment based on data that's coming out of the ACFE, and then we'll share some insights related to government entity concerns and wrap up with a case study. So let's get into it. So this may be a refresher for some. We did want to share an overview of what fraud is isn't, and then the fraud triangle. So when we think about fraud, there's really no one definition, but we did include an excerpt from the Association of Certified Fraud Examiners or the ACFE.

A lot of states have their own definitions that they might include in the legislative code organizations. They might include their own definitions in their policies. Again, there's lots of definitions, but usually you'll see something related to intent. Intent is what separates fraud from abuse. So we think about waste and abuse, that's typically your unsound business practices. And in the definition here you can see that we bolded it. It's that knowing misrepresentation, why people commit fraud. That's an interesting subject and because fraud can be so common, there's a lot of information on that subject. The most widely accepted explanation as to why fraud is committed is committed, it's captured rather in that fraud triangle we have here. So that was developed in the 1970s by a criminologist whose name was Dr. Cressey, and it really looks at those three factors that have to be present at the same time for people to commit fraud.

You might've also heard of a fraud diamond that captures capability, but for the purposes of this session, we're just looking at the fraud triangle. So pressure looks at what motivates people in the first place. This can be inability to pay bills. Maybe there's drugs or gambling problems, desires for status symbols like new house car could be promotions that might not happen if certain metrics aren't meant. And then maybe there's a pressure to have a balanced budget or you have compliance with your debt covenants. All of those are going to be pressures rationalization. The other part of the triangle thinks about how that person justifies fraud in a way that makes it acceptable to them. So that can be like, I'm underpaid. I'm just going to borrow this money. I'm entitled to this money I have to deal to support my family. Maybe it's just the government's money, maybe there's an attitude to serve the greater good.

There's low morale levels. All of that kind of goes back to that rationalization component. And then we have opportunity, and that focuses on the method by which fraud can be committed. So a person really has to see a way that they can abuse their position, and they also have a low perceived risk of getting caught, lack of personnel, lack of effective controls, hands-off governance structures, those all contribute to it. And then as we think about opportunity in this image here, we have it parsed out because removing opportunity is most directly affected by those internal controls, and it's generally the most actionable deterrence to fraud.

So here we have the ACFE report to the nations. A slide here just to kind of introduce it, the Association of Certified Fraud Examiners or the A CE, they are the world's largest anti-fraud organization and they grant the designation of Certified Fraud Examiner. They conduct a survey and then they publish a report every two years that's called, so the reports to the nations. And so they are specifically looking at occupational fraud, which is essentially fraud committed by an employee against an employer. The first report was issued in 1996 and it has a lot of interesting data. It looks at costs, schemes, victims, perpetrators, and we've just included some of that information in this session. And so the 2024 report, it looked at about 1900 occupational fraud cases that were investigated between January of 2022 and September of 2023. And then the survey itself is just open for three months to collect that information from various people that are reporting it. You can access this report online for free on the ACFE website, and it's a really great resource if you aren't familiar with it, it's a pretty easy read. There's lots of infographics, so definitely check it out if you are not familiar with it or if you haven't looked at the most recent one.

So the ACFE in their research. So through all of these reports and surveys that they've done over the last several decades, they created the fraud classification system, which is known as the fraud tree. And again, this is just looking at occupational fraud, but there's three primary categories. So we have corruption, asset misappropriation, and financial statement fraud. And the ACFE defines corruption as a scheme where employee is misusing their influence in some kind of business transaction and they're violating their duty to their employer to gain a benefit. So that's going to include purchasing sales schemes, bribery schemes, we have invoice kickbacks, bid rigging, illegal gratuity, economic extortion. And so corruption is going to be typically associated with an override of those existing controls. There was a high profile case, I think about 20 years ago where a former governor was arrested and convicted on federal corruption charges when he was trying to sell a former president's vacated senate seat.

