Speaking Notes

PADM 5301

March 23, 2010

Dr. Neubauer

CHAPTER 11: FINANCIAL MANAGEMENT: ACCOUNTING, REPORTING, AND AUDITING

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My most recent reflections relevant to this chapter.

• There is a general perception that (the federal) government agencies are (for whatever reason) unable to get it right and to do things in a cost-effective way.
• This relates to PUBLIC AMBIVALANCE regarding the passage of health care reform yesterday.
• The public's perception of the appropriate ROLE AND SIZE of government relates to the public's perception of fraud and incompetence within government agencies.
• INFORMATION SYSTEMS are key to the automatic generation of the data necessary for auditors (and others) to inspect.
• Incompetence is not necessarily a personal attributes. Organizations are SYSTEMS that can be incompetent or suffer from EXCESSIVE COMPLEXITY.
• Simple accounting systems work quite well. They can be effective in DETECTING FRAUD. Advanced accounting systems (like advanced public budgeting strategies) tend to fall apart because they are not UNIVERSALLY APPLICABLE and because the "data" they require is difficult or impossible to collect and verify.

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The sad truth is that given a chance many people will take advantage of an opportunity to enrich themselves at the expense of others.

One of the purposes of MPA program is to teach students ethics.

If actions are made illegal it is the CERTAINTY of prosecution rather than the severity of the penalty.

BUDGETING and GOVERNMENT ACCOUNTING are not the same thing.

AUDITING and ACCOUNTING are not the same thing.

ACCOUNTING is what is necessary to produce a record of what happened with an emphasis on monetary receipts and monetary expenditures.

AUDITING IS INTENDED . . .

• To prevent and detect fraud
• To provide information useful to administrators, budget analysts and others
• To facilitate measurement of PERFORMANCE
• To make possible COMPARISONS across similar jurisdictions

ACCOUNTING SYSTEMS ARE INFORMATION SYSTEMS

• Probably less discretion regarding how TRANSACTIONS are recorded
• Accounting systems are subject to the weaknesses and failures of other kinds of computer information systems

ACCOUNTING SYSTEMS DO NOT INSURE ACCURACY AND HONESTY

• The systems themselves need to be audited
• It is still possible to do bad things at the level of SOCIAL ENGINEERING
• If the computer system itself was HACKED that could be very difficult to discover

There are STANDARDS for both corporate and government accounting.

Most organizations use commercial accounting software.

THERE ARE MANY PURPOSES OF ACCOUNTING (see page 411 of our textbook)

• Help prevent fraud
• Provide information to stock holders and citizens
• Provide information useful to managers
• Help strategic managers and politicians understand the origins of good and bad performance
• Facilitate comparisons (benchmarking) between comparable organizations

At the federal level, there are lots of agencies and groups who influence how the federal agencies do their accounting -- GAO, OMB, Federal Accounting Standards Advisory Board, the General Services Administration, the Government Financial Officers Association, the Government Accounting Standards Board and the Government Accounting Standards Advisory Council.

The agencies of state and local governments are likely to use "Big 4" accounting companies and other external accounting services to do the AUDITING.

Since the demise of Anderson the "Big 4" have divested their consulting businesses to avoid both apparent and real conflicts of interest.

The books should be kept in ways specified in GAAP (Generally Accepted Accounting Practices). There are variations in GAAP for different kinds of organizations.

It is important to audit not just the "books" but the processes. Organizations should practice SEGREGATION OF AUTHORITY. This way, if there is a systematic fraud at least two or more people have to be involved. It is important to keep this in mind when an agency DOWNSIZES to reduce costs.

An accounting system has a CHART OF ACCOUNTS.

There used to be a JOURNAL and LEDGER. (It is all automated now.)

Most accounting systems are DOUBLE ENTRY systems in which each transaction results in modification of at least TWO accounts.

When something is entered incorrectly you don't go back and fix it. You make an ADJUSTING ENTRY.

