New Mexico Office of the State Auditor
Improving Accountability: Submission of Timely Audits and Fighting Fraud, Waste and Abuse
An Update from the State Auditor
NM City Management Association Conference – December 4, 2013 Hector H. Balderas State Auditor New Mexico State Auditor Tier Reporting 2013 Agenda
Submission of Timely Audits
. Requirements Under State Law and Regulation
. Causes of Late Audits
. Penalties for Late Audits
. The Audit Act’s Tiered System of Financial Reporting
Fighting Financial Fraud, Waste and Abuse in Government
. Examples of Fraud, Waste and Abuse
. Recognizing Fraud
. Fraud Prevention and Detection
New Mexico State Auditor Tier Reporting 2013 Submission of Timely Audits
New Mexico State Auditor Tier Reporting 2013 What does the law require?
If you are a state agency or a political subdivision of the state that receives or expends public money (this includes capital outlay funds), you must account for that public money on a daily basis and report on an annual basis.
Under the Audit Act, this accounting may take the form of an “audit,” “tiered system certification, or “tiered system engagement.” State law also requires that the government agency bear the cost of an audit or tiered system engagement.
The Audit Act requires the State Auditor to oversee these audits, tiered system certifications and tiered system engagements.
New Mexico State Auditor Tier Reporting 2013 What does the law require?
The State Auditor issues rules (the “Audit Rule”) which outline the specific requirements for an audit or tiered system engagement.
The Audit Rule (2.2.2.NMAC) is updated annually to reflect significant changes in auditing, accounting and financial reporting standards, and related laws, regulations and State Auditor policies and procedures.
The Audit Rule also contains implementing regulations relating to the contracting process, report review and submission requirements, and the performance of special audits and investigations.
New Mexico State Auditor Tier Reporting 2013 What does the law require?
Reasonable costs of all audits and tiered system engagements shall be borne by the agency audited.
The State Auditor shall cause a complete written report to be made of each annual or special audit and examination conducted.
Each report shall set out in detail any violation of law or good accounting practices found by the audit or examination.
New Mexico State Auditor Tier Reporting 2013 What does the law require?
The Audit Rule specifies the annual due dates for reports required by the Audit Act. Municipalities are due December 1 each year.
Reports become public five days after they are officially released by the State Auditor. The agency may waive the five-day period by providing a written waiver to the OSA.
The State Auditor shall provide reports of agency audits to the Department of Finance and Administration and the Legislative Finance Committee.
New Mexico State Auditor Tier Reporting 2013 Why does the law require it?
Government agencies must be accountable to the taxpayers for the use of public money.
When government agencies account for the use of public funds:
. Fraud risks decrease;
. Financial health of an agency is transparent; and
. It creates public confidence.
Auditors make recommendations that can improve the agency’s protection over the use of public funds.
New Mexico State Auditor Tier Reporting 2013 What causes untimely audits?
Staff turnover and lack of financial expertise by government agency staff.
High audit costs or inability to procure independent auditors.
Breakdowns in communication between a government agency and its independent auditor.
Lack of awareness of requirements under state law.
Negligence or intentional noncompliance.
New Mexico State Auditor Tier Reporting 2013 Are there consequences?
Failure to account for public funds or timely comply with audit submission requirements can jeopardize a government agency’s ability to receive grants and appropriations.
State law and regulations provide certain penalties for failure to submit timely audits. Most of these penalties are tied to some funding stream for the agency. Deficiencies in the agency’s handling of public funds can also impact eligibility.
State Auditor has implemented the “at-risk” designation program to encourage compliance.
The “tiered system of financial reporting” is a reform that is also intended to encourage compliance.
New Mexico State Auditor Tier Reporting 2013 Are there consequences?
Some Current Penalties: . Progressive sanctions for school districts and charter schools (Section 22-8-13.1 NMSA 1978); . Potential withholding of allotments and distributions to state agencies, counties, municipalities and higher education institutions (Section 9-6-5.2 NMSA 1978); . Executive Order 2013-006 issued by Governor Susana Martinez (applies to capital outlay for agencies); . Final budget certification withheld by DFA (2.2.3.9 NMAC); . Late audit finding in the agency’s audit report for noncompliance (2.2.2.9(2) NMAC).
New Mexico State Auditor Tier Reporting 2013 Section 9-6-5.2 NMSA 1978 (House Bill 411, 2011 Legislative Session)
House Bill 411 passed in 2011 legislative session and signed by the Governor. Grants authority to the Secretary of Finance and Administration to direct:
. The State Budget Division to temporarily withhold an allotment to a state agency that has failed to submit an audit report required by the Audit Act;
. The Secretary of Taxation and Revenue to temporarily withhold distribution of certain tax revenues to a municipality or county that has failed to submit an audit report required by the Audit Act. Became effective July 1, 2012.
