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July 1991

Current state of government budgets.

by Mayper, Alan

    Abstract- Governments are required to have a balanced budget, but users of government financial statements are confused about the association between a cash-basis budget and statements on a generally accepted accounting principles (GAAP) basis. Auditors can improve government financial reporting procedures by becoming involved in the budgeting process. The ways in which the government budgeting process can be improved include basing budgets on GAAP, and having accounting organizations and authorities develop standards that require independent budget reviews.

It's time for accountants to accept responsibility for government budgets, in addition to government financial statements! By doing so auditors will elevate the standards of both budgeting and financial reporting and enhance their professional contributions to efficient and effective governance.

According to GASB pronouncements, budgeting is an essential element of the financial planning, control, and evaluation processes of governments. GASB standards require that every government prepare an annual budget and that the annual financial report include a comparison of the budget to actual results. GASB has asserted that a foremost objective of financial reporting should be to demonstrate whether resources were obtained and used in accordance with an entity's legally adopted budget.

Despite the importance attached to budgeting, professional rules have permitted governments free rein in preparing budgets. There are no established standards for formulating these budgets nor requirements that budgets be audited. Except for mandating that budgets be prepared and compared with actual results, standard setting bodies apparently have considered budgets to be beyond their purview. The authors believe that the profession needs to establish standards for both the preparation and the audit of government budgets. Auditing standards for budgets will not only promote more prudent fiscal management, but will also lead to improved financial reporting.




First, budgets are the primary financial documents produced by governments. In the business sector, budgets are internal documents; the annual report is a company's main link with stockholders, creditors and other users. In government, by contrast, the budget occupies center stage; the annual report is a mere sideshow. For accountants to be concerned only with the annual report is to assure that they will never be more than bit players for governmental entities.

Second, current standards require that budget to actual comparisons be incorporated into the general purpose financial statements upon which independent auditors are required to report. Thus, auditors are presently associated with budgetary data, even though they have no responsibility for them other than to verify that when they appear in an annual report, they were drawn from the legally adopted budget. Insofar as budgets contain errors or are perceived as being misleading, the reputation of individual auditors as well as the accounting profession is certain to be tarnished. It is improbable that the public will disassociate an auditor from unaudited information when that information appears in the same set of statements as audited data.

Third, budgets have had a predominant influence upon accounting and reporting standards. As pointed out, GASB has asserted that a main objective of financial reporting is to demonstrate budgetary compliance. Budgets, however, are generally on a cash or near-cash basis. For that reason GASB has selected "financial resources" as the "measurement focus" in government funds. Another of the Board's reporting objectives, however, is that financial statements should reveal the extent to which interperiod equity was achieved, i.e., whether current revenues covered the cost of current services. To realize this objective, however, the measurement focus must be broader than financial resources. It must also encompass nonfinancial resources, such as long-lived assets. In addition, financial reporting must be on an accrual basis. Thus, because governments have prepared only cash or near-cash budgets, the two reporting objectives have been in conflict. Were the budget to be prepared on the accrual basis, which better reflects interperiod equity, the conflict would be reduced or eliminated.

Michael H. Granof, CPA, is the Ernst & Young Centennial Professor of Accounting at the University of Texas. He has been a member of the National Council of Governmental Accounting and the Governmental Accounting Standards Advisory Council. Professor Granof is currently a member of the AICPA's Government Accounting and Auditing Committee.

Alan Mayper is Associate Professor of Accounting at the University of North Texas, and he is the author of numerous publications pertaining to financial and governmental accounting.

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