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					Public Power Auditing and
Governance Update
American Public Power Association
Savannah, Georgia

September 15, 2009
Today’s agenda


►   Yellow Book and Related SAS 115 Update
►   American Recovery and Reinvestment Act (ARRA)
►   Recent Market Events:
    Accounting and reporting considerations
►   Sarbanes-Oxley Act Impact in the Public Power Sector




             Page 2   Public Power Auditing and Governance Update
Yellow Book and Related SAS 115 Update
►   Review of Government Auditing Standards
►   Changes to Government Auditing Standards due to July
    2007 Revision
►   Review of SAS Number 115
►   Impact of SAS 115 on:
    ►   GAS audits
    ►   A-133 audits




              Page 4   Public Power Auditing and Governance Update
When GAS applies


►   The financial statement audit of an entity is performed in
    accordance with GAS when subject to the requirements
    of:
    ►   OMB Circular A-133
    ►   Or other laws, contracts, regulations or agreements




              Page 5   Public Power Auditing and Governance Update
Additional GAS requirements


►   We assume certain responsibilities beyond those of audits
    performed in accordance with AICPA Standards
►   GAS includes the following standards:
    ►   General
    ►   AICPA fieldwork and reporting standards
    ►   Additional fieldwork and reporting standards
►   Additional report on internal control over financial
    reporting and on compliance and other matters




              Page 6   Public Power Auditing and Governance Update
What GAS does not require


►   An opinion on internal control over financial reporting
►   Tests of internal control over financial reporting
►   An opinion on compliance




            Page 7   Public Power Auditing and Governance Update
Additional GAS standards


►   Continuing professional education
►   Quality control and assurance
►   Independence
►   Auditor communication




            Page 8   Public Power Auditing and Governance Update
Additional GAS standards


►   Consideration of the results of previous audits and
    attestation engagements
►   Developing elements of a finding
►   Guidance on abuse
►   Reporting
    ►   Restatements




             Page 9    Public Power Auditing and Governance Update
General standards


Quality control and assurance
► Auditor requested to provide most recent external quality
  control review report and any letter of comments to the
  party contracting for the audit.




          Page 10   Public Power Auditing and Governance Update
Auditor required communication


►   Communication with management of the audited entity,
    those charged with governance, the individuals
    contracting for or requesting audit services, and the audit
    committee regarding the nature, timing, and extent of
    planned testing and reporting and the level of assurance
    provided.
    ►   Performed annually during planning




              Page 11   Public Power Auditing and Governance Update
Abuse-a notion unique to GAS


►   Distinct from fraud, illegal acts and violations of provisions
    of contracts or grant agreements.
►   No law, regulation or grant agreement is violated.
    ►   Involves behavior that is deficient or improper when compared with
        behavior that a prudent person would consider reasonable and
        necessary business practice given the facts and circumstances




              Page 12   Public Power Auditing and Governance Update
Additional guidance on abuse


►   Auditors should be alert for situations or transactions that
    could be indicative of abuse.
►   When information comes to the auditors attention that
    abuse may have occurred,
    ►   May have to extend audit procedures in certain circumstances
    ►   Example – Travel and Entertainment market




              Page 13   Public Power Auditing and Governance Update
Restatements – increased transparency –
NEW for July 2007 Revision

►   In response to frequent restatements of federal and other
    governmental financial statements
►   Goes beyond AICPA standards
►   Auditors should advise management to make appropriate
    disclosures when they believe it is likely that previously-
    issued financial statements are misstated and the
    misstatement is or reasonably could be material




            Page 14   Public Power Auditing and Governance Update
Restatements – additional GAS requirements


►   Evaluate the timeliness and appropriateness of
    management’s disclosure and actions to determine and
    correct misstatements in the previously-issued financial
    statements
►   Report on restated financial statements
►   Report directly to appropriate officials when the audited
    entity does not take the necessary steps




            Page 15   Public Power Auditing and Governance Update
Restatements – evaluating management’s
disclosure and actions

►   Auditors should evaluate the timeliness and
    appropriateness of:
    ►   Management’s disclosures to those likely to rely on the financial
        statements
    ►   Management’s actions to determine and correct misstatements in
        previously-issued financial statements




