Finance Insights: Working with the auditors
November 17, 2015 – Charlie Francis
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November 17, 2015
From the Finance Director’s Desk …
Early in my career, I considered the audit process to be a necessary thorn in my side. As my career advanced though, I learned the auditors were very useful. For example, during the audit, I would point them to department heads not complying with internal control procedures. Then, after the memorandum of internal control was issued, the City Manager and City Council were motivated to ensure staff followed all internal controls.
However, despite our best efforts, there can still be mixups between staff and auditors!
The City’s long-time Finance Director left at the beginning of a new fiscal year; an interim director was appointed, who left abruptly less than five months into the job. I was the second interim finance director, and as the fiscal year came to an end, the City Manager asked if I wanted to become the permanent replacement. There were several line staff changes during the year as well. Fortunately, we had audit workpapers from several preceding fiscal years, but I still felt it would be tough to have management-prepared financial statements ready for audit. So, I called the Partner in Charge.
I made it clear the first year could require additional communication and collaboration between auditor and auditee. The critical period was between the end of the interim audit work, and the beginning of final field audit testing. I emphasized that PBC (Prepared by Client) workpapers might have to be recreated from underlying auditor workpapers. I also needed the auditors to point me to additional closing entries that I might not be aware of. During this pre-audit preparation meeting, we agreed to work together.
The process went better than expected. The audit manager and his staff diligently created a list of prior year adjusting entries and other PBC workpapers. Staff and I were able to figure out which reports in and outside of the enterprise system produced the reconciliations and other supporting documentation by often referring to the binders from the prior year’s audit workpapers.
Finally, a day before fieldwork began, I was able to create the final trial balance for audit. The week went better than expected, even though there were additional adjustments that hadn’t been made in the final trial balance. The auditors left and went through their internal reviews when, at the last minute, the reviewing partner informed me a certain OPEB adjustment in the City’s enterprise funds had not been made. I was able to find the supporting documentation and make the adjustment. The audit was finished on schedule, the CAFR issued on time.
Several weeks later, the auditors prepared the internal control management letter. I was shocked to find their version of this story in the Schedule of Other Matters in the Memorandum on Internal controls!
Criteria: Year-end closing procedures should be designed and carried out effectively to ensure that all significant year-end journal entries are recorded timely.
Condition: In the current year, Finance Department had two changes in key personnel. As part of the year-end closing process, City staff expended a significant amount of time to close the books and provided us the year-end financial data for our analysis. We received the financial data from the City and performed our analytical review, variance analysis and other applicable audit work. As a result, we inquired with staff on whether certain post-closing journal entries were required. Staff determined that additional post-closing journal entries were required and proposed 44 post-closing journal entries for our review. They were all accurate and correctly prepared by staff. These journal entries included payable accruals, receivable accruals, long-term debt transactions, capital assets transactions, capital outlay transactions, compensated absences, and claims payable.
Cause: The City had a year end closing process and staff had spent a significant amount of time to close the books. In the current year, there were changes in certain key finance personnel. As a result, a number of year-end closing entries were overlooked. However, as noted above, after the auditors had inquired about whether additional journal entries were required, staff had prepared and proposed all the necessary journal entries which were found to be accurate by the auditors.
Effect: The number and amount of significant post-closing adjustments indicates that if the City’s year end closing procedures is not enhanced in the future, it would raise the potential that a significant error or errors could occur and not be timely detected and corrected by existing staff.
Recommendation: As part of the year end closing, the general ledger should be subjected to additional analysis and review to ensure that ending balances are supported and appropriate. Current year-end account balances should be compared with prior year’s balances to determine whether the amounts are reported accurately. Capital assets records should be reviewed to make sure that they are reconciled to general ledger balances. City Council minutes should be reviewed regularly to make sure that significant financial transactions are appropriately recorded in the general ledger.
Prepare for the auditors!
I realized I had to institutionalize year end closing procedures and audit workpapers. New operational reporting and intelligence tools such as OpenGov are enabling Finance Directors to not only automatically generate year end workpapers, but also to provide for the transfer of institutional knowledge from transition Finance Directors to newly appointed incumbents.
So, reluctantly, I included this management response in the Schedule of Other Matters in the Memorandum of Internal controls:
Management Response: City concurs with the recommendation and will work diligently to limit post-closing adjusting entries for future fiscal years..
Charlie Francis is a municipal finance expert. He has more than forty years of local government financial management experience in both the public and private sector, including twenty years of experience as a Chief Financial Officer. Most recently, he served as the Director of Administrative Services and Treasurer for the City of Sausalito where he earned the unofficial title of “OpenGov super user”. He has also served as a finance manager for the Town of Colma, CA and as CFO and acting City Manager for the Cities of Indian Wells, CA and Tracy, CA.
Questions or comments? Email Charlie at email@example.com.
Category: Government Finance