HUD-US DEPT OF HOUSING & URBAN DEVELOPMENT: How to Read Financial Statements - Intermediaries

Transcription

1 Final Transcript HUD-US DEPT OF HOUSING & URBAN DEVELOPMENT: How to Read Financial Statements - Intermediaries SPEAKERS Virginia Holman Wilfredo Corps PRESENTATION Moderator Ladies, and gentlemen, thank you for standing by and welcome to the How to Read Financial Statements conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. (Operator instructions.) I would now like to turn the conference over to our host, Ms. Virginia Holman. Please go ahead. Virginia All right, thank you very much, Kathy. This is again Virginia Holman with the Office of Housing Counseling, and we re so pleased that you have joined us for this really valuable webinar on how to read financial statements. Before I turn it over to the presenter, I d like to go over some logistics. The audio is being recorded and we will be posting the replay number, a transcript, and the PowerPoint on our archive section, which is now located on HUD Exchange. We ll send out a Listserv when that s available. As Kathy said, all your lines are muted but there will be some

2 Page 2 questions periodically that you can ask and the operator will then tell you how to do that exactly. Next slide, but there are also some other ways to ask your questions. On the control panel, on the right-hand side of your screen, there s a box that says questions. Just type in the question and we have staff that are monitoring those, and they will make every effort to answer them during the webinar. Afterwards, if you think of a question, you can also send it to housing.counseling@hud.gov, and just put overview of How to Read Financial Statements in the subject line. There is going to be a brief survey at the end of this session so if you would just stay on and complete that survey. All of your input is really valuable to us in improving our webinar training that we give to you. You also within 48 hours will be receiving a thank you for attending from GoToWebinar which may also say from Virginia Holman. That is in fact your certificate of training. There will be no attachment. It is the . At the bottom of the slide it shows you what it s going to look like. So you need to print that out and save the for your records. At this point, let me turn it over to the representative from Booth Management who will conduct the rest of the webinar. Thank you very much. Wilfredo Hi, everyone, my name is Wilfredo Corps. I ll be the person conducting your training today. As Virginia mentioned, there s going to be some points during my presentation at which I m going to pause and try to address any questions that we have. If for whatever reason you don t get an answer during the presentation, if I miss your question or for whatever reason, you can be sure that the responses will be provided to you at the end via . Just make sure that you send it to that address. We will provide you the address again towards the end of the presentation in case you didn t get it when Virginia provided to you. Today s topic will be on how to read financial statements. Again, I m Wilfredo Corps. I m with Booth Management Consulting. Some of you, I don t know who s on the line, obviously, but some of you perhaps have seen me, heard of me or have had conversations over the phone.

3 Page 3 I ve been working on the contract that we have with HUD now for I will say six, seven years conducting a lot of the financial and administrative reviews, providing technical assistance to over 100 grantees. So I m very familiar with the grant award that you get from HUD Housing Counseling Office, and so forth. As we go through the slides, I don t mind if questions are asked. Obviously you re all on mute, so we ll try to read those questions as we go along like I mentioned. The topics for today will be the different levels of financial reporting, different types of audit opinions, some key financial reports, the single audit requirements, and then at the end we re going to have another opportunity to ask additional questions. The purpose of today s training will be to provide an understanding of those different levels of financial statements and then to provide an analytical discussion on the fundamentals of reviewing audit reports. In other words, obviously we are under the assumption, or I am, that a lot of you are not accountants as we are, so perhaps when you get a financial statement, the first thing that comes to mind is what is it really mean. What is it telling me? What should I get from this financial statement? What conclusions should I draw from it, and so forth? So those are the different things that I ll be discussing throughout the presentation. As well, there will be things that we will call red flags. Some of them are as easy as looking at the findings section but then some of them may require a little bit of background of why, what does it mean, why am I looking at this and so forth. Then hopefully you will get a better understanding of the financial performance. What indicators or what should I look for in the financial reports that will tell me about the financial performance of the organization that I m reviewing? Or perhaps, for your own organization, what is it that your auditors are going to report so you better understand what you re saying about your own organization to either HUD or any other funders that require your financial statements? There are different levels of financial reporting. Depending on the requirements that you have, we will get to this in more detail, but there are some thresholds. For example, if you spend or claim more than $750,000 on federal awards, you are going to have to complete an A-133 as part of your financial statement audit. So in that case there will be an audit opinion as part of that audit.

