In The Black

Emily Rhodes

The Government Finance Officers Association brings their annual conference to San Antonio, TX this year, May 22-25. With the conference, come nearly 5,000 finance professionals from across the United States and Canada who represent the municipal, county, state, provincial, and federal levels of government. The GFOA is an organization dedicated to enhancing and promoting the professional management of governments for the public benefit through education, training, and leadership. The conference attendees won’t just enjoy San Antonio’s River Walk; they’ll also have access to the GFOA’s professional development and networking activities. This year’s theme is “Navigating the New Normal in Government Finance”.

Null-Lairson will be exhibiting at this year’s conference; we look forward to the opportunity to visit with our clients and friends. We also enjoy meeting and interacting with professionals from across the country. We’ll be at booth #720, if you’re attending- stop by and say hello!  We hope to see you there.

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Troylynn Robichaux, CPA, CIA

Hotel Occupancy Taxes is a significant revenue source for many cities.  Approximate hotel tax revenues for fiscal year 2010 total over $400 Million for Texas cities and municipalities based on hotel revenues reported to the State of Texas (State Comptroller’s website).

Issues sometimes arise relating to hotel owners and operators not submitting the proper amount of revenues or submitting late.  Therefore, cities may consider performing Hotel Occupancy Tax examinations in order to ensure that hotels are complying with local and state rules and guidelines.  Reasons to perform such examinations include:

• Promotes compliance with established rules and guidelines set forth by municipalities and the state
• May result in money owed to City
• May result in money owed to the hotel (not a direct benefit for the government in the short run, but promotes goodwill in the long-run)
• Keeps everyone honest

Local governments may opt to have their own staff perform hotel tax examinations.  If the resources (including time, personnel, etc.) and knowledge is present, it makes sense for local governments to use current personnel in this capacity.  Alternatively, the government can hire a CPA firm that is very experienced in efficiently performing examinations of financial, operational, and compliance information.

Documents and forms that should be considered in the examination include:

• Quarterly Remittance Reports to Municipalities-The remittance reports may be improperly calculated, resulting in incorrect hotel tax amounts being remitted.
• Sales Tax Submission Reports-Reviewing this information may result in the observance of inconsistencies in hotel transaction activity, indicating that either or possibly both sales tax or hotel tax is being understated.
• Occupancy Reports-There should usually be a direct correlation between the level of occupancy at a hotel and the related tax remitted (exceptions includes stays over 30 days and exempted entities).  Examining anomalies from the review of monthly or daily occupancy reviews and comparing them to the hotel taxes may result in amounts being due to the local government.
• IRS Tax Returns and Bank Statements-Documents such as IRS tax returns may indicate differences in amounts being reported to the federal government versus what’s being reported to the local government.  In other words, multiple sets of books.
• General Ledger-As the general ledger records various transactions, reviewing it may show adjustments in which demonstrate the underreporting of revenues.  This includes bad debt expense adjustments, refunds, etc.   Such activity may be further examined to determine if underreporting of revenues does indeed exist.

There are certain conditions and situations that may indicate that hotels are underreporting revenues.  These include the following:

• Disorganized Records
• Revenue adjustments
• Inconsistencies in amounts reported
• Late submission
• No supporting Exemption Certificates

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Celina Miller, CPA

It is evident that funding cuts are inevitable given the federal government’s financial turmoil. Many entities will be and already are scrambling to find new sources of revenue to keep their governments afloat. The State of Arizona, for example, put its office buildings up for sale and raised $700 million, but has a long way to go to eliminate its $4.5 billion deficit. With situations like these, what information will states and local governments have to disclose to allow users to make true assessments on an entity’s economic condition?  Since December 2009 the Government Accounting Standards Board (the “Board”) has become very interested in governments fiscal sustainability and began a project called Economic Condition Reporting: Fiscal Sustainability in December 2009 . The project has three objectives:

• To identify the information that users of governmental financial information need to assess a governmental entity’s fiscal sustainability
• To compare those needs with the information that users receive under both current accounting and financial reporting standards and from other sources
• To consider reporting alternatives for additional information needed by users.