              Page 16   Public Power Auditing and Governance Update
Restatements – evaluation responsibilities


►   Auditors should also evaluate whether management
    ►   Acted in an appropriate time frame after new information was
        available
    ►   Disclosed the nature and extent of the known or likely material
        misstatements
    ►   Disclosed whether specified information was in the entity’s
        restated financial statements




              Page 17   Public Power Auditing and Governance Update
Restatements – report on restated financial
statements

►   Explanatory paragraph includes
    ►   Disclosure that the previously-issued financial statements have
        been restated
    ►   Statement that previously issued report should not be relied on
        and is replaced by a revised report
    ►   Reference to the notes that discuss the restatement
    ►   If applicable, reference to the report on internal control




              Page 18   Public Power Auditing and Governance Update
Restatements – direct reporting


►   Auditors should notify those charged with governance:
    ►   If entity management does not act in an appropriate timeframe
    ►   Does not restate with reasonable timeliness
    ►   To take necessary steps to prevent further reliance on the auditor’s
        report and advise them to notify oversight bodies and funding
        organizations
►   If users not notified, auditors should make the notification




              Page 19   Public Power Auditing and Governance Update
SAS No. 115, Communicating Internal
Control Related Matters Identified in an Audit

►   Effective for periods ending after 12/15/09
    ►   Ernst & Young has early implemented
►   Supersedes SAS No. 112 of same title
    ►   To conform definitions of control deficiency (CD), significant
        deficiency (SD), and material weakness (MW) to more closely
        align to AS 5




              Page 20   Public Power Auditing and Governance Update
Main changes in internal control definitions


►   No real change to CD or MW definition
►   SD’s
    ►   Matters that merit the attention of those charged with governance




              Page 21   Public Power Auditing and Governance Update
Material weakness


►   A material weakness is a deficiency, or a combination of
    deficiencies, in internal control, such that there is a
    reasonable possibility that a material misstatement of the
    entity’s financial statements will not be prevented or
    detected on a timely basis
    ►   Based on FASB 5 definition of “reasonably possible”
    ►   Lack of a material misstatement does not mean that you do not
        have a material weakness




              Page 22   Public Power Auditing and Governance Update
Significant deficiency


►   A deficiency, or a combination of deficiencies, in internal
    control that is less severe than a material weakness, yet
    important to merit attention by those charged with
    governance




            Page 23   Public Power Auditing and Governance Update
SAS 115 indicators


►   No longer includes a list of deficiencies that ordinarily
    would be considered at least significant deficiencies
►   Revises the list of deficiencies in internal control that are
    indicators of material weaknesses
    ►   Fraud by senior management
    ►   Restatements
    ►   Auditor found material adjustments
    ►   Ineffective oversight by governance




              Page 24   Public Power Auditing and Governance Update
SAS 115 impact on GAS audits


►   GAO has issued guidance allowing use of new SAS 115
    definitions in the GAS report on internal control over
    financial reporting and on compliance and other matters




            Page 25   Public Power Auditing and Governance Update
SAS 115 impact on A-133 audits


►   Do not use the new SAS 115 definitions in A-133 internal
    control and compliance reports
    ►   Until such time as the OMB approves the new definitions and
        AICPA adapts them for internal control over compliance




              Page 26   Public Power Auditing and Governance Update
SAS 115 impact on A-133 audits


►   Depending on timing of OMB approval:
    ►   Could have different definitions of CD, SD and MW in the GAS
        internal control report and the A-133 internal control and
        compliance report within the same reporting package!