4 Page 4 However, if you spend less than that, then you have different options and these are different levels of reviews or different levels of audits. Perhaps if you have a relationship with the bank or maybe even though you didn t spend over $750,000, you re a grantor or federal agency that is providing you funding, HUD or any other agency perhaps will tell you we would like for you to provide us a review or do a compilation. These are the different levels, compilation being the most basic one. There is no opinion provided on that compilation. In other words, on that one you are telling that organization these are my numbers. This is my income, these are my expenses, and so forth, but there is no opinion. That is something that could most probably be done by management. Then, there are organizations that perhaps don t have the knowledge even to do a compilation because like I said you don t have maybe an accountant on staff depending on your size and then you might have to hire a CPA firm. These compilations are, I will say, fairly inexpensive as no opinion is provided. They could be done fairly quickly as well. From there, you move to a review. This one provides limited assurance that there are no material modifications to the financial statements and that they are in conformity with GAAP. Again, there is no opinion provided either so it would be something that accounting firms could do fairly quickly as well. There s no risk to them so they don t have to go to such an extensive testing and perhaps spend that much time doing that review. Then, you go to what we will call a full report or full audit. These are the ones that you ll be required if you were to spend over $750,000 of federal funding from a combination of agencies. It doesn t have to be just from one agency, and in this case this is, in terms of financially speaking, this will be the most expensive one. This one provides the highest level of reporting providing an opinion of whether the financial statements are prepared in accordance with GAAP. Then because of that and because there s an opinion involved, there could be extensive testing performed and that is what normally makes the audits longer and more expensive depending on the amount of testing that normally the audit partner in the firm is the one that decides because his signature is the one going in the report. So that partner will be the one that will determine how much testing needs to be done.

5 Page 5 Normally, you only do those if you spend over $750,000 on federal awards. I want to make clear as well that it s only if you spend $750,000, not if you received over $750,000 in awards. You can receive them, but you don t necessarily spend them. It has to be that you actually use the funding, just wanted to be clear on that. In terms of the different audit opinions, which from this point forward we re going to concentrate on the report that requires the audit opinion. That s the one that will be the most important. The other two are, I will say, not that common. So in terms of the audit opinions, these are the different, I will say, main five opinions that could be in a report. They are it used to be the qualified or unqualified, now it is unmodified and modified. Then from the modified, you could have a going-concern disclaimer and an adverse opinion. Those three fall under the modified. Unmodified will be in other words when an independent auditor judgment is that a company s financial statements and records are thoroughly and appropriately presented in accordance with GAAP. This is by far the most common opinion, I will say. We will show you some examples of what it looks like. This is obviously the one opinion that everybody would like to have. Here, this is a standard language that AICPA and GAAP requires for auditors to use. Here, if you look at the third paragraph from the top down, you will see that it says, In our opinion the financial statements referred to above represent fairly and in no material respect to financial position. That is the key sentence that you re looking for. If you re just kind of browsing through a financial statement, and you want to see okay what kind of opinion they received, this is where you want to go first and then obviously you can go look more in depth in terms of the many notes to the financial statement and so forth. Here is where you will see if there was a modified or unmodified opinion or qualified or unqualified opinion on the grantee. Then, opposed to that, then obviously we have the modified or qualified opinion. These opinions are given for two reasons, mainly two reasons. First is scope limitation which means that the auditor doesn t have access to enough information or to relevant information to provide an opinion, and then the second is in the circumstance that there is a departure from

