UPDATEONFY13CAFRANDCASHRECONCILIATION

NewMexicoDepartmentofFinanceandAdministration(DFA)
February2015

Background on Cash Reconciliation

Early in the first Martinez Administration, DFA became aware that the State had not been reconciling
cash balances of State agencies since the inception of the SHARE Enterprise Resource Program under the
Richardson Administration in July 2006. Although there were some well-publicized weaknesses in the
deployment of the SHARE system, the fact that the Richardson Administration was not reconciling cash
balances was not publicized until it was discovered by the Martinez Administration. In fact, the State
Auditor and the Department of Finance & Administration (DFA)s independent auditor under the
Richardson Administration not only failed to point out the lack of cash reconciliation, they did not
provide notice that the State was not preparing an audited Comprehensive Annual Financial Report
(CAFR) as required by state law and by the most fundamental accounting standards. Instead, the States
CAFR had always only been reviewed, a much lower standard.
Beginning with a research project in 2012, the Martinez Administration has been working to remedy this
serious deficiency in the States accounting practices. During a project termed Cash Remediation I,
DFA worked with consultants and state agencies to implement a monthly reconciliation of cash
transactions on a go forward basis beginning in February 2013.
With the assistance of contractors and the independent auditor, DFA also conducted preliminary research
to estimate the difference between the States actual cash balances and the amount of cash recorded in the
States General Ledger. Based upon a very preliminary methodology, DFA determined that the potential
shortfall was a minimum of $100 million but potentially larger. Given this uncertainty, accounting
standards require that the low end of the range of loss estimates be booked as a liability. This was done
by DFA in two stages: a $70 million liability was booked against the General Operating Reserve in
FY2012, and a second $30 million liability was booked in FY2014.
Since the State did not have reliable beginning balances, DFA next implemented the Historical Cash
Reconciliation project, between July 2014 and December 2014. This project attempted to reconcile a
total of almost 160 million transactions. A variety of limitations in the data prevented the consultants
from being able to reconcile all transactions. The consultants identified 15 findings and accompanying
recommendations that enable the State to target the systemic deficiencies in accounting practices that lead
to the un-reconcilable balances.
DFA is currently implementing the Cash Remediation II project with assistance from contractors, staff
and other state agencies. This project will address remaining deficiencies in the States Book-to-Bank
reconciliation processes. The timeline is expected to be roughly one year for this work beginning in
February 2015.
DFAs plan to address the uncertainty about the States cash balances is as follows: when the agency
audits for FY15 are completed, roughly around January of 2016, the cash balances reflected in those
audits will be used to identify the amount of cash in the States General Fund Investment Pool attributable
to each agency. Any shortfall between the actual cash available and the total cash balances reported in
the States General Ledger will then be booked against the $100 million loss contingency liability already
established in the General Operating Reserve. If the shortfall exceeds $100 million, an additional loss
will be booked against the General Operating Reserve.

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UPDATEONFY13CAFRANDCASHRECONCILIATION

NewMexicoDepartmentofFinanceandAdministration(DFA)
February2015

Definition of CAFR (generally)

