6 Essentials for Maintaining Public Trust – What We Learn From Financial Audits

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Guidance for You and Me:

A 2005 publication titled  “Dollars and Sense: Financial Reporting and Management Guidelines for Public Water Agency Officials” was developed by ACWA as an introduction to the governmental financial environment and the fiduciary responsibilities of district directors and management. It is aimed at helping individuals without a financial background gain a better understanding of sound financial practices as well as key reporting and auditing requirements.

The purpose of an independent financial audit is to provide assurance apart from district management that district financial statements (reports) are reliable–that is, that the financial statements fairly present, in material respects, the financial position, the results of operations, and cash flows of the district. Such assurance is important to district directors, management and the customers, taxpayers and community or communities they serve.

Operating the district’s utility system in an open and transparent manner and demonstrating that the district  is a proper steward of public resources, including public funds, is essential to maintaining public trust. Therefore, any system designed to track, control and report on the financial affairs of a special district should include the following elements:

1. Internal accounting systems sufficient to track and document all financial transactions of the agency and adhere to Generally Accepted Accounting Principles (GAAP)
2. Internal controls designed in an effort to detect errors and deter fraud or other forms of financial abuse
3. Regular, frequent reports to the governing body on all significant financial activities of the agency using reporting that clarify the data being presented in a non-intimidating, usable format. The readers of the reports should be able to determine what the financial status of the district / agency is without the assistance of a Certified Public Accountant (CPA).
4. Written policies governing all significant financial affairs of the district, including a written policy on any funds that are held in reserve, (minimum and maximum amounts to be held and any specific use / designation for these reserves)
5. An annual financial audit by a qualified independent auditor.
6. Publication of all significant financial reports of the district, including the annual audit in a form that is readily available to the public.

Auditors do not attempt to ensure that all of the data contained in the financial statements are 100 percent accurate, rather the auditor is testing that the financial statements are free from any material misstatements. Auditors do not attempt to examine individually every transaction or event affecting a district’s financial statements. Instead, auditors perform their work on a “test basis”, which is often statistically based to provide a certain level of confidence.

For CCSD Directors:

Governing board members can gain a more thorough understanding of the district’s financial health by reviewing notes to financial statements as well as any estimates, assumptions, post retirement benefits and potential debts not listed as a liability. An annual audit provides the district governing board with the opportunity to provide policy guidance to district management in any areas deemed necessary, and the audit provides a “checks and balances” opportunity between an elected board and district management.
There are eleven questions  the district governing board and management should ask during the process of producing basic financial statements:

1. Is the district better off today than it was one year ago?
2. Are there any estimates in the financial statements? If so, what are they and what assumptions are used (e.g., interest rates, discount factors, usage rates)
3. Are there any pension and/or post retirement benefits being funded by the district? Is there any unfunded pension or post-retirement liability?
4. Is there any debt or potential debt of the district not presented in the financial statements?
5. Are there any deviations from GAAP?
6. Are there any differences between the published annual audited financial statements and the internal financial statements used by staff and directors to manage the district? If so what are they?
7. How do the statements compare to annual budgets and projections?
8. Do the investments tie to portfolio report?What is the review process to insure the financial statements are appropriate and accurate?
9. Does the district have written fiscal policy and procedure manuals?
10. Are the employees, board members and volunteers who handle cash and investment bonded?
11. Is there adequate insurance coverage to safeguard the district’s assets?

All content provided herein is from a Association of California Water Agencies publication.  (ACWA)  ACWA’s mission is to assist its members in promoting the development, management and reasonable beneficial use of good quality water at the lowest practical cost in an environmentally balanced manner.
ACWA is a statewide non-profit association whose 440 public agency members are responsible for about 90% of the water deliveries in California.

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