Most of us account for our household transactions on what would be called a CASH bases of accounting. That is, we consider something an expense when we pay for it. We keep our records in our checkbook and hopefully at the end of the month the balance reconciles with our bank statement.
Business generally uses the ACCRUAL method of accounting. Under the Accrual method of accounting revenue, or income, is recorded when it is earned and expenses are recognized when the benefit of a purchase is received regardless of when the cash transaction takes place. The general idea is to match the revenue with the expenses when the transactions occur rather than when payment is made.
Governments, particularly municipal Governments, use a MODIFIED ACCRUAL method of accounting. This method combines accrual-basis accounting with cash-basis accounting. In this method revenues are recorded when they become available and measurable and, with a few exceptions, expenditures are recognized when commitments, or encumbrances, are incurred.
Briefly, since Town revenues are primarily drawn from Property tax and that is calculated based on our anticipated expenses we need to plan based on our cash requirements rather than on an accrual bases in order to have the funds available to pay our bills.
So what happened?
After reviewing the preliminary audit report and talking with people involved here is what I have pieced together:
1) For many years (at least 7 years or more) the BOE has been moving some expenses to the next fiscal year when there was a need based on unexpected current year expenses. This was apparently done to stay inside budgeted amounts for current years. The process was approved by the Town Auditor.
2) While this practice may be acceptable when the amounts are immaterial, the cumulative effect through the end of June 30 2013 is of material concern and should not be considered an acceptable procedure.
3) The cumulative amount that has built up over the years is approximately $705,000.
4) The Auditors have required the Town to restate the Fund Balance (Town's savings) as of the beginning of the fiscal year to reflect these prior expenses. By making this adjustment it puts the town on a current bases and “sound” footing going forward.
What do we do?
The Adjustment reduces the Fund Balance as of June 30, 2013 to $4.166 million. This is just over 7% of the budgeted spending. The Town has a guideline that we will maintain fund Balance at 7.5% of spending or better. In order to get back to the guideline, (an additional $300,000 - $500,000 in anticipation of next year’s budget) the Town needs to generate surpluses in its net of Revenue less expenses. The resulting surplus will go to replenish the Fund Balance. These surpluses may be achieved any number of ways and need not be done in a single year. More specifically, to authorize the $705,000 expense we may include a portion of that in our budget going forward. Our Charter and statutes allow for the town to spread the cost of a large expenditure over 5 years. Doing this would minimize the impact on the annual budget and recoup the Fund Balance as mentioned above.
The Auditor:
I want to clarify the issues around the Auditor. The audit work is generally done by a manager. That work is overseen by a Partner from the accounting firm who is ultimately responsible for the audit opinion. Though he had changed firms at least 3 times in the last dozen or so years, Brookfield has had the same Partner on our audit since about 2002. Last year, around March, Rob Howard, the Partner, informed the Town he was leaving Grant Thornton (GT). According to Rob, GT wanted to get out of the business of auditing municipalities so he was going to a new firm and he was, by agreement with GT, allowed to take his clients with him. Our Board of Finance decided to follow Rob to his new firm. The reason we now have a different Partner on our account is that Rob unexpectedly died in an accident this past October.
I do not know if it is standard in the industry, but my experience has been that even when you stay with an accounting firm for many years, their own internal rules require that they periodically change the Partner on an account. The reasons are self evident.
My take away:
As mentioned above the solution to our immediate problem is, or can be, relatively simple. Of course there are people who want to point fingers and lay blame. My personal feeling is there is a lot of blame to go around to many people over many years, myself included, as well as many of the people that have served in the same position over the past 10 years and as members of both the Board of Ed and the Board of Finance. I think, however, better to take the learning from this and figure how to move forward. For me there are three key take aways:
1) The finance professionals employed by the Town must do a better job of communicating risks and opportunities to their respective constituencies. At the same time the Boards they report to must do a better job of oversight and be more questioning rather than simply accept the reports.
2) We need to ask if whether or not the people we elect truly and fully understand the fiduciary responsibilities they take on. Do they have the proper competence to ask the questions they need to ask? What additional support do they need in order to understand these issues and how do we deliver it?
3) The Town has a number of professional service firms that are entrenched. We should formalize a process of reviewing the relationships we have not only with our Accountants, but our Legal representation, engineering firms and any other professional services we contract for. We should consider whether the Town is best served by maintaining the same people, some for 2 or more decades, or periodically changing to insure both an alternate perspective and that the Town is getting the best value for the dollars.
