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Xerox University Microfilms 300 North Z M b Road Ann Arbor, M ichigan 44100 ] I II 76-27,082 CHARLTON, Richard Earle, Jr., 1932- COST/BENEFIT ANALYSIS OF MUNICIPAL FINANCIAL REPORTING AND AUDITS: A CASE STUDY (MICHIGAN PUBLIC ACT 2 OF 1968) Michigan State University, Ph.D., 1976 Accounting Xerox University Microfilms , Ann Arbor, Michigan 48106 COST/BENEFIT ANALYSIS OF MUNICIPAL FINANCIAL REPORTING AND AUDITS A CASE STUDY (MICHIGAN PUBLIC ACT 2 OF 1968) By Richard Earle Charlton, Jr. A DISSERTATION Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Accounting and Financial Administration 1976 COST/BENEFIT ANALYSIS OF MUNICIPAL FINANCIAL REPORTING AND AUDITS: A CASE STUDY (MICHIGAN PUBLIC ACT 2 OF 1968) ABSTRACT By Richard Earle Charlton, Jr. The impetus for this research was provided by the passage in the State of Michigan on February 2 0, 1968, of Public Act 2 of 1968. This Act was intended to represent a major step forward in the process of raising the accounting, reporting, and auditing standards in Michigan municipalities, defined in the Act as cities, villages, and townships. The essential purposes of this research were: (1) To identify items of cost or benefit that have resulted from the implementation of Public Act 2 of 1968. (2) To test the feasibility of meaningfully measuring, or assessing, the net costs and benefits of a governmental program as they have been perceived by the local units of government• (3) To attempt to diagnose the reasons for the various experiences with costs and benefits by the use of a number of control variables, such as type and size of municipality. (9) To attempt to develop an informational aid for future policy concurrently with the effort to assess the past effects. The methodology of this research consisted of: (1) The identification as tully as possible of the effects of Act 2 on the local units of government in terms of costs and benefits by means of an interview procedure. (2) The measurement, or assessment, of cost and benefit effects in Richard Charlton local units of government by means of a two-stage questionnaire procedure. (a) The first questionnaire was mailed to a stratified random sample of 200 local units of government. (b) The second questionnaire was mailed to the CPA auditors of those units which had responded to the first one, in order to substantiate the results obtained from it. (3) The inclusion of eight items in the first questionnaire and one item in the second one which served as the control variables of the research, for the purpose of attempting to explain the results. (4) The solicitation from the CPA auditors of their perceptions of the cost and benefit effects of Act 2 on their own firms. (5) The attempt to learn the cost and benefit effects of Act 2 at the State level by means of an interview procedure. The methodology of this research has been subject to the following limitations• (1) The placing of heavy reliance upon the perceptions of the respondents as expressed by their ratings on a scale. (2) The use of equal weights for each of the benefit and cost items in the study and also the use of equal weights for each of the local units of government which participated in the study. (3) The absence of a means of ascertaining in what way fhe various benefit and cost items might have been interpreted by those individuals who responded to the questionnaire. Richard Charlton (A) The absence of a means of identifying or assessing the importance of potential externalities such as psychological effects. (5) The relatively small sample size of approximately 11.5% of the universe. The methodology of this research has benefited from the following strengths. (1) The advantages of the use of perceptions of respondents as expressed by their ratings on a scale with respect to providing flexibility for the study and with respect to alleviating the need to account for the externalities separately. (2) The flexibility provided by the use of equal weights for the benefit and cost ■‘terns and for the local units. (3) The use of the data obtained from the auditors* questionnaires for the purpose of substantiating those obtained from the municipalities* questionnaires. (A) The potential application of statistical techniques as the result of having used a stratified random sample in the process of selecting the local units. The following conclusions have been produced by this research, based on the perceptions and assessments of the respondents to the que s t i onnaire s . 1. Although both the units and the auditors agreed that a net benefit has been produced by Act 2, the degree of the net benefit suggested by the units is substantially stronger than that suggested by the auditors. Richard Charlton 2. The significant control variables appear to be: (a) The size of the unit relative to others of the same type. (b) The absolute size of the unit. (c) The utilization of the accounting system recommended by the Municipal Finance Officers Association prior to Act 2. (d) The year of adoption of the Michigan uniform accounting system. (e) The employment of a CPA auditor before Act 2. (f) The rating by the CPA auditor of the quality of the unit*s accounting and bookkeeping operations. The policy recommendations proceeding from this study include: Cl) Additional emphasis on the viewpoint of managerial municipal accounting. (2) The adoption of a more realistic time limit for the filing of the annual financial reports. (3) More intensive utilization of the educational services of the Institute for Community Development at Michigan State University. (4) Analysis and dissemination of data at the State level. (5) Some relaxation in the enforcement of the use of the Michigan uniform accounting system where the required reporting format is used. With respect to the methodology of the research, this study recommends that a questionnaire of this nature be completed by the CPA auditor of the local unit at the time of each audit and submitted to the State Department of Treasury with the audit report. ACKNOWLEDGMENTS I extend ray appreciation to the following members of my dissertation committee for their efforts in connection with this research. Dr. George C, Mead, Chairman, of the Graduate School of Business Administration Dr. Harold M, Sollenberger, of the Graduate School of Business Administration Dr. Robert C. Anderson, of the Institute for Community Development In addition, I extend my appreciation to the hundreds of Michigan citizens who participated in this research in connection with either its interview procedures or its questionnaire procedures. Finally, I express my gratitude to my wife, Eleanor, and to our children, Richard III, Eric, and Cheryl, for their extreme patience. TABLE OF CONTENTS LIST OF T A B L E S .................................................... ix Page Chapter I . I N T R O D U C T I O N .............................................. 1 Importance of Governmental Accounting and Cost/Benefit Analysis ......... . . . . . . . ......... . . . . . . Public Act 2 of 1968 . . . . . ......... . . . . . . . . Background of Public Act 2 of 1968 Origin ................................................ History . . . . . . . . . . . ......... . ......... . . . . . . Future Possibilities . . . . . . . A Criticism of the Results of Public Act 2 of 1968 The Effect of Act 2 on Augusta T o w n s h i p ................. October, 1973 , . . . . . . . July, 1974 ............................................ August, 1974 ................. Recapitulation ....................................... Purposes of the R e s e a r c h ............................ Essential Purposes . . . .................... . . . Additional Purposes . . . . . . . . . . . . . . . . Intention of the Research . . . . . . . . Development of Framework ......... . . . . . . . . . Identification of Costs and Benefits . . . . . . . . Judgmental Conclusion of the Research . . . . . . . Appendix* Text of Public Act 2 of 1968 ................. II. BACKGROUND OF RESEARCH— REVIEW OF LITERATURE . . . . . . Governmental Accounting in General ...................... Accounting in Municipalities ............................ The "Blue B o o k " ..................................... Auditing of Municipalities .................... . . . Accounting Systems for Municipalities ............. Harrill's S y s t e m .......... Mead's Model . . . . . . . . . . . Additional Criticisms and Suggestions ............. The Measurement of P r o d u c t i v i t y .......... Recent Criticisms and Suggestions . . . . . . . . . Depreciation— to Record or Not to Record? . . . . . iii 1 2 4 4 4 5 6 7 7 8 8 8 9 9 10 10 11 12 13 14 18 18 21 21 22 23 23 24 24 26 27 29 Chapter Page The AICPA Audit Guide .............................. S u m m a r y .............................................. The Implementation of Uniform Accounting Systems and Audits by Independent Accountants . ............... • • • . . Illinois • C a l i f o r n i a ............................ C a n a d a ................................................ Washington ........................ . . . . . . . . . . . . . . . . . . . South Carolina • . Ohio . • ............ Worth C a r o l i n a .......... ............ Michigan S ummary .............................. III. THEORETICAL BASIS OF RESEARCH .......................... A Recurrent Theme.......................................... Elements of Cost/Benefit Decision Analysis . . . . . . . .......... McKean Kaufman, Hu, Lee, and S t r o m s d o r f e r ................. 1968 ............................... Public Act 2 of The Theory of Benefit/Cost Analysis ...................... The Purpose of S c i e n c e .......................... .. . The Allocation Problem .............................. The Theoretical P r o b l e m ........................ The Heart of the P r o b l e m ........................ The Structure of the P r o b l e m ..................... Structure of This R e s e a r c h ............... Identification of Benefit and Cost Variables . . . . Measurement and Analysis of Benefit and Cost Effects Measurement Structure . . . . Costs and Benefits Measurement Scale .......... Method of Obtaining Benefit and Cost Ratings . Further Rating and Analytical Considerations . Specification of Constraints (Control Variables) . ■ Identification of Externalities . . . . . ......... Summary . . . . . . . . . ............. . . . . . . Public Act 2 of 1968— Decision Criteria and Constraints • Anticipated Benefits ■ • . ■ • . . . ............... The E n v i r o n m e n t ............... Comparison of the Kaufman Study with this Research . . . S u m m a r y .................................................... Appendix* The Ideal Approach ............................ 43 45 IV. RESEARCH PROCEDURES ....................................... Goals of the Research ................................... Primary Goals . . . . . . . ........................ Secondary Goals .......... Methods of Research . . . . . . . . . iv 30 31 32 32 33 33 33 34 34 35 35 36 37 37 39 39 40 41 42 42 43 45 47 47 49 49 56 60 64 67 68 69 70 71 72 73 77 79 92 92 92 92 93 Chapter Methodological Details ................................... Exploratory I n t e r v i e w s .......................... Interviews for the Purposes of Identifying and Evaluating Cost and Benefit I t e m s ........... The Questionnaire for the Municipalities . . . . . . Control V a r i a b l e s ............. ............ .. . Accounting and Reporting Benefits ............. Accounting and Bookkeeping Operations . . Budgeting and Financial Management Page 94 94 95 95 98 100 100 107 109 109 Ill 112 112 113 119 12 0 122 122 123 123 127 128 130 132 133 145 146 149 150 O p e r a t i o n s .......................... " O t h e r " .............................. Auditing Benefits . . . ........................ Accounting and Reporting Costs ............... S p a c e ................................. Data Processing and Operating . . . . . . Equipment E d u c a t i o n ............................ "Other" .............. . . . . . ................... 103 106 109 112 ............................ Auditing Costs Selection of the Sample The Questionnaire for the A u d i t o r s ............. Benefit and Cost I t e m s .................... Quality Item . . . . . . . . . ............... Effects of Act 2 on the A u d i t o r s .......... 118 119 Responses from the Municipalities* Questionnaire . . Units Whose Auditors Received Questionnaires . . . . Responses from the Auditors* Questionnaire ......... Scoring of the Results ..................... . . . . . Example of the Scoring of the R e s u l t s ......... Appendix At Exploratory Interviews . . . . . . ......... Appendix Bi Additional Exploratory Interviews . . . . . Appendix Ci Interviews for the Purposes of Identifying 124 and Evaluating Cost and Benefit Items . . Appendix 0* Municipal Officials Selected to Review the Questionnaire Appendix Ei The Questionnaire for the Municipalities . . Appendix Ft Departments in Which the City of Ann Arbor Employs Program Budgeting and Output M e a s u r e m e n t .............................. Appendix Gt Exact Content of Each of the Twelve Cells . Appendix Hi CPA Auditors Selected to Review the Questionnaire ............................ Appendix Ii The Questionnaire for the Auditors . . . . . the Appendix Ji Exact Content of the Response Portion S a m p l e ..................................... 162 Appendix Ki Exact Content of That Portion of the Sample Appendix Li Exact Content of That Portion ot the Sample Whose Auditors Received Questionnaires . . 163 Whose Auditors Responded to Questionnaires 166 v Chapter Page V. RESULTS OF THE RESEARCH IN TERMS OF COST AND BENEFIT ITEMS 168 Introduction . . . . . . . . . . . . . . Evaluation of the Benefits . . . . . . . . . . . . . . . '•Accuracy*' of the Accounting and Bookkeeping Operations Promptness of the Accounting and Bookkeeping Operations . . . . . . . . . . . . . . Conversion of Mandatory Accounts to Optional • . • • Valuation of Fixed Assets .......................... Use of the Modified Accrual Basis . . . . . . . . . Discontinuing of Reports to the Municipal Finance Commission Additional Interim Financial Reports . . . . . . . Completeness of Financial Reports ................. Recording of Expenditures by Activity . ......... Budgeting by Activity . . . . . . . . . . ......... Correlation between Budgeted and Actual Amounts . . Development of Program Budgeting .................... Measurement of Performance or Evaluation of Output . Cash Management Receipt of Information and Assistance from Other .......... Units . • • • • . • • • . . . . . Contributions by Respondents ......... . . . . . . . Promptness of Filing of Financial Statements and 168 170 170 173 174 17 5 179 182 183 187 188 191 194 196 198 199 2 01 2 03 Reports .......... .............................. 209 210 Implementation of Audit Recommendations . . . . . . Understanding of Financial Report ................. 212 214 Contributions by Respondents . . . . . . ......... 218 Summary .......................... . . . . . . . . . 219 Evaluation of the C o s t s . . . . . ........................ 219 S p a c e ................................................ 220 Labor Costs 224 Bookkeeping Services . . . . . . . . . . . . . . . . Record Books, Journals* and Supplies ............... 226 Copying Machine 229 Bookkeeping Machine* Accounting Machine, or Calculator 231 Computer or Computer Time . . . . . . . . . . . . . 232 Classes, Conferences, Workshops, or Instructional ................................ Contributions by Respondents Auditing by CPA Firms ........................ The Effect of Time on the Dollar Amounts of Costs . . . . Space . • • • • . • • ............... . . . . . . . Labor C o s t s ......................................... Bookkeeping Services . . . . . . . . . . . . . . . . Record Books, Journals, and Supplies ............... Copying Machine . . . « • .................... . . . Bookkeeping Machine, Accounting Machine or Calculator Computer or Computer Time 233 ................. 238 242 246 247 247 247 248 248 248 249 Materials Chapter Classes* Conferences, Workshops or Instructional M a t e r i a l s ......................................... Contributions by Respondents ......... . . . . . . . Auditing by CPA F i r m s .............................. Summary ................. Additional Comments and Reactions . . . . . . . . . . . . ............................. From the Cities From the Villages From the T o w n s h i p s .................................. .................. .. Summarization of the Results Average Scores per Unit “Yes” Responses, Total Scores, and Average Scores per U n i t ................................................ Benefit/Cost Ratios.......................... ......... Additional Considerations .......................... .......... Page 249 250 250 250 252 2 52 2 55 2 56 258 258 2 61 2 63 263 VI. EXAMINATION OF THE EFFECTS OF THE CONTROL VARIABLES . . . 266 Introduction................................................ Associations Between Control Variables and Average Scores per U n i t .......................... Type of M u n i c i p a l i t y ................................. Quartile of Municipality • • • • . . . . • ......... Absolute Size of M u n i c i p a l i t y ............... Employment of Professional Manager or Superintendent Earlier Utilization of "Blue Book** Accounting System Year of Adoption of Michigan Uniform Accounting System . . . . . . . . . . . . . . . ........... Earlier Employment of CPA A u d i t o r s .......... Year of Initial Employment of CPA A u d i t o r s ......... Quality Ratings freon A u d i t o r s ............. 266 267 267 267 270 272 2 74 276 278 2 80 282 VII. OTHER EFFECTS OF PUBLIC ACT 2 OF 1968 .................... 285 Effects of Public Act 2 of 1968 on CPA Firms Responses without Weights ............... . . . . . Responses Weighted by Number of Municipal Clients Consulting Services for Accounting Decisions . . . . Consulting Services for Other Than Accounting Decisions Effects of Public Act 2 of 1968 at the State Level . . . Cost Effects of Act 2 . . . . . . . . . . . . . . . Development Costs Installation Costs Costs of Handling the R e p o r t s ................. Anticipated Future Costs ...................... Benefit Effects of Act 2 Information Sharing Revenue Sharing . . . . Other State Agencies Bond Issues and Other Debt . . . . . . . . . . Prevention of a Financial Crisis ............. In the Long Run ........................ .......................... . . . . . . vii 285 285 287 287 290 290 290 290 291 291 292 292 292 293 293 293 294 294 Chapter Page VIII- SUMMARY, CONCLUSIONS, AND R E C O M M E N D A T I O N S ........... 295 Purposes of the Research Essential Purpose Additional Observations • Public Act 2 of 1968 ................................. Methodology of the R e s e a r c h .............................. Identification of Cost and Benefit Effects . • > • • Measurement of Cost and Benefit Effects in Local Units . . . . . . . . . . . . . . . . of Government The Use of Control V a r i a b l e s .................... Cost and Benefit Effects in the CPA Firms; Cost and 301 Benefit Effects at the State Level . . . . . . . . Limitations of the Methodology . . . . . . . . . . . Strengths of the Methodology Conclusions of the Research At the Local L e v e l ............................... 309 Individual Benefit and Cost Items . * • • • • . Overall Benefits and Costs . . . • • • • • • • Effects of the Control Variables . . . . . . . Effects on the CPA Auditors .......... Recommendations of the Research ........................ Policy Recommendations . . . . . . . . . . . . . . . Emphasis on the Managerial Viewpoint . . . . . Adoption of a Realistic Time Limit ■ • • . . . Education . . . . • • • . • • • . ........... • Analysis and Dissemination of Data . . . . . . Enforcement of the Use of the Uniform Accounting System Recommendations with Respect to This Methodology . . 295 295 295 297 299 299 300 302 302 303 309 305 305 306 307 308 308 308 309 310 311 311 313 B I B L I O G R A P H Y .......................................... 316 viii LIST OF TABLES Table 1 City of B i g t o w n ...................... ..... ................. 2 Benefit X • ......... . . . . . . . ......... • • • • . . 3 Data Provided by Municipalities (or by Auditors) ..... Page 51 51 53 4 Data Provided by Municipalities and by CPA Auditors . . . . 54 5 State of Michigan 6 Benefit Rating #2— Large Benefit ........... . 7 Township in Cell T 1 ......................................... 8 City in Cell C 4 ............................................. 9 " A c c u r a c y * * ........ ................... ..................... 10 "Accuracy" of Accounting and Bookkeeping Operations . . . . 55 61 84 90 12 5 171 11 Summary of Changes in Dollar Costs ................. 2 51 12 All Benefits and Costs .............................. 13 All Benefits and C o s t s .................................... 14 Benefit/Cost Ratios . . . . . . ....................... . . . 2 59 262 264 15 Average Scores per Unit Related to Type of Municipality . . 268 16 Average Scores per Unit Related to Quartile of Municipality 269 17 Average Scores per Unit Related to Absolute Size of Municipality . . . . . . . . . . . ...................... 271 18 Average Scores per Unit Related to Employment of Professional Manager or Superintendent ............... . 273 19 Average Scores per Unit Related to Earlier Utilization of "Blue Book" Accounting System 275 ix Table 20 Average Scores per Unit Related to Adoption of Michigan Uniform Accounting System ........................ Year of 21 Average Scores per Unit Related to Earlier Employment of CTA A u d i t o r s ................................................ 22 Average Scores per Unit Related to Employment of CPA Auditors Year of Initial .......................... 23 Average Scores per Unit Related to Quality Ratings from Auditors ........... .. . . . ............. * .......... Page 277 279 281 283 24 Effects of Public Act 2 of 1968 on CPA Auditing Firms . . . 286 25 Effects of Public Act 2 of 1968 on CPA Auditing Firms Weighted by Number of Municipal Clients .................. 288 x Chapter I INTRODUCTION IMPORTANCE OF GOVERNMENTAL ACCOUNTING AND COST/BENEFIT ANALYSIS According to a 1969 textbook on governmental accounting* ’•Governmental and nonprofit entities account for approximately one third of the gross national product of the United States of America."^ In 2 1976 the proportion has been estimated to be almost forty percent. The importance of the public sector* its growing complexity* and its remoteness from the electorate have created a need for more sophisticated and reliable means of accountability. Also* there have arisen both considerable academic interest in cost/benefit analysis and applied experimentation with iti and there exist practical attempts in the area at the present time. Moreover, the use of cost/benefit analysis is often either related to or identified with a planning-programming-budgeting system (PPBS), of which program budgeting* one aspect of the managerial approach to governmental accounting* is considered to be an essential component. 3 R. M. Mikesell and Leon E. Hay* Governmental Accounting, fourth edition, Homewood* Illinois! Richard D. Irwin, Inc.* 1969* p. vii. 2 Arthur F. Burns, in a television interview on Meet the Press, January 18* 1976. 3 Leon E. Hay and R. M. Mikesell* Governmental Accounting* fifth edition, Homewood, Illinois! Richard D. Irwin* Inc., 1974, pp. 19-20. 1 2 PUBLIC ACT 2 OF 1968 In the State of Michigan a trend in the direction of higher accounting* reporting* and auditing standards for municipalities has been exemplified by the passage of Public Act 2 of 1968, the complete 4 text of which appears in the appendix to this chapter. The implementation of its two major provisions* calling for uniform accounting and reporting standards and for the audits of municipalities by independent certified public accountants, represents a considerable investment of time and money on the part of the people of the State of Michigan. Public Act 2 of 1968 was enacted on February 20, 1968, for the following purposes."* To provide for the formulation and establishment of uniform charts of accounts and reports in local units of government, to define local units of government, to provide for the examination of the books and accounts of local units of government, to provide for annual financial reports from local units of government, to provide for the administration of this act, to prescribe the powers and duties of the state treasurer and the attorney general, to provide penalties for violation of this act, and to provide for meeting the expenses authorized by this act. Although Act 2 contained thirteen provisions, for purposes of this research its significance may be indicated primarily by provisions (1), (2), (4), (5), and (6). Under (1) and (2) the State Treasurer is required to prescribe uniform charts of accounts for all local units in Michiganj and a local unit is defined as a city, village, township, or 4 State of Michigan, Michigan Compiled Laws— 1970, Volume I I , Lansing, Michigani Michigan Legislative Council, December IS, 1971, paragraphs 141.421-141.433. ^Robert E. Pell and others, Bulletin for Audits of Local Units of Government in Michigan, revised, April 1, 1974, p. 23. 3 any authority, board, or commission thereof. The county is not included as a local unit under this definition. Under (4) each local unit is required to file an annual financial report in the office of the State Treasurer. Under (5) and (6) the local unit will have the first option of selecting an independent certified public accountant. If an independent certified public accountant is not selected by the local unit, the State Treasurer must perform the audit or select an independent certified public accountant.^ In all cases the entire cost is to be borne by the local unit* The audit is intended to be annual except that, in the instance of a unit with less than 2,000 population, the minimum requirement is the performance of an audit at least every two years. If the unit has a population of 1,000,000 or more and is audited internally, the minimum requirement is the performance of an independent audit at least every five years; only Detroit falls under this provision* Consequently, Act 2 provides a timely opportunity for an application of cost/benefit analysis to a significant action in the public sector. Further, it could be expected that the A c t ’s provision for the classification of expenditures by governmental function would lead to greater managerial emphasis, in addition to the traditional stewardship function, in municipal accounting and possibly eventually foster the utilization of program budgeting techniques. ^To my knowledge, the State Treasurer has never actually acted under this provision. BACKGROUND OF PUBLIC ACT 2 OF I9687 Origin Fundamentally, the foundation of Public Act 2 of 1968 was constitutional in nature. The Michigan Constitution, Article IX, Section 21, expressed the following mandate. g The legislature shall provide by law for the annual accounting for all public moneys, state and local, and may provide by law for interim accounting. The legislature shall provide by law for the maintenance of uniform accounting systems by units of local government and the auditing of county accounts by competent state authority and other units of government as provided by law. History The development of Act 2 was actually begun in 1966 by the joint efforts of the Michigan Municipal League, the State Department of Treasury, and the Michigan Association of Certified Public Accountants. The implementation of the Act was expected to have been completed by the fiscal year 1971, but this implementation did not materialize in every case. One result of the auditing requirement of Act 2 has been complaints from the smaller communities with respect to the difficulties faced in being obligated to finance the regular services of certified public accountants. In reply, the State Department of Treasury has pointed out that, in the event that problems arise from the auditing process, the Much of the material in this section was provided by Senator Robert VanderLaan and presented to me with his compliments on November 20, 1974. g Section 21 of Article IX, "Finance and Taxation,” of the Constitution of the State of Michigan, May 11, 1962, p. 19. municipalities have recourse against the CPAs which would not be available against auditors who did not hold the CPA certificate. 5 The implementation of Act 2 has been a major force in bringing to light serious fiscal problems in the Cities of Hamtramck, Taylor, and River Rouge. At the same time, the State Department of Treasury has been concerned that the legislature has not provided them with sufficient staff to make more use of the audit reports. Future Possibilities In May, 1973, House Bill No. 4662 was introduced for the purpose of insuring that all authorities and comnissions are subject to regular audits by certified public accountants whether they are created directly by an individual local unit of government or indirectly by a separate public entity created by one or more local units of government. This would have been accomplished by expanding the definition of "local unit" in Section 2 of Act 2 to encompass all governmental entities. Unfortunately, the Bill never came out of the Committee on Towns and Counties. On April 9, 1975, the Bill was reintroduced as House Bill No. 4852; but as of this writing it has remained in the Committee on Corporations and Finance. On May 19, 1975, it was introduced as Senate Bill No. 878; but as of this writing it has remained in the Committee on Municipalities and Elections. Also, on the horizon is the possibility of the introduction of a bill that would instruct the State Department of Treasury to perform the audits in those local units of government with populations of less than 2,000. The dominant force behind this bill would be the Michigan Townships Association. Presumably, the intention of the bill would be 6 to save the local unit the expense of hiring a CPA auditor. However, the local unit would still bear the cost of the audit at an hourly rate predetermined by the Treasury Departmentj and any saving would appear to be strictly problematical. A CRITICISM OF THE RESULTS OF PUBLIC ACT 2 OF 1968 As indicated on page 5, a major problem connected with the implementation of Public Act 2 of 1968 has been that the legislature has not provided the State Department of Treasury with s -fficient staff to make more use of the audit reports. One reflection of this problem occurred in February, 1973, when an editorial writer for The Detroit News discussed Act 2 in connection with an exposure of defalcations in cities and school districts. 9 That law is a sham. Until Detroit News reporters last year began sniffing around, the Treasury boys simply stuffed the audits into a file drawer. And some audits scream for attention. The River Rouge audit in particular clearly stated something was wrong. Phillips continued by discussing what, in his opinion, the enforcement of Act 2 should entail. All local government and school audits should be reviewed at the state level, not just to look for corruption but to make sure procedures are being followed. The state has a vested interest in these matters because federal and state money is commingled with local tax dollars. If something out of line is detected, the state has a responsibility to stop by for more than a friendly chat. 9 Allen Phillips, The Detroit News, 100th year, No. 189, February 27, 1973, Section A , p. 22. THE EFFECT OF ACT 2 ON AUGUSTA TOWNSHIP 7 One of my early interviewees in connection with this research was Mrs. Marie Grigsby, Clerk of Augusta Township, Washtenaw County, whom I found to be both charming and conscientious. This section is not intended in any way to portray criticism of Augusta Township or any of its officials. It is included because, in my opinion, it is an interesting example of the type of environment into which the enactment and implementation of Act 2 might have been injected in a given situation. October, 1973 In October, 1973, Mrs. Grigsby first threatened to resign, and then backed down, if she were not provided with the services of a CPA firm for assistance with the township bookkeeping. She promised to be satisfied if “accounting specialists" were called in "to 'set up the books' according to state uniform bookkeeping laws." In Mrs. Grigsby*s opinion, she was not qualified "to organize her accounting records to meet state standard s. Several days later, Mrs. Grigsby's plea to the township residents to make the position of Township Clerk full-time was rejected by the Township Board. However, the Board did agree to employ Wright, Griffin, and Davis, an Ypsilanti CPA firm, to "bring the township bookkeeping system into compliance with state accounting codes by April, 1*74." In return, Mrs, G r i g s jy agreed to "complete a course detailing the state bookkeeping system." However, until March, 1974, Mrs. Grigsby was ^ °The Ypsilanti Press, October 20, 1973, p. 1. required to "maintain township accounting records as she has in the 8 past . " ^ July* 1974 In July, 1974, it was reported that local officials had "placed a dollar value on township equipment and land" in order that the township could "switch to the new bookkeeping system required by the state." Moreover, the clerk and treasurer had gone "to classes this spring to learn about the new bookkeeping system." 12 August, 1974 In August, 1974, it was announced that the audit by Wright, Griffin, and Davis for the fiscal year ended March 19, 1974, "found the township's accounts *in conformity with generally accepted accounting principles for local governmental units.*" Recommendations included the more careful budgeting of revenues, the expenditure of revenue sharing funds more promptly, the safeguarding of township records against fire, the bonding of persons holding positions of trust, and the maintenance of a fixed asset ledger of all township property. 13 Recapitulation To summarize, although the uniform accounting system was supposed to have been in operation in all local units of government by fiscal 1971, Augusta Township was still not in conformance in October, 1973 (fiscal 1974). The township's conscientious clern, already overburdened ^ R a n d y Garton, The Ypsilanti Press, October 1971, p. 4. 12 13 The Ypsilanti Press, July 2b, 1974, p. 5, The Ypsilanti Press, August 1ft, 1974, p. 7. 9 by a demanding job, did not feel capable of installing the new system alone. The Township Board, after hearing her pleas for assistance, agreed to hire a local CPA firm to install the new system but not until after another six months had passed. By the summer of 1974, the situation had improved considerably. The township*s clerk and treasurer had attended classes in the operation of the uniform system; and Wright, Griffin, and Davis had converted the township's accounts into conformance with it. Moreover, the township officials had undergone a valuation of the fixed assets as a part of the conversion process. Although the township had undoubtedly procrastinated with respect to the implementation of Act 2, the process of conversion, once undertaken in cooperation with an established CPA firm, was relatively fast and smooth. I have used Augusta Township as an example because, in my observation, its process over time of procrastination, resistance, capitulation, and relatively quick rdjustment into conformance with Act 2, especially when the adjustment is orchestrated by a qualified CPA firm, is not unusual as an example of a small municipality's reaction to the Act 2 requirements. PURPOSES OF THE RESEARCH Essential Purposes The essential purposes of this research are as follows. (1) To identify items of cost or benefit that have resulted from the implementation of Public Act 2 of 1968. (2) To develop a framework for organizing, evaluating, scaling, and comparing the marginal costs and benefits of Act 2 by means of a questionnaire procedure. (3) To develop conclusions of a judgmental nature based on the net 10 impact of Act 2 and, hopefully, to offer to the State Department of Treasury reccrinendations based on those conclusions. Additional Purposes In addition, although the use of program budgeting is not mandated by Act 2, it i3 to be expected that the trend in the direction of higher accounting and reporting standards exemplified by the Act might encourage Michigan municipalities eventually to adopt program budgeting techniques. Further, if a managerial accounting system which includes the recording of expenditures by governmental function is combined with program budgeting, it might be anticipated that the employment of techniques of performance measurement and output evaluation would follow. Consequently, an important secondary purpose is to obtain some feedback from the units sampled with respect to the extent to which these procedures have been applied; and certain items in the questionnaire have been designed for this particular purpose. Intention of the Research With the exception of anecdotal evidence, I have discovered no official or unofficial attempt to measure the general costs and benefits connected with Act 2 implementation; nor has my preliminary work revealed any assessment of the degree to which Act 2 might have led to the actual improvement of municipal management. A recent article by the Deputy Treasurer in the Bureau of Local Government Services of the State Department of Treasury described briefly an attempt to evaluate just the auditing requirement, but there was no attempt to measure the general costs and benefits. 14 Consequently, after eight years of history 11 following the enactment of Act 2, it appears desirable to undertake a systematic examination of the costs and benefits resulting from its implementation■ Ideally, this research would provide objective evidence that the net result of the enactment and implementation of Act 2 either provided a net benefit for the people of the State of Michigan or burdened them with a net cost. In the former case one could argue for its retention and perhaps its expansion; in the latter case, for its revision or repeal. However, both because of the nature of the variables studied in this research and because of the data-gathering limitations, such clear evidence and such a compelling conclusion have not been attainable. Instead, the central purpose of this research may be stated as follows* Development of Framework The central purpose of this research has been to design and test a method for assessing the success in the State of Michigan of the application of Public Act 2 of 1968 in terms of net cost or benefit. The research has attempted to develop a framework for scaling and comparing marginal costs and benefits of Act 2, based on questionnaire data; the questionnaire has been tested with respect to individual municipalities by selecting a random sample of them stratified by population. 14 James J. Bolthouse, "Some New Thoughts on 'Who's Auditing the Auditors?"' in "Focus on Accounting and Auditing," The Michigan C P A , Volume XXV, No. 5, March-April, 1974, pp. 14-16. 12 The framework has included many specific benefit and cost iterns, all of which have been systematically selected as variables which in a given municipality might have been affected by the implementation of Act 2. Where it was possible for them to do so, the units in the response portion of the sample have provided for the cost items for each of two consecutive years both (1) the total dollar amount and (2) that portion of the total dollar amount attributable to Act 2. Almost all of the responding units have contributed a judgmental rating of the effect of Act 2 on each item of benefit and cost included in the framework; and similar ratings have been obtained from the CPA auditors of most of the responding units for the purpose of substantiating the responses received from the units* In addition, the CPA auditors were asked to respond to six items dealing with the effects of Act 2 upon themselves. Identification of Costs and Benefits As a preliminary research step, it was necessary to complete the identification of the costs and benefits which have been associated with Act 2. This was accomplished as a result of a process of interviewing both (1) municipal officials and (2) members of CPA firms where both individuals and firms are active in municipal audits* Since the study has also included the consideration of costs and benefits with respect to the State of Michigan overall, identification of costs and benefits at the State level has been provided by Mr. Alfred L. Westol, head of the Local Government Audit Division of the Bureau of Local Government Services of the State Department of Treasury, and Mr. James J. Bolthouse, Deputy Treasurer in the Bureau of Local Government Services of the State Department of Treasury. Judgmental Conclusion of the Research 13 This research effort was not designed to support the formation of a statistically valid conclusion with respect to the net effect of Act 2 for the people of the State of Michigan but was designed to support certain generalizations of a judgmental nature. More importantly, this research tests the appropriateness of the following policy recommendation for the State Department of Treasury. Given a sufficiently extensive sample, this type of measurement framework and data-collection technique (questionnaire) would be usable by the Department in attempting to evaluate the various benefits and costs of Act 2 and of future additional requirements aimed at the improvement of financial management and reporting at the local government level. 14 Appendix to Chapter I TEXT OF PUBLIC ACT 2 OF 1968 P.A.1968, No. 2, I m d . Eff. Feb, 19 AN ACT to provide for the formulation and establishment of uni form charts of accounts and reports in local units of government! to define local units of government; to provide for the examination of the books and accounts of local units of government; to provide for annual financial reports from local units of government; to provide for the administration of this act; to prescribe the powers and duties of the state treasurer and the attorney general; to provide penalties for violation of this act; and to provide for meeting the expenses authorized by this act. The People of the State of Michigan enact; 141.421 Uniform charts of accounts; standard procedures and forms Sec. 1. The state treasurer shall prescribe uniform charts of accounts for all local units of similar size, function or service designed to fulfill the requirements of good accounting practices relating to general government. Such chart of accounts shall conform as nearly as practicable to the uniform standards as set forth in the publication of the municipal finance officers* association of the United States and Canada entitled Ma standard classification of municipal accounts, 1953” or as revised or changed. The official who by law or charter is charged with the responsibility for the financial affairs of the local unit shall insure that the local unit accounts are maintained and kept in accordance with the chart of accounts. The state treasurer may also publish standard operating procedures and forms for the guidance of local units in establishing and maintaining uniform accounting. 141.422 Local unit; definition Sec. 2. As used in this act "local unit** means a city, village, township or any authority, board or commission thereof established by a city, village or township ordinance or charter. 141.423 Publication; hearings Sec. 3. The state treasurer, before the adoption of a uniform chart of accounts, shall provide for advance publication and for hearings thereon with an advisory committee selected by the state treasurer from the local units and from other interested or concerned groups. The uniform chart of accounts, when finally adopted, shall be published and made readily available to all interested persons. 1 4 1 . 4 2 4 Annual financial report 15 Sec* 4. Each local unit of government shall make an annual financial report which shall be uniform for all accounts of the same class« 3 copies of which shall be filed in the office of the state treasurer and shall contain an accurate statement in summarized form showing* for each fiscal year* the amount of all collections and receipts from all sources and their disposition, the amount of expenditures for each purpose* the amount of indebtedness* balance of funds on hand at the close of each fiscal period, together with such other information as may be required by law. The annual report filed under this section shall be in lieu of the reporting requirements imposed by Section 5 of Act No. 202 of the Public Acts of 1943* as amended, being section 133.5 of the Compiled Laws of 1948. 141.425 Annual audit; exception Sec. 5. Cl) All local units of government of less than 1,000*000 population shall have an annual audit of its financial records, accounts and procedures except that in the units of local government having populations of less than 2 , 0 0 0 such audit shall be required not less frequently than biennially, (2) Local units of government with 1,000*000 or more population shall be required to obtain an annual audit as provided in this section, except that if internal auditing procedures for all public moneys are established* and a copy of the annual internal audit of all public moneys is filed with the state department of treasury, then an independent audit shall be required not less frequently than each 5 years. 141.426 Certified public accountants; cost Sec, 6 . Local units may retain certified public accountants to perform such audits. If any unit fails to provide for an audit, the state treasurer shall either conduct the audit or appoint a certified public accountant to perform it. The entire cost of any such audits will be borne by the local unit. 141.427 Procedures and standards of auditing Sec. 7, (1) The state treasurer shall prescribe minimum auditing procedures and standards and these shall conform as nearly as practicable to generally accepted auditing standards established by the American institute of certified public accountants. (2) A report of the auditing procedures applied in each audit shall be prepared on a form provided for this purpose by the state treasurer. (3) One copy of every audit report and 1 copy of the report of auditing procedures applied shall be filed with the state treasurer. 