Some of you might recall that. So that's an example of corruption. Asset misappropriation is a scheme when an employee is misusing or they're stealing an organization's resources. So here we have cash fraudulent disbursements. You can be theft of inventory or any other assets asset mass appropriation that's typically going to be associated with they're going to have false or misleading records. And internal controls are generally missing or they're being circumvented. And about a decade ago, there was a pretty large scale fraud where a military agency, their employees were stealing millions of military gear like weapons parts and body armor, night vision goggles, all that kind of fun stuff. And they were actually selling it on eBay and Craigslist. I think a lot of times we think about asset mass appropriation being small dollars, but some of it can actually be quite large. And then we have financial statement fraud.

So that is when an employee is intentionally misstating, misrepresenting, they're omitting misleading the readers of those financial statements. That could be a misleading footnote, perhaps accelerating or decelerating revenue recognition, you're manipulating expenses in the government sector, it may look like that net position or fund balance surplus overstatement or understatement. And financial statement fraud is typically associated with poor tone at the top or just there's a lack of management review. There was a pretty high profile fraud that occurred in 2003. There was a federal loan mortgage corporation. They overstated their earnings by about 5 billion. So that's an example. I'm sure most of you have heard of Enron by now. And that was inflated earnings. So that's another example of financial statement fraud. So here we have our next polling question. We're going to open it is what occupational fraud scheme do you think occurs the most in the government? They have asset misappropriation, corruption, financial statement fraud or other. And we'll give everyone a moment to select their answer, sir.

Most happens most. Maybe some people would like to be all of the above, but we're going with most here. All right, so it looks like the majority of you are indicating asset misappropriation. Okay, great. And so when we get into the next section here, we'll see what the ACFE found in their study. Alright, so now we want to spend some time looking at the current fraud environment. Now that we've kind of covered some of those foundational elements of fraud. So the ACFE, when they look at those three categories that we talked about, it shows that asset misappropriation is the most common at 89%. But you can see here this is the least costly and has a median loss of 120,000 US dollars. And then we have corruption is the next most common and almost half of the cases involved actually some kind of corruption. And we have the median loss at 200,000 per case. The least common is financial statement fraud. That's just at about 5% of cases. But you can see here it has the largest median loss. One thing to keep in mind this chart isn't showing is the cost of reputational damage. The investigation costs potential fines. Some entities might receive fines if they have inadequate controls. And so the true cost of fraud can really be significantly larger than what is reported here.

So here we have the answer to our polling question. The ACFE study reviewed data from just under 300 cases when they were looking at governmental organizations and they identified that it kind of varies widely, but the most common was corruption schemes followed by billing, which falls under that fraudulent disbursements and asset misappropriation. So because asset misappropriations, they really account for such a large percentage of occupational fraud, they divide it into these subcategories which focus on the mechanism used to misappropriate assets. So then that's when we kind of fall into billing, non-cash skimming, payroll, et cetera.

Okay, here we have, who is committing all of this fraud in the government, right? So the ACFE, their study actually did provide some good insights here for us. 19% of cases are at the executive level and have the largest losses financially, managers and employees are making up the remainder of those cases. And then again, we can see here where a manager, the manian loss is quite a bit higher than the employee. And typically what we see is these individuals hold positions of trust. Another factor that might be contributing to this is the higher up you go in an organization or agency, you likely have more access, right? You have the ability to override controls. And so that can have a larger impact on fraud. But again, here it's important that we think about fraud in the context of that it can be committed by anyone regardless of their level in the organization.

So here we have the top three methods for detecting fraud in government organizations. According to the report, the top three methods we have tips, internal audits, and then management review and tips is about 44% of all fraud detection mechanisms. This data, what we can gather from this is it is really important to have reporting mechanisms and that you have regular audits to detect and prevent fraud tips continue to be the top detection method of all of the reports that have come over for the last couple of decades. So it's really important that you have something in your department or you have relationships with entities that can receive tips. So in some states, like in Louisiana, the state legislative auditor has a hotline. They receive tips and they might coordinate with state or local agencies. Regardless of however you set up this reporting mechanism, you want to make sure that your employees are trained because that does increase the likelihood of reporting.

