Unfair to the Fair: Much ado about audits

As a certified public accountant, a longtime Fair supporter and patron, and now — as of Wednesday — a member of the finance committee for the Fair, I am again frustrated to see the term ‘forensic audit’ in a headline or an article involving the Fair, the Board of County Commissioners, and the County Clerk. I liken it to yelling fire in a crowded movie theater in terms of the gravity of audits. So what is the difference in a financial statement audit, an internal audit, and a forensic audit? And what does this mean to in terms of the Fair and its financial soundness? Let’s take a look:

Forensic — ‘Forensic accounting services generally involve the application of specialized knowledge and investigative skills possessed by CPAs to collect, analyze, and evaluate evidential matter and to interpret and communicate findings in the courtroom, boardroom, or other legal or administrative venue. More simply, in the context of litigation, the term forensic means to be suitable for use in a court of law.’ These are not my words, rather the definition from the American Institute of Certified Public Accountants. It does not mean ‘full economics — dollars and cents, acquisition and disposition of funds’ as Commisioner Stewart stated in Friday’s article. It does not mean an audit with ‘general scope’ and for reaching ‘reasonable assurance’ as stated to me by Pat Raffee, Chief Deputy Clerk, when I asked in a phone call Wednesday specifically what information from the internal audit caused their office to ask for a forensic audit. This is the issue and why further education appears to be needed for all parties involved before the word forensic is ever used.

Financial statement audits have been performed for years on the Fair by an external auditor. They perform the audit in accordance with Government Auditing Standards that require they plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Fair has received an unqualified opinion every year. What does that mean? Unqualified means that the external auditor doesn’t find any financial statement issues and is the best opinion in an auditor’s report that any entity can achieve. Here is where the county clerk’s office should have achieved their reasonable assurance; otherwise, they are implying that for years this service has not been performed. I have complete faith that the external auditors did a thorough and professional job given their level of expertise and experience and the firm’s professional reputation. There is an additional report that the external auditor does that identifies internal control issues that need to be addressed, however, each year that items have been noted the Fair has taken steps to address those concerns.

Internal auditing, as defined by the Institute of Internal Auditors, ‘is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.’ This standard was not utilized in the county’s internal audit. The internal audit report objective stated that their work was to ‘identify areas for improvement, and recommend any additional controls which may be needed so that the County and the Fair Board attained reasonable assurance that the Fair’s financial reports are accurate.’ And here may be where the true issue sits — their objective is nowhere near what professional standards call for and severely overlaps what is the objective of a financial statement audit.

I spent five hours reviewing the internal auditor’s report, the Fair’s response to that report, and the Fair’s audited financial statements for 2012-2015. Note though that the 2015 financials are still in draft form because, when an actual forensic audit of an entity is called for, the external auditor is required by Government Auditing Standards to hold off on reporting until they can gain an understanding of that request. The use of the term ‘forensic’ is not something the accounting profession takes lightly.

The internal audit report comes with 21 recommendations — a lot for what was an internal audit of limited scope. I agree with many items such as elimination of payroll advances, mileage paid per IRS guidelines, systems administration and distinct logins for personnel, two people go to the bank to make a deposit, and others. I disagree with others that appear to have no basis such as the recommendation that the Fair Board keep minutes of all their meetings, since that is what the Fair already does and the internal auditors based that recommendation by looking at files kept by the County and not the Fair.

Two recommendations in the internal audit report were to parties other than the Fair — one to the County and one to the external auditor suprisingly. The County can’t implement their recommendation based on law, specifically Idaho Statute 22-202, and why the Fair Board Chair, Gerald Johnson, appointed me to the Finance Committee. The one to the external auditor is the one that is more concerning to me as a CPA, which included sending audit findings to the Commissioners and to invite the County Clerk/Auditor to their presentation of the audit to the Fair Board. This is because if the external auditor where to implement this any second year accounting student knows that this would be a breach of professional ethics. The Fair is the external auditor’s client and this would be akin to your CPA mailing your tax return to someone else because they think they ought to have the information. The internal auditing staff in the County Clerk’s office, many with the initials CPA behind their name, should understand the professional ethics issue with this recommendation as well. I think this demonstrates, along with the vagueness of many of the findings in the internal audit report, the lack of direction on the internal audit, and the fact that professional standards for internal audits don’t appear to have been considered, that the Internal Audit staff of the County Clerk’s office may need to invest in continuing professional education. It is important to note that the Fair has a County liaison, Commissioner Stewart, and the other County Commissioners may attend the public meeting where the audit is presented and findings are discussed.

So, financially, how’s the fair doing? Pretty good. Operating revenue in 2015 was down compared to 2014, but that is typical when there are large weather or climate issues (last year I believe it was smoke from nearby wildfires). Overall though, operating revenues increased 40 percent from 2012 to 2015 and that is due not from fair admissions (relatively constant in that period) but from the other activities at the fairgrounds. Management has worked hard to make it a viable venue all year round. Operating revenue doesn’t include funds provided by the County, but you ask then where do those funds go? Last year I understand that the County wanted it spent on capital expenditures — capital purchases and maintenance of that capital. That was done to the tune of $165K last year; in total, the past four years, the Fair invested over $500,000 in (buildings, improvements, equipment) and over $360,000 on maintenance.

Hopefully this information will allow our community to enjoy the Fair this year without worrying if there is a financial issue or worse. I readily agree though that the Fair could have better internal controls. Procedures need to be better defined in many areas. This is why I volunteer to assist this worthy organization. I have spoken to the Fair’s contract CPA, Mary Richter, and am gaining an understanding of the task she, the Fair Board and management have ahead of them. They will be meeting with the Board of County Commissioners to update them on an ongoing basis. The Fair management, board, and staff are committed to improvement and I hope that the County Clerk and his staff are as well.

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Suzanne Metzger, CPA, CVA, CDFA, is owner of Chatters, Metzger & Co. PLLC.