141.428 Contents of audit report 16 Sec. 8 . Every audit report shallt (a) State that the audit has been conducted in accordance with generally accepted auditing standards and with the standards prescribed by the state treasurer. (b) State that financial statements in such reports have been prepared in accordance with generally accepted accounting principles applied on a consistent basis and with applicable rules and regulations of any state department or agency. Any deviations from such principles, rules or regulations shall be described. (c) Disclose any material deviations by the local unit from generally accepted accounting practices or from applicable rules and regulations of any state department or agency. (d) Disclose any fiscal irregularities, defalcations, misfeasance, nonfeasance, or malfeasance which came to the auditors* attention. 141.429 Public inspection of audit reports Sec. 9. All audit reports submitted under this act shall be made available for public inspection. 141.430 Orders and subpoenas Sec. 10. In connection with any audit and examination conducted under the provisions of this act, the state treasurer, or a deputy state treasurer, may issue subpoenas, direct the service thereof by any police officer, and compel the attendance and testimony of witnesses, may administer oaths and examine such persons as may be necessary, and may compel the production of books and papers. The orders and subpoenas issued by the state treasurer or by a deputy state treasurer, in pursuance of the authority in them vested by provisions of this section, may be enforced upon their application to any circuit court by proceedings in contempt therein, as provided by law. 141.431 Violations Sec. 11. If any audit or investigation conducted under this act discloses statutory violations on the part of any officer, employee or board of any local unit, a copy of such report shall be filed with the attorney general who shall review the report and cause to be instituted such proceeding against such officer, employee or board as he deems necessary. The attorney general, within 60 days after receipt of the report, may institute criminal proceedings as he deems necessary against such officer or employee, or direct that the criminal proceedings be instituted by the prosecuting attorney of the county in which the offense was committed. The attorney general or the prosecuting attorney shall institute civil action in any court of competent jurisdiction for the recovery of any public moneys, disclosed by any examination to have been illegally expended or collected and not accounted forj also for the recovery of any public property disclosed to have been converted and mi sappropriated. 141.632 Verification of transactions 17 Sec. 12. (1) For purposes of verifying any transactions disclosed by an audit or investigation, any person or firm authorized to conduct an audit under this act may ascertain the deposits, payments, withdrawals and balances on deposit in any bank account or with any contractor or with any other person having dealings with the local unit. (2) A bank, contractor or person shall not be held liable for making available any of the information required under this act. 141.433 Examiners authorityi access to and production of recoids; confidential information, divulging Sec. 13. (1) Notwithstanding the confidentiality provisions of any tax laws, any authorized employee of the state treasurer, certified public accountant or firm of certified public accountants conducting an audit under this act shall have access to and authority to examine all books, accounts, reports, vouchers, correspondence files and other records, bank accounts and moneys or other property of any local unit excepting any records which were obtained from the United States internal revenue service under the federal state cooperative exchange agreement. (2) An officer of a local unit upon demand of persons authorized under this act, shall produce all books, accounts, reports, vouchers, correspondence files and other records, bank accounts and moneys or other property of the local unit under audit or investigation and shall truthfully answer all questions related thereto. (3) The liabilities and penalties provided by all specific confidentiality statutes for divulging confidential information shall be applicable to all persons authorized to make an audit under this act. 1971 Amendment. Inserted "Notwithstanding the confidentiality provisions of any tax laws" and "excepting any records which were obtained from the United States internal revenue service under the federal state cooperative exchange agreement" in subsection (l)i and added subsection (3). Chapter II BACKGROUND OF RESEARCH— REVIEW OF LITERATURE GOVERNMENTAL ACCOUNTING IN GENERAL For many years there has existed a need for financial statements for governmental units which are both more informative and more understandable.^ In 1957 the Committee on Concepts and Standards Underlying Corporate Financial Statements of the American Accounting Association recognized that nonprofit, or public, enterprises should be included within its statement of the primary function of accounting— "to accumulate and communicate information essential to an understanding of 2 the activities of an enterprise." Shortly thereafter, the 1957 Committee on Governmental Accounting of the American Accounting Association recognized the growing importance of financial management in 3 governmental organizations. As discussed by Wright, "The standards of accounting for governmental units do not differ from those of other An early expression of this viewpoint may be found in Delmer P. Hylton, "Neededt More Informative and Understandable Financial Statements from Governmental Units," The Accounting Review, Vol. XXXII, No. 1, January, 1957, pp. 51-54. 2 Ccsmnittee on Concepts and Standards Underlying Corporate Financial Statements of the American Accounting Association, "Accounting and Reporting Standards for Corporate Financial Statements— 1957 Revision," The Accounting Review, Vol. XXXII, No. 4, October, 1957, p. 536. 3 1957 Committee on Governmental Accounting of the American Accounting Association, "Tentative Statement on Government Accounting," The Accounting Review, Vol. XXXIII, No. 2, April, 1958, p. 209. 18 activities* only the methods differ where there are different circumstances and objectives." 4 19 In 1962 the Cocnnittee on Accounting for Nonprofit Organizations of the New York State Society of Certified Public Accountants emphasized the importance of accounting in measuring the effectiveness of nonprofit organizations.^ In 1966 the Committee to Prepare a Statement of Basic Accounting Theory of the American Accounting Association declared that the accounting process is applicable, "not only to business operated for profit, but also to the activities of individuals, fiduciaries, governmental units, charitable enterprises, and similar entities."^ Subsequently, the 1966-1970 Committee on Accounting Practices of Not- for-Profit Organizations of the American Accounting Association attempted to review the accounting practices of not-for-profit organizations in the context of the standards set by the 1966 7 Statement. The committee concluded that* "Current accounting and reporting practices of most NFP organizations, being almost exclusively evolved from and focused upon legalistic dollar accountability for 4 Howard W. Wright, "Tentative Statement on Governmental Accounting," The Accounting Review, Vol. XXXIII, No. 2, April, 1958, p. 213. . L. Steinwurtzel, Chairman, Committee on Accounting for Non- Profit Organizations of the New York State Society of Certified Public Accountants, "Statement on Accounting Postulates and Principles for Non- Profit Organizations," in "Letters to the Editor," The New York Certified Public Accountant, Volume XXXII, No. 9, September, V 9 6 2 , pp. 577-580. ^American Accounting Association, A Statement of Basic Accounting Theory, Evanston, Illinois* American Accounting Association, 1966, p~7~T7~ ^Committee on Accounting Practices of Not-for-Profit Organizations of the American Accounting Association, "Report of the Committee on Accounting Practices of Not-for-Profit Organizations," The Accounting Review, Supplement to Vol. X L V I , 1971, pp. 80-163. 20 . individual fund entities on a year-by-year basis, often lack relevance and freedom from bias and do not adequately fulfill the objectives of g accounting as proposed in A Statement of Basic Accounting Theory.** The 1970-71 Contnittee on Concepts of Accounting Applicable to the Public Sector of the American Accounting Association attempted to identify the concepts and standards applicable to governmental organizations, including both internal management and external 9 reporting. The committee defined the two basic objectives of accounting in the public sector as (1 ) accountability and (2 ) management control. 1 1 0 From this brief review of a sample of the literature on governmental accounting in general, three particular trends are apparent. First, for almost twenty years there has existed a growing state of dissatisfaction with the existing state of the art in governmental accounting. Secondly, there have appeared expressions of belief that the accounting for nonprofit organizations should conform to standards similar to those applicable to the private sector of the economy. Thirdly, there have appeared statements suggesting that in the public sector of the economy, as in the private sector, the objectives of “accountability" and “management control" are dual motives which must stand side by s i d e . g Committee on Accounting Practices of Not-for-Profit Organizations of the American Accounting Association, op. cit., p. 8 6 . 9 Committee on Concepts of Accounting Applicable to the Public Sector of the American Accounting Association, 1970-71, "Report of the Committee on Concepts of Accounting Applicable to the Public Sector, 1970-71," The Accounting Review, Supplement to Vol. XLVII, 1972, pp. 76-108. * ^Ibid., p p . 80-85. 21 ACCOUNTING IN MUNICIPALITIES The same elements of dissatisfaction with the existing situation, comparison of standards with those in the private sector, and increasing emphasis on managerial governmental accounting are evident in the literature which deals more specifically with local units of government. Joplin has pointed out that, since local government will became a major "growth industry** in future years, government accountants must go beyond legal requirements in the reporting of both internal and external financial information. His pronouncement included items such as the accumulation and reporting of costs by function, the measurement and objective reporting of benefits, and the measurement of the economic impact on the consnunity of shifts in the tax b a s e . ^ In a reply to Joplin, Dean lamented thatt "The present accounting principles do not allow the full disclosure of pertinent facts to outside parties." 12 The "Blue Book*' In 1968 the National Committee on Governmental Accounting of the Municipal Finance Officers Association provided a comprehensive foundation for local government accounting with the "Blue Book"— Governmental Accounting, Auditing, and Financial Reporting. 13 Although the structure of accounts was maintained along traditional fund lines, Bruce Joplin, "Local Government Accounting* It*s Your Responsibility, Too," The Journal of Accountancy, Volume 124, Number 2, August, 1967, pp. 38-43. 12 William G. Dean, in "Letters to the Journal," The Journal of Accountancy, Volume 124, Number 5, November, 1967, p. 30. 13 National Committee on Governmental Accounting, Governmental Accounting, Auditing, and Financial Reporting, Chicago* Municipal Finance Officers Association, 1968. 22 especially noteworthy from the managerial point of view is the recommendation with respect to the classification of expenditures* 14 The Camnittee recommends the use of a functional classification wherein each function is composed of a group of activities or programs* An activity classification is particularly significant because in many cases it makes possible the measurement of efficiency of operation by producing unit cost figures. Although the "Blue Book” was apparently well received, it drew criticism because of the language used in a sample auditor's report. 15 According to Nest, when the example in the "Blue Book" permitted the modification of the term "generally accepted accounting principles" by the phrase "applicable to governmental units,” it conflicted with Statements on Auditing Procedure No. 33.^** The account classification in the "Blue Book” has been reviewed in a 1972 article by S c h r a m m . ^ Auditing of Municipalities During the same period, increasing attention was being given to the auditing of municipalities by independent accountants. One survey, the results of which were published in 1969, disclosed "a marked increase over the past eight years in the use of independent auditors by state and local governmental units." 18 14 National Committee on Governmental Accounting, o p . cit*, p. 13, 1 5Ibid., pp. 146-147. ^ R i c h a r d A. Nest, "Governmental Accounting and Reporting," in "Accounting and Auditing Problems," The Journal of Accountancy, Volume 126, Number 1, July, 1968, p. 67. ^ J o h n E. Schramm, Jr., "Financial Accounting and Reporting for Municipalities," The CPA Journal, Vol. XLII, No. 4, April, 1972, pp. 297-302. 18 "Survey Shows Increase in State and Local Audits," in "News Report," The Journal of Accountancy, Volume 127, Number 1, January, 1969, p. 9. Accounting Systems for Municipalities 23 Harrill*s System. In the area of accounting systems, there was introduced into the literature in 1970 a financial management system for local governments which encompassed both the "process of financial management in government" and the "unification of all accounting into one system" without losing the identity of each fund. 19 The basic rationalization for the use of an integrated system was to overcome the problem caused by the absence of a "mechanism for generating accurate and timely data concerning programs which are to be achieved through the contribution of several operating units." 20 Eventually, Harrill*s system came to be known as FAMIS— financial and accounting management information system. 21 Harrill attempted to explain how the "Blue Book" "can be used as the foundation for developing a unified governmental accounting system as part of a Financial and Accounting Management Information System (FAMIS) that includes planning, programming, budgeting, accounting, reporting, and evaluating for all levels of management and operations." 22 In Canada the system’s use of financial planning, including cost analysis, was praised "as an essential element in the attainment of meaningful 19 E. Reece Harrill, "A Financial Management System for Local Governments," Management Controls, Vol. XVII, No. 2, February, 1970, pp. 27-34. Reece Harrill and Thomas E. Richards, "A Total Systems Approach to Governmental Accounting," Management Accounting, Vol. LIII, No. 11, May, 1972, p. 14. 21 E. Reece Harrill, "An Information System for Local Government," Management Controls, Vol. XIX, No. 6 , June, 1972, pp. 129-140, 22 E. Reece Harrill, "A Multi-Purpose Budgeting and Accounting System for Governments," Governmental Finance, Volume 1, Number 4, November, 1972, p. 21. benefits from available resources.” 24 23 Subsequently, it has been called "an ideal foundation for an Integrated Municipal Information System" and "a major tool for analyzing government activities on a cost/benefit basis * ,.24 Mead*s M odel. Also, in 1970 there appeared in the literature a model for local government accounting which emphasized planning and control information and treated stewardship reporting as secondary. The purpose of the model was to provide a managerial accounting system that would complement the use of program budgeting. Both the use of encumbrance accounting and "the concept of separate accounting entities for every fund source" were eliminated from the system. 25 Additional Criticisms and Suggestions Also, in 1970 a survey by Robason and Neeley disclosed a number of deficiencies in accounting by city governments across the country. These deficiencies related toi (1) lacK of distinction between reports for internal and external use; (2 ) failure to use the modified accrual basis; (3) inadequate reporting for the General Fund; (4) either the Glenn Grosset, "Financial Accounting and Information for Management," in ''Management Services," Canadian Chartered Accountant, Vol. 101, No. 6 , December, 1972, p. 72. The system described by Grosset is clearly Harrill's although no credit is given. 24 E. Reece Harrill, Thomas E. Richards, and Jonathan M. Waliman, "FAMIS— a Financial Accounting and Management Information System for Local Government,” Management Controls, Vol. XXI, No. 5, May, 1974, p. 94. 25 George C. Mead, "A Managerial Approach to Governmental Accounting," The Journal of Accountancy, Volume 129, Number 3, March, 1970, pp. 50-55. 25 complete absence of an audit or the issuance of a qualified opinion as the result of an audit* 2 6 In 1971 Bullock declared that* although the major emphasis in the development of accounting data has been compliance with the law— for reporting and for operating within the budget* the accounting data must also be useful for the making of decisions by public managers. Available tools for this purpose include performance budgets, program budgets* and cost effective analysis* 27 Also* in 1971* Ameiss, referring to the earlier article by Mead* emphasized that* "The fund accounting concept should be seen for what it really is— a means or device for limiting resource applications to authorized purposes* not an irreducible principle of governmental accounting.” 28 He continued by calling for the design of a new accounting system and the abandonment of separate accounting entities for every fund source. 29 In 1972 Freeman addressed the question of the appropriate types of systems needed for the handling and reporting of governmental accounting information. He recommended Harrill's system for "any government having 2 6 Goyne A. Robason and L. Paden Neeley, "Financial Reporting in Municipalities," Management Accounting* Vol. LI, No. 9, March, 1970, pp. 45-46. 27 James Bullock, "Improving Municipal Accounting* A Question of Attitude* Municipal Finance* Volume XLIII* Number 4, May* 1971, pp. 179-184. ^^Mead, op* cit.* p. 55j quoted by Albert P. Ameiss* "Is •Stewardship Reporting* Adequate for Municipal Accounting Today?" The National Public Accountant, Volume 16, Number 8 , August, 1971, p. 23. 2 9Ibld., pp. 18-19, 22-26. computer capability** and Mead’s system "for those with manual or keysort 26 operations." -30 In a discussion of similar problems in Canada, Kerr dealt with the need for uniform classifications of financial transactions, which, in his view, was far more important than uniform accounting and reporting. He continued by describing how a system of classifying financial transactions could be developed like a pyramid, enabling a municipality to exercise a degree of choice in selecting the desired level of detail. 31 The Measurement of Productivity During 1973 there appeared in the literature a series of articles, each of which emphasized a different aspect of the measurement of productivity in local government. Hatry identified the most potentially useful areas of application of productivity measurements as* (1 ) cost reduction; (2) managerial control of operations; (3) program and policy planning; (4) development of employee incentives. 32 Barbour reported his observation that there was a need to go beyond "simple workload measurement data," since involvement with program budgeting had created a demand for sharper performance indicators." 33 Anderson called for the ^ R o b e r t J. Freeman, "New Thoughts in Governmental Accounting," Governmental Finance, Volume 1, Number 4, November, 1972, pp. 2-8, 31 Anthony G. Kerr, "The Principles of a Financial Information System for Municipalities," Governmental Finance, Volume 2, Number 2, May, 1973, pp. 7-11, 27. 32 Harry P. Hatry, "Applications of Productivity Measurement in Local Government," Governmental Finance, Volume 2, Number 4, November, 1973, pp. 6-9, 11, 33 George P. Barbour, Jr., "Productivity Measurement* The ICMA Viewpoint," Governmental Finance, Volume 2, Number 4, November, 1973, pp. 12-13. 27 coordination and linking together of non-financial and financial data as the "starting point for programming, future planning* and measures of effectiveness and productivity,” 34 Caldwell distinguished between efficiency— which refers to the utilization of available resources in government programs— and effectiveness-which refers to the results accomplished with those resources. He then emphasized the need for the development of formal evaluation procedures with respect to both of these criteria, 35 Finz suggested the development of a "management indicator system” for a situation where a planning-programming-budgeting system does not exist. 36 Such a system would consist of "those elements or groups of data elements which would be useful in determining the effectiveness and progress of various county agencies and programs toward achievement of specific goals and objectives,” 37 Recent Criticisms and Suggestions More recently, the 1972-73 Coimnittee on Not-for-Profit Organizations of the American Accounting Association repeated the positions of the 1966-1970 and 1970-71 committees with respect to the relevance to accounting of information on economy, efficiency, and Bond Anderson, III, ”A Ninety Degree Turn,” Governmental Finance, Volume 2, Number 4, November, 1973, pp. 14-16, 35 Kenneth S. Caldwell, "Efficiency and Effectiveness Measurement in State and Local Government,” Governmental Finance, Volume 2, Number 4, November, 1973, pp. 19-21, 23-26. 36 Samuel A. Finz, "Productivity Analysisi Its Use in Local Government," Governmental Finance, Volume 2, Number 4, November, 1973, pp. 29-33. 37Ibid., p. 31. effectiveness in governmental organizations. 38 Both of the earlier 28 committees had advocated that* "Such information should be incorporated within the purview of accounting and accounting systems to the extent practicable in order to assure that it may bet (1 ) systematically collected and analyzed in an appropriately controlled manner and (2 ) independently audited.” 39 In a 1974 article King and Baron argued that! *'One of the principal reasons for the development of the fund entity as the focal point in accounting for the affairs of governmental units is to obtain a separation in the accounts between current and noncurrent resources.” 40 They recommended “ that every account in the chart of accounts be classified and coded as being either an appropriatable account or a nonappropriatable account” and envisioned the concurrent elimination of the fund account structure. 41 Later, in 1974 Steinberg emphasized thati "Government is turning increasingly to management approaches and management systems.” This involves concepts such as planning-programming-budgeting (PPBS) or program budgeting (a similar approach), management by objectives. 38 Committee on Not-for—Profit Organizations of the American Accounting Association, 1972-73, "Report of the Committee on Not-for- Profit Organizations, 1972-73, The Accounting Review, Supplement to Vol. XLIX, 1974, pp. 224-249. 3 9 Ibid., p. 236. 40 Randle R. King and C. David Baron, "Governmental Accounting and Financial Reporting," The Accounting Review, Vol. XLIX, No. 1, January, 1974, p. 78. 4 l Ibid., pp. 76-87. Harold I. Steinberg, "Accountability in Local Government,** Management Controls, Vol. XXI, No. 5, May, 1974, p. 82. productivity improvement, performance auditing, and the appointment of 29 an audit committee. A3 Also, in 1974 King discussed the problems that result from a ••fragmented funds accounting model.” 44 He considered several alternatives, one of which was to **invent an entirely new governmental accounting model which provides for multidimensional accounting and reporting objectives reflecting a clearly articulated theory.” 45 Most recently, White has pointed out that matters concerning financial operations and compliance are no longer the primary concern of governmental accounting and auditing. "The major concern now is whether governmental organizations are achieving the purposes for which programs are authorized and funds are made available, whether they are doing so economically and efficiently, and whether they are complying with applicable laws and regulations.” 46 Depreciation— to Record or Not to Record? Meanwhile, the issue of whether or not depreciation should be recorded in the accounts of governmental units continued. Paton has recommended, not only that depreciation should be faithfully recorded in governmental accounts, but that the managerial point of view strongly 43 44 Steinberg, op. cit., pp. 82-84. Randle R. King, "Critique of Conventional Governmental Accounting," Governmental Finance, Volume 3, Number 2, May, 1974, pp. 25-26. *5Ibid., p. 2 6 . 46 Robert H. White, "Governmental Accounting— Past, Present, and Future," in "Statements in Quotes," The Journal of Accountancy, Volume 139, Number 3, March, 1975, p. 79. suggests the use of current dollars in depreciation computations* 47 By 30 contrast, in a 1974 article Patton concluded thatt "The allocation problem could lend considerable weight to the argument against the recognition of depreciation* and thati "Any suggestion to extend the use of depreciation to municipal accounting must be considered premature. „48 Patton's conclusion was severely criticized by the 1973-74 Committee on Nonprofit Organizations of the American Accounting Association* Its members declared that Patton's conclusion represented an "erroneous interpretation and extension" of the conclusions of the 1970-71 Committee on Foundations of Accounting Measurement of the American Accounting Association and "casts an unwarranted pall over attempts to develop applied cost (expense)-based, output-oriented accounting information.” 49 The AICFA Audit Guide In order to provide an auditing reference to accompany the "Blue Book," the AICPA in 1974 issued an industry audit guide for state and local governmental units.’*** Specifically, its purpose was "to assist 47 William A. Paton, "Let's Recognize Depreciation in Government Operations," The GAO Review, Winter, 1971, pp. 38-44. 48 James M* Patton, "The Allocation Problem in Governmental Accounting," Governmental Finance, Volume 3, Number 2, May, 1974, pp. 26-28. 49 Committee on Nonprofit Organizations of the American Accounting Association, 1973-74, "Report of the Committee on Nonprofit Organizations, 1973-74," The Accounting Review, Supplement to Vol. L. 1975, p. 19. ^Committee on Governmental Accounting and Auditing of the American Institute of Certified Public Accountants, Audits of State and Local Governmental Units, New York* American Institute of Certified Public Accountants, 1974. 31 the independent auditor in examining and reporting on financial statements of governmental units other than the federal government."^" In same respects the ”Blue Book" and the AICPA Audit Guide were not in precise agreement, and some of the areas in which the two works may be compared and contrasted have been discussed both By Spriggs 52 and by Oliver and Brighton. 53 Summary From this review of a sample of the literature on accounting in municipalities, the following six observations may be made. First, the importance of local units of government in the economy has increased both absolutely and relatively in the recent past; and this increase may be expected to continue in the foreseeable future. Secondly, this growing importance has led to increased emphasis on the managerial point of view in accounting for municipal operations, especially the recording and reporting of costs by governmental function. The publication of the "Blue Book" represents a significant step in this direction. Thirdly, increasing attention has been paid to the regular auditing of local units of government by independent accountants. This has been especially evident from the recent publication of the AICPA Audit Guide. Fourth, new accounting systems have been developed for use by local governments; and it is not unreasonable to anticipate that at some point ^Committee on Governmental Accounting and Auditing of the American Institute of Certified Public Accountants, op. cit., p. ix. 52 C. Richard Spriggs, "New Positions Taken by Audit Guide for State and Local Governmental Units," in "Focus on Accounting and Auditing," The Michigan C P A , Volume XXVI, No. 1, July-August, 1974, pp. 45-50. 53 Fred M, Oliver and Gerald D. Brighton, "Auditing State and Local Governmental Units,** in "Accounting and Auditing," The Journal of Accountancy, Volume 140, Number 2, August, 1975, pp” 87-91. 32 in the future the traditional fund structure of accounts may be abandoned in favor of a design which Is more manager!ally oriented. Fifth, attempts to measure the output of governmental organizations have gained in importance; and the continuation of such attempts may be expected to accompany the increasing emphasis on the managerial point of view. Sixth, some pressure has already existed for the recording of depreciation in governmental organizationsj and the trend in this direction may be expected to continue as an important reflection of the managerial point of view. THE IMPLEMENTATION OF UNIFORM ACCOUNTING SYSTEMS AND AUDITS BY INDEPENDENT ACCOUNTANTS As a development concurrent with the recent trends in municipal accounting, it has not been surprising to discover that several states and Canada have developed uniform accounting and reporting systems for local units of government. In same cases this has been accompanied by increased reliance on the services of independent accountants for auditing purposes. Illinois In Illinois, as of August, 1965, although there was still considerable variation in the auditing of local governments, cities and villages were audited by professional accountants; copies of the audit reports were available for public inspection; and a statewide summary was available to the public. School districts were audited by "professional accountants," as were counties with populations of between 10,000 and 500,000. However, townships were still audited by elected boards of auditors, with no requirement that any of the board members 33 must be accountants, 54 California The Chart of Accounts for California Cities was published in 1957 and, as of November, 1965, had been widely adopted on a voluntary basis. The annual financial reporting form was revised in accordance with it. Comparative figures were published annually. Sophisticated budget techniques were employed by most of the larger cities. 55 Canada In Canada, Graschuk indicated the following in January, 1967.56 The financial affairs of municipalities within a province are presented on a uniform basis and are subject to comparison. A measure of uniformity from province to province is also achieved with the aid of the Manual of Instructions for Municipal Corporations published by the Dominion Bureau of Statistics. Washington As of November, 1967, the State of Washington had uniform systems of accounting and reporting for all taxing districts and public service industries. All of them were required to submit annual financial reports based on the uniform accounting systems, which were based on the MBlue Book" as much as possible. They were audited by the Division of Slichael J. Hewlett, "State Supervision of Local Government Audits,” Municipal Finance, Volume X30CVIII, Number 1, August, 1965, pp. 61-64. ^^Martin F. Anderson, "Progress toward Uniform Accounting and Budgeting," Municipal Finance, Volume XXXVIII, Number 2, November, 1965, pp. 90-94. H . S. Graschuk, ’T h e Audit of a Municipality," The Canadian Chartered Accountant, Volume 90, Number 1, January, 1967, p. 44. Municipal Corporations, a state agency. Automatic data processing could be used to compile information from the annual reports. 57 34 South Carolina In 1969 Bedenbaugh indicated that in 1963 South Carolina had begun to adopt a uniform chart of accounts for municipalities. He warned, however, that proper internal controls should be established to supplement the new system. 58 Ohio In 1969 Cloud reported that Ohio had decided to develop a new accounting and reporting system for municipalities around six basic standards* (1) utilization of the "Blue Book"; (2) designing of a flexible accounting system; (3) provision of a framework for data processing; (4) introduction of PPBS concepts; (5) employing of a double-entry modified accrual system; (6 ) facilitating of the development of a standard audit program. The following benefits were anticipated* (1) provision of more meaningful data for decision making; (2 ) accurately determining the financial position of a municipality; (3) improved service to the public through full disclosure and the availability of fiscal data; (4) reducing the cost of record keeping, reporting, and auditing. 59 Robert V. Graham, "State Standardization of Local Government Accounting," Municipal Finance, Volume XL, Number 2, November, 1967, pp. 95-100. 58 John A. Bedenbaugh, "The Changing Face of Accounting in Local Government," The National Public Accountant, Vol. 14, No. 2, February, 1969, pp. 30-31. 59 Roger Cloud, "Upgrading Uniform Municipal Accounting Systems," Municipal Finance, Volume XLII, Number 2, November, 1969, pp. 81-84. North Carolina 35 Recently, Boyles and Martin have susgested the following list of benefits from the uniform accounting system for local governmental units in North Carolinat (1} increased efficiency; (25 improved internal control; (3) reduced system redundancies; ( O increased comparability of data; (5) easier communication; (6 ) trained personnel; (7) strengthened audit position; (8 ) improved management reporting. Michigan Although Michigan's uniform accounting system retained the traditional fund structure of accounts, it introduced into the local units of government a chart of accounts which incorporated the classification of expenditures by governmental function. As described by Young, at least one CPA firm has developed an automated record keeping system to accompany it.6* A very simple, inexpensive method of record keeping has been developed through the use of data processing equipment. Young, Skutt, and Breitenwischer, a firm of certified public accountants, has an automated system progranmed, de—bugged, and in operation. In brief, financial statements are prepared comparing revenues and expenditures with budgeted amounts. The statements can be prepared monthly, quarterly, semi­ annually, or annually depending on the needs of the unit government. The check numbers and the official cash receipts classified as to fund and account number are all that is required of the local unit of government. At the end of year, write-up audit analyses are prepared for the auditors. 6Slarlan E . Boyles and Randall P. Martin, "A Statewiie Accounting System for Local Government," Management Controls, Vol. XXII, No, A, June, 1975, pp. 93-95. 6*Harold M. Young, "Record Keeping Relief for Local Units of Government," in "Focus on Accounting and Auditing," The M i chigan CPA, Volume XXVI, No. 2, September-October, 1974, pp. 9-17. 6^Ibid., p. 9. 36 Beginning with the first issue in 1975, The Michigan CPA has begun to supplement Public Act 2 of 1968 by running a regular column dealing with financial problems of municipalities. The first issue discussed the deadline for the filing of financial reports and the obtaining of an extension in cases where the deadline cannot be met. 63 SUMMARY This chapter has reviewed a sample of the literature which describes the development of municipal accounting thought during the past two decades, one aspect of which was the introduction at the state level of uniform accounting systems for local units of government. The next chapter is directed more specifically toward an examination of the theory of cost/benefit analysis and how it is applied. 63 "The Municipal Forum," The Michigan C P A , Volume XXVI, No. 4, January-February, 1975, pp. 5-6. Chapter III THEORETICAL BASIS OF RESEARCH A RECURRENT THEME Throughout the recent history of municipal administration and accounting runs the recurrent theme of measuring input against output, usually referred to as cost-benefit analysis or cost-effectiveness analysis, as a framework for decisions and as a subsequent measure of performance in the absence of a profit measure. With respect to governmental budgeting and planning, financial planning (including cost analysis) has been called "an essential element in the attainment of meaningful benefits from available resources."^ Several systems have been proposed and tested as tools "for analyzing government activities 2 on a cost-benefit basis." The accumulation and reporting of actual costs by function, program, or activity has become increasingly common - With respect to the measuring and reporting of benefits, however, "the Glenn Grosset, "Financial Accounting and Information for Management," in "Management Services," Canadian Chartered Accountant, Vol. 101, No. 6 , December, 1972, p. 72. 2 E. Reece Harrill, Thomas E. Richards, and Jonathan M. Wallman, "FAMIS— a Financial Accounting and Management Information System for Local Government," Management Controls, Vol. XXI, No. 5, May, 1974, p. 94. 37 38 government accountant finds his greatest challenge because there is no easy way to measure the benefits of service functions**' 3 The discussion of cost/benefit analysis in the literature is often accompanied by the consideration of a planning-programming-budgeting system (PPBS), of which program budgeting is considered to be an essential component. Both the **Blue Book" and the Michigan uniform accounting system have incorporated the recording of expenditures by governmental functionj and any given function might be expected to include a number of activities, each of which might involve one or more programs. A local unit of government which records its expenditures by governmental function or a subdivision thereof might be expected to budget them in the same manner* Although the development of methods of measuring and reporting benefits objectively is generally agreed to be difficult, a local unit which both records and budgets its expenditures by function, activity, or program might be expected to develop measures of output or performance in order that the costs of a given function, activity, or program might be compared with its benefits. When the requirements of Act 2 were imposed, the State of Michigan made a program decision affecting both the State and the local units, primarily the local units. This research is an effort to develop and test a method for measuring the costs and benefits of that decision at both the local unit and combined State-wide levels. In addition, an efficient information measurement system should also offer clues as to costs and benefits were realized; and this is also attempted in the proposed methodology* 3 Bruce Joplin, "Local Government Accounting! It's Your Responsibility, Too," The Journal of Accountancy, Volume 124, Number 2, August, 1967, p. 42. ELEMENTS OF COST/BENEFIT DECISION ANALYSIS 39 When cost/benefit analysis is used as a formal approach to decision making, it consists of a number of elements* McKean has suggested the following listr (1 ) the desired objectives; (2 ) the means of attempting to achieve those objectives; (3) the costs entailed for each of the means; (A) models to help trace out the estimated costs and achievements; (5) a criterion to identify the best means.^ By contrast, in this research cost/benefit analysis is used for the purpose of an assessment after-the-fact. In such an after-the-fact assessment it is necessary to consider (1 ) the chosen objectives, as well as others which might have been fortuitously achieved, (3) the marginal costs experienced, and (4) the model used in the decision* Only then can one fairly judge whether the net anticipated benefit has been obtained* In addition, the question of whether the results actually experienced were greater than, equal to, or less than those planned must be considered. Furthermore, a complete analysis presumably would also ask if the proper means (item (2 > above) were chosen in the first place. The two sections which follow describe examples of the cost/benefit decision process* McKean In a cost/benefit study described by McKean in 19 58, the desired objective was the development of water resources, partly by the application of federal government expenditures. The means of attempting to achieve that objective were (1) the Green River Watershed in Kentucky 4 Roland N. McKean, E c o n o m i c s of Defense,** in David L. Sills, editor. International Encyclopedia of the Social Sciences, Volume 4, New Yorki The Macmillan Company & The Free Press, p. 487. AO and Tennessee, and (2) the Santa Marla project tn California. The costs entailed for each of the means were estimated in terms of (1) installation and (2) annual operation and maintenance. Various types of models to help trace out the costs and achievements were used for both projects* The criterion to identify the best means was the ratio of total benefits to total costs.^ Kaufman, Hu, Lee, and Stromsdorfer In a cost-effectiveness study of vocational education, the desired ob jective was the education of those high school students who did not plan to attend college for the purpose of enabling them to lead useful and productive lives after graduation. The means of attempting to achieve that objective were (1 ) the vocational-technical curricula and (2) the nonvocational-technical, or academic, curricula. The costs entailed for each of the means were defined in terms of the supply costs of education and divided into current and capital classifications, with the current category being considerably larger than the capital. Models to help trace out the costs and acnlevements were presented in the form of statistical functions. The criterion to identify the best means was the benefit/cost ratio, producing the conclusion that funds spent on the vocational-technical curricula were more productive than those spent on the nonvocational-technical (academic) curricula.^ ^Roland N. McKean, Efficiency in Government through Systems Analysis, New Yorkt John Wiley & Sons, Inc., 1958. 6Jacob J. Kaufman, Teh-wei Hu, Maw Lin Lee, and Ernst W. Stromsdorfer, A Cost-Effectiveness Study of Vocational Education, University Park, Pennsylvania* Institute for Research on Human Resources, The Pennsylvania State University, March, 1969, Public Act 2 of 1968 41 With respect to Michigan*s Public Act 2 of 1968, the desired objectives will be indicated in more detail in a later section of this chapter. The stated primary intention was "to maintain the citizen's confidence in his government and the integrity of the financial reporting by that government." The means of attempting to achieve that objective was the improvement of accounting, reporting, and auditing standards for Michigan municipalities contemplated by the enactment and implementation of Act 2. Expected costs entailed for each of the means, as well as the alternative means considered, were not available because the legislative hearing records were not retained. This study attempts to obtain estimates of the Act's implementation costs from a sample of Michigan municipalities and provide a procedure for estimating the total cost of implementing Act 2. With respect to models to help trace out the costs and achievements, this study has attempted to construct at least a simple framework, assumed to be consistent with that implied in legislative deliberations and within the limitations of the data obtained, to trace out the costs and benefits resulting from the implementation of Act 2. Although this study has attempted a comparison of costs and benefits produced by the implementation of Act 2, it has not attempted to establish a criterion to identify the best m e a n s . Presumably, this was done, at least implicitly, when the State legislature made the decision to enact Act 2. The means of attempting to achieve the objective were indicated above; and in this study alternative means which could have been chosen by the legislature have not been considered, except, by inference, the alternative of "no change.M THE THEORY OF BENEFIT/COST ANALYSIS 42 The purpose of this section is to provide a brief description of the theory of benefit/cost analysis, in order that it may be compared with the structure of this research in the section which follows.^ The Purpose of Science When various pieces of phenomena are organized in a process called the scientific method, the purpose is to explain the past and to help predict the future. The scientist attempts to simplify reality by abstracting from it, categorizing it, inferring relationships about it, and making decisions based on the relationships inferred. To the extent that this research has attempted systematically to organize pieces of phenomena, it could be classified under the general heading of "scientific.” The process of this research has been a concentrated attempt to abstract from reality, categorize it, and infer relationships with respect to it. However, since the enactment of Public Act 2 of 1968 and, in many cases, its implementation are historical events, this research is much more heavily oriented toward attempting to assess and explain the past than toward trying to predict the future. It should be viewed only indirectly as a vehicle for decision making based on the relationships inferred although it does attempt to suggest recommendations for future policies based on its results. 