So now that we've looked at the types of fraud, who's committing it, how it's detected, what are the impacts? So government entities, as we all know are charged with providing benefits to the public at large and their constituents. And there are significant impacts when fraud happens. This list here isn't comprehensive, but some of the major ones include erosion of public trust and that reputational impact. And it's not just financial impact, right? Fraud can have really severe impacts to the reputation and trust in the government. Fraud also can undermine the ability to achieve intended incomes. You might not be able to serve the populations that you intended to When fraud happens, there's also a lot of lost opportunity costs through reduced available funding, money lost to fraud. And then if we think about money that's expended to potentially prosecute, that also adds to the cost dollars. But again, not just the financial impact. And we're not just talking about employees of the government or employees against an organization. Fraud can be organized. Crime hackers, there are external fraud vendors, contractors list goes on and on. But all of that does make an impact when we think about the true cost of fraud.

So here we have another time for our polling question. Does your department or organization provide fraud specific training? So we have yes, regular. And it's mandatory B, yes, it's optional. Infrequent, no, but we could benefit it from it and no, it's not a priority. So we'll give everyone some time so everyone is responding. I didn't want to cover a question here. So we have, how do you prevent fraud and ensure efficiency in government operations? That's a great question, right? It's super relevant for today and today's climate. It's a balance. You really have to, when you think about fraud, take a risk-based approach to prevent fraud, you might not provide the same level of scrutiny overall transactions. So maybe you're able to leverage data analytics or technology when you're thinking about how to combat fraud. An example, maybe low risk transactions, maybe you have automated approvals and then higher risk rated transactions have that additional verification. Really, when we think about fraud prevention and detection, we need to be thinking about it as a layered approach. And so that's that balance that we can create so that we're not creating inefficiencies. But that's a great question.

Alright, so here we have the answer. So most people have regular and mandatory training, that's great. About half of you're there. I would say for those who fall into that smaller category of no, and it's not a priority or no, you could benefit from it, I'd really recommend that as you have those opportunities, that you're including that as a topic when you have those conversations. It's something that we find having people knowledgeable, what to do when fraud happens, how to respond to it, where to go, how to report, all of those things can really empower employees. And so now I'm going to hand it over to Brandy and she's going to share some of her thoughts related to government entity concerns.

Brandy Smith: Hi, my name is Brandy Smith and I'm an audit partner in our New Orleans office and I work mostly on government audits. And what I would like to talk about is going through some different areas that of concern that are specific to government entities. Just to add on to what Louise talked about. And one area, the first area that I want to talk about is fund accounting. Some governments just have one fund or one reporting unit. So not too complex depending on the type of organization that you are, but there are some governments that have maybe hundreds of funds, especially if separate funds are set up for each individual grant that they receive. So there's added complexity of each fund being its own fiscal unit amounts having to be recorded, whether it be assets, revenues are expenses, and each individual fund, making sure those amounts are recorded properly in each specific fund.

And there's just added time that goes into reviewing these amounts. There's specific accounting rules for the type of funds that you have. So do you have individuals with that knowledge that know how to record those assets and revenues and expenses in each individual fund? So what are some of the reasons that this makes it a more complex area related to fraud? One, some entities may want to maintain current tax levels. So tax revenues between funds may be inappropriately moved. So that is an issue that sometimes we see. One big thing is improper use of restricted resources for general operations. So again, if you have a special revenue fund, you should only record the revenues and expenses for those grants or those sources of revenues in that one particular fund. But if you're having a shortfall in your general fund, are some of those revenues, those sales tax, property tax revenues, grant revenues being improperly moved from your special revenue fund to the general fund to cover those expenses?

That should not be recorded. Are you trying to conceal budget shortfalls? Again, maybe in your general fund you may have a potential budget shortfall in some of those assets or some of those revenues are being moved to the general fund or the other way around. Some expenses that should be recorded in the general fund are being moved to your special revenue funds or to your debt service capital projects funds. And then also depending on the type of debt, if you have revenue bonds or certain debt covenants that have to be met, are you moving revenues, expenses around to be able to meet those debt covenants? Or maybe you're supposed to have a certain amount of cash and investments in a debt fund. Are you over-inflating the value of cash and investments to show that you have enough assets to meet those debt covenants when really when you go to that bank account you don't have that amount of funds in that account?

