Moss Adams LLP MOSS ADAMS LLP 1

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1 The Auditor is Coming. Gregg Amend Moss Adams LLP MOSS ADAMS LLP 1

2 MOSS ADAMS Firm established in 1913 Serving telecom clients since 1957 The 11th largest public accounting firm in the U.S. o 1,700 staff, including 220 partners Organized by industry and service Teams serving rural telcos are in Spokane, Stockton, Seattle, Portland and Kansas City Audit, consulting and tax focus MOSS ADAMS LLP 2

o 1,700 staff, including 220 partners Organized by industry and service Teams

3 TYPES OF AUDITS RURAL ILECS FACE Annual financial statement FCC OIG/USAC IRS NECA focused cost study review Other MOSS ADAMS LLP 3

4 FOR EACH TYPE OF AUDIT. Answer 2 questions: What are the high risk areas that generate significant findings? How can companies reduce the risk of findings in these areas and make the audit less burdensome? MOSS ADAMS LLP 4

5 FROM AN AUDITOR S POINT OF VIEW. Thoughts on improving the audit experience, regardless of the type of audit or auditor: o Focus preparation on specific and significant high risk areas associated with the type of audit. o Communication with the auditor throughout the audit process will minimize surprises and move things along. o Strive to avoid the audit becoming adversarial. o Prompt and accurate responses typically an reduce an auditor s skepticism. MOSS ADAMS LLP 5

specific and significant high risk areas associated with the type of audit.

6 AUDIT PROCESS Engagement <5% Planning and preliminary fieldwork 30% Fieldwork 40% Wrap and reporting 25% MOSS ADAMS LLP 6

7 FINANCIAL STATEMENT AUDITS High risk areas o Key internal controls o Revenues that are driven by cost study and high cost filings o Accruals for billed revenue and cost study revenue o Plant accounting o Affiliate transactions MOSS ADAMS LLP 7

cost filings o Accruals for billed revenue and cost study

8 FINANCIAL STATEMENT AUDITS Best practices for preventing findings o Make sure key internal control cycles are documented and spot checked throughout the year o Implement or strengthen entity level controls o Cost study and USF filings should have high level internal review o Map billing system cutoff for each revenue stream, then review for appropriate accruals (unbilled/unearned) o Facilitate active and frequent communication between network personnel and accounting MOSS ADAMS LLP 8

have high level internal review o Map billing system cutoff for each revenue stream, then review for appropriate accruals

9 FINANCIAL STATEMENT AUDITS Best practices for preventing findings (cont.) o Test intercompany transactions for compliance w/ FCC rules and appropriate supporting documentation o Review prior year adjusting journal entries and management comments and determine whether or not they have been/need to be addressed MOSS ADAMS LLP 9

supporting documentation o Review prior year adjusting journal entries and

10 AFFILIATE TRANSACTION SUMMARY FCC PART MOSS ADAMS LLP 10

11 FCC OIG/USAC AUDITS High risk areas o Continuing property records o Affiliate transactions Management fees o Part 64 allocations o Cost study adjustments o Line count documentation MOSS ADAMS LLP 11

12 FCC OIG/USAC AUDITS Best practices for avoiding findings o Actively manage your CPRs Verify that they reconcile to the GL Enlist employees knowledgeable in the network to review the CPRs for accuracy and retirements Clearly define retirement units and minor items o Develop a cost allocation/affiliate transaction manual that: Identifies the types of transactions between the regulated telco and affiliates Provides support for pricing methods Clarifies compliance with Part Discusses Part 64 allocations for nonregulated operations MOSS ADAMS LLP 12

cost allocation/affiliate transaction manual that: Identifies the types of transactions between the regulated telco and affiliates

13 FCC OIG/USAC AUDITS Best practices for preventing findings (cont.) o Implement a formal internal review process for affiliate transactions, Part 64 adjustments, cost study adjustments Should be done at the controller/cfo level telco certifies the accuracy of regulatory filings Do adjustments make sense in the context of the regulated ILEC s operations? Do actual allocations recorded in the financial statements follow the procedures identified in the CAM? Does management understand the purpose of the off book cost study adjustments? MOSS ADAMS LLP 13

the controller/cfo level telco certifies the accuracy of regulatory filings Do adjustments make sense in the context of the regulated ILEC

14 IRS AUDITS High risk areas o Uncertain tax positions o 85% test for cooperatives o Aid to construction o Deductions for meals, entertainment, charitable contributions o Depreciation o Unusual items CSV of life insurance Major asset sales or acquisitions MOSS ADAMS LLP 14

entertainment, charitable contributions o Depreciation o Unusual

15 IRS AUDITS Best practices for preventing findings o Involve tax preparer at the beginning when you are notified of audit o Understand that tax positions that are included on the return: most findings arise from misunderstandings of the Company s treatment of particular items by the tax preparer o Maintain accurate records for common adjustments (meals & entertainment, charitable donations, etc) MOSS ADAMS LLP 15

from misunderstandings of the Company s treatment of particular items by the tax preparer o Maintain

16 NECA FOCUSED COST STUDY REVIEW High risk areas o Major fluctuations in rate base or expense o Direct assignment of rate base or expense o NECA reporting 24 month latest view o Major equipment reclassification o Average schedule to cost conversion MOSS ADAMS LLP 16

base or expense o NECA reporting 24 month latest view o Major

17 NECA FOCUSED COST STUDY REVIEW Best practices for preventing findings o Incorporate a detailed review of key regulated rate base and expense accounts that fluctuate more than 10% into annual internal financial statement review. o Review amounts directly assigned to interstate in the cost study Maintain invoice, timesheet or CPR support for plant and expenses o Develop an internal control where billed revenue reported to NECA is reconciled to the billing system and the general ledger. MOSS ADAMS LLP 17

o Review amounts directly assigned to interstate in the cost study Maintain invoice, timesheet or CPR support for plant and

18 NECA FOCUSED COST STUDY REVIEW Best practices for avoiding findings (cont.) o Maintain engineering records and sample invoices for equipment that is reclassified that supports the final classification o Average schedule to cost considerations traffic studies, CPR development, etc. MOSS ADAMS LLP 18

reclassified that supports the final classification o Average schedule to

19 PARTING COMMENTS FROM THE DARK SIDE.. o Incorporate recurring audit prep into monthly close process to minimize i i year end crunch o Communicate and resolve unusual issues and transactions in the planning phase before fieldwork starts o Responses to findings supported by data that they auditor may not have reviewed are effective tools to mitigate or eliminate findings o What not to do MOSS ADAMS LLP 19

Communicate and resolve unusual issues and transactions in the planning phase before fieldwork starts

20 The material appearing in this presentation is for informational purposes only and is not legal or accounting advice. Communication of this information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant client relationship. Although these materials may have been prepared by professionals, they should not be used as a substitute for professional services. If legal, l accounting, or other professional advice is required, the services of a professional should be sought. MOSS ADAMS LLP 20

limited to, an accountant client relationship.

Common Audit Findings and Recommendations

Common Audit Findings and Recommendations Rose Blakely, CPA President Curtis Blakely & Co. P.C. P. O. Box 5486 Longview, TX 75608 903-758-0734 2007 NTCA Finance and Accounting Conference [email protected]