7 The theory of benefit/cost analysis described in this section depends heavily on Harley H. Hinrichs, "Government Decision Making and the Theory of Benefit-Cost Analystsi A Primer,” in Harley H. Hinrichs and Graeme M. Taylor, editors, Program Budgeting and Benefit-Cost Analysis, Pacific Palisades, California! Goodyear Publishing Co., Inc., 1969, pp. 9-2 0. The Allocation Problem The entiTe history of economic thought has been concerned with problems of allocationf those problems arising from the perpetual condition of scarce means and unlimited ends. One aspect of allocation problems in the economy may be found in the numerous decisions by governments at all levels to spend at a level representing almost 40% of the nationfs gross national product. When Act 2 became a State statute, the focus of its proponents was very probably on the anticipated benefits to be derived from it, both to the State and to the local units of government affected by it. This research recognizes that those anticipated benefits could not be attained without the concomitant incurrence of costs of their attainment, again both by the State and by the affected local units of government. Thus, the creation, enactment, implementation, and enforcement of Act 2 exemplify an allocation problem in the setting of the relationship between a state government and numerous local governments. More precisely, the achievement of the anticipated benefits of Act 2 at both levels of government has necessitated the expenditure of scarce resources at both levels of government, resources which could have been expended in some other manner. In the economic sense the cost of the benefits derived from Act 2 is the value in their next best alternative use of the resources utilized in its creation, enactment, implementation, and enforcement. The Theoretical Problem The theoretical problem is not difficult; the difficulties lie in practical applications of the theory. If it were possible to conceptualize an existence without time, space, or uncertainties, it 44 would then be possible to specify the desired ends, measure them in order to quantify the benefits obtainable from those ends, and utilize the limited means for the purpose of maximizing the value of those benefits. When complexity is introduced, the limited means become budgets. One type of problem becomes that of maximizing the benefits, already specified and quantified, for any given set of inputs or costs, also specified and quantified. g A similar problem is that of attempting to minimize costs for the purpose of achieving a given level of benefits. Still another type of problem arises when both benefits and costs are permitted to vary. In the setting of the public sector of the economy, the latter type of problem, in the process of attempting to derive the optimal size of the public sector, typically reverts back to the former type— given benefits, minimize costs. Although the problem is still dominated by the eternal fact of scarce means, it is, nevertheless, conceptually possible to identify both the effect on outputs of marginal changes in inputs and the effect on inputs of marginal changes in outputs. As indicated earlier, this research is only indirectly concerned with attempting to postulate the future; its primary concern is that of trying to assess the past. Consequently, it does not deal squarely with any of the three problems described abovei the maximization of benefits, given costs; the minimization of costs, given benefits; or the achieving of an optimal combination of benefits and costs when both are allowed to vary. Essentially, the purpose of this research is to identify and to judge the effects of benefits and costs which, for the ®Hy children face essentially this problem when they attempt to assemble the largest possible structure with a given set of Tinkertoy parts. most part, have already occurred although the purpose of this judgment is to make recommendations with respect to possible future policies* 45 The Heart of the Problem If it could be assumed that all of the data in terms of benefits and costs of this type of problem were known, the solution to the problem would be merely a rearrangement of the existing information. Consequently, the heart of the benefit/cost problem lies in the identification and measurement of the benefits and costs of all viable alternative solutions since knowledge of these factors, given the decision criteria, itself implies possession of the solution. This research is concerned primarily with the statement of the problem of the identification and measurement of costs and benefits and with the attempt to formulate an approach to a solution. The procedures utilized in this research have been very carefully considered at all times. The processes of the identification of benefit and cost items and of the use of the rating scale technique for the evaluation of them have been carried along logical paths. However, although the conclusions suggested in this research have been carefully formulated, they should be regarded more realistically as the secondary product of the attempt to model and test a process than as the climatic result of a rigorously assembled mathematical structure. The Structure of the Problem On page 39 of this chapter, an outline for cost/benefit analysis was given. This research, however, is oriented more specifically toward assessing the results of a given decision. It is intended to provide an appraisal of the realized benefits and costs of Public Act 2 of 1968. 46 While the considerations at both times should be essentially the same, the outline which follows seems somewhat more applicable to such an after-the-fact assessment of the problem. 9 1. The ends and the benefits to be obtained from those ends must be specified, or identified. 2. The benefits must be measured. If possible, the benefits should be quantified in dollar terms in order that the various benefits might be compared both with one another and against the costs involved in attaining those benefits. 3. The costs to be included must be specified, or identified. 4. The costs must be measured. If possible, the costs should be quantified in dollar terms in order that the various costs might be compared both with one another and against the benefits obtained. 5. The constraints must be specified. The new program was introduced into an already existing environment which contained elements which presumably could influence the realization of the benefits and costs. In order to assess the net results of the original decision, as well as to attempt to discern factors which influenced those results, it is necessary to consider the constraining elements. In the sense that such constraints are present in different degrees in different municipalities, these have been treated as control variables in this research. 6 . The externalities must be identified. Inevitably, a number of potential benefits and potential costs will have been excluded from the analysis in order to expedite the formation of a conclusion. It is 9 Hinrichs, op. cit., p. 10. jr W7 necessary to decide whether or not the excluded phenomena make a difference in the result of the analysis. 7. Finally, the achieved benefits and costs should be judged against those anticipated in the original decision. STRUCTURE OF THIS RESEARCH Identification of Benefit and Cost Variables Relative to the problem as stated above, this research contains both similarities and differences. One of the two most difficult conceptual problems faced by this research was the question of how to determine in an individual municipality whether or not particular phenomena, either those anticipated or others discovered, really were caused by Public Act 2 of 1968 and thus should be included as a benefit or cost item to be measured. It is virtually impossible for an individual outside of the governmental unit to make such a determination. Ideally, Act 2 might have provided for each unit a means of keeping track of its own benefit and cost effects on the municipal organization. However, even in this ideal situation it would have been necessary for someone within the municipality to have interpreted what was, or was not, an Act 2 benefit or cost. One possible means of identifying the benefit and cost effects might have been for me merely to have utilized my own ideas of what those effects might have been. This approach was deemed incomplete, however, because I could not possibly have been aware of a large number of benefit and cost effects which potentially might exist. Another possible means might have been the employment of a preliminary open- ended questionnaire which might have been mailed to a broad sample of 48 municipal officials and CPA firms. This approach was rejected because I believed that the use of a broad sample as a base for the solicitation of benefit and cost effects was probably not necessary. After a careful consideration of the problem, it was decided to use the interview technique in order to permit municipal officials and CPAs to contribute their ideas concerning possible effects generated by the implementation of Act 2. Consequently, the preliminary stage of this research consisted of a long series of interviews with both municipal officials and selected CPA firms who were especially active in the auditing of municipal clients. Although a number of these interviews were conducted merely for the purpose of discussing the feasibility of this project, twelve of them were intended specifically for the purpose of obtaining ideas with respect to which benefit and cost items resulted from Act 2 and thus should be included in the study. The items assembled from the interviews were then discussed in greater detail with three municipal officials who were carefully selected for their experience in municipal government, their expressed interest in this research, and their ability to evaluate the benefit and cost items in terms of their relative importance. As a consequence of the results obtained from these discussions, I reviewed the list of items several times in order to eliminate possible duplication, identify those which seemed to be the most important, and reduce the list to a manageable size. Eventually, a list of the twenty most probable benefit items and the ten most important cost items emerged. It should be noted that I did not attempt to use the information obtained by the interview technique in any direct analytical form. Rather, the interviews were used for the sole purpose of generating and 49 selecting benefit and cost items which were attributed to the implementation of Act 2. As indicated in the next section, after the responses had been reviewed and classified, a representative sample of them was chosen to be measured by a rating scale device. The elements to be analyzed by the device were in the form of benefit and cost items attributed to the implementation of Act 2 . Measurement and Analysis of Benefit and Cost Effects The other difficult conceptual problem faced by this research was the question of how to measure and analyze the benefit and cost items once they had been identified. Consequently, a considerable amount of attention was devoted to these questions. The following addresses both the framework for analysis and methods for assessing the henefit and cost inputs to the framework. Measurement Structure. In the ideal situation both benefit and cost items would be quantifiable in terms of dollars. Even if the benefit items were not directly obtainable in dollars, they might still be measurable in some physical terms, such as time; and the time measurements would be converted into dollars at some appropriate rate. Thus, for each municipality, for groups of municipalities, and for all municipalities, as well as at the State level, all benefit and all cost items would be measured in both consistent and additive terms; and the total benefits and total costs would be comparable with each other. Thus, it would be possible to measure in dollar terms the net benefit or net cost both for individual local units of government and on a State­ wide basis. This ideal is illustrated in the appendix to this chapter. Given an ideal situation of this nature it is possible to construct several types of matrix arrangements for the purpose of organizing the 50 results of the research. Essentially, there are two dimensions to be consideredi (1) municipalities and (2) items of benefit and cost* In addition, if more than one source of the same measure exists, the data from the different sources may be compared and contrasted. This has been accomplished in this research by obtaining data from both the local units of government and their CPA auditors* One type of matrix would display, for each municipality, the sources of data horizontally and the benefit and cost items vertically, in order to sum the benefit and cost measures as assessed by both sources* This type of matrix is illustrated in Table 1. Total benefits and total costs may be obtained, and the two totals may be compared with each other in order to derive a net benefit or a net cost for the municipality within a given time period. Further, the similarities and differences in the assessments by the two types of respondents may be examined. Such displays could be combined by a process of addition into various cells or other groups of municipalities or into a grand total of all municipalities. Another type of matrix arrangement would display, for each item of benefit or cost, the sources of data horizontally and the municipalities vertically, in order to examine the municipalities related to the sources from which the data were provided. This type of matrix is illustrated in Table 2. For each source of data, the implicit effect of the various cells or other groups of municipalities or of all municipalities on the given item of benefit or cost may be obtained. Such displays could be combined by a process of addition into various groups of benefit items, cost items, or both benefit and cost items. Still another type of matrix arrangement would display, for each source of data, the benefit and cost items horizontally and the 51 Table 1 CITY OF BIGTOWN All Benefit and Cost Items Benefit and Cost Items Sources of Municipality Data CPA Auditors Municipalities Benefitsi Benefit X Benefit Y Benefit Z Total Benefits Costsi Cost A Cost B Cost C Total Costs Net Benefit or Net Cost Ratio of Total Benefits to Total Costs Table 2 BENEFIT X All Municipalities Municipalities (by Cell) Sources of Municipality Data CPA Auditors Municipalities^ Cities* Cell 1 (largest cities) Cell 2 (next largest cities) Cell 3 (next smallest cities) Cell A (smallest cities) Total Cities Villages* Cell 1 (largest villages) Cell 2 (next largest villages) Cell 3 (next smallest villages) Cell A (smallest villages) Total Villages Townshipsi Cell 1 (largest townships) Cell 2 (next largest townships) Cell 3 (next smallest townships) Cell A (smallest townships) Total Townships Total Municipalities 52 municipalities vertically, in order to examine the benefit and cost Items related to the municipalities. This type of matrix is illustrated in Table 3. From this matrix may be obtained any combination of benefits, costs, or net benefits for any of the municipalities or groups of them. In this case the two matrices could not be combined by an addition process; since the data in the matrix for the CPA auditors are intended merely to substantiate those in the matrix for the municipalities, the matrices are not additive. Finally, these two matrices could be combined into the construction of a single matrix which would display the benefit and cost items horizontally and the municipalities vertically. Each cell would be divided into two sections, one for the data obtained from the local units of government and the other for the data provided by the CPA auditors. For each source of data, any combination of benefits, costs, or net benefits for any of the municipalities or groups of them may be obtained. This type of matrix is illustrated in Table 4. At the origin of this research the possibility was considered of devoting a major section of it to the consideration of the effects of Public Act 2 of 1968 at the overall State level. For this purpose it might have been possible to have employed a type of matrix which would have displayed, at the State level, one or more sources of data horizontally and the benefit and cost items vertically, in order to have examined the benefit and cost items related to the sources from which they had been provided* This type of matrix is illustrated in Table 5. For each source of data, total benefits and total costs may be obtained; and the two totals may be compared with each other in order to derive a Table 3 DATA PROVIDED BY MUNICIPALITIES (OR BY AUDITORS) All Municipalities Municipalities (by Cell) X Benefits Y Z Total A B C Total Benefits Costs_ _ _ _ _ _ _ _ _ Net Ratio of Benefits to Costs Cities: Cell 1 (largest cities) Cell 2 (next largest cities) Cell 3 (next smallest cities) Cell 4 (smallest cities) Total Cities Villages: Cell 1 (largest villages) Cell 2 (next largest villages) Cell 3 (next smallest villages) Cell 4 (smallest villages) Total Villages Townships: Cell 1 (largest townships) Cell 2 (next largest townships) Cell 3 (next smallest townships) Cell 4 (smallest townships) Total Townships Total Municipalities Table 4 DATA PROVIDED BY MUNICIPALITIES AND BY CPA AUDITORS All Municipalities Benefits Y 2 M A M A M A X Total M A Costs Z X Y M A M A M A Total M A Net Benefits Ratio of Benefits to Costs Municipalities (by Cell) Cities* Cell 1 (largest cities) Cell 2 (next largest cities) Cell 3 (next smallest cities) Cell 4 (smallest cities) Total Cities Villages* Cell 1 (largest villages) Cell 2 (next largest villages) Cell 3 (next smallest villages) Cell 4 (smallest villages) Total Villages Townships* Cell 1 (largest townships) Cell 2 (next largest townships) Cell 3 (next smallest townships) Cell 4 (smallest townships) Total Townships Total Municipalities 55 Table 5 STATE OF MICHIGAN All Benefit and Cost Items Sources of State Level Data Deputy State Treasurer Director of Local Government Audit Division Benefit and Cost Items Benefits: Benefit X Benefit Y Benefit Z Total Benefits Cost si Cost A Cost B Cost C Total Costs Net Benefit or Net Cost Ratio of Total Benefits to Total Costs net benefit or a net cost and to compute a ratio of total benefits to 56 total costs. However, as this study evolved from the interview stage into the questionnaire stage, its scope with respect to the individual local units of government became greatly expanded. Consequently, it was subsequently decided to limit the scope of the study with respect to the effects of Act 2 at the overall State level. Two interviews were conducted with Key personnel in the Bureau of Local Government Services of the State Department of Treasury, and the results of these interviews are reported in Chapter VII of this study. Costs and Benefits Measurement Scale. During the course of this research the possibility of conducting interviews with a carefully selected sample of municipalities in order to extract items of benefit and cost from their records, hopefully measured in terms of either dollars or time, was very seriously considered. However, even if information of this nature had been available, both the interviewer and the respondent would have been continually faced with the question of whether or not a given event had been really precipitated by Act 2, a cause-and-effeet question which could never have been completely resolved even with the advantage of hindsight. Moreover, the obtaining of measurements for the various items, in terms of either dollars or time, would have been extremely difficult. The cost items would have been best expressed in dollars, and possibly the appropriate dollar amounts could have been identified and extracted. Nevertheless, a serious measurement problem would have occurred on the benefit side of the problem since the expression of the benefit items in dollar terms would have been virtually impossible. 57 The difficulty of placing dollar values on benefit items in cost/ benefit analysis is well documented in the literature. In the context of systems evaluation, Gregory and Van Horn suggested thati "In practice, the appraisal of benefits Is likely to be quite difficult."^ In a similar context Boutell declared that* "Benefits in large measure seem to be merely qualitative in nature and are difficult, if not impossible, to quantify in many c a s e s . S i m i l a r l y , Alexander has concluded thati **When the systems analyst attempts to reduce the benefits expected from the new information system to specific dollar values, he faces substantial risks and difficulties." 12 In the context of governmental accounting, Bierman and Drebin have observed thati "The benefits of government programs are usually difficult to quantify." 13 Hatry has stated thati "Realistically most governmental problems involve major objectives of a nondollar nature; not only is it very difficult for analysts to assign dollar 'values' to such nondollar objectives, but it is also questionable whether it would be desirable even if it could be done." 14 Hay and Mikesell concluded thati "If the anticipated benefits from a program cannot be stated in Robert H. Gregory and Richard L, Van Horn, Automatic Data- Frocessing Systems, second edition, Belmont, California* Wadsworth Publishing Company, Inc., 1964, p. 193. ^ W a y n e S. Boutell, Computer-Oriented Business Systems, second edition, Englewood Cliffs, New Jersey* Frentice-Hall, Inc., 1973, p. 55. 12 M. J. Alexander, Information Systems Analysis, Science Research Associates, Inc., 1974, p. 187. 13 Harold Bierman, Jr., and Allan R. Drebin, Managerial Accounting: An Introduction, New York* The Macmillan Company, 1968, p. 319. ^ ^ a r r y P. Hatry, "Criteria for Evaluation in Planning State and Local Programs," in Hinrichs and Taylor, op. cit., p. 101. 58 quantitative terms, they must be stated verbally."^~* In addition, the difficulties of measuring both benefits and costs in municipalities have been discussed by the 1973-74 Committee on Nonprofit Organizations of the American Accounting Association.^6 Even though its function is served in the public sector of the economy, the uniform accounting and reporting system required by Act 2 for local units of government in Michigan, supplemented by the requirement of audits by CPA firms, is, in effect, a management information system. Moreover, it is to be expected that the managerial applications of the uniform system, although limited in scope at the present time, will acquire additional importance as its utilization grows and develops. In effect, the attempt to apply a form of benefit/ cost analysis to the evaluation of Michigan's uniform accounting system is one example of the general problem of applying benefit/cost analysis to the evaluation of a management information system. In a discussion of the evaluation of a management information system, Sollenberger has suggested responding to measurement difficulties by employing "workable proxy measures." 17 No other basic issue is as easy to state nor as difficult to execute practically as the need for a strong application of cost-benefit analysis, otherwise known as economic justification. Theoretically, if the information-handling function's costs can be compared to the benefits it produces, a measure of efficiency and effectiveness of the information ^ L e o n E. Hay and R. M. Mikesell, Governmental Accounting, fifth edition, Homewood, Illinois* Richard D. Irwin, Inc., 1974, p. 417. ^6Coramittee on Nonprofit Organizations of the American Accounting Association, 1973-74, "Report of the Committee on Nonprofit Organizations, 1973-74," The Accounting Review, Supplement to Vol. L, 1975, pp. 17-23. ^ H a r o l d M. Sollenberger, "Basics of Planning MIS Development," Managerial Planning, Volume 23, Number 1, July/August, 1974, p. 31. 59 services could be calculated. Such a theoretical approach is not a practical solution because of measurement difficulties; however, everything done in information management must be evaluated by workable proxy measures of the economic theory. As a consequence of the difficulty of assigning dollar values to the cost items in this study and because of the infeasibility of assigning dollar values to its benefit items, the decision was made to employ a rating scale device for the evaluation of the items as a type of "workable proxy measure." 18 In the case of the benefit items, the rating scale technique was used exclusively. Each of the participants, both municipalities and auditors, was asked to respond to each benefit item by choosing "Large Beneficial Effect," "Small Beneficial Effect," "Immaterial," "Small Negative Effect," or "Large Negative Effect"; and these responses were assigned point values of + 2 , + 1 , 0, - 1 , and - 2, respectively. In the case of the cost items, the municipalities were asked to respond in two ways. First, each unit was asked to place marginal dollar values on each cost item with respect to both the year in which the Act 2 system was implemented in that unit and the following 19 year. Secondly, each unit was asked to respond to each cost item by choosing "Large Cost," "Small Cost," "immaterial," "Small Cost Saving," or "Large Cost Saving"; and these responses were assigned point values o f + 2 , + 1 , 0, - 1 , and - 2, respectively. However, the auditors were The rating-scale device has been discussed in the Michigan State University doctoral dissertation of Robert C. Anderson, A Method and Instrument for Predicting the Consequences of Intra-Organizatlonal Action, 1963, pp. 79-82, 189-195. 19 Unfortunately, some of the municipalities in the sample who responded did not complete the portions dealing with dollar values of cost items. As a result of some of the comments received, it is ray opinion that the overall response from the municipalities would have been both larger and faster if the requests for dollar values of cost items had not been included. 60 asked to supply only ratings and not dollar amounts. It should be especially noted that# in cases where **benefit** items have been considered to have been impediments or where marginal cost items have provided savings, the ratings have acquired a negative sign. A more complete description of the scoring procedure utilized and an example of how it was applied may be found in Chapter IV of this study.^^ When the rating scale technique is employed, it would be possible to utilize the matrices described earlier in Tables 1, 2, 3, 4, and 5 with ratings instead of dollar amounts. Moreover, it would be possible to construct, for each rating, a matrix which would display the sources of data horizontally and the benefit and cost items vertically. In this case each cell of the matrix would contain the number of municipalities falling into that particular category. For each source of data, the number of municipalities with a given rating could be obtained for any combination of benefits or for any combination of costs. This type of matrix is illustrated in Table 6. Although in this case the matrices could be combined by an addition process, the sum of any given cell in the benefit matrices, or the sura of any given cell in the cost matrices, would merely produce the total number of municipalities represented in the matrices. Method of Obtaining Benefit and Cost Ratings. Along with the decision to adopt the rating scale technique as the primary means of evaluating the benefit and cost items, the decision was made to utilize a questionnaire approach to obtaining information from the A discussion of the use of rating scales may be found in Chapter 11, "Rating Scales," in J. P. Guilford, Psychometric Methods, second edition, New York* McGraw-Hill Book Company, Inc., 1954, pp. 263-301. 61 Table 6 BENEFIT RATING #2— LARGE BENEFIT All Benefit Items Benefit Items Benefits: Benefit X Benefit Y Benefit Z Total Benefits Sources of Municipality Data CFA Auditors Municipalities municipalities and the auditors. 21 In order to broaden the base of the 62 study, it was decided to prepare and assemble a questionnaire to be mailed to a random sample, selected from a universe stratified by population, of 200 local units of government. A similar questionnaire was prepared and mailed to those CPA firms who had recently audited 7A of the responding municipalities. Essentially, there were two purposes for mailing the questionnaire to the CPA firms. First, it was Intended to substantiate the results received from the units. Secondly, it was a matter of interest to learn the reactions of the auditors with respect to the effects of Act 2 upon both their clients and themselves. The results obtained from both of these questionnaires are presented in Chapters V, VI, and VII of this study. It should be noted that this methodology places heavy reliance on the respondent's interpretation of concepts such as "large,** "small," or "immaterial" by assuming that any given response is in fact valid for that respondent. Any of the items in the questionnaire might have been considered "large" by the municipality but "small” by its auditor. This study did not attempt to analyze the variation among individual responses. Rather, it accepted a given response to a given item as being an accurate reflection of the respondent's perception of that item. Moreover, if it had been desired to obtain an explanation of the variation in responses, it would have been necessary for me to have returned to the respondents in order to have done so. 21 A small number of interviews of both municipal officials and CPA auditors were conducted later, but these were primarily for the purpose of reviewing the preliminary draft of the questionnaire rather than for the solicitation of new ideas. 63 Thus, the data generated by the research deals with respondents* perceptions rather than independent measures. This may be viewed as a limitation. However, given (1) a sufficient sample and (2) the independent ratings from auditors, the research appears to have provided a sufficient base for judgments regarding Act 2. This matter is discussed further in the next section of this chapter in the paragraphs dealing with weightings. In addition, this research has not specifically considered the fact that some of the items of benefit and cost are by their nature more important than others, especially on the cost side of the problem. For example, although a large percentage effect on a large amount may be considerably more significant in dollar terms than a large percentage effect on a small amount, both of them would presumably appear on the ratings scale as a "large effect." Further, the list of benefit and cost items in this research has not specifically incorporated the effect of externalities. These matters may or may not have influenced respondents* ratings of those specific items included, and this is treated in a later section of this chapter. Moreover, this research has not specifically considered the question of whether or not the benefit ratings and cost ratings actually lie on the same scale with respect to each other. Obviously, this is a key assumption in the computation of benefit/cost ratios. When benefits measured in dollars are divided by costs which are also measured in dollars, the same scale of measurement has been used in the numerator and denominator of the computationj and the two are directly comparable. On the other hand, when a rating scale is used as a surrogate for a 64 dollar measure, it is not certain that each individual respondent assessed the various benefit items on the same scale as the various cost items were assessed although the research implicitly assumes that this, in fact, occurred. It should be recognized that, for any given respondent, the transformation function for converting dollars to ratings may have been different for benefits than for costs. Further Rating and Analytical Considerations. It should also be noted that this research did not specifically attempt to weight the various benefit and cost items with respect to one another, other than on an equal basis. One alternative possibility might have been merely to have reported the various items individually, thus permitting the informed reader to supply his own weights in deriving an overall assessment. A second alternative would have been for me to have assigned unequal weights, based on my own concepts of the relative importance of the items. In this research I chose to follow the third alternative of weighting the items equally with respect to one another since I felt that, as an individual not directly involved with the day- to-day operations of municipal governmental accounting, I did not possess an acceptable basis for employing any other weighting pattern. However, as indicated in an earlier section, before the original list of 43 benefit items and sixteen cost items was condensed to twenty benefits and ten costs, I discussed the entire list of items with three municipal officials who were especially qualified to respond to them. Although this was primarily an evaluation process rather than a weighting process, it did serve the function of emphasizing those items in the original list which were considered to be especially important. 65 A similar question arises in the evaluation of individual benefit and cost items across the various local units of government both with respect to type of municipal organization (city* village, or township) and with respect to size of municipality. As In the above paragraph, one possibility might have been merely to have permitted the informed reader to have supplied his own weightings of relative importance. A second possibility might have been for me to have assigned arbitrary but unequal weights. In this research I employed the third alternative of weighting the units equally with respect to one another, again, because of the absence of an acceptable basis for doing otherwise. It is at least somewhat apparent, from a perusal of the responses, that some of them have been prepared more thoughtfully than others. Although this is to be expected, it is still virtually impossible to be certain that any one particular response should be weighted more heavily than any other. Generally, one might expect that the patterns of benefit and cost perceptions might have varied with respect to both type of municipal organization and size of municipality. However, in this research variation with respect to these two criteria was not apparent. It should be observed that, although the units were weighted equally for the purpose of deriving an overall State-wide assessment, in Chapter VI of this study the data are analyzed by type of municipal organization, size of municipality, and other criteria. Furthermore, although the comments with respect to the various benefit and cost items which are included in Chapter V of this study are intended to supplement the results of the dollar costs and rating scales, this research has not attempted to consider specifically the reasons for the reporting of a "No Effect” response to a given item. On 66 the benefit side of the problem, a **No Effect” response might have resulted from any of the following causes* (1) the municipality might already have experienced the benefit before the implementation of Act 2; (2) the item might have been affected by the implementation of the Act but not supplying any apparent benefit; (3) the item might have been affected by the implementation of the Act but supplying merely a potential benefit which has not actually been realized. Although the knowledge of potential but unrealized benefits would have been useful in assessing the effects of Act 2, it was deemed too difficult to ascertain meaningfully. On the cost side of the problem, a "No Effect" response might have resulted from either of the following causes* (1) the municipality might already have experienced the cost before the implementation of Act 2 or (2) the unit might have expected to incur the particular cost independently of the implementation of the Act. In either case. Act 2 had no appreciable cost effect; and the reason is not important. In addition, the unit might have incurred a cost resulting from its implementation of the Act which, because of its allocation procedure, did not appear as one of the items on the questionnaire. Although this possibility is acknowledged, given the care with which I have identified the cost items and treated the miscellaneous comments received, I do not believe it to be a material factor. In particular, this research has not considered* (15 which of the various benefit and cost items contain most of the "No Effect” responses and to what extent they appear there; (2) whether the appearance of the "No Effect" responses was affected by the type of municipality responding— city, village, or township; (3) to what extent the appearance of "No Effect" responses differed between those from the municipalities and those from 67 their auditors. It should also be noted in this research that the ratings of the various benefit and cost items relate to the period of time from the date of the implementation of Act 2 to that of the completion of the questionnaires, which occurred during the summer of 1975. This period of time may have been relatively long or relatively short for different local units of government since the arrival of the questionnaires found different respondents in different stages of compliance with the Act 2 requirements. A separate analysis with respect to the effect of the passage of time on the cost items experienced appears in Chapter V of this study. Specification of Constraints (Control Variables) As indicated on page 46 of this chapter, the environment into Which Act 2 was introduced contained elements which might have influenced the results and might help to explain their realization. This research has attempted to consider such constraining elements, which could impact differently on the various individual total benefits and costs, in the form of control variables by considering the degrees to which they exist in different municipalities. First, all local units of government in the universe were classified by type of municipal organization among the three categories of cities, villages, and townships. Secondly, the units were classified by size by choosing a random sample from a universe in which each category had been stratified by population. Each type of municipality was divided into four cells by population, with the number four being chosen arbitrarily. Thirdly, the units were classified by degree of professionalization of administration by asking 68 each municipality whether or not it employed a professional manager or superintendent in the administration of its operations. Fourth, the units were classified by prior accounting standards by asking each municipality to indicate whether or not it had adopted the "Blue Book'* accounting system prior to the enactment of Act 2 and the availability of Michigan's uniform accounting system. Fifth, each unit was asked to indicate the fiscal year for which it had adopted the State uniform accounting system. Sixth, each unit was asked to indicate whether or not it had first employed a CPA firm for auditing purposes prior to its efforts to implement the requirements of Act 2. Seventh, if the unit had first employed a CPA firm for auditing purposes during 1968 or later, it was asked to indicate the fiscal year of the initial employment. Finally, each of the CPA auditors was asked to provide a general quality rating for each of its clients in the response portion of the sample, both before and after its implementation of the Act 2 requirements. The results of the attempt to associate these control variables with the ratings of the benefit and cost items appear in Chapter VI of this study. Identification of Externalities This research has not made an attempt to identify and judge externalities such as the psychological or political effects of the implementation of Act 2. Although such effects could have been incorporated into the rating scale technique, they did not emerge at the interview stage of the research. However, the questionnaires produced a variety of comments from the respondents, some of which have related to the psychological impact of the implementation of Act 2; and these are disclosed in Chapter V of this study. For an example of a potential benefit which might have been considered in the study, suppose that the accountant of a given 69 municipality has taken great pride in having utilized a modern system of accounts and has subsequently discovered that the uniform system very closely resembles his existing one. It is fully conceivable that a psychological benefit might have resulted from Act 2. For an example of a potential cost which might have been considered in the study, suppose that the accountant of a given municipality has taken great pride in having enjoyed almost exclusive access to the financial books and records of the unit and has subsequently discovered that under State law those books and records must be audited independently! and the results of that independent audit must be made public. It is fully conceivable that a psychological cost might have resulted from Act 2. Although other possible influences such as these were not directly or specifically measured in the questionnaires, it is possible that they appeared indirectly by influencing some of the items which did appear. Summary To summarize the preceding section, this research has basically Incorporated a two stage methodology. In the first stage the variables in the form of benefit and cost items were generated from key informants. The interviews with these informants ceased when the responses became redundant. These variables were then organized by means of a rating scale device, and questionnaires containing them were mailed to a broader audience of municipalities and their CPA auditors. Although dollar amounts were requested in connection with the cost items, it was considered unreasonable to expect the respondents to put at least the benefit items into a dollar format. 70 The advantage of the rating scale technique proceeds from its ability to deal with both dollar amounts and externalities, both of which lie behind the ratings, at the same time. Such methodology provides a great latitude of analytical procedures since the data obtained by it can be used to measure both intensity and direction and can be organized in terms of control variables such as type of municipality or its size as measured by population. A measure of central tendency, such as the mean, median, or mode, may be used to indicate direction. The variance may be used to measure disagreements with respect to intensity! and the use of the variance lends itself to other statistical computations, such as, for example, the _F test. In this research the computations were developed merely in terms of averagesj no attempt was made to develop variances. However, it should be observed that the rating scale technique lends itself to a wide spectrum of statistical analysis, with respect to both measures within groups and those among groups. PUBLIC ACT 2 OF 1968— DECISION CRITERIA AND CONSTRAINTS As indicated in the preceding chapter, the growing importance of local units of government in the economy has led to increased emphasis on the managerial point of view in accounting for municipal operations. One expression of this trend has been the uniform accounting system required by Michigan's Public Act 2 of 1968. Concurrently, as indicated earlier in this chapter, the concept of cost/benefit analysis as a substitute for a profit measure has pervaded the recent history of municipal accounting. One area in which cost/benefit analysis has been especially applicable is that of management information systems. 71 Consequently* Act 2 has provided an excellent opportunity to bring together the uniform accounting system, with its managerial emphasis* and the concept of cost /benefit analysis, especially of a management information system* by demonstrating the application of cost/benefit analysis to the uniform accounting system* as well as to the auditing requirement of Act 2. Anticipated Benefits The major anticipated benefits of Public Act 2 of 1968 have been stated as follows. 22 The primary purpose for the auditing and reporting requirements of this Act is to maintain the citizen's confidence in his government and the integrity of the financial reporting by that government. The independent certified public accountant can provide the local unit with constructive reconiaendations which* when adopted* will enhance fiscal control and make budgets more easily understood so they become valuable "tools of management." The audit will help to insure compliance with the legal requirements and maintenance of fiscal responsibility. Although the Report of the Governor's Special Commission on Local Government was not directly connected with the enactment of Act 2* it has suggested same possible benefits which might result from the Act's implementation. 23 Analysis of expenditures and revenues by types of local units (counties* cities and villages* townships* and special districts) and by governmental function is severely limited due to the absence of comprehensive, consistent* and current reporting of local government expenditures and revenues in the state. Knowledge of who is spending how much for what is essential if intelligent decisions are to be made at the state level on such issues as the reorganization of the pattern of local government organization* the assignment of new service 22 Robert E, Pell and others* Bulletin for Audits of Local Units of Government in Michigan, revised* April).* 1 ^ 4 * p. 1. 23 James H. Brickiey and others. Report of the Governor's Special Commission on Local Government* March 6, 1972* p. 37. 