Auditing and accounting

Auditing and Accounting Lecture 14 – Administrative Processes in Government What Is An Audit?  Audit refers to any independent examination, any objective assessment of something What Is An Audit?  In public administration audit refers to either of two very common activities – The official examination of a financial report submitted by an individual or organization to determine whether it accurately represents expenditures, deductions, or other allowances determined by laws or regulations; Or – The final phase of the government budgetary process, which reviews the operations of an agency, especially its financial transactions, to determine whether the agency has spent its money in accordance with the law, in the most efficient manner, and with desired results What Is An Audit?  In all cases, an audit connotes comparison with some standard  The essence of auditing is measuring something against a good example to make a critical, an evaluative, judgment  Virtually all modern organizations from a local tennis club to the U.S Government have auditors whose basic task is to certify that the financial accounts of the organization are correct What Is An Audit?  Auditing has become a major branch of the accounting profession, with complex professional standards and procedures for admission, practice, and reporting  The audit of large corporations and agencies is supposed to certify that they comply both with the law and with national accounting standards Multiple Applications  Management audit – An independent examination of the policies, practices, and performance of management functions within an organization Multiple Applications  Performance audit – An independent examination of the policies, practice, and performance of an organization to determine if the desired results or benefits established by the legislature or other authorizing body are being achieved  Efficiency audit – An independent examination of the policies, practices, and performance of an organization to determine if the organization manages and uses its resources so as to achieve the maximum benefit at the minimum cost Multiple Applications  Other applications – Environmental audit to assess compliance with environmental laws and sound environmental practices – Energy audit to assess the use or waste of energy – Water or telecommunications audits to reduce utility bills – Social audit to assess social issues in an organizational context Multiple Applications  Audit processes focus on the present and the immediate past  Future audits are usually called impact statements or assessments  Audits can be conducted internally or externally – Internal audits (conducted by a unit independent of management) designed to provide objective advice quickly – External audits comes from outside, but also usually reports outside History of Auditing  Government auditing goes back to ancient times – There are records of a Chinese audit function in the eleventh century B.C and in Athens in the fourth century B.C Savings and Loan Scandal  Savings and loan scandal is an example of a government bailout – a governmentsponsored rescue of a failing private sector enterprise Internal Audit  Managers are often reluctant to wait for an external examination to find problems in their organization  Many government agencies have internal audit agencies  To work, they need to have: – Reporting authority high in the organization – Adequate, clear authority, support and resources, and the right to enter all parts of the organization Internal Audit  Internal audit functions vary: – Compliance audit – Independent troubleshooters  Internal auditors with freedom to determine their own agendas are inspectors general Internal Audit  To ensure independence: – Location outside line management – A high reporting line for audit results – Reasonable latitude in selecting assignments  Small agencies have a problem of resources, so more external audits done Accounting  An important issue underlying any successful traditional or comprehensive audit process is the nature and quality of the underlying financial and performance information kept by the organization  The development of accounting principles and practices that lay down procedures for gathering and keeping data in meaningful ways is an absolutely essential foundation for effective management and the audit of it Accounting  Private sector accounting standards set by the Financial Accounting Standards Board  Public sector accounting standards set by the Federal Accounting Standards Advisory Board Accounting  Cash accounting – Traditional method of accounting simply sought to control and track the passage of cash funds voted by legislatures as the funds were allocated to and spent by agencies – Too simplistic for complex government operations Accounting  Accrual accounting – Prompted a shift to accrual accounting – Allows for true measures of income and expenditures whether or not cash payments associated with the earnings or debts have actually taken place – Can only calculate a balance sheet if you use accrual accounting Requires the determination of assets and liabilities – Fixed assets must be capitalized and depreciated Accrued liabilities must be accounted for Accounting  Modified accrual accounting – Many governments in the United States used modified accrual accounting, which matches revenues raised and costs incurred, but may ignore long-term liabilities and the adequate valuation of assets – Leaves room for political manipulation Asset Management  The conceptual move to accrual accounting has had immense impact  Under cash accounting, government did not have to identify capital or assets  Under accrual accounting, they must systematically program the maintenance of assets throughout their life cycles, to value assets, to look for returns from them, or to have asset disposal programs Asset Management  In the public sector, some assets are commercial (railroads, utilities, airlines) These must use commercial standards of asset management  Most government also own assets of intrinsic worth  Governments have to establish