Another potential issue, functional allocations of expenses. So again, going back to the debt covenant example, you may have certain ratios that have to be met. So are revenues expenses being moved around to be able to meet those ratio requirements? Or for example, if you receive a grant where maybe only 25% of that grant can be used for payroll, are you moving expenses between payroll and non-payroll line items? So that is an additional risk in recording those expenses in addition to recording expenses in the incorrect funds. Also, internal controls. So Louis talked about it earlier, your organizations need to have proper internal controls, but an added risk for governments, like we mentioned, is that government accounting is very different in many instances from accounting that you learned in school for commercial entities. So do you have enough resources? You have knowledgeable resources who understand government accounting, understand how and where amounts should be recorded. So that is something very important and can be an additional challenge that you may not have for a commercial entity.

These are some specific risks for governments. One, revenue recognition exchange versus non exchange transactions. There's different accounting requirements, whether you have exchange revenues, which is sale of items, goods services versus non exchange revenues, which may be property tax revenues or grant revenues. There's different timing for each. Also accounting estimates of course, the more judgment that you have, the more risk potential fraud risk that you may have. An example valuation of complex investments if you are invested in items that are in the stock market. Easy to find the value. Governments have restriction on the type of investments that they may have. But we see sometimes for retirement plans for example, that there's more flexibility, more options of items that you can invest in. I've had clients that have invested in real estate, have invested in companies, purchase companies for the income producing aspect of those companies.

So there's a lot more involved in determining those types of investments and more of a potential of overstating or over-inflating the value of those investments. Useful eyes of capital assets, impairment of capital assets. Normally when we think of impairment, we think of damage to a building. Maybe there was a fire, maybe there was a natural disaster that caused damage to a building. But there may also be impairment if the government owns a building that's no longer in use or maybe you purchased another building to replace the old one, but maybe you're still using the old one, maybe one floor out of a five story building that isn't also a sign of potential impairment. And those things that you need to consider when you're reconciling your fixed assets, not just looking at the initial useful life of those assets, but looking at whether the assets are still in use even are still currently being depreciated, allowance for uncollectible receivables, pension, and other post-retirement benefits.

There are significant actuarial assumptions that go into calculating your accrual for pension and post-retirement benefits. And any one change to an assumption can cause a significant impact to the accrual. And for most governments, the pension accrual and your OEP accrual are very large balances on the financial statements. So if that's something very important, not just to rely on the actuary, but to review those assumptions and make sure that you agree with the assumptions that they're using. Accrual for pending or threatened litigation, that involves one, making sure you have a complete list of all outstanding litigation and also any litigation that has been settled but hasn't been paid yet. And reviewing that list timely to make sure that any updates, any settlements are being taken into account and that that list is updated. Also, approval of compensated absences, allocation of direct and indirect costs. So sometimes expenses are allocated between funds, between grants. So looking at that as well to make sure that expenses are not being allocated to grants or to funds that should not be allocated and cause you potentially to not be in compliance with those requirements.

Some significant unusual transactions listed here. So these are transactions that do occur, but they don't occur on a regular basis. The government combinations and disposals privatization of government services, which we're seeing more and more of what assets are being transferred or any liabilities being transferred. So these are significant items that again, may not be common but cause a higher risk of fraud just because they are unusual and they usually do involve large dollar amounts. We have public private partnerships, real estate purchases or sales. So there's a requirement of the federal government that if you receive grant funding to purchase real estate, you should be able to identify that on your fixed asset listing because when you sell those items, you potentially will have to return the proceeds of those sales back to the federal government. So very important to keep track of that. Make sure you're not keeping money that needs to be remitted. Back to the federal government, early extinguishment of debt. Again, this is not uncommon, but normally it doesn't happen every year, usually involve large dollar amounts and very easy unless you're knowledgeable of those requirements to talk to your auditors to record expenses incorrect deferred envelopes and outflows related to those transactions.