              Page 27   Public Power Auditing and Governance Update
American Recovery and Reinvestment Act
(ARRA)
American Recovery and Reinvestment Act
(ARRA)

►   Signed by President Obama in February of 2009
►   Goals of the Recovery Act
    ►   To preserve and create jobs and promote economic recovery
    ►   To assist those most impacted by the recession
    ►   To provide investments needed to increase economic efficiency by
        spurring technological advances in science, technology and health
    ►   To invest in transportation, environmental protection and other
        infrastructure that will provide long-term economic benefits




              Page 29   Public Power Auditing and Governance Update
Facts about ARRA


►   No republicans in the House of Representatives voted for
    it
►   Only two current republican senators voted for it
    ►   Spending and accountability for funds likely to be politically
        charged
►   Vice president in charge of Recovery Act aspects
►   Governors have to certify with respect to the propriety of
    its spending




               Page 30   Public Power Auditing and Governance Update
ARRA Impact


►   Total cost of spending is $787 billion
    ►   300 billion in grants
►   Federal government is funneling billion of dollars to state
    and local governments (including public power entities),
    much of which will be subject to single audit
    ►   Significant increase in Department of Transportation funding
    ►   Environmental Protection Agency funding tripled




               Page 31   Public Power Auditing and Governance Update
ARRA Impact


►   70 billion has been obligated by the federal government
    so far
    ►   18 to 20 billion so far
    ►   70% of grant funding expected to be disbursed by the end of the
        summer of 09
►   Speed of awarding funds
►   Many entities not subject to OMB Circular A-133 in the
    past may now be subject to it




              Page 32   Public Power Auditing and Governance Update
ARRA oversight and transparency


►   Unprecedented oversight and transparency mandated
    ►   www.Recovery.gov ( announcements, agreements, program
        managers, governors, mayors)
►   Formation of the Recovery Act Accountability and
    Transparent Board
    ►   Created to review management of recovery dollars and to provide
        early warning of problems
    ►   Seven member board includes federal agency inspector generals
        and federal deputy cabinet secretaries
    ►   Coordinating and conducting oversight of federal spending under
        the ARRA




              Page 33   Public Power Auditing and Governance Update
ARRA oversight and transparency


►   The GAO and the federal agency inspector generals have
    been provided additional funds and access for reviews of
    the act funds and spending
►   The Recovery Act tasks GAO with a range of
    responsibilities to help promote accountability and
    transparency and ensure that these funds are used as
    specified




            Page 34   Public Power Auditing and Governance Update
GAO Recovery Act Activities


►   Conducting on site bi-monthly reviews on how funds are
    used by 16 states and the District of Columbia which
    contain 65% of the grant funds available through the
    Recovery Act
    ►   Review specific areas such as trade, education, small business
        and health care
    ►   Commenting on reports filed by fund recipients
►   GAO’s oversight work on the Recovery Act will be
    published on its web site at http://www.gao.gov/recovery/




              Page 35   Public Power Auditing and Governance Update
ARRA oversight and transparency

►   A-133 audit is an important part of the Recovery Act’s
    accountability mechanisms
    ►   Significant federal scrutiny via Quality Control Reviews (QCR’s) of
        A-133 audits performed on entities receiving Recovery Act money
        (primarily in 2010-2011 time frame)
        ►   Results of QCR’s to be placed on recovery.gov
        ►   A-133 audit reporting packages to be made available at the federal
            audit clearinghouse web site




               Page 36   Public Power Auditing and Governance Update
ARRA Oversight and Transparency


►   Federal OIG’s will use risk assessment techniques where
    data is available to identify high risk programs and non-
    federal entities to be targeted for priority audits and
    investigations with faster turnarounds
    ►   A-133 audits not performed until nine months after the end of the
        recipient’s fiscal year




              Page 37   Public Power Auditing and Governance Update
ARRA Implementation Guidance


►   Initial implementing guidance issued on February 18,
    2009 at
    http:www.recovery.gov/files/initial%20Recovery%20Act%
    20Implementing%20Guidance.pdf
►   Follow-up implementing guidance issued on April 3, 2009
    at http://www.recovery.gov/sites/default/files/m09-15.pdf




            Page 38   Public Power Auditing and Governance Update
ARRA Compliance Requirements


►   As required by section 1512, each direct recipient federal
    funds under ARRA must report the following information
    10 days after each calendar quarter beginning on July 10,
    2009
    ►   Total amount of recovery funds received from each federal agency
    ►   Amount of funds received that were obligated (encumbered) and
        expended to projects or activities




              Page 39   Public Power Auditing and Governance Update
ARRA Reporting Elements ( cont.)


