Questions You Should Be Asking Your Finance Director

Questions You Should Be Asking Your Finance Director Arizona Municipal Risk Retention Pool & Government Finance Officers of Arizona Pat Walker August 24, 2016 3: 15 PM – 4: 45 PM

YOU HAVE RESPONSIBILITIES AS AN ELECTED OFFICIAL UNDER ARIZONA REVISED STATUTES…. …FOR OVERSIGHT AND REVIEW

Agenda Introduction/Overview Fiduciary Responsibilities as Elected Official Budgetary Cycle Responsibility of City/Town Staff Important Questions to ask your Finance Director Summary Discussion/Questions

Never Ending Cycle Preparation Audit Evaluation Adoption Implementati on

What is our budgetary responsibilities?

Budgeting in Arizona – Keeping it Legal

Expenditure Limitation • • State Expenditure limitation Alternative? • Home Rule • Permanent Base Adjustment • One time override

Budget Requirements Control of Expenditures Arizona state law stipulates that no expenditures may be made for a purpose not authorized in the annual budget. (ARS§ 4217106). This makes it extremely important for the budget to be closely monitored to ensure that expenditures do not exceed the amount budgeted.

Budget Requirements Control of Expenditures Review budget reports – if expenditures exceed revenues, ask why Financial obligations should not be incurred unless there is money coming in Budget is different than cash flow! Budget just sets forth the “financial plan” for the fiscal year

Budgeting in Arizona • • • Must adopt a balanced budget Tentative budget must be adopted by third Monday in July No requirement for final budget unless City/Town has property tax Property Tax must be adopted by 3 rd Monday in August but 14 days after final budget adoption Various restrictions on funds – HURF, Impact Fees

Budgeting in Arizona • • • Tentative budget is required to be itemized per Auditor General Forms Published once a week for two consecutive weeks Notice of hearing date for final budget Both tentative and final must be published on City/Town website 7 business days after adoption Must remain posted for 60 months (five years)

Publication Requirements • • • Cities/Towns must establish and maintain an official internet website Posted no more than 7 days after estimates of revenues and expenditures are given to governing body A. R. S 42 -17105 & 17103: Requires adoption of expenditure estimates (tentative budget) Posting of tentative and final budgets for 60 months

Truth in Taxation • • • Levy versus rate! Bottom line, if current AV goes up, truth in taxation may be required Citizen perspective: If you had a house that was valued at $100 K last year and it is valued at $110 K this year and the rate stays the same, your levy is going up!

Truth in Taxation • • Notice published twice a week. 1 st publication at least 14 days but not more than 20 days before public hearing 2 nd publication at least 7 days but not more than 10 days before public hearing Hearing must be held at least 14 days before the adoption of the levy

Truth in Taxation • • Hearings for Truth in Taxation, levy and final budget can be combined Truth in Taxation hearing MUST be held before the adoption of final budget Publication cannot be published in classified or legal sections Notice must be ¼ of page in size and surrounded by a border of 1/8 inch

Truth in Taxation • • Headline must read “Truth in Taxation Hearing. Notification of Tax Increase” at 18 point type If you have truth in taxation, you MUST adopt tentative budget BEFORE statutory deadline of July 15 NEW LAW – Must have unanimous roll call vote to pass higher levy AGAIN, if rate remains the same, but AV increases above new construction, you must do truth in taxation notice procedures

The following slide is from the League’s Budget & Finance Manual & are the statutory dates required. These are for reference after the presentation.

Budget Steps

Important Budget Related Statutes • 9 -499. 15. Proposed municipal taxes and fees; notification required; exception • • If New or increased tax rate or fee, provide written notice of the proposed increase on the home page of the municipality's website at least sixty days before the date the proposed new rate is approved or disapproved by the governing body of the municipality. HB 2635 passed this past session requires additional notice requirements, posting, reports.

Important Budget Related Statutes • 9 -511. 01. Water and wastewater business; rates; procedures; responsibility for payments • • Water & Wastewater rate, fee or service charge must file a written report supporting increase at least 30 days prior to a public hearing Council adopt a “notice of intention” at a regular council meeting and set the public hearing date, but must be within 30 days.

