LGC UPDATE

1
LGC UPDATE

• Sharon Edmundson, Director
• Fiscal Management

2
LGC UPDATE

• AGENDA
• Reporting Issues
• SAS 112
• Payroll Issues
• 1099-INT
• OPEB
• Audit Contracts
• Flood Insurance
• LGC Memos
• Upcoming Projects and Events

3
LGC UPDATE

• Reporting Issues
• DMV 3 Interest
• Counties Report in Agency Fund
• Should report interest collected, remitted, and
  owed to State at June 30
• Amounts likely immaterial but DOT looking for

4
LGC UPDATE

• GASB 40 Disclosures
• Notes must say clearly if no formal policy
• Including custodial credit risk for deposits
• No policy statement implies Board approval
• A statement is only required if the risk exists
• Avoid negative disclosures
• e.g. If no custodial credit risk at the category
  C(3) level then no need to include a discussion
  on your policy of using third party safekeeping
• Concentration of credit risk be sure to include
  when applicable

5
LGC UPDATE

• Investment Policies for GASB 40
• Effective with the 2006 financial statements all
  relevant investment risks had to be disclosed
• Interest rate risk
• Credit risk
• Custodial credit risk
• Concentration risk
• Foreign currency risk not applicable in NC
• Formally adopted policy had to be disclosed
  relevant to each specific risk
• Formally adopted Board approved

6
LGC UPDATE

• Investment Policies for GASB 40 (cont.)
• Several different scenarios
• Board approved policies modeled after the
  examples in the Policies Manual that dont
  address all the risks
• Internal policy/procedures not Board approved
• Whether Board approved is units discretion
• If no formal policy to address the specific risk,
  notes must say that the unit has no formal policy
• GASB has confirmed that the unit can also
  disclose a brief statement regarding the
  procedure or management practices that help
  manage or mitigate the risk

7
LGC UPDATE

• Investment Policies for GASB 40 (cont.)
• Three risks that were seen the most often with no
  formal policy statements
• Custodial credit risk for deposits
• Custodial credit risk for investments
• Credit risk

8
LGC UPDATE

• Fund Balance Appropriated
• Look primarily at two things
• What was appropriated for year under audit
• What is being appropriated for next year
• Can never appropriate more than what was
  available at end of prior fiscal year
• This applies to all funds, not just General Fund
• Should not have fund balance appropriated as a
  revenue source in a multi-year project budget

9
LGC UPDATE

• SAS 112
• Effective for year ending December 15, 2006 or
  later
• New terminology
• Significant deficiency instead of reportable
  condition
• Material weakness
• Communication must be in writing
• Must be no later than 60 days after release date
  of report

10
LGC UPDATE

• SAS 112 (cont.)
• As long as significant deficiencies and material
  weaknesses exist they must be reported
• Drafting of financial statements does not
  automatically result in a material weakness
• May be result of a control deficiency
• Deficiency exists if client does not have control
  over preparation of statements and disclosures
  that would prevent or detect a misstatement

11
LGC UPDATE

• SAS 112 (cont.)
• System of internal control over reporting does
  not stop at general ledger but includes controls
  over preparation of the financial statements
• Reports on deficiencies must be made to those
  charged with governance
• Board
• Management

12
LGC UPDATE
13
LGC UPDATE

• SAS 112 (cont.)
• Control deficiency
• Exists when design or operation of a control does
  not allow management or employees in the normal
  course of performing their assigned duties to
  prevent or detect misstatements on a timely basis
• Significant deficiency is control deficiency from
  which there is more than a remote likelihood that
  that a misstatement of the financial statements
  that is more than inconsequential will not be
  prevented or detected

14
LGC UPDATE

• SAS 112 (cont.)
• Material weakness
• Significant deficiency or combination of
  deficiencies that result in more than a remote
  likelihood that a material misstatement of the
  financial statements will not be prevented or
  detected
• Remote when it is at least possible
• More than inconsequential magnitude of
  potential misstatement

15
LGC UPDATE

• SAS 112 (cont.)
• Factors that affect magnitude
• Financial statement amounts or total of
  transactions exposed to the deficiency
• Volume of activity in the account balance or
  class of transactions exposed to the deficiency
• Affect on compliance audits
• A-133 requires report to include reportable
  conditions and material weaknesses that relate to
  federal programs

16
LGC UPDATE

• SAS 112 (cont.)
• Affect on Compliance Audits (cont.)
• Draft interpretation developed to provide
  guidance on updated definitions and terminology
  for control deficiencies relating to the single
  audit environment
• Currently under review at OMB and may revise
  Circular A-133
• YellowBook has adopted new terminology

17
LGC UPDATE

• SAS 112 (cont.)
• Deficiencies in these areas are generally
  significant deficiencies at a minimum
• Selection and application of accounting
  principles that are in conformity with GAAP,
  including having sufficient expertise
• Antifraud programs and controls
• Controls over non-routine and non-systematic
  transactions
• Controls over period-end financial reporting
  process