72 responsibilities or reassignment of present service responsibilities* the allocation of taxing powers among the various types of local governments * and the development of state aid programs. In addition* a uniform system of financial reporting could make available to local elected officials and administrators comparative data on the expenditure of other local units that would be of assistance in evaluating programs and costs. The Environment As indicated in the preceding chapter* a number of developments in municipal accounting have occurred during the past two decades. These include events such as the growing importance of local government* increased emphasis on the managerial point of view* and increased attention paid to auditing by independent accountants. They also include the development of new accounting systems* attempts to measure the output of governmental organizations* and continued pressure for the recording of depreciation as one reflection of the managerial point of view. Concurrently, a number of states* including Michigan* have introduced uniform accounting systems for either some or all of their local units of government* accompanied in some cases by requirements of audits by independent accountants. It appears reasonable to assume that these uniform accounting systems* in particular* that of Michigan* might reflect the environment into which they have been placed* especially with respect to various aspects of the managerial point of view. Such aspects would include the recording and reporting of expenditures by governmental function* the incorporation of program budgeting* the achievement of close correlation between actual and budgeted expenditures* various aspects of the measurement of output* and the careful and productive management of cash. It is also reasonable to expect that the introduction and 73 installation of a uniform accounting system, especially if accompanied by an audit by independent accountants, would entail additional costs for the local units of government. If the system is installed by the auditors, the installation costs would be reflected in their fees. If the system is installed by the officials or employees of the municipality, the costs might be reflected in additional expenditures for labor or for education. In either case, a certain amount of education costs would be expected to continue into the future as new officials are elected or new employees are obtained. As a result of my search of the literature, I have not discovered any formal attempt to use the principles of cost/benefit analysis to evaluate any of the uniform accounting systems either in the various states or in Canada, including that which was introduced by Michigan's Public Act 2 of 1968. Consequently, this research has been dedicated to attempting an exploratory study of the results of the implementation of Act 2 within a framework of costs and benefits. Specifically, the question asked is* In what respects has Michigan's uniform accounting system been able to fit into an environment of managerial municipal accounting in terms of the costs incurred and the benefits produced? COMPARISON OF THE KAUFMAN STUDY WITH THIS RESEARCH The cost/benefit study by Kaufman and others referred to earlier in this chapter may be compared and contrasted with this research in a number of respects. That study was motivated by the Vocational Education Amendments of 1968, federal legislation which provided for the authorization of increased expenditures for vocational education through the fiscal year 1972-73. This research was motivated by Michigan#s 74 Public Act 2 of 1968. Additional motivation for the Kaufman study was provided by the inadequacy of existing evaluation techniques and the lack of data and tangible evidence in the area of vocational education. Similarly, additional motivation for this research was provided by the absence of evaluation techniques and by the lack of data in the area of municipal accounting in the State of Michigan. The question in the Kaufman study wast Should the United States invest more money in vocational education, given alternative investment opportunities in other educational curricula? The question in this research has been* Has the State of Michigan, especially the local units of government, obtained a net benefit from the enactment and implementation of Public Act 2 of 1968? What recommendations might be made for future policy directives in this area? The two fundamental objectives of the Kaufman study weret (1) to develop the appropriate theoretical framework and an appropriate methodology to accompany that framework; (2 ) to obtain data relevant to the framework which would demonstrate the extent to which such a study can be carried on. Similarly, the two fundamental objectives of this research are essentially the same as these. The Kaufman study contained the following two qualifying factors* (1 ) the existence of externalities can cause difficulties in deriving an accurate measurement of benefits or costsj (2 ) the benefits and costs, when involving human resources, are likely to be more general than those measured by simple economic indices. First, as indicated above, this research has not attempted to deal directly with externalities except 75 for those contributed in the form of comments. Secondly, this research has not made a direct attempt to deal with more general benefits or costs. For example, one possible contribution of Act 2 that has been regarded as having been of extremely great value has been its role in the prevention of possible fraud on the part of municipal officials and employees. Although the existence of this phenomenon has contributed an unquestionably beneficial effect, it has been omitted from explicit consideration because of the difficulty of obtaining accurate responses and because of the difficulty of measuring accurate responses if they could have been obtained. The Kaufman study regarded the identification of costs and benefits as the most important stepj by contrast, in this research it was regarded as an important secondary step even though it occurred first chronologically. In addition, Kaufman and his colleagues were able to obtain monetary values for most of the benefit and cost items on their list. By contrast, in this research only a limited number of dollar values for cost items were obtained. Much more reliance was placed on the results of the rating scales, and only those results influenced the computation of the benefit/cost ratios. Moreover, as a result of working with monetary values, Kaufman and the others were able to compare a stream of discounted annual benefits and a stream of discounted annual costs for a period of six successive years. By contrast, although in this research the dollar costs could be identified with two particular years in the case of each municipality, the ratings on the scales were solicited without respect to a given particular time period. 76 Kaufman and the others complained that the evaluation of benefits was more complex than that of costs because of their multidimensional nature. In this research benefits were also more difficult to evaluate but for a different reason— my inability to obtain dollar measures of them. Although in the Kaufman study estimated costs were obtained from the three cities which participated in the project, estimated benefits were obtained by reliance on a mail questionnaire. By contrast, in this research the benefit and cost items were identified by an interview procedure! and the ratings of them were obtained exclusively by means of mail questionnaires for municipalities and their auditors. Overall, the sample represented approximately 11.52 of the universe. However, broken down among cities, villages, and townships, this represents approximately 152, 162, and 102, respectively. In the Kaufman study the nonrespondents were subsequently interviewed by personal contact. By contrast, in this research all nonresponding cities and villages were contacted by telephone; all nonresponding townships were contacted by either telephone or postcard; and all nonresponding CPA auditors were contacted by telephone. The Kaufman study included seven sets of independent variables! types of curriculum, sex, race, marital status, city of graduation, IQ measures, and father1s education. In this research there appears just one independent variable— Public Act 2 of 1968. However, this study has utilized the seven selected criteria given earlier in this chapter as control variables! type of municipality, population of municipality, employment of manager or superintendent, adoption of "Blue Book*’ system. 77 date of adoption of Michigan uniform accounting system, date of first engagement of CPA auditor, and quality rating by CPA auditor. In the Kaufman study the supply costs of education were divided into current and capital, and data on current costs for two of the three cities were obtained from published sources. Analysis of the benefits emphasized the two dependent variables, namely, (1 ) average monthly earnings before and after taxes during the six year period following graduation and (2 ) percent of time employed during the six year period, and the seven sets of independent variables referred to above. In this research both costs and benefits were divided into (1 ) accounting and reporting, and (2 ) auditing; and these divisions were employed when the results from the rating scales were aggregated and analyzed. Although statistical analysis was not employed, an interesting follow-up study would be an item-by-item comparison of municipality and auditor responses with respect to the degree of agreement between them. Because the Kaufman study covered a period of six years, the benefit/cost ratios compared discounted marginal benefits to discounted marginal costs. By contrast, in this research the discounting process was not appropriate because of the lack of sufficient dollar values and because of the relatively short periods of time covered by the dollar values actually obtained; instead, comparisons were made between total benefits and total costs. SUMMARY This chapter has described how Michigan*s uniform accounting system may be viewed as a connection between the environment of managerial municipal accounting and the theory of cost/benefit analysis. As 78 indicated in both this chapter and the chapter which follows, the research, although begun with an interview process, was given a broad base by the use of a mail questionnaire % and the units included were selected by means of a stratified random sample. Although dollar values for the cost items were obtained where possible, expressions of opinion as disclosed by responses to a rating scale device were relied upon much more heavily with respect to the evaluation of both the benefit items and the cost items. The following chapter describes in more detail the specific procedures employed in the research and considers the selection of the various benefit and cost items included. 79 Appendix to Chapter III THE IDEAL APPROACH Ideally, a benefit/cost analysis of this nature would include a thorough examination of the responses from each participating local unit of government in order to attempt to determine whether a given municipality enjoyed a net benefit or incurred a net cost* Such an ideal approach was not attempted in this study for two reasons. First, many of the units did not respond to many of the items where dollar amounts of costs were requested) and some did not attempt even to provide ratings on the scales with respect to the cost items. Several of the larger units which reported total costs very faithfully did not report having experienced any costs at all attributable to Act 2, Of the 86 units which responded to the questionnaire, only 41 reported the dollar amounts of any costs associated with Act 2. Of these 41, one unit reported Act 2 dollar costs with respect to seven of the ten cost items. Four units reported four Act 2 costs each, and one reported three costs and a cost saving* Eight units reported three Act 2 costs each; eight units reported only two each, and nineteen units reported only one each. The second reason for not attempting a unit-by-unit approach to presenting the results of this study arose during the course of some of the interviews with CPA auditors. The suggestion was made to me that the CPA auditors of the responding units in the sample would contribute more readily if they could be assured that I would refrain from the disclosure of responses with re spect to individual municipalities and thus preserve the confidential nature of the relationships between themselves and their municipal clients. Consequently, I have limited my consideration of individual units to the two examples presented below. 80 Example No. 1 — A Large Township A large township responded as follows to the benefits portion of the questionnaire. IA1 ("Accuracy")— no rating; comment— not applicable, IA2 (Promptness)— no rating; conment— the promptness of the accounting and bookkeeping operations has been affected indirectly as a result of having changed CPA auditors since the waiting time for an audit has been considerably shortened. IA3 (Conversion of Accounts)— no rating; comment— not applicable. IA4 (Fixed Assets Valuation)— Large Benefit. IA5 (Modified Accrual Basis)— Large Benefit. XA6 (Discontinuing Reports)— no response. IA7 (Interim Reports)— no rating; comment— the preparation of quarterly financial reports will be instituted in the near future. IA8 (Completeness of Reports)— Large Benefit. IB1 (Recording by Activity)— Large Benefit. IB2 (Budgeting by Activity)— Large Benefit. IB3 (Correlation)— no rating; comment— a close correlation, hopefully, will be achieved. IB4 (Program Budgeting)— no rating; conment— program budgeting has not yet been developed. IBS (Evaluation of Output)— no rating; comment— output evaluation has not yet been developed. This reaction, although fully understandable, was most unexpected. The reader should note that, relative to this item, the township was not affected by the auditing requirement of Act 2 as such since the unit apparently had been audited regularly. Instead, a change in CPA auditors had led to the implementation of the accounting and reporting requirement of the Act and subsequently had enabled the unit to receive an audit more promptly. IB6 (Cash Management)— Small Benefit* 81 ICl (Receipt of Information)— Large Benefit] comment— hopefully, this will continue* IC2 (Contributions)— no ratings; comments— the sharing of computer programs with other units is a good idea; the water and tax billings are now on an in-house computer system. IIA (Promptness of Reports)— no rating; comment— this is the first year with the new CPA firm. IIB (Audit Recommendations)— Large Benefit. IIC (Understanding of Report)— Small Benefit; comment— the initial impact of this item has been small. IID (Contributions)— no ratings; comment— the auditing requirement has provided us with faith in our system. The same township responded as follows to the costs portion of the questionnaire. IA (Space)— Small Cost; comment— the addition of space is now in progress* IBl (Labor Costs)— Large Cost; dollar amounts! Year It Total Item Cost ...... $13,200 Portion of Cost Associated with Act 2 .... $13,200 IB2 (Bookkeeping Services)— no rating. IB3 (Stationery and Supplies)— Small Cost; dollar amounts! Year It Total Item Cost ............................ $200 Portion of Cost Associated with Act 2 .... $200 ICl (Copying Machine)— Small Cost; dollar amounts! Year It Total Item Cost ............................ $1,000 250 Portion of Cost Associated with Act 2 .... $ IC2 (Machines and Equipment)— Small Cost; dollar amounts! Year It Total Item Cost ............................ $2,500 250 Portion of Cost Associated with Act 2 .... $ IC3 (Computer/Computer Time)— no rating. ID (Education)— Small Cost; dollar amounts: Year It Total Item Cost ...... ................. $500 Portion of Cost Associated with Act 2 .... $500 Comment— the cost was incurred for the governmental accounting-bookkeeping course and books for three people. IE (Contributions)! 82 (1) Complete re-working of internal controls— Small Cost; dollar amounts! Year li Total Item Cost ........................ $500 Portion of Cost Associated with Act 2 . $375 (2) Complete re-working of accounting systems— Large Cost; dollar amounts! Year li Total Item Cost .......................... $5*000 Portion of Cost Associated with Act 2 . $5*000 II (Auditing by CPA Firms)— Large Cost; dollar amounts: Year li Total Item Cost ........................... $25*000 Portion of Cost Associated with Act 2 .... $ ->,000 Comment— the $25,000 applies to both Water and General Funds. A close inspection of the benefits ratings reveals the indication of Large Benefits in items IA4, IAS, IA 8 , IBl, IB2, ICl* and I IB and of Small Benefits in items IB6 and IIC. There are seven large benefits counting two points each and two small benefits counting one point each* for a total of sixteen points. Dividing by twenty benefit items produces an average score per item of .80, indicating an overall "Small Benefit,*' 30Z above the bottom of the category. A close inspection of the costs ratings reveals the indication of Large Costs in items IBl, IE, and II and of Small Costs in items IA, IB3, ICl, I C 2 , ID, and IE. There are three large costs counting two points each and six small costs counting one point each, for a total of twelve points. Dividing by ten cost items produces an average score per item of 1.20, indicating an overall "Small Cost,” 30Z below the top of the category. For all items, dividing the average benefit score of .80 by the average cost score of 1.20 results in a benefit/cost ratio of .67* indicating a net cost to the township for all items. Because of the tardiness of the unit's response* no questionnaire was mailed to the 83 auditor. 2 Since the township did not adopt the uniform accounting system until fiscal 1975* dollar amounts of costs have been indicated only for "Year 1." A summary of them appears in Table 7. The dollar amounts of costs presented in Table 7 indicate that the implementation of Act 2 has had a very substantial impact on the township's costs. Relative to the items included in the questionnaire, expenditures related to Act 2 accounted for 862 of the Accounting and Reporting costs* 202 of the Auditing costs* and 522 of the total costs. In order not to reveal the identity of the unit* I shall not disclose its populationj however* in my opinion* both the total item costs and those portions of them associated with Act 2 are unusually high relative to the size of the unit. Since the township has incurred a total cost of $24,775 in Year 1 for items associated with Act 2* the next question to be considered is that of what possible benefits might have been obtained for that amount. One approach would attempt to attribute dollar values to the benefitsj the total amount of these would then be divided by the $24,77 5* and a benefit/cost ratio would be obtained. A second approach would begin with the $24*775, look over the various benefit items* and attempt to decide if the total benefits obtained have been really worth the amount 2 Since the township employed a new CPA auditor in February* 1975, the probability of a response would have been reduced if a questionnaire had been sent to either the old or new auditors. In general, in this study the turnover of CPA auditors in a given unit during the past several years accounts for at least several of the non-responses from CPA firms. The former auditor is no longer interested in a former client while the new auditor has not experienced the continuity implied by the items in the questionnaire. 84 Table 7 TOWNSHIP IN CELL Tl Accounting & Reporting and Auditing Costs (First Year of Act 2 Adoption) Object of Expenditure Total Cost ccounting and Reportingt Data Processing and Operating! Portion of Cost Associated with Act 2 Percentage of Cost Associated with Act 2 Labor Costs $13,200 $13,200 Record Books, Journals, and Supplies 2 0 0 2 0 0 Total Data Processing and Operating $13,400 $13,400 Equipment t Copying Machine $ 1 , 0 0 0 $ 250 Bookkeeping Machine and Calculator Total Equipment Education Other: Re-working of Internal Controls Re-working of Accounting Systems Total Other Total Accounting and Reporting uditing Total Costs 2,500 $ 3,500 $ 500 250 500 500 $ $ $ 500 $ 375 5,000 5,000 $ 5,500 $ 5,375 $22,900 $19,775 $25,000 $ 5,000 $47f900 $24f775 1 0 0 1 0 0 1 0 0 25 1 0 14 1 0 0 75 1 0 0 98 86 2 0 52 85 expended In order to obtain them. A third approach would rely on the results of the rating system* which in this case has indicated that* at least during the first year of the adoption of the uniform accounting system* the township has incurred a net cost from the implementation of the requirements of Act 2. Example No. 2 — A Small City A small city responded as follows to the benefits portion of the questionnaire. IA1 ("Accuracy*')— Small Benefit. IA2 (Promptness)— Small Benefit. IA3 (Conversion of Accounts)— Imnaterial, IAU (Fixed Assets Valuation)— Imnaterial. IAS (Modified Accrual Basis)— Imnaterial. IA6 (Discontinuing Reports)— Imnaterial. IA7 (Interim Reports)— no rating. IAS (Completeness of Reports)— Small Benefit. IBl (Recording by Activity)— Small Benefit. IB2 (Budgeting by Activity)— Small Benefit. IB3 (Correlation)— Small Benefit. IB4 (Program Budgeting)— no rating. IBS (Evaluation of Output)— no rating. IB6 (Cash Management)— no rating. ICl (Receipt of Information)— Immaterial. IC2 (Contributions)— no responses. IIA (Promptness of Reports)— Immaterial. IIB (Audit Recommendations)— Small Benefit. IIC (Understanding of Report)--Small Benefit. IID (Contributions)— no responses. 86 The same city responded as follows to the costs portion of the questionnaire. IA (Space)— no rating. Year 1 Year 2 161 (Labor Costs)— Immaterial; dollar amountsz Total Item Cost .............................. $3*000 $3*875 $ 969 Portion of Cost Associated with Act 2 .... $ 750 IB2 (Bookkeeping Services)— no rating. IB3 (Stationery and Supplies)— Small Cost; dollar amount si Total Item Cost............................. $ Portion of Cost Associated with Act 2 . . . . $ 55 55 $ $ 18 18 ICl (Copying Machine)— Small Cost; dollar amountsi Total Item Cost 330 Portion of Cost Associated with Act 2 .... $ 165 $ $ -0- $ -0- IC2 (Machines and Equipment)— no rating. IC3 (Computer/Computer Time)— no rating. ID (Education)— no rating. IE (Contributions)— no responses. II (Auditing by CPA Firms)— Large Cost; dollar amount s t Total Item Cost Portion of Cost Associated with Act 2 .... $1,132 $2*787 $2*008 $ -0- A close inspection of the benefits ratings reveals the indication of Small Benefits in items IA1* IA2* IA8 * IB1, IB2* IB3, IIB* and IIC. There are eight small benefits counting one point each* for a total of eight points. Dividing by twenty benefit items produces an average score per item of ,A0* indicating an overall rating of "Immaterial," 10% below the top of the category. A close inspection of the costs ratings reveals the indication of a Large Cost in item II and Small Costs in items IB3 and I C l . Ther* is 87 one large cost counting two points) and there are two small costs counting one point each, for a total of four points. Dividing by ten cost items produces an average score per item of .40, indicating again an overall rating of "Immaterial,** 10% below the top of the category. For all items, dividing the average benefit score of .40 by the average cost score of .40 results in a benefit/cost ratio of exactly 1 .0 0 , indicating neither net benefit nor net cost to the city for all items. The CPA auditor of the city responded as follows to the benefits portion of the questionnaire. IAl ("Accuracy*'>— Small Benefit. IA2 (Promptness)— Small Benefit. IA3 (Conversion of Accounts)— Immaterial. IA4 (Fixed Assets Valuation)— Immaterial. IAS (Modified Accrual Basis)— Small Benefit. IA6 (Discontinuing Reports)— Immaterial. IA7 (Interim Reports)— Large Benefit; comment— the city now prepares a quarterly financial statement. IAS (Completeness of Reports)— Small Benefit. IBl (Recording by Activity)— Immaterial. IB2 (Budgeting by Activity)— Immaterial. IB3 (Correlation)— Immaterial. IB4 (Program budgeting)— Immaterial. IBS (Evaluation of Output)— Immaterial. IB6 (Cash Management)— no rating. IC1 (Receipt of Information)— no rating. IC2 (Contributions)— no ratings; comment— since this client did a good job before Act 2, the impact of the Act did not affect this unit as significantly as others. 88 IIA (Promptness of Reports)— Imnaterial. IIB (Audit Recomnendations)— Small Benefit. IIC (Understanding of Report)--Small Benefit. IID (Contributions)— no responses. The same CPA auditor responded as follows to the costs portion of the questionnaire. IA (Space)— Immaterial. IBl (Labor Costs)— Small Cost. IB2 (Bookkeeping Services)— Small Cost. IB3 (Stationery and Supplies)— Immaterial. ICl (Copying Machine)— Imnaterial. IC2 (Machines and Equipment)— Immaterial. IC3 (Computer/Computer Time)— Immaterial. ID (Education)— Imnaterial. IE (Contributions)— no responses. II (Auditing by CPA Firms)— Small Cost. A close inspection of the benefits ratings reveals the indication of a Large Benefit in item IA7 and Small Benefits in items IAl, I A 2 , IAS, IA 8 , IIB, and IIC. There is one large benefit counting two pointsi and there are six small benefits counting one point each* for a total of eight points. Dividing by twenty benefit items produces an average score per item of .AO, indicating an overall rating of "Immaterial,** 1 0 % below the top of the category. A close ii ^pection of the costs ratings reveals the indication of Small Costs in items IBl, IB2, and II. There are three small costs counting one point each, for a total of three points. Dividing by ten 89 cost items produces an average score per item of .30, indicating an overall rating of "Imnaterial," 20Z below the top of the category. For all items* dividing the average benefit score of .40 by the average cost score of .30 results in a benefit/cost ratio of 1.33* indicating a net benefit to the city for all items. A comparison of the results from the municipality's questionnaire and those from the auditor's questionnaire reveals that for all items the benefit/cost ratio from the municipality's questionnaire is 1 . 0 0 while that from the auditor's questionnaire is 1.33. Although the overall ratings between the two questionnaires are similar, the net benefit appears on the auditor's questionnaire because the Auditing costs have been rated less strongly. In terms of individual items* in the Benefits section the city and its auditor agreed on nine of the twenty items and disagreed by only one rating on four others. Of the seven items not rated by either or both, substantial disagreement appears only in item IA7. This item was not rated by the city on the grounds that no interim financial reports had been addedj it was rated as "Large Benefit” by the auditor on the grounds that a quarterly financial statement had been added. On the other hand* in the Costs section the city and its auditor did not agree on any of the items which were rated by both. On these four items they disagreed by only one rating. Of the six items not rated by either or both, disagreement appears only in item IB2, which was not rated by the city but was rated as "Small Cost” by the auditor. A summary of the dollar amounts of costs appears in Table 8 . The dollar amounts of costs presented in Table 8 indicate that the implementation of Act 2 had a relatively small* but by no means 90 Table 8 CITY IN CELL C4 Accounting & Reporting and Auditing Costs (First Two Years of Act 2 Adoption) Portion of Cost Associated with Act 2 Total Cost Object of Expenditure Year 1 Year 2 Year 1 Year 2 Percentage of Cost Associated with Act 2 Year 1 Year 2 Accounting and Reportingi Data Processing and Operatingi Labor Costs $3,000 $3,875 $ 750 $969 25 25 Record Books, Journals, and Supplies Total Data Processing and Operating Equipmenti 55 18 55 18 100 100 $3,055 $3,993 $ 805 $987 26 25 Copying Machine $ 330 $ -0- $ 165 $-0- 50 Total Accounting and Reporting $3,385 $3,893 $ 970 $987 29 25 Auditing $2,787 $2,008 $1 ,132 $-0- 41 Total Costs $6,172 $5,901 $2 ,102 $987 34 17 91 immaterial, effect on the city*s costs. Relative to the items included in the questionnaire, expenditures related to Act 2 accounted for 292 and 252, respectively, of the Accounting and Reporting costs in Years 1 and 2 | 41X of the Auditing costs in Year 1; and 342 and 172, respectively, of the total costs in Years 1 and 2. As was the case in the preceding example, I shall not reveal the identity of the unit by disclosing its population; however, in my opinion, both the total item costs and those portions of them associated with Act 2 are about average relative to the size of the unit. Since the city has incurred total costs of $2,102 in Year 1 and $987 in Year 2 for items associated with Act 2, the next question to be considered is that of what possible benefits might have been obtained for those amounts. Although this example contains less items of dollar costs than the preceding one, the comparison of Years 1 and 2 indicates a definite pattern of declining costs related to Act 2, as might typically be expected. One approach would attempt to attribute dollar values to the benefits; the total amounts of these would then be divided by the $2,102 and the $987, respectively; and benefit/cost ratios would be obtained. A second approach would begin with the $2,102 and the $987, respectively, look over the various benefit items, and attempt to decide if the total benefits obtained have been really worth the amount expended in order to obtain them. A third approach would rely on the results of the rating system, which in this case has indicated that, on balance, the city has enjoyed a slight net benefit from the implementation of the requirements of Act 2. As might typically be expected, the net benefit, if it exists, is more apparent in Year 2 than in Year 1. Chapter IV RESEARCH PROCEDURES GOALS OF THE RESEARCH Primary Goals The essential purposes of this research are* (1) To identify items of cost or benefit that have arisen in connection with the implementation of Public Act 2 of 1968. (2) To develop a framework for organ!zing, evaluating, scaling, and comparing marginal costs and benefits of Act 2 as the result of a questionnaire procedure. (3) To derive conclusions of a judgmental nature with respect to the net impact of Act 2 and, hopefully, to be able to offer t the State Department of Treasury recommendations based on those conclusions. Secondary Goals Further, although Act 2 does not require program budgeting, it is fully possible that the trend in the direction of higher accounting and reporting standards exemplified by the Act might lead to the eventual adoption of program budgeting techniques by Michigan municipalities. Moreover, given a managerial accounting system consisting of the recording of expenditures by activities combined with program budgeting it might be expected that techniques of performance measurement and output evaluation might be employed. Therefore, an important secondary 92 goal Is to obtain some feedback from the units sampled with respect to 93 the application of these proceduresj and certain items in the questionnaire are designed for this particular purpose. For the purpose of carrying out the goals of this research, specific methodological procedures have been adopted. These procedures are outlined in the next section. METHODS OF RESEARCH The methods of this research have been* (1) A long series of interviews with municipal officials and members of CPA firms, aimed specifically at the identification of variables which could be viewed as costs and benefits of Act 2. (2) A questionnaire mailed to a sample of Michigan municipalities for the purpose of obtaining information relating tot (a) Dollar amounts of Act 2 costs* (b) Opinions with respect to the impact of those costs. (c) Opinions with respect to the impact of Act 2 benefits. (3) A questionnaire mailed to those CPA firms Who have audited the municipalities responding to the above questionnaire for the purpose of obtaining information relating tot Ca> Opinions regarding the impact of the costs. (b) Opinions regarding the impact of the benefits. (c) Opinions regarding the quality of the accounting and bookkeeping operations of a given municipality. (d> Opinions regarding the impact of Act 2 on the operations of the CPA firm. The remainder of this chapter contains a discussion of details 94 which expand on the steps involved in the methodology. METHODOLOGICAL DETAILS At the time of the formulation of this research it was decided that the determining criterion of its focus would be its ability to assist the Deputy Treasurer in the Bureau of Local Government Services in evaluating the impact of Public Act 2 of 1968. Specifically, the basic question to be considered would bet To what extent have the requirements of Act 2 been successful in achieving the purposes intended? Further, in view of the growing importance of the managerial aspects of municipal accounting, it was decided that one of the elements of the research would be concerned with the attempt to determine the extent of the adoption of program budgeting techniques among the local units of government. Exploratory Interviews Shortly thereafter, I initiated a long series of exploratory interviews with selected individuals which were primarily for the purpose of discussing the feasibility of employing a cost/benefit approach in a study to determine the effects of Act 2. A secondary purpose of these preliminary interviews was to attempt to obtain suggestions from those interviewed with respect to what the cost and benefit effects of Act 2 might have been. A brief chronology of these interviews appears in Appendix A to this chapter. Moreover, there was another long series of additional interviews of an exploratory nature, some of which were for the purpose of obtaining endorsements of the research, and others of which were for the purpose of solicitlng reactions to the study and possible ideas for the development of it. A brief chronology of these interviews appears in 95 Appendix B to this chapter. Interviews for the Purposes of Identifying and Evaluating Cost and Benefit Items During the course of this research, it was decided to use an interview process for the purpose of identifying the various items of cost and benefit to be included. Among the many interviews with both municipal officials and CPA auditors which I have conducted in connection with this study, twelve specifically led to my compiling a list of sixteen cost items and 43 benefit items for potential inclusion in it. These Interviews were not completely open-ended; I frequently offered my own suggestions with respect to What types of costs and benefits might have arisen. These were followed by three interviews with municipal officials who were especially able to assist in the evaluation of those items. All of the fifteen interviews were aimed specifically at the identification and evaluation of candidates for items of cost and benefit. Subsequently, the list was condensed to the present length of ten cost items and twenty benefit items; and this is the size Which has been structured into a questionnaire format. A brief chronology of these interviews appears in Appendix C to this chapter. The Questionnaire for the Municipalities After the identification and evaluation of the items of cost and benefit, a questionnaire approach was adopted for the purpose of obtaining ratings and quantifications of the various items of cost and benefit. This was done in order to contact a much larger number of municipalities than would have been possible through interviews, to 96 obtain estimates of dollar costs where it has been possible to do so, and to obtain a broad sample of opinions with respect to both costs and benefits* The questionnaire was mailed to 200 local units of government throughout the State of Michigan, broken down into approximately 40 cities, 40 villages, and 120 townships. In order to accomplish this, all local units of government in Michigan were classified into cities, villages, and townshipsj each of these categories of units was stratified by population, and a stratified random sample of each category was selected. Although the data obtained in this study were not evaluated statistically, a random sample was employed for two reasons* First, the primary Intention of this research has been the development of a model of how a study of this nature could be carried out. Secondly, it is conceivable that computations of a statistical nature could be developed in the form of a follow-up study to this research) if anyone should desire to do this, the random sample required for it is already there. In order to capture a possible psychological advantage from beginning with the relatively less involved section, benefits were placed first in the questionnaire. They were divided into two major divisions, namely, those arising from the accounting and reporting requirement of Act 2 and those arising from its auditing requirement. The former division was subdivided into three categories, namely, accounting and bookkeeping operations, budgeting and financial management operations, and **other." Similarly, the costs section was also divided between those costs arising from the accounting and reporting requirement of Act 2 and those arising from its auditing requirement. The former division was 97 subdivided Into five categories* namely* space* data processing and operating* equipment* educational* and "other." Spaces for comments were provided beside each item of benefit and cost. The questionnaire for each municipality solicited the following information. (1) The total dollar cost* if any* of each of the ten cost items, relating tot (a) The fiscal year in which Act 2 was implemented in that unit, with the particular year in each case to be chosen by the respondent. (b) The fiscal year following that of implementation* also chosen by the respondent. <2) That portion of the total dollar cost which resulted from the implementation of Act 2* if any* of each of the ten cost items* relating to each of the same two years. (3) A rating on a scale by a municipal official with respect to the general impact of the implementation of Act 2 on each of the ten cost items. (4) A rating on a scale b y a municipal official with respect to the general impact of the implementation of Act 2 on each of the twenty benefit items. (5) The questionnaire was not completely closed-ended; after each item possible comments were solicited from the respondent. Prior to the complete finalization of the questionnaire* the final rough draft of the document was submitted to five selected municipal officials for their inspection and comments. A brief chronology of these interviews appears in Appendix D to this chapter. 98 Although the complete text of the questionnaire for the municipalities appears in Appendix E to this chapter* the following section contains a brief discussion of each of the items included in it. Control Variables. The second page of the questionnaire contains a list of introductory questions which were intended to serve as some of the control variables of the study. The first of these asked the respondent to indicate whether or not the municipality employed a professional manager or superintendent* in addition to its elected officials* for the purpose of supervising its governmental functions. This was intended merely to see if an association* either positive or negative* existed between the employment of a professional administrator and the emergence of a net benefit from Act 2. The second question asked the respondent to indicate whether or not the unit had adopted the bookkeeping system recommended in Governmental Accounting* Auditing* and Financial Reporting by the National Comoittee on Governmental Accounting* often referred to as the "Blue Book," prior to its implementation of Act 2. The presumption in this Item was that* since the unit which had utilized the "Blue Book" system already had taken* in most cases* a major step in the direction of the improvement of its accounting standards* the net benefit of having adopted the Michigan uniform accounting system would be minimal. Although the second part of the question asked the respondent to indicate the fiscal year for which the "Blue Book" system had first been adopted* this portion was discarded as a potential control variable because of the imprecise nature of the responses. The third question asked the respondent to indicate the fiscal year for which the unit had first adopted the uniform accounting system 99 prescribed by Act 2. Since the target date for adoption by all units was originally intended to be fiscal 1971* this item attempted to discover if significant differences in net benefits emerged as a result of units having adopted the system early* on time* or late* respectively, relative to the target date. The first part of the fourth question asked the respondent to indicate whether or not the unit had first employed a CPA firm for the performance of a certified audit prior to its implementation of Act 2. The presunption in this item was that the prior employment of a CPA auditor would have reduced the impact of Act 2* in terms of either net benefit or net cost* at least with respect to the auditing requirement of the Act. Since some of the responses to this item were imprecise* it has become apparent from hindsight that the question might have been improved if it had been phrased more precisely. Specifically* since the employment of a CPA auditor was a part of the implementation of Act 2 for those units that had not done so previously* the question might have been worded "prior to 1968" instead of "prior to the implementation of Act 2." The second part of the fourth question asked the respondent to indicate* if a CPA auditor had been first employed in 1968 or later* for the financial statements of which fiscal year the initial engagement had occurred. As In question (3) above* since the target date for adoption by all units was originally intended to be fiscal 1971 * this item attempted to discover if significant differences in net nenefits or net costs emerged as a result of units having employed a CPA auditor early* on time* or late* respectively* relative to the target date. In the sixth question the respondent was asked to indicate whether 100 or not the unit had received a Certificate of Conformance from the Municipal Finance Officers Association* Although the presumption in this item was that those units which had received certificates would e n j o y relatively little net benefit from the implementation of Act 2 , the question was discarded as a potential control variable when it was discovered that only three units had responded to it affirmatively. Accounting and Reporting Benefits. The Accounting and Reporting requirement division of the Benefits section of the questionnaire consisted of sixteen individual items. Of those sixteen items, eight were contained in the Accounting and Bookkeeping Operations category. In the f.rst question the respondent was asked to evaluate the effect of Act 2 on the "accuracy" of the unit's accounting and bookkeeping operations* The possibility that the term "accuracy” might have been intended to refer to the purely technical aspects of the unit's operations was considered but rejected. Rather, "accuracy** was defined in the questionnaire as the ability to select those accounts which most clearly describe a given transaction. The presumption in this item was that the choice of account titles offered by the uniform system might enable the unit to select accounts which describe a given transaction more precisely and, therefore, more "accurately,** than would have been possible with whatever chart of accounts had been utilized previously. In the second question the respondent was asked to evaluate the effect of Act 2 on the promptness of the unit's accounting and bookkeeping operations. The concept of "promptness" was defined in the questionnaire to include both the length of time required to select the most descriptive accounts and that required to prepare financial reports 101 based on those accounts. In the third question the respondent was asked to evaluate the effect on the unit's accounting and bookkeeping operations of the recent change in status of certain accounts within the uniform system from "mandatory** to "optional.” The original chart of accounts had been intended to be extremely comprehensive in scope; as such* it was regarded as having exceeded the needs of the smaller units of local government. Shortly before the finalization of the questionnaire* it was decided by the Department of Treasury to reduce the number of required accounts in the system; and this item was intended to discover if the units had perceived any benefits as a consequence of the reduction. In the fourth question the respondent was asked to evaluate the effect of Act 2 on the unit's efforts to place dollar values on its holdings of fixed assets. The "Blue Book" strongly emphasizes the dollar valuation of fixed assets in the eighth of its thirteen principles although in the ninth principle it recommends not recording depreciation in general governmental accounts.* The Department of Treasury Bulletin for Audits of Local Units of Government in Michigan repeats the "Blue Book" without modification. 2 In the fifth question the respondent was asked to evaluate the effect of Act 2 on the unit's adoption of the modified accrual basis of ^National Conmittee on Governmental Accounting* Governmental Accounting* Auditing, and Financial Reporting, Chicago! Municipal Finance Officers Association* 1968* pp. 10-11. 2 Robert E. Pell and others* Bulletin for Audits of Local Units of Government in Michigan* revised* April-!","Y974, p. 20. 102 recording revenues and expenditures. The "Blue Book" recommends the use of the modified accrual basis in the tenth of its thirteen basic 3 principles. Although the Bulletin for Audits of Local Units of Government in Michigan has somewhat altered the statement in the "Blue Book," it, too, recommends (but does not require! the use of the A modified accrual basis. Mr. James Bolthouse, Deputy Treasurer in the Bureau of Local Government Services of the State Department of Treasury, has indicated that the cash basis is fully acceptable to his department in those cases where it "fairly presents."^ In the sixth question the respondent was asked to evaluate the effect of Act 2 with respect to discontinuing reporting to the Municipal Finance Commission in Lansing. The existence of this item as a potential benefit is more than mere speculation. Public Act 96 of 1969 reads as follows.** If the books of record and account pertaining to a municipality are audited annually by a certified public accountant and the audit contains the information required in the annual reports as required by section 5 and in the form prescribed by the municipal finance commission, the audit report of the annual audit for the purposes of section 5 and at the option of the governing body of the municipality, may be used in place of the report to the municipal finance commission required by section 5. In the seventh question the respondent was asked to evaluate the effect of Act 2 on the unit’s efforts to generate additional interim 3 National Coimnittee on Governmental Accounting, o p . ci t . , pp. 11-13. S e l l , op. cit., pp. 20-21. ^James J. Bolthouse, in a personal interview, on November 14, 1974. ^State of Michigan, Michigan Compiled Laws— 1970, Volume II, Lansing, Michigani Michigan Legislative Council, December 15, 1971, paragraph 133.5a. 103 financial reports* The presumption in this item was that the utilization of the uniform system would encourage the municipal officials to prepare reports more frequently and that gains in efficiency created by the system might enable them to do so. In the eighth question the respondent was asked to evaluate the effect of Act 2 on the completeness of the financial reports generated by the unit* both annual and interim. The presumption in this item was that the utilization of the uniform system would encourage the municipal officials to expand the scope of the reports and that the new chart of accounts and other materials provided by the Department of Treasury might serve to assist them in doing so. The Budgeting and Financial Management Operations category of the Accounting and Reporting requirement division of the Benefits section contained six individual items. In the first question the respondent was asked to evaluate the effect of Act 2 with respect to the unitvs ability to classify expenditures by activity. As indicated in Chapter II of this study* the MBlue Book” strongly emphasizes the use of a functional classification for expenditures* with each consisting of a group of activities or programs.