BRM 451 - University of Phoenix



ACC/460 Week Five

CURRENT ISSUES IN GOVERNMENT and NOt-for-PROFIT ACCOUNTING

INTRODUCTION

Learners might want to stay current on issues in government and not-for-profit (NFP) accounting; otherwise, the knowledge gained in this class will evaporate over time. Access to the World Wide Web via the Internet makes staying current with respect to accounting issues a much easier task than without it. One more suggestion is to join a professional organization. Many national organizations (American Institute of CPAs, Association of Government Accountants, Government Finance Officers’ Association, to name a few) also have local chapters throughout the U.S. Learners will be able to enrich their learning experiences by becoming a part of a professional organization. Below is a partial list of some relevant web sites one might find very useful for staying up to date.















This Week in Relation to the Course

This week’s discussion will complete the objectives for this course. During the past four weeks, learners explored: (a) The environment of government/NFP accounting, (b) part I on fund accounting, (c) part II of fund accounting, and (d) an overview of NFP accounting. During this final week of learning, students should have a better understanding of:

1. Increased scrutiny and demand for accountability

2. How audits of governments and NFP organizations differ from financial accounting

3. Relevance of the Yellow Book

4. Single Audit Act of 1984

5. New audit standards

Discussion of Current Issues in Government and NFP Accounting

Public outcry regarding the increase in corporate misconduct resulting in fraud prompted the U.S. Congress to pass new legislation to tighten up the rules for public corporations. Bankruptcies at Enron, Global Crossings, WorldCom, Adelphia, and Tyco in 2001 and 2002, created a major concern to U.S. legislators because of corporate scandals involving financial fraud (Kuizick, 2004). The concern shared by legislators was on the negative impact to the global capital markets and to investor confidence (Lander, 2004). In an attempt to restore investor confidence, Congress passed H.R. 3763, The Public Company Accounting Reform and Investor Protection Act (known as, Sarbanes-Oxley Act of 2002). Fraud is not limited to public companies. The general public has demanded increased scrutiny and greater accountability.

What is a nonprofit organization? Siegel and Shim (2000) defined a nonprofit organization as:

Group, institution, or corporation formed for the purpose of providing goods and services under a policy where no individual (e.g., stockholder, trustee) will share in any profits or losses of the organization. Profit is not the primary goal of nonprofit entities. Profit may develop, however, under a different name (e.g., surplus, increase in fund balance). Assets are typically provided by sources that do not expect repayment or economic return. Usually, there are restrictions on resources obtained. Examples of nonprofit organizations are governments, charities, universities, religious institutions, and some hospitals. Most nonprofit organizations have been granted exemption from federal taxes by the Internal Revenue Service. Many of these organizations refer to themselves according to the IRS Code section under which they receive exempt status (i.e., 501[c](3) organization). This identification lets donors know that their contributions to this organization may be deductible for income tax purposes. (Siegel & Shim, 2000, p. 299)

How do audits of governments and NFP organizations differ from financial accounting audits of public companies? While an audit is an examination of records or accounts to check for accuracy, an attestation affirms the correctness and truth in management’s assertion. In governmental and NFP organizations, audits do more than examine financial records. The primary difference is that auditing these types of organizations extends the audit to include a determination as to whether the entities have complied with laws, regulations, and the terms of federal grants received (Granof, 2010).

What is the Relevance of the Yellow Book? The General Accountability Office (GAO), an agency of the U.S. Congress, issued its first edition of Government Auditing Standards in 1972. The new guidance was required for federal agencies and to elevate the quality in audits of state and local governments (SLG); even though the GAO had no jurisdiction over SLGs. SLGs are governed by the Governmental Accounting Standards Board (GASB). Because the cover page of this new guidance had a yellow cover, this guidance was herein referred to as the Yellow Book (Granof, 2010).

