July 2009
Oklahoma Council of Public Affairs
Preface Oklahoma and the United States face many serious problems. We face enormous financial issues in the unfunded obligations of Social Security and Medicare. Many in our society are not sufficiently educated to lead productive lives. Many others suffer from social pathologies that resist the efforts of existing government programs to alleviate them. At the same time, we face threats to our very existence from terrorists that may make substantial unexpected demands on our fiscal resources. At the state level, Oklahoma faces a major problem with the unfunded liabilities of its retirement systems. Meanwhile, it struggles with the same problems as other states to provide for the education, health care, transportation, and other needs of its citizens. Governments at all levels must balance budgetary demands with available resources. At the same time, they must deliver quality services that solve problems. The public has reason to fret about the financial position of its governments. The public also needs assurances that we are educating our children well enough to compete in the global economy; that all citizens have access to adequate health care; that our roads are well maintained; and that other programs their tax dollars fund contribute to a better society. Despite continued efforts by our government leaders, progress seems slow or even non-existent. Have poor accounting practices contributed to these problems, or at least failed to provide information critical to developing workable solutions? Have government accounting practices allowed or even facilitated government services that are ineffective and too costly? This paper will explore the relationship between our system of government and its accounting and financial reporting practices. This paper is written with the belief that while the problems we face are not without solutions, we must recognize those problems and address them pragmatically. It is also written with the belief that improved accounting and financial reporting practices can improve the quality of government services, lowering their cost with both immediate and long-term positive impacts on our society. Accounting and reporting can contribute far more to solving our problems than they do at present. As we shall see, improved accounting and financial reporting practices can make current transparency initiatives more potent. A citizen
seeking to hold government to account for its performance will have far better information with which to do so, and find what is currently available on transparency websites more relevant and understandable. For decades, Oklahoma has lagged behind the rest of the country in per capita personal income, perhaps the broadest available measure of general prosperity. Not surprisingly, Oklahoma also trails in most indicators of health and education. While Oklahoma has shown improvement relative to the rest of the country over the last 12 years, the state’s per capita personal income remains mired in the lower half of the states. Along with most other states, Oklahoma’s elected officials struggle to adequately fund programs to improve the health, education, transportation, and safety of Oklahomans. Advocates in each of these areas can show accurate statistics indicating that current funding is inadequate to the task at hand. Others can make similarly compelling arguments that the current funding is spent on programs that do not work. Meanwhile, the problems our national leaders face dwarf those with which Oklahoma leaders wrestle. At this writing, avowed terrorist enemies of the United States are threatening to take control of a country that has nuclear weapons, more than 45 million Americans are reputed to be without adequate health insurance, and the economy is attempting to digest unprecedented levels of government intervention into private markets. At the same time, the national government faces obligations for Social Security and Medicare benefits it cannot meet without significant and possibly very painful reform. Yet, since the earliest days of the Republic, Americans have rallied in times of crisis and have found the means to solve the problems facing the country. As in the past, the first step is to realize and accept the fact that we have a problem. The next step is to determine the extent of the problem and to begin evaluating the cost and potential effectiveness of alternative solutions. Better accounting and financial reporting can play a significant role in identifying and quantifying our problems and developing solutions. Using Oklahoma as an example, this paper attempts to show how enhanced financial reporting can help us better understand the nature of the issues confronting us and better evaluate our options. 1
Accounting and societal values We don’t always relate accounting and financial reporting to values, but understanding the connection between them is crucial to making the improvements we need. When the United States won its independence, most people in the world lived as subjects of a monarch or other ruler and his or her vassals. An individual’s existence relative to the government was simple. The subject owed obedience to the king or queen and the monarch was expected to at least provide a degree of protection to his or her subjects. An individual in such a society had no need of financial reporting from the government. The individual played no role in directing the affairs of the government and, strictly speaking, the government owed its citizens nothing. The ruler organized the government and whatever benefits the government provided were for the ruler’s ultimate benefit. The ruler’s principal interest was in maintaining order and providing enough services to make organized insurrection unappealing. The subject simply eked out an existence within this system and did not need to concern himself with how well or how efficiently government delivered its services. The ruler’s subjects lived to tend to the ruler’s business, most often by working the ruler’s fields. The subjects bought the ruler’s goods and worshipped according to the ruler’s religion. Those who violated these duties often learned that the ruler did not bear the sword for nothing. At that time, the government was simply the ruler’s means of enforcing his or her desires. Similar arrangements can be found today in countries mired in despotism. Until 20 years ago, the Soviet Union, the second most powerful nation on earth militarily, organized its society on the
basis that man’s duty was to serve the state. The important aspect of this for our purposes is to consider what information a well-designed financial report from such a despotic government would convey. We would first observe that the government officials would report to the ruler. Accordingly, any reports would be prepared for his or her benefit (Figure 1). However, our country was founded on different principles, the most basic being that men have God-given rights and that their government should only govern by their consent. This belief completely overturned the previous arrangement and said, in effect, that the government is to serve its citizens rather than the other way around. Our founders did not institute anarchy. However, they did establish a system where the people could ultimately control their government and make it answerable to them. While Americans may have replaced a king with a constitution, their government’s reports on its activities seem better suited to a monarchy. Our system of accounting and financial reporting used in every state and at the federal level is designed as if to hold appointed officials responsible to the elected officials. We should be holding the elected officials responsible to those who elect them and pay the taxes to support their activities (Figure 2). We should also note that our system of government is inherently a bottom-up design while the system it replaced was a top-down arrangement. This difference is worth more than passing notice, because the nature of the accountability demands a systematic and orderly reporting in order to achieve the desired level of accountability. A ruler can ask questions or demand information as the need arises. However, the diffuse nature of the electorate renders an ad hoc reporting system ineffective. 2
A citizen in a republic needs a comprehensive system that reports what the elected leaders have done with the power the citizens have delegated to them. What assets have been created for public use? What liabilities have been incurred for which the citizen bears ultimate responsibility? What problems have been addressed? What have been the results and at what cost?
but to reallocate resources from taxpayers to various competing special interest groups. If this were the purpose of the American system of government and the system had not degenerated into despotism, we would probably expect it to report its results in a manner very similar to what we do now under generally accepted accounting principles (GAAP) (Figure 3). If the purpose of government is not to run effective programs that maintain justice and domestic tranquility, defend us against the forces of those who mean us harm, promote the general welfare, and secure the blessings of liberty, but rather to carve up a budgetary pie among competing special interests, would we not want a reporting system that focuses on the budget rather than on results? We would see the carving up of the pie as the end in itself rather than as a step toward providing useful services to the public. In such an environment, we would expect the reporting system to focus on the exchange of resources easily gathered and currently redistributed. We would expect a reporting system that looks very much like what we have had for most of the last century. To use our social safety net as an example, are we primarily interested in helping those less fortunate improve their lot, or are we primarily interested in transferring resources from the general public to special interests? These special interests may either profit or earn a living from the programs directly, perhaps only doing enough for the poor so that the transfer can be justified as something other than outright theft. This is not meant to disparage the motives of social workers or vendors to social service programs. I have spent most of my career either in government directly or as a consultant to government and have gained a great sympathy for the plight of civil servants and contractors. But, speaking as a government employee or contractor, my concern is not about what we receive, but about what we do with what we receive. I am proposing in this paper that our elected
The purpose of government The preamble to our Constitution explains why it was established: We the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America. With this familiar passage in mind, we should ask why we have government programs. Do these programs exist to meet society’s needs? Or, do these programs exist to favor one interest group over another or over the general public? Most of us would prefer that our government address problems on behalf of all citizens rather than simply act on behalf of special interests. Yet, as we shall see, our current policies of financial reporting are more appropriate for a government that sees itself as an arbiter of competing special interests rather than as an instrument to secure the blessings of liberty for its citizens. Our elected leaders have a duty to the electorate to account for the effectiveness and cost of whatever programs they implement. Currently, our system of accounting and financial reporting stops short of this ideal, largely limiting itself to reporting whether the legally adopted budget was followed and various regulations regarding expenditures were observed. Budgetary compliance should not be the focus of accounting and financial reporting in America. To illustrate, let us hypothesize that the purpose of government is not to serve the general welfare 3
leaders have an inherent duty under our system to explain their goals, what they are doing to achieve those goals, and to what effect and at what cost. And, yes, if our elected leaders refuse to explain themselves in this way, we should remove them. If the government exists for the benefit of the governed, and because the governed delegate power to those they elect, it follows that the elected are accountable to those who elected them for the performance of the entire government under their charge. How effective are their programs in addressing our collective problems? How efficiently are those programs run? What is their output? Are they achieving their goals? And, beneath these questions, we should know at what cost the programs are carried out and how much of that cost remains to be borne by future taxpayers.