6 Page 6 applicable financial reporting framework, which may be the result of either an accident or negligence on the part of the client being audited. Here is when the adverse or disclaimer opinions come into play where the auditors, they just don t feel comfortable enough to provide a clean opinion and they will explain. Normally what you will have is you will have in the opinion the qualified or unqualified, and then when you go to the actual notes of the financial statement, that s where you will see the explanations in more detail as to why they reached this conclusion and why the auditors decided to provide this type of opinion. You will see that mostly in the notes. Then, we have the going-concern. This is, I will say, the most wellknown adverse opinion is when there s a going-concern exception. This was saying that the accountant has doubts that the company as a whole will be able to remain in business. A good example on this one would be when we re doing these financial audits for example and we go to the company which they are relying heavily on federal award. When I say heavily, I mean 70%, 80% of their funding is coming from one specific agency. As we re looking at that agency, and the actual program that is being funded under that grant, we determined that either the goals of that program are actually coming to an end for different reasons or maybe because the agency already told the grantee that they are going to have to cut funding for a variety of reasons. Anything that we see that is casting a doubt on that funding for the future, we as auditors have to express a going-concern. That doesn t mean that there s anything wrong or anything bad found or any exceptions found, perhaps, while we did our testing. That could solely be determined on what we see for the future for the next coming years in terms of situations that organization will be facing. That is just one example in terms of the funding, but there could be other things. There could be that there is a lawsuit. There could be so many other things that as an auditor we have to let the audience of this financial statement audit know in terms of the agency going forward. Here is an example of how a going-concern opinion looks like. As you see, the opinion in the third paragraph, the opinion is saying that we didn t find anything; however, there is a fourth paragraph that is added only because of the going-concern. Again, this is standard language. Most of

7 Page 7 the times this is the language that you will see regardless of the audit firm that is doing these audits. In the first sentence, we normally state it. It is stated in our first sentence on the fourth paragraph, and as you can see also in the second sentence it says, "A discussing note X to the financial statement." So there is where you will go on that note you will see the reason why the auditors are expressing this going-concern. I will say even though it s not that common, in the grand scheme of the audits being done, when there is an adverse opinion, this is one of the most common ones, this going-concern issue. The other one is a disclaimer, and in this one, an auditor may decide to issue a disclaimer of opinion if one of four circumstances are applicable. There s a lack of independence, of scope limitations, substantial doubt about the organization s ability to survive, or matters involving uncertainties. In this case, the auditor s saying I m not going to provide an opinion at all. They are not even providing an opinion on modified. In other words, here, they are saying, I m not able to provide an opinion at all. Then, again, the reasons will be explained in the notes to the financial statements. Then, the adverse is a professional opinion made by an auditor indicating that a company s financial statements are misrepresented, misstated, and do not accurately reflect its financial performance and health. This is perhaps the worst opinion that an organization could get because what we re saying here is that the financials were manipulated, are not reflecting what the company is saying or acting like. They either falsified information, misstated numbers for different reasons. So this is I will say in very rare cases the adverse opinion is provided, but obviously it is an option. When you see that, if you are a funder, or if you are a partner of that organization, I will say that that is the moment for you to really reconsider the relationship that you have with somebody that is getting an adverse opinion. That, obviously, is something you don t want to see or something you don t want to get when you are being audited. Also as I mentioned, if you spend over $750,000 of federal funding, then you are required to have an A-133 audit done, what is known as the single audit. These single audits don t have to be done in conjunction with your financial statement audit, but normally for financial reasons, it is more

8 Page 8 cost effective for the organization being audited to have an audit firm do the financial statement audit and the A-133 audit combined normally obviously at the same time. That is I will say the rule of thumb. I have seen cases where they have been done separate, but it s very rare as well. Normally the same audit firm does both. As part of the process, when they are these A-133 audits need to be completed within nine months after the end of the fiscal year of this entity. Then, the auditors are required to submit their report to the Federal Clearinghouse and that is also required to be done within nine months timeframe. That is one of the things that when we go out and do that, I don t know if some of you on the line belong to organizations where we have done the financial and administrative reviews. If you have perhaps we have normally when we go out, we will ask you for the notification or for the evidence from the Federal Clearinghouse that the audit was actually submitted just to confirm that it was done within the nine months. At the end of the day, this is really the responsibility of the auditors. They should know that it has to be done but it s really good for the agency to know just to make sure you follow up with them and that you perhaps double check with them that it was actually done and submitted within that nine month timeframe. There are a few key financial statements that are part of the entire financial statement report; they have different names based on the status of the organization now is if it is a not-for-profit or if it is a for-profit organization. Most of the ones on the line today I will suspect are not-forprofit. These are the main key financial statements that will be prepared by your auditors. The statement of the financial position. That will give us an idea of the assets, liabilities and the equity that the organization has. This statement of activity, and perhaps the most common names are the ones used in the for-profit like the balance sheet, the income statement, statement of cash flow. For-profit has P&L, people call it. In the not-for-profit world, they have different names as we have there. Depending on the one that you re looking at, they re equivalent; the statement of financial position to the balance sheet, and so forth. The statement of activity will be the revenues and expenses and the changes in those amounts during a given period.

