Financial Reporting and the Expectations of Departmental Audit

Committees

Arn van Iersel, FCGANovember 26, 2008

Importance of Audited Financial Statements Departmental Audited Financial Statements are key

to the Federal Government Accountability Initiative.Audited Statements help improve departmental

accountability and overall financial practices including reporting e.g. Demonstrate proper stewardship for resources

entrusted to departments.Provide credible (audited) financial information for

reporting back to the public.Can be married up with non-financial performance

information for comprehensive performance reporting.DAACs can be useful advisors to get to audited

statements.

DAAC Mandate-Financial ReportingTB Directive (Section 4.2.7):Prior to audited statements:The DAAC is to review the statements and recommend

acceptance to deputy head.Review includes discussions with management,

examination of accounting policies, estimates, and adjustments.

Once audited statements are prepared: The DAAC is to review the statements with the external

auditor (OAG) and senior management.Review includes examining significant audit adjustments as

a result of the audit, review of any difficulties with management during the audit, OAG findings and recommendations, management’s responses to audit issues, and performance of the external auditor.

DAAC Responsibilities-Financial ReportingTo understand the business of the department.To understand the statements and related

financial information.To assess the appropriateness of the accounting

policies, underlying estimates, judgements made.To review the overall transparency of the

statements in reporting the financial status and operating results.

To understand not only the numbers but he quality of the financial information and how they have been assembled.

DAAC Expectations of DepartmentManagement clearly acknowledges they are

responsible for the statements.Professionally prepared statements consistent with

GAAP.Statements free of material error.A frank and timely flow of accurate and relevant

information.Prompt follow up and response to DAAC enquiries.A strong financial statement preparation team that

works toward best practice and continuous improvement.

DAAC Expectations of Department-Cont’dStrong support from the deputy head, executive

and CFO.Excellent understanding of public sector GAAP

and its interpretation and application.Clear supporting documentation and rationales.A strong internal control environment

supporting the financial reporting function.Close working relationship with the internal

auditor and tracking and prompt follow up of audit recommendations.

Departmental Expectations of DAACsConstructive independent advice aimed at improving the

financial statements and reporting practices of the department.

At least one member that: Is experienced in reviewing financial statements and knows

public sector GAAP.Understands internal controls and the certification process as it

relates to financial reporting.Asks probing questions in the area of accounting policy,

processes and timing, and financial statement presentation and review.

Probing of unusual and significant transactions.Works well with Management and the external Auditor (OAG).Adds value to the departmental financial function including

financial reporting.

Questions the DAAC will askBefore Audited Statements:

What are the major financial reporting and internal control issues facing the department in moving to audited statements?

What have we learned from the assessment of readiness for audited statements?

Is there a realistic and defensible plan that gets the department to audited statements?

How do you justify the timing for introducing audited statements?

What are the major risks and opportunities in the audited financial statements implementation plan?

How will the plan be monitored and reported on back to the Audit committee?

Does the department have the necessary resources (people, systems and controls) for achieving the plan?

Questions DAAC will ask-Cont’dWhen Audited Statements are in place:How appropriate are the accounting polices,

principles and practices?What were the key judgements and major estimates in

pulling the financial statements together?Were alternative accounting approaches considered

and what is the best representation of the substance of the transaction?

What were the unusual transactions for the period?How does the deputy and CFO know what they are

signing off is correct?What was the sign off process for the statements?What audit adjustments were not made and why?Were there any frauds or defalcations?

Some ChallengesAcknowledge that audited statements are a

means to an end not the end itself.Departments need to put in place the people, the

controls and the systems.Take accountability and make it happen.Establish a detailed plan and make it work.Fitting DAAC’s into the financial statement

preparation and review process, including the requirements of the OAG.

Being ready for a controls reliant audit rather than a substantive audit

The OpportunitiesThe Federal government will be one of only two

senior governments to publish departmental or ministry financial statements below the Summary Financial Statement level.

Developing audited statements will help to improve the financial systems, provide discipline and improve rigour.

The Federal government will be ahead of PSAB just having approved a project on “Issues with Entity level Financial Statements”.

Using the expertise and guidance of your audit committee members in resolving issues.

Confirms the Federal commitment to improving oversight and departmental accountability per the Federal Accountability Act.

Summary Comments/Conclusions1. This is a great opportunity for Federal

departments to improve financial practices and reporting

2. Departments will only succeed if they take responsibility and make it happen.

3. Recognize that there will likely be improvements to the statements over time.

4. This is one big step in the journey not the final destination.

5. Work closely with the DAAC and OAG.6. Make a realistic plan and stick to it.

Questions/Comments/Contacts

Are there any questions/comments?

Contact Information:

Arn van Iersel, FCGAavaniers@shaw.caPhone: Home-250-652-4865 Cell-250-516-4865