Compilation Reporting and Documentation Tips

Here are some tips to make sure your compilation work looks great!

You can use your compilation report to remind you of important considerations:

compilation tips

  • Compare your engagement letter with your compiled financial statements; make sure that the following agrees:
    • Financial statement titles (agree engagement letter financial statement titles to the accountant’s compilation report financial statement titles; agree the accountant’s compilation report financial statement titles to the financial statements – the titles should be the same for all three: engagement letter, accountant’s compilation report, and financial statements)
    • Period of the compilation (e.g., monthly)
    • Basis of accounting (e.g., if the financial statements are to be income tax basis, then the engagement letter should not say in accordance with GAAP)
  • If you are preparing income tax basis statements without disclosure, include the language in your engagement letter that states the notes will be omitted.
  • Compare your financial statement periods to your compilation report language; for example, if the income statement is for three months and the year-ended December 31, 2013, then those same periods should appear in the accountant’s compilation report. Or if the income statement is for two years, then the accountant’s compilation report should cover both years rather than just the current year.

Your Ideas

What are your ideas for making compilations better?

Yellow Book CPE Requirements – A Summary

What are the requirements for Yellow Book continuing professional education (CPE)?

Below we will address (1) who is subject to the Yellow Book CPE requirements and (2) what CPE classes satisfy those requirements.

Yellow Book CPEOverview

First realize there are two rules:

  1. The 80-hour rule (every two years)
  2. The 24-hour rule (every two years)

Then you must answer:

  1. Who is subject to each rule?
  2. What classes qualify for each rule?

The 24 Hour Rule – Who is Subject?

The answer: each auditor performing work on a Yellow Book audit; if as an auditor you work on the engagement, you are subject to this rule. If your audit report contains a Yellow Book report (usually located just after the notes to the financial statements), then that engagement is subject to generally accepted government auditing standards (GAGAS).

The 80-Hour Rule – Who is Subject?

The answer: Auditors who are involved in any amount of:

1. Planning,
2. Directing, or
3. Reporting on GAGAS assignments
and
4. Those auditors who are not involved in those activities but charge 20 percent or more of their time annually to GAGAS assignments.

I interpret 1., 2. and 3. as mainly partners, managers, and in-charges. 4. relates to staff who support the audit.

So a staff person that does not meet the criteria in 4., but still works on a Yellow Book engagement must still satisfy the 24-hour rule (but not the 80-hour rule).

What Classes Qualify?

The Yellow Book states, “Determining what subjects are appropriate for individual auditors to satisfy both the 80-hour and the 24-hour requirements is a matter of professional judgment to be exercised by auditors in consultation with appropriate officials in their audit organizations.”

First we see that there is judgment in what qualifies (no bright yellow lines). But there are differences in the 80-hour rule and the 24-hour rule; otherwise, there would be only one category.

The 80-Hour Rule – Classes that Qualify

The 80-hour rule is broad (encompassing any CPE that enhances the auditor’s professional proficiency); so, for example, CPE classes about writing skills or using Excel would qualify. (Taxation CPE usually does not qualify unless the class addresses audit-related issues. For example, a 1040 tax class does not qualify.)

For those subject to the 80 hour rule, at least 20 hours of CPE should be taken in each year of the two-year period; a total of 80 hours is to be taken in the two-year period.

The 24-Hour Rule – Classes that Qualify

Each auditor performing work under GAGAS should complete, every 2 years, at least 24 hours of CPE that directly relates to government auditing, the government environment, or the specific or unique environment in which the audited entity operates.

The 24-hour rule is specific to:
(1) Government auditing,
(2) The government environment or
(3) To the specific or unique environment in which the audited entity operates.

Government Auditing

Classes directly related to standards used in governmental auditing qualify; since GAGAS incorporates the AICPA statements on auditing standards (SASs) for field work and reporting, then audit classes that include a study of the SASs as they relate to the audit of your governmental entity would qualify. The same is true of pronouncements issued by the FASB. Single Audit classes also obviously qualify.

Government Environment

CPE dealing with Governmental Accounting Standards (GASB pronouncements) will qualify for the 24-hour rule since the class focuses on accounting standards in the government environment.

If you audit a county or a city, then most any CPE dealing with GASB pronouncements or governmental issues (e.g., sales taxes) will satisfy the 24-hour rule; also classes dealing with compliance with laws and regulations qualify.

Classes addressing economic conditions, fiscal trends, and pressures facing the governmental entity qualify.

Specific or Unique Environment in Which the Audited Entity Operates

Suppose you audit electric membership corporations (EMCs) subject to the Yellow Book; a CPE class about electrical supply grids qualifies. Or if you audit banks subject to Yellow Book requirements (e.g., FHA loans), then a CPE class dealing with lending qualifies. These classes address issues in the unique environment in which the audited entity operates.