9 Page 9 These financial statements, as perhaps you know, you ve seen, normally you ll have the year being audited and the previous year, side by side. So, it gives you an idea, a picture of what has been going on from year to year, if things have been getting better or if things are getting worse, let s say. That information is in the financials as well. Then the statement of cash flow reflects the changes in statement of the financial position accounts and then assets that affect the cash and the cash equivalents. So, that one is a key statement that we look at because that talks about how liquid the organization is, the ability for that organization to fund the current liabilities and to pay them on time and so forth. The cash and cash equivalents is something that as auditors is very important. Then we have the same in functional expenses. That in essence reports expenses according to both function and nature of that expense. Those are the four statements that you will see 99% of the time in the entire financial statement. As I was talking about, the statement of the financial position, you will see there the total assets, liabilities, and the net assets which will be that equity that the organization has. Then within those net assets, there could be unrestricted, temporarily restricted or permanently restricted, and those are depending mostly on the funding or the funder of the organization, and depending on their restrictions that they have put when the organizations have been awarded grants, for example, or received any funding from any organizations, sometimes they just put a restriction on it for a few years. Sometimes they will give you perhaps X amount of dollars and the organization is only allowed to use the interest obtained from that funding, just to give you an example of the permanently restricted. So you re not allowed to touch the principal. Those were the terms that were provided by the funder when they gave you the money and you accepted them. Those would be reported as permanently restricted in your financial statement. There could be a variety of reasons of why some could be temporarily restricted. Those are the different classifications of the net assets. They not all have to be present in a financial statement. They could be all unrestricted, for example. In that case, that would be the only category of net assets shown in the financial statement.

10 Page 10 One other thing that we do analyze from the statement of the financial position is what we call the current ratio. That is the ratio between the current assets to current liabilities. Normally, we want a ratio under one. These are just standard numbers being used across the board. There could be reasons why, for one specific period, the number is higher. What that means is liabilities are higher than those assets. This is when we say current that means there is also a long-term portion of the assets. Current meaning that one year that we are looking at. When we do the ratio, it s just dividing one by the other, we want to see that the company obviously has more assets than the liabilities that they have to pay for that period, which is common sense. If you have assets for $1,000, we want to make sure that you don t have to pay more than $1,000. If for any reason the ratio is higher than one, then we could look at other things and see what the reserves were from previous years and perhaps you re still in good shape and there s something that happened that year that required the organization to have to pay more than what they earned during that period. So, it needs to be analyzed on a case-by-case basis, in other words. Then, we also need to look at the current portion of the long-term debt. You have a loan, or a mortgage, or anything that is financed for more than a year, we need to take into account the amount of that debt that needs to be paid within the year that we re looking at. Those are, I will say, the main things that we look at when we re looking at the statement of financial position. In the statement of activities, there could be a net loss, like I was inferring when I was mentioning the example. It doesn t necessarily need to be a bad thing. Obviously, we d perhaps rather not see that but if there is a loss, sometimes there are known cash transactions that in paper will show a loss that didn t include any cash for the period. But the way they are reported they just make the numbers look worse than what they really are. When we see a net loss, the first instinct or the first reaction is normally to go and look at the previous year. That s why, when we have the notes or the numbers side by side, it s very helpful because we can then compare what happened the previous year to what happened this year that we are auditing and see if there were reserves or the ratio that we had the previous year was something that was planned, let s say. The organization knew that that was going to happen. There could be a variety of things, so that s

