Association of Government Accountants The Central Kentucky Chapter

January-February 2004 - Volume XXIV, Issue 17/18

President’s Message

By Roy Hunter, Chapter President

As we are all settling into 2004 I hope everyone’s New Year is off to a great start. I know mine is. Yes…of course I’ve already broken all of my New Years resolutions; but they never last into February anyway.

Speaking of great starts, let’s all help some of the local animal shelters get off to a great start this year. For the remainder of this month and at our March meeting we will be collecting donations of money and supplies for local animal shelters. We will be making contributions to the Franklin County, Grant County and Boone County Animal Shelters. So have a heart and help our furry friends.

We also hope to make this event a doubly beneficial event by entering the 2004 National Community Service Photo Contest. In this contest we could win a free registration to the National PDC in Washington DC. This could save the chapter some expense and free up money for more good works. All we have to do is submit a photo of members busily involved in this community service activity and we have a chance to win.

I would also like to remind everyone that we are once again offering a scholarship. Applications are due by March 1 so if you are interested or know someone who is please contact me or any other CEC member for details.

Hope to see you all at our next meeting!

Chapter Executive Committee Meeting Notes For January

By Phil Nally, Chapter Secretary

The Association of Government Accountants, Central Kentucky Chapter, held its monthly Chapter Executive Committee meeting at China Wok on January 14, 2004, with eight members in attendance: Mary Hudson, Roy Hunter, Phil Nally, Linda Sagraves, Amy Small, Cindy Upton, Rick Waddle, and Lee Ann Watters.

Roy Hunter reported that he would like to see a Community Service function in February. Rick Waddle suggested that we combine the Community Service Banquet, Awards Banquet, and scholarship presentation for our May meeting. The CEC agreed with the idea.

Cindy Upton distributed scholarship instructions and an application for review by the CEC, as Sharon Parrish could not attend. The CEC approved. The Scholarship Committee reiterated that all applications are judged anonymously. March 5 is the deadline for applications.

The January meeting will be held on January 15, with Jolene Vanhorne from the Kentucky Deferred Compensation Authority speaking. The meeting will be at the Office Pub and Deli. Bill O’Mara, Revenue Director for the Lexington-Fayette Urban County Government, will be the speaker for the February 5 meeting. It was suggested that the CEC assist in the selection of speakers.

AGA Southeast Region Vice President Deby Davis would like to visit the Central Kentucky Chapter. The CEC voted to ask Deby to speak at the March meeting.

The next CEC meeting will be held on Wednesday February 4th at Fiesta Grande.

Chapter Meeting Notes For January

By Phil Nally, Chapter Secretary

The Central Kentucky Chapter met at the Office Pub and Deli on January 15, 2004. There were 11 members and guests in attendance.

The guest speaker was Jolene Vanhorne from the Kentucky Deferred Compensation Authority (Deferred Comp). Deferred Comp offers 401k and 457k plans to government workers throughout the state. They would like to offer Individual Retirement Accounts soon, dependent on federal regulation.

Deferred Comp has plans to offer more educational opportunities to large or small groups and individuals using a PowerPoint presentation. The website will be undergoing changes in order to make statements easier to obtain and understand.

Deferral limits have increased for 2004 to $13,000 annually for members less than 50 years of age and $16,000 for those over 50.

Four funds have recently been added. Fidelity is offering life cycle funds that change the makeup of investments dependent on the member’s time to retirement. Bond funds continue to remain aggressive.

Changes have been made for those considering deferring their annual leave and compensation time to Deferred Comp on retirement. Annual leave can only be deferred to 401k plans, while comp time can be deferred to both 401k and 457k plans.

A question and answer session followed his remarks. There being no other business, the meeting was adjourned.

Speaker For February Meeting

We will meet at the Office Pub & Deli at 11:30 for lunch. Remember lunch is $3 for members and $5 for non-members.