New Mexico State Auditor Tier Reporting 2013 Section 9-6-5.2 NMSA 1978 (House Bill 411, 2011 Legislative Session)
The bill requires the State Auditor to notify the Legislative Finance Committee and the Secretary of Finance and Administration if:
. A state agency, municipality or county has failed to submit a required audit report within ninety days of the due date specified by the State Auditor (in the Audit Rule); and
. The State Auditor has investigated the matter and attempted to negotiate with the state agency, municipality or county but the state agency, municipality or county has not made satisfactory progress toward compliance with the Audit Act.
Allotments or distributions may be withheld if the state agency, municipality or county has not submitted all past-due audit reports or has not otherwise made progress satisfactory to the State Auditor toward compliance with the Audit Act.
New Mexico State Auditor Tier Reporting 2013 Executive Order 2013-006
Under Executive Order 2013-006 issued by Governor Susana Martinez, a government agency may be deemed “ineligible” to receive capital outlay funds if:
. The agency fails to submit the required reports or certifications under the Audit Act and Audit Rule; or
. The agency’s audit report or tiered system engagement report reveals “material weaknesses” or “significant deficiencies.”
These funding decisions are made by granting agencies (either federal or state), NOT the State Auditor.
Under Executive Order 2013-006 it is the duty of DFA or the state agency making the grant to determine whether material weaknesses or significant deficiencies documented in an entity’s audit report “raise concerns about the grantee’s ability to expend grant funds in accordance with applicable law and account for and safeguard grant funds and assets acquired with grant funds.” New Mexico State Auditor Tier Reporting 2013 Executive Order 2013-006
Executive Order 2013-006 provides the following for “Uniform Funding Criteria” regarding this determination: . The grantee must have remedied the material weaknesses and significant deficiencies to the satisfaction of the State agency making the grant; . The State agency making the grant must have determined that it can impose and has the resources to implement special grant conditions that adequately address those weaknesses and deficiencies; or . The State agency making the grant must have determined that another appropriate entity is able and willing to act as fiscal agent for the grant. The Attorney General recently issued a nonbinding legal opinion that stated the Executive Order violated separation of powers by adding conditions to an agency’s appropriations not intended by the Legislature.
New Mexico State Auditor Tier Reporting 2013 State Auditor’s “At-Risk” Designation Program
The State Auditor created the “At-Risk” Designation Program to help combat the problem of late audits. The State Auditor designates agencies “at-risk” for failing to submit annual audits in accordance with the Audit Act. Program launched in Sept. 2009. Agencies that fail to submit annual audits are notified of the “at- risk” designation and required to submit written status reports on the audit to the State Auditor by certain deadlines until compliance with the Audit Act is achieved. The OSA updates its “At-Risk” List on a monthly basis and notifies appropriate oversight agencies of the designation. Those agencies include: . Legislative Finance Committee, Department of Finance and Administration, Public Education Department, Attorney General The State Auditor will withdraw the designation once an agency achieves compliance.
New Mexico State Auditor Tier Reporting 2013 State Auditor’s “At-Risk” Designation Program
The “At-Risk” Designation List updated monthly and posted on the OSA’s website at http://www.osanm.org/government_score_card. Information about government agency financial audit reports posted online: . OSA Transparency and Accountability Portal at www.osanm.org. . Government agency audit reports received by OSA are posted online. Reports submitted past 2007 are available for electronic download. . Indicates date audit report received by the OSA, the opinion and the number of findings. Information about government agency auditor recommendations posted online . List of agencies that have not submitted an auditor recommendation to the OSA at http://www.osanm.org/agencies_without_approved_auditor.
New Mexico State Auditor Tier Reporting 2013 Tiered System of Financial Reporting
Annual Financial Audit:
. An annual audit is for government agencies that have over $500,000 in annual revenue; and
. Auditors issue an “opinion” on the financial statements of the agency.
Tiered System of Financial Reporting:
. Applies only to certain “local” government agencies that have less than $500,000 in annual revenue; and
. Agencies submit certifications or auditors perform limited procedures (agreed-upon procedures).
New Mexico State Auditor Tier Reporting 2013 Criteria for Tiered Financial Reporting
The tiered system applies to “local public bodies” with certain annual revenues. A “Local public body” is a land grant, mutual domestic water consumer association, special district or incorporated municipality.
The tiered system is based on annual revenues, excluding capital outlay appropriations and grants.
Section 2.2.2.16(A) - The examination of the financial affairs of a local public body shall be determined according to its annual revenue each year.