11 Page 11 why a net loss doesn t mean a bad thing. We have to then look at the bigger picture to see what really happened. Now, one thing, like I mentioned, when we have this side by side, we re looking for those large fluctuations on the income, obviously expenses, why there was much higher expense on a certain category the year that we re looking at as a compared to the previous year. Why are we getting less income this year than last year? Or, even the other way, what happened that we now doubled the income this year from the previous year? So all of those things are taken into account when we re looking at the statement of activities. A key also there is looking at the leveraging of funding from nongovernmental sources. When you re receiving federal awards or state awards, federal agencies want to see how other funding is being obtained and if there s any other funding obtained to help run the program. In this case, talking about the Housing Counseling Award, it is extremely important that agencies are able to obtain funding from other sources to be able to fund the program overall because it takes much more than what you are receiving from HUD. That s something that when you look at the financial statements we can see how this other funding has been obtained, how much is coming from nongovernmental sources and so forth. So that talks about the fundraising that this organization is doing to help run the organization and the different programs that they have in place. When you look at the cash flow statement, the cash flow is broken out in between three different categories. You will see the cash flow from operating functions, from investing, and from financing. They are pretty self-explanatory. The operating portion comes from the day-to-day functions. Is there any program income or what are the different functions done on a daily basis that provide cash or that use cash on this organization? From investing, where is the company or organization investing its excess funding? Are they receiving any income from that? Then, financing, clearly there we want to see what are especially any loans. Is the company having to incur loans constantly to fund their operations? Are they going to be able to actually repay them accordingly in a matter that doesn t compromise the operation of the organization, for example? So those are the things that we re looking at on that cash flow.

12 Page 12 In terms of functional expenses, the key here that a lot of funders look for is how much of the actual revenue from this organization is going to these administrative expenses or fundraising expenses. What we re trying to obviously obtain is the lowest possible administrative expense so that when a funder or any federal agency, state agency, when they re looking at providing a grant to your organization, you are attractive to them. They feel like they give you $100,000, that most of it, $80,000, $90,000 of it is going to go towards the actual operation or the actual goal for which they re giving you the money for as opposed to spending a lot of money running the organization and then having difficulties actually obtaining the goal of the award. This is I will say a challenge that I see constantly and this is why being able to obtain funding from private organizations is so essential. It is extremely important, or from individuals or in your case I ve seen a lot of grantees obtain funding from banks, credit unions, and so forth to help defray the cost of running the organization so that the actual grant awards are utilized to provide the counseling that is really what the program is all about. Clearly, we all know that there s some cost associated with running an organization. That s a given, but still it is something that we look at. So make sure that those expenses are in line with what the benchmarks that we have out there, for example. Let me actually take a look here and see if there s any questions. Let me see if I m able to open this. I m not sure. M Wilfredo M Wilfredo Moderator Wilfredo Moderator Wilfredo, we don t have any in the queue. Okay. I was just having trouble opening the small window. So, we re fine. You can check and see if there are any on the line. Yes, is there any questions on the line before I move forward? (Operator instructions.) I ll just wait a minute to see if anybody has any questions before I move. No one is queuing up.

13 Page 13 Wilfredo All right, then there s some financial disclosures as well as part of the overall financial statement audit and report. This is additional information that is attached to the entity s financial statements. It s usually an explanation for activities which have a significant influence on the financial results of the said entity. Those could include debts and commitments. They could be any separate legal footnotes, subsequent events. There could be many other things that need to be disclosed in this financial statement. It could be the going-concern explanation, different things. Normally, I find the most usually in the notes, the most useful information, when you re trying to understand what s really going on and if you re having a hard time understanding the numbers, normally when you go to the notes you get a pretty good idea if there s anything that you really need to know will be there. If you don t see anything on the notes that gets your attention, and you see a clean opinion, perhaps there s nothing that the auditors felt that the readers need to know about that organization. That doesn t mean that there could ve been some comments from the auditors to the organization especially to the organization s management. There are some issues that sometimes do not make it to the level of financial statement finding, and there are comments that the auditors want to make sure that they share with the organization. These are normally shared in the form of a management letter. There isn t always a management letter. Based on experience, I will say that 60%, 70%, around that number, of financial statement audits also have a management letter. In this management letter you could find items that the auditor felt that didn t have any effect on the financial statements and how the numbers were presented but that still management should consider making those, I will say, minor changes for future years. Perhaps they might at some point provide the same comment on a management letter in back to back years. If they see the organization is not doing anything to actually fix it, they might decide, okay well let s put it on the financial statement as a finding because now it s been a minor

