Question

Q: Write a 2-3 pages essay describing how the principles you learned in our class provide for accountability and control in Government Accounting Systems.

Answer 1

Unlike most private sector organizations, governmental entities must be responsive to a number of different groups and organizations, including elected officials, other units of governments, investors, creditors, and citizens that are focused on monitoring their activities. All forms of monitoring include collecting and interpreting data, and this oversight function is often performed through information provided in governmental reports. Among the most important types of communication is the annual financial report, which presents the financial position, operating results, and cash flows for a particular accounting period. All governments, including school districts, develop their annual financial reports in accordance with principles established by standard-setting authorities to provide consistency and comparability for users.

For governments to achieve the objective of accountability, financial information must be both relevant and reliable for reasonably informed users. Financial reports must satisfy numerous and diverse needs or objectives, including short-term financial position and liquidity, budgetary and legal compliance, and issues having a long-term focus such as capital budgeting and maintenance. Additionally, differences exist in the amount of detail that various users need.

Following a decade of research and analysis, the GASB recently concluded that to meet the varied needs of a wide range of users, governmental reports must provide information regarding the public entity as a whole in addition to the traditional fund financial statements. The two levels of financial reporting are intended to

• provide more relevant information that will result in greater accountability by state and local governments and
• enhance the understandability and usefulness of the annual financial reports to users of these reports to enable them to make more informed economic, social, and political decisions.

MEASUREMENT FOCUS AND BASIS OF ACCOUNTING.

It is important for governments to provide effective financial information to constituencies in a consistent and clear format. Specifically, the information provided by governments should contribute to accountability in the following areas:

• Financial position and results of operations
• Actual financial results compared with adopted budgets
• Compliance with finance-related laws, rules and regulations
• Efficiency and effectiveness of operations
• Maintenance of governmental assets

Traditionally, the majority of governmental financial information has been maintained and reported in the fund financial statements on the modified accrual basis of accounting or the accrual basis for business-type activities. The recently enacted GASB Statement 34 establishes additional reporting (the governmentwide statements) that represents major shift in the focus and content of governmental financial statements. Collecting and reporting additional financial information required by the governmentwide statements add to the complexity of financial reporting activities and have significant implications for the traditional focus and basis of accounting used in governmental financial statements.

The new governmentwide financial statements consist of a Statement of Net Assets and a Statement of Activities and are prepared using the economic resources measurement focus and the accrual basis of accounting. Thus, revenues are recognized in the accounting period in which they are earned and become measurable without regard to availability, and expenses are recognized in the period incurred, if measurable.

Governmental fund financial statements continue to be prepared using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized in the accounting period in which they become available and measurable, and expenditures are recognized in the period in which the fund liability is incurred, if measurable, except for unmatured interest on general long-term debt, which should be recognized when due.¹Proprietary fund financial statements continue to be prepared using the economic resources measurement focus and the accrual basis of accounting.

Like proprietary fund financial statements, fiduciary fund financial statements are prepared using the economic resources measurement focus and the accrual basis of accounting. Table 1 summarizes the measurement focus and basis of accounting for each reporting element and type of fund.

Table 1. Measurement Focus and Basis of Accounting for Financial Statements
Financial Statements	Measurement Focus	Basis of Accounting
Governmentwide Financial Statements	Economic Resources	Accrual
Governmental Funds Financial Statements	Current Financial Resources	Modified Accrual
Proprietary Funds Financial Statements	Economic Resources	Accrual
Fiduciary Funds Financial Statements	Economic Resources	Accrual

GASB Statement 20, as amended by Statement 34, allows a government the option of applying FASB Statements and Interpretations issued after November 30, 1989, except for those that conflict with or contradict GASB pronouncements, to enterprise funds and governmentwide financial statements. The election is made on a fund-by-fund basis; however, consistency in the application within a particular entity fund is encouraged.

FUND STRUCTURE

For governmental entities to ensure the proper segregation of resources and to maintain proper accountability, an entity's accounting system should be organized and operated on a fund basis. Each fund is a separate fiscal entity and is established to conduct specific activities and objectives in accordance with statutes, laws, regulations, and restrictions or for specific purposes. A fund is defined in GASB Codification Section 1300 as a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations.

Statement 34 modified the structure of two categories of funds used by local governmental entities. Specifically, the new reporting model introduces two new types of funds:

• Permanent funds (in the governmental fund category). Permanent funds are required to be used to report resources that are legally restricted to the extent that only earnings (and not principal) may be used for purposes that support the reporting government programs.
• Private-purpose trust funds (in the fiduciary fund category). Private-purpose trust funds should be used to report all other trust arrangements under which principal and income benefit individuals, private organizations, or other governments.

The new model eliminates expendable and nonexpendable trust funds to focus fiduciary reporting on resources held for parties external to the reporting government: individuals, private organizations, and other governments. Fiduciary funds, therefore, cannot be used to support the government's own programs.

INTERNAL CONTROL STRUCTURE

Internal control is a process-affected by an entity's board of trustees, management, and other personnel-designed to provide reasonable assurance regarding the achievement of objectives in the following categories:

• Reliability of financial reporting
• Effectiveness and efficiency of operations
• Compliance with applicable laws and regulations

As a result, internal control consists of five interrelated components:

• Control Environment
• Risk Assessment
• Control Activities
• Information and Communication
• Monitoring