2018 Ohio Compliance Supplement Direct Laws
Table of Contents
CHAPTER 1
DIRECT LAWS
AU-C 250 Consideration of Laws and Regulations in an Audit of Financial Statements clarifies the auditor’s responsibility regarding OCS tests:
“.02 . . . The provisions of some laws or regulations have a direct effect on the financial statements in that they determine the reported amounts and [required] disclosures in an entity's financial statements. . .”
Conversely:
“.A13 Many laws and regulations relating principally to the operating aspects of the entity do not directly affect the financial statements (their financial statement effect is indirect and are not captured by the entity's information systems relevant to financial reporting. Their indirect effect may result from the need to disclose a contingent liability because of the allegation or determination of identified or suspected noncompliance.”
· Based on the above (and AU-C 250.A9 – .A11), “direct and material compliance” refers only to laws a government’s information system (which includes its accounting system) must “capture” to determine financial statement amounts and required disclosures[1]. Therefore, we have classified a law as direct in this OCS if noncompliance has the potential to materially misstate the financial statements. Chapter 1 of this compliance supplement includes “direct” laws.
o As one example, GAAP requires governments to present budgetary comparisons as basic statements or as RSI.
o GAAP also requires these presentations to follow the government’s legal budget basis.
§ In Ohio, a “5705 government’s” information system must capture information using the accounting basis Ohio Rev. Code Chapter 5705 (via GASB Cod. 2400) prescribes to compile budget and actual amounts and budget variances GAAP requires.
§ Ohio Rev. Code Chapter 5705 generally prescribes a cash + encumbrance accounting basis, which a compiler must understand and follow to satisfy GAAP.
· In addition to the discussion above from AU-C 250, the AICPA Audit and Accounting Guide State and Local Governments, sections 4.09 through 4.22, discusses legal requirements which might directly and materially affect determining financial statement amounts for a governmental entity. Material noncompliance (having a direct or indirect effect) would often:
o Require adjusting amounts or revising disclosures.
§ Auditors should do the same regarding noncompliance indirectly affecting financial statement amounts or disclosures, if they become aware of it.
· For example, AU-C 250.06 b.iii describes material penalties as an indirect effect, though they may require disclosure or even accrual as a contingent expense
o Require reporting as a material GAGAS noncompliance finding.
o May represent significant / material violations of “finance-related legal and contractual provisions”
§ GASB Cod. 2300.106(h) require “notes to the financial statements should disclose significant violations of finance-related legal and contractual provisions” and “actions taken to address significant violations”.
§ See the OCS Implementation Guide page 6 for the Finance Related Legal or Contractual Provisions.
· AAG SLG 4.12 lists examples of laws that may directly and materially affect the determination of financial statement amounts and disclosures. When preparing this edition of the OCS we considered the examples in 4.12. Each law in OCS Chapter 1 has potential for a direct effect. Laws with indirect classification per AU-C 250.06 b are included in Chapter 2.
Compliance Requirements Page
Section A: Budgetary Requirements 5
General Requirements 5
1-1 Compliance Requirement: Ohio Rev. Code § 5705.38 Annual appropriation measures - classification. 5
1-2 Compliance Requirements: Ohio Rev. Code §§ 5705.41 (D); and 5705.42 - Restriction upon appropriation and expenditure of money – certificate of fiscal officer. 9
1-3 Compliance Requirement: Ohio Rev. Code § 5705.40 - Amending or supplementing appropriation, ordinance – transfer – unencumbered balance – appropriation for contingencies. 14
REQUIREMENTS OF REVENUE, FUNDS, AND TRANSFERS 16
1-4 Compliance Requirement: Ohio Rev. Code §§ 5705.09 and 5705.12 - Establishing funds and Permission to establish special funds. 16
1-5 Compliance Requirement: Ohio Rev. Code §§ 5705.05-.06, 5705.10, 5705.14(E), 5731.48, and 3315.20(A) - Distributing revenue derived from tax levies, proceeds from sale of bond issue, proceeds from sale of permanent improvement, and depositing estate taxes into the general fund. 20
1-6 Compliance Requirements: Ohio Rev. Code §§ 5705.05-.06, 5705.14, 5705.15, and 5705.16; and HB 49 § 387.20 - Transfer of funds. 25