So these are some other types of fraud and Louise did touch on a couple of these, but theft of tangible assets. So cash investments, is there appropriate billing for services? Is the government not returning customer deposits? Is an individual who has access to their own account reducing the amounts that are due. So if you are a government, for example as a hospital or utility, you may live in that city, you may go to that hospital or you may have water and sewer services. Do you have access to change your account and write off your own balances and would someone catch it? So that's something that's important to look at internal controls just to see, think of what are the risks if someone had access to the accounts, could they change the accounts for their benefits, for their purpose, inventory and capital assets? What security does the government have in place to ensure that those items aren't being stolen?

Do you have count procedures in place to make sure that it would be notified or detected if assets are disappearing on a regular basis? And another big area is overtime, overstating overtime is someone really looking at it over time in detail. There are some governments that where employees do work a lot of overtime like a fighter or a police department or maybe a utility system or hospital. So there may be governments where overtime is common, but it's someone looking to make sure that the overtime is reasonable. So again, just making sure you have procedures in place so you have limits in place. Is someone monitoring those limits? Some unauthorized uses or sales of intangible assets include lowering property tax valuations for a fee to benefit family and friends, again, who has access to it and is someone reviewing the transactions that the individuals that have access to it, reviewing what they're doing.

Illegal forgiveness of parking and traffic tickets as something that you've probably commonly heard of. Falsifying non-financial records to show compliance with grant requirements. So if you receive a grant and those funds have to benefit low income individuals or services being provided to individuals that don't meet the eligibility requirements is somewhat falsifying the eligibility records to show that that person was eligible when really they weren't. And then also another common example for a grant, maybe you are required to service a thousand individuals but only having to service 750. Is someone falsifying those records to show that they served a thousand when really the government did not. So that's just another example of fraud where you're falsifying records may not be financial records, but you're falsifying records to show compliance that can potentially impact you if it was determined that you were not compliant and could in the future not receive that same funding, issuing permits or licenses without going through the formal processes. And then falsifying health or safety inspections is another example. So we have our next polling question. What is the first step to designing and implementing an effective internal control system? So a implement preventative internal controls to prevent fraud from occurring in the first place. Review audit findings to determine whether risks are and c, perform a risk assessment, a process and rank to determine the likelihood of the risk occurring and the impact of the occurrences. So I'll give you a moment to answer.

All right, so most of the responses are for C, so that's correct. Perform a risk assessment of processes and rank to determine the likelihood you will need to do number one, implement preventative internal controls to prevent fraud. But really you need to perform a risk assessment first to determine what preventative controls you should put in place.

So next we are going to walk through a case study and we've all seen headlines over the years. These are some examples of headlines that you may have seen, you see it year to year, something new, something different that's occurring. And I'm going to walk through one specific example. So this is a case study related to James Rupert and this fraud occurred in the early two thousands, around 2001. So he was a captain and a treasurer for a fire department for which he worked. Everyone considered him to be trustworthy. He started out as the treasurer and eventually moved up to be the captain of the fire department. And he was so trustworthy that he eventually became the president of the Local Firefighters Association, which was a separate charitable organization that raised money on behalf of the fire department. So they received donations and provided it to the fire department.

So what he did in his role is he opened a legitimate banking account for the firefighters department, but he also opened several fake volunteer firefighter checking accounts. And as part of his role, he had overall access to the cash. So he transferred money from the legitimate accounts to the fake accounts. He forged signatures. So he really did not get caught for several years while he was doing so money that he was stealing was property tax revenues of the fire department and the charitable donations that went to the firefighters Association on behalf of the fire department. And then on top of this, he also owned an insurance company and convinced both organizations to purchase annuities, but from his insurance company, he did not purchase those annuities. He pocketed the money. So on top of just transferring the money outright, he was also convincing the board to purchase annuities from his insurance companies that he did not purchase.