Important Budget Related Statutes • 9 -511. 01. Water and wastewater business; rates; procedures; responsibility for payments (Cont’d) • • • Must publish notice of intention in local newspaper with public hearing date, time & place no less than 20 days before public hearing After public hearing, Council can adopt by resolution or ordinance rate, fee or service charge increase 9 -463. 05 Development Impact Fees

Important Budget Related Statutes • 9 -511. 01. Water and wastewater business; rates; procedures; responsibility for payments (Cont’d) • Increase does not become effective until 30 days after the adoption of the resolution or ordinance

Budget Related Elections Bonds • General Obligation Bonds – Yes! • Highway User Bonds – Yes! • Municipal Property Tax Corporation Bonds – No!

Budget Related Elections • • Establishment of a Primary Property Tax Alternative Expenditure Limitation (Home Rule) every 4 years Permanent Base Adjustment One-time override

Evaluation/Monitoring

AG: Former Kingman employee embezzled $1 M A 59 -year-old woman is accused of using her position as Kingman's interim finance director and budget analyst to steal more than $1 million from the city, the state Attorney General's Office said Wednesday. Diane Maxine Richards was arrested after being indicted by a state grand jury on 23 felony counts, including theft, forgery and misuse of public money. An investigation into theft began in September after "financial institutions reported unusual activity regarding Richards' bank accounts, " the AG's Office said in a statement. Richards was fired in November after search warrants were executed at her home and at Kingman City Hall, the AG's Office said. Investigators discovered Richards had used the city credit card from July 2007 to January 2015 to pay more than $121, 000 in personal utility, cellphone and car-insurance bills, and then created fake invoices to cover her tracks, according to the AG's Office. The investigation also produced evidence that, from September 2008 to November 2015, Richards took more than $991, 000 from the city's Employee Benefits Trust account and used the funds to pay off 17 personal lines of credit, some of which included cash advances at casinos in Nevada, the AG's Office said. "The city is very happy that the Attorney General's Office returned this indictment, " Kingman City Attorney Carl Cooper said in a prepared statement. "This is a betrayal to the city and citizens. " A judge ordered that Richards be held at the Mohave County Jail on a $100, 000 bond. It was not clear Wednesday night if Richards was still in custody. Azcentral. com

City of Surprise, April 2016 Azcentral. com

Arizona Auditor General Special Investigation, January 2005

Show Low Fire District—Theft and Misuse of Public Monies In July 2012, the Navajo County Attorney’s Office requested the Office of the Auditor General to assist in its investigation of potential theft at the Show Low Fire District (District). As a result of our investigation, we determined that from February 2005 to June 2012, Natalie Cluff, former district administrative manager, used a fraud scheme to embezzle public monies totaling $1, 794, 594, falsifying records to conceal her misconduct. The embezzled monies came from taxes paid by district property owners that should have been used to support district operations for fire protection and preservation of life. Arizona Auditor General Special Investigation Report, May 2016

Pine-Strawberry Water Improvement District—Theft and Conflict of Interest In May 2012, the Arizona Attorney General’s Office informed the Office of the Auditor General of potential conflict-of-interest violations by former Pine-Strawberry Water Improvement District (District) Treasurer Michael Greer in regard to his involvement with the District’s award of an $89, 700 contract to his former business. Consequently, we conducted an investigation during which we became aware of other potential misconduct by Mr. Greer with the District as well as with another entity for which he was treasurer, the Gila County Mounted Posse (Posse). Our investigation revealed that from April 2011 to February 2013, Mr. Greer may have violated state laws related to conflict of interest, theft, fraudulent schemes, and forgery. We have submitted our report to the Attorney General’s Office, which has taken criminal action against Mr. Greer resulting in his indictment on eight felony counts. Mr. Greer abused his authority as district treasurer—Mr. Greer illicitly received from two district vendors a total of $65, 895 after he participated in awarding district contracts to them totaling $110, 700. Mr. Greer also improperly paid $2, 299 of his personal and business expenses using his district credit card. In addition, Mr. Greer forged a district letter falsely asserting that the District had received $31, 565 in cash deposits from himself. Mr. Greer abused his authority as posse treasurer—Mr. Greer spent $38, 706 of posse money for personal benefit. Specifically, he paid his personal and business expenses by withdrawing cash and writing checks from the posse bank account and by using a posse debit card. He also orally presented false treasurer’s reports, concealing the Posse’s true financial condition by fraudulently overstating bank account balances 12 times at posse governing board meetings. Arizona Auditor General Special Investigation, June 2016