criteria to determine which assets may be sold in a financial crunch and which cannot be sold because of intrinsic value  Difficult to sell public assets Financial Reporting  A financial report is a written statement prepared by an independent accountant or auditor after an audit It is addressed to the owners, directors, and stockholders of the audited enterprise  The auditor states briefly the nature and the scope of the examination and expresses a professional opinion as to the fairness of the appended financial statement in presenting the firm’s financial position and operating results for the specified period Financial Reporting  The opinion may be unqualified, or it may contain exceptions, qualifications, or other comments regarding the treatment of particular items, the limitations of the auditing procedures followed, and changes of accounting methods from those used in previous years Financial Reporting  Budget documents need to accompany financial reporting with relevant aggregations of expenditure so that patterns and significance can be seen Financial Reporting  Government should establish a framework of financial reporting that is intelligible to legislators and citizens alike that is capable of aggregation toward a unified or “whole of government” financial statement  A financial statement similar to a private corporations should be goal of government each agency  Problem is the valuation of public assets and liabilities [...]... or compromise Savings and Loan Scandal  What happens when audit offices conduct unbiased audits and their political masters ignore them?  Answer: Savings and loan scandal – Brought about by the loosening of bank regulations and federal oversight – Hundreds of banks failed and the federal government was stuck with $500 billion bill to pay off depositors Savings and Loan Scandal  Combination of... financial position and the results of financial operations in accordance with generally accepted accounting principles – Whether the entity has complied with laws and regulations that may have a material effect upon the financial statements Types of Audit  Economy and efficiency: – Whether the entity is managing and utilizing its resources (such as personnel, property, and space) economically and efficiently;... U.S General Accounting Office (Government Accountability Office in 2004) was established in 1921  The establishment of independent auditing offices helps the audit function stand above corruption and apart from the political administration of the day History of Auditing  The prestige and renown of the individual in charge of an audit office can be important in personifying the integrity and credibility... results at a lower cost Compliance Audit  The oldest and most traditional form of auditing activity is known as compliance audit  The auditor is looking for the extent to which, in the financial management of the organization, financial inputs have been managed in compliance with the law and accepted standards and conventions for the treatment of accounting information Compliance Audit  The value... citizens and the government rely on us to serve as their watchdog to ensure the effective and efficient administration and management of public funds and programs It is our job to help make sure that California government stays one step ahead As the State's independent external auditor, we provide independent, nonpartisan, accurate, and timely assessments of California government's financial and operational... activities in compliance with generally accepted government auditing standards  http://www.bsa.ca.gov/bsa/index.html Types of Audit  The GAO in its Standards for Audit of Governmental Organizations, Programs, Activities, and Functions maintains that a comprehensive audit program should include the following three types of audit: Types of Audit  Financial and compliance: – Whether the financial statements... as they see fit  The advent of traditional auditing meant that every public official had to expect and prepare for a regular visit by the auditor, had to keep records in the prescribed format, and had to make records available to the auditor Compliance Audit  However, voluntary compliance is the basis of a civil society – IRS and tax payment  Compliance auditing is also undertaken by funding agencies... economically and efficiently; – The causes of inefficiencies and uneconomical practices; and – Whether the entity has complied with laws and regulations concerning matters of economy and efficiency Types of Audit  Program results: – Whether the desired results or benefits established by the legislature or other authorizing body are being achieved; and – Whether the agency has considered alternatives that... of 1982, which allowed a wider range of investments for savings and loan institutions – including unsecured business loans  At the same time, Reagan administration dramatically cut the number of bank auditors  Thousands of bankers (mostly in South and Southwest) able to loot their own banks because no one was looking Savings and Loan Scandal  Depositors not worried because deposit insurance was increased...History of Auditing History of Auditing  Modern audit developed in the nineteenth century when the growth of public sector activities became so complex that an independent and objective assessment of financial management became essential  With huge sums of money moving around global empires, the temptation to corruption was overwhelming History of Auditing  Great Britain created ...  Auditing has become a major branch of the accounting profession, with complex professional standards and procedures for admission, practice, and reporting  The audit of large corporations and. .. establishment of independent auditing offices helps the audit function stand above corruption and apart from the political administration of the day History of Auditing  The prestige and renown of the... personnel, property, and space) economically and efficiently; – The causes of inefficiencies and uneconomical practices; and – Whether the entity has complied with laws and regulations concerning