^ In this important respect the chart of accounts in the Michigan uniform accounting system followed closely the pattern developed in the ''Blue Book” ) and the presumption in this item was that the activity classification would result* at least ultimately* in a distinct benefit for the units* all of which are now obligated by statute to employ it. In the second question the respondent was asked to evaluate the effect of Act 2 with respect to the unit's ability to budget by ^National Committee on Governmental Accounting, op. cit.* p. 13, 104 activity. The presumption in this item was that, since the unit now has been required by Act 2 to record expenditures by activity, it might have been encouraged thereby to budget them accordingly, thus avoiding the burden of translating budget data developed by line item into actual data developed by activity. In the third question the respondent was asked to evaluate the effect of Act 2 on the ability of the unit to correlate budgeted and actual amounts. The presumption in this item involved two aspects. First, it might be assumed that the higher accounting and reporting standards contemplated by the enactment and implementation of Act 2 might have encouraged the local units of government to budget more carefully and to exert extra effort to operate within a given budget once it had been formulated. Secondly, and more specifically, assuming that a given local unit recorded expenditures by activity, as required by statute, and also decided to budget by activity, in order to maintain comparability between actual and budgeted data, it might be expected that improvement in correlation between them would almost necessarily result. In the fourth question the respondent was asked to evaluate the effect of Act 2 on the development of program budgeting by the unit. For purposes of this question, "program budgeting" could be viewed as long-term budgeting for individual projects, a step in the direction of output measurement, or a sub-category of activity budgeting. As indicated in earlier chapters, various aspects of the subject of program budgeting have become increasingly important in the recent governmental accounting literature. Further, it might have been expected that the emphasis placed on recording expenditures by activity 105 both in the "Blue Book" accounting system and in the Michigan uniform accounting system might have evolved into the extensive employment of program budgeting by the various local units of government. However, m y preliminary interviews in connection with this research did not indicate any apparent trend in this direction. Typically, the reaction to the mention of program budgeting was one of indifference. More strongly, the executive canmittee at the State level of the Municipal Finance Officers Association reacted with a mild amount of hostility to the suggestion that the Michigan uniform accounting system might have been expected to have encouraged the development of program budgeting by the municipalities. However, on a more optimistic note, the 1974-75 budget of the City of Ann Arbor, which was not included in the random sample in this research, displays a definite trend toward both program budgeting and output measurement in a number of departments. 8 In the fifth question the respondent was asked to evaluate the effect of Act 2 on the ability of the unit to measure the performance of employees or to evaluate the output of projects. As indicated in the "Blue Book," the particular significance of the classification of expend!tures by activity is that it makes possible the measurement of 9 efficiency of operation by providing unit cost figures. Thus, performance measurement and output evaluation might have been expected to have been an outgrowth of recording expenditures by activity and of program budgeting. Attempts by the City of Ann Arbor to direct their Q A complete list of the departments in which the City of Ann Arbor employs program budgeting and output measurement appears in Appendix F to this chapter. q National Committee on Governmental Accounting, op. c i t . , p. 13. efforts in this respect were given in connection with the preceding 106 item. In the sixth question the respondent was asked to evaluate the effect of Act 2 on the performance of the unit with respect to the area of cash management. One aspect of this item refers to the ability of the municipal officials to have sufficient funds available for the liquidation of obligations as they become due in order to avoid heavy reliance upon borrowing, especially in a period of relatively high interest rates* The other aspect refers to the ability of the municipal officials to keep excess funds invested at the maximum available rates of return, especially in a period when those rates of return are unusually attractive. The availability in recent years of federal revenue sharing funds which are not expended immediately following their receipt has strengthened the importance of the latter aspect. Although the uniform system did not provide specific guidelines for the management of cash, it might be expected that its introduction might have served both to increase the awareness by municipal officials of cash management problems and to provide a chart of accounts in which cash transactions could be recorded and traced smoothly. The "Other** category of the Accounting and Reporting requirement division of the Benefits section contained two individual items. In the first question the respondent was asked to evaluate the effect of Act 2 on the ability of the unit to improve its own functioning by receiving information and assistance from other local units of government. The presumption in this item was that the establishment of a uniform chart of accounts might enhance the ability of the various local units to record similar transactions in the same manner, thus improving the comparability of the results. Consequently, the units would then enjoy a heightened ability to obtain useful information and assistance by 107 communicating with one another. In the second question the respondent was asked to contribute and to evaluate additional ways in which the unit might have been affected by the Accounting and Reporting requirement of Act 2. This item was intended to be completely open-ended, and all of the feedback received was welcomed. Auditing Benefits. The Auditing requirement division of the Benefits section contained four individual items. In the first question the respondent was asked to evaluate the effect of Act 2 on the ability of the unit to file its financial statements and reports promptly. Essentially, the basis for this item was the existing requirement that the financial statements and reports of each municipality, with the CPA audit certificate enclosed, must be filed with the Bureau of Local Government Services within four months after the close of the fiscal period covered. From the reactions obtained in the interviews, it was not clear whether to expect a positive or a negative benefit. Some of the interviewees believed that the time limit for filing would encourage the units to employ a CPA as quickly as possible after the close of the fiscal period and to file its audited financial report at the earliest opportunity. On the other hand, other interviewees suggested that the delays involved in the obtaining of the CPA auditors might cause the completion of the audited financial reports to be postponed beyond the date When their preparation might have been terminated otherwise. In the second question the respondent was asked to evaluate the effect of Act 2 with respect to the benefit obtained by the unit from 108 the implementation of the audit recommendations made by the CPA auditor at the close of the audit engagement* In general, the presumption in this item was that the local units of government would very probably benefit from the implementation of the audit recommendations; indeed, as mentioned in Chapter III of this study, this had been one of the primary reasons for the enactment of Act 2. However, in my interviews I uncovered two important qualifications to this presumption. First, it became apparent that some of the more sophisticated units which enjoyed internal auditing of a high quality did not necessarily view the reconmendations of an independent auditor as being worthy of implementation merely because they had been offered in the audit report. Secondly, in many units where the recomnendations of the CPA auditor were considered worthy of implementation, no attempt was made by the unit to implement them, often resulting in the same recommendations being made at the time of each audit. In the third question the respondent was asked to evaluate the effect of Act 2 on the ability of the council members or board members of the unit to understand the financial report when it was presented by the CPA auditor. Although the presumption of this item was that the presence of the CPA auditor at the presentation of the report would serve to enhance the understanding of it, it has become apparent that this has not occurred in every case. As mentioned in Chapter V of this study, one particular township replied on the questionnaire that the increased length and complexity of the report was causing a loss of interest in the audience gathered for the presentation of it. In the fourth question the respondent was asked to contribute and to evaluate additional ways in which the unit might have been affected 109 by the Auditing requirement of Act 2, This item was intended to be completely open-ended, and all of the feedback received was welcomed. Accounting and Reporting Costs. The Accounting and Reporting requirement division of the Costs section of the questionnaire consisted of nine individual items. Of those nine items, the Space category contained only one. In this question the respondent was asked to evaluate the effect of Act 2 on the acquisition, either through purchase or construction or by rental, of additional space by the unit. Since during the course of the interviews I had observed that some of the units interviewed were in the process of creating or acquiring additional space for administrative operations, it seemed appropriate to inquire on the questionnaire with respect to a possible Act 2 influence on space acquisition. However, with very few exceptions, the feedback on this item was not indicative of an Act 2 effect. The Data Processing and Operating category of the Accounting and Reporting requirement division of the Costs section contained three individual items. In the first question the respondent was asked to evaluate the effect of Act 2 on the labor costs paid by the unit in the form of salaries to those individuals associated with its accounting and bookkeeping operations. In order to keep the questionnaire from becoming any longer than it already was, no attempt was made to interpret this item. Ideally, however, matters such as whether or not the salaries of payroll clerks should be included and whether or not the elected clerk*s time should be allocated between bookkeeping and other duties should be spelled out. In the second question the respondent was asked to evaluate the effect of Act 2 on the cost of bookkeeping services performed by a CPA firm or other outside accounting firm* When this item was inserted into the quest!onnaire, it had a very specific purpose* During the course of 1X0 the interviews* it had become apparent to me that some of the local units of government* instead of performing their own bookkeeping operations* were taking advantage of the computerized bookkeeping services offered by local CPA firms. Reference to an article describing one of these was made in Chapter II of this study, and it appears to me that the trend in this direction is gaining strength. However, on the completed questionnaires I observed an unfortunate tendency to confuse this item with the "Auditing” item at the end of the Costs section; and it was necessary for me to distinguish very carefully between the responses to these two items. If I were to repeat this type of effort in the future, I should want to specify clearly the exact intention of the "bookkeeping services" item. In the third question the respondent was asked to evaluate the effect of Act 2 on the cost of record books, journals* and supplies used in the accounting and bookkeeping operations. Although to a great extent the costs of acquiring these items would continue regardless of the bookkeeping system being utilized* it was occasionally brought to my attention during the course of the interviews that the existing stationery in use by a given unit had not been sufficient for the new uniform system and that it had been necessary to acquire new materials. Even though most of the impact of such a cost would have occurred initially* to the extent that the new materials might have been more expensive than the old ones, a certain marginal cost might be expected to continue. Ill The Equipment category of the Accounting and Reporting requirement division of the Costs section contained three individual items. In the first question the respondent was asked to evaluate the effect of Act 2 on the purchase or rental of a copying machine. Although the connection between this Item and Act 2 appears to be tenuous* I discovered an example of it during one of my interviews. One of the anticipated aspects of the impact of Act 2 was that it might stimulate the local units of government to emphasize more strongly the publication of their financial affairs. Concurrently, it was hoped that the citizens might be encouraged to develop a heightened interest in the financial affairs of local government. One way to accomplish this would be for the local unit to utilize a copying machine for the purpose of creating and then circulating a large number of copies of its financial reports. In the second question the respondent was asked to evaluate the effect of Act 2 on the purchase or rental of a bookkeeping machine, an accounting machine, or a calculator. This item was included in order to attempt to discover if the uniform system had created an additional work load sufficiently great to force the local units to purchase additional accounting, bookkeeping, or arithmetical equipment. In the third question the respondent was asked to evaluate the effect of Act 2 on either the purchase or rental of a computer or the purchase of computer time. Since some of the local units indicated that they had been in the process of switching to a computerized system at approximately the time that Act 2 was implemented, a clear cause-and- effect relationship might not be apparent in this item. Nevertheless, it is very possible that the implementation of Act 2 might have encouraged a given unit to adopt computerization more quickly than it 112 would have done so otherwise. The Education category of the Accounting and Reporting requirement division of the Costs section contained just one item. In this question the respondent was asked to evaluate the effect of Act 2 on the attendance by representatives of the units at in-service training sessions, such as classes, conferences, or workshops, or on the purchase of manuals or other instructional materials. From the information gathered in the interviews, this item was expected to be especially important in terms of the number of units affected by it. Throughout the history of the enactment of Act 2 and the creation and implementation of the Michigan uniform accounting system, information with respect to the purpose and contents of the system has been disseminated either through personal contact or by means of books and other instructional materials. To a very great extent, this has become an ongoing educational process as those units which employ hired accountants acquire new personnel and as new officials are elected in those units which rely on elected officials for the performance of accounting duties. The "Other** category of the Accounting and Reporting requirement division of the Costs section contained just one item. In this question the respondent was asked to contribute and to evaluate additional ways in which the unit might have been affected by the Accounting and Reporting requirement of Act 2. This item was intended to be completely open-ended, and all of the feedback received was welcomed. Auditing Costs. The Auditing requirement division of the Costs section contained just one item. In this question the respondent was 113 asked to evaluate the effect of Act 2 on the total cost incurred by the unit for auditing, by CPA firms. During the course of the interviews, it was apparent that this item would be especially important, both in terms of the number of units affected by it and in terms of the dollar amounts involved in it. In their responses several of the units suggested that the higher auditing costs brought about by the auditing requirement of Act 2 were the temporary result of the CPA auditor*s time and efforts devoted to installing the uniform system rather than the ongoing result of auditing the system once it had been installed. Since the cost of auditing appears in the uniform system in a single account, and since this particular aspect had not been brought to my attention during the interviews, I had not segregated the cost of installing the uniform system into a separate item. However, it now appears that at least some of the units in the sample might have been able to break out that portion of the auditing cost represented by the installation of the uniform system from the remainder of the auditing cost if they had been asked to do so. Selection of the Sample As a preliminary step in the selection of the sample, I arranged all cities, villages, and townships in Michigan in the order of their 1970 populations. The sources from which I obtained my information are indicated below in footnote form.^^' E d m o n d W. Alehin, Selected Population Data for Michigan*s Minor Civil Divisions by County, East Lansing, Michigan: Institute for Community Development, Michigan State University, June, 1972. ^ M i c h i g a n Townships Association, Directory of Township Officials, 1971-1973. After the preliminary step had been completed, the exact content of the sample was finalized. Each local unit of government within each of 114 the three categories of municipalities, namely, cities, villages, and townships, was assigned a number representing its rank by population within its respective category. Each category was then divided into four cells, containing approximately 10%, 2 0%, 30%, and 40%, respectively, of the units in that category, with the exact dividing lines being determined by the observation of natural breaks. Next, a random sample of numbers was selected from a random number table up to the following maximums without duplicationi cities— a total of 40 with ten in each cell; villages— a total of 40 with ten in each cell; townships— a total of 120 with 30 in each cell. 12 During the process of obtaining names and addresses to which the questionnaires might be sent, I discovered that Farmington Township had become the City of Farmington Hills and that the Village of Houghton had become the City of Houghton. Also, it was indicated later on the returned questionnaire that the Village of Petersburg had become the City of Petersburg. Thus, the exact number of cities, villages, and townships in the sample became 43, 38, and 119, respectively, although it is conceivable that it might have been 40-40-120 during the time period to which the reported data pertain. The exact content of each of the twelve cells is given in Appendix G to this chapter. The Michigan Townships Association office in Lansing provided for me a mailing list of the names and addresses for the townships, from For this purpose I employed the random number tables in Herbert Arkin, Handbook of Sampling for Auditing and Accounting, Volume I — Methods, New York* McGraw-Hill Book Company, Inc., 1963, pp. 242-295. 115 which I was able to select those needed for the sample. I obtained the names and addresses for the cities and villages from the Michigan Municipal League library in Ann Arbor. The questionnaires were addressed to city mayors, village presidents* and township supervisors. They were mailed to the addresses of municipal offices of those municipalities for which central mailing addresses were available; where central mailing addresses were not available* they were mailed to the home addresses of the mayors, presidents* or supervisors. All 200 of the questionnaires were mailed at precisely the same time. Thirteen days later, only eighteen of the 200 had been returned. On the following day I initiated a long series of telephone calls to the offices of many of the municipalities which were slow to respond. Where telephone numbers for municipal offices could not be located* I attempted to reach the city mayors, village presidents, or township supervisors at home except in cases where their home telephone numbers could not be located* either. Although on two consecutive days I utilized the telephone lines of the Department of Treasury at their expense* most of the calls were made from my own telephone, where I could benefit from the advantage of a private line. In all cases I offered to send duplicate questionnaires if there was any uncertainty concerning whether or not the questionnaire had been received or, if it had been received, whether or not it was still available. Within a period of approximately three weeks* I had contacted almost all of the cities and villages Which had not responded and some of the townships. About two months after the initial mailing* I mailed postcard reminders to 83 municipalities which had not responded and for which appropriate officials had not been reached by telephone. In the cases 116 of ten units, either the phone had not been answered or the specific person called had not been available} the remaining 73 were t w n s h i p s which had not been called. I offered to mail duplicate questionnaires to those who called roe at my expense, and several accepted this offer. In spite of these efforts, it had been virtually impossible to obtain responses from the municipalities in cell V4, the smallest villages. Thus, shortly after mailing the postcards, I mailed duplicate questionnaires to the CPA firms which audited seven of the eight villages in cell V4 which had not responded} in one case no CPA firm had been selected for the current or previous fiscal year. Only one CPA firm returned a completed questionnaire} another wrote a letter explaining that his client had not yet adopted the uniform accounting system} a third CPA refused to complete the questionnaire on the grounds that it would not be "legal" for him to divulge information concerning a client*s records; the remaining four did not respond. Some of the reactions received during the course of the telephone calls should be especially noted. The finance director of a large city admonished me sharply for not having addressed the questionnaires to the finance directors rather than the mayors or other elected officials and warned roe never again to repeat the "mistake." The clerk of a large village and the president of another large village admitted that their municipalities had not adopted the uniform accounting system. The president of a small village and the supervisor of a large township expressed the following sentiment. Paraphrased, each said, "If I can be convinced that my completion of this questionnaire is primarily for your personal benefit rather than for the benefit of the State of Michigan, I shall be happy to respond. Otherwise, I shall not respond." 117 In both cases these individuals were far more willing to serve a private citizen in need than to respond to what they considered to be a State bureaucracy, and in both cases responses were received. This was a surprising reaction since during the course of the interviews I had been led to believe that exactly the opposite would be true. The president of a small village appeared to be most agreeable during our telephone conversation and promised to see that the questionnaire was returned. Subsequently, he wrote a letter explaining that the original questionnaire had been "destroyed** and requesting a replacement. Since he did not have m y home address, he mailed the letter in care of Michigan State University, incorporating a long apology that, no matter how difficult it might be for the University to locate one student among more than 40,000, he would appreciate their best efforts. I shall not keep the reader in suspensei the University "located** me effortlessly in a very short time; the replacement questionnaire was in the mail within hours after I obtained the request; and no response to the replacement was ever received. On two previous occasions the clerk of a large township had adopted an attitude of having been somewhat above what he considered to be the relatively routine requirements of Act 2 and had failed to respond to the questionnaire. As a reaction to my postcard, I received a surprise telephone call eighteen days later from the deputy treasurer and mailed a replacement questionnaire. Upon receiving the response from the deputy treasurer, I learned that the township until quite recently had been ignoring the uniform accounting system requirement of Act 2 and merely pretending to be in conformance with the Act. The Questionnaire for the Auditors 118 For each responding municipality* a slightly shorter hut similar questionnaire was sent to its CPA firm. The questions pertained primarily to the auditors* impressions of the municipality's Act 2 costs and benefits* and the responses were used to substantiate those from the units themselves. This questionnaire solicited the following information. (1) With respect to the given unit* (a) A rating on a scale by an auditor with respect to the general impact of the implementation of Act 2 on each of the ten cost items. (b) A rating on a scale by an auditor with respect to the general impact of the implementation of Act 2 on each of the twenty benefit items. (c) A rating by an auditor with respect to the quality of the accounting and bookkeeping operations, both before and after the implementation of Act 2. (2) Six items, three of which solicited ratings on scales by an auditor, which dealt with the impact of Act 2 on the CPA firm itself. (3) The questionnaire was not completely closed-ended$ after each item possible comments were solicited from the auditor. During the process of receiving the responses from the municipalities in the sample, the firm decision was made to mail the auditors* questionnaire to the CPA firms which had audited all of the local units of government which had responded to the municipalities' questionnaire. Prior to the couplete finalization of the auditors' 119 questionnaire, the final rough draft of the document was submitted to two selected CPA firms for their inspection and comments. A brief chronology of these interviews appears in Appendix H to this chapter. Although the complete text of the questionnaire for the auditors appears in Appendix I to this chapter* the following section contains a brief discussion of its contents. Benefit and Cost Items. The twenty benefit items and ten cost items in the auditors* questionnaire were exactly the same as their counterparts in the municipalities* questionnaire with two exceptions. First, although the "Yes or No" questions in the Benefits section were retained in the auditors' questionnaire, those in the Costs section were omitted. While assembling the items to be included in the auditors* questionnaire, I dropped the "Yes or No" questions from the Costs section because I felt that the responses to them would not make a significant contribution to the conclusions reached by the study. Secondly, and more importantly, the requests for specific dollar amounts in the Costs section were not included in the auditors* questionnaire. The omission of the requests for dollar amounts occurred because it was felt that the auditors might not be able to obtain this type of information without actually consulting the records of their clients, and this would need to be done on the premises of their clients. Quality Item. In addition to the various benefit and cost items, the auditors* questionnaire contained a question dealing with the general quality of the accounting and bookkeeping operations of their clients, both before and after the implementation of Act 2, Although I anticipated that the implementation of Act 2 would either improve the quality of the operations or have no effect on it, one CPA auditor 120 indicated that the quality of his client's operations had actually declined. The reason for inserting this control variable was to attempt to discover an association between this item and the data obtained from the benefit and cost items in the questionnaires. Effects of Act 2 on the Auditors. Finally, the auditors* questionnaire contained a series of six items dealing with the effects of Act 2 upon the auditors themselves. In the first question the auditor was aslced to indicate the number of local units of government in Michigan (cities, villages, and townships) which have been audited regularly by his particular office. This question was inserted as a control variable in order to attempt to discover an association between this item and the three items which immediately followed it dealing with costs and billings. In the second question the auditor was asked to indicate a rating of the additional costs incurred by his office as a result of education or retooling required by Act 2. The education costs might involve two aspects. First, the auditors themselves might incur additional oasts for their attendance at classes, conferences, or workshops or for the purchase of books or other instructional materials. Secondly, the auditors might incur marginal costs for the purpose of holding educational sessions on behalf of their clients, especially those with a large number of municipal clients who were willing to meet in group sessions. In addition, the retooling costs might be substantial in those cases where the CPA firms had developed computer programs for the Michigan uniform accounting system to be used on their own computers. In the third and fourth questions the auditor was asked to indicate ratings of the changes in billable time required to perform a typical 121 municipal audit as a consequence of Act 2, both immediately after the implementation of the Act and over a period of several years thereafter. The p r e s m p t i o n in these items was that a substantial increase in billable time would occur immediately after implementation as a consequence of installing and launching the uniform system for municipal clients. Presumably, once the system had been installed and launched, the billable time would either increase to a lesser extent, but still remain greater as a result of auditing a larger system, or even decrease as a result of efficiencies acquired in auditing the new system. In the fifth and sixth questions the auditor was asked to identify consulting services developed as a consequence of Act 2, for both accounting decisions and decisions other than those of an accounting nature. These items were intended to be completely open-ended, and all of the responses received were welcomed. After the exact content of the questionnaire had been finalized, the office of the Michigan Association of Certified Public Accountants in Southfield provided for me a mailing list of the CPA firms to be included. Most of the 74 questionnaires which went to CPA firms were mailed at precisely the same time. Since fourteen of the firms received two questionnaires each, only 60 envelopes were actually mailed. No single firm received more than two questionnaires. In order to establish a cutoff date, only replacements were mailed after the sixteenth day following the original mailing. One of the 74 was mailed to the auditor of a large township which had not responded to the former questionnaire because the township supervisor had specifically requested over the telephone that one be sent to the auditor. In the case of another large township a questionnaire was not sent to the auditor even though the township had responded to the former questionnaire because the auditor had clearly completed and signed the township's 122 questionnaire. In general, the auditors responded more rapidly to their questionnaire than the municipalities had responded to theirs. Within a period of 21 days, 21 responses had been received. Over a period of two days thereafter, I made telephone calls to the offices of all of the CPA firms which had not yet responded. All of the calls were made from my own telephone, where I could benefit from the advantage of a private linej and all of the CPA firms were successfully contacted. As a result of these calls, five replacement questionnaires were mailed in response to specific requests for them. Responses from the Municipalities* Questionnaire Altogether, 86 responses have been received from the municipalities* questionnaire. The exact content of the response portion of the sample is given in Appendix J to this chapter. Units Whose Auditors Received Questionnaires As indicated above, auditors* questionnaires were mailed to 74 of the CPA firms which had audited the municipalities that had responded. The exact content of this portion of the sample is given in Appendix K to this chapter. Responses from the Auditors* Questionnaire 123 Altogether, 54 completed responses have been received from the auditors* questionnaire. 13 The exact content of the response portion of the sample is given in Appendix L to this chapter. Scoring of the Results The following three chapters present the results obtained from the procedures described here. Before examining those results, a brief presentation of the method of scoring the questionnaire responses is in order. In the benefit sections of the questionnaires for both municipalities and auditors, the respondent was presented a scale line and asked to select one choice among "Large Beneficial Effect," "Small Beneficial Effect," "Inmaterial," "Small Negative Effect," and "Large Negative Effect." Some respondents used the "Comments" column to write in "None" or "Not Applicable." Often there was no response at all to a given item. The scoring procedure was as follows. A "Large Beneficial Effect" counted + 2 | a "Small Beneficial Effect" counted + lj a "Small Negative Effect" counted - 1; and a "Large Negative Effect" counted - 2. "Immaterial," "None," "Not Applicable," and "No Response" did not receive scores although they were included in the overall tabulation and counted for purposes of averaging the results. Consequently, the "Large Benefit" range is from + 1.5 to + 2.0* the •*Small Benefit" range is from + 0.5 to + 1.5; the "Immaterial" range is In addition, three blank questionnaires were returned but not counted in this total since there was less emphasis on the composition of the cells with respect to the auditors* questionnaires. 124 from - 0,5 to + 0.5; the "Small Negative" range is from - 0,5 to - 1,5; and the "Large Negative" range is from - 1.5 to - 2.0. Similarly, in the cost sections of the questionnaires for both municipalities and auditors, the respondent was presented a scale line and asked to select one choice among "Large Cost," "Small Cost," ’'Immaterial," '•Small Cost Saving," and •'Large Cost Saving." Again, some respondents used the "Comments" column to write in "None" or "Not Applicable." Quite often there was no response at all to a given item. The scoring procedure was as follows. A **Large Cost" counted + 2; a "Small Cost" counted + 1; a "Small Cost Saving" counted - 1; and a "Large Cost Saving" counted - 2. "Inmaterial," "None," "Not Applicable," and "No Response" did not receive scores although they were included in the overall tabulation and counted for purposes of averaging the results. Consequently, the "Large Cost” range is from + 1.5 to + 2.0; the "Small Cost" range is from + 0.5 to + 1.5; the "Immaterial" range is from - 0.5 to + 0.5; the "Small Cost Saving" range is from - 0.5 to - 1.5; and the "Large Cost Saving" range is from - 1.5 to - 2.0. The same general pattern was used in the auditors* questionnaires for the three items dealing with the costs and billings of the CPA firms. In this case, however, no attempt was made to compute benefit/ cost ratios. Example of the Scoring of the Results As an example. Table 9 presents the results obtained from the first benefit item— "Accuracy" of Accounting and Bookkeeping Operations. The cell containing the largest cities included eleven of them, of which nine responded to the municipalities* questionnaire. Table 9 "ACCURACY" Units' Self-Ratings and Ratings by Units' Auditors Number of Units in Sample A U 9 11 4 10 4 11 11 6 43 51 5 9 2 9 3 10 2 10 12 38 14 29 30 8 9 30 8 30 All Townships TT9 39 74 Cell Cl C2 C3 C4 All Cities VI V2 V3 V4 All Villages Tl T2 T3 T 4 All Units 200 Number of Respon­ dents U 9 4 5 6 54 6 3 3 5 17 17 9 10 9 45 86 A 7 3 2 5 17 5 1 2 1 9 10 4 8 6 58 54 Large Bene­ ficial Effect A 1 2 0 1 4 Small Bene­ ficial Effect U A U 3 2 4 1 1 1 0 0 1 4 2 3 8 5 9 3 “T 1 "I T 1 0 2 1 1 2 0 0 2 3 1 9 4 7 6 3 5 1 1 4 4 3 3 2 0 1 0 3 4 3 3 2 16 15 rs T 5 23 34 19 22 0 0 1 2 2 1 3 1 7 15 Imma­ terial or None U 2 1 3 0 6 Small Nega­ tive Effect A 0 0 1 0 U A 0 3 1 0 1 1 0 0 4 1 T ~5 0 0 0 0 0 0 0 2 0 1 0 0 0 1 2 1 3 “5 4 9 0 0 0 1 1 0 0 0 0 0 2 Large Nega­ tive Effect A 0 0 0 0 0 T 0 T 0 0 0 0 0 0 0 0 0 0 U 1 0 0 0 1 0 0 0 0 0 0 0 0 0 0 1 No R e ­ sponse u A 0 0 0 0 0 0 0 1 0 0 0 0 0 0 1 0 0 0 1 1 l 0 2 4 2 0 2 1 5 10 Total Score (Units x Ratings) U 8 2 1 8 19 7 4 5 4 50 20 11 9 5 45 84 A 5 5 - 1 6 15 4 2 3 - 1 8 12 5 11 8 36 59 N> Ul Average Score per Unit A U .71 .89 1.67 .50 - .50 .20 1,20 1.33 ,88 .79 ,80 1.17 2,00 1.33 1.50 1.67 - 1.00 .80 .89 1.18 1.20 1.18 1.25 1,22 1,38 .90 1.33 .56 1.29 1.00 1.09 .98 It should be noted that the complete list of municipalities in the sample and their populations is given by cell in Appendix G to this chapter. 126 The results from the municipalities indicatei Large Benefit— 4j Small Benefit— 2j Immaterial or None— 2j Large Negative— 1. The Large Benefits counted two points each* and the Small Benefits counted one point eachj however, two points were subtracted for the Large Negative. Thus, the total score for that line was 8j and the average score per unit was .89. Since .89 is between + 0.5 and + 1.5, it should be interpreted as a "Small B e n e f i t 39% up from the bottom of the category. The results from the auditors indicate* Large Benefit— lj Small Benefit— 3j Immaterial or None— 3. The Large Benefit counted two points, and the Small Benefits counted one point each. Thus, the total score for that line was 5j and the average score per unit was .71. Since .71 is between + 0.5 and + 1*5, it should be interpreted as a "Small Benefit,** 21% up from the bottom of the category. Similar calculations have been made for each of the other cells of smaller cities and for all of the cities combined, for each of the size classes of villages and for all of the villages combined, for each of the size classes of townships and for all of the townships combined, and for all of the municipalities combined. 127 Appendix A to Chapter IV EXPLORATORY INTERVIEWS April 11, 1973— Mr. James J. Bolthouse. Deputy Treasurer in the Bureau of Local Government Services— in order to solicit his ideas with respect to a useful topic and to discuss the topic under consideration. April 18, 1973— Mr. Donald Moore, Treasurer of Lansing Charter Township, Ingham County— in order to attempt to determine the effects of Act 2 on his township. April 19, 1973— Mr. Kenneth VerBurg, Associate Professor in the Institute for Community Development at Michigan State University— in order to obtain his ideas with respect to the structure and content of the study. May 4, 1973— Mr. Guy Larcom, former Administrator of the City of Ann Arbor— in order to obtain the experience of Ann Arbor with respect to the effects of Act 2. Ann Arbor was considered to be an especially good candidate for the preliminary interviews because of its recent experiments with program budgeting. Ma y 4, 1973— Mr. Patrick Kenney, Assistant Administrator of the City of Ann Arbor— in order to obtain his viewpoint with respect to the effects of Act 2 on Ann Arbor and with respect to the experience of Ann Arbor with program budgeting. May 8, 1973— Mr. Kenneth Sheehan, Assistant Administrator for Finance of the City of Ann Arbor— in order to obtain his viewpoint with respect to the effects of Act 2 on Ann Arbor and with respect to the experience of Ann Arbor with program budgeting. August 8, 1973— Mr. Richard Jones, CPA, of Hungerford, Cooper, Luxon A Co. in Taylor— in order to discuss the feasibility of the study with respect to both structure and content. Mr. Jones endorsed the direction of the research, and his firm later participated in the questionnaire stage. August 13, 1973— Mr. Kenneth Kunkel, CPA, of Plante A Moran in Southfield— in order to discuss the feasibility of the study with respect to both structure and content. Both Mr. Kunkel and his firm later participated in the questionnaire stage of the research. August 14, 1973— Mr. Robert Pell, CPA, of Arthur Young A Co. in Detroit— in order to discuss the feasibility of the study with respect to both structure and content. September 11, 1973— Mr. Roger J. Schafer, CPA, of Seidman A Seidman in Lansing— in order to discuss the feasibility of the study with respect to both structure and content. Mr, Schafer partially endorsed the direction of the research, and both he and his firm later participated in the questionnaire stage. 128 Appendix B to Chapter IV ADDITIONAL EXPLORATORY INTERVIEWS December 12, 1973— Mr* Robert Hegel, Assistant to the Director of the Michigan Municipal League--in order to solicit his suggestions for cities and villages which might have been Included in the interview stage of the study. Although Mr* Hegel was willing to grant me a brief interview and to endorse the general direction of the research, he denied my request to suggest municipalities to be interviewed on the grounds that he did not believe that the identification of individual local units of government for research purposes was a legitimate function of his office. January 21, 1974— Dr. Alexander Kloster, Associate Professor of Administration & Higher Education at Michigan State University— in order to obtain his reaction with respect to the feasibility of the study. Dr. Kloster strongly endorsed the structure and content of the study and volunteered his services as a potential member of the faculty committee. I refused with much gratitude his offer on the grounds that the composition of the faculty committee had already been completed. February 7, 1974— Col. Joseph Part si. Executive Director of the Michigan Townships Association— in order to solicit his suggestions for townships which might have been included in the interview stage of the study. Col. Paris! strongly endorsed the general direction of the research and promised his complete cooperation, not only with respect to the selection of townships to be interviewed, but also to the extent of providing for me an official letter of introduction and endorsement for presentation to township officials. March 5, 1974— Mrs. Shirley Smith, Manager, Publications and Research Division, of the Michigan Municipal League— in order to request an official letter of introduction and endorsement for presentation to city and village officials. The letter was subsequently provided and signed by Mr. Robert Fryer, executive director of the Michigan Municipal League. April 11, 1974— Executive committee of the Municipal Finance Officers Association at the Capitol Park Motor Hotel in Lansing— in order to request an official letter of introduction and endorsement for presentation to city and village officials. The letter was subsequently provided and signed by Mr. John J. Lamerato, General Manager of the Southeastern Oakland County Water and Incinerator Authority. Although I also solicited the committee's suggestions for cities and villages which might have been included in the interview stage of the study, ray request was denied on the grounds that the committee did not believe that the identification of individual local units of government for research purposes was a legitimate function of the Association. However, the committee pointed out to me that I retained the legal privilege of being able to interview any local units of my own choosing. 129 April 25, 1974— -Mr. James Hogan, CPA, of Coopers & Lybrand in Detroit— >in order to discuss the feasibility of the study with respect to both structure and content. November 20, 1974— Senator Robert VanderLaan— in order to obtain background material for the research. Senator VanderLaan very graciously provided background material, much of which is incorporated in Chapter I of this study. 130 Appendix C to Chapter IV INTERVIEWS FOR THE PURPOSES OF IDENTIFYING AND EVALUATING COST AND BENEFIT ITEMS Identifying March 8 , 197A— Mrs. Marie Grigsby* Clerk of Augusta Township, Washtenaw County. March 11, 1974— Mr. John Flodin, Clerk of Canton Charter Township, Wayne County. April 10, 1974— Mr. Erwin Hawley, Clerk of Napoleon Township, Jackson County. April 17, 1974— Mr. Philip Siegfried, CPA, of Siegfried, Crandall, Vos & Egly in Kalamazoo. April 30, 1974— Mr. John Hepfer, CPA, of Lyle D. Hepfer & Co. in Lansing. May 6 , 1974— Mr. Larry Dirkse, CPA, of Alexander Grant A Co. in Grand Rapids. May 8 , 1974— Mr. Roger Raupp, CPA, Controller of the City of Southgate. May 13, 1974— Mrs. Lucille Griffith, Clerk of the City of Perry, and Mrs. Theodore Cook, Treasurer of the City of Perry. May 14, 1974— Mr. Gordon McCready, CPA, of Touche, Ross 4 Co. in Grand Rapids. May 17, 1974— Mr. Arthur Schlosser, Clerk of Handy Township, Livingston County. May 22, 1974— Mrs. Thelma Spencer, Clerk of Avon Township, Oakland County. May 24, 1974— Mr* Russell Zielesch, CPA, of Skillman, Zielesch & Co., auditor for Shelby Township, Macomb County. Evaluating 131 June 10, 1974— Mr- John Fonger, Finance Director of the City of Holland. June 12, 1974— Mr. Donald Moore, Treasurer of Lansing Charter Township, Ingham County. June 20, 1974— Mr. Bruce Seymore, CPA, Finance Director of the City of Port Huron. 