Our speaker will be Bill O'Mara with the Lexington-Fayette County Urban Government.

Also, Deby Davis, AGA's Regional Vice President will be joining us!

Animal Shelter Drive

The Central Kentucky Chapter of AGA is hosting an ANIMAL SHELTER NEEDS DRIVE!!

February--Grant County and Boone County Animal Shelters

These animal shelters are in desperate need of assistance...last month, as you may have seen on the news, several malnourished dogs were confiscated from farms in these areas. Funds are needed to feed and care for these dogs!

We will be accepting monetary donations for Grant County and Boone County Animal Shelters through the end of the month. You can bring your donation to the meeting tomorrow or send it to AGA c/o Animal Shelter Needs Drive, P.O. Box 576, Frankfort, KY 40602.

March--Franklin County Animal Shelter

Franklin County also needs assistance to care and feed animals!

We will be accepting monetary donations at the membership meeting in March. Or, you can send monetary donations to the address above during March. We will also accept supplies donations at the membership meeting in March. Some suggested items to donate include:

• bleach
• detergent (both dish and laundry)
• paper towels
• old towels/blankets
• money for medicine
• cat litter
• newspapers
• water and food bowls

Please make checks payable to the AGA Central Kentucky Chapter. We will send each animal shelter one check.

Seven Year Auditor Rotation

By Tom Crouch, CPA, CIA, CISA, and Attorney

During the last few years, many major accounting scandals have been perpetrated by senior management. Permitting senior management to have sole control over external auditor selection and retention is like the fox guarding the hen house. The other stakeholders, such as suppliers, bondholders, customers, shareholders, and non-management employees, are usually denied any input into the selection and retention of the external auditors. A more balanced approach is needed.

A few British business publications have had recent articles supporting mandatory auditor rotation. The Financial Times reported that mid-tier firms have expressed support for compulsory rotation, and rotation every seven years. Accountancy Age (and sister publication Financial Director) published a survey showing that 57% of the financial directors back auditor rotation.

A GAO report noted that the average Fortune 1000 company has had the same auditor for twenty-two years. Many U.S. companies have had the same external auditors for over forty years. Some auditors believe these cozy relationships create an appearance that the external auditors may not be truly independent. Reducing the cozy relationship between senior management and the external auditors should improve both external auditor independence and shareholder confidence. A higher degree of shareholder confidence should increase investor confidence, and improve share prices.

Many U.S. auditors believe mandatory seven-year auditor rotation should be imposed for publicly traded companies. If this is implemented, the requirement should include seven-year contracts for the annual audits. Such requirements should enhance the independence of the external auditors. These requirements should enable the external auditors to provide more constructive comments. More external auditor independence would provide stakeholders a higher rate of return on the audit fees.

Using seven-year auditor rotation and seven-year annual audit contracts for publicly traded companies, the external auditors could be chosen by:

• senior management,
• audit committee of the board,
• the Securities and Exchange Commission (SEC),
• by the SEC from a list of 5 auditors selected by the audit committee,
• by the key debtors, or
• by a combination of above.

The external auditor selection and retention process should help ensure a high degree of external auditor independence. When external auditor independence is maintained and enhanced, investors are more likely to invest more money.

The key leverage senior management usually has over external auditors is the risk senior management will change auditors. When external auditors handle an accounting and reporting issue contrary to the wishes of senior management, senior management frequently decides to change auditors. For these reasons, many auditors believe senior management’s motives are not pure when they want to replace the external auditors.

If seven-year auditor rotation and seven-year annual audit contracts were implemented, senior management’s leverage with the external auditors would be greatly diminished. Senior management would not be able to influence the possible next auditor contract with the organization. This is because the current external auditors contract renewal would not be on the table for at least seven years. During the time since the earlier contract was executed, senior management or the other stakeholders may have changed.