Governments tend to have MULTIPLE FUNDS, which makes them different from corporations.

It is common for administrators to let one fund BORROW from another fund if necessary. Fund accounting can become VERY COMPLEX because what is allowed and what is not allowed depends upon many pieces of legislation.

Accounting systems can generate STANDARD REPORTS as needed.

SPECIALIZED REPORTS needed by strategic managers and others can make the accounting system very complicated.

Using accounting data to measure performance is difficult.

THERE ARE TWO COMMON "BASES OF ACCOUNTING"

Cash accounting -- events are recorded when the money is actually received and when the money is actually spent

Accrual accounting -- events are recorded when money is "earned" and when money is committed but not yet actually dispersed

Cash account is adequate for CASH MANAGEMENT but most organizations use accrual accounting. It is a little less like driving at high speeds at night without headlights.

The book lists other "bases" of accounting.

COST ACCOUNTING is easier in industry (manufacturing) than in government and "service industries." It has to do with the ALLOCATION OF DIRECT AND INDIRECT COSTS to whatever is being produced. Services are less "tangible" than "widgets."

IF THE ACCOUNTING SYSTEM IMPOSES LARGE BURDENS UPON THOSE DOING WORK the information derived may not be worth the expense created by the accounting system. UNOBTRUSIVE measures are preferable to making people account for every minute of their time.

Accounting data may be helpful in strategic managers making decisions about OUTSOURCING.

It is often hard to know how to categorize expenditures for things like employee training, for example.

ACCOUNTANTS AND AUDITORS don't just look at financial data. They may be producing and verifying records about other things such as risks and safety.

SARBANES-OXLEY ACT

Passed in 2002 this law makes corporate executives personally responsible for the financial reports of their corporations. Its possible modification and extension to state and local governments would be controversial and there would be constitutional issues to be resolved. It could be required as a condition of accepting federal grant monies. (page 437)

MOST STATE AND LOCAL GOVERNMENTS HAVE PENSION PLANS FOR THEIR EMPLOYEES

Advance Funding -- the more responsible approach.

Pay-as-you-go -- high risk "put it off until tomorrow" approach

Governments can get in a real bind if they cannot raise taxes and they are required to pay pensions and don't have the funding to do so.

In 2006 New York City reported it could be in arrears by as much as $49 billion in funding for its pensions. (page 441)

FINANCIAL REPORTS

Accounting systems produce several kinds of standard reports that are needed for different reasons. These are similar to what corporations are required to provide for stockholders and others.

I believe these reports are required in the instance a government seeks to issue bonds as a way to raise additional revenue.

GOVERNMENT AUDITING

No one wants to be audited but in government agencies it is just a way of life.

In a postaudit, if something is found to be wrong the "horse is already out of the barn."

A preaudit is intended to indentify potential problems before they occur.

Among the federal agencies, the largest ones are most likely to have the most problems, such as IRS and DOD.

All levels of government use the Big 4 and other accounting firms to conduct or assist in auditing. (page 457) I don't know if the same company can both help "keep the books" and perform auditing or not.

In addition to financial audits there are performance and program audits.

Field auditing means verifying that what has been reported can actually be documented. The probable intent is to audit the quality of the system rather than the particular thing.

There are four types of CONCLUSIONS that can be the result of an audit:

UNQUALIFIED -- everything is fine

QUALIFED -- the system is generally okay but there are some issues (qualifications)

DISCLAIMER AUDIT -- it is not possible to issue a conclusion

ADVERSE or NEGATIVE -- serious problems with the system or with the reports generated by the system

Many agencies (and entire governments) receive less than unqualified audit conclusions. See page 461.

One of the most common problems found is erroneous or improper payments. This may or may not be evidence of fraud.

FEMA was under extreme pressure to help victims of Hurricane Katrina (and other hurricanes) and made many payments that could not be justified.

An audit is of little value if something is not learned from it. Hopefully SYSTEMIC problems can be identified and corrected and people who may be abusing the system can be prevented from continuing to do so.