power. All things over which the elected leaders exercise control, either directly or indirectly through appointments, should be included as part of the entity. All matters outside that delegation, regardless of the financial interplay, are not part of the entity. At the same time, not all citizens have the same level of interest in all the programs a government administers. For example, some citizens may want more information about programs focused on education, others may be more concerned about protecting the environment and still others about public safety. A large complex government can fulfill its responsibility to the general public and still publish more detailed financial reports on its programs for those who have greater interest in those programs. In all cases, the focus of the reports should be on the results and the cost. As explored in an earlier stage of this project,1 the financial statements should focus on what it costs the government to carry out its activities. That cost should be measured just as the public generally understands cost, consistent with private sector reporting. The financial statements should also provide relevant information about what the government provides in return for the costs it incurs on the public’s behalf. This is a major departure from commercial accounting because, unlike a for-profit enterprise, the benefit of the government’s activity can often not be measured in dollars and cents. A corporation incurs costs in order to sell its goods and services. It can measure those costs in dollars. In return for its efforts, the corporation makes sales and collects revenue, which are also measured in dollars. An analyst may compare the dollars in sales to the cost of making those sales and begin to evaluate the corporation’s performance. However, while the cost of government activities can be measured in dollars, the output of government programs must usually be measured by other means. • How many students were educated • How many tests of water quality were completed • How many mentally ill patients were evaluated Adding more complexity, the outputs are usually not the end in themselves, but a means of solving other problems. For instance, we test water quality so we can better monitor and lessen the amount of pollution in our water. We maintain roads so that citizens can travel to different places. This does not mean that government cannot
How should we design a reporting system for government in America? If we are to have a reporting system that serves citizens as its first order, we must have a system that reports to those citizens and reports the information they need. These citizens have delegated authority to the government, which means that, in return, the government should report back: • What it does • What it costs to do it • What it provides We can distinguish between what financial reporting is needed from a government focused on promoting the general welfare and one focused on patronage and the transfer of resources. Special interests do not require extensive financial reporting to know what they have received. The special interest advocate is focused on only a relatively small part of the overall picture. The special interests will know the size of the contract, tax credit or even employment they receive as a result of their lobbying. However, the general citizen-taxpayer needs information precisely because, when it comes to lobbying, he or she is “out of the loop” and in need of facts objectively presented. In reporting to its citizens, the government should outline what it does. It should include all activities undertaken through the authority delegated to it by the electorate. The electorate authorizes the formation of a government and sets the limit of its powers. This means that the entity of the government is defined by the limits of its 4
compare the benefit of its programs with the cost and transactions that often complicate even of those programs. It does mean that such comroutine corporate reporting and the dearth among parisons will be more difficult and require careful corporations of the privilege resulting from soverthought and design. eignty that governments enjoy. It should be easier As part of our research into how we could to prepare a set of financial statements for a state improve the value of government financial reports, government than for a major corporation. The we conducted an informal, non-scientific survey of permitted limit of time for publication of a state’s members of the press and subscribers to Perspecfinancial statements should be no more than 90 tive, OCPA’s monthly publication. We asked if they days after the end of the year. currently made use of the state’s annual audited We should also note that one very bright spot in financial statements and/or the performance this regard is the U.S. Government. The Acting measures in the budget book submitted to the Comptroller General signed the Auditor’s Report legislature. on the accrual basis consolidated financial Forty-three people responded to our survey, of statements for the year ended September 30, whom fewer than 10 owned up to actually using 2009, on December 9, 2009. Unfortunately, lest I either the financial statements or the budget book encourage more sanguinity than is merited, I directly. We also asked about should divulge that the areas where they might like letter included a disOur system of accounting and to see additional perforclaimer of opinion on the financial reporting used in mance information. financial statements and Oklahoma and at the federal level While additional informaan adverse opinion on is designed as if to hold appointed tion concerning education, internal control.2 But, at least the sobering report roads, and child welfare officials responsible to elected was prompt! was most prevalent, what officials. We should be holding the Of course the financial came across to me was an elected officials responsible to statements should be inherent mistrust of governvoters and taxpayers. readily disseminated ment on the part of many of through government the respondents. Several websites. However, just as in the private sector, came right out and said they didn’t trust what they where the financial press acts as an intermediary read in official reports. between corporations and the investing public, we This response points to a need for audited should recognize the role the press plays in analyzfinancial statements that provide information to ing information, organizing it, and presenting it so the public in ways it can interpret for itself. The that we can make informed decisions without survey was not scientific and was only conducted wading through all the minutiae of official reports. to glean some suggestions for performance meaLike many Americans, I personally follow the sures, but the clear message of those who restock market and manage a small personal sponded to our informal survey was to provide portfolio of investments. Each company in which I better, more transparent information that has been invest sends me an annual report. I have never subjected to an independent audit. read an entire annual report. I usually do little more The government should consistently report on a than glance at it, yet I consider myself sufficiently timely basis. Public companies must publish their financial statements within three months of the end informed to make my own investment decisions. How? I rely on intermediaries to read the of their fiscal year. Few governments currently report so promptly. With the helpful prodding of the reports and summarize them in ways that enable me to act intelligently. I read both the local and a Government Finance Officers Association, many national newspaper regularly. I take advantage of governments now report their results within six services my brokers make available to me, and I months of the end of the year, although the federal also subscribe to an independent service that government will allow up to 13 months before analyzes investment opportunities. considering any adverse action toward its grantees. We should encourage the development of Most state governments are no more financially similar institutions for government. We already complicated than major corporations. In fact, they are usually less so, owing to the foreign operations have those institutions, but what we need is better, 5
including the advantages of well-designed performance measures, accrual accounting and budgeting, and independent audits. It is also worth noting that while this paper has been written from a limited-government, freemarket perspective, the benefits of this approach do not all go to fellow conservatives. The enemy of this approach is not likely to be the liberal camp, as many in that camp are very serious about using government to achieve desirable social ends. Those who would have the most to fear from this approach would be those special interests seeking to use the budget process to acquire special favors at the expense of the general public. If their goal is not really to provide superior service but to profit from providing services to the program, the approach to financial reporting presented here will make life more difficult for them. The financial statements, now coupled with performance data, will remind the public why we have the program and give them an idea of how well it is doing. Programs that are ineffective or inefficient are likely to see significant reform if not outright termination. Those whose main interest is not in getting results but in selling things to the government at a profit will find that they must either improve performance or suffer loss. At the same time, liberals interested in using government as a tool for social improvements will find a rich source of data to advocate for expansion of things that are working and spending public resources effectively. Of course, many liberals are no more interested in protecting special interests than are most conservatives, as they also see those special interests as a drain on resources that could be put to more productive use.
more organized information for their analysis. Currently, the information with which the press must work comes mostly from ad hoc sources and is often unaudited. The information available to business journalists is superior in helping the business press inform its readers. Government needs to catch up. Experience elsewhere This paper has sought to draw parallels between the American system of government and a system of reporting that combines consolidated accrual accounting with relevant performance measures. The proposals put forward represent a substantial departure from the status quo. However, some governments have taken tentative steps toward a reporting system by which they would hold themselves more accountable to their citizens. Ironically, most progress seems to be taking place outside the United States. In November 2008 the International Federation of Accountants (IFAC) published an information paper, “Developments in Performance Measurement Structures in Public Sector Entities,” that reported on an international survey of the use of performance measurement, both financial and non-financial, and related issues in government reporting. Only 23 of the IFAC’s 250 respondents were based in the United States, and, in many instances, the responses of the Americans surveyed differed significantly from those based elsewhere. After reviewing the IFAC survey, it is difficult not to conclude that other countries lead the United States in the introduction of relevant performance measures. While a thorough worldwide survey of reporting practices is outside the scope of this project, the IFAC study is very helpful in shedding light on the progress being made elsewhere in improving government reporting practices. The IFAC reported that its survey “responses centered on the same themes and respondents seemed to agree that it is the combination (emphasis in the original) of financial and non-financial measurement that shows the performance of the public sector entity in a broader perspective.”3 The IFAC study surveyed government accounting officials, or “insiders,” while this paper is primarily concerned with how to improve reporting to those outside the government. However, many of the conclusions drawn in the IFAC study are consistent with the themes expressed here,
What should the report look like? While it is one thing to outline the principles that should govern accounting and financial reporting in government, it is yet another to outline a workable design for the actual format of the statements themselves. While the principles that underlie our system of government may be straightforward, the government itself is extremely complex, even at the state level. An earlier paper, “Enhanced Financial Reporting for State Government,” upon which this paper attempts to build, examined the superiority of cost-focused accounting and reporting and outlined a basic structure for financial statements. 6
