posted October 17, 2017

Common Financial Reporting Deficiencies and Steps Your District Can Take to Avoid Them

by Melanie Askew, CPA, Audit Manager

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Mistakes happen. Errors are part of life but they can be avoided and risk minimized with some planning. The first step in avoiding mistakes is to learn about the most common errors and determine what type of controls can help reduce the risk of making these same errors. In a review of approximately 150 audits performed by HeinfeldMeech over the last two years that resulted in significant financial reporting deficiencies, there were several common issues found. The top three areas to encounter the most issues were: 1) Capital Assets, 2) Cash and Cash Reconciliations, and 3) Payroll Expenditures.We will review each of these areas briefly and provide some general ideas for how best to avoid these issues.

Capital Assets

Capital asset controls had the most findings and quite a few severe issues were noted. This is not surprising as this is an area put on a back burner until it is time to hand information over to the auditors. One of the most common errors was items that were misclassified, such as a building classified as a land improvement, or vice versa. Additionally, there were many findings for items not being valued appropriately. For example, an asset added to the listing that did not include all the costs necessary to put into operation, such as taxes, freight, or installation charges. Construction in Progress (CIP) issues were very common as well and included not moving the project out of Construction in Progress once the work was complete or not including all work completed to date, assets not added to the listing although they were already in service, and assets duplicated on the listing. Many of these issues were compounded by the entity not performing a capital outlay reconciliation.

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A big step to move toward resolving or reducing risk of these issues is to work on the capital asset listing at regular periods during the year. On a quarterly or monthly basis, depending on how much activity is in this area, review the capital type expenditures for that period and determine if any should be added to the listing. Gather all supporting documentation for the expenditure and ensure it includes all costs necessary to put the item into place including installation costs, freight, and other ancillary items if needed. Ensure this documentation is maintained to support the amount included in the listing. Keep track of all items added to reduce risk of duplicate items. Reviewing these items more frequently can reduce the risk of an overwhelming amount of work if it is done only before the arrival of the auditors. Reviews that are more frequent will also help reduce the risk of errors by allowing a little more time to address each item.

Another step would be to ensure reconciling of the current year list to the prior year listing, the physical inventory count, and to the current year expenditures. Many of the issues with missing or duplicated items can be caught using this method. A physical inventory is required at least every three years (two years for items purchased with federal funds) and, if possible, it would be best to perform an annual inventory. In larger districts, or those with multiple sites, it might be best to split the number of sites, and perform this on one-half or one-third of the total assets each year.

Construction projects are often the most at risk for errors. These projects can be quite large and overwhelming. For very large projects, it is important to ensure that staff are allocated to tracking the work performed to date as well as the expected completion costs. These should be reviewed with each contractor billing and amounts should be tracked as they are received. All billings and other supporting information should also be tracked by project at a level detailed enough to easily separate into assets. This will allow ensuring items are added at their full cost and reduce risk that something might be missed.

At year end, all projects should be reviewed to determine if the work has been completed, is near completion or is still ongoing.Then a determination should also be made as to whether to move the items from CIP into their completed category. Items should be included only if their “inservice” date is in the fiscal year.Keep in mind that this date should be when the item is fully ready to be placed into use, even if it’s not actually being used. For example, a building may be completed and all approvals given for occupancy in June but the district does not move in or use the building until August. In this example, although not actually being used until the subsequent fiscal year, the building should be added in the current fiscal year.

This may seem to be a very daunting set of tasks; however if completed in bits throughout the year, it can be very manageable and save a great deal of future headaches.

Cash and Cash/Bank Reconciliations

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Cash issues were the next most common type of finding. These can have a very significant impact on an entity and have a wide-ranging effect. Some of the issues noted with this area included: reconciliations not being performed timely (monthly), incorrect amounts used in the reconciliation (either bank/treasurer balance or check register/GL balances), differences not being investigated or resolved (improper reconciling items left on and/or unreconciled differences remaining), debt or other expenditures and revenues not recorded resulting in incorrect ending balances, outstanding checks of more than one year old on the reconciliations, and deficit cash balances in cash controlled funds.

Cash and/or bank reconciliations can be one of the most important and useful internal controls available to your district. These allow a person outside of the normal process to review transactions quickly and determine if there any material errors or issues. This should be performed by someone who is not a check signer and whose duties do not include the writing of checks or depositing of funds. If this is not possible, then the reconciliations should be reviewed by someone else.

Since they are such a crucial internal control, reconciliations should be performed monthly. This will allow for errors to be caught much more timely and will also reduce the challenges in completing them. Additionally, if done properly each month, there should only be a few errors or items to be addressed. Waiting until the end of the year means having to go through and investigate 12 times the amount of errors. If possible, set aside a few hours without distraction and gather all the information needed, including the bank statement/county treasurer’s information and any other support needed. It is also recommended to practice a closed door policy while conducting the reconciliation, if at all possible. Finally, saving the reports or other items used to support the reconciliation will allow a reviewer to better check the work performed.

Payroll Expenditures

Payroll was the third area with significant issues noted. This is not surprising considering that, for most organizations, this is the majority of the expenses each year. Some of the errors noted included: no time cards, time cards not approved (signed by employee/supervisor), employees not paid in accordance with their contract, overtime not being paid or not paid at the correct rate, prorated hourly employee pay not adjusted for less than 40 hours worked, no delayed payroll, or issues with leave time not being used, calculated, or tracked properly.

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For this area, the setup is one of the key areas to focus on. Most systems require very little pay check to pay check work and will automatically process most items based on the initial input. This is handy on one side as it means very little human error risk on the bi-weekly processing; however, it does mean that an error made on initial entry could become devastatingly huge. It is very important to have one person enter all the information for the employees, including pay rate, number of pays, deduction information, etc. and have a separate employee review all of these to catch any potential errors. For each pay period, a few controls should be put into place, including a review of all time sheets (electronic or paper) by both the employee and their supervisor. Once the hours have been approved on these and they are entered into the system, another employee should review them to ensure they have been entered accurately. Finally, once the checks have been printed, they should be reviewed to ensure they agree to the hours and other supporting information.

Leave tracking is another area that tends to be ignored until near the end of the year. This adds to the risk of errors and makes the work much more difficult. Leave should be reviewed on a more regular basis and reconciled to the prior year as well as current year usage.Having a second person look over the entries and usage at the same time as a payroll review will help catch errors and reduce the overall risk in this area.

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Summary

The best way to resolve errors is to avoid them in the first place; but since no one person or system is perfect, the next best goal is to catch issues before they grow into serious problems. Making time to review items more often is one of the keys to success in this area. Additionally, it is always a good practice to have a second set of eyes reviewing items. Humans are very bad at catching their own mistakes but are very good at catching errors made by someone else! Put this to good use in your organization and let someone else catch your little mistakes before they grow into huge ones. Finally, don’t hesitate to ask for advice and training in these areas. It is better to bring in help at the beginning of the year than to wait until after the audit finds errors and it is too late to fix them.


The content of these pages is for general information purposes only and does not constitute advice. Heinfeld, Meech & Co., P.C. tries to provide content that is true and accurate as of the date of writing; however, we give no assurance or warranty regarding the accuracy, timeliness, or applicability of any of the contents.