. Annual Revenue (calculated on a cash basis) - (Capital Outlay Revenue) - (Federal or Private Grant Revenue) = Annual Revenue for tier structure
New Mexico State Auditor Tier Reporting 2013 7 Tiers of Financial Reporting
Tier 1 - Less than $10,000 in revenue
Tier 2 - > $10,000 <$50,000 in revenue
Tier 3 - < $50,000 in revenue and spends 50% or remainder of capital outlay award
Tier 4 - > $50,000 < $250,000 in revenue (no capital outlay expenditures)
Tier 5 - > $50,000 < $250,000 in revenue plus capital outlay expenditures
Tier 6 - > $250,000 < $500,000 in revenue
Tier 7 - > $500,000 in revenue
New Mexico State Auditor Tier Reporting 2013 Tier 1 – Certification Required
Tier 1: Less than ten thousand dollars ($10,000) and does not directly expend at least fifty percent of, or the remainder of, a single capital award.
Requirement: Must submit a certification which includes the local public body’s revenue and that the body did not spend 50% or the remainder of any capital outlay award.
. Certification Form is located at http://osanm.org/tiered_system_reporting
Exemptions: Exempt from submitting and filing quarterly reports and final budgets for approval by the Department of Finance and Administration.
Remember! This does not exempt from other external audit requirements (Single Audit, Bond Covenants, etc).
New Mexico State Auditor Tier Reporting 2013 Tier 2 – Certification Required
Tier 2: At least ten thousand dollars ($10,000) but less than fifty thousand dollars ($50,000). Requirement: Must submit a certification which includes the local public body’s revenue and that the body did not spend 50% or the remainder of any capital outlay award. . Certification Form is located at http://osanm.org/tiered_system_reporting Requirement: Shall also comply with the applicable provisions of Section 6-6-3 NMSA 1978 (budget certification), which provides that every local public body shall: . keep all the books, records and accounts in their respective offices in the form prescribed by the local government division; . make all reports as may be required by the local government division; and . conform to the rules and regulations adopted by the local government division.
New Mexico State Auditor Tier Reporting 2013 Tier 3 – Must Contract with an IPA
Tier 3: Less than fifty thousand dollars ($50,000) and directly expends at least fifty percent of, or the remainder of, a single capital outlay award
Requirement: The local public body must procure an independent public accountant (IPA) for the performance of a Tier 3 Agreed-Upon Procedures (AUPs) engagement.
A Tier 3 AUP engagement tests state-appropriated capital outlay expenditures and compliance with award requirements.
The local public body must submit a Tier 3 AUP report by the due date provided in the Audit Rule.
The required Tier 3 AUP is located on the OSA’s website at http://osanm.org/tiered_system_reporting
New Mexico State Auditor Tier Reporting 2013 Tier 4 – Must Contract with an IPA
Tier 4: At least fifty thousand dollars ($50,000) but less than two hundred fifty thousand dollars ($250,000)
Requirement: The local public body must procure an IPA for the performance of a Tier 4 AUP engagement.
A Tier 4 AUP engagement includes financial test procedures and a budget comparison.
. Procedures include cash, capital assets, revenue, expenditure and journal entry test work.
The local public body must submit a Tier 4 AUP report by the due date provided in the Audit Rule.
The required Tier 4 AUP is located on the OSA’s website at http://osanm.org/tiered_system_reporting
New Mexico State Auditor Tier Reporting 2013 Tier 5 – Must Contract with an IPA
Tier 5: At least fifty thousand dollars ($50,000) and less than two hundred fifty thousand dollars ($250,000) and expends any capital outlay funds.
Requirement: The local public body must procure an IPA for the performance of a Tier 5 AUP engagement.
A Tier 5 AUP engagement includes financial procedures, a budget comparison and procedures related to capital outlay expenditures.
. Combination of Tier 4 and Tier 3 procedures.
The local public body must submit a Tier 5 AUP report by the due date provided in the Audit Rule.
The required Tier 5 AUP is located on the OSA’s website at http://osanm.org/tiered_system_reporting
New Mexico State Auditor Tier Reporting 2013 Tier 6 – Must Contract with an IPA
Tier 6: At least two hundred fifty thousand dollars ($250,000) and less than five hundred thousand dollars ($500,000) Requirement: The local public body must procure an IPA for the performance of a Tier 6 AUP engagement and a compilation. A Tier 6 AUP engagement includes financial procedures, a budget comparison and procedures related to capital outlay expenditures (if capital outlay was expended in fiscal year). . Similar procedures to Tiers 4 and 5 if capital outlay was spent; and . A financial statement compilation is also required for Tier 6. The local public body must submit a Tier 6 AUP report and compilation by the due date provided in the Audit Rule. The required Tier 6 AUP is located on the OSA’s website at http://osanm.org/tiered_system_reporting
New Mexico State Auditor Tier Reporting 2013 Tier 7 – Financial Audit Required
Tier 7: Five hundred thousand dollars ($500,000) or more.