The purpose of the Comprehensive Annual Financial Report (CAFR) is to present the financial position
and operating results of the entire State government in accordance with generally accepted accounting
principles (GAAP). The State of New Mexicos CAFR is comprised of 129 agencies which collectively
account for over 1200 funds. In addition, the CAFR includes Component Units, which are legally
separate organizations that must be included in the financial report of the primary government (e.g. UNM,
NMFA, etc.)
How long have we been going unaudited? When was statute passed requiring the CAFR to be
audited?
The first CAFR was for the Fiscal Year ended June 30, 2001, but that CAFR was only reviewed, not
audited. Prior to FY2001, the State produced and promulgated an Annual Financial Report that was
reviewed, but not audited. The CAFRs from FY2001 to FY2012 were reviewed only, not audited. Thus,
the CAFR just completed for FY2013 was the first audited CAFR in the States history.
A 2003 amendment to Section 12-6-3(A) NMSA 1978 added the following language: The comprehensive
annual financial report for the state shall be thoroughly examined and audited each year by the state auditor,
personnel of the state auditors office designated by the state auditor or independent auditors approved by
the state auditor. [Emphasis added.]
Do we have any idea why previous DFA and/or State Auditor didnt audit it?
We can only speculate as to the reasoning. Most likely, an audited CAFR would have exposed the
problems with both the compilation of the CAFR and problems with the SHARE implementation, such as
the lack of a statewide cash reconciliation. These are problems that have surfaced and have been verified
by the audit results of the FY2013 CAFR.
When did we decide to get the CAFR audited?
The Martinez Administration identified the lack of audit of the CAFR in the Fall of 2011. It was then
learned that the CAFR only had been reviewed, not audited. A review is a much lower standard of
examination. A review may not entail: a) obtaining an understanding of the entitys internal control
system; b) testing accounting records; or c) applying procedures ordinarily performed in an audit. In a
review, the independent accountants do NOT express an opinion about the financial statements.
DFA made the decision to have the CAFR audited, understanding that the first audited CAFR would
inevitably face many challenges due to the previous Administrations failures. There were 3 major
reasons for this: 1) transparency-the citizenry is entitled to know audit results; 2) this is a statutory
requirement (this is the law); 3) without an independent audit, systemic problems could not be
independently identified and remediated. In addition, the bond rating agencies have frequently pointed to
the lack of a timely audit as a weakness for the state. The rating agencies were very disappointed to learn
the CAFR was not audited. Our impression is that the state will be given some time to work out the
issues with the audited CAFR but it remains a very sensitive issue with rating agencies.

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UPDATEONFY13CAFRANDCASHRECONCILIATION

NewMexicoDepartmentofFinanceandAdministration(DFA)
February2015

The main problem with the CAFR is the lack of adequate cash reconciliation procedures since the
implementation of SHARE
Cash was not reconciled on a monthly basis as required by statute since the inception of SHARE on July
1, 2006. By the time this was exposed in the fall of 2011, cash had not been reconciled for approximately
5 years. The first monthly reconciliations of cash began February 2013.
Besides cash reconciliation, what did the audit of the CAFR find?
1. Transactions between agencies within the central accounting system (SHARE) are not adequately
recorded in accordance with GAAP or GASB pronouncements. Like cash, these transactions
have never been reconciled since the inception of SHARE. It cannot be known if reconciliations
occurred prior to SHARE because years prior to SHARE were not audited either.
2. Inconsistent practices at multiple agencies are so prevalent the independent auditor could not
form an opinion as to the states financial position (termed a disclaimed opinion.) Inconsistent
practices include using different classifications for either side of the same transaction,
inconsistent classification of fund types, etc.
3. The decentralized approach in compiling the states financial statements generates reports that are
unreliable. The entire process is currently being overhauled and replaced with a centralized
CAFR preparation software (Hyperion).
State Auditor and Richardson Administration should have addressed these problems
The audit of the CAFR per Section 12-6-3(A), NMSA 1978, has been a requirement under the State
Audit Act and imposed upon the State Auditor, personnel of the State Auditors Office designated by the
State Auditor or independent auditors approved by the State Auditor since 2003. The CAFR was not
audited until 2013. The statutory obligation to insure that the CAFR is audited is on the State Auditor.
The Richardson Administration ignored the problem and would not allow agencies to disclose issues with
SHARE in general. Reconciliation of cash balances is a statutory responsibility of DFA that was not
fulfilled under the Richardson Administration. Under the Martinez administration, DFA has publicly
acknowledged that cash was not being reconciled. We have implemented remedial procedures to
reconcile cash on a go-forward basis, we have researched historical transactions, and we have designed a
remediation project to resolve the States unreconciled balances in the coming year.

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