NORTH CAROLINA DEPARTMENT OF STATE TREASURER STATE AND LOCAL GOVERNMENT FINANCE DIVISION AND THE LOCAL GOVERNMENT COMMISSION _________________________________________________________________________________ JANET COWELL TREASURER

GREGORY C. GASKINS DEPUTY TREASURER

Memorandum #2016-04 TO:

Local Government Finance Officials and Their Independent Auditors

FROM:

Sharon Edmundson, Director, Fiscal Management Section

SUBJECT:

2015 Financial Statement Reporting Tips

DATE:

September 9, 2015

Based on the 2014 audit reviews and questions directed to our staff, we want to address the following reporting issues to all local government auditors and finance officials. We believe these items will impact the audit and preparation of financial statements for the fiscal year ended June 30, 2015. Go to Sample Financial Statements (Carolina County, City of Dogwood, or any of the other statements relevant to your unit) for more details. 1.

Most Common Errors  Please make sure the f i n a n c i a l statements tie to the notes and the MD&A; we often find last minute adjustments to the statements are not reflected in the notes and/or MD&A.  Please be sure to include all applicable statements and schedules in the completed audited financial report; on occasion a budget schedule will be missing or a financial plan for an internal service fund will not be included.

2.

New Vehicle Tax Collection With the new vehicle tax collection process, units should have a vehicle collection rate close to 100%. If a unit reports a vehicle collection rate of 95% or less, we will ask either the unit or auditor to provide us with more details.

3.

Interfund Activities  Interfund Transfers o Reimbursement of costs should never be labeled as a transfer. Instead a journal entry should be made, debiting the expense in the fund where the true cost belongs and crediting the expense account where the expense was initially charged (see Memo #2014-07 for more information). o Per §159G-37 units could be ineligible for DENR grants if the unit has transferred funds from the Water and/or Sewer Fund to the General Fund to support general operations. 

Forgiveness of Interfund Loans o Sometimes units will provide loans from one fund to another, and at times some units will subsequently decide to write off the loans if repayment is unlikely. 3200 ATLANTIC AVENUE, LONGLEAF BUILDING, RALEIGH, NORTH CAROLINA 27604 Courier #56-20-45 Telephone: (919) 814-4300 Fax: (919) 855-5812 Website: www.nctreasurer.com

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If an interfund loan is made with no intention of repayment, then the transaction should be recorded as a transfer from the beginning If loaned funds are not repaid by the end of the fiscal year, then this should be recorded as a transfer for budgetary purposes. If a transfer entry was not made make sure you record either a prior period adjustment or record a transfer in the year the loan was forgiven.

4.

Management’s Discussion and Analysis (MD&A)  The MD&A should include the required elements as dictated by GASB. For some units their discussion of the government-wide statements will include discussion about implementation of GASB Statement 68. There is no requirement that comparative information from 2014 be restated to include pension information, as complete data for that year is not available in such a manner that the year could be restated.  The MD&A offers the unit the opportunity to discuss the “why” of its financial condition. Units should utilize the MD&A to discuss the factors that influenced the unit’s fiscal health, and the significant components of the next year’s budget as adopted, including comments as to how the budget will or will not improve any financial deficiencies.

5.

Debt Disclosures  The following items need to be included for all units that have debt: o Original issue date o Original issue amount o Specific debt amounts for each debt issuance as of June 30, 2015 o Terms of issuance o Purpose of debt o Current balance on each outstanding debt issued o Information regarding the provider of funds. Particularly if debt was not approved by our office, it would be helpful to name the provider (i.e. State Revolving Fund, United States Department of Agriculture etc.)  A record of outstanding debt approved by the LGC is available online; to access click on Local Government Debt Schedule. This form is updated regularly.  Please be advised that these records will not include debt that did not have Local Government Commission approval.

6.

Long Term Revolving Loans GAAP requires that, for financial reporting purposes, revolving loans (ex. CDBG) should be reported on the balance sheet and net position statements, not the operating statements (in most circumstances). North Carolina requires units to budget for these loans; Memo #201602 discusses this issue and provides sample journal entries.

7.

Exchange of Funds with Discretely Presented Component Units Per GASB 34 paragraph 61, funds moving from a primary government to a discretely presented component unit should be reported as if they are external transactions and not as transfers.

