4th
Public Finance Administration
Chapter 10
The Budget Cycle: Accounting and Auditing
The Budgeting-Accounting Interface
Accounting systems provide information for crafting budgets, implementing budgets, and tracking budgets
Record inputs (revenue) and outputs (expenditures)
Ensure expenditures fit into approved categories
Help keep the governmental unit from exceeding approved expenditures
Allow for mid-year adjustments as necessary by understanding the state of the budget at any given time
Provide information for auditing completed budgets
The Accounting Framework
GAAP – Generally Accepted Accounting Principles
Helps ensure governments are accounting for revenue and expenditures in a reasonable and systematic manner
GASB – Governmental Accounting Standards Board
Sets national standards that carry significant weight in state & local government budgeting
The Accounting Framework (cont.)
Funds – The grouping of revenue into categories for use in general or specific expenditures
General Fund – Most common fund; used to pay for most local government services that do not have specific user fees attached to them – i.e. police, fire, planning, etc. Most general tax revenue that the municipality collects goes into general funds – property, sales, income, etc.
Enterprise Fund – Funds that are generated through user fees and cannot usually be spent on any other function – i.e. water charges, sewer charges usually go into an enterprise fund, and only expenses related to water & sewer can be spent from this fund
The Accounting Framework (cont.)
Other common funds
Special Revenue – derived from special revenue, i.e SPLOST, hotel tax
Debt Service – Revenue set aside to pay for specific debt issues, usually bonds. Revenue for this fund can come from transfers from the General Fund or from other dedicated revenue sources
Capital Improvements – Revenue set aside to pay for capital improvements. Also often comes from General Fund transfers but can have dedicated revenue sources, i.e. 1% SPLOT for sidewalk construction
Movement of revenue between funds usually requires legislative body approval (city council). Occasionally, state law will prohibit interfund transfers – usually prohibited are transfers from Enterprise or Special Revenue Funds into General Funds
The Accounting Framework (cont.)
Accounts – used to represent specific revenue or expense items that will populate or draw from the funds within the budget
Revenue vs. Appropriations
Revenue is cash in – tax collections, sale of assets, loan proceeds, etc.
Appropriations are expenditures out – Salaries, benefits, fuel, capital projects, etc.
Accounts also exist in accounting to track non-budgetary items – i.e. Fixed Assets (buildings, trucks, etc), Liabilities (Accrued employee vacation, taxes paid, etc), Uncollected revenue (bad debt, etc)
The legislative body (city council) receives reports on a regular basis describing the state of all municipal accounts at that point in time – revenue, expenses, etc.
The Accounting Process
Recording, Reconciling, Reporting
Recording – Logging expenses and revenue within the accounting system in order to properly control and implement the budget. Think of this as filling in the register in your check book – one side has deposits, one side checks written.
Three types of recording systems
Accrual – logging expenses and revenue as soon as they are realized. Example: when utility bills go out, all bills are recorded as revenue even though the cash has not yet arrived. When a new truck is ordered, it is immediately recorded even though it has not been paid for yet.
The Accounting Process (cont.)
Recording types (cont.)
Cash basis – recording entries only when actual cash changes hands. Example: recording water revenue when customers actually pay the bills and the checks are cashed; recording expenditures when the check is actually written.
Modified Accrual basis – Recording revenue when it actually arrives (i.e. cash basis) and recording expenses when they are encumbered (accrual basis)
Modified Accrual is the best system for local government – you want to know what cash is actually available to support expenditures, and you want to know what expenditures have already been accounted for even if they have not yet been paid in order to keep the budget in check!
The Accounting Process (cont.)
Reconciling – the process of being sure that expenses are contained within correct accounts, expenditures encumbered actually match the invoices that come in to be paid, that revenue that is billed matches revenue received (less uncollectable amounts). Think of this like matching up your check register to the bank statement
Reporting – Compiling all data into reports for use by the legislative body, state, public to ensure transparency, adherence to law, expenditures on proper items, etc.
Auditing
CAFR – Comprehensive Annual Financial Report
Compiled generally by the local government administration to demonstrate compliance with the budget resolution, budget was balanced, and the overall financial state of the government body
CAFR is simple or complex depending on the state and the locality compiling data. For some locales CAFR is little more than compiled financial statements, while in others it intimately details how the budget unfolded and concluded
Outside auditors will review the CAFR depending on state law to ensure compliance with state & federal laws. The depth of the audit depends on the state and the locality
Auditors are looking for financial irregularities, failure to comply with GAAP/GASB directives, internal control failures, and other deficiencies
Conclusion
Without proper accounting, a local government’s budget will be a disaster!
Good accounting means: compliance with law, following good control procedures to protect funds from theft or misuse, properly routing expenses and revenues into sensible accounts, producing reports that demonstrate the government’s financial position at any given time.
Auditing is a “necessary evil” that can either independently confirm the good job the government is doing, or shine the light on abuse, incompetency, or lawbreaking