Audit Requirements

ADMINISTRATIVE LETTER: 48
POLICY CODE: IL

TO:                  Superintendents of Schools
                        Municipal Officials of School Administrative Units
                        Directors of Career and Technical Education Regions

FROM: Angela R. Faherty, Acting Commissioner

DATE: May 17, 2010

SUBJECT: Audit Requirements

Recently, Public Law 2009, Chapter 571 was enacted by the legislature and signed by Governor Baldacci on March 31, 2010. This recently enacted law included revisions to the audit statutes 20-A M.R.S.A. Chapter 221 Section 6051, as follows:

Requirement for a determination of whether the school administrative unit has complied with budget content requirements and cost center summary budget format,
Requirement for a determination of whether the school administrative unit has complied with transfer limitations between budget cost centers(Budget Categories),
Requirement for a determination of whether the school administrative unit has exceeded its authority to expend funds, as provided by the total budget summary article,
Requirement for a corrective action plan to address audit findings and management comments and recommendations that have been identified by the commissioner, and
Exception for eligible municipal school administrative units. If a municipal school administrative unit meets all of the eligibility criteria, then the municipal school administrative unit may file the annual municipal audit or audits in lieu of the annual audit required by this section. See eligibility requirements in Section 6051, subsection 7. Click here for exception request form .

Reminders:

An audit reconciliation of the annual financial data prepared and certified by the auditor must be included in the initial report to the commissioner.
Maine law provides that each school administrative unit’s school board is responsible for providing a copy of the audit report to the Department of Education.
Maine law requires an “Initial Report to the Commissioner” due on or before November 1st and submission of the June 30th audit report within 6 months after the end of the audit period (no later than December 30th).

Enclosed with this letter is 20-A M.R.S.A. Chapter 221, Subchapter II Audits (§ 6051 and §6052) that include the revisions enacted in PL 2009 Chapter 571. Please review these new requirements with your auditor.

The “Initial Report to the Commissioner” due on or before November 1st and the submission of the June 30th audit report due within 6 months after the end of the audit period (no later than December 30th) should be sent to:

Shel Marcotte, Supervisor of Audit
School Operations & Finance
Department of Education
23 State House Station
Augusta, ME 04333-0023

If you have audit questions, please direct those questions to Shel Marcotte at 624-6863 or email shel.marcotte@maine.gov and Tonya K. Perkins at 624-6865 or email tonya.perkins@maine.gov

As amended by Public Law 2009, Chapter 571, Part E – effective 3/31/10:

CHAPTER 221
SCHOOL RECORDS, AUDITS AND REPORTS
SUBCHAPTER II
AUDITS
20A § 6051. School administrative units
1. Audit. A school board shall provide for an annual audit of the school administrative unit. The audit shall include the following:
A. Accountability of all revenues and expenditures;
B. A determination of whether or not proper budgetary controls are in place;
C. A determination of whether or not the annual financial report submitted to the department is correct;
D. An audit of all federal programs in accordance with applicable federal law;
E. A determination as to whether the school administrative unit has complied with applicable provisions of the School Finance Act of 1985 and the School Finance Act of 1995;
F. Any other information that the commissioner may require;
G. A determination of whether the school administrative unit has complied with transfer limitations between budget cost centers pursuant to section 1485, subsection 4;
H. A determination of whether the school administrative unit has complied with budget content requirements pursuant to section 15693, subsection 1 and cost center summary budget format requirements pursuant to sections 1305C, 1485, 1701C and 2307; and
I. A determination of whether the school administrative unit has exceeded its authority to expend funds, as provided by the total budget summary article.

2. Fiscal year. The fiscal year of an audit shall be from July 1st to June 30th, except that audits of federal programs shall conform to federal requirements.

3. Auditors. Audits shall be conducted by either the Department of Audit or qualified certified public accountants or public accountants registered by the Board of Accountancy.

4. Initial report to the commissioner. On or before November 1st, the school board shall provide the commissioner with:
A. and B. (Repealed)
C. Written determination of whether or not proper budgetary controls are in place;
D. A written determination of whether or not the annual financial data submitted to the department is correct, including submission of an audited reconciliation of the annual financial data prepared and certified by the auditor; and
E. A written determination as to whether the school administrative unit has complied with applicable provisions of the Essential Programs and Services Funding Act.

5. Records. Financial records and accounts shall be kept for 7 years after the end of the fiscal year and shall be available to the auditors and any other upon request.