1-7 Compliance Requirement: AOS Bulletin 1997-003 and various ORC sections – Advances. 31
1-8 Compliance Requirement: Ohio Rev. Code §§ 5705.13, and 5705.132, and 5705.29 - Reserve balance accounts and funds. 35
ADDITIONAL COUNTY REQUIREMENTS 41
1-9 Compliance Requirement: Ohio Rev. Code § 5101.144 - County Children Services Fund 41
BOARD OF EDUCATION (SCHOOLS) 42
1-10 Compliance Requirement: Ohio Rev. Code § 3313.33 - Board of Education (schools) conveyances and contracts. 42
1-11 Compliance Requirement: Ohio Rev. Code Chapter 3318 (Traditional School Districts) and section 501.10 Am. Sub. House Bill 64 (Community Schools) participating in classroom facilities assistance programs. 43
Section B: Contracts and Expenditures 54
NONE 54
Section C: Debt 55
COMMUNITY SCHOOLS 55
1-12 Compliance Requirement: Ohio Rev. Code § 3314.08 - Foundation anticipation notes. 55
ENTITIES OTHER THAN COMMUNITY SCHOOLS 56
1-13 Compliance Requirement: Ohio Const. Art. XII, Section 11; Ohio Const. Art. XVIII, Section 12, Ohio Rev. Code §§ 133.10, 133.22, 133.24, 167.041, 308.08, 321.34, 505.401, 5705.03, 5705.05, 5705.09, 5705.10 and 5705.2113; 1981 Op. Atty. Gen. No. 81-035 – Issuing or Retiring Bonds and Notes. 56
1-14 Compliance Requirement: Ohio Rev. Code §§ 133.10, 133.22, 133.24, and 4582.56(B) & (C) – Bond, Tax and Revenue Anticipation Notes (BAN, TAN and RAN). 63
1-15 Compliance Requirement: Ohio Rev. Code § 3375.404 - Additional borrowing authority for boards of library trustees. 68
1-16 Compliance Requirement: Ohio Rev. Code §§ 133.29, 135.14, 731.56 - Governments investing in their own securities. 70
Section D: Accounting and Reporting 75
GENERAL 75
1-17 Compliance Requirements: Ohio Admin. Code §§ 117-2-03(B) and 126:3-1-01(A)(2)(a) and Ohio Rev. Code §§ 117.38, 1724.05, and 1726.11, and AOS Bulletin 2015-007 - Annual financial reporting. 75
1-18 Compliance Requirements: Ohio Rev. Code §§ 1702.57, 1724.05, 1724.06, 1726.11, and 1726.12 - GAAP and annual financial reporting for community improvement corporations (CICs) and development corporations (DCs). 80
Section E: Deposits and Investments 83
NONE 83
Section F: Other Laws and Regulations 84
VARIOUS ENTITY TYPES 84
1-19 Compliance Requirement: Ohio Rev. Code §§ 9.833 and 305.172 - Health Care Self Insurance 84
1-20 Compliance Requirement: Ohio Rev. Code § 2744.081 - Liability Self Insurance 87
1-21 Compliance Requirement: Ohio Rev. Code § 117.13(C)(3) and 2 C.F.R. § 200.425 – Allocating Audit Costs. 89
1-22 Compliance Requirements: Various ORC Sections - Vacation and sick leave. 91
1-23 Compliance Requirements: Internal Revenue Code (I.R.C.) Chapter 26 [26 U.S.C.] - Collection of Income Tax at Source on Wages; 26 U.S.C. § 3401 through 3406: 94
1-24 Compliance Requirement: Various ORC Sections – Definitions, rates of contributions etc. 97
1-25 Compliance Requirement: Ohio Rev. Code §§ 1715.51-59; 517.15; 759.36 – Permanent endowment funds. 101
SCHOOL DISTRICTS 105
1-26 Compliance Requirement: Ohio Rev. Code §§ 3317.01, 3317.02, 3317.03(E), 3317.031, 3313.981(F), 3313.48, 3313.668, and 3321.04; Ohio Admin. Code § 3301-35-06 - School District Average Daily Membership. 105
COMMUNITY SCHOOLS 113
1-27 Compliance Requirement: Ohio Rev. Code §§ 3313.64, 3314.02, 3314.03, and 3314.08, and 3314.27; Ohio Admin. Code § 3301-102-02 – Community School Funding. 113
MUNICIPAL 114
1-28 Compliance Requirement: Ohio Rev. Code Chapter 5727 – Electronic kilowatt-hour tax. 114
1-29 Compliance Requirement: Ohio Rev. Code §§ 507.09 and 505.24(D)- Allocating township trustee and fiscal officer compensation. 116
SOLID WASTE MANAGEMENT 120
1-30 Compliance Requirements: Ohio Rev. Code §§ 343.01, 3734.52, 3734.55, 3734.56, 3734.57(B), 3734.573, 3734.57(G), and 3734.577 – Expenditures by solid waste management districts. 120
Appendix A: Agricultural Society Compliance Supplement 122
1
2018 Ohio Compliance Supplement Direct Laws
Section 1-1
1
2018 Ohio Compliance Supplement Direct Laws
Section 1-1
Section A: Budgetary Requirements
General Requirements
1-1 Compliance Requirement: Ohio Rev. Code § 5705.38 Annual appropriation measures - classification.
Summary of Requirements:
Ohio Rev. Code § 5705.38(A) requires that on or about the first day of each fiscal year, an appropriation measure is to be passed. If the taxing authority wants to postpone the passage of the annual appropriation measure until an amended certificate is received from the county budget commission based upon the actual year end balances, it may pass a temporary appropriation measure for meeting the ordinary expenses until no later than April 1, or in the case of the City of Cincinnati, no later than October 1. This does not apply to school district appropriations.
