Fiscal Distress Ron Queen CGFM CPA Nashville AGA

Fiscal Distress Ron Queen CGFM, CPA, Nashville AGA Winter Seminar 2013

Disclaimer The following presentation represents my views and thoughts on this issue. It does not represent the position or concerns of the Office of the Comptroller of the Treasury.

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Authoritative Guidance • GASB Statements 56 & 59 • SAS 59 as amended

Going Concern Assumption The Going Concern Assumption is that a legally separate governmental entity’s continuation as a going concern is assumed in financial reporting in the absence of significant information to the contrary.

Contradictors Information that may significantly contradict the going concern assumption would relate to a governmental entity's inability to continue: • not able to meet its obligations as they become due without substantial disposition of assets outside the ordinary course of governmental operations, • restructuring of debt, or • submission to the oversight of a separate fiscal assistance authority or financial review board, or similar actions.

Indicators • Negative trends o recurring periods in which expenses/expenditures significantly exceed revenues o recurring unsubsidized operating losses in businesstype activities o consistent working capital deficiencies o continuing negative operating cash flows from business-type activities o adverse key financial ratios

Indicators • Other indications of possible financial difficulties default on bonds, loans or similar agreements denial of usual trade credit from suppliers restructuring of debt noncompliance with statutory capital or reserve requirements o the need to seek new sources or methods of financing or to dispose of substantial assets o o

Indicators • Internal matters o work stoppages or other labor difficulties o substantial dependence on the success of a particular project or program o uneconomic long-term commitments (burdensome labor contracts, for example) o the need to significantly revise operations

Indicators • External matters o legal proceedings, legislation, or similar matters that might jeopardize intergovernmental revenues and the fiscal sustainability of key governmental programs o loss of a critical license or patent for a business-type activity o loss of a principal customer; taxpayer, or supplier o uninsured or underinsured catastrophe such as a drought, earthquake, or flood

Government Environment • the taxing power and borrowing capabilities of governments together with the constant demand for the provision of public services are factors that may diminish the possibility that a government would be unable to continue as a going concern. • Some conditions or situations identified in the indicators previously mentioned should be assessed differently for governments.

Financial Statement Preparers • Note Disclosure • Management’s Discussion & Analysis

Note Disclosure • Pertinent conditions and events giving rise to the assessment of substantial doubt about the government's ability to continue as a going concern for a reasonable period of time • The possible effects of such conditions and events • Government officials' evaluation of the significance of those conditions and events and any mitigating factors

Note Disclosure • Possible discontinuance of operations • Government officials' plans (including relevant prospective financial information) • Information about the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities.

Management’s Discussion & Analysis • It may be necessary to include a discussion of going concern issues in the MD&A, depending on the facts and circumstances.

Government in Fiscal Distress • • Harrisburg, PA Pittsburg, PA Vallejo, California Jefferson County, Alabama Central Falls, Rhode Island Stockton, California Detroit, Michigan

Auditor’s Responsibilities • Evaluate whethere is substantial doubt about the entity’s ability to continue as a going concern. o Consideration through procedures in planning, gathering audit evidence relative to the various audit objectives, and completing the audit • Auditor’s action on determining there is substantial doubt o obtain information about management's plans that are intended to mitigate the effect of such conditions or events, and o assess the likelihood that such plans can be effectively implemented • Auditor’s action on concluding there is substantial doubt o consider the adequacy of disclosure about the entity's possible inability to continue as a going concern for a reasonable period of time, and o include an explanatory paragraph (following the opinion paragraph) in his audit report to reflect his conclusion. If the auditor concludes that substantial doubt does not exist, he should consider the need for disclosure.