132 Appendix D to Chapter IV MUNICIPAL OFFICIALS SELECTED T O REVIEW THE QUESTIONNAIRE May 5, 1975— Mr. John Flodin, Clerk of Canton Charter Township* Wayne County. Mr. Flodin promised to review and return the questionnaire but never responded. May 6 i 1975— Mr. Patrick Kenney, Assistant Administrator of the City of Ann Arbor. Mr. Kenney promised to have the Controller's office review the questionnaire. Their cocmients were received on May 21. May 7, 1975— Mr. Roger Raupp, CPA, Controller of the City of Southgate. Mr, Raupp reviewed the questionnaire immediately in his office and made many helpful comments. May 12, 1975— Mrs. Mary Garrett, Accountant for Ypsilanti Township, Washtenaw County. Mrs. Garrett responded to the questionnaire in the form of a pre-test. The returned questionnaire arrived in the mail on May 14. May 20, 1975— Mr. Donald Moore, Treasurer of Lansing Charter Township, Ingham County. Mr. Moore reviewed the questionnaire immediately in his office and made helpful cocmients. Appendix E to Chapter IV THE QUESTIONNAIRE FOR THE MUNICIPALITIES 133 MI CHI GAN STATE UNI VERSI TY lut c o h i m m m nuunoN — w o • M i m m »• commumitv duiw w k t amd tnncu - mioco c i m u This is an invitation to your Municipality to participate in a coet- banafit analysis of tha uniform accounting Act — Public Act 2 of 1968. This statute required all local units of government in Michigan (1) to adopt the uniform accounting system and to submit annual financial reports to the State Department of Treasury and (2) to undergo regular audits by CPA f i n s . The enclosed questionnaire has been prepared for the purpose of helping you to determine tha experience of your municipality with respect to the costs and benefits produced by the isplesmntation of the Act 2 requirements. Although the questionnaire is spread out across several pages, its design should make it relatively easy to coexists i and explanations of individual items have been provided where necessary. Your response will enable me to compare the experience of your unit with that of other units in my doctoral research at Michigan State University. The project is being undertaken in cooperation with the State Department of Treasury, the Michigan Townships Association, the Michigan Municipal League, the Municipal Finance Officers Association, and the Instituts for Community Development at Michigan State University. It carries tha endorsement of all of these organisations, and the results obtained will be provided to them. I should appreciate your passing along this questionnaire to that person in your municipality who has the chief responsibility for its accounting and bookkeeping operations. A steeped envelope addressed to the Institute for Community Development at Michigan State University has been enclosed for your response. After the results have been determined, I shall be pleased to mail a concise sternary of thsm to those respondents who indicate that they wish to receive it. Thank you very much in advance for your willing participation in this project and your p r o ^ t return of the questionnaire. Please accept my best wishes for a successful 1975. Richard E. Charlton, Jr. c c L M - X 134 - 2- PREL1MINARY QUESTIONS Before beginning the questionnaire itself, please provide the information requested below. (1) H i s i of Municipality (2) Does your Municipality employ a professional manager or euperlntendent, in addition to its elected officials, for the purpose of supervising its governsshtal functions? ______ (3) Prior to the implementation of Act 2, did your unit adopt the bookkeeping system racoasBended in Governmental Accounting, Auditing, and financial Reportlng by the National Committee on Governmental Accounting, often referred to as the "Blue Book"? _______ If so, for which fiscal year did your unit first adopt the "Blue Book" system? ________ (4) Regardless of your answer to item (3) above, for which fiscal year did your municipality first adopt the uniform accounting system prescribed by Act 27 ________ (S) Did your municipality first employ a CPA firm for the performance of a If a CPA certified audit prior to the implementation of Act 2? auditor was first employed in 1968 or later, for the financial statements of which fiscal year did the initial engagement occur? ________ (6) Has your municipality received a Certificate of Conformance from the Municipal Finance Officers Association? ______ If so, in what year was it received? ________ Did your implementation of the requirements of Act 2 enhance your ability to qualify for this certificate? ______ 135 -3- QUESTXOMS Ott BENEFITS Possible benefit* resulting from Hct 2 have been divided b * t w w n thoss arising froa tha accounting and reporting raquiraatnt and thoia arising froa tha auditing requirement. Tha t a n "accounting and raporting" refers to tha uaa of tha uniform accounting ayatam and tha annual filing of tha financial raporta in Lansing. Tha tars "auditing" rafara to tha ragular audita by CPA f i n s . For aach itam in tha banafit auction, plaaaa indicate your judgaMnt of tha affact of tha you consider to ba tha most appropriate location on tha acala lina. Also, plaaaa respond to tha "Yea" or "No" questions on tha lines provided in those items where they appear. In addition, if you wish to do so, plaaaa use tha space directly to tha right of aach question to make any c e m e n t s you consider appropriate. ntation of Act I on that i tarn by placing an X in what Example; To what extent has Act 2_ affected the interest of tha citizens of your coaseunity in the financial reports? COMtEHTS ^ U P M t A D n il f> I V 7 t A’ £ S T f H n M Beneficial Effect Large 1 Swell L X _________________ i '' | i 1 IsmwterlaT I Small ' Large Negative negative ^ Effect * r , T l I. Accounting and Reporting. With respect to the accounting and raporting requirement, some possible benefits resulting from Act 2 have been divided into three sections. A. Accounting and Bookkeeping Operations. The first section contains a list of eight items which refer to the accounting and bookkeeping operations of tha municipality. 1. To what extent has tha accuracy of your accounting and bookkeeping operations been affected as a result of Act 2? in this item accuracy refers to the ability to select those accounts which most clearly describe a given transaction. Beneficial Effect . Large ' Small * Immaterial . . .__________ Negative Small ' Large Effect 2. To what extent has the promptness of your accounting and bookkeeping operations been affected as_ a result of Act 27 In this item promptness refers to the length of time required both to select the most descriptive accounts and to prepare financial reports based on those accounts. Beneficial Effect Large ■ . Small ' Immaterial , . Small Large Negative Effect 13 6 COtWEHTS 3. To what u u n t has tha recant change In status of cartaln accounts within tha Act 2_ uniform accounting system from mandatory to optional affactad your accounting and bookksaplng operations? Banaflcial__________ .__________ .__________ ,__________ .__________ Negative Effect L a r g e S m a l l ’i i a t a r l a l Small 1 Large Effact 4, Has Act 2 lad to an attempt by your unit to placs dollar valuas on its holdings of fixed aasats? ______ Zf so, to what extent has your unit baan affactad? Please usa tha apacs to tha right to dascrlba tha effects. Banaflcial___________ |__________ ,__________ .__________ Nagative Effact L a r g a S m a l l 'ImmateriaX Small 1 Large Effact 5. Has Act 2_ lad to tha adoption by your unit of tha modified accrual basis of recording revenues and expenditures? ______ If so, to what extent has your unit been affected? Please use the space to the right to describe the affects. Benef icial___________,__________ ,__________ ,__________ |__________ Negative Effect Large Small immaterial Small ' Large Effect 6. Before Act 2_, was your unit required to file financial reports with the Municipal Finance Commission in Lansing? ______ If so, now that it must file annual reports with the Bureau of Local Government Services, to what extent has your unit been affected by discontinuing reporting to the Municipal Finance Coamiission? Beneficial___________ i_________ . Large Effect Small i Immaterial . Small Larga Negative Effect 7. Has Act 2^ led to the preparation of any additional interim financial reports? ______ If so, what types of interim reports have been added? ______________________________________ How frequently are they prepared? ____________________________ To what extent has your unit been affected by preparing them? Beneficial Effect ■ Large Small ■__________ .__________ i__________ Negative I m a t t r iar Sam 11 Effect Large 8. Has the use of the Act 2 uniform accounting system, especially the classification of expenditures by activity, enabled your unit to prepare sore complete financial reports, either annual or interim? ______ If so, to what extent has your unit been affected by added c o ^ l e t e n e s s in reporting? Beneficial Effect Large I I Small I I___________Negative 'immaterial Small Large Effect 137 - 5- C O W E W T S B. Budg>tii>g and Financial Minigim t Otnratloni. The second section under the accounting end reporting requirenant contains s list of six items which refer to the budgeting and financial management operations of the municipality. For each item in this section, please use the space to the right of the question to describe the effects. 1. To what extent has your unit been affected by the requirement of the Act 2_ uniform accounting system that expenditures be classified by activity? Beneficia1 Effect ____ .__________ . ■ Large ' Small 'ismisteriaf ■ Small Large negative Effact 2. Since your unit is required by Act 2 to record its expenditures by activity, does it also budget by activity? ______ If so, to what extent has your unit been affected? Beneficial Effect . .__________ i__________ •__________ Negative Large Saal1 ’immaterial Small Large Effact 3. If your unit both records and budgets its expenditures by activity, does it achieve a close correlation between budgeted and actual amounts? _______ To what extent has Act 2_ affected this correlation? Beneficial__________ . Effect Large Small ■ I m e U r i t I .__________ |__________ Negative Small Large Effect 4. Mas Act 2_ led to the development of any program budgeting in your unit7 ______ If so, in what areas is it applied? To what extent has your unit been affected in the areas of application? Program budgeting might be long-term budget­ ing for individual projects, a step in tha direction of output measurement, or a sub-category of activity budgeting. Bene f i c lal Effect j large ' Small 'immaterial . . Small * Large ,_____ Nega ti ve Effect 5. Has Act 2_ led to the development of ways to measure the performance of employees or evaluate the output of projects in your unit? ______ If so, in what areas are they applied? _____________________________________________ To what extent has your unit been affected in the areas of application? Beneficial Effect Large ■ ■__________ . Small 'imsmterial Sswll .___________Negativ Effect Large 138 - 6- COMfEKTS 6. Ha* the t M of the Act 2_ uni for* account log system tfftcttd the p « r f o n u n c « of your unit In th* *r** of c**h — naqement? ______ If *o, to what *xt*nt h*a your performance in this area b**n *ff*ct*d? B*n*flclsl__________ | Effact largi Small | I iHittrlal' .__________ M g t t i v * Small ' Large Effect C. Other. The third section under the accounting and reporting requirement contains just two items - 1. Has th* adoption of the Act 2_ uniform accounting system, {by providing a basis for comparability among the units which did not exist previously and enabling them to communicate with on* another more easily with respect to common problems), enabled your unit to benefit from the receipt of information and assistance from other units which would not have been attainable before Act 2? If so, to what extent has this occurred? Beneficial__________ I Effect Large Saw 11 I *1— starla! "Small I I large negative Effect The second item is left open for your suggestions. Can you identify any additional ways in which th* accounting and reporting requirement of Act 2_ has affected your unit? For example, as a result of th* Act 2 uniform accounting system, units that us* computers in their bookkeeping operations might be able to share computer programs with other units. Ill____________________________________ ______ ill------------------------------------- — --- H i__________________________________________ ____ To what extent has your unit bean affected in these additional ways? <1) Beneficial Effect (2 )Beneficial^ Effect large Small terial 11 Large Large Small Immaterial Small Large ^Negative ' Effect Negative Effect ...Beneficial__________ .__________ ,__________ ,__________ .__________ Negative Effect Large 1 Small 'immaterial S m a l l L a r g e Effect 139 - 7- O O M O M T S II. Aud it ing. With rtiptct to th« auditing requirement, tha following list of possible banafita contain* four itasw. If your unit has not yat baan auditad by a CPA tirw, you M y oait this section and procaad to tha naxt paga. A . undar Act 2 tha financial statement* and raport* of your unit, with tha CPA audit cartificata enclosed, Must ba filad with tha Buraau of Local Govarnaant Sarvicaa within four nontha aftar th* close of tha fiscal period covered. Since I M S , what has baan tha experience of your unit with respect to tha promptness of th* filing of tha financial statements and reporta as influenced by tha auditing requirement of Act 27 Horn Prosit __________ . | Much fsllghtly I m a t a r i i l Slightly j . Much La as Prompt B. As a, result of th* auditing requlraamnt of Act 2, to what axtant has tha issl amentation of th* audit rai i ^maiillations made by tha CPA auditor at th* close of tha audit angagaawnt affactad your unit? Beneficial__________ .__________ .__________ .__________ , _ Hagativa Effect Large 1 Sake 11 Immaterial Small Largs Effact C. To what axtant has th* auditing requirament of Act 2^ affactad tha understanding of th* financial report by tha council members or board members of your unit when it is presented by th* CPA auditor? Banaflcial Effact I Large small J I Ismmtarial I Small " Large Hagativa Effact D. Tha fourth item is left open for your suggestions. Can you identify any additional ways in which th* auditing requirement of Act 2^ has affactad your unit? iii__________________________________________ All_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ m _________________________________________________ To what axtant has your unit baan affactad in these additional ways? Beneficial__________.-----------.---------- , Large 1 Small 'lassaterial Effact ill _________ Negative Large Effact Banaflcial Effect , Large 1 Sm II , , I m m a t e r i a l S m a l l ' . _ _________ Nagative Large Effact Beneficial__________ .__________ .__________ .__________ ,___________Hagativa Effact Large 1 a s l l ' i w t a r i a l Small 1 Largs Effact 140 - 8- QUBSTIONS OH COSTS Possible costa resulting from Act 2_ have baan divided between those arisLng from tha accounting and reporting requirement and those ariaing fraa the auditing requirement. Plaaaa respond to aach itea in tha cost section in two ways. FIRSTi I- Accounting and Reporting. With respect to tha "Accounting and Reporting" section, please indicate your best estimate, based on the administrative accounts of your unit for the fiscal year in question, of t A. The dollar amount of the total cost of each item for both the fiscal year in which your municipality first adopted the Act 2^ uniform accounting system and the fiscal year imasdlately following. B. The dollar m o u n t of that portion of the total cost of aach item which was incurred solely as a_ result of adopting the Act 3 uniform accounting system for tits same two years. For s t a b l e i If your unit first adopted the Act 2 uniform accounting system in fiscal 1971, please indicate for fiscal 1971 and fiscal 1972 both the dollar amount of tha total cost of each item and the dollar amount of that portion of the total cost of each item which would probably not have existed if the uniform system had not been adopted. II. Auditing. With respect to tha "Auditing" section, please indicate your beat estimate, based on the administrative accounts of your unit for the fiscal year in question, o f : A. The dollar amount of tha total cost of the item for both the fiscal year in which your municipality first esployed a^ CPA firm for auditing purposes under the auditing requirement of Act 2_ ai»d the fiscal year immediately following. If your unit had already employed a CPA auditor prior to 1968, please use the first fiscal year ending after February 20, 19E8, and the immediately succeeding fiscal year. B . The dollar amount of that portion of the total cost of the item which was incurred solely as * result of conforsdng to the auditing requlraamnt of Act 2_ for the same two years. For examplei If your unit first esq>loyed a CPA firm for auditing purposes under the auditing requirement of Act 2 in fiscal 1968, please indicate for fiscal 1968 and 1969 both the dollar amount of the total cost of the item and the dollar amount of that portion of the total cost of the item which would probably not have existed if the unit had not conformed to the auditing requirement of Act 2. SECONDLYi Please indicate your judgment of the effect of the implementation of Act 2_ on each item by placing an X in what you consider to be the most appropriate location on the scale line. Also, please respond to the "Yes" or "Ho" questions on the lines provided in those items where they appear. In addition, if you wish to do so, please use the space directly to the right of each question to amice any cosmwnts you consider appropriate. 141 -9- l«i Did your unit scquira addition*! office furniture? Ke s If bo, what portion of ita coat was for tha puxpos* of _ meeting incraaaad naada cauaad by Act 2_ raquiramenta? Yaar l Total ita* c o a t ....................... « flr- ? // r* Portion of Coat Aaaociatad with Act 2 X_,__________ .__________ i__________ Amount of Year 2 o i Larga Snail 'immaterial Skill * Larga Cost Saving Aawunt of Coat I l ' R C h a ?, t o A v £ w Fi i. i * a c a Nfwc r • J $____O ___ c a v & u. n fl r /fcr-2 Arrno)HMATs^r 5 o 7 a ( £ £ M £ » r t I . Accounting and Raporting. Kith raapact to .he accounting and raporting raquiresMnt, son* poasibla costs raaulting fron Act 2_ hava baan dividad into fiva aactions. A. Spaca. Th* first saction contain* Just ana ita*. Did your unit acquire additional spaca, aithar through purchaaa or construction or by rantal? what portion of its cost was for th* purpose of an sting incraaaad naada cauaad by Act _2 raquirm ints? If so, Total Ita* C o a t _______________________ £___________ $__________ S___________ Portion of Coat Aaaociatad with Act 2 S Yaar 1 Yaar 2 Amount__________ , i______ j__________.__________ Amount of of Cost Larga 1 Sanll 'iMitarirl Small 1 Imrge Cost Saving B . Data Procaaainq and Operating. Th* sacond saction undar th* accounting and raporting requirement contains a list of thra* itaata which rafar to various costs of data procassing and operating involved in the accounting and bookXaapinq operations of tha municipality which may have changed as, a result of Act 2_ requirement*. 1. What was th* aanunt of labor cost* paid by your unit in th* form of salaries to thoa* individuals who are aaaociatad with its accounting and bookkeeping operations? What portion was for th* purpose of meeting increased needs caused by Act 2 requirements? If tha total item coat would have been larger in the absence of actions taken in response to Act 2^ please us* tha third line instead of the second line to indicate the aanunt of coat saving. Total Item Cost ..................... 5____________ 1__________ Portion of Cost Associated with Act 2 $____________ $ Cost Saving Aaaociatad with Act 2 ... J___________ |_________ Yaar 1 Yaar 2 Amount of Cost I Large Small I I I m * t *rial I___________ Amount of Small Large Cost Saving 142 -io- COMMENTS 2. What « u the u o u n t of th* colt of bookkeeping eervicee performed by * CPA firm or other outsid* accounting firm? Mhat portion was for th* purpose of m**ting incr**s*d need* c«us*d by Act 2_ requirements? If th* total it*m cost mould hav* been larger in th* shssnc* of actions taken in response to Act 2, pl*as* us* th* third lin* inat*ad of th* — cond lin* to indicat* th* amount of cost saving. Total Item Cost ............. . . .:__ Portion of Cost Associated with Act 2 Cost Saving Associated with Act 2 ... S $ 5 $ $ S Yaar 1 Yaar 2 Amount__________ |__________ .__________j j ________ Amount of of Cost Large Small I ■mater 1 * I Small Large Cost Saving 3. What was the amount of th* cost of record boohs, journals, and supplies us*d in th* accounting and bookkeeping op*rations? What portion mas for th* purpose of meeting increased n**ds can* _J b £ Act 2 requirement*? If the total it*m cost mould have b*«n larger in th* absence of action* taken in response to Act 2, pleas* use the third line instead of th* second lin* to indicate the amount of cost saving. Total Item Cost ...................... Portion of Cost Associated with Act 2 Cost Saving Associated with Act 2 ... $ $ $ $ $ Year 1 Year 2 Amount__________ . of Cost Large ' S m a l l -__________ 1__________ .___________ Amount of ' m a t e r i a l Cost Saving Small Large C- Equipment. The third section under the accounting and reporting requirement contains a list of three items which refer to various types of equipment that might hav* been either purchased or ranted by th* municipality as a result of Act 2_ requirements. 1. Did your unit purchase or rent a copying machine? ______ If so, mhat portion of its cost was for th* purpos* of ms*ting incr*a— d needs caused by Act 2_ requirements? Total Item Cost ........................ 5__________ $____________ 5____________ Portion of Cost Associated with Act 2 S Year 1 Year 2 Amount__________ i__________ ,__________j__________ i___________ Amount of of Cost Largs 1 Small 1 I m m a t e r i a l S m a l l 1 Large Cost Saving 143 - 1 1 - 2. Did your unit purch*** or rant a b o o k k M p i n g machine, an accounting smchine, or a calculator? _______ If w , what portion of ita coat was for tha purpoaa of smetinq incraaaad naada cauaad by Act 2 raquiramenta7 Total Item Coat ........................ $__________ Portion of Coat Aaaociatad with Act 2 J $ Yaar 1 Y Amount__________ . of Coat Larga Small . . 'issaaterial ■ Saall Large Aaount of Coat Saving 3. Did your unit purchaae or rant either a cc^>uter or crm p uter tiae? ________ If so, what portion of ita coat waa for tha purpoaa of abating Incraaaad neada cauaad by Act _2 requirements? Total Iteai Coat ........................ j__________ $____________ Portion of Coat Aaaociatad with Act 2 $________ $ ____________ Yaar 1 Year 2 Aaount of Coat I Larga ' Saall 'laataterial I I I Saall * Large Aaount of Coat Saving D. Education. The fourth section under tha accounting and raporting requirement containa just one itaa. In many caaea rapraaentativea of your unite aay have attended in-aervice training sessions, auch aa classes, conferences, or workshops. Your unit nay have purchased manuals or other Instructional materials. Did your unit incur coata auch aa these of an educational nature? _______ If so, what portion of them was aaaociatad with Act 2_ requlrementa? Total Item C o a t ....................... $__________ $____________ _______ $____________ Portion of Coat Associated with Act 2 $ Yaar 1 Year 2 Amount__________ . of Coat Large * Small .__________j__________ ■___________ Amount of Iaesaterial small * Large Coat Saving E. Other. The fifth section under the accounting and reporting requirement also containa just one item, and this item is left open for your suggestions. Can you identify any additional costa which your unit has incurred as a result of the accounting and reporting requirement of Act 27 For example, the installation of the Act 2^ uniform accounting system aay have led to expenditures for revision of the internal control ayatemt or it may have necessitated higher telephone expenditures for communications with CPA firms, the Bureau of Local Governme n t Services, or other units. Ill______________________________________________________ 111_______________________________________________ 121______________________________________ 144 - 12- {1)Total It* Tot*l A — ' ^ <3> Cost 9 Cost Associated with Act 2 s Cost 9 Cost Associated with Act 2 9 Cost 9 Coat Associated with Act 2 ? $ 9 9. 9 9 9 Aaount__________ |_________ |___________ i__________ j__________ Aaount of 'of Cost U r ; * Small I— « t i r U X ^ a l l Largs Cost Saving (2 ) Aaount of Cost ,,, Aaount of Cost . Largs Saall . Iaautarial Saall " .__________ Aaount of Larga Cost Saving . Larga Saall ■___________ ,__________ . Immaterial S m a l l * Aaount of Larga Coat Saving II. Auditing. With raspect to tha auditing raquiraaant, tha following section contains just one itaa. Mhat was tha amount of total cost for auditing by CPA firms? This should not include fees paid strictly for bookkeeping services, but it will normally include that portion of tha auditor's tiate which is devoted to consulting and included in his billings. Mhat portion was for tha purpose of meeting increased needs caused by cowforming to the auditing requirement of Act 2? If the total item cost would have baan larger in tha absence of actions taken in response to Act 2, please use tha third line instead of the second line to indicate the aaount of cost saving. Year 1 Yaar 2 ................. Total Item Cost Portion of Coat Associated with Act Cost Saving Associated with Act 2 .. Aaount of Cost I Large ' Sam 11 dimeter ial I I I Saall ’ Large Amount of Cost Saving Thank you very auch for the time and effort which you have devoted to completing the questionnaire. If you wish to ask any questions or to make any consents via the telephone, please call (313) 4S7-S990 collect. Please feel free to add on a separate sheet of paper any coaMsnts which you wish to make in writing. Also, please sign this form and indicate your title on the lines belowj and please check the space provided below if you would like to receive a copy of the results of this study. Signature _______________________________________________________________________ Title ____________________________________________________________________________ I should like to receive a copy of the results of this study. 145 Appendix F to Chapter IV DEPARTMENTS IN WHICH THE CITY OF ANN ARBOR EMPLOYS PROGRAM BUDGETING AND OUTPUT MEASUREMENT Building and Safety Engineering! Program! Administration Engineering Construction Housing and Safety Environmental Bureau Parks and Recreation! Program! Park Maintenance Fairview Cemetery Development Shade Trees (Forestry) City Recreation Buhr Pool and Rink Fuller Pool and Rink Veterans Pool Argo Canoe Livery City/School Recreation Golf Administration and Management Huron Golf Course Leslie Golf Course Veterans Ice Arena Public Workst Program! Refuse Collection Surface Maintenance (major streets) Street Cleaning (major streets) Ice and Snow Control (major streets) Storm Sewer Maintenance (major streets) Surface Maintenance (local streets) Street Cleaning (local streets) Ice and Snow Control (local streets) Residential Services (local streets) Storm Sewer Maintenance (local streets) Wastewater Treatment Pumping Station Maintenance Sanitary Sewer Maintenance Traffic Engineering and Transportation: Program! Major Street Signals Street Sign Major Line Painting Major Street Local Street Signing Street Painting Local 146 Appendix G to Chapter IV EXACT CONTENT OF EACH OF THE TWELVE CELLS Cities Cell Cl (11) Cell C2 (1 0 ) Name of Unit Grand Rapids Lansing Dearborn St. Clair Shores Kalamazoo Taylor Southfield Lincoln Park Farmington Hills East Detroit Jackson 1$70 Population 197,649 131,546 104,199 88,093 85,555 70,020 69,285 52,984 48,694 45,920 45,484 Name of Unit Holland Berkley Adrian Kentwood Harper Woods River Rouge Niles East Grand Rapids Albion Plymouth 1976 Population 26,337 22,618 20,382 20,310 20,186 15,947 12,988 12,565 12 , 1 1 2 11,758 Cell C3 (1 1 ) Cell C4 (1 1 ) Name of Unit Grandvilie Hillsdale Three Rivers Grosse Pointe Dowagiac Houghton Grand Ledge St. Clair Mount Morris Algonac Charlevoix Villages Cell Name of Unit Wolverine Lake Chelsea Franklin Paw Paw Lake Orion Chesaning Oxford Newberry Vicksburg 1970 Population 10,764 7,728 7,355 6,637 6,583 6,067 6.032 4,770 3,778 3,684 3,519 Name of Unit St. Ignace Hartford East Tawas Sylvan Lake Auburn Frankfort Newaygo Galesburg Pinconning Petersburg Fennville 1970 Population 2,892 2,508 2,372 2,219 1,919 1,660 1,381 1,355 1,320 1,227 811 VI (9) Cell V2: (9) 1970 Population 4,301 3,858 3,344 3,160 2,921 2,876 2,536 2,334 2,139 Name of Unit Constantine Manchester Quincy Nashvi1le Carleton Armada Elk Rapids Saranac Colon 1970 Population 1,733 1,650 1,540 1,531 1,503 1,352 1,249 1,223 1,172 (1 0 ) 1970 Population 1 , 0 2 0 993 970 961 949 898 806 686 666 638 147 Cell V4 (10) Name of Unit Hanover Pevamo Estral Beach Sherwood Mesick Prescott Ahmeek Tustin Pierson Fountain 1970 Population 513 498 419 400 376 306 238 230 193 156 Cell V3 Name of Unit Fowler Pentwater Dlmondale Merrill Mendon South Range Westphalia Kent City Shoreham One Kama Townships Cell Tl (29) Name of Unit M t • Morris Bedford Southfield Plymouth Delta Frenchtown Leoni Muskegon Oscoda Canton Emmett DeWitt Alpena Pennfield Pittsfield County Genesee Monroe Oakland Wayne Eaton Monroe Jackson Muskegon Iosco Wayne Calhoun Clinton Alpena Calhoun Washtenaw 1970 Population 29,349 20,875 17,521 17,497 17,396 14,685 13,953 13,754 11,758 1 1 , 0 2 6 10,881 9,909 9,001 8,290 8,185 Name of Unit Sumpter Spring Lake Green Oak Washington Holly Flushing Park Kimball Macomb Coldwater Madison Grand Haven Antwerp Cascade County Wayne Ottawa Livingston Macomb Oakland Genesee Ottawa St, Clair Macomb Branch Lenawee Ottawa Van Buren Kent 1970 Population 8,091 8,013 7,598 7,526 7,396 6,957 6,639 6,152 6,140 5,841 5,494 5,489 5,346 5,243 Cell T2 (30) Name of Unit Oakland Windsor Williams LaSalle Imlay Wells Ontonagon Millington Tyrone Thom a p p l e East Bay Chocolay Wright Exeter Grass Lake County Oakland Eaton Bay Monroe Lapeer Delta Ontonagon Tuscola Livingston Barry Grand Traverse Marquette Ottawa Monroe Jackson 19*6 Population 4,793 4,483 4,296 4,151 4,150 4,003 3,751 3,471 3,437 3,363 3,356 3,299 2,983 2,971 2,970 Name of Unit Armada Three Oaks Crockery Addison Deerfield Adams Perry Howell Johnstown Beaver Weesaw Bertrand Albee Courtland Pokagon County Macomb Berrien Ottawa Oakland Lapeer Houghton Shiawassee Livingston Barry Bay Berrien Berrien Saginaw Kent Cass 1970 Population 2,953 2,894 2,861 2,809 2,713 2,599 2,598 2,426 2,388 2,346 2,338 2,259 2,242 2,196 2,189 148 Cell T3 (30) Name of Unit Fairfield B1 oomingdale Frankenmuth Osceola Columbus Woodland Penn Grant Camden Albion Carmel Sidney Fremont Essex Chassell County Lenawee Van Buren Saginaw H ought on St. Clair Barry Cass Clare Hillsdale Calhoun Eaton Montcalm Saginaw Clinton Houghton 1976 Population 2,64? 1,989 1,965 1,957 1,937 1,776 1,775 1,754 1,723 1,582 1,539 1,504 1,500 1,435 1,415 Name of Unit Pulaski Denver Porter Rome Goodland Banks Briley Newberg Hillman Scipio Conway Monterey Florence Wise Resort County Jackson Newaygo Van Buren Lenawee Lapeer Antrim Montmorency Cass Montmorency Hillsdale Livingston Allegan S t . Joseph Isabella Emmet Cell T4 (30) Name of Unit Morton Pine Dafter Garfield Belknap Green Homestead Winfield Flynn Prairie Ronde Curtis Edwards Cedar Creek Kasson McKinley County Mecosta Montcalm Chippewa Clare Presque Isle Alpena Benzie Montcalm Sanilac Kalamazoo Alcona Ogemaw Wexf ord Leelanau Huron 1970 Population 998 984 942 938 902 863 854 839 828 777 718 708 692 676 637 Name of Unit Hume Echo Middle Branch Germfask Otsego Lake Wakefield Cornell Michigamme Grant Rockland Limestone Foster Alabaster Au Sable Peaine County Huron Antrim Osceola Schoolcraft Otsego Gogebic Delta Marquette Mason Ontonagon Alger Ogemaw Iosco Roscommon Charlevoix 1970 Population 1,396 1,362 1,360 1,330 1 , 2 6 1 1,231 1,215 1,174 1,173 1,173 1 , 1 6 0 1,148 1,125 1,065 1,009 1970 Population 573 542 541 529 473 456 438 436 419 368 302 282 280 1 1 8 58 149 Appendix H to Chapter IV CPA AUDITORS SELECTED TO REVIEW THE QUESTIONNAIRE July 31, 1975— Hr. Roger J. Schafer, CPA, of Seldman & Seidman in Lansing. Hr, Schafer reviewed the questionnaire immediately in his office and made many helpful comments. August 4, 1975— Mr. Richard Jones, CPA, of Hungerford, Cooper, Lux on & Co. in Taylor. Mr. Jones reviewed the questionnaire immediately in his office and made helpful comments. Appendix I to Chapter IV THE QUESTIONNAIRE FOR THE AUDITORS M I C H I G A N STATE UN1V11SITY »>r u M m . i m w a m «ui MAVMTI •CMOOL Of MtunoHT or lawwiMt * iuuiicul uxmitutkni . ohit a m t O M M T U T K M In order to obtain data relative to tha banaflta and coata of tha accounting, raporting, and auditing raqulrananta of Public Act 2 of 1968, I hav* praparad a quaatlonnalru for distribution to a saloctad sample of Michigan municipalities and thalr audltora. Tha raaponaaa to this quaatlonnalra will ba compared and sggrsgatad In such a nannar that overall estimates of banaflta and coata will ba obtained without sacrificing confidentiality. Since I have already received a response fron the walclpallty nanad below, I have enclosed a quaatlonnalra for tha purpose of obtaining your aatinataa and appraisals with respect to benefits and costs for that unit. In addition, I have included a few general questions with respect to the effects of Act 2 on your firm. I believe that the Itana contained in the questionnaire are self-explanatory. The responses to this quaatlonnalra will enable m to conpara the reactions of the Municipalities and those of their auditors with respect to the various benefits and costs in ny doctoral research at Michigan State University. The project Is being undertaken in cooperation with the State Department of Treasury, the Michigan Townships Association, the Michigan Municipal league, the Municipal Finance Officers Association, and the Institute for G o t m lty Development at Michigan State University; and it carries tha endorsement of all of these organisations. The results obtained will be presented in ainatry torn, and Information about individual units will not be released. I should appreciate your passing along the enclosed questionnaire to that person In your flrn who la moat familiar with the financial operations of tha municipality named below. A stamped envelope addressed to my residence has been enclosed for your response. After the reaults have bean determined, I shall be pleased to mall a concise st^mary of then to those respondents who Indicate that they wish to receive it. Thank you very much in advance for your willing participation in this project and your prompt return of tha questionnaire. Please accept ay best wishes for a successful 1975. Stacftralv. Richard E. Charlton, Jr. QUESTIONS ON BENEFITS Possible banaflta resulting from Act 2 hav* baan divided between thoaa arlalng from tha accounting and raporting requirement and thoaa arising fro* tha auditing requirement. Tha tarn ''accounting and raporting" rafara to tha uaa of tha wlform accounting eystam and tha annual filing of the financial raporta In Lanalog. Tha t a n "auditing" rafara to tha ragular audita by CPA f i n . For aach lean in tha banaflt auction, plaaaa indlcata your Judgment of tha affact of tha cllant by placing an X In what you conaldar to ba tha most appropriate location on tha acala 1ina. Also, plaaaa raapond to tha "Yaa” or "No" quaatlona in thoaa Items whara thay appear by circling tha appropriate response. In addition. If you wlah to do ao, plaaaa uaa tha spaca directly to tha right of aach quaatlon to sake any coHtnta you conaldar appropriate. plantation of Act 2_ on that item with raapact to your Example; To what extant haa Act 2^ affected tha Interest of your client's cltlxana in tha financial reports? -------------------- COMMENTS . S o M £ A D D E D iW T £ R C 9t- f r o m Ur|f I Sm11 ^iMtarUi! Small ^ Large (Negative Effact) (Beneficial Effact) C i T t Z E N S I. Accounting and Reportlng. With raapact to tha accounting and raporting requirement, some possible benefits resulting from Act 2 have been divided Into three sections. *■ Accounting and Bookkeeping Operations. Tha first section containa a H a t of eight Items which refer to Che accounting and bookkeeping operations of tha municipality. 1. To what extent has the accuracy of your client's accounting and bookkeeping operations been affected aa a result of Act 2? In this item accuracy refers to tf~ ability to select those accounts which most clearly describe a given transaction. Large ^ Saall ^Imiterlal^ Small ^ Larga (Negative Effect) (Beneficial Effact) 2. To what extent has tha proamtnsae of your client's accounting and bookkeeping operations been affected as a result of Act 2? In this Item promptness refers to the length of time required both to select the most descriptive accounts and to prepare financial reports based on those accounts. ____________ j_____________I--------------------- J--------------------- 1-------------------- Large 1 Small 'Immaterial Small T Large (Beneficial Effact) (Negative Effect) 152 -3- c c m o m t s 3* To whet extent bee the recent chenge In etetue of certeIn account* within the Act 2_ uniform «ccoiuif y t « a . especially tha cluaification of expenditures by activity, enabled your cllant to prapara aort complete financial reports, althar annual or interim? (Yee/No) If so, to what axtant h u tha unit baan affactad by added conplatanasa In raporting? ------- 1------- 1------- J_______ I________ Larga ' Saul I 'inamterlaTSnail 1 Larga (Hagativa Effact) (Banaflcial Effact) B. Budgeting and Flnancial Management Operations. Tha second section under tha accounting and reporting requirement containa a list of six itana which refer to tha budgeting and financial management operations of tha municipality. For aach item in this aactlon, please use tha space to the right of tha question to describe the affects. 1. To what extent has your client baan affactad by the requirement of tha Act _2 uniform accounting system that expenditures ba clusiflad by activity? Large ^ Small ^Material! Small I Larga (Hagativa Effect) (Beneficial Effect) 2. Since your client la required by Act ) to record its expenditures by activity, does the unit also budget by activity? (Yes/Ho) If so, to what axtant has it baan affactad? ______ 1------ 1- - - - - - J------ 1- - - - - - - Larga 1 S m a l l I n m a t e r i a l S m e l l L a r g e (Hagativa Effact) (Beneficial Effact) 3."-If your cllant both records and budgets its axpandituraa by activity, does tha unit achieve a close correlation between budgeted and actual amounts? (Yes/No) To what extent ban Act 2 affactad this correlation? Large ^ Small ^Material! Small ^ Large (Negative Effect) (Beneficial Effect) 154 -5- 4. B m Act 2_ lad to th* davalopoant of u y ptotraa budgeting by your clientT (Yea/No) If ao. In what araaa la It applied? ___________________________________________ To what axtant hae tha unit baan affactad In tha arena of application? Program budgeting might ba long-term budget­ ing for Individual projecta, a atap In tha direction of output meaeurement, or a eub-category of activity budgeting. conggrrs -------- 1________ L_______ 1________ 1_________ {Banaflcial Effact) Small i B i t t r U l Small 1 Large (Negative Effact) Large 5. Elea Act 2_ lad to tha development of waya to Tterure tha parfoimeuca of amployaea or evaluate tha output of projacta by your cllant? (Yee/No) If eo. In what araaa era they applied? ___________________________________ To what extant hae tha unit baan affactad in tha areae of appllcatIon? Large ^ Small ^Materlel^ Small ^ Larga (Negative Effact) (Banaflcial Effact) 6. Hae the uaa of tha Act _2 uniform accounting aye tarn affactad tha performance of your cllant in tha area of caah management? (Yee/No) If ao, to what extant hae the unlt'a performance In thle area baan affactad? ------- 1--------k (Beneficial Effact) 1------- 1-------- (Negative Effact) Larga 1 Small ’ImnaterlaT Small 1 Large C. Other. Tha third eactlon under tha accounting and reporting requirement containa Juat two iteme. 1. Haa tha adoption of the Act 2_ uniform accounting eyatem, (by providing a baala for comparability among tha unit* which did not axlat prevlouely and enabling them to coMunlcate with one another more eaally with raapact to common problama), enabled your cllant to benefit from the receipt of Information and aeeletance from other unite which would not have baan attainable before Act Z? (Yee/No) If eo, to what axtant haa thla occurred? Large ^ Small ^Material! Small ^ Larga (Beneficial Effact) (Negative Effact) 155 -6- comEirrs 2. Th* second 1 c m Is left opin for your suggestions. Can you identify eny sdditlonel ways in which th* account ins end report l m requirement of Act _2 he* effected your client? For axa^il*, ss s result of the Act 2 unlfon accounting system, units that us* computer* in their bookkeeping operstlons might be able to share computer programs with other units. i n ____________ __ ______________ m m _______________________ _____________________ To whet extent has th* unit been affected In these additional ways? ______ (1) Urge ' Small 'Ii (Beneficial Effect) itsrlal Smell Lerge (Negative Effect) (2) Large Small (Beneficial Effect) itsrlal Small 4- (Negative Effect) Large (3) Large Si ^ Small (Beneficial Effect) ^Isswterlai! 11 1 Large Small ^ (Negative Effect) II. Auditing. With respect to the auditing requirement, the following list of possible benefits contains four items. A. Under Act _2 the financial statement* and reports of your client, with the CPA audit certificate enclosed, must be filed with the Bureau of Local Government Services within four months after the close of th* fiscal period covered. Since 196B, what has been the experience of the unit with respect to th* promptness of the filing of th* financial statements and reports as Influenced by the audit<"g requirement of Act 2? 5»ch Slightly ^Material! Slightly^ Ifaeh (Hors Prospt) (Leas Profit) B. As a result of th* auditing requirement of Act 2 , to what extent has th* i s i smsntstion of tha audit rsco— endat ions mads by th* CPA auditor at tha close of th* audit engagement affected your client? Large ^ Small ^Material! Small ^ Large (Beneficial Effect) (Negative Effect) 15 6 -7- COWffiWTS C. To what extant haa tha auditing requirement of Act 2 affactad tha underataodlna of tha fInaneial report by tha council mwmhara or board members of your cllant whan it la preaented by tha CPA auditor? Large ^ Swell ^Iwtarlal^ Small ^ Large (Negative Effact) (Banaflcial Effact) 0. The fourth Item la left open for your auggeetiona* Can you identify any additional waya In which the auditlna requirement of Act 2 haa affected your cllant? - - 1- - 'I M a t e r i a l - - - - (3) If your office experienced a change In the billable tlae required to perfore a typical Municipal audit 1— edlately after the j-ei •Mentation of Act 2 aa a consequence of Act 2 , how would you characterise the •xtent of the change? ----------------------I----------------------L --------------------1____________ 1_____________ Large r Snail ^Material Snail 1 Large (Increase) (Decrease) (4) If your office has experienced a change in the billable tine required to perfora a typical Municipal audit over a_ period of several yeara aa a conaequence of Act 2_. how would you characterize the axtent of the change? Large ^ Saall (Increaae) ^1 Material Snail ^ Large (Decrease) (5) If, aa ± conaequence of Act 2_, the Members of your flra have becone able to provide consulting services for accounting decisions, plaaae Identify these servlc••. (6) If, u a^ conaequence of Act 2_, the nenbers of your firm have becoes able to provide consulting services for declalona other than accountlng decisions, please identify these servlcea. Thank you very much for the tine and effort which you have devoted to coa^letlng the questionnaire. If you wish to ask any questions or to make any coa«ents via the telephone, please call (313) 487-3990 collect. Please feel free to add on a separate sheet of paper any consents which you wish to Make in writing. Also, please sign this form and Indicate your title on the lines below; and check the space provided below if you would like to receive a copy of the results of this study. Signature __________________ __________________________________________ _ Title _______________ I should like to receive a copy of the results of this study. 162 Appendix J to Chapter IV EXACT CONTENT OF THE RESPONSE PORTION OF THE SAMPLE Cell C2 (4) Holland Berkley Kentwood River Rouge Cell C3 (5) Three Rivers Grosse Pointe DoiragLac Grand Ledge Mount Morris Cell C4 (6 ? Hartford East Tawas Auburn Galesburg Pinconning Petersburg Cell V2 (3? Nashville Elk Rapids Colon Cell V3 (3? Pentwater Merrill South Range Cell V4 (5? Sherwood Mesick Prescott Ahmeek Fountain Cell T2 (9? Windsor Williams La Salle Ontonagon Tyrone Grass Lake Addison Johnstown Bertrand Cell T3 (10? Fairfield F ranke nmuth Woodland Grant (Clare Co.? Carmel Pulaski Denver Porter Briley Resort Cell T4 (9? Belknap Curtis Edwards Kasson McKinley Otsego Lake Cornell Michigamne Grant (Mason County? Cities (24? Cell Cl (9) Grand Rapids Lansing Dearborn St. Clair Shores Xalamazoo Southfield Lincoln Park Farmington Hills Jackson Villages (17? Cell VI (6 ? Wolverine Lake Chelsea Franklin Paw Paw Oxford Vicksburg Townships (45? Cell Tl (17? Plymouth Delta Frenchtown Muskegon Canton Eimnett DeWitt Alpena Pennfield Pittsfield Spring Lake Washington Park Coldwater Madison Grand Haven Cascade 163 Appendix K to Chapter IV EXACT CONTENT OF THAT PORTION OF THE SAMPLE WHOSE AUDITORS RECEIVED QUESTIONNAIRES Cities (23) Units Grand Rapids Lansing Dearborn St. Clair Shores Kalamazoo Southfield Lincoln Park Farmington Hills Jackson Units Holland Berkley Kentwood River Rouge Units Three Rivers Grosse Pointe Grand Ledge Mount Morris Units Hartford East Tawas Auburn Galesburg Pinconning Petersburg Villages (12) Cell Cl (9) Auditors Touche, Ross & Co.— Grand Rapids Seidman & Seidman— Lansing Hungerford, Cooper, Luxon & Co.— Dearborn Haskins & Sells— Detroit Ernst & Ernst— Kalamazoo Reive, Kent & Kuhn— Southfield 0 #Connell & 0*Connell— Allen Park Plante & Moran— Southfield Young, Skutt & Breitenwischer— Jackson Cell C2 (4) Auditors Touche, Ross & Co.