As discussed in the previous paper, governments program would deprive that program of the ability need to report the results of their activities and to achieve its potential impact. However, even with compare those results to the cost of delivering the insufficient funding, we would expect to see at services in order to give the public a picture of its least some progress toward the desired goal. operations. “Enhanced Financial Reporting for State With each program, the government should Government” elaborated some of the reasons why define what the program is trying to accomplish, accounting and financial reporting in government provide a measure of its progress toward that should focus upon cost rather than budgetary goal, and explain how the program attempts to compliance. A focus on cost will tell us what we accomplish the goal. A measure of program give up for government programs. However, we output should accompany this explanation. also need to measure results in order to tell us Two stages may be discerned in trying to what we are getting in return for the expense we achieve a public goal. First, the government must ultimately bear. identify a program or course of action that it There is also evidence that the use of wellthinks will accomplish the goal, and second, it designed performance measures can help keep must implement its program efficiently and effecprogram administrators directed toward their tively enough to have the goals with fewer political desired impact. or extraneous distractions In other words, the prothat impede progress. The Improved accounting and gram may fail to achieve the IFAC survey found that financial-reporting practices desired goal for two rea“respondents from public can improve the quality of sons. First, it may fail to sector entities with nongovernment services, administer its program in a financial performance lowering their cost with both manner that is effective or objectives are significantly immediate and long-term efficient, and second, a wellmore satisfied … than positive impacts. run program that is inherthose without non-finanently unable to achieve the cial performance objecdesired outcome will also tives.”4 fall short of the desired goal. This requires the At a minimum, our elected officials should tell government to measure both outputs (what the us exactly what they are attempting to accomplish program produces) and outcomes (the changes in with the resources we make available to them. We the social or economic indicator where change is also have a right to some objective measure of how well they are doing and at what cost. desired). The elected officials should set the performance For instance, a state may want to reduce the measures. As part of the appropriation process, number of traffic fatalities on its highways. In an the elected officials should tell the appointed effort to realize this desired outcome, it may officials what they expect the program managers organize and fund a highway patrol to enforce to accomplish with the resources being provided. laws related to traffic safety and assist motorists At present, relatively few governments make in need. If a well-run highway patrol is an effecsystematic use of performance measures as part tive means of reducing traffic accidents and the of their financial reporting. Many of the perforstate administers an effective highway patrol, the mance measures that are used are developed by state’s citizens should be safer when traveling those administering the programs and measure state roads. program inputs. Most of those inputs are directly Conversely, if the presence of a highway patrol or indirectly related to inputs or financial rehas only a small impact on traffic fatality rates, sources made available. Most of this information we would have an ineffective program. At the same is irrelevant for our purposes. time, if the highway patrol, while potentially effective If a program is underfunded, it will have diffiat curbing accidents, failed to realize its potential culty meeting its goals. If it is meeting its goals, because of ineffective management, poorly trained we should question whether it is really personnel, or counterproductive internal practices, underfunded. After all, is our goal to simply spend we would not see the desired outcome. money or to accomplish something with what we Of course, a failure to adequately fund a 7
spend? Most citizens want accomplishments, and of all assets created or acquired and liabilities that is where our financial reporting should incurred on behalf of the taxpayers. Of course, concentrate. any liabilities incurred in exchange for services or One of the best performance reports available actions to benefit the state results in a charge to at the state level is prepared by the Oklahoma expense as well as a liability. Legislators may Health Care Authority.5 Since the Medicaid continue to vote for increased pension benefits program that the Authority delivers is probably and fail to fund them. However, those legislators the most complex in state government, it does not will have to incur an estimate of the liability to lend itself to a concise explanation. However, the which they obligate their constituents. report is an excellent step toward better accountConversely, elected officials who by their ability. actions create assets for future use, such as As a result of the analysis summarized in this roads, classrooms, or dams, will incur only the paper, I am proposing a multi-level system of portion of the cost attributable to the services reporting. The top level would relate governmentprovided during their term of office. Future offiwide information while the bottom level would cials who do not want to continue incurring the relate individual transactions. The following cost of the services may always discontinue the chart shows the relationservice and dispose of the ship of the different levels, assets. If the assets are which will be further excarried at the lower of plained in the following cost or market value, The use of accrual accounting sections of this paper. which is proper, they will has the added advantage of not incur a loss in doing making it more difficult for Level I: Government-wide so except for termination scheming officials to start to financial statements expense. build programs without fully Governmental accountThe Statement of disclosing the long-term cost ing has long used a pyraActivities will disclose the of what they are doing. mid (or at least a truncated cost of various functions pyramid) to illustrate carried out by the state. financial reporting. It While the governmentcontains broadly presented wide report is not specific government-wide information at the top with enough to gauge the cost of most programs, it more specific information as we move down. In does present a clear picture of where the elected our illustration, reprinted from “Enhanced Finanofficials are placing priority. cial Reporting for State Government,� we see The government-wide financial statements may high-level data for the entire government, prealso include a statement of cash flows or changes senting its financial position and spending in financial position and a separate statement of priorities. reconciliation between the expenses shown on The presentation is made on the full accrual the statement of activities and the legally basis so that the cost of government services is adopted budget. emphasized rather than budgetary compliance. The government should also include appropriThe use of accrual accounting has the added ate notes to the financial statements, providing advantage of making it more difficult for schemexplanations of amounts carried on the face of ing officials to start or build programs for which the financial statements and disclosing continthey may presently take credit without having to gencies, unusual risks, and other important fully disclose the real long-term cost of what they information about the government’s activities. An are doing. illustrative balance sheet, statement of activities, The reader is referred to the earlier report for and notes to the financial statements are shown more detail, but the idea is to provide a summary on pages 10-17.
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Total Liabilities and Equity
$52,838,908
$5,110,404,000
$2,562,831,000
Education
$176,161,000 Transportation
$103,147,000 Natural and Cultural
($53,107,000)
General Government
Public Safety
($90,866,000)
Public Insurance
$88,517,000
$1,045,707,000
Health and Welfare
Public Utilities
$103,237,000 Regulation
$172,903,000 Assis. to Local Governments
$93,604,000 Economic Development
$376,689,000 Cost of Inc. Pen. Ben. to Former Employees
LEVEL I: Provides picture of financial position and overall costs of entire government LEVEL II: Transition from Level I to Level III LEVEL III:Focus is on individual programs and includes performance data: • objectives with measurements of outputs • goals with measurements of oucomes Notes to statements would cover: • sales (descriptions of items sold, pricing and terms, including special exclusions) • grants and contributions (grantor, amount likelihood of renewal, terms and conditions) • capital assets employed and related deprecitation • estimates of deferred maintenance LEVEL IV: Individual transactions
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A WORD ABOUT THE ILLUSTRATIVE FINANCIAL STATEMENTS face of the statements, such as subsequent events. Most items covered by existing notes generally included with state government financial statements would remain under a cost-focused scenario. As such, the notes that currently appear in Oklahoma’s financial statements are referenced but not further addressed. However, there are additional disclosures that should be considered under the approach outlined in this project. These additional disclosures include a discussion of tax preferences, sometimes called “tax expenditures,” where the government grants preferential tax treatment. Additional disclosure may be helpful with regard to the government workforce as the recruitment and retention of qualified workers is often more difficult in the government environment. The notes to Oklahoma’s financial statements are referenced below with explanations and examples where changes from the existing content are recommended. Existing GAAP may require notes that are excessively detailed beyond what is constructive. However, a critique of this practice is beyond the scope of this project. This project focuses on the cost of government activity. Elsewhere in this report, the merit of including information about the value added by government activity, often called “service, efforts, and accomplishments reporting,” is discussed. Including such information is beyond the scope of this project. However, financial statements that do include information about the value added by government activity should include notes relating to that information.
The illustrative financial statements that accompany this report are not prepared in accordance with generally accepted accounting principles that currently apply to government. They are prepared to illustrate how generally accepted accounting principles in government can be more useful. The amounts shown in the illustrative financial statements are often taken from official state sources, including the state’s own comprehensive annual financial report and its OpenBooks transparency website. Other data were acquired informally from knowledgeable officials, and still other data presented were estimates prepared by me and the team that helped me complete this project. The illustrative financial statements are shown only for the purpose of discussion about financial reporting and may not fairly present the state’s financial position or results of operations. The data have not been audited or, in some cases, even independently verified and may contain material errors and omissions. This project presents a new approach to financial accounting for government. The project uses data for the State of Oklahoma to prepare illustrative financial statements that focus on cost and accountability of the elected government to its citizens. The notes are an integral part of the financial statements. They explain the policies used in the accounting process and provide important detail to aid the reader in understanding. The notes also provide important information that cannot be readily quantified, such as contingencies, or that would be inappropriate on the
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ILLUSTRATIVE GOVERNMENT-WIDE FINANCIAL STATEMENTS STATE OF OKLAHOMA Illustrative Cost-Focused Financial Statements Balance Sheet June 30, 2008 (in $ thousands) ASSETS Current assets Cash and equivalents Short-term investments Accounts receivable Current portion, long-term receivables Inventory Pension assets Other current assets Total Current assets Noncurrent assets Long-term investments Long-term receivables Land Construction in progress Depreciable assets, net Pension assets Assets held only as fiduciary Other noncurrent assets Total Noncurrent assets Total assets
LIABILITIES Current liabilities Accounts payable and accrued liabilities Current portion, long-term debt Current portion, pension liabilities Deferred revenue Other current liabilities Total Current liabilities
$ 6,134,672 4,617,295 1,385,986 92,108 121,092 1,651,971 28,041 14,031,165
Noncurrent liabilities Accrued liabilities not currently payable Capital lease obligations Long-term debt Pension liabilities Liability for other post employment benefits Deferred revenue Liability for assets held only as fiduciary Other noncurrent liabilities Total Noncurrent liabilities
3,794,870 1,998,465 1,824,367 811,668 10,760,363 18,706,963 482,756 428,291 38,807,743
Total liabilities
$52,838,908
EQUITY Citizen equity Total liabilities and equity
The accompanying notes are an integral part of the illustrative financial statements.
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$ 2,041,149 514,813 1,651,971 778,025 267,923 5,253,881
799,911 174,273 7,033,369 32,880,756 283,233 4,308,281 482,756 507,134 46,469,713 51,723,594
1,115,314 $52,838,908
STATE OF OKLAHOMA Illustrative Cost-Focused Financial Statements Statement of Activities For the Fiscal Year Ended June 30, 2008 (in $ thousands) Expense ACTIVITY Education Health and Welfare Public safety Transportation Public insurance Public utilities Assistance to local governments Natural and cultural resources General government Regulation Economic development Cost of increased pension benefits to former employees Total
$ 9,225,428 7,091,784 1,435,108 928,386 923,698 380,367 328,910 295,270 159,849 116,668 110,039
$
Total taxes
Increased / (decreased) burden to taxpayers in future years
$ (5,835,264)
2,819,364 2,069,303 1,114,950 604,926 552,193 419,617 237,166 100,778 86,648 513,020
197,617 (938,310) 41,936
Total, other revenues
Burden to taxpayers from current services less: current amount of taxes and other revenues
-
8,517,965
Other revenues Licenses and permits Income/(loss) from money and investments Fines, forfeitures and miscellaneous
Total, all sources
Net expense
$ (3,344,613) (477,099) (85,939) (307,598) (976,805) (471,253) (4,139) (84,214) (66,080) (6,513) (11,011)
376,689 $ 21,372,196
TAXES and OTHER REVENUES Taxes Individual income taxes Sales and use taxes Gross production taxes Motor vehicle taxes Corporate income taxes Fuel taxes Tobacco taxes Insurance taxes Beverage taxes Other taxes
Sales
(698,757) $
7,819,208
$
9,689,207 7,819,208
$
1,869,999
The accompanying notes are an integral part of the illustrative financial statements.
