Deficiencies in Financial Reporting and Other Interesting Accounting Topics Bill Purnell, Partner KPMG LLP

2 Topics for Discussion Pension Mortality Rates – Updated Internal Controls over Financial Reporting –Review controls over consolidation The process of preparing and reviewing consolidated reporting –Controls over the budgeting process Budget vs. actual review and documentation –IT Controls Access Controls Data Base Controls Income Taxes – Deferred Tax Asset Valuation Acquisition Accounting Reminders –Fair Value – Valuation with asset allocation schedule Securities Market Activity Grant Accounting – Schedule of Expenditures of Federal Awards –Controls over the preparation of the schedule –Accrual accounting

3 Pension Mortality Rates

4 New mortality rates were approved and issued by the actuarial association Rates project longer expected lives Expect a one time increase in pension liabilities of approximately 10% Corresponding expense increase in Fiscal year beginning July 1, 2015

5 Internal Controls over Financial Reporting

6 Background Areas for discussion: –Review controls over the consolidating process –Budget vs. Actual –Internal Controls of IT Systems

7 Internal Controls over Financial Reporting Consolidation process: Observation on consolidating process Lack of proper review or lack of documentation of review Review and documentation of elimination entries Process is many-times manual by nature

8 Internal Controls over Financial Reporting Controls over the budgeting process: One of the comments we here from companies is the review of Actual Results vs. Budgeted results is our review control over reporting Documentation of the review process Understanding of the level of errors uncovered by the process Follow-up of variances

9 Internal Controls over Financial Reporting IT controls: –Data base controls If spread sheets are used to maintain account reconciliations / support access should be controlled –Regular review of Access controls should be performed Use a quarterly process Department heads review the list of employees with access and at what level Document the process

10 Income Taxes – Deferred Tax Asset Valuation

11 Income taxes – Deferred tax asset valuation Review genesis of deferred tax assets: –Understand how the DTA is computed and the continued need of a Valuation Allowance

12 Acquisition Accounting Reminders

13 Acquisition Accounting Reminders Fair Value – Assets acquired must be accounted for at fair value. The acquisition requires a valuation which includes an asset allocation of the purchase price or fair value of the entity

14 Municipal Securities Market

15 Municipal Securities Market Provides funding to build and maintain the infrastructure of the USA Provides a funding source to non-governmental private projects, through ‘conduit’ financings Growth in the market:  1945 – approximately $20 billion of outstanding municipal debt securities  1981 – approximately $360 billion of outstanding municipal debt securities  Today – approximately $3.7 trillion of outstanding municipal debt securities Increase in number of defaults, and several high-profile bankruptcies, including several cities in California, Jefferson County Alabama, and even Harrisburg, Pennsylvania

16 SEC Study To protect investors, maintain fair, orderly, and efficient markets SEC began inquiries into municipal market failures Field hearings across the U.S., participant panels, conference calls, and open public comment 165 page report issued July 31,

17 Areas of Focus Timeliness of financial information Comparability of financial information Disclosures by conduit borrowers Pension funding obligations and other post-employment benefits Exposure to derivatives Disclaimers of responsibility for information included in Official Statements Disclosure of conflicts of interest

18 Recommendations – Market Structure Most investors tend to be ‘buy-and-hold’, and most trades occur through municipal bond dealers, with limited access to information by retail investors Combination of legislative, regulatory, and industry-based initiatives, with consideration of any costs that might be passed along to investors Improve pre-trade transparency – public dissemination of bid-ask prices Improve post-trade transparency Require bond dealers to report ‘yield spreads’ Enhancement of EMMA website to provide retail investors with better access to pricing information

19 Grant Accounting - SEFA

20 Grant Accounting - SEFA –Schedule of Expenditures of Federal Awards Preparation of the schedule Accrual Basis Accounting

21 Questions William Purnell, Partner KPMG – Baltimore