— Grand Rapids Doeren, Mayhev, Grob & McNamara— F e m d a l e Merkel, Prangley & Marks— Grand Rapids Plante & Moran— Southfield Cell C3 (4) Auditors Doeren, Mayhew, Grob & McNamara— Battle Creek Haskins & Sel's— Detroit Young, Skutt & Breitenwischer— Jackson La Fever, Bell S. Laird— Flint Cell C4 (6 ) Auditors Clinton H* Maki— St. Joseph Harold J. Knight— East Tawas Laine, Appold & Co.— Saginaw Siegfried, Crandall, Vos & Egly— Kalamazoo Weinlander, Fitzhugh, Bertuleit & Schairer— Bay City Carlton, Longmuir, Cooley & Hehl— Monroe Units Wolverine Lake Chelsea Paw Paw Oxford Vicksburg Cell VI (5) Auditors Janz & Knight— Birmingham Robert A. Steger— Chelsea William A. Cutting— Paw Paw Jenkins, Eshman & Magnus— Bloomfield Hills Alexander Grant & C o . — Kalamazoo Units Nashville Elk Rapids Units Pentwater Merrill South Range Units Mesick Fountain Townships (39) Units Plymouth Delta Frenchtown Muskegon Emmett DeWitt Pennfield Pittsfield Spring Lake Washington Park Madison Grand Haven Cascade Units Windsor LaSalle Ontonagon Tyrone Grass Lake Add!son Bertrand Albee 164 Cell V2 (2) Foote, lies & Foote— Battle Creek Thomas L. George— Elk Rapids Auditors Cell V3 (3) Auditors Merskin A Merskin— Hart Yeo & Yeo— Saginaw Cybulski A T u m q u i s t — Houghton Cell V4 (2) Auditors Lincoln, Devlin A Kalcher— Manistee Merskin A Merskin— Ludington Cell T1 (14) Auditors P o s t , Smythe, Lutz A Ziel— -Plymouth Seidman A Seidman— Lansing Gerald C. Schroeder A Co.— Southfield Arthur H. Ruthkoski— Muskegon Doeren, Mayhew, Grob A McNamara— Battle Creek Lyle D. Hepfer A Co.— Lansing Calvin L. Whitbeck— Battle Creek Post, Smythe, Lutz A Ziel— Plymouth Calvin D. Meeusen— Grand Haven Buss, Ullrich, Bernock A Wilt— M t . Clemens Ferris, Busscher A Lohman— Holland Louzella Seeburger— Adrian Lloyd C . 0 BNeal— Grand Haven Beene, Garter, Orchard A Co.— Grand Rapids Cell T2 (8 ) Auditors Lyle D. Hepfer A Co.— Lansing Carlton, Longmuir, Cooley A Hehl— Monroe Haukkala A Jacobson— Ironwood Alton E. McKee— Fenton Willis, Drake A Watters— Jackson Janz A Knight— Birmingham Raymond Suabedissen, Jr.— Niles Foulds A Zeros— Saginaw Units Fairfield Frankenmuth Woodland Grant (Clare Co.) Carmel Pulaski Denver Briley Resort Units Belknap Curtis Kasson McKinley Otsego Lake Cornell Michigamme Grant (Mason Co.) 165 Cell T3 (9) Auditors Louzella Seeburger— Adrian Retunann, Eischer, Vallee & Lunt— Saginaw Foote, lies & Foote— Battle Creek Sullivan, Page, Cassel & Olson--Nt. Pleasant Samuel Beglin— Charlotte Willis, Drake & Watters— Jackson Merskin & Merskin--Hart Young 6 Nethercut— Alpena Hill, Woodcock & Distel— Petoskey Cell T4 (8 ) Auditors La Fleche 6 Boldrey— Alpena Harold J. Knight— East Tawas Fuller & Somero— Traverse City Melvin P. Dutcher— Casevilie Hill, Woodcock & Distel— Gaylord Schneider, Larche & Haapala— Escanaba Fleury, Singler & C o . — Iron Mountain K. G. Hungerford & Co.— Ludington 166 Appendix L to Chapter IV EXACT CONTENT OF THAT PORTION OF THE SAMPLE WHOSE AUDITORS RESPONDED T O QUESTIONNAIRES Cities (17) Units Lansing Dearborn St. Clair Shores Southfield Lincoln Park Farmington Hills Jackson Units Berkley Kentwood River Rouge Units Grosse Pointe Grand Ledge Units Hartford East Tawas Galesburg Pinconning Petersburg Villages (9) Cell Cl (7) Auditors Seidman £> Seidman— Lansing Hungerford, Cooper, Luxon 6 Co.— Dearborn Haskins 6 Sells— Detroit Reive, Kent & Kuhn— Southfield O'Connell & O'Connell— Allen Park Plante & Moran— Southfield Young, Skutt & Breitenwischer— Jackson Cell C2 (3) Auditors Doeren, Mayhew, Grob & McNamara— F e m d a l e Merkel, Prangley & Marks— Grand Rapids Plante & Moran— Southfield Cell C3 (2) Auditors Haskins & Sells— Detroit Young, Skutt 6 Breitenwischer— Jackson Cell C4 (5) Auditors Clinton H. Maki— St. Joseph Harold J. Knight— East Tawas Siegfried, Crandall, Vos & Egly— Kalamazoo Wcinlander, Fitzhugh, Bertuleit & Schairer— Bay City Carlton, Longmuir, Cooley 6 Hehl— Monroe Units Wolverine Lake Chelsea Paw Paw Oxford Vicksburg Cell VI (5) Auditors Janz & Knight— Birmingham Robert A. Steger— Chelsea William A. Cutting— Paw Paw Jenkins, Eshroan & Magnus— Bloomfield Hills Alexander Grant & Co.— Kalamazoo Units Nashville Cell V2 (1) Auditors Foote, lies & Foote— Battle Creek Units Pentwater Merrill Units Mesick Townships (28) Units Plymouth Delta Muskegon Emmett DeWitt Pittsfield Spring Lake Park Grand Haven Cascade Units La Salle Ontonagon Addison Albee Units Frankenmuth Woodland Grant (Clare Co.) Carmel Pulaski Denver Briley Hesort Units Belknap Curtis Otsego Lake Cornell Michigamroe Grant (Mason Co.) 167 Cell V3 (2) Auditors Merskin & Merskin— Hart Yeo & Yeo— Saginaw Cell V4 Cl) Auditors Lincoln, Devlin & Kalcher— Manistee Cell Tl (10) Auditors Post, Smythe, Lutz & Ziel— Plymouth Seidman 6 Seidman— Lansing Arthur H. Ruthkoski— Muskegon Doeren, Mayhew, Grob & McNamara— Battle Creek Lyle D. Hepfer & Co.— Lansing Post, Smythe, Lutz & Ziel— Plymouth Calvin D. Meeusen— Grand Haven Ferris, Busscher & Lohman— Holland Lloyd C. O'Neal— Grand Haven Beene, Garter, Orchard 6 Co.— Grand Rapids Cell T2 (4) Auditors Carlton, Longmuir, Cooley & Hehl— Monroe Haukkala fi> Jacobson— Ironwood Janz & Knight— Birmingham Foulds & Zeros— Saginaw Cell T3 (8 ) Auditors Rehmann, Eischer, Vallee & Lunt— Saginaw Foote, lies & Foote— Battle Creek Sullivan, Page, Cassel 6 Olson— Mt. Pleasant Samuel Beglin— Charlotte Willis, Drake & Watters — Jackson Merskin & Merskin— Hart Young & Nethercut— Alpena Hill, Woodcock & Distel— Petoskey Cell T4 (6 ) Auditors La Fleche & Boldrey— Alpena Harold J. Knight— East Tawas Hill, Woodcock & Distel— Gaylord Schneider, Larche & Haapala— Escanaba Fleury, Singler & Co.— Iron Mountain K. G. Hungerford £> Co.— Ludington RESULTS OF THE RESEARCH IN TERMS OF COST AND BENEFIT ITEMS Chapter V INTRODUCTION The preceding chapter described In detail the procedures which were used in the conduct of the research. The purpose of this chapter is to examine the individual benefit and cost effects of the implementation of Public Act 2 of 1968 on an item-by-item basis as perceived by the respondents to the questionnaires. Each of the twenty benefit items and each of the ten cost items is considered in the order in which it appeared on the questionnaires. First, for each item of benefit or cost the overall effect is considered by comparing the average ratings derived from the data contributed by both the units and their auditors. In the process of computing the ratings, each local unit has received an equal weight. In addition, the comments from both the units and their auditors are considered for the following two purposes! (1 ) in order to add an additional dimension to the study and (2 ) in order to provide clues with respect to other items which might be rated in a subsequent analysis. Further, for each cost item those dollar amounts which have been perceived by the units to have been associated with the implementation of Act 2 have been disclosed. Following the consideration of each of the benefit and cost items, a short section is presented which considers the effect of time on the 168 169 various dollar amounts, in terms of each cost item. Another short section presents those miscellaneous comments, from both units and auditors, which could not be attributed to specific benefit or cost items. The overall analysis at the end of the chapter is derived from the data contributed by both the units and their auditors. First, it ranks the average ratings for both the benefit items and the cost items in the order of their respective magnitudes. Next, it presents the average ratings for each item of benefit or cost, together with the average ratings for all Accounting and Reporting benefits combined, all Auditing benefits combined, all benefits combined, all Accounting and Reporting costs combined, and all costs combined. In the process of computing the average ratings for combinations of items, each item of benefit or cost has received an equal weight. Finally, it describes the computation of a benefit/cost ratio, determined by dividing average benefit by average cost, for all Accounting and Reporting items combined, all Auditing items combined, and all items combined. In the last section of Chapter IV an example was presented to describe precisely how the results of the research were scored. In order to interpret the results, it should be recalled that, with respect to the scoring of benefits, the "Large Benefit” range is from + 1.5 to + 2.0; the "Small Benefit” range is from + 0.5 to + 1.5j the "Immaterial" range is from - 0.5 to + 0.5; the "Small Negative" range is from - 0.5 to - 1.5; and the "Large Negative" range is from - 1.5 to - 2.0. Similarly, with respect to the scoring of costs, the •'Large Cost" range is from + 1.5 t o + 2.0; the "Small Cost" range is from + 0 . 5 to + 1.5; the "Immaterial" range is from - 0.5 to + 0.5; the "Small Cost Saving” range is from - 0.5 to - 1.5; and the ”Large Cost Saving" range 170 is from - 1.5 to - 2.0. As described in Chapter IV. the municipalities in the sample have been divided by population into twelve cells, four each for cities, villages, and townships, as a means of providing a convenient organization for the data. It should be observed that, for each type of municipality, the cells have been numbered from one to four in the descending order of the populations of the municipalities which are included in them. Thus, the largest cities, villages and townships appear in Cells Cl, VI, and T l , respectively; the next to the largest in Cells C 2 , V2, and T 2 , respectively; the next to the smallest in cells C3, V3, and T3, respectively; and the smallest in Cells C4, V4, and T4, respectively. The complete list of municipalities in the sample and their populations is given by cell in Appendix G to Chapter IV. EVALUATION OF THE BENEFITS "Accuracy** of the Accounting and Bookkeeping Operations In the first benefit item the respondents were asked to evaluate the effects of Act 2 on the accuracy of the unit’s accounting and bookkeeping operations. For purposes of this item, "accuracy” was defined as "the ability to select those accounts which most clearly describe a given transaction." Table 10 provides data in detail by cells which place the item in the "Small Benefit" category, indicating improvement from Act 2, with almost exactly a + 1 average rating across all units (equally weighted) as self-assessed. As assessed by the auditors, in about 602 of the cases the average rating is approximately Table 10 "ACCURACY" OF ACCOUNTING AND BOOKKEEPING OPERATIONS Cell Cl C2 C3 C4 All Cities VI V2 V3 V4 All Villages Tl T2 T3 T4 All Townships All Units Number of Units in Sample Units Auditors 9 11 10 4 4 11 11 6 43 23 9 5 2 9 10 3 10 2 12 38 29 14 30 8 30 9 30 8 39 119 200 74 Number of Respondents Units 9 4 5 6 24 6 3 3 5 17 17 9 10 9 45 86 Auditors 7 3 2 5 17 5 1 2 1 9 10 4 8 6 28 54 Total Score (Units x Ratings) Units Auditors 5 8 2 5 1 - 1 8 6 19 15 4 7 2 4 3 5 - 1 4 20 8 12 20 11 5 9 11 5 8 45 36 84 59 Average Score per Unit Units .89 .50 .20 1.33 .79 1.17 1.33 1.67 .80 1.18 1.18 1.22 .90 .56 1.00 .98 Auditors .71 1.67 - .50 1.20 ,88 .80 2.00 1.50 - 1.00 ,89 1.20 1.25 1,38 1.33 1.29 1.09 1 7 1 the same* The average ratings of .98 and 1.09, respectively, appear to 172 indicate a moderate but clear perception of benefit. Table 10 is given in its entirety in order to demonstrate the alternative methods of compiling the average rating statistic. The cell-by-cell display (1 ) would allow the user to provide his own weighting as an alternative to the equal weighting used in this research and (21 permits the user to review the data in order to examine the influences of type and size of municipality. In this case there is no discernible pattern with respect to either type or size of municipality. The treatment of these and other control variables will be emphasized in Chapter VI of this study. In addition, the display by rating given below indicates the variability in the rating pattern. ________ + I + 2 Number of Unitsi Data from Units Data from Auditors Scores Based on Datat Data from Units Data from Auditors 34 19 6 8 38 22 23 22 23 5 25 1 0 0 0 Ratings - 1 - 2 Totals 4 2 - 4 - 2 1 0 - 2 0 86 54 84 59 The conments from the auditors disclosed that at least two of the cities had been in substantial compliance with Act 2 prior to its implementation. Although one might have assumed ratings of "Immaterial” in this case, both of the auditors rated the item as "Small Benefit" while the units rated it as "Large Benefit" and "Immaterial," respectively. Two other cities complained of having experienced problems with the utilization of the account titles and the activities. The units rated the item as "Large Benefit" and f*Small Negative," respectively, while both of the auditors rated it as "Large Benefit." 173 The auditor of a village indicated that his client*s chart of accounts had been expanded due to Act 2. The auditor rated the item as "Small Benefit” while the unit rated it as "Large Benefit.” The auditor of a township disclosed that his client had not adopted the standard accounting system. Instead, his firm converts the township's records to conform to the reporting requirements of Act 2.* The auditor rated the item as "Inmaterial” while the unit rated it as "Small Benefit.” Promptness of the Accounting and Bookkeeping Operations In the second benefit item the respondents were asked to evaluate the effect of Act 2 on the promptness of the unit's accounting and bookkeeping operations. For purposes of this item, "promptness” was defined as "the length of time required both to select the most descriptive accounts and to prepare financial reports based on those accounts." The average ratings of .77 from the data from the units and .59 from the data from the auditors place the item in the "Small Benefit" category but not very solidly. The dispersion in the rating pattern is indicated below. Number of Unitst Data from Units Data from Auditors 24 10 29 20 24 18 7 4 2 2 86 54 + 2 + 1 Q T~f~ - 2 Totals Ratings The auditors were clearly less impressed by the value of this item. The auditor of a city disclosed that statements prepared by his client have been delayed because of efforts to conform to Act 2. The auditor ^In a personal interview on October 8 , 1975, Mr. James Bolthouse indicated that this procedure was fully acceptable to the Department of Treasury. 174 of another city declared that, although his client was approximately six months behind, its tardiness was not necessarily the result of Act 2. In both cases the auditors rated the item as "Large Negative" while the units rated it as "Small Benefit." The auditor of another city indicated that his firm prepares the financial reports for his client. The auditor of a village stated that his client prepares no financial reports for internal use. In both cases the auditors rated the item as "Immaterial" while the units rated it as "Large Benefit." One township rejoiced that it had become able to receive an audit more quickly than formerly. However, it did not contribute a rating of the item; and, because of the tardiness of the unit’s response, no questionnaire was mailed to the auditor. Two other townships complained that the accounting and bookkeeping operations take more time than prior to Act 2. Although one of the units rated the item as "Small Negative," the other rated it as "Large Benefit"! The auditor of the former unit did not respond to the questionnaire; the auditor of the latter rated the item as "Small Benefit Another township suggested that the uniform system was not superior to the system which it had previously used. The unit rated the item as "Small Negative" while the auditor rated it as "Large Benefit." Conversion of Mandatory Accounts to Optional In the third benefit item the respondents were asked to evaluate the effect of the recent change in status of certain accounts within the Act 2 uniform accounting system from mandatory to optional on the u n i t ’s accounting and bookkeeping operations. The average ratings of .40 from 175 the data from the units and .30 from the data from the auditors place the item in the "Immaterial" category but not very far below the top. The dispersion in the rating pattern is indicated below. Number of Units: Data from Units Data from Auditors + 2 9 3 ___________Ratings______ ____________ Totals ~ 0 - 1 - 2 + 1 27 16 42 30 5 4 3 1 86 54 Two cities declared that they had not been affected by this item, in one case because the city*s accounts are already more detailed than the uniform chart of accounts. The units rated the item as "Small Benefit** and "Immaterial,** respectively! and the auditors* ratings were identical. Although the auditor of another city stated that his client had not been affected, the auditor rated the item as "Large Negative” while the client rated it as "Large Benefit"! Another city responded that the effect of the item was not yet known. Although the unit did not contribute a rating of the item, the auditor rated it as "Small Negative." The auditor of a village indicated that the change had not yet been implemented and did not contribute a rating of it. The unit rated the item as "Large Benefit." The auditor of another village suggested that smaller units of government do not need a chart of accounts as elaborate as that which had formerly been required. Both the auditor and the unit rated the item as **Small Benefit." Valuation of Fixed Assets In the fourth benefit item the respondents were asked to evaluate the effect of Act 2 on the unit's attempt to place dollar values on its holdings of fixed assets. The average ratings of .37 from the data from both the units and the auditors place the item in the "Immaterial** category but not very far below the top* The dispersion in the rating 176 pattern is indicated below. Number of XJnitsi Data- from-Units Data from Auditors 10 3 16 15 56 35 4 1 0 0 86 54 + 2 Hr~V 0 Ratings - 1 - j Totals One city indicated that only the water department assets are recorded and depreciated. The unit rated the item as '^Small BenefitM while the auditor did not contribute a rating of it. The auditor of another city disclosed that his client had not maintained a fixed assets fund prior to Act 2. Although the auditor rated the item as "Large Benefit," the unit rated it as "Immaterial." Another city declared that it had accounted for "fixed assets and general fixed assets” prior to Act 2j and its auditor agreed that all assets are accounted for, thereby increasing the city's internal control. The unit did not contribute a rating of the item while the auditor rated it as "Large Benefit." Another city complained that there are no benefits to be derived— only expense. Neither the unit nor the auditor contributed a rating of the item. The auditor of another city disclosed that the valuation of its fixed assets had been established by an appraisal firm. Although the auditor rated the item as "Inmaterial," the unit rated it as "Small Benefit•" The auditors of two villages stated that their clients had made no attempt to account for general fixed assets; in at least one case the auditor's report is qualified thereby. The auditors rated the item as "Small Negative** and "Immaterial," respectively, while neither of the 177 units contributed a rating of it. The auditor of another village indicated that, although the village has valued its fixed assets in connection with Act 2, the valuation process does not concern him since no depreciation is recorded. On behalf of the unit, the auditor rated the item as "Small Negative," Since the unit*s questionnaire was completed by the auditor, no questionnaire was mailed to the auditor. One township stated that the process is not complete yetj another said that the process is under consideration for the near future. The units rated the item as "Small Benefit" and "Inmaterial,” respectively. The auditor of the former unit did not respond to the questionnaire; the auditor of the latter rated the item as "Immaterial." The auditor of another township disclosed that his client maintains a listing of fixed assets but not of their cost. The auditor did not c tribute a rating of the Item while the unit rated it as "Small Benefit." Another township rejoiced that the valuation of fixed assets had provided more accurate insurance coverage. The unit rated the item as ,rLarge Benefit"; the auditor did not respond to the questionnaire. Another township promised that in the future it would be keeping a more accurate record of fixed assets. Its auditor substantiated this statement by disclosing that his client had experienced a detailed appraisal of fixed assets as of January, 1973, with all subsequent additions having been recorded at cost. The unit rated the item as "Large Benefit" While the auditor rated it as "Small Benefit." Another township rejoiced that the value of its fixed assets is now Known. The unit rated the item as "Large Benefit” while the auditor did 178 not contribute a rating of it. The auditor of another township declared that the valuation of fixed assets has been recommended but not yet implemented. The auditor of another township indicated that his client does not have*individual ownership of material fixed assets. Another township auditor disclosed that his clients have difficulty in assigning values and in understanding what "general fixed assets” is. Another township auditor stated that his report has disclosed to the township that they should begin inventorying and valuing their fixed assets. The auditor of the first unit did not contribute a rating of the item while the auditors of the remaining units rated it as "Small Benefit,” "Immaterial,” and "Immaterial,” respectively. None of the units contributed a rating of the item. Another township declared that its space for meetings is rented rather than owned. Its auditor declared that, although values have always been placed for insurance purposes, it is difficult for laymen bookkeepers to maintain detailed accounting records. The unit rated the item as "Immaterial" while the auditor did not contribute a rating of i t . The auditor of another township rejoiced that his client had gained an increased awareness of fixed assets, especially with respect to the insuring of them. Both the auditor and the unit rated the item as "Small Benefit." Use of the Modified Accrual Basis 179 In the fifth benefit item the respondents were asked to evaluate the effect of Act 2 on the unit's adoption of the modified accrual basis of recording revenues and expenditures* The average ratings of .28 from the data from the units and .35 from the data from the auditors place the item in the "Iimnaterial" category but not very far below the top. The dispersion in the rating pattern is indicated below. "TT~ -- 6 Ratings - r~-- -------- Totals Number of Units* Data from Units Data from Auditors 8 3 11 15 64 35 3 0 0 1 86 54 Comments on this item were received in nine cases from either cities or their auditors as follows* Cl) City; (2) Auditor of a city; (3) City; (4) City; (5) Auditor of a city; (6 ) City; (7) City; ( 8 ) City; (9) Auditor of a city. In all cases the responses indicated that the city had been using the modified accrual basis prior to Act 2. In addition, comments were obtained from the auditors of Cities (3), (6 ), and (7). The auditor of City (3) declared that the city's client- prepared statements are now in conformance with generally accepted accounting principles. The auditor of City (6 ) simply substantiated the city's response. The auditor of City (7) pointed out that the city uses the modified accrual basis principally with respect to recording the property tax levy as revenue. City (7) rated the item as "Immaterial" while none of the remaining units contributed a rating of it. The auditor of City (1) did not respond to the questionnaire; the auditors of Cities (3), (4), and (7) rated the item as "Large Benefit," "Immaterial," and "Small Benefit," respectively, while the auditors of the remaining units did not contribute ratings of it. 180 The auditor of a village indicated that his client had used the accrual system prior to Act 2. Another village suggested that Act 2 had made it easier to use the modified accrual basis. Neither of the auditors contributed a rating of this item while the units rated it as "Large Benefit** and HSmall Benefit,” respectively. The auditor of another village complained that it is still difficult to get the council to think in terms of the accrual basis. The auditor rated the item as "Large Negative" while the unit did not contribute a rating of it. Another village stated that it is in the process of changing to the modified accrual basis, and its auditor substantiated that the village would possibly adopt the modified accrual basis by 197 5-76. Neither the auditor nor the unit contributed a rating of the item. The auditor of another village complained that all reports are on the cash basis due to the lack of properly trained personnel. The auditor rated the item as"Immaterial" while the unit did not contribute a rating of it. Comments on this item were received in six cases from either townships or their auditors as follows* (1) Auditor of a townshipj (2) Auditor of a township} (3) Auditor of a township; (4) Township; (5) Auditor of a township; (6 ) Auditor of a township. In addition, a conment was obtained from the auditor of Township (4). The auditors of Townships (1) and (2) reported that the modified accrual basis was used for year-end statements only. Township (4) indicated that it had already adopted modified accrual before Act 2; however, the auditors of both Townships (3) and (4) stated that the modified accrual basis was used for year-end audit reports only. The auditor of Township (5) 181 declared that the modified accrual basis is used only at year-end by adjustment from the cash basis, and the auditor of Township (6 ) disclosed that most accrual entries are made by the auditor at year-end. Townships Cl) and (2) rated the item as "Small Benefit” and " I m m a t e r ial respectively , while none of the remaining units contributed a rating of it. The auditors of Townships (4), C5), and (6 ) rated the item as "Small Benefit" while the auditors of the remaining units did not contribute ratings of it. Another township reported that it was in its first ye»r of operating on the modified accrual basis. The unit rated the item as "Large Benefit"* because of the tardiness of the unit's response, no questionnaire was mailed to the auditor. The auditor of another township disclosed that his client has their own "system" of modified accrual* current taxes collected are shown as deferred revenue since this is the money they will be using to operate the next year. The auditor rated the item as **Small Benefit" while the unit rated it as "Immaterial." The auditor of another township stated that his client prefers the cash basis. The auditor did not contribute a rating of the item while the unit rated it as "Immaterial," Another township declared that it had been using the modified accrual basis on a monthly basis. The unit did not contribute a rating of the item while the auditor rated it as "Small Benefit." The auditor of another township indicated that most of his township clients do not make the necessary entries to reflect modified accrual accounting. The auditor of another township complained that the journal entries for the modified accrual basis are not readily understood. Both of the auditors rated the item as "Immaterial" while neither of the units contributed a rating of it. 182 Discontinuing of Reports to the Municipal Finance Conmlssion In the sixth benefit item the respondents were asked to evaluate the effect of Act 2 with respect to discontinuing reporting to the Municipal Finance Commission in Lansing. The average ratings of .26 from the data from the units and .28 from the data from the auditors place the item in the "Immaterial" category but not very far below the top. The dispersion in the rating pattern is indicated below. Number of Unitsi Data from Units Data from Auditors + 2 7 4 ___________Ratings - 1 0 + 1 - 2 Totals 10 8 67 41 2 1 r 0 86 54 One city rejoiced that now there is no duplication of effort, and its auditor agreed that the extra work has been eliminated. Both the unit and the auditor rated the item as "Large Benefit." The auditor of a township reported that his client was unaffected by the item since it has no debt. Another township stated that its auditor handles this item. Another township indicated that its auditor sends the audit reports to Lansing. The auditors of the first two units did not contribute ratings of the item; because of the tardiness of the third unltfs response, no questionnaire was mailed to the auditor. The first and third units rated the item as "Immaterial" and **Small Benefit," respectively, while the second unit did not contribute a rating of it. Additional Interim Financial Reports 183 In the seventh benefit item the respondents were asked to evaluate the effect of Act 2 on the preparation and use of additional interim financial reports. The average ratings of .19 from the data from the units and #24 from the data from the auditors place the item in the “Immaterial” category a little more than % of the way below the top. The dispersion in the rating pattern is indicated below ~+~2~-------- 6 - T ~ ---— T T ~ -- Totals Ratings Number of Unitsi Data from Units Data from Auditors 5 6 8 A 71 41 2 3 0 0 86 54 The auditor of a city reported that his client's statements are prepared by computer. The General Fund is on a computer, including the budget. The reports are automatic. Neither the auditor nor the unit contributed a rating of the item. Another city replied that it had used interim reports prior to Act 2. Another city stated that it had always used monthly reports. Another city declared that financial reports are issued monthly, and its auditor agreed that the city has always had a monthly cash receipts and disbursements type report. The first and third units rated the item as "Immaterial” and "Large Benefit,” respectively, while the second unit did not contribute a rating of it. The auditor of the third unit rated the item as "Immaterial” while the auditors of the first and second units did not contribute ratings of it. Another city indicated that financial reports are issued once each quarter per charter. The auditor of another city disclosed that a detailed report of revenue and expense is issued monthly. Another city declared that a report of revenues and expenditures is issued monthly. 184 The auditor of another reported that quarterly financial statements are issued* The first and third units rated the item as **Inmaterial** and "Small Benefit," respectively, while the second and fourth units did not contribute ratings of it. The auditors of the second and third units rated the item as "Small Negative" while the auditor of the fourth unit rated it as "Large Benefit." The auditor of the first unit did not respond to the questionnaire. The auditor of a village disclosed that interim financial statements had been prepared prior to Act 2. The auditor of another village stated that the village had previously experienced fairly adequate reporting. In both cases neither the auditors nor the units contributed ratings of the item. Another village reported that statements of quarterly operation are prepared. The auditor of another village Indicated that a statement of revenues and expenditures is prepared monthly. The auditor of another village explained that complete statements are prepared monthly by means of an outside computer service. The auditor of another village disclosed that, while financial reports are issued to the council monthly, they have been more complete since Act 2. Another village replied that a monthly statement is prepared for the council. The first and fifth units rated the item as "Small Benefit" and "Large Benefit," respectively, while the second, third, and fourth units did not contribute a rating of it. The auditors of the second and fourth units rated the item as "Large Benefit" and "Small Benefit," respectively, while the auditors of the first and third units did not contribute a rating of it. The auditor of the fifth unit did not respond to the questionnaire■ 185 The auditor of another village revealed that, while his client prepares a report of monthly disbursements, no interim financial statements are prepared. The auditor of another village indicated that financial statements have only been prepared every two years by the auditor. The auditor of the second unit rated the item as "Inmaterial" while the auditor of the first unit did not contribute a rating of it. Neither of the units contributed a rating of the item. One township reported that quarterly reports have always been prepared. Its auditor disagreed, stating that the township just prepares yearly financial reports. Another township declared that monthly financial statements have always been prepared for the board. The auditor of another township disclosed that the interim reports prepared are the same as before Act 2. The auditor of another township indicated that the interim reports had been present before Act 2 and are prepared monthly. The first unit rated the item as "Immaterial** While the remaining units did not contribute ratings of it. The auditor of the fourth unit rated the item as "Immaterial" while the auditors of the remaining units did not contribute ratings of it. Thirteen other townships or their auditors indicated that interim reports are prepared. In addition, a comment was obtained from the auditor of the fifth township. The first stated that quarterly reports are prepared quarterly. The auditor of the second disclosed that a cash budget is prepared monthly. The auditor of the third revealed that monthly budget reports are prepared. The fourth reported that a budget is prepared monthly. The fifth affirmed that quarterly financial reports are prepared quarterly, and its auditor substantiated that quarterly financial statements are prepared for all funds. The sixth 186 declared that financial reports are prepared every month. The seventh stated that line reports are prepared quarterly. The eighth Indicated that budget comparison reports are prepared quarterly. The ninth reported that budget, actual, and balance reports are prepared every two or three months and pointed out that it is more work for the clerk. The auditor of the tenth disclosed that a summary of revenues and expenditures is prepared quarterly. The eleventh revealed that a report of revenues and expenditures is prepared twice each year. The auditor of the twelfth stated that operating statements are prepared monthly. The auditor of the thirteenth indicated that a profit and loss statement is prepared monthly. The first, fifth, sixth, ninth, and eleventh units rated the item as "Small Benefit"; the second unit rated it as "Immaterial"; while the fourth, seventh, and eighth units rated it as "Large Benefit." The third, tenth, twelfth, and thirteenth units did not contribute a rating of the item. The auditors of the second, tenth, and twelfth units rated the item as ‘'Large Benefit" while the auditors of the third, fifth, and thirteenth units rated it as "Small Benefit." The auditors of the fourth and seventh units did not contribute a rating of the item. The auditors of the first, sixth, eighth, and ninth units did not respond to the questionnaire. Because of the tardiness of the eleventh unit*s response, no questionnaire was mailed to the auditor. Another township reported that, although interim reports have not yet been prepared, quarterly reports will be started soon. The auditor of another township disclosed that financial reports are only prepared yearly. Neither of the units contributed a rating of the item. The auditor of the latter unit rated the item as "Large Benefit"; because of the tardiness of the former unit's response, no questionnaire was mailed 187 to the auditor. Completeness of Financial Reports In the eighth benefit item the respondents were asked to evaluate the effect of Act 2 on the completeness of financial reports, either annual or interim. The average ratings of .98 from the data from the units and 1.04 from the data from the auditors place the item very solidly in the "Small Benefit" category. The dispersion in the rating pattern is indicated below. Number of Unitst Data from Units Data from Auditors 33 16 19 24 33 14 1 0 0 0 86 54 + 2 *+ 1 0 - 1 - 2 T ot al s' ___________ Ratings ___________ The auditor of one city stated that additional control over expenditures is provided. The auditor of another city disclosed that his firm prepares the financial reports for his client. The auditor of a village indicated that the audit report is now more informative. The auditors of the first and third units rated the item as "Large Benefit” and "Small Benefit,” respectively, while the auditor of the second unit did not contribute a rating of it. Both the second and third units rated the item as **Large Benefit” while the first unit did not contribute a rating of it. The auditor of a township pointed out that added completeness appears only in a large expense grouping like salaries which the township had broken out before. The auditor rated the item as "Small Benefit” while the unit rated it as "Immaterial.” The auditor of another township rejoiced that his client is now able to knew what each activity costs. Another township indicated that 188 more classifications are now available. Another township rejoiced that it has an accurate record of each budgeted category within each fund. The auditor of another township stated that added completeness appears in the year-end audit reports. The auditor of another township disclosed that added completeness appears in improved budgeting and planning. Another township rejoiced that the completeness is exceptional for the annual spring meeting budget report. The auditors of the first, second, and fifth units rated the item as ,fLarge Benefit" while the auditor of the fourth unit rated it as "Small Benefit." The auditors of the third and sixth units did not respond to the questionnaire. The first, second, and fifth units rated the item as "Large Benefit" while the fourth unit rated it as "Small Benefit." The third and sixth units did not contribute a rating of the item. Another township complained that Act 2 has just doubled the time the clerk previously spent on the books. The financial reporting at the annual meeting has tripled. Although those attending the meeting feel that too much time is spent on financial reporting, those responsible for the accounting understand the completeness. The auditor of another township disclosed that the township does not prepare financial reports. The units rated the item as "Large Benefit" and "Small Benefit," respectively. The auditor of the former unit rated the item as "Large Benefit" while the auditor of the latter unit did not contribute a rating of i t » Recording of Expenditures by Activity In the ninth benefit item the respondents were asked to evaluate the effect of Act 2 with respect to the requirement that expenditures be classified by activity. The average ratings of .88 from the data from Che units and .85 from the data from the auditors place the item solidly in the "Small Benefit” category. The dispersion in the rating pattern 189 is indicated below. Number of Units! + 2 ___________ Ratings______ ___________ Totals - 2 - 1 0 + T ~ Data from Units Data from Auditors 2 8 13 25 24 29 15 3 0 1 2 86 54 Although one city pointed out that it has achieved better control as a result of this item, its auditor stated that the city began classification by activity before Act 2. Both the unit and the auditor rated the item as "Large Benefit.” In another case, although the city indicated that it had used activity on expenditures prior to Act 2, its auditor stated that the city has achieved additional control over expenditures as a result of this item. The unit rated the item as "Immaterial" while the auditor rated it as "Large Benefit." The auditor of another city disclosed that it had previously recorded by activity. Another city reported that it had employed a classification by departments before Act 2. Another city indicated that it had classified by activity previously. The auditors rated the item as "Immaterial,” "Small Benefit," and "Large Benefit," respectively, while the units rated it as "Large Benefit," " I i m n a t e r i a l a n d "Small Benefit," respectively. Another city pointed out that, although the classification by activity is good, many activities are not logical and are duplicated by expense items. The auditor of another city reported that the city now has better classifications. Another city explained that it previously was able to handle some items as line items. It is too small to use 190 activities for* Board of Review* Courts* Clerk— Elections. Another city rejoiced that classification by activity provides more accuracy. The first and fourth units rated the item as "Large Benefit" while the second and third units rated it as "Immaterial** and "Large Negative,** respectively. The auditors of the first and second units rated the item as "Small Benefit" and "Large Benefit," respectively, while the auditors of the third and fourth units rated it as "Inmaterial." The auditor of a village lamented that it is difficult for the administrative staff and council to adjust their thinking from object reporting to activity reporting. The auditor of another village complained that classification by activity has confused the client. Both of the auditors rated the item as "Large Negative"* the former unit rated it as "Large Benefit" while the latter unit did not contribute a rating of it. One township pointed out that its system prior to Act 2 was very similar. The unit rated the item as "Immaterial" while the auditor rated it as "Small Benefit." The auditor of another township disclosed that his client did not record expenditures by activity or budget by activity prior to Act 2. The auditor of another township indicated that his client did not classify by activity prior to Act 2, Another township stated that before Act 2 it had not employed an activity classification. All of the auditors rated the item as "Large Benefit"; the first and third units rated it as "Large Benefit" while the second unit rated it as "Small Benefit." Another township complained that classification by activity is more work. The auditor of another township reported that the township's use 191 of classification by activity is improving. The auditor of another township pointed out that for small townships the requirement to classify by activity is minimal. Another township declared that classification by activity has benefited it to a great extent. The second and third units rated the item as "Large Benefit" and "Small Negative," respectively} the first and fourth units did not contribute ratings of it. The auditors of the second and third units rated the item as "Large Benefit" and "Small Benefit," respectively; because of the tardiness of the first unit's response, no questionnaire was mailed to the auditor while the auditor of the fourth unit did not respond to the questionnaire. Budgeting by Activity In the tenth benefit item the respondents were asked to evaluate the effect of Act 2 with respect to the possibility that the municipality might have been encouraged to budget by activity. The average ratings of .81 from the data from the units and .94 from the data from the auditors place the item solidly in the "Small Benefit" category. The dispersion in the rating pattern is indicated below. Number of Units* Data from Units Data from Auditors 28 14 20 24 34 15 2 1 2 0 86 54 + 2 + 1 0 Ratings - 1 - 2 Totals The auditor of a city reported that the city was budgeting by activity before Act 2. Another city indicated that it budgets by activity to the extent feasible within the present organizational structure, and its auditor disclosed that the city has always budgeted by activity. Another city stated that it has better control of its expenditures as a result of this item, and its auditor revealed that the 192 city had begun to budget by activity before Act 2. The auditor of another city reported that the city was already budgeting by activity and by line items. Another city Indicated that budgeting by activity had been prior practice for the city. The auditors of the first, second, and fourth units rated the item as "Immaterial" while the auditors of the third and fifth units rated it as ffLarge Benefit.” The first and fourth units rated the item as "Small Benefit" while the third and fifth units rated it as "Large Benefit" and "Immaterial," respectively; the second unit did not contribute a rating of the item. Another city explained that budgeting by activity will require a more detailed analysis as it will break down "departmental" budgets. The budget is prepared on a "departmental" basis; activity is a sub­ category* The city uses FPPS— Financial Planning and Programming System. The unit did not contribute a rating of the item while the auditor did not respond to the questionnaire. Another city pointed out that in budgeting the city needs program items, also* Another city complained that the older department heads are somewhat confused. The auditor of another city explained that the finance comnittee prepares the budget by activity using the old account names whereas the accounting system uses the "uniform accounting system." Another city rejoiced that budget preparation is now easier for it. The first and fourth units rated the item as ,rLarge Benefit" while the second and third units rated it as "Small Negative" and "Small Benefit," respectively. The auditors of the first and fourth units rated the item as "Small Benefit" While the auditor of the third unit rated it as "Immaterial"; the auditor of the second unit did not contribute a rating of it. 193 The auditor of a village stated that an attempt is made by the village to budget by activity; the village has been fairly successful so far. The auditor of another village lamented that his client*s budget has been deficient in past years. Budgeting by activity was suggested by the auditor, and he expects a change in future years* budgeting procedures. The auditor expects the change to result in great improvement in future years. The auditor of another village disclosed that the village has never prepared a budget until the fiscal year 1975-76. The auditor of the first unit rated the item as "Small Negative" while the auditors of the second and third units did not contribute ratings of it. The first and second units