In addition, there are three phases to the project, but we will only touch on the third and most recent phase which focuses on the usefulness of the indicators of economic condition, which are already presented in the statistical section of the Comprehensive Annual Financial Report. The Board’s goal is to tackle the components of economic condition and address fiscal sustainability. The Board is interested in informing users about both the past and current economic condition, what events led to the government’s current condition and focus on the government’s fiscal sustainability.

The Board has provided a tentative definition for economic condition, which is a composite of a government’s financial position and its ability and willingness to meet its financial obligations and service commitments on an ongoing basis.

The Board recognized that economic condition and fiscal sustainability are similar concepts, but agreed that economic condition and its components include information as of a specific point in time, while fiscal sustainability is the “forward looking aspect of economic condition [i].” Fiscal sustainability was also tentatively defined as a government’s ability and willingness to generate inflows of resources necessary to honor current service commitments and meet financial obligations as they become due, without transferring financial obligations to future periods that do not result in commensurate benefits.

The Board determined that the governmental structure and processes measure an entity’s willingness. Demographics, growth, employment, wealth production, and other measures are important components of a government’s operations. The Board finds it troubling that governments use trend analysis to project into the future. The Board needs to make a critical decision whether projections should be made and what methods to use.[ii]

With the mid-term elections behind us, the Congress will have some important decisions to make. How will it reduce the federal deficit without impacting state and local governments? If the Board does not issue any new pronouncements, governments will more than likely present crucial information in Management’s Discussion and Analysis.

In conclusion, expect the Board in the months to come to discuss whether additional reporting will be required. If so, the Board will need to decide whether it will provide guidance or voluntary guidelines, the period that should be used to make projections and the methods used to make these projections.  The Board anticipates issuing a due process document in November 2011.

[i] Obtain from Lisa R. Parker’s, CPA Project Manager, Governmental Accounting Standards Board presentation presented on December 2, 2010

[ii] Information in this paragraph was obtained from an article written by Eric S. Berman, CPA who will become a partner with Brown Armstrong on January 1, 2011.

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Troylynn Robichaux, CPA, CIA

Null-Lairson is excited to once again be participating in the Texas Municipal League’s Annual Conference. This year the conference brings us to Corpus Christi during the last week in October. The Texas Municipal League was created to serve Texas’s cities and counties and is comprised of over 18,000 mayors, council members, city managers and city department heads. The annual conference brings the members together for networking, educational sessions and to visit the exhibit marketplace, which is where you’ll find Null-Lairson (booth #515).

I’m looking forward to seeing a lot of clients and friends at the conference- stop by and visit us!

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Troylynn Robichaux, CPA, CIA

Click here to read about a corrections lieutenant that has been indicted on charges of financial fraud.

There are a few lessons to be learned from this situation.

#1- You can’t fully depend on others outside the organization to be a part of the organization’s control environment. (e.g. do we really think all bank tellers verify proper signatures on checks?).

#2- Hindsight is 20-20. Implementing and executing relatively simple controls could have avoided this situation.  For example, having the Accounts Payable Personnel match the invoices, purchase orders (to which in this case they would found that there were none), and delivery receipts (or other notification that the goods, in this case ammunition, were received by the organization) before paying the line-of-credit. Doing this could have prevented the level of fraud committed here.  This may have saved the town of Berkley, MA the loss of money that the alleged crook inflicted and the embarrassment of the entire situation.

#3- Listen to your gut. I find it hard to believe that the alleged crook did not show indications that he was living the “high-life” at the expense of the City.  Did anyone notice the new items he purchased with the credit cards?  Did he brag about the home projects he started with the goods purchased at Lowe’s and Staples?  Did anyone not find his constant contact with the vendors suspicious?  I’m not suggesting to start doing surveillance 24-7 just because he mentions installing a new island in his kitchen.  However, following up on some suspicions when there are clues that something just isn’t right, by reviewing documents, inquiring of individuals involved in the purchasing process, etc. would have given cause to start the 24-7 surveillance in this case.