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$ 5,880,815 6,614,685 1,349,169 620,788 (53,107) (90,886) 324,771 211,056 93,769 110,155 99,028 376,689 $15,536,932
Grants and contributions $
(770,411) (4,051,854) (303,462) (444,627) (151,868) (107,909) (5,252) (6,918) (5,424) -
$ (5,847,725)
Burden to taxpayers $ 5,110,404 2,562,831 1,045,707 176,161 (53,107) (90,886) 172,903 103,147 88,517 103,237 93,604 376,689 $ 9,689,207
N O T E S T O T H E I L LU S T R AT I V E C O S T- F O C U S E D F I N A N C I A L S TAT E M E N T S Note 1. Summary of Significant Accounting Policies The illustrative financial statements include several features that differ from existing GAAP presentation. Most of these differences are related to entity definition, measurement focus, matching, intergenerational equity, and symmetry in society. Entity definition—The illustrative financial statements include all activities under the direction, either directly or indirectly, of officials elected by the voters of Oklahoma. This includes all activities where a board is appointed by state elected officials or by others appointed by those officials. Consistent with the fact that the state is a political unit accountable to its citizens, the financial statements report on all activity conducted by that unit on behalf of those who elected its decision makers. As a result, the illustrative financial statements do not distinguish between general government, component units, or other relationships. If the duly elected officials of the state can ultimately direct the operations of an agency, board, commission, or public trust, it is included as part of the illustrative financial statements. Accordingly, the illustrative financial statements recognize indirect expenses incurred for the benefit of other agencies as part of the expense of providing services through those agencies. For instance, in the illustrative financial statements, the cost of collecting taxes is allocated among all activities financed by those taxes. The illustrative financial statements also allocate other overhead costs among the activities meant to benefit from those activities. Central fiscal operations, personnel management, central purchasing, and other general management functions are allocated to activities based upon appropriate criteria, such as expenditures, appropriations, or number of personnel. This policy is maintained even though the purpose may be to prevent misappropriation or abuse rather than benefit the activity charged directly. The illustrative financial statements also distinguish between transfers that are truly a payment from one agency to another and transfers that are made on behalf of third parties. For instance, the Oklahoma State and Education Employees Group Insurance Board (OSEEGIB) is a state agency that provides insurance benefits to state and county employees and teachers. How-
ever, state employees are not automatically enrolled in OSEEGIB. Rather, OSEEGIB must compete with several private sector providers for the business of those it serves. The State offers its employees a choice between OSEEGIB and its competitors and withholds the cost of premiums from its employees’ pay and benefit allowances. It then transfers the funds withheld to the providers as chosen by its employees. When the transfer is made from the State to OSEEGIB, it is treated as an arm’s length transaction rather than a transfer. The State has compensated its employees. Separately, the State, through OSEEGIB, has sold insurance to its employees. The transfer to OSEEGIB is treated as revenue to the State, specifically a charge for service. Special considerations arise when more than one level of government funds, manages, or delivers a service. The illustrative financial statements report the cost of programs primarily managed and delivered by the State of Oklahoma as a state activity. Funds provided by the federal government for state activities are included in grants and contributions. Funds the State provides to local governments for services primarily managed and delivered by local government are reported as assistance to local governments. The factors considered in determining which level of government primarily manages and delivers a service include which level of government is responsible for: • determining the extent of program coverage • determining eligibility to participate by establishing rules for participation • determining eligibility to participate by applying the rules to individual situations • determining the type and level of benefits delivered • employing workers and/or contractors to deliver services including o establishing criteria for employees and contractors o establishing rules that govern the firing of employees and retaining of contractors o selecting individual employees and contractors o supervising employees and contractors Common schools are funded primarily by the State of Oklahoma, although federal assistance and local taxes are also important sources. Voters 13
local government on an ad hoc basis or where the level of funding is not significant. These situations are all treated as an expense related to a state activity, although a local government may exercise considerable control over the management and delivery of the ultimate service. Examples of such situations are found as part of the Office of Juvenile Affairs, the Oklahoma State Bureau of Investigation, the Arts Council, the Water Resources Board, the Department of Libraries, and many other agencies. Measurement focus—The illustrative financial statements are presented using the economic resources measurement focus and the accrual basis of accounting. Consistent with the principles that follow, revenue is recognized when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Similarly, grants and similar items are recognized as revenue as soon as the State has met all eligibility requirements imposed by the provider. Under existing GAAP, financial statements prepared at the government-wide level are prepared using the accrual basis of accounting and a measurement focus on economic resources. However, existing GAAP use a modified accrual basis of accounting and a measurement focus on current financial resources in all general government statements below the entity level. The illustrative financial statements make no such distinction. The illustrative financial statements apply the measurement focus consistently, from the entity-wide financial statements to the more detailed activity-level statements. The illustrative financial statements also refine the measurement focus by recognizing a liability to the State when others have taken action in good faith with a reasonable expectation of receiving a future benefit. Therefore, when the State, in an effort to achieve a public goal, offers to pay the college tuition of high school students who meet certain requirements, such as taking a more rigorous set of classes than would otherwise be required, the illustrative financial statements recognize a liability when students and their parents, in good faith, sign up for the program and begin complying with its requirements. The liability is adjusted to the extent the students are expected to complete those requirements. Similarly, the State also recognizes the present value of pension and other post-employment benefits as a liability at the time they are earned
elect local school boards, but important decisions about who is to be educated, the amount of education services provided, the overall curriculum, and qualifications for teachers are made by the State of Oklahoma apart from local school districts. Accordingly, Oklahoma’s common schools are treated as a state function, although the financial statements do not include local tax revenues. Similarly, the activities of the Department of Career Technology and Education, the Oklahoma Conservation Commission, and the District Attorneys Council are treated as state functions, although local districts make many decisions and provide important funding. In all cases, the purpose, scope, and rules are determined at the state level, although locally accountable officials implement the decisions made at the state level. The illustrative financial statements do not include funds provided by local sources. However, other county activities are not treated as state functions because the locally elected county officials exercise more decision-making control. However, the State provides major funding for many county activities. The illustrative financial statements report this financing under assistance to local governments. The major areas of assistance reported include funding for county health departments and county roads and bridges. In addition, the State manages pension systems for firefighters and police officers. Almost all participants in both systems are local government employees. However, while both employees and employers contribute to the pension plans, the State underwrites the benefits, establishes the rules of participation, and sets the benefit determination formulas. Increases in the unfunded liability of the systems are treated as an expense of the state, while declines in the unfunded liability (or gains in surplus funding) are treated as revenue to the state. Another area of consideration is community development. The largest program, the Community Development Block Grant, is a federally funded pass-through intended to spur local economic growth. The federal assistance is included in grants and contributions, while the grants to local governments are included in assistance to local governments. However, community development also includes funds appropriated by the state for sub-state planning districts. There are many other instances in which a state agency will provide funds or services to a 14
by state employees. This is discussed in more detail below, under intergenerational equity. Matching principle—The matching principle is basic to accounting and financial reporting. As generally applied in the private sector, the matching principle means expenses are recognized when the revenue to which the expenses give is recognized. Thus, expenses are matched to revenue and the financial statements give a clearer picture of the profitability. However, government is not in business to make a profit, but to provide services for the public good. Rather than incurring expenses to produce revenue and profit, the government collects taxes and other revenues in order to fund its services. Whereas in the private sector, the desire for revenue drives the need for expense, in government, the desire to provide services drives the need for revenue. The matching principle is relevant in government. However, rather than matching expense to revenue, the illustrative financial statements match revenue to expense. For example, when the federal government provides funds for capital improvements such as roads, the State would generally record revenue when it has met all the eligibility requirements of the grant. This would usually mean building a road in compliance with the terms of the federal assistance. However, the road, a capital asset, will provide service to the public over many years. In the illustrative financial statements, the State recognizes the expense of providing that service through depreciation. Accordingly, the illustrative financial statements defer revenue from federal grants that help pay for road and bridge construction and recognize it over the same period that the expense of providing the public service is recognized. The application of the matching principle is further refined by two additional principles: symmetry in society and intergenerational equity. Symmetry in society—In the private sector, when a transaction occurs between two parties, each party will usually make corresponding accounting entries at the same time. For instance, if X sells to Y on credit, X will record a receivable and Y will record a payable at the time the sale is executed. The illustrative financial statements apply this same principle to the State’s financial statements. When an individual or business earns income that is subject to income tax, the illustrative
financial statements recognize revenue to the State. The taxpayer would recognize an expense and a liability for any tax due at the time income is earned. Accordingly, the State recognizes revenue and a receivable at the same time, regardless of when the tax is paid or due. Similarly, sales taxes are recognized when sales subject to the tax are made, and gross production taxes are recognized when oil or gas is produced. Intergenerational equity—Intergenerational equity measures the extent to which public officials have postponed or accelerated the incidence of cost related to program benefits. To the extent practicable, the illustrative financial statements charge the cost of actions taken by current officials to the current time period. For instance, the present value of the cost of added pension or other post-employment benefits related to services already performed is recognized when those benefits are voted in by the legislature rather than being amortized over some future period. Note 2. Deposits and Investments No significant change is contemplated except that the effect of securities lending agreements is not displayed on the balance sheet. The note disclosures would remain as at present. Note 3. Receivables The State has amounts due from numerous sources: taxpayers, the federal government, and those purchasing state services, etc. No change is contemplated except that income earned by taxpayers that is subject to state income tax results in the State recognizing a receivable for tax revenue at the time the taxpayer earns the income. Note 4. Interfund Accounts and Transfers Interfund transactions and balances, including those between what is currently referred to as the primary government and component units, are eliminated. This is consistent with private sector consolidated reporting. Note 5. Capital Assets No significant change is contemplated. However, one issue raised but not resolved by this project is the reporting of replacement cost of capital assets in use. Note 6. Risk Management and Insurance No significant change is contemplated. 15
Note 7. Operating Lease Commitments No significant change is contemplated.
very name of the program indicates the State has obligated itself to fund the scholarships and has therefore incurred a liability. Approximately 28,500 Oklahoma high school students are enrolled in the Oklahoma’s Promise program. The State projects the cost of tuition for the program for the current year to be $54 million. The liability for future tuition payments for high school students enrolled in the program and for college students in the program for whom additional tuition payments beyond the current year will be made is estimated to be $313.8 million. No other significant change is contemplated except that the illustrative financial statements would not distinguish between the obligations related to governmental activities, business-type activities, or component units.