AZ Auditor General Comments Although no internal control system can completely prevent dishonest behavior such as Mr. Greer’s, there are ways to help ensure officials properly safeguard and control monies for which they have fiduciary responsibilities. Governing boards should require all board members and certain personnel to complete conflict-of-interest forms every year. In addition, governing boards should develop and implement purchasing policies and procedures that ensure monies are properly controlled and expended. These policies should provide for a clear separation of responsibilities regarding the disbursement of monies so that individuals preparing checks do not also sign them and supporting documentation, such as invoices or contracts, is reviewed for propriety by a separate authorized individual. Additionally, board members should regularly review bank statements to ensure bank accounts are authorized and that reconciliations between the bank statement and check register are independently performed and reviewed. Arizona Auditor General Special Investigation, June 2016

A. R. S. Statutes Highlights 35 -301: Duties and liabilities of custodian of public monies; violations; classification � Knowingly loans it, or any portion thereof � Knowingly keeps a false account, or makes a false entry or erasure in an account of, or relating to it � Alters, falsifies, conceals, destroys or obliterates such an account with an intent to defraud or deceive

A. R. S. Statutes Highlights 35 -302 – Public money defined � The phrase “public money” as used in this article includes bonds and evidence of indebtedness, and money belonging to, received or held by, state, county, district, city or town officers in their official capacity 35 -1206 - Public depositors; immunity � When deposits are made in accordance with this chapter, an official of a public depositor is not personally liable for any loss resulting from the default or insolvency of any eligible depository in the absence of negligence, malfeasance, misfeasance or nonfeasance on the part of the public depositor or the depositor’s agents.

Do we have strong internal controls?

What is Internal Control? A process effected by the governing body, administration, and front line workers, designed to provide reasonable assurance regarding the achievement of objectives in the following areas: � Effectiveness and efficiency of operations � Reliability of financial reporting � Compliance with applicable laws and regulations

Internal Control Myths and Facts MYTHS: FACTS: Internal control starts with a strong set of policies and procedures. Internal control starts with a strong control environment. Internal control: That’s why we have external /internal auditors! While external/internal auditors play a key role in the system of control, management is the primary owner of internal control. Internal control is a finance thing. Internal control is integral to every aspect of business. Internal controls are essentially negative, like a list of “thou-shalt-nots. ” Internal control makes the right things happen the first time. Internal controls take time away from our core activities. Internal controls should be built “into, ” not “onto” business processes. Source: Institute of Internal Auditors, 2003

Why are Internal Controls Important? • • Help an organization achieve objectives/performance targets Reduce fraud opportunities Prevent loss of resources Ensure reliable financial reporting Ensure compliance with laws and regulations Preserve integrity Reduce adverse publicity

Why Internal Controls Don’t Always Work! Organizational policies Segregation of duties Access to assets Form over substance Control override Inherent mistakes

Limitations of Internal Control Judgment – humans make decisions Breakdowns – misunderstandings Management overrides – high level overrides of policies and procedures Cost/Benefit – the cost of establishing internal controls Collusion – multiple people can circumvent controls

What happens if we have weak internal controls?

Fraud!

What is Fraud? According to the Association of Certified Fraud Examiners (ACFE), fraud is “the use of one’s occupation for personal gain through deliberate misuse or theft of the victim organization’s resources or assets. ”

How do we prevent fraud?

The Fraud Triangle Understanding why & how employees commit fraud. The fraud triangle summarizes three elements that are present when an individual commits fraud: � Opportunity � Pressure � Rationalization

Opportunity Implement internal controls Provide oversight that deter potential fraudsters Employees may become aware that they have an opportunity to commit fraud and avoid detection

How to Limit Opportunity Internal controls and oversight Segregate duties Conduct an independent review/comparison of original source documents Restrict access to cash and checks

Pressure • Financial problems • Drug, alcohol, or gambling addictions. • Family difficulties such as a divorce or loss of a loved one. • Maintaining job performance or working toward a promotion. • Simple greed • Based on individual’s motivations, problems, and needs.

Rationalization Justify the act Reliant on the individual’s mindset “I was just borrowing” “I deserve it” “I am facing a difficult situation”

How to Minimize Rationalization • Create a code of ethics • Zero tolerance for fraud • Employees acknowledge role as stewards of public monies • Top management leads by example • Establish policies for internal controls • Develop a strong whistleblower system • Perform background checks and hire competent employees

The Cost of Fraud Annual Cost $2. 9 Trillion Avg. Org Loss 5% of Revenues

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Definitions for Clarity Billing Schemes – Making false claims for payment (i. e. fictitious invoices for services rendered or materials delivered). Expense Reimbursement – Manipulation of an organization’s expense reimbursement procedures (i. e. mischaracterized or overstated expenses, altered receipts). Check Tampering – Altering a check in some way to make the perpetrator the payee (i. e. check washing, check larceny). Payroll Schemes – Again, make false claims for payment, except through the payroll system (i. e. falsification of time cards, altering payroll records, ghost employees). Wire Transfer Schemes – Initiation of wire transfers for payment of fictitious services or materials. Usually requires collusion with financial institution personnel.