►   A detailed list of all projects or activities for which recovery
    funds were obligated and expended including:
►   The name of the project or activity
►   A description of the project or activity
►   An evaluation of the project status of the project or activity
►   An estimate of the number of jobs created and the
    number of jobs created and the number of jobs retained
    by the project or activity




             Page 40   Public Power Auditing and Governance Update
ARRA Reporting Elements ( cont.)


►   For infrastructure investments made by state and local
    governments, the purpose, total cost, justification for use
    of ARRA funds, and the name of a contact person
►   Detailed information on any subcontracts or sub-grants
    awarded by the recipient, including the data elements
    required to comply with the Federal Funding
    Accountability and Transparency act of 2006 (P.L. 109-
    282), allowing aggregate reporting on awards below
    $25,000 or to individuals.




            Page 41   Public Power Auditing and Governance Update
Other ARRA Reporting Issues


►   Subrecipients may need to report information to enable
    direct recipients to report up to recovery.gov
►   Accounting system capabilities
►   Resources
    ►   Act provides no funding for recipients to administer the awards




              Page 42   Public Power Auditing and Governance Update
Recovery Act Risks


►   Many entities spending federal funds who have never
    gotten them before
    ►   Do they have the internal controls to properly expend these funds
►   Many programs will significantly increase the amount of
    the federal funding they expend
►   Are these entities equipped for such an increase in
    funding?
    ►   Staffing and controls




              Page 43   Public Power Auditing and Governance Update
Recovery Act Risks


►   A-133 audits are not due until nine months after year end
    ►   Thus for the fiscal year ending June 30, 2010, the A-133 audit is
        not due until March 30, 2011
        ►   Half of the states are also late with their reports
►   This timing may not result in timely accountability for
    Recovery Act Funds




                Page 44   Public Power Auditing and Governance Update
Addressing Recovery Act Risks-Timing of A-
133 Audits-Potential Solutions

►   Reduce the deadline from nine months after year end
►   Quarterly recovery act compliance audits
►   Internal control reviews of entities spending Recovery Act
    funds in a timely fashion after their receipt of recovery act
    funds
►   Potential solutions applicable to all entities spending
    recovery act funds including second and third tier
    subrecipients




            Page 45   Public Power Auditing and Governance Update
Recovery Act-Impact on All Programs


►   Separate CFDA numbers for ARRA funding
    ►   Including separate CFDA numbers for ARRA funding that
        supplements pre-existing programs
►   Pass-through entities must provide this CFDA number to
    each entity they pass funds through




              Page 46   Public Power Auditing and Governance Update
Recovery Act Impact on OMB Circular A-133
Audit

►   Use of A-133 audit for risk assessment
►   Use for monitoring program
    ►   Assignment of separate ARRA CFDA
    ►   Evaluate high risk programs and grantees
    ►   Separate reporting on SEFA and data collection form
    ►   Federal audit clearinghouse to display all ARRA findings




              Page 47   Public Power Auditing and Governance Update
Recovery Act Impact on OMB Circular A-133
Compliance Supplement

►   The 2009 OMB Circular A-133 Compliance Supplement
    includes a high level Appendix on the ARRA
►   The OMB will issue interim updates to the Compliance
    Supplement to keep ARRA requirements current
►   Stay plugged in on upcoming updates to the Compliance
    Supplement
►   OIG’s will also provide training on ARRA requirements




           Page 48   Public Power Auditing and Governance Update
Other A-133 audit impacts due to ARRA


►   The A-133 reporting package will be publicly available in
    the federal audit clearinghouse for fiscal years ending on
    or after June 30, 2009
    ►   This includes the financial statements
    ►   Does not matter if the entity did not spend ARRA funds
►   Keep social security numbers, check routing numbers and
    individual’s names out of the findings and corrective
    action plans to avoid privacy violations




              Page 49   Public Power Auditing and Governance Update
Impact of Recovery Act Going Forward


►   Some June 30, 2009 audits impacted
►   Bigger impact on June 30, 2010, audits
►   Changes that could impact major program determination
    process
►   Non-static Compliance Supplement
►   Watch communications for further updates and
    developments