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Statement of Net Position and Fund Balance Sheet  Restricted Assets – any payables to be paid with restricted assets ( i.e. Powell Bill Funds etc.), should be designated as liabilities payable from restricted assets on the face of the statement. In addition, make sure the restricted assets are consistent between government-wide statements and the fund statements.  If a liability is restricted then make sure the associated asset is restricted. For example, customer deposits presented as a restricted liability should be offset by restricted cash.  Recording Grants: o Accrual Basis – generally, eligibility requirements for a grant are met when the unit has spent the funds on allowable costs and the unit can record a receivable for amounts due from the grantor. Not filing for the reimbursement is not considered an eligibility requirement. o Modified Accrual Basis – is the same accounting as the accrual basis except that the expected funds must be considered available to pay the c u r r e n t fiscal year bills. Most units use the 90 day rule to define availability except for property taxes, which must be recorded using a 60 day timeframe.  Fund balance being appropriated in next year’s budget that is not already classified as restricted or committed should be disclosed either as assigned fund balance on the face of the statements, in the notes, or both. Please present a breakdown of the assigned/restricted/committed fund balance in the notes so that we can distinguish the amounts appropriated and better evaluate the fiscal health of the unit.  Restricted for Stabilization by State Statute (RSS) should be included on the Statement of Net Position as well as the Balance Sheet.  R e p a y m e n t p l a n s f o r intergovernmental debt s h o u l d b e disclosed so our staff can better assess the unit’s health.  Component Units – make sure the inter-entity balances between the primary governments and their components are consistent.  Prepaid rents should be recorded as liabilities and not as deferred inflows.

9.

Obsolete Terminology  Per GASB 54: reserved, unreserved, and designated fund balance. o Instead use the terms: nonspendable, restricted, committed, assigned, or unassigned fund balance.  Per GASB 63 and 65: Net Assets o Instead use: Net Position.  Per GASB 63 and 65: Deferred Revenues o Instead use: Unavailable Revenues, Deferred inflows of resources, or another appropriate term as an alternative.  Per GASB 63: Investment in Capital Assets Net of Related Debt o Instead use Net Investment in Capital Assets.  For Compliance reports: Unqualified and Qualified Opinions o Instead use: Unmodified and Modified Opinions.

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Net Investment in Capital Assets Due to the complexity of the relationship between schools and counties, all counties are requested to provide their detailed calculation schedules as part of their statement package that is submitted to SLGFD for review.

11.

Finance Officers must be individually bonded.  All units, including tourism development authorities (TDAs) must have their finance officers individually bonded for at least $50,000. If an employee works as a finance officer in multiple units then s/he must be individually bonded for each unit.  Per GS 159-29 and GS 115C-441(a) for schools, we ask that local governments disclose, in their risk management note, the dollar amount of bond they carry: o individually on the finance officer position, o the tax collector position, o and the blanket bond held for individuals who handle or have in their custody more than $100 of the unit’s funds at any time or who have access to inventories of the unit.

12.

Budgetary Statements  Per GS 159-8 – All monies received and expended by local governments and public authorities should be budgeted with the exception of trusts and agency funds. o State law requires u n i t s t o h a v e b a l a n c e d b u d g e t s f o r a l l f u n d s (except internal service funds which are required to report a financial plan). o Charter schools are not required by law to have a budget but the Department of Public Instruction requires that they have at least a school-wide budget.  Public Housing Authorities are required to have a budget but estimated revenues may exceed appropriations.  Any material budget overages at the legal level of control (the budget ordinance) should be communicated in the audit report as part of the stewardship note.  Any differences between the budgetary statements and the statements of revenues and expenditures should be reconciled.  Reclassifying certain transactions – when items are reclassified, the related budget also must be reclassified to prevent any appearance of over - expenditures. o For example: unit budgets debt in a water sewer c a p i t a l p r o j e c t fund when it should have done so in the water sewer operating fund. When this entry is reclassified, be sure to make the necessary adjustment on the budgetary side.

13.

Special Revenue Funds  Special revenue funds are used to account for and report the revenue of specific revenue sources that are restricted or committed to expenditures for specified purposes other than debt service or capital projects. Although these funds can be supplemented with other resources, the foundation of the funding should come from the committed or specific restricted revenues for this fund.

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Fund 8 is considered a special revenue fund and therefore should not report an unassigned balance. Please refer to Memo #2013-04 for more information on how to comply with the use of Fund 8 as intended by DPI.

14.

Statement of Cash Flows  Capital Project Funds associated with enterprise funds should be consolidated into the full accrual statements for the appropriate enterprise fund, including the cash flow statement.  Transfers and interfund borrowings should be reported according to the nature of the transaction.