Ohio Rev. Code § 5705.38(B) provides that a board of education shall pass its annual appropriation measure by the first day of October. If a school district’s annual appropriation measure is delayed as permitted by law (see below), the board may pass a temporary measure for meeting the ordinary expense of the school district until it passes an annual appropriation measure.
The taxing authority of a taxing unit that does not levy a tax must still appropriate at the minimum level of control prescribed by Ohio Rev. Code § 5705.38(C) (or a lower level). No budget commission approval is required by 5705.28(B)(2)[2].
There are two circumstances when school district certificates/certifications would be issued after October 1:
Ø A certificate/certification would be issued after October 1 when a school district has borrowed against its spending reserve. This certificate/certification would not be issued until second half personal property taxes are settled.
Ø A certificate/certification would be issued after October 1 when the delivery of a tax duplicate is delayed under Ohio Rev. Code § 323.17 because a subdivision in the county has placed a levy on the November ballot which, if approved, will go on the current tax list and duplicate.
If a school district is in either of these two situations, passage of the annual appropriation measure should be delayed until the necessary certificates/certifications are received.
Legal Level of Control: Minimum Requirements[3]
1. Ohio Admin. Code § 117-2-02(C)(1) states in part: “The legal level of control is the level (e.g., fund, program or function, department, or object) at which spending in excess of budgeted amounts would be a violation of law. This is established by the level at which the legislative body appropriates. For all local public offices subject to the provisions of Chapter 5705 of the Revised Code, except school districts and public libraries, the minimum legal level of control is described in section 5705.38 of the Revised Code (see 2 below). For school districts, the minimum legal level of control is prescribed in rule 117-6-02 of the Administrative Code (see 3 below). For public libraries, the minimum legal level of control is prescribed in rule 117-8-02 of the Administrative Code (see 4 below). The legal level of control is a discretionary decision to be made by the legislative authority, unless otherwise prescribed by statute.” (Emphasis added.)
2. Ohio Rev. Code § 5705.38(C) requires the following minimum level of budgetary control for “subdivisions” other than schools: “Appropriation measures shall be classified so as to set forth separately the amounts appropriated for each office, department, and division, and, within each, the amount appropriated for personal services.”[4]
3. Ohio Admin. Code § 117-6-02 prescribes the following for school districts’ legal level of control: “At a minimum, appropriation measures shall be classified to set forth separately the amounts appropriated by fund. The appropriation measure as passed by the school board shall be the legal level of control. This is the level at which compliance with statutory budgetary requirements will be determined." The AOS recommends that boards of education pass appropriations at a more detailed level. This is, however, a discretionary decision for the board of education based on the degree of control the board of education wishes to maintain over the financial activity of the school district.
4. Ohio Admin. Code § 117-8-02 requires the library's legislative body to adopt appropriation measures. These measures establish the legal level of control.
5. Ohio Admin. Code § 117-2-02(C)(1) also states in part: “All local public offices should integrate the budgetary accounts, at the legal level of control or lower, into the financial accounting system. This means designing an accounting system to provide ongoing and timely information on unrealized budgetary receipts and remaining uncommitted balances of appropriations.”
Amounts / Funds Not Subject to Budgeting:
Ø The nonexpendable principal of nonexpendable trust funds.[5] Appropriating nonexpendable principal would authorize the fiscal officer to spend the principal in violation of the trust agreement. [§ 5705.36(A)]
Ø Budget stabilization reserves [§ 5705.13, 5705.29(G)]
Ø The balance in a township reserve balance account established under Ohio Rev. Code § 5705.132.
Ø For some time, AOS policy has been that agency funds do not require budgeting. Agency funds account for money a government holds in an agency capacity on behalf of another person or entity. Therefore, a government has minimal discretion in spending this money. Accordingly, the legislative body need not authorize a purpose for spending the money.
In determining how the government ensures compliance, consider the following: / What control procedures address the compliance requirement? / W/PRef.
· Accounting system capable of recording appropriations and comparing them to actual results
· Reconciling appropriation totals to totals recorded in the accounting system.
· Policies and Procedures Manuals
· Knowledge and Training of personnel
· Tickler Files
· Legislative and Management Monitoring
· Management’s identification of changes in laws and regulations
· Management’s communication of changes in laws and regulations to employees
Suggested Audit Procedures - Compliance (Substantive) Tests:
1. Read the minutes and determine if the governing board adopted an annual appropriation measure by the required date.
2. If a school district has delayed adoption of an annual appropriation measure, inquire about the reasons for the delay.
3. Scan appropriation measures to determine whether they meet at least the minimum legal level of control Ohio Rev. Code § 5705.38(C) prescribes.
4. Determine if the accounting system “integrates” budgetary data at the legal level of control. This means the accounting system should report appropriations, encumbrances, unencumbered cash balances, and estimated receipts, and should compare budgetary data to actual results. If the client uses a manual system (i.e. spreadsheets) determine if the manual system used by the client adequately tracks and compares budgetary data.