Note 8. Lessor Agreements No significant change is contemplated. However, lease agreements between different agencies of the State of Oklahoma are consolidated. Note 9. Long-Term Obligations Oklahoma’s Promise—The State Regents for Higher Education promote and administer a program to assist students from families with income below $50,000 to attend college in Oklahoma. To remain eligible, the student’s family income cannot exceed $100,000 in the year the student enters college. To participate, a student must apply before his or her final two years of high school. The student’s parent(s), custodian(s), or guardian(s) must agree to help the student meet the program’s requirements. The student must take a more rigorous curriculum than is generally necessary to graduate from high school according to the following schedule of required courses: 4 years of English 3 years of lab science 3 years of mathematics 3 years of history and citizenship skills 2 years of foreign language or 2 years of computer technology 1 year additional of any of the above 1 year of fine arts or speech In addition, the student must maintain a 2.5 GPA in the required courses and a cumulative 2.5 GPA for high school, abstain from abusing drugs and alcohol, abstain from criminal activity, and meet certain other requirements. For a student who successfully completes the program, the State will pay the student’s college tuition according to schedules published by the Regents for Higher Education. The program covers only tuition and does not cover books, room and board, activities, and special fees. Students are encouraged to apply for other financial aid for assistance with these other costs. The statutes provide a mechanism to reduce the number of awards in the event that funding is insufficient to cover anticipated costs. However, this provision is not widely discussed in Oklahoma’s Promise promotional literature. Since students must complete actions that they might not in the absence of Oklahoma’s Promise, the
Note 10. Restatements of Balances No significant change is contemplated. Note 11. Nonrecourse Debt and Debt Guarantees No significant change is contemplated. Note 12. Retirement and Pension Systems No significant change is contemplated in the notes, but the full extent of the present value of pension assets and pension liabilities is reported on the balance sheet. Note 13. Other Postemployment Benefits No significant change is contemplated in the notes, but the full extent of the present value of other postemployment benefits is reported on the balance sheet. The State does not maintain assets to offset this liability. Note 14. On-Behalf Payments No significant change is contemplated. Note 15. Tax Preferences The State levies taxes to finance many of its activities. As part of its system of taxation, the State grants certain tax preferences including exemptions, credits, exclusions, deferrals, preferential rates, and other provisions. In alternate years, the Oklahoma Tax Commission attempts to estimate the amount of revenue the State would have collected but for the existence of the tax preference. The tax preferences with the largest estimated impacts on revenue as calculated by the Oklahoma Tax Commission are listed below. 16
Preference (in $ thousands) Amount Sales tax on sales of items used in the manufacturing process ...................................................... $1,623,110 Sales of items for the purpose of resale .............................................................................................. $1,493,000 Use of itemized and standard deductions on individual income tax ................................................. $685,506 Use of personal exemption on individual income tax .......................................................................... $137,911 Sales tax on sales to counties, municipalities, and other local governments .................................. $104,750 Sales tax on utilities for residential use ................................................................................................... $99,592 Cigarette tax on sales to Indian tribes that have compacted with the State ...................................... $96,648 Sales tax on sales to the State of Oklahoma .......................................................................................... $85,105 Motor vehicle excise tax on used motor vehicles held for sale by dealers ......................................... $70,726 Sales tax on sales of livestock, agricultural products, and certain items used in agricultural production ................................................................................. $63,905 Prorated motor vehicle excise tax on registered trucks and trailers .................................................... $63,516 Tax on sales of prescription drugs and similar items ............................................................................ $60,967 Rebate of 6/7 of gross production tax paid on oil and gas produced from deep wells, horizontally drilled wells, and other special wells ............................................................ $57,000 Exclusion from income tax for up to $7,500 of most government retirement and Social Security benefits ...................................................................................................................... $50,215 Use tax on livestock brought into Oklahoma for eventual sale ............................................................ $48,049 Sales tax on advertising ............................................................................................................................. $46,794 Use tax on property to be used by airlines or railroads ........................................................................ $45,706 Credit for sales tax paid by individuals with gross income of less than $20,000 or families with less than $50,000 ............................................................................................. $37,813 Credit for income tax paid to another state on personal services income .......................................... $33,321 Income tax credit equal to 5 percent of federal earned income tax credit .......................................... $30,243 Nonrefundable income tax credit for an investment in depreciable property or to increase in employment .................................................................................................................... $28,680 Sales tax on food purchased with food stamps ...................................................................................... $20,731
Other tax preferences may not be included because the Oklahoma Tax Commission does not calculate an estimate of the revenue impact or has determined that a meaningful estimated cannot be made. The Tax Expenditures Report is prepared by the Tax Policy Division of the Oklahoma Tax Commission and is available from the Commission.
personnel system, and comply with Merit System rules in the management, promotion, and termination of its employees. At June 30, 2007, agencies required to operate under the Merit System had 32,532 employees, of which 27,098 were in classified Merit System positions. Other state agencies employed 4,379 individuals. In addition, Oklahoma’s system of higher education operates outside Merit System regulations. For the year ended June 30, 2007, the State experienced employee turnover of 13.2 percent. For the ten-year period ended June 30, 2007, employee turnover ranged between 11.7 percent and 14.2 percent.
Note 16. Commitments No significant change is contemplated. Note 17. Litigation and Contingencies No significant change is contemplated.
Note 19. Subsequent Events No significant change is contemplated.
Note 18. Workforce Resources and Qualifications Most State agencies are required to hire new employees through the Merit System, a central 17
Level II: Statements of activities by program grouping This level of statement provides additional detail not found on the government-wide financial statements. However, for most programs in most states, there is too much complex activity to attempt to link the amounts for program costs with the government-wide statements. Accordingly, we have made this level of reporting to serve as a bridge between the government-wide financial statements and program-specific statements. While this paper is written to address issues facing state governments, the format shown can be followed by any type of government. For a small government, such as a small municipality or single-purpose government such as a school or water district, it might be appropriate to eliminate this level of financial statement altogether. The purpose is to provide a bridge from the government-wide financial statements to the program-level financial statements. When such a bridge is not helpful or necessary, it should not be used. Conversely, while small or single-purpose governments may not need this intermediate stage, a truly large government, such as the federal government, may find it advantageous to use more than a single level of reporting to link
the programs with the entire government. Flexibility in this regard is encouraged. From funds to programs Financial reporting in government has traditionally revolved around funds. A governmental fund accounts for all sources of funds with similar restrictions. The general fund represents resources which can be used for any purpose. While government is no longer tied as closely to the use of a myriad of funds in its financial statements as previously, it may still use special revenue funds to account for all revenue that can only be used for specific purposes. Repeated discussions with interested citizens have found relatively little public interest in the activity of a particular fund or group of funds. However, there is interest in the financial activities of programs. GAAP has moved away from rigid adherence to a fund structure in recent years. However, current financial reporting stops short of reporting on programs. A goal of this paper is to demonstrate that reporting by program is possible and even desirable. However, in large governments with many varied programs, an intermediate statement that links the programs with the entire government may be helpful. Illustrative statements of activities for program groupings follow.
I L LU S T R AT I V E S TAT E M E N T S O F A C T I V I T I E S F O R E A C H A C T I V I T Y G R O U P I N G
STATE OF OKLAHOMA Illustrative Cost-Focused Financial Statements Statement of Activities for Education For the Fiscal Year Ended June 30, 2008 (in $ thousands) Expense
Sales
Net expense
Grants and contributions
Burden to taxpayers
Elementary and secondary education Higher education Vocational education Oklahoma Student Loan Authority School for the Deaf School for the Blind Other education
$ 5,069,833 3,793,083 270,965 67,045 9,481 6,479 8,542
$
(112,890) (3,165,217) (5,160) (60,391) (59) (41) (855)
$ 4,956,943 627,866 265,805 6,654 9,422 6,438 7,687
$ (599,803) (141,351) (18,328) (6,307) (4,310) (312)
$ 4,357,140 486,515 247,477 6,654 3,115 2,128 7,375
Total Education
$ 9,225,428
$ (3,344,613)
$ 5,880,815
$ (770,411)
$ 5,110,404
The accompanying notes are an integral part of the illustrative financial statements.
18
STATE OF OKLAHOMA Illustrative Cost-Focused Financial Statements Statement of Activities for Health and Welfare For the Fiscal Year Ended June 30, 2008 (in $ thousands) Expense
Sales
Net expense
Grants and contributions
Burden to taxpayers
Medicaid and related health services $ 3,878,686 Food Stamps program 610,366 Services and assistance to the aged, blind, and disabled 561,687 Child and family services 558,855 Mental health services 312,007 Day care assistance 227,817 Assistance to the unemployed 197,423 Oklahoma Housing Finance Authority 173,349 Disease prevention services 154,701 University Hospital Authority 146,784 Nursing care for veterans 113,455 Rehabilitation services 89,605 Temporary Assistance for Needy Families program 67,016 Oklahoma State University Medical Authority 33
$ (99,456) (20)
$ 3,779,230 610,346
$ (2,450,021) (564,243)
(89,350) (30,737) (27,574) (8,595) (6,687) (54,417) (11,102) (108,005) (36,146) (287)
472,337 528,118 284,433 219,222 190,736 118,932 143,599 38,779 77,309 89,318
(150,731) (197,481) (40,019) (35,785) (241,117) (126,215) (96,240) (39,171) (54,745)
321,606 330,637 244,414 183,437 (50,381) (7,283) 47,359 38,779 38,138 34,573
(56,086) -
6,607 (367)
Total health and welfare
$ (477,099)
$ 7,091,784
(4,323) (400)
62,693 (367) $ 6,614,685
$ (4,051,854)
$ 1,329,209 46,103
$ 2,562,831
The accompanying notes are an integral part of the illustrative financial statements.