15.

Notes to the Financial Statements  Fund Balance Policy – Per GASB 54 - although a fund balance policy is not required, if a unit has a fund balance policy, the discussion of the policy in the audit needs to include: o The official person authorized to assign amounts and o The actual policy established by the governing body.  Risk Disclosures – please be sure to include all the relevant risk disclosures. For examples, see Sample Financial Statements.  Long-Term Debt – units must include ALL debt they have incurred in this section. Include: Descriptions, Ending Balances, and any other relevant items  Advance Refunding Debt Transactions – disclosures are required the year after the advance refunding occurs and until the escrowed debt is paid off.  Encumbrances – disclose encumbrances for each major fund and disclose encumbrances in the aggregate for non-major funds.  When transfers and/or interfund advances are presented, be sure to provide a detailed explanation of the purpose of these transactions.  On Behalf Payments for Fringe Benefits and Salaries – Per GASB 24 paragraph 12, employer governments should include this note disclosure. Make sure the amounts in the note disclosure tie to the revenues on the budget and actual statement. Please refer to the City of Dogwood pages 35-I-85 and 35-I-97.  Notes to the financial statements and the Law Enforcement Officers Separation Allowance schedules should be consistent.  Per §159-30, certificates of deposits in the form of time deposits should be included in the deposits note and not considered as investments.

16.

Capital Projects for Enterprise Funds  Budget actual statements – a u d i t o r s s h o u l d p r e s e n t b u d g e t s i n t h e s a m e f o r m a t t h e U n i t a d o p t s t h e m . GS 159-26 requires that a unit use a capital project fund if the project is being debt-financed; if a unit does not this should be noted as a finding. At times we see units that do not utilize capital project budgets for non-debt financed capital projects. Units should be aware that comingling capital project expenditures with operating expenditures can distort results of the operating funds.

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Full Accrual Statements – capital projects need to be properly consolidated in the full accrual statements. The modified accrual statements should include a reconciliation to the full accrual numbers.

17.

Other Post-Employment Benefit Disclosures  Please complete the actuarial studies required for Other Post-Employment Benefits in a timely manner.  If pension cost is immaterial and an actuarial study was not performed, please include a statement explaining this.  OPEB disclosures are required unless the unit and/or auditor has deemed the plan to be truly immaterial and received approval from us to exclude from the audit.  Although not necessarily required, if any portion of a retirees’ healthcare is paid for by the unit, we strongly encourage the unit to have an actuarial study performed on a periodic basis. Units with less than 100 members that have only the implicit rate subsidy may use the alternative method worksheet in lieu of having an a c t u a r i a l study done. However, we strongly encourage even these u n i t s t o have at least one actuarial study completed.  Units with 100-199 members – the triennial study may be used  Units with 200 or more – the biennial study may be used  Local Current Expense Appropriation for BOE’s  The amount reported in the Counties’ and BOE’s audit reports for local current expense should b e reconciled with each other before the audits are submitted. Please see Memo #2014-21 for more information or reporting Local Current Expense.  Counties have statutory authorization to provide schools funding for operating, capital and special revenue purposes. Counties can budget operating expenses to either the Local Current Expense Fund or the Special Revenue Fund (ex. Fund 8). Counties can budget capital expenses to the Capital Outlay Fund.

18.

Communications with Management  Findings must be properly communicated to management before the audit is submitted for our review. It is important that units understand issues that are brought up before them.  This can prevent any significant presentation compliance errors, particularly with budget comparisons.  Management letters should be reserved for less egregious inadequacies.  When units are not periodically providing accurate financial information to the board, auditors should consider recommending that the board regularly receive interim financial reports.  When units sign the management representation letter, make sure they understand what they are signing.  Common issues that should be findings are:  Units habitually failing to meet important submission deadlines for audits, AFIRs, 203s, etc.  Inappropriately spending restricted cash.  Inaccurately or incompletely performing the pre-audit process.

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Entering into a debt agreement that requires LGC approval without obtaining that approval. Management responses to findings should be written by the unit. Units’ responses to Unit L e t t e r s and/ or Compliance Findings should be substantive and should address the underlying issues that led to the finding. Serious deficiencies in internal controls should appear in compliance reports as well as the stewardship note.

19.