           Page 50   Public Power Auditing and Governance Update
Recovery Act Internal Control
Considerations

►   Consider whether control procedures in place over federal
    expenditures are appropriate, working properly, and
    designed to prevent unallowable expenditures
►   Consider whether additional controls and system
    requirements will be needed to ensure that Recovery Act
    funds are able to be separately identified and tracked
►   If applicable consider whether new controls are needed to
    meet the stringent reporting requirements back to federal
    agencies




            Page 51   Public Power Auditing and Governance Update
Recovery Act Internal Control
Considerations

►   If Recovery Act funds will be passed down to
    subrecipients, controls should be in place to ensure
    appropriate subrecipient monitoring and also whether any
    new controls will need to be established related to new
    subrecipient reporting responsibilities




            Page 52   Public Power Auditing and Governance Update
Recent market events:
Accounting and reporting considerations
Overall economic conditions


►   Steep adjustments in real estate values
►   Restricted criteria for obtaining capital
►   Liquidity concerns of financial institutions
►   Deterioration in consumer spending

These conditions create challenges for many companies,
including public power organizations




            Page 54   Public Power Auditing and Governance Update
Internal control


Issue: Maintaining effective internal control
► Are existing controls sufficient:
  ►   New material risks to operations, financial reporting, compliance or
      new fraud risk
  ►   Changes in significance of risks




            Page 55   Public Power Auditing and Governance Update
Valuation of investments


Issue: Measuring fair value of assets
► Fair value is intended to convey the current value of an
   asset or liability and not the potential value at some future
   date
► Understand sources of valuation
    ►   Quoted prices in active markets
    ►   Broker quotes
    ►   Methods and inputs used
►   Are market participant assumptions used




              Page 56   Public Power Auditing and Governance Update
Derivatives


Issue: Impact of counterparty creditworthiness
► Severe deterioration could indicate a hedge is no longer
   “highly effective” = loss of hedge accounting
► Credit deterioration and bankruptcy could terminate a
   derivative = receivable or payable on balance sheet
► Possible ineffectiveness for continuing hedges;
   particularly fair value hedges




          Page 57   Public Power Auditing and Governance Update
Postretirement benefits


Issue: Plan assets valuation and assumptions
►   Fair value of plan assets affected by market conditions
    ►   Hard to value assets (e.g., alternative investments)
►   Discount rates used to measure the benefit obligation at the
    measurement date should be based on high quality fixed income
    instruments
    ►   Not investments that have been downgraded as a result of the credit crisis
        below the “high-quality” rating level
    ►   Customized portfolios and use of spot curves require analysis
►   Assumed returns on plan assets for next year should reflect current
    expectations of asset returns
►   Recognition of an underfunded plan may have implications for debt
    covenant compliance


               Page 58   Public Power Auditing and Governance Update
Debt


Issue: Debt covenants and financing concerns
► Review for compliance with all provisions and covenants
   (financial and non-financial)
    ►   Covenants that were met solely by amendment
    ►   Ability to comply in next 12 months
    ►   Waivers must be for at least 1 year plus 1 day
►   Intent and demonstrated ability to refinance maturing debt
    long term should be documented to classify long term
►   Lender concessions may be a troubled debt restructuring
►   Debt service securities may need to be replaced.
►   Subjective acceleration clauses may impact classification

              Page 59   Public Power Auditing and Governance Update
Going concern

Issue: Declining operations and liquidity concerns could
affect an organization’s ability to continue as a going
concern
► Evaluate conditions or events that may cast significant
   doubt on an organization’s ability to continue as a going
   concern
► Management evaluates its sources of financing and
   liquidity
    ►   Circumstances may impact management’s plans and assumptions
        regarding refinancing, rolling over existing debt, and other credit
        arrangements
►   Management develops plan to mitigate going concern risk
    (e.g. improving operating results, financing strategies,
    increasing balance sheet liquidity)
              Page 60   Public Power Auditing and Governance Update
Disclosures