STATE OF OKLAHOMA Illustrative Cost-Focused Financial Statements Statement of Activities for Public Safety For the Fiscal Year Ended June 30, 2008 (in $ thousands) Expense
Sales
Net expense
Grants and contributions
Burden to taxpayers
Punishment and rehabilitation of adult offenders $ 565,813 Disaster preparedness and response 153,414 Juvenile crime prevention and correction 143,419 Highway Patrol and related activities 123,515 Investigative and forensic services 108,597 District Attorney activities 82,018 Child support enforcement 72,716 Homeland security 52,889 Oklahoma National Guard 34,675 Criminal defense of indigent defendants 20,969 Law enforcement other than Highway Patrol 15,597 Domestic violence prevention, etc 10,173 Other public safety and defense activities 51,313
$ (42,901) (2,794) (1,158) (1,067) (26,475) (5,955) (3) (569) (2) (1,057) (1,397) (2,561)
$ 522,912 153,414 140,625 122,357 107,530 55,543 66,761 52,886 34,106 20,967 14,540 8,776 48,752
$
(4,835) (144,511) (15,514) (1,622) (3,479) (11,334) (40,169) (47,071) (21,205) (1,428) (2,223) (3,184) (6,887)
$ 518,077 8,903 125,111 120,735 104,051 44,209 26,592 5,815 12,901 19,539 12,317 5,592 41,865
Total public safety
$ (85,939)
$1,349,169
$ (303,462)
$1,045,707
$1,435,108
The accompanying notes are an integral part of the illustrative financial statements.
19
STATE OF OKLAHOMA Illustrative Cost-Focused Financial Statements Statement of Activities for Transportation For the Fiscal Year Ended June 30, 2008 (in $ thousands) Expense
Sales
Net expense
Grants and contributions
Burden to taxpayers
State highways and turnpikes Railroads Aeronautics Waterways
$ 912,293 10,457 3,377 2,259
$ (304,515) (1,380) (1,414) (289)
$ 607,778 9,077 1,963 1,970
$ (435,818) (6,378) (1,093) (1,338)
$ 171,960 2,699 870 632
Total transportation
$ 928,386
$ (307,598)
$ 620,788
$ (444,627)
$ 176,161
The accompanying notes are an integral part of the illustrative financial statements.
STATE OF OKLAHOMA Illustrative Cost-Focused Financial Statements Statement of Activities for Public Insurance For the Fiscal Year Ended June 30, 2008 (in $ thousands) Expense
Sales
Net expense
Grants and contributions
Burden to taxpayers
OSEEGIB* CompSource Health insurance high risk pool Multiple injury trust fund
$ 590,831 299,566 25,337 7,964
$ (602,576) (347,019) (25,270) (1,940)
$ (11,745) (47,453) 67 6,024
$
-
$ (11,745) (47,453) 67 6,024
Total public insurance
$ 923,698
$ (976,805)
$ (53,107)
$
-
$ (53,107)
* Oklahoma State and Education Employees Group Insurance Board The accompanying notes are an integral part of the illustrative financial statements.
STATE OF OKLAHOMA Illustrative Cost-Focused Financial Statements Statement of Activities for Public Utilities For the Fiscal Year Ended June 30, 2008 (in $ thousands) Expense
Sales
Net expense
Grants and contributions
Burden to taxpayers
Grand River Dam Authority Oklahoma Municipal Power Authority
$ 224,542 155,825
$ (314,287) (156,966)
$ (89,745) (1,141)
$
-
$ (89,745) (1,141)
Total public utilities
$ 380,367
$ (471,253)
$ (90,886)
$
-
$ (90,886)
The accompanying notes are an integral part of the illustrative financial statements.
20
STATE OF OKLAHOMA Illustrative Cost-Focused Financial Statements Statement of Activities for Assistance to Local Governments For the Fiscal Year Ended June 30, 2008 (in $ thousands) Expense
Sales
Net expense
Grants and contributions
Burden to taxpayers
County health services Community development County roads and bridges Police and firefighter pension costs
$ 122,256 100,259 71,099 35,296
$ (3,890) (249) -
$118,366 100,010 71,099 35,296
$ (78,066) (73,802) -
$ 40,300 26,208 71,099 35,296
Total assistance to local governments
$ 328,910
$ (4,139)
$324,771
$ (151,868)
$172,903
The accompanying notes are an integral part of the illustrative financial statements.
STATE OF OKLAHOMA Illustrative Cost-Focused Financial Statements Statement of Activities for Natural and Cultural Resources For the Fiscal Year Ended June 30, 2008 (in $ thousands) Expense
Sales
Net expense
Grants and contributions
Operate state parks and golf courses $ 61,718 Wildlife and fisheries activities 48,470 Agriculture and food services 35,286 Conservation of water resources 27,170 Conservation and reclamation services 24,392 Okla Centennial Comm Fund 24,152 Oklahoma history programs 21,878 Forestry and fire fighting services 20,178 Reclaim well sites 14,507 Public television 14,125 Other natural and cultural resources activities 3,394
$ (26,821) (4,912) (4,593) (37,374) (72) (2,116) (3,102) (538) (4,289) (397)
$ 34,897 43,558 30,693 (10,204) 24,320 24,152 19,762 17,076 13,969 9,836 2,997
$
Total natural and cultural resources
$ (84,214)
$ 211,056
$ (107,909)
$ 295,270
(2,967) (24,002) (4,633) (14,232) (12,447) (21,701) (2,755) (4,731) (17,434) (2,485) (522)
Burden to taxpayers $ 31,930 19,556 26,060 (24,436) 11,873 2,451 17,007 12,345 (3,465) 7,351 2,475 $ 103,147
The accompanying notes are an integral part of the illustrative financial statements.
STATE OF OKLAHOMA Illustrative Cost-Focused Financial Statements Statement of Activities for General Government For the Fiscal Year Ended June 30, 2008 (in $ thousands) Expense
Sales
Net expense
Grants and contributions
Burden to taxpayers
Judiciary Legislature Elections Governor Other general government
$ 107,564 35,754 8,938 3,507 4,086
$ (62,402) (575) (27) (260) (2,816)
$ 45,162 35,179 8,911 3,247 1,270
$ (4,587) (114) (10) (541)
$ 40,575 35,065 8,901 3,247 729
Total general government
$ 159,849
$ (66,080)
$ 93,769
$ (5,252)
$ 88,517
The accompanying notes are an integral part of the illustrative financial statements.
21
STATE OF OKLAHOMA Illustrative Cost-Focused Financial Statements Statement of Activities for Regulatory Activities For the Fiscal Year Ended June 30, 2008 (in $ thousands) Expense
Sales
Net expense
Grants and contributions
Burden to taxpayers
Regulation of businesses and professions Regulation of energy and environment Driver licensing Regulation of transportation Insurance regulation Workplace regulation Public utility regulation Regulation of retail fuel outlets Health services regulation Investment regulation
$ 23,159 18,651 18,514 14,414 11,495 8,738 5,840 5,584 5,545 4,728
$ (1,242) (695) (2,545) (715) (338) (41) (376) (40) (324) (197)
$ 21,917 17,956 15,969 13,699 11,157 8,697 5,464 5,544 5,221 4,531
$
(355) (1,725) (185) (784) (696) (1,609) (157) (1,407) -
$ 21,562 16,231 15,784 12,915 10,461 7,088 5,307 4,137 5,221 4,531
Total regulatory activities
$ 116,668
$ (6,513)
$ 110,155
$ (6,918)
$103,237
The accompanying notes are an integral part of the illustrative financial statements.
STATE OF OKLAHOMA Illustrative Cost-Focused Financial Statements Statement of Activities for Economic Development For the Fiscal Year Ended June 30, 2008 (in $ thousands) Expense
Sales
Business development Support of scientific research and development Promote Oklahoma tourism Training for Industry program Oklahoma Industrial Finance Authority Oklahoma Capital Investment Board Oklahoma Development Finance Authority Other economic development activities
$ 57,530 22,543 16,156 5,979 3,002 2,478 1,231 1,120
$
Total economic development
$ 110,039
$ (11,011)
Net expense
(82) (880) (1,208) (202) (3,089) (4,140) (1,347) (63)
The accompanying notes are an integral part of the illustrative financial statements.
22
Grants and contributions
Burden to taxpayers
$ 57,448 21,663 14,948 5,777 (87) (1,662) (116) 1,057
$ (3,082) (1,369) (725) (248)
$ 54,366 21,663 13,579 5,052 (87) (1,662) (116) 809
$ 99,028
$ (5,424)
$ 93,604
Level III: Program financial statements The financial statements presented here allow the government to disclose its goals, what it is doing to attain those goals, what progress it is making, and at what cost. At this level, the inclu-
sion of non-financial performance information becomes critical. The principal statement is a statement of activities with each program getting a line in the statement.