Submission Deadline and Requirements for Debt Issuance  Units interested in seeking debt approval by the Local Government Commission approval must submit their opinionated 2015 financial audits by: o October 14, 2015 for the November 3, 2015 LGC Meeting o November 12, 2015 for the December 1, 2015 LGC Meeting o December 16, 2015 for the January 5, 2016 LGC Meeting  Although completion of the single audit is not r e q u ir e d by the above due dates, the single audit needs to have progressed enough that any f ina n c ia l r e l a t ed compliance findings can be included in the stewardship, compliance and accountability note.  Statements must be in final form with a signed independent auditor’s opinion; however, the completed comprehensive annual financial report (CAFR) is not needed.  Adequate and timely responses to issues raised in a unit letter must be received before units can be placed on the agenda for debt consideration. Response letters should address each topic discussed in the unit letter with a specific corrective action plan. Units should ensure that corrective action plans are specific and clearly explain how the unit will correct or has already corrected each issue addressed. If you need assistance in writing an adequate unit letter response, please contact the SLGFD staff.

20.

Data Needed for Fiscal and Financial Analysis Our staff and the School of Government have worked together in providing a benchmarking analysis tool for governmental units. This tool allows users to benchmark a county or municipality against up to five peers of their choosing in a variety of fiscal indicators spanning a five year period. Indicators are available for governmental activities (full accrual basis), the General Fund (modified accrual), the Water and Sewer Fund, and the Electric Fund. Reports can be downloaded in either an Excel or Adobe format. In order for our staff to properly capture the data pr o v id e d in this tool, we ask that you please incorporate the following changes into your audit report:  Have a separate summary of changes in capital assets and long-term debt for the electric activities and the combined water and sewer activities;  Specify the amounts transferred from the General Fund to the Debt Service Fund either in the transfer note disclosure or in the individual fund schedules;  Ensure that any liabilities payable from restricted assets and the associated restricted cash are properly presented on the Statement of Net Position for the Governmental Activities, Enterprise Funds, and on the General Fund’s Balance Sheet.  Clearly label debt refunding either on the face of the Exhibits or within the long- term debt note disclosure.

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

Please provide a separate line on the Statement of Activities for Total General Revenues excluding transfers and special items. In order to determine a unit’s repairs and maintenance costs for the Water and/or Sewer operation we are requesting that all local governments that operate a Water and/or Sewer Fund separately present the amount of repairs and maintenance expenditures in the supplementary information. The Schedule of Revenues, Expenditures, and Changes in Fund Balance should reflect a separate line item for repairs and maintenance – this can be within each functional area or in total. Please note that these amounts are not required to be separately stated in the full accrual Statement of Revenues, Expenses, and Changes in Fund Net Position.

21.

Independent Auditors’ Opinion You may refer to the Sample Financial Statements on our site.  Please make sure the financial opinion units tie to the financial statements, this includes special revenue funds. o Per G.S. 159-13, all money received and expended by local governments and public authorities shall be budgeted. P l e a s e make sure these b udgetary r e p o r t s a r e p r o p e r l y r e f e r e n c e d i n t h e o p i n i o n s a n d are consistent with the actual financial statements. o Opinions should reflect the most current language and should be updated for the clarity standards. Please refer to the AICPA Audit Guide, Government Auditing Standards and Circular A-133 Audits for the most current language. o Component units should be addressed in the opinion. If a component unit has been audited in accordance with Government Auditing Standards, the report on internal control and compliance should include a reference to the component unit.  The Supplementary and Other Information paragraph should reference all a p p l i c a b l e schedules and tables. o Each item presented as supplementary information should indicate whether they have or have not been subjected to auditing procedures. o Common supplementary items include: the introductory information, combining and individual non-major fund financial statements, budgetary schedules, other schedules, statistical tables, and the accompanying schedule of expenditures of federal and State awards as required by US Office of Management and Budget Circular A- 133, Audits of State, Local Governments, and Non- Profit Organizations, and the State Single Audit Implementation Act  Schedule of expenditures of federal and state awards (SEFSA) presented under the same cover of the financial statements should be referenced in the opinion as supplementary information.  Governmental units that do not have a single audit, but still present the SEFSA, should not include the statement “ the SEFSA is required by US Office of Management and Budget or the State Single Audit Implementation Act,” since it is not required.

22.

Compliance Reporting  Make sure the stewardship, compliance and accountability notes are consistent with the internal control findings.