14 Page 14 issue for a couple of years and then it becomes a financial statement issue. Perhaps at that point, the organization will then fix it. I have seen that as well happen. Now, like I mentioned, these are organizations that spent over $750,000 federal funding and are required to do the A-133 audit or the single audit. In the next few slides, I m going to talk to you about the couple of reports that are part of the A-133 audit, where to look for the findings, and how to understand those findings in general on the A-133 reports. There are mainly two opinions that will be present on these single audit reports. There is going to be one related to the internal controls, and there s going to be one related to compliance. This is exactly how they are named, and again this is standard language, so this is how you will see them called regardless of the audit firm that is conducting the audit. The first one is the report on internal control over financial reporting and noncompliance and other matters based on an audit of the financial statements performed in accordance with government auditing standards. All of that you ll see normally in that one opinion. So that you know, the key there is that you really see that what we have in bold that this has to do with the internal controls of that organization. Then, the second one is the report on compliance with requirements that could have a direct and material effect on each major program and on internal controls over compliance in accordance with OMB Circular A So this one has to do more specifically with the requirements stated in the A-133 Circular. Then the first report, like I mentioned has to do with the internal controls in the organization, how they are designed, and so forth. So that s the main difference in between those two. As you can see, this is the language; you can look at the top and you ll see that this is the report on internal control over financial reporting and on compliance and other matters based on an audit. You can see the whole thing there. This is again standard language being used by whatever firm is providing the opinion. Here, there is always a key section or a key center [ph] that you want to look at, and here will be towards the end when you see compliance and other matters, this section in the middle, it s really definitions. If you see that there is a finding, it will be listed there under that third paragraph. Then, when you come towards the end, you will see that as part of

15 Page 15 obtaining reasonable assurance about whether the organization financial statements are free of material mistakes, we performed tests. It gives you the information to then determine there were findings, there were no findings, and if there were findings, I will show you where you can see them as well. All of this regarding the A-133 audits is mandated by the OMB Circular A-133, not only the requirements for the organizations obtaining the funding but also it tells the auditors how to conduct the audits. So there really is no room for an audit firm to go in and say we re going to do it differently than this other firm. The requirements are described in the same circular, so we have no leeway in terms of what we want or don t want to do in the audits. We don t have a choice. We have to follow these regulations as well. This will be the second page of the opinion. This will normally be signed by the partner of the firm doing the audit. Then, we have this will be the second report that I mentioned, the independent auditor s report on compliance with requirements that could have a direct and material effect and yada, yada, yada. So you see the composition of it is fairly similar, just the language is a little bit different. Here, if you look at the third paragraph from the top, this is where you really want to come and see, okay let me see what happened. It says, in our opinion, organization ABC complied in all material respects with the compliance requirements and yada, yada, yada. In this case, this was a clean opinion regarding the compliance with the requirements of A-133. Standard language again, so this is the first page of the audit opinion and then here s the second page as well. Similar than the other one, as you see it has to be signed, dated by the partner of the firm doing the audit. Now, where will you find these findings? Again, as a standard part of these reports, there s going to be a schedule called the schedule of findings and questioned costs. This is what it looks like. It is a set of questions that the auditors have to go one-by-one and answer. As they answer them, it has to be included in this report. So you can go into any A-133 audit, done by any firm, and you will always find this schedule. Similar questions, obviously, the answers that you re looking for, if there were any material witnesses.

16 Page 16 I will tell you that I really like this schedule because it gives you a glance of in a one page document what really happened there regarding federal funding. If there were findings, if there were no findings, if there were any material witnesses, and what type of opinion was provided. In this case you can see it was unmodified. So in a nutshell you get, I will say, pretty good idea what s going on from this report. This continues that schedule. Then here, you can see also as well at the top you can see which to me is very useful as well if the auditee will qualify as a low risk auditee. If it s yes or no, and that also gives you an idea of the kind of testing that was done. Higher risk, so more testing. If it qualifies as a low risk less testing, but also that was due because of the results of previous years. Then, if there were material witnesses, or any additional findings, you can see them here in the second section called financial statement findings. Here, you will see there is a set structure for these findings as well. The yellow book requires auditors to present these findings in a certain way and we need to include our criteria, the condition, the effect, the cost and the recommendation. Those five elements always need to be part of those findings. Again, you have that same format regardless of who did the audit, you will always see that kind of language. So this report could be one page; it could be three, four, five pages. It will depend on how many findings were during the audit. So, it could vary depending on the results. Then here in Section 3 and Section 4, federal award findings and state award findings and in this case in this example there were none reported. So again based on results, this could extend a few pages. What do we mean with findings or which are the common findings? Well, these are, as I see it is, these are the areas of improvement. Depending on the severity or how meaningful these findings are, these were the grantor could decide to maybe put the organization under probation, could decide to terminate their relationship with this organization, or could decide, which is most of the cases, to continue the relationship with this organization. That is what happens in most cases, in a very high percentage of cases. Some of the most common findings that we ve seen especially as we re dealing with these financial and administrative reviews that are being