Definitions for Clarity (cont. ) Register Disbursements – Manipulation of a cash register as to record a fictitious transaction to account for the reduction in cash (i. e. false refunds, false voids). Skimming – Removal of cash before it is recorded in the accounting system (i. e. theft of cash or checks mailed to the organization). Cash Larceny – Intentional taking of cash without the consent and against the will of the employer (i. e. theft). Non-cash – Asset misappropriation in which the asset is either misused or stolen (i. e. inventory or fixed assets). Corruption - An employee wrongfully using influence in a business transaction to procure some benefit for themselves or another, contrary to their duty to their employer. Fraudulent Statements – Falsification of an organization’s financial statements to give the appearance of greater or less profitability.

Fraud – Case Studies Roslyn School District employees used at least $11. 2 million of school funds for personal benefit � Private mortgages and loans – $1. 1 million of district funds used to make payments on private mortgages and loans to superintendent, business manager, and district account clerk � Businesses established by district officials – payments of over $1 million made to businesses created by district officials, family members, and friends

Fraud – Case Studies Roslyn School District (cont’d) � Unauthorized salaries – $549 K in excessive salaries paid to certain district officials � Home Depot purchases – $609 K for goods not used at the district � Financing of private automobiles – $207 K used to purchase or lease automobiles for superintendent, Asst. superintendent, and her daughter, including BMW and Jaguar In addition to their vehicle allowance of $8, 000 a year, later increased to $17, 200

Fraud – Case Studies Roslyn School District (cont’d) � Payments for personal insurance policies – $160 K paid for various personal life, homeowners, car, and boat policies � Unauthorized travel – $133 K paid for travel not related to school business for various officials and non-school district employees, including travel to Las Vegas, San Francisco, Bermuda, and London on the supersonic Concorde � Superintendent’s parking – $42 K was paid for parking in Manhattan

Fraud – Case Studies Roslyn School District (cont’d) � Food – $549 K was spent for food unrelated to any district activity � Fitness club membership, cable service, dry cleaning, student loans, pool cleaner, Rolex watches, hair and nail salons

Fraud – Case Studies Roslyn School District (cont’d) � Auditors determined misappropriation occurred because: Complete breakdown in internal controls Superintendent and Asst. Superintendent could override system and process payments outside of normal flow of transactions Two employees who could have identified misappropriations did not do their job Board failed to oversee and monitor financial activities Independent auditor had conflicts of interest and performed work so flawed and so below professional standards it failed to identify the millions stolen

Fraud – Case Studies Roslyn School District (cont’d) � Audit makes 27 recommendations to correct weaknesses in internal control Audit committee to oversee audit work Limit computer access to specific job functions Separate duties School Board to review budget status reports

Fraud – Case Studies Arizona • Management moved Payroll under Human Resources Department • Payroll employees had full control over the process • Employee set up mother and father as employees

Fraud – Case Studies Arizona • Softball league coordinator linked to $270, 000 in missing funds • Checks made out to coordinators company • Wrote checks to himself • History of bad evaluations

Fraud – Case Studies Arizona • Utilities customer service employee stole $90, 000 • Adjusted customer bills for the amount of payment • Adjustments not reviewed or approved

Fraud – Case Studies Arizona • Finance Director set up payroll system to pay out vacation balance • Discovered and Council required return of monies • Told auditors bank account was not City’s money • Closed account and set up new account with fake tax id • Conspired with Town Manager to make an unauthorized transfer of funds

WHO AND WHY DO PEOPLE COMMIT FRAUD?

Who and Why People Commit Fraud Profile of the typical person committing fraud White male College educated Over the age of 35 Occupies position of authority Well respected in the community No prior criminal record

Who is a Potential Fraudster? EVERYONE!!!

HOW DO I DETECT FRAUD?

How Do I Detect Fraud?

