General Ledger Review: Analyzing and Ensuring Accuracy

1. “Canary in the Coal Mine”What my General Ledger is Telling me? Chris Betley, CPA, PSA Matthew Holman, CPA, PSA

2. Holman Frenia Allison, P.C.www.hfacpas.com Chris Betley, CPA, PSA Matthew Holman, CPA, PSA Matt has been a member of the team since 2003.  His areas of expertise include audits and non-attest financial services of municipalities, fire districts, school districts, county and municipal libraries and non-profit organizations.  He has extensive governmental auditing experience and assists local governmental entities with Christopher has been a member of the HFA team since 2011. His areas of expertise include audits of municipalities, fire districts, school districts, counties and municipal libraries. Christopher graduated from Moravian College in Bethlehem, Pennsylvania with a Bachelor of Arts Degree in Accounting. Additionally, Chris has been integral in implementation of a firm-wide quality control program. Chris has been a leader firm-wide in internal quality control development and adherence. their municipal budget process.  Matt graduated from Franklin and Marshall College with a B.A. in Accounting. Additionally, he has been integral in implementation of a firm-wide quality control program since being named Director of Quality Control. Matt specializes in designing and improving internal control systems for governmental entities to help safeguard against fraud and to help entities achieve business objectives.

3. What is a “Canary in the Coal Mine”?

4. Matt Holman Chris Betley

5. General Ledger Review General Ledger Review is the process of analyzing and performing certain analytical procedures to your general ledger balances and transactions to provide reasonable assurance that they are accurate. In addition, the reviewer verifies that transactions are appropriate and that they are compliant with New Jersey’s specialized basis of accounting.

6. Why is it Important to Review your General Ledger?

7. Internal Control - Management Oversight • Review of the General Ledger and Underlying Transactions are a Crucial Piece of Internal Control • Internal Control Structure Should be Designed to Include Management Oversight of Postings in a Timely Manner • Suggested Time Frame - Monthly - Certain Factors Will Determine the Correct Frequency for your Organization

8. Frequency Determination Factors • Volume • Number of Transactions or Occurrences of Transaction Type • Materiality • Monetary Value is Significant Enough to Warrant Oversight • Business Purpose • Importance of Transaction to the Entity • Riskiness • Inherent to the Transaction Type • Staff Quality and/or Experience

9. Internal Risk Assessment • Risk Assessment - the identification and analysis of relevant risks to the achievement of an entity's objectives, for the purpose of determining how those risks should be managed. • Given Limited Resources (Time), How do you Best Allocate the Time Available? • When performed accurately, The Riskiest areas will be properly identified and the most oversight will be performed in those areas.

10. Documenting and Adopting Financial Policies & Procedures Financial policies are central to proper financial management. Some of the most powerful arguments in favor of adopting formal, written financial policies include their ability to help governments: • Institutionalize good financial management practices. • Clarify and crystallize strategic intent for financial management. • Define boundaries. • Support good bond ratings and thereby reduce the cost of borrowing. • Promote long-term and strategic thinking. • Manage risks to financial condition. • Comply with established public management best practices. The Government Finance Officers Association (GFOA) has recognized financial policies as an essential part of public financial management.

11. Accurate and Timely Information for Decision Makers • Financial decisions need to be made constantly, accurate and timely information allow for the best decision making process.

12. What are the Important Steps of a General Ledger Review?

13. Two Steps of an Effective General Ledger Review • Review for Accounting Errors & Potential Problems • Warning Signs & TypicalMisstatements using analytical procedures • Performing Calculations Unique for New Jersey Municipal Accounting to Ensure Proper Financial Presentation • Perform Benchmarking of your Financial Records • Your Results vs. Industry Standards

14. Step #1 - Review for Accounting Errors & Potential Problems • Obvious Problems From Observing the General Ledger Balances • Debits and Credits do not Balance • Asset Accounts are Carrying a Credit Balance • Liability Accounts are Carrying a Debit Balance • Anticipated Revenues has a Credit Balance • Appropriation Balance is a Debit Balance

