Auditing Changes Implemented for Cities and Towns - Part 3 of 3
Audit Preparedness Paramount
Submitted by John Seever, Partner

In previous issues of Footnotes, we discussed the current practices of the Indiana State Board of Accounts ("SBoA") with regard to performing audits and their emphasis on the separation of auditing from bookkeeping.  As a result of both the Sarbanes-Oxley Act and in an effort to catch up on a backlog of audits, the SBoA has temporarily implemented changes to their audit practices and reports.  We have previously discussed the changes as they relate to municipal utilities. In this final article in the series, we will focus on these developments for cities and towns.

Cities and towns are likely to see a change in practice in regards to the development of adjusting and closing entries. We are told SBoA will no longer develop adjusting and closing entries to provide to municipalities prior to conducting an audit to avoid having to audit its own work.  It will be extremely important for local governments to have their financial information complete, current and in the correct format prior to the auditor's arrival.  These new practices track with changes being instituted by auditors in corporate America.

It is our understanding the SBoA will not present accrual basis financial statements in their audit reports unless the city or town provides the adjusting information necessary to do so.  For those communities on the cash basis of accounting, the SBoA will continue to present cash basis financial statements.  Regardless of your community's accounting basis, having the proper year-end procedures completed prior to the auditor's arrival will be critical.

In the event the records are not ready for audit, the SBoA may be forced to prepare an examination or disclaim an opinion on the financial statements of the city or town all together.  If possible, both of these alternatives should be avoided in favor of a full audit resulting in an unqualified opinion.  In other cases, the SBoA may be forced to withdraw from the audit until the source journals and accounting records are brought current, reconciled, balanced and ready for inspection. 

The Sarbanes-Oxley Act and other factors are causing additional pressures on the SBoA.  The issues discussed above will require cities and towns to adapt their accounting procedures.  The SBoA will no longer perform some of the activities with which they have historically assisted cities and towns.  Consequently, going forward audit preparedness will be vitally important to the financial reporting of your municipality.

To read previous articles in this series, please visit our website at www.umbaugh.com and click on the Newsletters link/Indiana and go to the following issues: September 6, 2006 and November 1, 2006.

If you have any questions, or if we can assist you with any of your accounting or financial reporting needs, please contact us at footnotes@umbaugh.com.