Questions & Answers:

Audit Findings

Question:

We have not had an audit since 2000. That audit covered the years 1998 and 1999. I took office in 2002. What happens if /when we get audited for 2000 and 2001 and there are findings? How do I answer for concerns that I didn't create? Or do I not need to?

Answer:

If there is a significant audit finding that involves a former officeholder, the usual practice of the State Board of Accounts is to discuss the audit finding with the previous office holder and receive a response from him/her. You are not expected to answer for or provide responses for findings that relate to periods before you took office. However, if the findings from previous years result in any audit adjustments, you will be asked by the Board of Accounts to enter these adjustments into your books. Assuming you agree with the adjustments, you should do so. Also, if you prefer to comment on the finding yourself, you may do so, and the Board of Accounts will normally include your comment in the report, as well as that of the previous officeholder.

Question:

What should an elected official do if the final report on an audit by the State Board of Accounts includes a finding which was not discussed at the audit exit conference, or which contradicts what was said at the exit conference.

Answer:

The audit standards followed by the State Board of Account require that the field examiner conduct an exit conference at the end of fieldwork. At that point, however, the final report usually has not been drafted and the audit has not been reviewed by the field supervisor. Consequently, it is possible that findings may change. It would be ideal if the Board of Accounts would notify the auditee of such changes, but your question suggests that does not necessarily happen.

If you wish to protect yourself, we recommend the following. At some point during the audit fieldwork, the field examiner will ask the executive and fiscal officer of your unit to sign a "representation letter." This letter acknowledges that the executive and fiscal officer are responsible for the reliability of the financial statements. Before providing such a signature, we recommend you ask to see the final financial statements. Essentially, you are asking to see the final report. By doing so, you will have some assurance that you will see the final report before it can be issued to the public.

Making this request will cause some inconvenience to the field examiner. It is easier for him to complete his work if he can get your signature in advance on the representation letter. Nevertheless, you are within your rights to see the final financial statements first.

There is no provision for "appealing" an audit. However, we have found that supervisors are willing to discuss audits conducted by their field examiners and are sometimes willing to make changes. If you disagree with a finding by a field examiner, whether or not the final report has been issued, we recommend you contact the field supervisor or office supervisor and ask for a meeting to discuss the finding.

The names of the field and office supervisors are on the Board of Accounts website at: http://www.in.gov/sboa/points/supervisors/.

Rainy Day Funds

Question:

Once the Rainy Day Fund is established, is it set or does there have to be a resolution each year?

Answer:

Only a single resolution is required to establish a Rainy Day Fund for a township. Additional resolutions in later years are not required.

Question:

My township is moving toward either purchasing adjoining land to a present cemetery to enlarge it, or purchasing new land to establish a new cemetery away from the existing one. After taxing for and appropriating for the project in year A, if the project is not completed in that year, can I (and my board) set up a Rainy Day Fund to carry these or the remainder of these monies over into year B to finish the project?

Answer:

In this case, establishing a Rainy Day Fund would not be the correct way to handle the situation. The sources of funding for a Rainy Day Fund are limited. One source is "unused and unencumbered balances from funds raised by a general or special tax levy in which the purposes of the tax levy have been fulfilled." Obviously, in this situation, the purpose of the tax levy has not been fulfilled, so transferring the money to a Rainy Day Fund would not be an option.

Two options for handling the situation are encumbering the funds from Year A to Year B or re-appropriating the funds in Year B through an additional appropriation. Encumbering the funds is only an option if there is a contract, purchase order, or some legal obligation allowing an encumbrance. If the township has none of these, then the money would have to be re-appropriated in Year B.

Other Questions

Question:

What is the formula for depreciation? Example: Fire Truck 1992 $289,000

Does it continue to depreciate?

Answer:

We assume this question relates to the implementation of a new accounting principle known as “GASB 34.” This principle is not a law or regulation. Rather, it is a generally accepted accounting principle. Such principles guide the preparation of the Township’s general purpose financial statements. These statements are usually prepared by the State Board of Accounts during their audit. However, even though the Board of Accounts may prepare the statements, the Trustee is responsible for them. In order for them to be prepared correctly, certain bookkeeping needs to be done.

“Depreciation” is a bookkeeping method that allows the cost of an asset to be recognized, a little each year, until the asset is expected to be worn out. Using this fire engine as an example, lets assume the Trustee’s estimate is that the engine will last until 2011, a total of 20 years, at which time it will have an estimated salvage value of $3000. That means the total depreciation over 20 years will be $286,000 (that is, the $289,000 cost less $3000 salvage value). The simplest depreciation method, and the one most often used by governments, is the “straight-line” method. By that method, exactly the same amount of depreciation is recognized each year. In this example, the annual depreciation would be $14,300 (that is, the cost of $289,000, less the $3000 salvage value, divided by 20 years.).

GASB 34 does not give much guidance on how specific assets should be depreciated. It is a matter of judgment for the trustee to decide how many years an asset is expected to last and what the salvage value will be. The main requirement is consistency. If one engine is depreciated over 20 years by the straight-line method, then all similar engines should be depreciated in the same way.

The “book value” of the engine is the original cost less all the depreciated recognized up to today. In the example above, 14 years of depreciation have accumulated since 1991. At $14,300 per year, that is a total of $200,200. The 2005 book value of the engine is the original cost of $289,000 less $200,200 of accumulated depreciation, or $88,800.

The straight-line method is not the only one allowed by GASB 34, but it is the simplest and most common. If you want to know about the other methods, just send us an email.

More questions and answers will be posted soon. We will notify you when this page is updated.

04/01/05

This article is intended to provide information of general interest to local government officials in Indiana . The information is not guaranteed to be applicable or appropriate in particular circumstances. Local officials should consult competent professionals before acting on any information contained in this article. We are not attorneys. Advice of a legal nature should be sought only from qualified attorneys.