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In recent years, California public finance professionals have witnessed an alarming number of headlines about fiscal mismanagement in municipal governments. Among the more high-profile examples: City of Pasadena: $6M embezzlement by a long-term employee City of Stockton: Filed bankruptcy on June 28, 2012 City of San Bernardino: Filed bankruptcy on August 1, 2012 City of Bell: Massive corruption and misappropriation of public funds through salary scandal

current auditing standards – but offering little in the way of substantive content. Regulators have expressed concern that the economic downturn and pressure from organizations to reduce audit fees has had a negative impact on auditor efforts. The fear is that many qualified practitioners may not have the budget necessary to properly complete the audit and must use their professional judgment to determine what is most important and, conversely, what can be relegated to second-tier status. It becomes an exercise in risk assessment. The issue here is that professional judgment by definition is highly subjective. It provides an all too inviting loophole that audit firms use to circumvent wellestablished and vetted professional standards.

The increasing frequency and severity of these cases raises a number of serious – and legitimate - questions What is a “good” audit? for anyone involved in the stewardship of public Auditors must begin with a 360-degree funds: What can and should stakeholders view of the organization, including expect from an annual audit? Why management’s philosophy and how were so many issues either not they operate. Does leadership identified or overlooked in the demonstrate commitment aforementioned cases? What in terms of transparency, process or measures were in honesty, integrity, and ethical place to evaluate the quality “A more effective model involves behavior? The evaluation of the audit work performed? open dialogue between the auditor process must involve more Providing answers to these and organization, including its than simply looking at questions becomes crucial governing body” a website or documents for the CPA profession, provided by management. It considering the reputational must include a comprehensive issues at stake. I would submit interview process involving not that the path leading to those only key operations personnel, solutions is well marked – assuming, but also stakeholders within the of course, one chooses to follow it. governing board, management, and accounting personnel. An audit is an independent examination of the books and records in order to ascertain that the Second, the process should include a comprehensive financial statements presented reflect a fair financial audit plan. This document serves as a guideline for picture of the organization. It should also provide auditors to follow and helps each engagement team an organization the reliable information needed to member to obtain sufficient evidence to accomplish address operating issues and/or concerns. This requires pre-determined objectives. financial statements to be in a format where users can easily follow – and, perhaps more important, fully comprehend -- the data. Beyond providing all the required disclosures, however, auditors should be sharing key ratio analyses and how those ratios compare to the industry. In addition, they should properly use the management letter to communicate their concerns. Unfortunately, this document in too many instances has become a form of self-protection, fulfilling reporting requirement under 39 CSMFO.ORG


CSMFO Magazine March 2016  

The premiere issue of CSMFO Magazine. Articles and features on finance in California by the professionals who make it happen and how.

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