STATE OF OKLAHOMA Illustrative Cost-Focused Financial Statements Statement of Activities for Highway Patrol and Related Activites For the Fiscal Year Ended June 30, 2008 (in $ thousands) Expense
Sales
Net expense
Grants and contributions
Burden to taxpayers
Law enforcement services Highway Safety office Size and weight permits
$115,533 6,726 1,256
$ (1,117) (32) (9)
$114,416 6,694 1,247
$
(1,613) (9)
$114,416 5,081 1,238
Total highway patrol and related activities
$123,515
$ (1,158)
$122,357
$ (1,622)
$120,735
Patrol hours on state highways Cost per patrol hour, gross Cost per patrol hour, net Burden to taxpayer per patrol hour
1,000,000 $115.53 $114.42 $114.42
Number of size and weight permit requests processed Cost per request, gross Cost per request, net Burden to taxpayer per size and weight permit request
120,000 $ 10.47 $ 10.39 $ 10.32
Traffic collision fatalities Millions of miles driven per fatality
636 70.75
for the purpose of illustration. If the state were to prepare financial statements according to the principles outlined in this paper, it would likely include thousands of measures of outputs and hundreds of measures of outcomes. In establishing these performance measures, the government leaders must outline what they are trying to accomplish for the public. What are their goals? The performance measures should tell us if the program is helping to achieve the goals intended. The government officials must also disclose what they are doing to achieve the goals they have established. These could best be described as objectives. For instance, to reduce the number of fatal crashes on state roads, the goal, the state may put in place a certain number of patrol hours on state highways, the objective. If the elected officials have correctly understood the nature of the problem they are addressing,
The simple illustration shown includes more detail about some public safety programs than the Level II statement, showing each distinct program and its costs. The three programs shown here are summed and carried to the Level II statements, where the totals are shown under Highway Patrol and related activities. This line item in turn is totaled with other groupings of programs related to public safety and the totals carried up to the government-wide statements. The idea is to create a flow of information between the government-wide statements and the program statements. At the same time, since the goal of the government is to bring about desirable social change, the statements incorporate performance data. Three examples are shown here, two related to outputs and one, fatalities resulting from traffic collisions, that illustrates an outcome. The limited scope of this project restricts us to presenting a few possible performance measures 23
$518,077,000
$8,903,000
Punish/Rehabilitate Adult Offenders
$125,111,000
Disaster Preparedness and Response
$44,209,000 District Attorney
Juvenile Crime Prevension/Correction
$26,592,000
$120,735,000
$104,051,000
Highway Patrol & Related Activites
Investigative and Forensic Services
$5,815,000
Child Support Enforcement
Homeland Security
$19,539,000
$12,317,000
Criminal Defense of Indigent Defendants
Law Enforcement o/t Highway Patrol
$12,901,000 Oklahoma National Guard $5,592,000
Domestic Violence Prevention, Etc.
$41,865,000 Other Public Safety and Defense
feel better about driving on Oklahoma highways and living in Oklahoma. Much has been written about performance management in business, and there is a wealth of information that is applicable here. It is beyond the scope of this project to attempt to analyze the various methods of measuring performance. What is intended is to encourage government to measure what it does and report the results. The important consideration is what the elected leaders had in mind in establishing the program. What is it supposed to do, and by doing it well, achieve?
they should have been able to sponsor programs that will address the problem. If the program is well-designed and effectively carried out, we should eventually see some mitigation of the problem. This does not mean that a program may not have more than one goal. For instance, a reason for maintaining a professional highway patrol, in addition to reducing the incidence of reckless driving behavior, might be to elicit a feeling of security and well-being while on the highways. The drivers, aware that a competent, well-trained and managed Highway Patrol is on the job, may 24
The program statement of activity should also provide a cost per unit of output. For instance, how much does it cost to put a trooper on the road for an hour? How much does it cost to process a permit to transport a heavier or larger-thanstandard load on the state highway system and designate an acceptable route? (At this point, it is perhaps appropriate to again emphasize, as in “Enhanced Financial Reporting for State Government,” that the financial statements shown in this paper are for illustrative purposes only. The amounts shown are based upon estimates made from publicly available data that may have been misinterpreted. They are unaudited and do not purport to be accurate. They are presented only to show what the format of the financial statements in the proposed system would look like.) There is nothing to prevent additional relevant information from being presented. For instance, the agency management responsible for the program may explain in narrative form what they are trying to accomplish and issues that affected their performance in the year under review. This would be similar to what is now presented in the management discussion and analysis (MD&A) section, except it would pertain to a program. However, if management presents additional information, the statements should clearly disclose whether the information has been audited and to what extent.
where the amounts are immaterial, the state, in order to achieve a public purpose, may provide services free to some for which it charges others. For instance, senior citizens may get to use certain state facilities free or at a reduced price. There are several definitional issues, the solution to which is beyond the scope of this project. For instance, some governments report fines and penalties as a charge for service because they help the government achieve desirable compliance with state law. Others reply that a true sale must be entered into voluntarily by both buyer and seller. A fine or penalty uses the sovereign power of the state to extract the required payment. Others dispute whether licensing fees are in fact sales. Some would argue that the state is selling the right to practice a trade or profession within its boundaries. Others would reply that the state is actually restricting people from actions they might like to take, and that, again, the transaction is hardly voluntary. However, regardless of what definition eventually prevails, the state should disclose what it is selling, for how much, and under what terms. Most of the items appearing in the financial statements under grants and contributions would be grants from the federal government to the state. For several years, the percentage of state expenditures paid for by federal grants has been increasing. At the same time, many legislators will often argue for a certain program because it “brings in federal money” or may advocate for a particular program because the existence of a federal grant to defray the cost may make it more attractive than a similar program for which the state must bear the full cost. Accordingly, the financial statements should include information about the details of major federal grants and other contributions. The disclosures would include the grantor’s identity, usually a federal agency, and the terms of the grant, key compliance factors to which the state must adhere and whether the state expects the grant to be recurring. For instance, a federal grant for a construction project may require the recipient to pay what are often called prevailing wages on its construction contracts. Such provisions may increase the cost of a project and offset or even eliminate the advantage of securing federal funding for a particular undertaking. Similarly, some highway
Notes to program level financial statements The statements of activities for programs should also contain appropriate notes that expand the information presented on the face of the financial statements themselves. While it is beyond the scope of this phase of the project to prepare illustrative notes to program level illustrative financial statements, we can describe what those notes should contain. Most statements should probably contain notes covering at least four areas: sales, grants and contributions, capital assets, and deferred maintenance. In addition, the notes could also contain a table showing expense by object in order to better help the reader transition from the Level III financial statements to transaction data. With respect to sales, the notes should disclose what is sold, the terms under which it is sold, pricing, and special terms. While preparers of financial statements should not include items 25
construction paid for with federal monies may require the use of more exacting and costly standards than what state engineers think is in the state’s best interest. However, if the state takes the money, it must abide by the rules that go with it. It is also important for readers to know if a source of funding is likely to continue into future years. Most federal grants are recurring, and a state may reasonably expect a similar level of funding in future years. However, many grants are made for special one-time projects. Even more vexing to states are the situations where the federal government may make money available to “seed” a program, with the expectation that the state will pick up the cost in future years. It may be to the state’s advantage to take federal money, even if the federal government will only provide the money for a limited time. However, the state’s leaders should consider carefully before launching a new continuing program and funding it with a temporary revenue source. The voters should have ready access to information about such situations when they arise. Many state agencies use capital assets to carry out their activities. The depreciation of these assets is included as an expense in the financial statements. However, at the program level, many readers would probably find it helpful to know something about the assets employed in providing services and the related depreciation. For instance, the highway patrol uses buildings to house its operations, maintains a fleet of relatively expensive patrol cars, and also maintains a sophisticated communications system. Material elements should be disclosed so that the reader can gain an understanding of when additional capital outlays may be required. Similarly, government officials often forgo routine maintenance on infrastructure and fixed assets in order to apply resources to more politically visible initiatives. Of course, this usually leads to even greater outlays in future years. Accordingly, any material amount of deferred maintenance should be disclosed in the notes.
transaction level. By structuring a financial reporting process that informs the public about the financial position of state government and the cost of services, we can provide a context to data on the transparency website not now available. Without the ability to place data in the proper context, activists will find that they will miss many opportunities to promote more efficient government and curtail the waste of taxpayer dollars. At the same time, they may find some of their own efforts misdirected. There will always be a tendency to use access to public data for a “game of ‘gotcha’” or similar diversions. However, concerned citizens must be able to distinguish between real waste and expenditures that can build value. Two examples may illuminate this point. When serving as finance director, one of my managers came and asked me to approve the awarding of a bid to a construction contract to a bidder whose bid was over 50 percent higher than the low bidder. On the surface, this sounded like a terrible idea. However, my manager explained that the low bidder had a record of substandard work and, through negligence, recently severed an underground fiber optic cable when digging a trench. The break forced state communications to be re-routed and, in some cases, completely eliminated service for several hours. In this situation, trenching was required near cables important to the state’s emergency response communications. There were other areas where the contractor’s past performance on similar work was substandard. However, my manager warned me that this contractor would aggressively challenge any bids he lost and that he suspected some agencies simply went ahead and awarded him some work to keep him off their backs. Fortunately, my manager had done a good job documenting the inadequacies of the contractor’s past performance. I told him I would support him choosing another contractor and we had no further difficulty. However, in a public competitive bidding process, there is a tendency to award contract on the basis of price alone. The inclusion of meaningful performance measures also adds value considerations to the equation. Because performance measures look at results, the manager of an agency will face a strong incentive to do things that add value. That may mean spending more in the short run if it saves money in the long run. A prudent manager
Level IV: The transparency website This project was put forward as an investigation into means of enhancing Oklahoma’s transparency initiative. Oklahoma was the first state to implement a comprehensive disclosure of its transactions on the Web. Its OpenBooks website provides visitors with information down to the 26
reduce the cost of Oklahoma government several years ago concluded that the state would save money by increasing its budget for training. My own experience has taught me that we can do more with less if we rely on fewer but better prepared professionals to get the job done. At the same time, programs with altruistic sounding titles can often escape scrutiny no matter how much money they waste or how ineffective they really are. A financial reporting system that focuses on cost and what we get in return for the cost we incur will help conscientious citizens better understand abuses in government and correct them.
will realize it may be better to spend more to do the job right the first time than to spend to do it again. Another area where managers often face difficulty making value decisions is in the area of travel and training. Good training will invariably more than pay for itself. It is imperative to have professionals who are conversant with the latest technology and developments within their area of expertise. I have seen situations where government officials travel at taxpayer expense, show up and register for the conference, and then we never see them again. Rather than attending the technical sessions, they spend all their time at the golf course or some other more relaxing venue. Unfortunately, criticism of excess travel tends to treat someone traveling for training and someone goofing off the same. The question is not whether someone traveled to a conference or seminar, but whether they attended the sessions and benefited from the trip. An independent study of how to
Auxiliary reporting The financial statements proposed in this paper do not rule out the possibility of other statements in many situations. For instance, a state or an agency within the state could still publish a report that reconciles the expense shown in the statement of activities with the legally adopted budget.