18
LGC UPDATE

• SAS 112 (cont.)
• Deficiencies that are at least significant and
  strong indicators of material weaknesses
• Ineffective oversight of financial reporting and
  internal control by those charged with governance
• Restatement to reflect correction of material
  misstatement (not due to change in accounting
  principle)
• Material misstatements not originally identified
  by entitys internal control

19
LGC UPDATE

• Payroll Issues
• W-2 v 1099 reporting
• Area of concentration by IRS
• Targeting units with payroll of 40 million or
  over now
• IRS no longer uses the 20 common law test
  approach
• Three step evaluation
• Behavioral control
• Financial control
• Relationship of the parties

20
LGC UPDATE

• Payroll Issues (cont.)
• Behavioral control
• Can employer tell worker how to do the job?
• Not necessary that employer actually direct or
  control manner in which services are performed
  but merely has the right to do so
• Financial control
• Reporting of profit or loss by worker as a result
  of services rendered indication of 1099 reporting
• Advertising service to general public indicates
  1099 reporting

21
LGC UPDATE

• Payroll Issues (cont.)
• Relationship of the parties
• Worker required to comply with other persons
  instructions with regards to when, where and how
  indicates W-2 reporting
• If employer provides training for worker,
  indicates W-2 reporting
• Documentation a must
• Must document thoroughly for all 1099 workers
• Critical if subject to examination

22
LGC UPDATE

• Payroll Issues (cont.)
• Payments to volunteer firemen
• Must be on W-2 not on 1099 Misc
• Must have FICA taxes withheld and paid
• Emergency worker exclusion does not apply
• IRS regulation
• Can pay funds to VFD if VFD is incorporated,
  then no reporting by local government required
• Can pay firemen under accountable plan

23
LGC UPDATE

• New Regulations on 1099-INT
• Tax Increase Prevention and Reconciliation Act of
  2005 (TIPRA) now requires 1099-INT filing for
  tax-exempt interest, starting with calendar year
  2006
• New Box 8 on 1099 INT for tax-exempt interest

24
LGC UPDATE

• New Regulations on 1099-INT (cont.)
• Most local governments wont have to report
• Interest paid through DTC will be reported by DTC
  to payees
• Interest payments to corporations, other
  tax-exempt organizations, and financial
  institutions not reportable
• If unit is paying interest directly to
  individual, partnership, limited liability
  companies taxed as partnerships, or
  S-corporations, reporting is required, typically
  for real estate purchase

25
LGC UPDATE

• New Regulations on 1099-INT (cont.)
• Substitute forms permitted for 2006 only
• 1099 must be furnished to payee by January 31, to
  IRS by February 28 (paper or magnetic) or March
  31 (electronic) beginning with 2007
• No penalties assessed for 2006
• Backup withholding required beginning in 2007 if
  dont have TIN of payee
• See IRS Notice 2006-93

26
LGC UPDATE

• OPEB
• Continuing to work on guidance
• Component units implement same time as primary
  governments
• Having a study doesnt require implementation
• Once study is complete, must disclose results in
  any official statements subsequently issued
• Encourage all units to have at least initial
  valuation

27
LGC UPDATE

• OPEB (cont.)
• Legislation
• Have met with various local governments, NCLM,
  and the Association
• Believe that legislation will be introduced to
  allow investment of OPEB funds with DST
• Will allow units that decide to fund and invest
  to use a higher ROR in calculations
• Working with NCACPA on issues of investment,
  administration and reporting

28
LGC UPDATE

• OPEB (cont.)
• Envision these investments to be funds not needed
  in short-term
• Should be that portion of funding that will go
  towards benefits paid in future
• Working on disbursement of funds on a
  reimbursement basis

29
LGC UPDATE

• Flood insurance
• In process of updating database
• Asking units to consider as part of good
  asset/debt management practices
• State funds may not be available in future to
  units that have opportunity to buy insurance and
  choose not to do so

30
LGC UPDATE

• LGC Memos
• Upcoming
• 1099 INT issues
• Contract 2007
• SAS 112
• New GASB Statements
• Further OPEB guidance
• Annual statistical reports

31
LGC UPDATE

• LGC Memos (cont.)
• Issued recently
• Guidelines for Using State Lottery Proceeds for
  School Construction
• OPEB
• Audit Alert 2006
• Common Reporting Problems from 2005
• Payments to Volunteer Firemen/Identity
  Theft/Grant Funded Construction Contracts

32
LGC UPDATE

• Upcoming Projects and Events
• SAS 112 Memo
• Statistical reports out soon
• Policies Manual Jones Norris
• Continue to work on OPEB issues
• Unit Assistance

33
LGC UPDATE

• Upcoming Projects and Events
• Sixth Annual Treasurers Conference
• Wednesday, April 25 at New Bern Convention Center
• Friday, April 27 at Hickory Convention Center
• Dave Bean from GASB featured speaker
• Register with Beverly Howarth at IOG