Two-Year Cycle

An audit organization can adopt a standard 2-year period for all of its auditors to simplify administration of the CPE requirements.

Carryover Credit

Auditors are not allowed to carry over hours taken in excess of the 24-hour or 80-hour rule to the next reporting period.

Proration of Hours for New-Hires (or Those Newly Assigned to a Yellow Book Audit)

You will prorate the hourly requirements based on the remaining 6-month intervals in your two-year reporting period. For example, you hire someone on May 1, 2013 and your two-year cycle ends December 31, 2013. There is only one remaining 6-month period. If you are subject to the 24 hour rule, then you will multiply 25% (one six-month period divided by the four six-month periods in the two-year cycle) times 24 to compute the hours required: 6 hours.

GAO Guidance

Click here for the April 2005 GAO publication: Government Auditing Standards, Guidance on GAGAS Requirements for Continuing Professional Education.

The Stench of a Birmingham Shenanigan

To show partiality is not good – yet a person will do wrong for a piece of bread. Proverbs 28:21

Birmingham rid itself of one stench (open sewage spilling into a river) but now has another: It appears bribes of approximately $200 thousand will cost county bondholders more than $1 billion. Here’s the tale.

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The Cast

  • Larry Langford – Jefferson County President
  • Albert LaPierre – Lobbyist (and long-time friend of Langford)
  • William Blount – Montgomery Broker-Dealer (and long-time friend of Langford)
  • Charles LeCroy – A Managing Director of JP Morgan Chase

The Setting

The web that was woven in Jefferson County, Alabama started in the late 1990s when the federal government required the county to comply with the Clean Water Act; open sewage had been spilling into a local river. The sewer improvement costs were several hundred million dollars so the County did what most counties do for such a project: it borrowed money by issuing bonds. Larry Langford, the newly elected county commissioner (2002), was president of the commission board and was involved in the related financing projects

The Scheme

Mr. Langford had a long-time friend (of more than 30 years) in investment banking, William Blount who worked for Montgomery-based Blount Parrish, a broker-dealer firm. Blount contacted Langford and soon thereafter Charles LeCroy, a managing director of JP Morgan Chase, pitched interest-rate swaps as a means to protect the County. Eventually the County had eighteen different swaps (with a notional value of $5.6 billion), an inordinate number of such agreements – each involving substantial fees.

Someone at Jefferson County had to approve the swap agreements. That someone was Larry Langford (President of the Jefferson County commission, in charge of finance for the commission). Did Langford sign off on the agreements believing them to be a valid means of lessening future interest costs or were bribes paid to induce Langford’s approval?

A March 12, 2008 New York Times article (High Finance Backfires on Alabama County) stated that Langford, after being deposed by the SEC, stated the bankers “did not make any unusual payments to him.” The article went on to say “The SEC also questioned him about payments that Mr. Blount had made to a local lobbyist who had paid off one of Mr. Langford’s delinquent loans. Mr. Langford said he did not know where the lobbyist got his money.”

The Damage

After entering into the swap agreements, interest rates moved in the wrong direction and Jefferson County’s interest costs ballooned out of control. In 2008, Jefferson County defaulted on its bond obligations and in 2009 filed for bankruptcy protection. Sewer rates were raised four-fold to help keep utility services afloat. And now it looks like the bondholders will take a substantial haircut. The Wall Street Journal recently reported (in Alabama County Sets Bankruptcy Exit Plan) that prior to filing for bankruptcy, bondholders had put forth a plan to shave more than $1 billion off the county’s debt (bondholders are due $3.1 billion).

The Sentences and Settlements

In April, 2008, the SEC brought bribery charges against Mr. Langford and stated that “he accepted more than $156,000 in undisclosed cash and benefits over the course of two years from William Blount.” An April, 2008 SEC compliant stated that “the broker-dealer and his firm reaped millions of dollars in fees in connection with these bond offerings and swap agreements.”

In October, 2009, a federal jury found Langford guilty of 60 counts of corruption (including bribery, mail fraud, and wire fraud) related to the bond swaps.

A November 4, 2009 SEC press release stated that “JP Morgan Securities settled the SEC’s charges and will pay a penalty of $25 million, make a payment of $50 million to Jefferson County, and forfeit more than $647 million in claimed termination fees.” The bank neither admitted nor denied wrongdoing.

In February, 2010, Mr. Blount along with Albert LaPierre (former executive director of the Alabama Democratic Party; later a lobbyist) were sentenced to four-year prison terms. An April, 2008 SEC press release stated Langford and Blount “concealed the payment scheme by using …LaPierre…as a conduit.”

Is Your Government Protected?

While bribery has existed throughout history, it’s wise to consider if corruption is harming your government – and how you can mitigate its existence.

The picture above is provided courtesy of iStockphoto.com.