15. Step #1 - Review for Accounting Errors & Potential Problems (continued) • Tracing your Balance Sheet Accounts to Supporting Documentation • Cash to Bank Reconciliations • Debt to Amortization Schedules • Tax/Utility Receivables to Tax/Utility Collector Reports • Revenues and Expenditures to Subsidiary Ledgers • Grant Receivables to Grant Awards documents

16. Cash to Bank Reconciliation

17. Debt (Bonds/Loans/BAN’s) to Amortization Schedules

18. Debt (Bonds/Loans/BAN’s) to Amortization Schedules (cont’d)

19. Taxes Receivable to Tax Collector Reports

20. Revenues & Expenditures Agree to Subsidiary Ledgers

21. Revenues & Expenditures Agree to Subsidiary Ledgers (continued)

22. Grant Receivables to Grant Awards

23. Most Common Adjusting Journal Entries We Make During Audit • Posting the Budget and Chapter 159’s • Deferred Charges and Grants Not Charged Out of Budget • Tax/Utility Levy not Recorded Properly • Cancellation of Taxes/Utility Collections, Overpayments & Other Non-Cash Activity Not Picked Up Correctly in General Ledger

24. Step #1 - Review for Accounting Errors & Potential Problems (continued) • Performing unique calculations • Grant Receivables with No Reserves • Interfunds • Receivables equal Reserve for Receivables • Deferred Charges in your General Capital Fund

25. Grant Receivable with No Reserve • Perform an analysis of individual grant receivables to the reserve balance.

26. Interfunds • Perform an analysis of your interfunds

27. Receivables Equal Reserve for Receivables

28. Deferred Charges - Funded and Unfunded • Deferred Charges - Funded = Serial Bonds + Loans Payable + other permanent financing • Deferred Charges - Unfunded = Notes Payable + Bonds & Notes Authorized but not Issued + other temporary financing

29. Deferred Charges - Funded and Unfunded

30. Deferred Charges - Funded and Unfunded

31. Step #2 - Benchmarks/Highlights Now that your general ledger is “perfect”, let’s see how we’re doing financially. The following are some common benchmarks: • Budget to actual comparisons • Month to month comparisons of expenditures. • Collection percentage on a quarterly or monthly basis • Cash flow • Fund Balance • Appropriation Reserve lapsed

32. Benchmarking Fund Balance/Surplus What is the appropriate level of Fund Balance/Surplus? • The fund balance should take into account each government’s own unique circumstances. • Example - governments that may be vulnerable to natural disasters, more dependent on a volatile revenue source, or potentially subject to cuts in state aid and/or federal grants may need to maintain a higher level in fund balance. • Articulating these risks in a fund balance policy makes it easier to explain to stakeholders the rationale for a seemingly higher than normal level of fund balance that protects taxpayers and employees from unexpected changes in financial condition. • Nevertheless, GFOA recommends, at a minimum, that general-purpose governments, regardless of size, maintain fund balance in their current fund of no less than two months of regular current fund operating revenues or regular current fund operating expenditures. The choice of revenues or expenditures as a basis of comparison may be dictated by what is more predictable in a government’s particular circumstances. • Furthermore, a government’s particular situation often may require a level of fund balance in the current fund significantly in excess of this recommended minimum level. • In any case, such measures should be applied within the context of long-term forecasting, thereby avoiding the risk of placing too much emphasis upon the level of unrestricted fund balance in the current fund at any one time.

33. Fund Balance/Surplus - Bond Rating Considerations

34. Determining Your Fund Balance Benchmark • The predictability of your revenues and the volatility of your expenditures, higher levels of fund balance may be needed. • Significant Revenue Sources are Subject to Unpredictable Fluctuations • Operating Expenditures are Highly Volatile • Exposure to significant one-time outlays. • Disasters • Immediate Capital Needs • Budget Cuts • The potential drain upon general fund resources from other funds, as well as, the availability of resources in other funds. • The potential impact on the entity’s bond ratings and the corresponding increased cost of borrowed funds.

35. Questions/Discussions www.hfacpas.com