GFOA Recommended Practice “Encouraging and Facilitating the Reporting of Fraud and Questionable Accounting and Auditing Practices “ Establish Policies and Procedures to encourage reporting of fraud or questionable accounting or auditing practices: � Widely distribute ethics policy � Establish mechanisms for confidential and anonymous reporting; consider outside vendor � Have an audit committee evaluate government’s internal control framework

Conclusion – Internal Control Checklist ü ü ü ü ü Adhere to policies and procedures Physically safeguard assets Train employees Monitor and review independently Establish clear lines of authority Rotate duties Regular vacations Background checks Evaluate regularly Report suspicious activity

What is our audit responsibilities?

A. R. S. Statutes Highlights 9 -481 – Audits of cities and towns; posting; budget � Audits must be performed by a CPA licensed in Arizona and not an employee of the City or Town. � Must be completed every fiscal year for incorporated cities � Must be completed every two years for incorporated Towns and over both years � Financial statements must conform with generally accepted accounting principles (GAAP)

A. R. S. Statutes Highlights 9 -481 Cont’d: � Disclosure if Highway User Revenue (HURF) is being used solely for transportation purposes � Audit shall be submitted within 6 months of the close of the fiscal year � Copy of audit must be made available to public, submitted to the Auditor General, Secretary of the State, posted 7 days on City/Town website after submittal, and kept on the website 60 months.

A. R. S Statute Highlights 41 -1279. 07 – Uniform expenditure reporting system; reports by Counties, Community College districts, cities and towns; certification and attestation; assistance by auditor general, violation; classification. Referred to as the “UERS” report to insure compliance with state expenditure limitation for each City & Town Must be submitted within nine months after the close of the fiscal year Must be signed by the “designated Chief Financial Officer. ”

What is an audit? Are the financial statements presented in conformance with GAAP and audited under governmental auditing standards? If so, then the statements are “presented fairly, in all material respects, the financial position of the governmental activities of each major fund…” Does not express an opinion on financial solvency of the organization

What is an audit? An “Unqualified or Clean” opinion is good A “Qualified” opinion is not good…. qualifications are listed out Opinion impacts bond interest rates…how? Internal controls are looked at but not at effectiveness of internal controls/policies

Audits Ø Auditors made it clear in audits that they do “not express an opinion on effectiveness of the City’s/Town’s internal control. ” Required reporting according to auditing standards: Deficiency – When a design or operation of a control does not allow management or employees in the normal course performing their assigned functions, to prevent or detect misstatements on a timely manner.

Audits Ø Cont’d Required reporting according to auditing standards: Material Weakness – Is a deficiency or combination of deficiencies in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. .

Audits Ø Cont’d Required reporting according to auditing standards: Significant Deficiency – Less severe than “material weakness” yet important enough to merit attention to those charged with governance.

Supplemental Information Management ‘s Discussion & Analysis Budgetary comparison information Pension liability information Introductory section Statistical information

What to look at? Auditor’s opinion Management’s Discussion and Analysis Notes to the Financial Statements Are revenues exceeding expenditures?

Do we have experienced financial personnel?

Important “Soft” Skills

Skill Sets Most important skill sets � Interpersonal skills (63%) � Technology (53%) � Written Communication (42%) � Management (32%) � Emotional intelligence, leadership, political astuteness � Public speaking/Presentations � Social Media

The importance of “Soft Skills*” #1 Professional Ethics – Ability to handle sensitive information in a confidential and responsible way is one of the most important soft skills for financial professionals. Build a team that exhibits trustworthiness, good judgement and discretion. *"How to find Finance Professionals with Solid Soft Skills" Robert Half

The importance of “Soft Skills*” How do you identify this? Ask a question in interview such as “How would you respond if your boss asked you to do something that went against your personal values? ” *"How to find Finance Professionals with Solid Soft Skills" Robert Half

The Importance of “Soft Skills” Identify professional ethics among your current staff � Watch – Cut corners on projects? Take responsibility for mistakes? Blame others when things go wrong? Fix it if they can or give up?

Hiring of Financial Professionals Check references Social media Background checks!

What are our financial policies?

Policies Accounting, Auditing & Financial Reporting policies Ethics Policies Internal Control Policies Credit Card Policies Operating Policies Formally Adopted by Council

Summary Questions to keep in mind Reliance on solid, professional staff Not meant to micromanage!

Discussion/Questions?

Resources Government Finance Officers Association http: //www. gfoa. org AZ Auditor General Office http: //azauditor. gov AZ League of Cities & Towns-Budget and Finance Manual http: //www. azleague. org Pat Walker Consulting pwalkerconsulting@aol. com