Issue: What to disclose
► Take a fresh look at financial statement disclosures
   addressing risks, uncertainties and concentration of risks
► Evaluate the sufficiency of MD&A, including liquidity plans
   and how a rating change and/or increased funding costs
   might affect future earnings, the ability to enter into new
   business, ability to fund collateral calls or repurchase
   requests, etc.
► Challenge whether previously disclosed market risks
   should be updated to reflect current conditions




           Page 61   Public Power Auditing and Governance Update
Sarbanes-Oxley Act Impact on the
Public Power Sector
Objectives


►   Review the S-O requirements
►   Learn what various industry and professional
    organizations are doing
►   What are public sector organizations and municipal
    utilities doing?
►   Auditor responses




            Page 63   Public Power Auditing and Governance Update
The Act - Highlights


►   Title II – Auditor Independence
    ►   Prohibition from certain non-audit services
    ►   Rotate lead and ind. partners every five years
    ►   Report various matters to the audit committee
    ►   Rules related to hiring from CPA firm
    ►   GAO to study mandatory rotation of firms
        ►   Issued November 2003




               Page 64   Public Power Auditing and Governance Update
The Act - Highlights

►   Title III
    ►   Audit committee appoints/compensates auditor
    ►   Independent audit committee members
    ►   CEO/CFO certifications
►   Title IV
    ►   Reporting on internal control (404)
    ►   Disclosures about code of ethics
    ►   At least one AC member is a financial expert




                Page 65   Public Power Auditing and Governance Update
Industry Activities


►   GAO –
    ►   Mandatory Rotation Study
    ►   June 2003 Yellow Book introduction references S-O
    ►   Various comment letters to PCAOB
    ►   Testimony in support of SOX (SEC, PCAOB)




              Page 66   Public Power Auditing and Governance Update
Industry Activities


►   AICPA A&A Guide
    ►   Audit risk alert covers S-O briefly
►   AICPA Government Audit Quality Center
    ►   Audit Committee Best Practices
        ►   Example charters
        ►   Qualifications
        ►   Meeting guidelines




               Page 67   Public Power Auditing and Governance Update
Industry Activities


►   GFOA – Recommended Practices
    ►   “Enhancing Management Involvement with Internal Control (2004)
        ►   Information and training of finance managers
        ►   Documentation of IC procedures
        ►   Periodic evaluations of controls




               Page 68   Public Power Auditing and Governance Update
Industry Activities

►   GFOA – Recommended Practices (cont.)
    ►   “Establishment of Audit Committees”
        ►   Not new, but updated
        ►   Formally established (appropriate legal means)
        ►   Expertise and experience
        ►   Selected from outside the government
        ►   Oversee the independent audit
        ►   Selection of audit firm
        ►   Written reports to governing board




               Page 69   Public Power Auditing and Governance Update
Industry Activities


►   Ratings agency questions around governance
►   Risk management organizations (e.g., ERM initiatives –
    especially in utilities)
►   Underwriters expectations




            Page 70   Public Power Auditing and Governance Update
Marketplace Responses to S-O

►   Improvements to existing audit committees
    ►   New/amended charters
    ►   Ensuring financial expertise
►   Formation of audit committees
►   Changes in reporting of internal audit




              Page 71   Public Power Auditing and Governance Update
Marketplace Responses to S-O

►   Adoption of code of ethics
►   Whistle-blower mechanism
►   CEO/CFO certification
►   Requests for auditor to review selected processes




            Page 72   Public Power Auditing and Governance Update
Marketplace Responses to S-O


►   Establish/out-source internal audit function
►   Use of IA to implement 404-like internal review
►   ERM – linking risk management with governance




           Page 73   Public Power Auditing and Governance Update
E&Y Response

►   More audit committee disclosure, particularly about
    accounting policies
    ►   Discuss estimates and related assets and liabilities
    ►   Discuss firm QCR processes
►   Recommendations to:
    ►   Establish/strengthen audit committees
    ►   Adopt ethics policies
    ►   Establish/reorganize internal audit
    ►   CEO/CFO certifications
    ►   Periodic IC evaluations by management




              Page 74   Public Power Auditing and Governance Update
Thank you!




   Thank you for attending this learning session.




       Page 75   Public Power Auditing and Governance Update

				
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