So eventually he gave up his role as the treasurer. But before he did that, he closed the original legitimate account and opened a new legitimate account so that the new treasurer could not look at the past history of the first legitimate account. So after a while when the new treasurer came on, the fire department received a FEMA grant to be used to purchase equipment. And James in his role, purchased the equipment from his business bank account, his own personal business bank account, and he requested reimbursement from the new treasurer and the new treasurer paid it, but it just seemed odd to him and he started asking questions and because of that he did more digging and he was able to figure out, he ended up going to the bank and was able to look at the history from the original legitimate account. So they were able to figure out after contacting authorities what he was doing and he ended up going to jail for a couple of years and he had to pay the money back. So this was just an obvious example of segregation to duties, lack of segregation to duties, lack of adequate review, that if you don't have that in place, that something like this can happen for multiple years without being caught.

So we have our next polling question. What internal controls if properly designed and implemented could have timely prevented James Rupert from stealing funds from both of the fire entities, a annual audit by an external CPA firm B, using a system of checks and balances to ensure no one has control over all parts of the financial transaction. C, avoid related party transactions, and D, all of the above, and E, B, and C.

Astrid Garcia: And this is our last poll for the day. So make sure that you select your answer and hit the submit button to register your credits.

Brandy Smith: We have most of you answered D, all of the above, and the answer really is B and C because the keyword is internal control and an annual audit by an external CPA. It's not an internal and control, it's an external procedure, external process. So the organization should have had a system of checks and balances to make sure that one person didn't have access to everything related to those financial transactions and avoid related party transactions. So he had a very close relationship to the insurance vendor, whereas he was the owner of the insurance vendor and he was able to convince the board to purchase insurance from his company, but he was not using that money appropriately.

So some red flags that maybe could have detected or prevented him from stealing the funds. James Rupert had an extensive criminal history including multiple heinous crimes. So it came out eventually that he actually served 15 years for murder in the seventies and eighties because he killed two of his grandparents. So not sure if the firefighter, the fire department did any type of background check, but that would've been something that obviously would've come up. He had significant debt and again, he had an unusually close relationship with the vendor. So causes both organizations had inadequate controls and the largest significant issue with the lack of segregation of duties. So that is the end of my presentation. I believe we have a few minutes for questions. I'll turn it back over to you Astrid

Freddy Smith: Astrid. If you don't mind, I'll take a moment and address just a couple of questions. A common question that appeared in the chat was regarding Medicare and its inclusion on the SEFA seemed to be a little bit of confusion. Just to be clear, Medicare is not included on the SEFA. Our presentation did include a box that said that addressed Medicare, however, it was just intended to inform the audience that Medicare was going to be addressed in the presentation. So hope that clears things up.

Tiffani Dorsa: Yeah, Freddy, I was going to say that the intention of that particular slide was a basis for determining the federal wards that's addressed in uniform guidance. So all of those items that were listed, there were just those items that were addressed as whether or not they were determined to be a federal wards expended. So just to be clear that that was not an all inclusive slide to say these things are included on the scheduled expenditure federal board,

Freddy Smith: And we don't have time to go through all of the questions, but if you did pose a question, Tiffany Doha has proposed an answer to your question. If there were several people that indicated that their question was not appearing, if your question did not appear, please email me. I put my email address in the chat if that in itself is not appearing, you can email Fred doSmith@eisneramper.com and we will get your question addressed. Another question was regarding the ghost column that was referred to in the GASB presentation when you have either a change in reporting entity or a change in your major funds. We do not include an example in the slides, but GFOA actually has several examples of when you're doing that, but basically you're taking the old fund or the old component unit perhaps, and you're going to have a zero balance sheet, but your income statement is also going to be primarily zeros. However, you're going to show the beginning balance and then a change in reporting into or change in fund presentation to come down to that zero ending fund balance. With that, we will go ahead and wrap up. We thank you for joining us and we hope you've gleaned a little bit of information to help you in your daily jobs, in your important roles of serving the public, because that's what it's all about, right? We're here to serve the public.

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