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Celina Miller, CPA

It probably seems that your auditor is obsessed with documentation. Although auditors may be tempted to take you at your word, they are bound by professional standards to approach client documentation with a healthy dose of professional skepticism. Frankly, we auditors sleep better at night if we can actually put our hands on a piece of paper. However, I can assure you that your external auditor only wants the best for your organization and so I share this information with a sense of urgency.

Let’s consider your federally funded employees. What documentation do you maintain for employees who are paid solely from a federal fund or for those that are split-funded? OMB Circular A-87 Cost Principals for State, Local and Indian Tribal Government (Circular A-87) Attachment B, Paragraph 8 Subsection 8 requires specific documentation of both types of these personnel costs. Noncompliance with this section of the circular has some serious consequences. In the last couple of months I have attended school district conferences where this was the main topic of discussion. The speakers provided real life examples that may have occurred over a year ago, but could not be more relevant than they are today.

Let’s recall Columbus City School District. The Office of the Inspector General (OIG) of the United States Department of Education (USDE) issued a questioned cost of approximately $2.5 million. The reason: Lack of documentation for the district’s federally funded employees. Also, when visiting the school district of the City of Detroit, the OIG questioned payroll costs totaling $1.3 million for the same reason. However, the OIG took it a step further and projected a questioned cost of $49.5 million. Yes, you read it correctly that’s $49.5 Million.  Due to the shock and horror I experienced, when I returned to the office the next day, I read the entire report. The OIG stated that the district either provide adequate documentation to support these payroll costs or to return the $49.5 million to the Michigan Department of Education. Can you imagine the blow to your General Fund? Wow!

With the recession in full swing, the federal government is not taking noncompliance lightly. It has no qualms about taking its federal funds back.  Many school districts in Texas have been visited by either the Texas Education Agency or the USDE. These agencies are closely examining the use of federal funds—whether related to ARRA funding or not. I also want to caution you that these agencies examine both payroll and non-payroll related costs. But since federal funds received by school districts primarily cover personnel costs, noncompliance with these requirements will have a significant financial impact. Independent auditors are also required to report questioned costs in their Single Audit reports if noncompliance is found.

So what can your district do to comply with Circular A-87?  The district should begin by identifying which employees are solely funded with federal funds. The next step is to prepare semi-annual certifications that state these employees were solely funded from a particular program (e.g. Title I, Part A, IDEA-Part B, Child Nutrition Program, etc). Districts should find it easier to complete the certifications at the end of each semester. In addition, either the employee or the employee’s immediate supervisor having firsthand knowledge of the duties performed should sign the certification. For those employees that are split funded (e.g. both General Fund and Title I, Part A), personnel activity reports (detailed time records with funding source) are required. The personnel activity reports must (1) reflect an after-the-fact distribution of the actual activity of each employee; (2) account for the all activities for the employee is compensated; (3) be prepared at least monthly, coincide with one or more pay periods, and be signed by both the employee and employer.

I realize that there are funding constraints, but I recommend districts avoid split-funding an employee’s salary to the extent possible. A solution to these funding constraints is to fully fund an employee with one funding source at one time. For example, for simplicity purposes let’s assume the district only has one Title I, Part A employee with a salary of $75,000. In addition, there is only $50,000 available in the Title I, Part A program. Also, let’s assume the remaining $25,000 will be paid out of the General Fund. So for three-fourths of the year, the employee will be compensated solely from Title I, Part A. When the federal fund is exhausted, the employee will be paid out of the General Fund. In this example, the district will only need a semi-annual certification for the period the employee was paid out of Title I, Part A. Districts will find it difficult to maintain personnel activity reports for teachers that were split-funded due to funding constraints. This is mainly because the same services are provided to the same students every day. So personnel activity forms would be ineffective in this situation but are best used to document employees’ duties that differ by funding source.