27
While this paper argues for a cost-based system, this does not mean that the financial statements cannot demonstrate budgetary compliance. Such a budget/financial statement reconciliation should include the adjustments necessary to move from one to the other. They should also be careful to include all available resources in the budget. Some agencies obtain budgeted resources from more than one source. There should also be nothing to prohibit a state agency from issuing stand-alone financial state-
ments in the same general format as outlined here. However, as the state would report on a consolidated basis, any agency balance sheet would have to display amounts due to and amounts due from other agencies. The statements of activities would also require adjustment for sales to other agencies and interfund transfers. There will be situations in which stand-alone agency statements may be helpful. A citizens’ group may take a special interest in the agency’s activities, and where an agency has incurred
Government-Wide Financial Statements
Agency Financial Statements
Reconciliation to Budget
28
liabilities for which the state as a whole is not responsible, the agency’s creditors may insist on audited agency financial statements.
The budget would then move on to evaluate the amount of resources needed to achieve the outputs for which the governor has called. While this would not dismantle all restrictions on purchasing and employment, it would focus primary attention on getting results (budgeting by activity) rather than compliance with rules (budgeting by object). Of course, the governor proposes the budget and the legislature enacts it, usually after making significant changes in the content of what the governor sent their way. Fortunately, many legislators take this appropriation process very seriously and often ask the agency director if they can really accomplish what is needed with the resources contemplated. However, the legislature should pass a budget that contains objectives for outputs and allocates resources. This process would allow the legislature and the public to see if a given agency achieved the output desired and permit intelligent questions about what changes are needed if the agency falls short.
The primacy of the budget Those who set standards for accounting in government readily concede that the budget document is primary. Certainly, the budget occupies a prominent place in our political discourse and deliberations. However, a budget is only a plan, or, more precisely, a device that limits a plan of action. We should ask ourselves what is more important: What we planned to do… or what we actually did? Of course, if the purpose of government is simply to reward special interests with public resources, we would need to pay less attention to the effectiveness and efficiency of the government’s programs. When they have enacted the budget, the chief executive and legislative body have discharged their foremost duty. Most of us would assert that the effectiveness and cost of programs should be of greater concern. This does not mean the budget is completely ignored in financial reporting, but it does mean that it should play a clearly secondary role because it should be of secondary importance. While it is beyond the scope of this paper, it should at least be noted that some governments are beginning to include GAAP or accrual concepts in their budgeting practices and generally report good results in doing so. Budgeting as well as reporting on a GAAP basis may well be the best practice for government. Is the budget the focus of financial reporting in the private sector? We all know it is not. Is that because publicly held companies do not prepare budgets and enforce their restrictions internally? Of course not, but we all know that shareholders care about results much more than plans. Taxpayers should be equally demanding. Perhaps we should consider a scenario where the governor outlines his or her goals as the first step in his or her budget presentation. Next, the governor would outline what he or she sees as the proposed actions needed to achieve those goals. To some extent, something similar to this takes place informally at present. However, the governor should also say “this is how I intend to measure progress toward my goals” and “these are the outputs I think are needed from our programs to achieve those goals.”
Comparing one government to another An obvious advantage of a uniform system of accounting among various governments, especially when results and cost are paramount, is the ability to begin comparing the relative success of different governments in achieving desired outcomes at the least cost. However, we must realize that each government is unique. The American system is a bottom-up, not a top-down system. The goals of a government should reflect the goals and values of its electorate. Subtle differences will exist between the wishes of different electorates that will be reflected in their government’s policies and programs. While Americans and Oklahomans exhibit broad agreement about what they would like for their government to accomplish, different people will prioritize differently. One electorate may hold that education is the most important state government function while another may give greater relative emphasis to alleviating poverty and a third may consider environmental concerns most important. There is nothing intrinsically superior about any of these priorities. What is important for our purposes is to recognize that differences will exist between states that will impact outcomes to some degree. While we should make financial reporting as 29
uniform as possible, we should not expect uniform activities or uniform goals among the states. The Governmental Accounting Standards Board (GASB) has repeatedly stated it is not in the business of telling governments how to measure their performance. Such a self-imposed restriction is wise.
represent a major diversion from existing practice. The IFAC survey repeatedly found respondents most satisfied with their situations when higher standards of professional practice were followed. The IFAC found “a strong positive correlation between the existence of an independent external non-financial performance review and the level of satisfaction.”6 Sometimes skeptical taxpayers and other observers will likely take comfort in knowing the information they find in published reports on government finances and performance has been audited according to professional standards. When I served as Auditor and Inspector for the State of Oklahoma, I would respond to questions about whether an agency should be audited with “In God we trust; all others we audit.” While most reports will doubtless be prepared with care and professionalism, the expectation of an audit and its attendant review of internal controls will serve to reinforce the integrity of any preparer that might be tempted to stray from the proper course. %
GAAP vs. OCBOA Some will complain that this proposed method of accounting is too complex for smaller governments. The same charge is often made with respect to GASB Statement 34 and has some validity. The idea behind the changes proposed in this paper is not to impose a burdensome framework on hard-pressed governments. Rather, the goal is to provide interested citizens with information organized in ways that meet their needs. We should grant leeway for smaller governments to adopt OCBOA (other comprehensive basis of accounting) where that meets the needs of their citizens. This is similar to what occurs now in the private sector. Every public company reports on the basis of GAAP. So do many other businesses. However, a bank may not require a very small business seeking a loan to present audited GAAP-basis financial statements. In the same way, we could permit small governments to waive some of the requirements of GAAP.
Endnotes 1
Tom Daxon, “Enhanced Financial Reporting for State Government,” Oklahoma Council of Public Affairs, April 2009. 2
“Financial Report of the United States Government,” 2008, Federal Management Service, a Bureau of the United States Department of the Treasury, available online at www.fms.treas.gov.
The role of the auditor One means of assuring the reliability of the information presented and, perhaps more importantly, giving the taxpaying public more confidence in the reporting from its government, is to subject the financial statements and the accompanying presentations of performance to an independent audit. Virtually every major government in the United States now undergoes an annual independent audit. It should be relatively straightforward to simply include reporting on performance within the scope of the audit. The Single Audit Act now requires most governments of significant size to have their financial statements audited. However, the Act also requires grant recipients to ask their auditors to look at and report on the recipient’s compliance with significant factors published in the OMB Compliance Supplement. Many of the items for which the auditor must perform audit tests are not financial in nature. Asking the auditor to determine if performance data are presented fairly will not
3
“Developments in Performance Measurement Structures in Public Sector Entities” International Federation of Accountants, 2008, pg. 29. 4
Ibid., pg. 21.
5
“Service Efforts and Accomplishments SFY 2008,” Oklahoma Health Care Authority, available online at http://www.okhca.org/ research.aspx?id=84#b 6
“Developments in Performance Measurement Structures in Public Sector Entities” International Federation of Accountants, 2008, pg. 24.
30
Tom Daxon is a Certified Public Accountant who holds both an undergraduate and a master’s degree from Oklahoma State University. In 1978, he was elected State Auditor and Inspector for Oklahoma. He inherited an office which had been placed on probation by the federal government and built it into one of recognized excellence. In his final year, Oklahoma became the first state to prepare and publish a comprehensive annual financial report using generally accepted accounting principles. Following his tenure as Oklahoma’s Auditor and Inspector, Daxon became a principal with Arthur Andersen and advised government clients across the country. He led the research team that prepared pro forma financial statements for the U.S. Government
using accrual concepts. In 1993, Daxon played a key role in stabilizing an office of the Resolution Trust Corporation that had been the subject of unfavorable national publicity, and the following year he was asked to serve as Treasurer of Orange County, California, following the County’s bankruptcy. Daxon organized and led a team of underwriters that was able to develop a successful strategy that repaid the County’s creditors, restored the County’s credit rating, and avoided raising taxes. In 1995, Daxon returned to Oklahoma where he served as Secretary of Finance and Revenue for Gov. Frank Keating. He currently practices as a CPA in Oklahoma City and serves on a task force of the Federal Accounting Standards Advisory Board.
The author would like to thank his fellow CPA, Steven J. Anderson, for his invaluable assistance and counsel and also Lauren Elise Jennings and Jonathan Niccum, students at Oklahoma Christian University who served as interns and compiled much of the data used in the report. In addition, Oklahoma Christian University students Nathan Goodnight, Heremiah A. McDaniel, Patrick Rayner, Michael A. Reese, and Rhea S. Swarb served as interns on a related earlier project and helped compile much of the data used in the illustrative financial statements that also appear in this report.
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Blake Arnold
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Oklahoma City
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Bartlesville
University of Oklahoma
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Mary Lou Avery
Robert Kane
David Deming, Ph.D.
Oklahoma City
Tulsa
University of Oklahoma
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Tom H. McCasland III
Bobbie L. Foote, Ph.D.
Duncan
University of Oklahoma (Ret.)
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Kyle Harper, Ph.D.
Lawton
Steve W. Beebe Duncan
John A. Brock Tulsa
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Research Fellow
Oklahoma City University (Ret.)
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Enid
Lloyd Noble II Tulsa Tulsa
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Oklahoma City University (Adjunct)
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Oklahoma City
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David L. May, Ph.D.
Oklahoma City
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Oklahoma City
Ronald L. Moomaw, Ph.D.
Melissa Sandefer
Oklahoma State University
Norman
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Oklahoma City University
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Cameron University
Tulsa
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Lew Ward
Western Oklahoma State College
Claremore
Enid
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William E. Warnock, Jr.
Oklahoma Christian University
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Oklahoma City
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Oklahoma City
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Oklahoma City
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University of Oklahoma
Oklahoma City
Oklahoma City
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Enid
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