Agenda - Council - 01/13/1981 - Laserfiche WebLink

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An indicator of local government compliance is the U.S. Comptroller General's report to Congress last May. To qualify for $25,000 or more under federal revenue sharing, 11,000 governments are asked for independent audits every three years. (Congress may amend that to annually.) Of the total reports submitted 63% met audit requirements, 26% partially complied, and about 11% were unacceptable. . At the state level the Council of State Governments is developing accounting practices for states under a National Science Foundation grant. Its survey of 50 states shows most of them audit agencies and departments. Few audit the entire state. That's as though General Motors Corp. had its divisions audited but not the parent company. Among states polled only 20 said they did annual audits. Others said audits were done every two, three or four-years, or were vague as to frequency and sc;ope. The credibility of an audit depends on the auditor's independence. Questions arise when audits are performed by the person who also keeps accounting records or who serves at the will of a governor or mayor. An auditor is considered independent if he: -Is elected to a term of office -Is appointed by a chief executive but reports to the legislature or city council which confirms the appointment -Is named by the legislature or city council to whom he reports -Is a state official auditing local government -Is an outside auditor who is a certified public accountant. Opinion and Comment "General obligation bonds are suffering from an erosion in confidence-a credibility gap:'-said-Brenton W. Harries, presidentofS&P, at a meeting of state auditors, comptroUers and treasurers. Can the trend be reversed? . There's been a structural change in the municipal bond market and in the way investors look at debt backed by an issuer's "full faith and crediC' Investors believed what they read in a slate constitution that general obligation meant the issuer would raise taxes in whatever amount necessary in the event of default. With such assurances, there was little interest in finandal statements, full disclosure, or independent audits. The experience of New York City and Cleveland shattered those illusions. A general obligation pledge is not a key to unlock a city's assets. Nor can investors rely on interpretations of passages in a state constitution, which through legal maneuvers may be put aside under a state's police powers to protect the health, welfare, and safety of its citizens. The antidote to moratoriums is fiscal discipline scrutinized under full disclosure, standardized accounting and timely auditing. From what we see at S&P, the message is getting across. But it is a slow, agonizing process, muddled in politics, legalities, and the desire of states to reject any tampering with sovereign rights and powers. Because of their considerable political clout, governments may be able to forestall a federal legislative solution to this problem. However, they cannot defeat the forces at work in the financial markets. Investors have too many other bond issues to choose from, and may continue to penalize general obligation issuers using archaic accounting systems. "This decade will require accounting and financial reporting be brought up to snuff," said Mr. /Harries. "Cash-basis accounting may well be the dinosaur of the 1980s:' 5