The tier system does not apply to a local public body that falls within Tier 7.
The local public body must procure an IPA for the purpose of conducting a financial and compliance audit.
The Audit Rule contains the requirements for the audit contracting process and audit report submission.
New Mexico State Auditor Tier Reporting 2013 Fighting Financial Fraud, Waste and Abuse
New Mexico State Auditor Tier Reporting 2013 The Effects of Fraud in Agencies
Fraud, waste and abuse of public funds can cause damage to your agency: . Poor reputation; . Loss of public confidence; . Adversely affects status with creditors, grantors, legislators, and oversight agencies; . Reduces public votes for a bond issuance; . Adversely affects staff morale; . Distracts an agency from its mission.
New Mexico State Auditor Tier Reporting 2013 Recognizing Fraud
Fraud Triangle: . Opportunity (Weak Controls) • Need (Financial Crisis) • Rationalization (Convincing Self)
46% of fraud schemes are discovered through tips.
33% of fraud schemes are detected by internal controls and audits.
21% of fraud schemes are uncovered by accident.
New Mexico State Auditor Tier Reporting 2013 Examples of Fraud and Fraud Risks
Lack of a code of conduct, and conflict of interest policies and procedures.
Conflicts of interest or potential self benefit/gain during the use or spending of public resources. Kickbacks and gratuities to public officials and employees.
The existence of related party transactions.
Theft of cash, supplies, inventories or capital assets. Using restricted funds to purchase unallowable items.
Improper reimbursement and/or excesses in travel, meals, entertainment, salary and benefits. New Mexico State Auditor Tier Reporting 2013 Examples of Fraud and Fraud Risks
Management’s override of controls.
Lack of segregation of duties.
Lack of bank account reconciliations.
Missing records.
Journal entries without supporting documentation.
Use of items for personal gain.
New Mexico State Auditor Tier Reporting 2013 Examples of Fraud and Fraud Risks
Contracting misconduct, including pre-selection of vendors, bid rigging and inappropriate sole sourcing.
Vendors not given an equal opportunity to bid on goods and services.
Not obtaining quotes for goods and services.
Improper documentation or lack of documentation to support the purchase of goods and services.
Split purchasing to avoid complying with procurement laws and regulations (Section 13-1- 125(D) NMSA 1978).
New Mexico State Auditor Tier Reporting 2013 Fraud Prevention and Detection
Analyze all of your operations and locations within your agency and conduct a fraud and misconduct risk assessment.
Develop and implement specific antifraud controls (follow the money and assets) to address the fraud risk factors.
Establish an appropriate Code of Conduct and a Code of Ethics.
Establish or use fraud hotlines.
Implement whistleblower policies and mechanisms to help protect employees.
New Mexico State Auditor Tier Reporting 2013 Fraud Prevention and Detection
Encourage employees to report questionable activities or transactions to management, the annual auditor, the governing body and oversight agencies.
Government agencies and their independent auditors must report known or suspected fraud or other potential violations of law to the State Auditor immediately as required by Section 12-6-6 NMSA 1978 and Section 2.2.2.10 K(3) NMAC: . The Audit Rule requires the notification to the OSA be in writing and include an estimate of the dollar amount involved and a complete description of the violation, including the names of persons involved and any action taken or planned.
New Mexico State Auditor Tier Reporting 2013 Fraud Prevention and Detection
• www.osafraud.org • 1-866-OSAFRAUD or 1-866-672-3728
New Mexico State Auditor Tier Reporting 2013 State Auditor’s Special Audit Power
Special Audits - In addition to the annual audit, the state auditor may cause the financial affairs and transactions of an agency to be audited in whole or in part (Section 12-6- 3(C) NMSA)
Notable Special Audits :
. New Mexico Finance Authority (2012);
. City of Sunland Park (2012);
. Public Regulation Commission (2012);
. New Mexico Department of Corrections (2011); and
. Jemez Mountain School District (2009).
New Mexico State Auditor Tier Reporting 2013 Any Questions?
New Mexico State Auditor Tier Reporting 2013 Contact Information
Evan Blackstone, Esq., Chief of Staff [email protected] 505-476-3800
New Mexico State Auditor Tier Reporting 2013 New Mexico State Auditor Tier Reporting 2013