I leave you with this: School district business officials should collaborate with their program directors to ensure the required documentation is maintained. As stated in my previous post, if it wasn’t documented, it never happened.

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Troylynn Robichaux, CPA, CIA

GASB 51-Accounting and Financial Reporting for Intangible Assets, was issued to improve consistency in reporting of intangible assets and comparability of reporting among governments. Governments are required to implement Statement No. 51 for periods beginning after June 15, 2009. So, let’s break it down…

Nature of Intangible Assets:
Must have all of the three characteristics:
#1- Lacks physical substance—in other words, you cannot touch it, except in cases where the intangible is carried on a tangible item (for example, software on a DVD).

#2- It is non-financial in nature—that is, it has value, but is not in a monetary form like cash or securities, nor is it a claim or right to assets in a monetary form like receivables, nor a prepayment for goods or services.

#3- Its initial useful life extends beyond a single reporting period.

Also!-  The asset has to be identifiable. That means that the asset is separable—the government can sell, rent, or otherwise transfer it to another party.

Examples of intangible assets include easements, water rights, timber rights, patents, and trademarks.
• Easements and right-of-ways are very common among governments, particularly in high-growth and heavy construction/revitalization areas.

An easement is the right to use the real property of another without possessing it. Easements are helpful for providing pathways across two or more pieces of property or allowing an individual to fish in a privately owned pond. An easement is considered as a property right in itself at common law and is still treated as a type of property in most jurisdictions.

A right-of-way is a strip of land that is granted, through an easement or other mechanism, for transportation purposes, such as for a trail, driveway, rail line or highway. A right-of-way is reserved for the purposes of maintenance or expansion of existing services with the right-of-way. In the case of an easement, it may revert to its original owners if the facility is abandoned.

It is very common for right-of-ways to be classified as part of land. However, given the new accounting guidance, these should be classified separately from land and other associated assets.

• Computer software
The activities involved in developing and installing internally generated computer software can be grouped into the following stages:
a. Preliminary Project Stage. Activities in this stage include the conceptual formulation and evaluation of alternatives, the determination of the existence of needed technology, and the final selection of alternatives for the development of the software.

b. Application Development Stage. Activities in this stage include the design of the chosen path, including software configuration and software interfaces, coding, installation to hardware, and testing, including the parallel processing phase.

c. Post-Implementation/Operation Stage. Activities in this stage include application training and software maintenance.

Only expenses incurred in the Application Phase can be capitalized.

GASBS No. 51 gives special measurement/recognition guidance for intangible assets that are internally generated and that will be used in the government’s operations. An intangible asset—one that meets the four essential characteristics discussed in paragraph 703.6—is internally generated if the asset is either:
a. Created or produced by the government’s personnel or by a third party contractor on behalf of the government, or
b. Acquired from a third party but the government must make more than a minimal effort to modify the asset so that it achieves its expected level of service capacity.
c. Water Rights, Patents, Copyrights, etc.

Accounting and Reporting
• Intangible Assets are to be reported as Capital Assets in the Government Wide and Enterprise Funds of financial statements and not be reported in financial statements prepared using the current financial resources measurement focus.

Useful Life
• The useful life of an intangible asset is often limited by contract, law, or regulation, as may be the case, for example, for patents and certain land use rights. Intangible assets with indefinite useful lives are not to be amortized. However, if situations give rise to questions about the future usefulness of an asset, then an impairment analysis should be performed.

Disclosure
• Nothing other than what is required under GASB 34 .

Retroactive application
• Governments of all sizes are exempt from retroactively reporting intangible assets that have indefinite lives or that would be considered internally generated under GASBS No. 51, paragraph 7. Phase 1 and Phase 2 governments are required to report all other intangible assets retroactively. If determining the actual historical cost of these intangible assets is not practical due to the lack of sufficient records, Phase 1 and 2 governments are required to report the estimated historical cost for these intangible assets that were acquired in fiscal years ending after June 30, 1980. Phase 3 governments are not required to retroactively report any intangible assets within the scope of GASBS No.51.

www.null-lairson.com

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