Some auditors believe senior management would insist on an escape clause if they were forced into seven-year contracts with external auditors. Contract language could specifically set-forth when and how the seven-year contracts could be terminated. The escape provisions should involve the audit committee and stakeholders other than senior management. In essence, senior management’s control over the external auditors could be reduced in a constructive manner. Some auditors believe that when senior management wants to change external auditors before the seven-year contract ends that this should trigger the regulators to select the next external auditor. A combination of these approaches should provide better governance of the auditees.

CONCLUSION

Senior management should have only minor input when determining if the existing external auditor should be replaced before the expiration of the seven-year audit contract. When senior management is able to control the external auditor selection and retention, the other stakeholders’ interests may not be fairly represented. The seven-year auditor rotation with the seven-year audit contract should provide a more balanced approach for all stakeholders, and enhance the external auditors’ independence. A more balanced approach should improve share prices. Improving external auditor independence really can increase the value of the audit.

Copyright (C) 2004 by Tom Crouch This text may be forwarded via fax or e-mail so long as the copyright is shown. This text may be re-printed anywhere in a constructive manner so long as the copyright is shown. All other rights are reserved.

Disclaimer: The views expressed in the above article do not purport to represent the views of any professional association or the views of any employer.

The Treasurer’s Report

Of the Central Kentucky Chapter

For the month ended December 31, 2003

By Rick Waddle, Treasurer

Central Account			Education Account
Beginning Bank Balance		$3,090.27	Beginning Bank Balance		$9,025.56
Revenue:			Revenue:
Interest	2.03		Annual Acct & Audit Update	425.00
Total Revenue	2.03		Total Revenue	425.00
Expenses:			Expenses:
			Dept. of Trans. Update Refund)	100.00
			Holiday Inn Capital Plaza	2,875.83
			W. A. Broadus	2,451.22
			Walmart (tax seminar)	76.13
			Family Affair (tax seminar)	291.50
			Speaker Gifts (tax seminar)	89.76
Total Expenses	0.00		Total Expenses	5,884.44
Ending Bank Balance		$3,092.30	Ending Bank Balance		$3,566.12

Office	CEC Officers	Email Address	Phone
President	Roy Hunter	Rhunter@cmbcpa.com	(502) 695-1040
President-Elect	Lee Ann Watters	LWatters@cmbcpa.com	(502) 695-1040
Past President	Cindy Upton	Cindy.Upton3@lrc.state.ky.us	(502) 564-8100
Secretary	Phil Nally	Phil.Nally@ky.gov	(502) 564-7750
Treasurer	Rick Waddle	Rick.Waddle@ky.gov	(502) 564-7750
Program Coordinators	Margaret Hurst, Rick Waddle, and Phil Nally	Margaret.Hurst@lrc.state.ky.us Rick.Waddle@ky.gov Phil.Nally@ky.gov	(502) 564-8100 (502) 564-7750 (502) 564-7750
Early Careers Director	Sharon Parrish	Sparrish@gwmail.kysu.edu	(502) 564-6910
Education & Training Coordinator	Cindy Upton	Cindy.Upton3@Irc.state.ky.us	(502) 564-8100
Newsletter Editor	Linda Sagraves	Lsagraves@kyauditor.net	(502) 573-0050
Historian	Don Fields	Don.Fields2@mail.state.ky.us	(502) 564-7334
Community Service	Rex Gregory	Rex.gregory@mail.state.ky.us	(502) 564-7334
Attendance Coordinator	Linda Sagraves	Lsagraves@kyauditor.net	(502) 573-0050
Membership Coordinator	Amy Small	asmall@kyauditor.net	(502) 573-0050
CGFM Coordinator/Public Relations Coordinator	Mary Hudson	mhudson@kyauditor.net	(502) 573-0050
Website Development Coordinator	Dan Flaherty	dan.flaherty@kyagr.com	(502) 573-0282
Central Kentucky AGA Website	http://www.ckyaga.com/

Chapter Executive Committee