6. Report to commissioner. Within 6 months after the end of the audit period, the school board shall provide the commissioner with:
A. A copy of the audit report;
B. Accountability of all revenues and expenditures;
C. Written assurance that the audit has been conducted in accordance with applicable state and federal laws relating to financial and compliance audits; and
D. Any other information that the commissioner may require.

7. Exception. If a municipal school administrative unit meets all of the following eligibility criteria, then the municipal school administrative unit may file the annual municipal audit or audits in lieu of the annual audit required by this section:
A. The municipal school administrative unit does not operate a school or schools;
B. A school administrative unit audit is not necessary to meet federal audit requirements;
C. The municipal school administrative unit files the municipal audit or audits that include the fiscal year specified in subsection 2; and
D. The municipal school administrative unit is not a member of a school administrative district, community school district, regional school unit or alternative organizational structure.

8. Corrective action plan. The commissioner shall review the audits of the school administrative unit and determine if the school administrative unit should develop a corrective action plan for any audit issues specified in the annual audit. The corrective action plan must address those audit findings and management comments and recommendations that have been identified by the commissioner, and the plan must be filed within the timelines established by the commissioner. The school administrative unit shall provide assurances to the commissioner that the school administrative unit has implemented its corrective action plan within the timelines established by the commissioner. If the school administrative unit has not met the conditions for submitting a corrective action plan or providing assurances that the school administrative unit has implemented the plan, the commissioner may withhold monthly subsidy payments from the school administrative unit in accordance with section 6801A.

20A § 6052. Federal audits
The following provisions apply to federal audits.
1. A school board of a school administrative unit which accepts federal funds shall hire auditors and pay out of available school funds or from federally allocated sums for any audit of federal programs.
2. Report to commissioner. The auditor shall provide the commissioner with a copy of the audit.
3. Use of audit. The commissioner may use these audits to provide the Federal Government with any information it requires.

Sample Reconciliation

CLARIFICATION REGARDING NEW AUDTING STANDARD
FINANCIAL STATEMENT PREPARATION

With the recent changes in Auditing standard (SAS 1112), there have been a lot of questions regarding any corrective action expected from the Department of Education. The corrective action request is asking for the school department’s or municipality’s current processes in place to prevent or detect material misstatements in the school department’s or municipality’s own financial statements.

A description of the corrective action that will be implemented;

A description of the current processes that are in place to help prepare and review the financial statements; or what new process will be put in place to take a more active role in helping to prepare the financial statements;

The contact person(s) responsible for monitoring and maintaining corrective procedures;

Who prepares the information given to the auditors to prepare the statements, and who reviews the statements and compares them with the raw data; or who will be taking this role.

The anticipated completion date of the corrective action.

When will the new processes be put in place if something new is being done?

The following, used with permission from the State Department of Audit from Minnesota, should provide some more clarification:

Correcting and following up on findings - An increase in the number of reportable findings will have a direct correlation to the amount of work required by a government’s management to correct and follow-up on reportable findings. In turn, this will affect the amount of audit effort required by your auditors to follow-up on corrective action to the findings.

The audit process may take longer because:
• The auditor will be required to gather more evidence and documentation to evaluate whether or not findings are significant deficiencies or material weaknesses, and
• The auditor must perform follow-up procedures on all previous audit findings.

Understanding financial statements and their disclosures - the financial statement closing process is also highly dependent on the skills, experience, training, and competency of the preparer(s) and approver(s). As such, if the entity does not have the necessary resources to effectively apply generally accepted accounting principles to recording the entity's financial transactions or prepare its financial statements, then a likely material weakness exists. The key controls are the review and approval by the preparer's supervisor and the review and approval by the governing body. As such, it is necessary for the governing body to have sufficient skills to read and understand the entity's financial statements and their degree of precision.

This last section has raised concerns about who can prepare an entity’s financial statements. Many local governments have their independent auditors prepare the actual financial statements, including notes to the financial statements. The reasons a local government has their auditor prepare the financials could give rise to a finding of a deficiency in internal control over financial reporting. The more complex the financial transactions underlying the financial statements, the more likely that this condition could result in a significant deficiency. Does this mean that your auditor can no longer prepare your financial statements? No, but if the reason is your staff does not have the expertise or knowledge to prepare the financials then there is likely a significant deficiency. This lack of expertise can be mitigated if the governing body is able to understand the financials and what is in them.

Some governments state that there is sufficient internal control because they rely on their auditor’s expertise and knowledge to prepare the proper financial statements. By doing this, they have made their auditors part of the internal control system of the entity. This creates an independence issue for the CPA, which generally would mean the auditor must disclaim an opinion on the entity’s financial statements.”