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Capital project funds should clearly identify the funding source by grant and should be separated by funding source on the intergovernmental revenue line. o For example, “Intergovernmental revenue – CDBG” o This is especially important in capital project funds that are used to report multiple projects or revenue sources Drinking Water State Revolving Fund and Clean Water State Revolving Fund We continue to see instances in which these loans are not audited as a major program but should have been; they are considered loans and loan guarantees and must b e audited as major if they meet the threshold requirements. Prior loans and loan guarantees vs loans and loan guarantees: o Per OMB Circular A-133 §.205(b); Prior loan and loan guarantees shall not be confused with loan and loan guarantees outstanding at year end.  Prior loans and loan guarantees are loan proceeds that were received and expended in prior years. In most instances these are not considered financial awards expended and should not be reported on the Schedule of Expenditures of Federal and State Awards (SEFSA) as they impose no continuing compliance requirements other than the repayment of the loans. Please refer to OMB Circular A-133 §.205 for more guidance on federal award determination.  Loan or loan guarantees expended should be reported on either the SEFSA (preferable) or as a footnote to the SEFSA, per OMB Circular A-133 §.310 (b)(6). Please note that if a footnote reports a loan or loan guarantee, this is considered financial assistance and subject to single audit requirements including major program determination requirements.

23.

External Investment Pools not Registered with the Securities and Exchange Commission (SEC)  Governments participating in an external investment pool that is not registered with the SEC must disclose a brief description of any regulatory oversight of the pool in the accounting policies for Deposits and Investments (G.S. 31-15c).  Governments also must disclose whether the fair value of the position in the pool is the same as the value of pool shares. Neither the State Treasurer OPEB Fund nor the State Treasurer Investment Fund is registered with the SEC. Governments can refer to Section I of the City of Dogwood and/or the Carolina Board of Education notes to the financial statements for a sample disclosure.

24.

Government Officials Please include a list of the names and titles of government officials in your audit report to assist the SLGFD maintain current information. Please refer to the City of Dogwood and Carolina County for an example.

25.

GFOA Illustrative Per GFOA’s illustrative statement in regards to the LEO note disclosure (page 60 under the Summary of Significant Accounting Policies), be sure to include the following statement addressing the recognition of benefits and refunds: “Benefits and refunds are recognized when due and payable in accordance with the terms of the plan.” At this time the City of Dogwood’s sample financial statement does not include this

Memorandum #2016-04 2015 Financial Statement Reporting Tips Page 10 statement. However, GFOA is insistent on units including this to ensure they receive their GFOA certificates. 26.

Audit Process Contracting Issues  Discretely Presented Component Unit (DPCU) – an audit contract is required for DPCU’s that fall under G.S. 159.  Any aberrations from the contract scope should be addressed as soon as possible. Should the scope of the contract change from what is specified in the contract, the auditor should cease work and communicate with the elected body before continuing. It is the auditor’s responsibility to notify the board that the scope of work must change and that additional compensation might be necessary. If a unit is unwilling to agree to a scope change please contact the SLGFD as soon as possible.  The unit has a responsibility to ensure the audit is performed in accordance with GAAS and other applicable standards.  The SLGFD encourages interim billing. Interim billing can mitigate potential cash flow issues for the auditor.  No interim bills should be presented before the contract date and interim billing amounts should proportionately align with the amount of audit work performed.

27.

Audit Approval  Governmental units and their auditors will continue to be notified via email once staff approves the presentation of both the audit content and compliance reports, if applicable.  Governmental units issuing General Obligation (GO) bonds within the next year may be required to correct or revise certain white letter item(s) that were previously communicated.  Additional changes may be required to mitigate issues arising from the presentation of three-year comparative statements in an official or offering statement.

28.

SLGFD Review of Drafts of Audited Financial Statements Due to staff limitations, the SLGFD will o n l y review drafts of audited financial statements that are camera ready CAFRs or drafts of audited financial statements for governments that have a scheduled debt sale requiring the issuance of an official statement. This means that the submission should present complete and final numbers in the audit report. If you are presenting a draft statement for review as a result of pending debt approval, please clearly indicate the file as a draft when submitted

29.

Submitting Audit Reports  PDF Text searchable copies of audit reports are required for the 6/30/2015 audit reports. For more information go to: Creating a Compliant PDF Audit Report. We provide electronic copies of audits to other agencies as requested.  The electronic copy of the audit is the unit’s official copy for state purposes and should be legible.

For any questions on any of this information, please contact the SLGFD at 919-814-4299. Thank you for your assistance with bettering the fiscal and financial health of our local governments.