Nov/Dec 2009

State News: August 2009



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Transparency and the Recovery Act

By Mikel Chavers, CSG Associate Editor
State officials know there are strings attached to the $787 billion federal stimulus package passed in February, but they may not be aware of the heavy administrative strings that came with the money.
That’s according to panelists from auditing, tax and advisory firm KPMG, in a special webinar hosted by The Council of State Governments Tuesday.
The primary goal of the stimulus package was to create 3.5 million jobs by 2010, stabilize state and local government budgets, provide tax cuts, increase education assistance, upgrade energy efficiency and offer tax incentives, as well as increasing investment in the nation’s infrastructure.
Now states are beginning to see just what it means to account for all that money. And that administrative burden for states is not a light load to bear, KPMG’s representatives said.
The goal is “open and honest transparency and accountability for the money that’s being spent,” said Shawn Warren, audit partner with KPMG’s state and local government audit practice.
But what that transparency will mean for states is an increasing administrative burden that includes more frequent reporting to the federal government, complex audits and often much shorter deadlines to get it all done, according to the panelists from KPMG.
KPMG visits regularly with state stimulus czars and chief financial officers from 30 states and territories around the country, so they know the administrative burdens of the Recovery Act, referred to as ARRA by some.
“We’ve seen a lot of the information related to the stimulus package and ARRA firsthand,” said Dave Dennis, advisory partner and state and local government adviser with KPMG.
“The pace of change that we’ve seen over the past several months has been faster than anything we’ve seen over our careers. There’s a continual need to look at the process.”
Ultimately someone will have to go back and analyze the different costs and components of job creation and the Recovery Act, he said. “There will be conflicting reports out there with what was the number of jobs saved or created.”
The first reports to the federal government are due in August and more robust reporting will be coming in the September reports that are due in October, Dennis said.
“At the end of the day someone will get the opportunity to do some job creation reconciliation,” he said.
But there are other concerns for states, KPMG representatives said. Because of the sheer amount of money flowing from the federal government, states need to be alerted to the potential for fraud, waste and abuse, according to Dennis.
He sees likely parallels between federal spending for the Recovery Act and for hurricane relief efforts. The federal government and the Federal Emergency Management Agency poured a lot of money into south Florida after Hurricane Andrew hit in 1992—but then spent the next 14 years after the devastating hurricane trying to account for the money, he said.
“And I think what you may have as a parallel with some of the stimulus issues—there’s going to be a great incentive to spend money quickly,” Dennis said. “The issue is going to be are we prepared for the auditors when they come in after the fact—which they will—to see how we are controlling the money.”
That’s why preventive controls are so important, he said. States can set up processes to monitor and track stimulus dollars and prepare for audits. “We’ve been told by the (Government Accountability Office) that they are setting up sting operations similar to what we saw with (Hurricane) Katrina with bad contractors and bad records,” Dennis said.
“The public has zero tolerance with fraud, waste and abuse,” he said. That makes it imperative for states to address these possibilities head-on, he said.
The reporting requirements to the federal government could also change the way states audit themselves, especially when it comes to tracking how stimulus dollars are spent, according to Nancy Valley, audit partner with KPMG.
When it comes to the slew of competitive grants available through the Recovery Act, “it really does change the way in which the states have reported their grants in the past to the federal government,” she said.
Before, state agencies would submit grants to a federal agency. That’s now a centralized reporting process, she said. The information will flow directly into one central location of the federal government and not be filtered through a specific federal agency, she said.
In states with a centralized audit office, internal auditors will do the reporting required through the Recovery Act. But in those states that don’t have a centralized audit office, auditing responsibilities are falling on the state’s budget office, Valley said.
And that can be quite a burden when states have to make a report for each award they receive from the Recovery Act.
Many states will have 20 to 30 reports submitted to the federal government for the first wave of grants, Valley said. But states could have hundreds of reports in later years, she said.
In addition, states face a tighter deadline for quarterly reports; they’re now due to the federal government 10 days after the quarter ends rather than the previous 45 days, Valley said.  That’s tough when some states had trouble keeping the 45-day deadline, she said.
She said many states are considering a continual auditing process and reporting to meet that deadline.
For more on the insight from KPMG, see the presentation from the webinar.

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