17 Page 17 performed at several organizations are the lack of segregation of duties, and then the lack of ability to prepare a complete set of the financial statements including those footnotes. Those mainly are because a lot of organizations are too small to have the staff necessary to have an ideal segregation of duties. In some cases, they lack the knowledge on how to actually segregate those duties. That is pretty common, I will say, on our reviews, when we look at the financial statements from these organizations. The one where we see here the lack of ability to prepare the financial statements for the same reason. Some of these financial statements require some level of expertise about certain things financially related to the organization and not all organizations are able to have a staff in place to complete those financial statements and the footnotes. A lot of organizations actually rely on their auditors to help them prepare their financial statements which is also, I will say, it is a pretty common practice on the smaller organizations and is something that is allowed to be done. So as part of these reviews or other findings, we ve had question calls regarding compliance issues when the expenses claimed were not supported. The information provided didn t support the cost claim. Or, the information was not provided at all. For example, in some cases, the reporting is not complete. There are fairly specific elements that need to be part of the quarterly reports, for example, that need to be submitted to HUD in this case. A lot of times when we are looking at those quarterly reports, there are elements that are not included for different reasons. Sometimes the grantee didn t know what needed to be reported. Even though it is part of the grant award, but sometimes, personnel turnover or any other reasons are preventing the grantee from submitting the proper information in those quarterly reports. A very key area that I always try to look for is if there are any repeat findings. If there are, why? The first thing that comes to mind as an auditor, we are very skeptical and we are always thinking that there is something going on. That s just in our nature. What is going on here that I need to find or that I m not aware of? When I see a repeat finding, the first thing we want to understand is why it wasn t addressed last year

18 Page 18 when it was a finding or maybe during the last two years or for however long that finding has been going on. I have been in places where there are valid reasons for the repeat findings, but we have to take it obviously on a case-by-case basis so that we understand what s going on. Ideally, that s something that we don t want to see. We want to see those findings being resolved by the grantee when they are provided by the auditors and an explanation as to why they were not resolved. So that s another key area that we look at on that. I would suggest if you are analyzing financial statements from whatever company, either to determine if I want to do business with them, look at multiple years of financial statements just so you can follow that trend and see if they are actually improving or if they are not from year-to-year. That s all I have in terms of overall. That really covers the bulk of the basic information that you will need to look for or look at when you are reviewing financial statements. For the most part, they are all pretty similar in how they look, how the information is presented. So don t be expecting for a bigger company a more complex financial statement than for a smaller one. In most cases, that could actually be true just because they have multiple different funding sources and they obviously have a bigger range in terms of the different expenses that they have reported in the financial statement as well. When you get to the A-133 report, that one will be pretty much standard across the board regardless of the size of the entity that the financial statement that you re looking at. As Virginia mentioned at the beginning, any questions could be asked now. After the slides, I m going to give you a chance. If you think of anything, after the presentation today, feel free to send an to this here on the screen, housing.counseling@hud.gov and the question will be routed properly to the right person so that you can get the appropriate answer. I want to thank you, and I also want to give you an opportunity to ask any questions if there s any at this point in time. M No questions at this time, Wilfredo.

19 Page 19 Wilfredo Okay. Well, thank you very much. I don t have anything else at this point. I hope that you have learned something. That was really the goal from the presentation that you learn something that you didn t know when we started. So you ve been a great audience. Thank you very much for your attendance, and I hope to speak with you soon or see you somewhere where we can be of help. So thanks a lot, and have a great day. M Moderator Thank you. That does conclude our conference for today. Thank you for your participation, for using AT&T Executive TeleConference Service. You may now disconnect.