What are the objectives of the Single Audit Act of 1984? In the 1960s, there was no requirement for federal agencies to have an independent audit of its records. Instead, federal agencies were audited by its respective agency. As a result of problems associated with millions of dollars in federal grant money, and duplication of audits, the Office of Management and Budget (OMB) called for audits of government agencies to be performed by CPAs or other independent auditors. In 1984, the U.S. Congress passed new legislation called the Single Audit Act (and amended in 1996). All recipients of federal assistance in more than a single program exceeding $500,000 had to comply with the requirements of this new law. The objectives of the Single Audit Act are to ensure:

• Financial statements are reliable

• Entities adhere to federal laws and regulations

• Entities are satisfying the laws, regulations, and provisions (Granof, 2007)

What are the latest developments in audit standards that affect governments? The Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants promulgated Statement on Auditing Standards (SAS) # 103, Audit Documentation in 2005, and SAS pronouncements 104 to 111 in 2006. In the past, auditors dated their work as of the completion of the field work. SAS # 103 now requires auditors of government entities to date the report when the audit is substantially complete. While auditors might use a risk-oriented approach toward auditing, the eight new pronouncements 104 to 111 now make taking a risk-oriented approach mandatory. The risk-oriented approach requires:

• Auditors to go beyond documentation of the organization’s internal controls to include the working environment of the organization.

• Substantive testing is not eliminated, but auditors have to gain considerable understanding of the organizational environment as wells as the internal controls established by management.

• Due to differences in organizational environments, it is less likely that auditors would limit their work using routine audit programs.

Another new requirement is SAS # 112, Communicating Internal Control Related Matters Identified in an Audit. Auditors have to report on the following deficiencies:

• Ineffective oversight regarding the internal controls of the entity

• Ineffective control environment of the organization

• Restatements of the financial records to correct an error

• Any discovery of a material misstatement not previously identified by the internal control (Gauthier, 2007).

Practical Application and Questions for Thought

According to Ruppel (2002), “There are over one million not-for-profit organizations in the United States” (p. vii). Since most NFP organizations rely on donations and fees, learners should be keenly aware of how important it is for an NFP to provide accountability for those donations, and accurate and timely reporting of the expenditures of these funds. Accountants who end up working for an NFP need to be aware of the applicable FASB standards that apply specifically to NFPs. One needs to be able to answer some fundamental questions with regard to governmental/NFP accounting organizations. These questions are:

• What are some GASB exposure drafts underway?

• Which method of accounting (proprietary or NFP) to use?

• What are the legal or contractual restrictions on the use of funds?

• How are local tax dollars being spent?

How Readings Solidify Concepts

The learning materials for this week culminate the final portion on the environment of government and NFP accounting. Learners intending to sit for a professional certification examination will want to pursue further studies in government and NFP accounting. Various commercial review programs are designed to aid the candidate in preparing for a professional examination. This course attempted to provide learners with a solid foundation in helping convey the complexities and importance of government and NFP accounting. In practice, one will learn that GAAP for governments does not address every possible accounting issue that will come up. One must use professional judgment. Interpretation is often required. Be confident in your stance. Be a thorough researcher in your position. Be able to support your conclusion with authoritative reference materials.

Conclusion

Ruppel (2005) stated, “Another feature of GAAP that needs to be understood is that in a number of instances there is more than one acceptable way to account for a specific type of transaction” (p. 3). Remember to stay current. Never stop learning. Learning and understanding government and NFP accounting is different from financial accounting. The key to success in working in the government and NFP environment is to know the applicable laws, regulations, and GASB/FASB standards that apply, and any federal statutes applicable to grant recipients. In conclusion, of the entire studies for this course, one must remember to exercise due diligence, care, and professional judgment.

References

Gauthier, S. J. (2007, June). How new standards for auditors will likely affect the governments they audit. Government Finance Review, 23(3), 40-44.

Granof, M.H. & Wardlow, P.S. (2003). Core concepts of government and not-for-profit accounting. New York: John Wiley & Sons.

Granof, M. H. (2007). Government and not-for-profit accounting: Concepts and practices. Hoboken, NJ: John Wiley & Sons.

Kuizick, R. S. (2004, Winter). Sarbanes-Oxley: Effects on financial transparency. SAM Advanced Management Journal, 69(1), 43-49.

Lander, G. P. (2004). What is Sarbanes-Oxley? New York: McGraw-Hill.

Ruppel, W. (2002). Not-for-profit accounting made easy. Hoboken, NJ: John Wiley & Sons.

Ruppel, W. (2005). Governmental accounting made easy. Hoboken, NJ: John Wiley & Sons.

Siegel, J. G. & Shim, J. K. (2000). Dictionary of accounting terms (3rd Ed.). Hauppauge, NY: Barron’s Educational Series.

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