rated the item as f,Large Benefit" while the third unit did not contribute a rating of it. One township reported that the uniform accounting system has changed the sequential order of listing and made the accounts more orderly and easier to locate. Another township indicated that it is just getting under way on budgeting by activity. Another township stated that it will begin to budget by activity during the next fiscal year. Another township asserted that budgeting by activity would begin during the fiscal year ending March 31, 1976. Another township disclosed that it has become more aware of price changes in preparing the yearly budget. Another township complained that the budget report has tripled in detail. Another township rejoiced that it has been able to have very good control of all activities. The auditor of a township revealed that budgeting had been done on an allocation budget format; the activity concept has been hard to grasp. The first unit rated the item as "Small Benefit" while the second, fourth, seventh, and eighth units rated it as "Large Benefit"; the sixth unit rated it as 194 "Immaterial" while the third and fifth units did not contribute ratings of it. The auditors of the first, second, and third units rated the item as ^Small Benefit" while the auditors of the sixth, seventh, and eighth units rated it as "Large Benefit"} because of the tardiness of the fourth unit's response, no questionnaire was mailed to the auditor while the auditor of the fifth unit did not respond to the que s t ionnaire. Correlation between Budgeted and Actual Amounts In the eleventh benefit item the respondents were asked to evaluate the effect of Act 2 on the correlation between budgeted and actual amounts. This item implies both more realistic budgeting by the unit and a heightened ability on the part of the unit to manage its actual data to meet the budgeted data. The average ratings of .70 from the data from the units and .76 from the data from the auditors place the item in the "Small Benefit" category but not very solidly. The dispersion in the rating pattern is indicated below. ________________________Ratings______ ___________ Totals + 2 + 1 - 1 - 2 0 Number of Unit s i Data from Units Data from Auditors 19 12 24 18 41 23 2 1 0 0 86 54 The auditor of a city stated that the city has always had good control in this area. Another city indicated that its future budget preparation has improved, and its auditor revealed that the city started before Act 2. The auditor of another city disclosed that this procedure was accomplished prior to Act 2. The auditor of a village reported that the correlation between budget and actual is improving. The auditors of the first and third cities rated the item as "Imnaterial" while the auditor of the second city rated it as •'Large Benefit"} the auditor of 195 the village rated it as "Small Benefit." The first and second cities rated rhe item as "Immaterial" and "Large Benefit," respectively, while the third city and the village did not contribute ratings of it ■ One township stated that the uniform accounting system enables it more closely to monitor expenditures against budget and modify as necessary* Another township indicated that the correlation between budget and actual has hopefully improved. The auditor of another township lamented that some major budgeted items (taxes and construction) do not conform to the reporting requirements. Another township reported that the correlation between budget and actual has improved in most cases* Another township asserted that it has not yet acquired enough experience with the uniform accounting system to predict the effects of this item. Another township rejoiced that the correlation between budget and actual keeps the Board aware of the budget balance. The auditor of another township disclosed that the correlation between budget and actual is improving* The first unit rated the item as "Large Benefit" while the third unit rated it as "Immaterial" the fourth and seventh units rated it as "Small Benefit" while the second, fifth, and sixth units did not contribute a rating of it. The auditors of the first, third, and fourth units rated the item as **Sioall Benefit" while the auditor of the seventh unit rated it as "Large Benefit"? because of the tardiness of the responses of the second and fifth units, questionnaires were not mailed to their auditors while the auditor of the sixth unit did not respond to the questionnaire. The auditor of another township declared that his client had been instructed to start preparing and using annual budgets* The auditor of 196 another township observed that the township does not appear to budget accurately. The auditor of the latter unit rated the item as "Iranaterial" while the auditor of the former unit did not contribute a rating of it. The units rated the item as "Immaterial" and "Small Benefit," respectively. Development of Program Budgeting In the twelfth benefit item the respondents were ashed to evaluate the effect of Act 2 on the development of program budgeting by the municipality. For purposes of this question, "program budgeting" could be viewed as long-term budgeting for individual projects, a step in the direction of output measurement, or a sub-category of activity budgeting. The average ratings of .12 from the data from the units and .07 from the data from the auditors place the item solidly in the "Immaterial" category* The dispersion in the rating pattern is indicated below. Number of Unitst Data from Units Data from Auditors 3 1 5 3 + 2 + 1 0~ 77 49 Ratings - 1 - 2 Totals 1 1 0 0 86 54 One city replied that a program budgeting system is presently being implemented which will require a detail greater than that required by Act 2. The auditor of another city revealed that program budgeting is used for Parks and Recreation and for Public Safety, The auditor of another city disclosed that program budgeting is used in the Public Improvement Funds. Another city declared that Act 2 is not related to program budgeting. The city does this to some degree independently. The auditor of another city indicated that, although program budgeting is not used by the city, it is at least discussed. The auditor of a 197 village reported that program budgeting is used in connection with federal revenue sharing. The first and second cities and the village rated the item as "Small Benefit" While the third and fourth cities rated it as "Immaterial"* the fifth city did not contribute a rating of it. The auditors of the second and third cities and the village rated the item as ’’Small Benefit" while the auditors of the fourth and fifth cities did not contribute ratings of it; the auditor of the first city did not respond to the questionnaire. One township stated that program budgeting was being done previous to Act 2. The unit rated the item as "Immaterial" while the auditor did not contribute a rating of it. The auditor of another township revealed that long-term budgeting is used for construction. The auditor of another township disclosed that program budgeting is used for Recreation. Another township indicated that program budgeting is used for Fire Department* Library, and Park. Another tcnmship reported that long-term budgeting is used for the fire truck. The auditor of another township stated that program budgeting is used in connection with federal revenue sharing. Another township observed that its major concern is local roads. The auditors of the third and sixth units rated the item as "Immaterial" while the auditor of the fifth unit rated it as "Large Benefit"; the auditors of the first and second units did not contribute ratings of it while the auditor of the fourth unit did not respond to the questionnaire. The first and second units rated the item as "Immaterial" while the third and fourth units rated it as "Large Benefit"; the fifth and sixth units did not contribute ratings of it. The auditor of another township indicated that the township is too small for this item. Neither the auditor nor the unit contributed a 198 rating of the item* Measurement of Performance or Evaluation of Output In the thirteenth benefit item the respondents were asked to evaluate the effect of Act 2 on the measurement of the performance of employees or on the evaluation of the output of projects by the municipality* The average ratings of ,02 from the data from the units and .04 from the data from the auditors place the item solidly in the "Immaterial" category. The dispersion in the rating pattern is indicated below, Number of Unitsi Data from Units Data from Auditors 0 1 3 1 ________ + 1 + 2 Ratings - 1 - 2 Totals 1 1 0 0 86 54 0 82 51 One city stated that this is included in its Financial Planning and Programming System as an efficiency measurement. Another city indicated that it hopes to measure performance and evaluate output in the future. Another city reported that it measures performance and evaluates output in Sanitation. The auditor of another city disclosed that, although the city does not measure performance or evaluate output, it is at least discussed. None of the units contributed a rating of the item. The auditors of the second, third, and fourth units did not contribute ratings of the item while the auditor of the first unit did not respond to the questionnaire* One township replied that it measures performance and evaluates output in Enterprise Fund operations. The auditor of another township revealed that it measures performance and evaluates output in connection 199 with funds administered under the Emergency Employment Act and the Comprehensive Employment and Training Act. Another township stated that it measures performance and evaluates output in connection with roads and the fire department. The first and third units rated the item as "Small Benefit" while the second unit rated it as "Immaterial." The auditor of the second unit rated the item as "Small Benefit" while the auditor of the first unit did not contribute a rating of it; the auditor of the third unit did not respond to the questionnaire. Another township replied that it does not measure the performance of employees since there are no employees. However, its auditor reported that the township employs segregation of responsibilities among supervisor, clerk, and treasurer and coordination of data for all officials. The unit did not contribute a rating of the item while the auditor rated it as ''Large Benefit." Cash Management In the fourteenth benefit item the respondents were asked to evaluate the effect of Act 2 on the performance of the municipality in the area of cash management■ The average ratings of ,41 from the data from the units and ,26 from the data from the auditors place the item in the "Immaterial" category but not very far below the top. The dispersion in the rating pattern is indicated below. Number of Unitsi Data from Units Data from Auditors 11 3 15 1 0 ________ + 1 + 2 Ratings______ ____________ Totals - 2 - 1 2 0 0 1 86 54 0 58 40 The auditor of one city offered the compliment that little could be done to improve the city*s previously high performance. Another city reported that the use of combined bank accounts makes control easier. 200 The auditor of another city indicated that Act 2 has improved the cash management only to the extent of better budget control. The auditor of another city stated that cash management has always been a concern of the city. Another city replied that Act 2 provides better management for investments. The auditor of the fifth unit rated the item as "Small Benefit" while the auditors of the remaining units did not contribute ratings of it. The second, fourth, and fifth units rated the item as 'T^irge Benefit" while the third unit rated it as "Small Benefit"; the first unit did not contribute a rating of it. The auditor of a village reported that Act 2 has contributed to the effective investing of monies. However, the auditor of another village lamented that before Act 2 his client knew what total receipts and disbursements on a cash basis were; now they do not. The auditor of the latter unit rated the item as "Large Negative" while the auditor of the former unit did not contribute a rating of it. The former unit rated the item as "Small Benefit” while the latter unit did not contribute a rating of i t • One township replied that Act 2 has led to a better understanding between the treasurer*s office and the clerk's office. The auditor of another township stated that the township had always been competent with respect to cash management before Act 2. Another township indicated that it has always budgeted and tried its best to stay within the budget. The auditor of another township rejoiced that its investment earning has increased from zero to $400 per year. The auditor ot another township reported that Act 2 has increased the awareness of balances by the clerk, the treasurer, and the Board. Another township replied that it does not use cash. The auditor of another township 201 professed that he believes that Act 2 helps the township in its budgets. The first, second, and seventh units rated the item as "Small Benefit,” "Inmaterial," and "Small Negative,” respectively, while the remaining units did not contribute ratings of it. The auditors of the first, third, and fifth units rated the item as ”Small Benefit” while the auditor of the fourth unit rated it as "Large Benefit"j the auditor of the sixth unit rated it as "Immaterial" while the auditors of the second and seventh units did not contribute ratings of it* Receipt of Information and Assistance from Other Units In the fifteenth benefit item the respondents were asked to evaluate the effect of Act 2 on the ability of the municipality to receive information and assistance from other local units of government. The average ratings of .28 from the data from the units and .33 from the data from the auditors place the item in the "Immaterial” category but not very far below the top. The dispersion in the rating pattern is indicated below. _______________________ Ratings______ Number of Unitsi Data from Units Data from Auditors 7 3 11 12 + 2 + 1 0 67 39 - 1 - 2 Totals 1 0 0 C 86 54 The auditor of a city stated that his firm is not aware of any communication among the units. The auditor of another city reioiced that his firm can now place reliance on information received from another city as compared with the operations of his client. Another city declared that it does not receive any reports from any State agency about financial comparisons across municipal lines. Its respondent asked, **What reports should we be receiving, and from whom?" Another city replied that it generally relies on its CPA firm to assist on 202 difficult accounting problems or procedures. Its respondent continued, “Act 2 probably helps them solve our problems more easily." Its auditor disclosed that communication among the units occurs in areas of computer applications. Another city complained that Act 2 permits too much latitude in account designation to be helpful in inter-municipal comparison. Another city asserted that it did not previously have a problem in receiving accurate usable information from nearby cities. The auditor of the second unit rated the item as "Large Benefit" while the auditors of the fourth and fifth units rated it as "Small Benefit"; the auditors of the first, third, and sixth units did not contribute ratings of it. The second and fourth units rated the item as "Small Benefit" while the third and fifth units rated it as "Immaterial"; the first and sixth units did not contribute ratings of it. The auditor of a village revealed that the village is able to make a comparison with other units of government. The auditor of another village stated that his firm is not Knowledgeable about the exchange of data among units. The auditor of the former unit rated the item as '•Large Benefit" while the auditor of the latter unit did not contribute a rating of it. The latter unit rated the item as '*Large Benefit" while the former unit did not contribute a rating of it. One township reported that it has not had the occasion to communicate with other units. Another township expressed the hope that it would be able to communicate with other units. The auditor of another township disclosed that his client has not received information regarding other units. The auditor of another township judged that township and municipal association professional media and pressure to perform to avoid criticism all have had their effect. The first, 203 second* and fourth units rated the item as "Immaterial*** "Large Benefit*" and "Small Benefit*" respectively* while the third unit did not contribute a rating of it. The auditor of the fourth unit rated the item as "Large Benefit** while the auditors of the first and third units did not contribute ratings of it; because of the tardiness of the second unit's response* no questionnaire was mailed to the auditor. Contributions by Respondents In the sixteenth benefit item the respondents were asked to contribute and to evaluate additional ways in which their units might have been affected by the accounting and reporting requirement of Act 2_. The items contributed were scored strictly on the basis of the quantity submitted* with no particular attempt being made to judge their quality. It should be understood that the various items contributed were not of equal importance with respect to one another. The average ratings of .22 from the data from the units and .46 from the data from the auditors place the item in the "Immaterial" category but not very far below the top. The dispersion in the rating pattern is indicated below. Please observe that in this case the numbers in the table reflect the number of individual items contributed rather than the number of units responding. Number of I ternsi Data from Units Data from Auditors 14 10 2 7 + 2 + 1 0 1 2 - 1 - 2 Totals 7 2 2 0 26 21 ______ ________ Ratings One city cautioned that accounting systems require more than a common classification structure. Its respondent continued, "Besides, our structure includes Financial Planning and Programming System." Another city indicated that Act 2 requirements have made it easier to plan toward program budgeting* the use of electronic data processing, 204 and the development of output measurement data. Another city asserted that Act 2 has improved the financial reporting# highlighted interfund relationships# and improved the accounting process* The auditor of another city rejoiced that the computer system developed is now in use in several cities and one county* Another city pointed out that the uniform accounting system is simpler than the one previously in use. Its respondent continued# "Eventually, the interchangeability will pay off.” Another city complained that Act 2 has reduced the flexibility of placing accounts or funds in an order other than that specified by the State chart and that the account titles do not always fit the transaction. Its respondent continued* "The chart is followed because it was mandated* not by choice*” Its auditor asserted that the units have benefited from the accounting and reporting requirement as a result of the report format and of the Comments and Recommendations letters. Another city complained that its accounting system is not automated, and nine digit Act 2 codes are more time consuming than its previous shorter code system. Its respondent continued, ”We are beginning to automate our accounting functions. He expect that as we automate in the next several years the existing programs of other cities will be a large help,” Its auditor stated that Act 2 has enabled the city to use computer programs and a general exchange of procedures. The third unit contributed three '*Large Benefit” ratings of the item while the fifth unit contributed a ,rLarge Benefit” and a ”Small Benefit” rating of it. The sixth unit contributed three ”Small Negative" ratings of it while the seventh unit contributed a "Small Negative" and a "Large Benefit” rating of it. The first, second, and fourth units did not contribute ratings of it. The auditor of the sixth unit contributed a "Large 205 Benefit” and a "Small Benefit" rating of the Item while the auditor of the seventh unit contributed two "Small Benefit" ratings of it* The auditors of the second, third* fourth, and fifth units did not contribute ratings of it while the auditor of the first unit did not respond to the questionnaire* Another city replied that Act 2 has contributed to the standardization of record-keeping and an educational process with other units* Another cLty stated that Act 2 has led to the data processing of financial records and of budget reports* The auditor of another city reported that the units have benefited from the accounting and reporting requirement as a result of the report format and of the Comments and Recommendations letters. The auditor of another city lamented that the city*s financial accounting is in poor condition due to the lack of trained employees* Another city promised that it would try to use the county computer program this year. The auditor of another city reported that Act 2 has provided better accounting concepts and has made the city more aware of the budgetary process. The auditor of another city disclosed that his client had done a good job before Act 2; therefore, the impact of the Act did not affect his client as significantly as others. The first unit contributed a "Small Benefit" and a "Large Benefit" rating of the item while the second unit contributed a "Large Benefit" rating of itj the remaining units did not contribute ratings of it. The auditor of the third unit contributed two "Large Benefit” ratings of the item while the auditor of the sixth unit contributed two "Small Benefit" ratings of it. The auditors of the second, fourth, and seventh units did not contribute ratings of it while the auditors of the first and fifth units did not respond to the questionnaire. 206 One village Insisted that it had followed uniform accounting for a long time. Another village complained that, with such an added work load, it must employ additional help. Another village lamented that, as a result of Act 2 , the obtaining of information costs more money and takes longer. Another village rejoiced that Act 2 has enabled it to maintain more accurate records. The auditor of another village stated that his client is too small for Act 2 to be effective. Another village indicated that it has benefited with respect to the preparation of the federal government revenue sharing actual use report and of the State recreation grant report. The second unit contributed a "Large Negative” rating of the item while the third unit contributed two ^Small Negative” ratings of it. The fourth unit contributed a "Large Benefit” rating of it while the sixth unit contributed two "Large Benefit” ratings of it; the first and fifth units did not contribute ratings of it. Because of the tardiness of the fourth#s unit response, no questionnaire was mailed to the auditor; the auditors of the remaining units responded but did not contribute ratings of the item. One township stated that Act 2 has made it easier to identify the various activities* Another township indicated that Act 2 has enabled the more efficient and effective use of its accounting machine. Another township reacted with enthusiasm to the idea of possibly sharing computer programs with other units. It reported that the township’s water and tax billings are now on an in-house computer system. The auditor of another township rejoiced that Act 2 has provided a positive direction to follow. However, he continued, "In some cases, for example, supplies, the amounts involved are too immaterial to match the proper State requirements, for example, clerk or treasurer; so my client 207 just uses other general government activity.” The auditor of another township declared that his client now maintains better and more complete records. Another township reported that its bookkeeping and accounting is working out fine so far; its books are audited or balanced every 30 days. Another township stated that Act 2 has enabled it to have better accounting. Each of the first two units contributed a "Large Benefit” rating of the item while the seventh unit contributed an "Imnaterial” rating of itf the remaining units did not contribute ratings of it. The auditor of the fourth unit contributed a "Large Benefit” and an "Immaterial” rating of the item while the auditor of the fifth unit contributed an "Immaterial” rating of it; the auditors of the first, second, and seventh units did not contribute ratings of it. Because of the tardiness of the third unit's response, no questionnaire was mailed to the auditor; the auditor of the sixth unit did not respond to the questionnaire. Another township complained that, although Act 2 has resulted in a much better accounting system, it has increased the clerk's duties to a very great extent, sometimes with no corresponding increase in salary. Another township rejoiced that its Board of Trustees will be better informed and that interim financial reports will be available. Another township complained that Act 2 has resulted in more bookkeeping than before. Another township lamented that Act 2 has made more work. Another township reported that its council feels that all local township units should be required to observe the Act 2 requirements. The auditor of another township replied that Act 2 has provided a more detailed expense breakdown. The auditor of another township rejoiced that Act 2 has led to a better understanding by officials of their responsibilities, the removal of poorly trained and unmanageable 208 officials, and the improvement of rapport and communication with the general public. The auditor of another township declared that in general Act 2 has made the township officials more aware of the necessity of good accounting and the benefits to be derived therefrom. The auditor of another township complained that Act 2 has compounded the bookkeeping requirements. The auditor of another township stated that Act 2 has resulted in better accounting concepts, a better budgetary system, and the requirement of accounting knowledge. The auditor of another township pointed out that it is now required to maintain an adequate accounting system. Another township complained that Act 2 has resulted in added expense for books. The second unit contributed two "Large Benefit” ratings of the item; the fifth unit contributed a ”Large Negative” rating of it while the twelfth unit contributed a "Small Negative” rating of it. None of the remaining units contributed ratings of it. The auditor of the sixth unit contributed a "Small Benefit" rating of the item while the auditor of the seventh unit contributed three "Targe Benefit" ratings of it. The auditor of the eighth unit contributed a "Large Benefit” rating of it while the auditor of the ninth unit contributed a "Small Negative" rating of it. The auditor of the tenth unit contributed a "Small Benefit," a "Large Benefit,” and a "Small Negative" rating of it while the auditor of the eleventh unit contributed a "Large Benefit” rating of it. The auditors of the fifth and twelfth units did not contribute ratings of it. The auditors of the first and fourth units did not respond to the questionnaire; because of the tardiness of the responses of the second and third units, questionnaires were not mailed to their auditors. Promptness of Filing of Financial Statements and Reports 209 In the seventeenth benefit item the respondents were asked to evaluate the effect of Act 2 on the promptness of the filing of the financial statements and reports* At present, the financial statements and reports of each municipality, with the CPA audit certificate enclosed, must be filed with the Bureau of Local Government Services within four months after the close of the fiscal period covered. The average ratings of ,24 from the data from the units and .41 from the data from the auditors place the item in the "Immaterial” category but not very far from the top. The dispersion in the rating pattern is indicated below. Number of Units* + 2 ___________ Ratings______ ____________ Totals - 2 - l 0 + 1 Data from Units Data from Auditors 10 6 13 13 56 33 2 1 5 1 86 54 The auditor of a city pointed out that this had been required by a city ordinance long before Act 2. Another city complained that its outside auditor is usually late in filing. The auditor of another city explained that the city is less prompt only because of city growth in excess of the city's accounting department, in terms of the number of employees, and because of various problems with computer programs and the service bureau. Another city stated that its timetable is about the same. Its auditor indicated that, prior to the enactment of Act 2, the reports were not sent to the Bureau of Local Government Services. The auditor of a village reported that the village has always been prompt. The auditors of the first city and the village rated the item as "Immaterial” and ”Slightly More Prompt," respectively, while the auditors of the third and fourth cities did not contribute ratings of 210 it* the auditor of the second city did not respond to the questionnaire. The first and fourth cities rated the item as "Immaterial" while the third city and the village rated it as "Slightly More Prompt" and "Much More Prompt," respectively; the second city did not contribute a rating of it. One township explained that this is its first year of operation under the uniform accounting system. Another township expressed the belief that its auditor has previously filed with the State. Another township reported that its promptness in filing has been good. Another township indicated that it has had very good CPAs; and, when asked to do so, they have always handled its audit very promptly. The auditor of another township stated that his client was always prompt. Another township rejoiced that it has a good and prompt CPA. Another township replied that its auditor does this, and another township stated that this is done by its CPA firm. The second unit rated the item as "Slightly More Prompt" while the fifth and sixth units rated it as "Immaterial"; the remaining units did not contribute ratings of it. The auditors of the second, fifth, and seventh units rated the item as "Immaterial" while the auditors of the sixth and eighth units rated it as "Much More Prompt." Because of the tardiness of the first unit*s response, no questionnaire was mailed to the auditor; the auditors of the third and fourth units did not respond to the questionnaire. Implementation of Audit Recommendations In the eighteenth benefit item the respondents were asked to evaluate the effect of Act 2 with respect to the implementation of the audit recommendations made by the CPA auditor at the close of the audit engagement. The average ratings of .74 from the data from the units and 1.06 from the data from the auditors place the item solidly in the "Small Benefit” category. The dispersion in the rating pattern is 211 indicated below. Number of Unitsi Data from Units Data from Auditors 18 18 32 21 + 2 + t 0 32 15 Ratings - 1 - 2 Totals 4 0 0 0 86 54 The auditor of a city complained that there is no follow-through by the State. The auditor of another city declared that enforcement by the State is needed in this area. Another city stated that there is no follow-up to require implementation. The auditor of another city lamented that most of the audit recommendations are not adopted. The auditors of all of the units rated the item as "Immaterial"* the first and third units rated it as "Immaterial” while the second and fourth units rated it as "Small Benefit." The auditor of a village indicated that his client implements the firm*s suggestions very readily. However, the auditor of another village revealed that his client has not complied with recommendations until the fiscal year 1975-76 due to the lack of follow-through by the prior auditor. The auditor of the former unit rated the item as **Large Benefit" while the auditor of the latter unit rated it as "Immaterial,” The former unit rated the item as "Small Benefit” while the latter unit did not contribute a rating of it. One township stated that its books have been audited annually prior to Act 2. Another township reported that recommendations from its auditors have involved the control of fixed assets, the identification of funds, and changes in budgeting. The auditor of another township indicated that the implementation of recommendations under Act 2 has 2X2 improved the accounting system and the internal controls. The auditor of another township disclosed that his client has adopted all recommendations. Another township complained that this creates more work in the end for the clerk. The auditor of another township rejoiced that the understanding and performing of accounting responsibilities have considerably improved. The first, third, and fourth units rated the item as "Small Benefit" while the second, fifth, and sixth units rated it as ,rLarge Benefit." The auditors of the first, third, fifth, and sixth units rated the item as "Large Benefit” while the auditor of the fourth unit rated it as "Small Benefit” i because of the tardiness of the second unit's response, no questionnaire was mailed to the auditor. Understanding of Financial Report In the nineteenth benefit item the respondents were asked to evaluate the effect of Act 2 on the understanding of the financial report by the council members or board members of the municipality when it is presented by the CPA auditor. The average ratings of .62 from the data from the units and .76 from the data from the auditors place the item in the "Small Benefit" category but not very solidly. The dispersion in the rating pattern is indicated below. ________________________Ratings__________________ Totals + 1 + 2 - 1 - 2 0 Number of Unitst Data from Units Data from Auditors 17 9 25 26 39 17 4 1 1 1 86 54 The auditor of a city stated that his firm is not aware of any change. Another city reported that it has no real first hand information on the commissioners* understanding under Act 2 as compared to prior reports. Another city indicated that its council relies mainly on budget comparisons. The auditor of the second unit rated the item as 213 "Large Benefit" while the auditor of the third unit rated it as "Small Benefit"} the auditor of the first unit did not contribute a rating of it. The first and second units rated the item as "Small Benefit" while the third unit rated it as "Immaterial." One township replied that the beneficial effect was small at first. Another township stated that the effect has been questionable. The auditor of another township disclosed that the Board members have a good understanding of the financial report. The auditor of another township reported that the council was always aware of the financial position. Another township complained that the Board gets more dissatisfied with the Act 2 accounting system each time the auditing report returns. The auditor of another township rejoiced that the budgeting and actual comparisons now provide a clearer understanding. The auditor of another township claimed that there is no way to know since this has not been discussed with the Board* The first, second, and eighth units rated the item as "Small Benefit" while the third and fifth units rated it as '•Immaterial." The sixth and seventh units rated it as "Large Negative" and "Large Benefit," respectively, while the fourth unit did not contribute a rating of the item. The auditors of the second and seventh units rated the item as "Large Benefit" while the auditor of the third unit rated it as "Small Benefit." The auditors of the fifth and sixth units rated it as "Immaterial" while the auditor of the eighth unit did not contribute a rating of it. Because of the tardiness of the first unit*s response, no questionnaire was mailed to the auditor} the auditor of the fourth unit did not respond to the questionnaire. Contributions by Respondents 214 In the twentieth and final benefit item the respondents were asked to contribute and to evaluate additional ways in which their units might have been affected by the auditing requirement of Act 2_. The items contributed were scored strictly on the basis of the quantity submitted, with no particular attempt being made to judge their quality. It should be understood that the various items contributed were not of equal importance with respect to one another. The average rating of .07 from the data from the units places the item solidly in the "Imuaterial" category while the average rating of .94 from the data from the auditors places the item solidly in the "Small Benefit" category. The dispersion in the rating pattern is indicated below. Please observe that in this case the numbers in the table reflect the number of individual items contributed rather than the number of units responding. ______________ f 1~ f 2 0 Ratings_ — 1 — 2 Totals" Number of I ternsi Data from Units Data from Auditors 4 24 4 5 1 0 2 2 2 0 13 31 One city replied that there has been little impact from the auditing requirement as it has always had an annual audit. Another city responded that it has always had annual audits by CPAs. Another city stated that it has been audited for over twenty years* no real measurable change has occurred resulting from Act 2. Its auditor asserted that, as a result of Act 2, answers to auditing problems have been provided by the Treasury Department; and more municipal accounting seminars have been held. The auditor of another city pointed out that Act 2 has resulted in better control over expenditures. Also, it has provided uniform reporting, which makes auditing easier. In addition. 215 new employees are experienced when they move from another unit of government. Another city declared that the suggested chart of accounts, with nine digits, is not acceptable. Another city rejoiced that internal controls have been improved, and the need for such controls is better understood by council. Its auditor added that, as a result of Act 2, answers to auditing problems have been provided by the Treasury Department; and more municipal accounting seminars have been held. Another city revealed that its auditor believes in cash basis accounting, and the auditor is the main barrier to fully implementing Act 2, The auditor of another city indicated that Act 2 has led to a more accurate following of the city charter provisions. The sixth unit contributed a "Large Benefit" rating of the item while the seventh unit contributed a "Small Negative" rating of it; the remaining units did not contribute ratings of it. The auditor of the third unit contributed two "Large Benefit" ratings of the item while the auditor of the fourth unit contributed three "Large Benefit" ratings of it; the auditor of the sixth unit contributed two '*Large Benefit" ratings of it while the auditor of the eighth unit contributed a "Small Benefit" rating of it. The auditors of the first, second, and fifth units did not contribute ratings of it while the auditor of the seventh unit did not respond to the questionnaire. One village complained that Act 2 has caused the added expense of the audit. Another village stated that Act 2 has provided a better accounting system. Another village rejoiced that Act 2 has led to the obtaining of assistance in adjusting the books. The auditor of another village reported that there has always been good cooperation by his client, and the new law allowed both the client and his firm to effect 216 desired changes* Another village indicated that its auditor has verified ending balances both for funds and for taxes. The second unit contributed a "Large Benefit** rating of the item while the third unit contributed a **Small Benefit” rating of it* the fifth unit contributed a "Large Benefit” and a "Small Benefit” rating of it while the first and fourth units did not contribute ratings of it. The auditors of the first and fourth units did not contribute ratings of the item while the auditor of the second unit did not respond to the questionnaire; because of the tardiness of the responses of the third and fifth units, questionnaires were not mailed to their auditors. The auditor of a township replied that Act 2 has provided stronger accounting controls. The auditor of another township stated that the supporting evidence is now more readily available. Another township declared that Act 2 has enabled it to have faith in its system. Another township reported that there have been no other Act 2 effects outside of changing account numbers. However, its auditor indicated that Act 2 has caused timing differences and has provided uniformity or consistency among years and accounts. The auditor of another township pointed out that the township can now maintain better and more ccmplete records. Another township complained that Act 2 has burdened it with the cost of audit. Another township replied that it "now knows what it is all about.” The auditor of another township disclosed that, as a result of Act 2, internal control has improved; and the township is more closely following its ordinance provisions. The auditor of another township revealed that Act 2 has resulted in improved accounting systems and records, an increased awareness of accounting and administrative problems, and the seeking of advice on accounting matters. Its respondent added, "The second and third items above would relate only to 217 those persons directly involved in the accounting function." The auditor of the first unit contributed a "Large Benefit" rating of the item while the auditor of the second unit also contributed a "Large Benefit" rating of it. The auditor of the fourth unit contributed a "Small Negative" and a "Large Benefit" rating of it While the auditor of the fifth unit contributed a "Large Benefit" rating of it. The auditor of the eighth unit contributed a "Large Benefit" and a "Small Benefit" rating of it while the auditor of the ninth unit contributed three ■'Large Benefit" ratings of it. The auditor of the seventh unit did not contribute ratings of itj because of the tardiness of the responses of the third and sixth units, questionnaires were not mailed to their auditors. The sixth unit contributed a "Large Benefit" rating of the item while the seventh unit contributed a "Small Benefit" rating of it; the remaining units did not contribute ratings of it. Another township complained that Act 2 has left a very negative effect on its council. The auditor of another township replied that Act 2 has provided improved classifications of revenues and expenditures. The auditor of another township stated that the township is more aware of accounting. Another township indicated that it has a better understanding of accounting. Its auditor substantiated that the effect of Act 2 is evident in internal control areas, accounting procedures, and increased confidence in the records. Another township complained that Act 2 has increased its cost. However, its auditor declared that Act 2 has made the client more aware of its reporting responsibilities, has encouraged the accounting for and reporting of general fixed assets, and has generally upgraded the quality of the 218 people who still want to be clerks and treasurers. He added, "These comments apply, not necessarily to this client, but overall to all of our township clients.” The auditor of another township disclosed that Act 2 has led to better control of expenditures, improved management, and additional cost of auditing. The auditor of another township reported that the township's excess cash is being invested and that budgeting has led to better spending of available funds. The respondent from another township revealed that, ”No one understands it except myself." The first unit contributed a "Large Negative" rating of the item while the fburth unit contributed a "Small Benefit" rating of it. The fifth unit contributed an "Immaterial" rating of it while the eighth unit contributed a "Small Negative" rating of it. The remaining units did not contribute ratings of it. The auditor of the second unit contributed a "Large Benefit" rating of the item while the auditor of the third unit contributed a **Small Benefit" rating of it. The auditor of the fourth unit contributed three "Large Benefit" ratings of it while the auditor of the fifth unit also contributed three #,Large Benefit" ratings of it. The auditor of the sixth unit contributed two f,Small Benefit" ratings and a "Small Negative" rating of it while the auditor of the seventh unit contributed two "Large Benefit" ratings of it. The auditors of the first and eighth did not contribute ratings of it. This section has examined each of the twenty benefit items in the order in which they appeared on the questionnaire. It has disclosed that "Small Benefit" ratings have emerged with respect to the following items: "Accuracy" of the Accounting and Bookkeeping Operations; Promptness of the Accounting and Bookkeeping Operations; Completeness of 219 Financial Reports; Recording of Expenditures by Activity; Budgeting by Activity; Correlation between Budgeted and Actual Amounts; Implementation of Audit Recommendations; Understanding of Financial Report. A n additional "Small Benefit" rating emerged in connection with the auditing requirement of Act 2 as a result of open-ended contributions by the CPA auditors. The ten cost items are examined in the next section. Space EVALUATION OF THE COSTS In the first cost item the respondents were asked to evaluate the effect of A c t 2 on the acquisition of additional space by the municipality, either through purchase or construction or by rental. The average ratings of .01 from the data from the units and .15 from the data from the auditors place the item decidedly in the "Immaterial" category. The dispersion in the rating pattern is indicated below, _________________ Ratings____________________ Totals + 1 - 2 - 1 0 + 2 Number of U n i t s i Data from Units Data from Auditors 0 0 1 8 85 46 0 0 0 0 86 54 None of the municipalities which participated in this research provided any dollar amounts for this item with respect to either total item cost or that portion of the cost associated with Act 2. One village reported that some remodeling had occurred at this time; however, it probably would have been done regardless of Act 2. The auditor of another village stated that no additional space had been added. The auditor of another village indicated that the village had not acquired more space. One township replied that work on additional 220 space is in process, The township rated the item as **301811 Cost** while the villages did not contribute ratings of it. The auditors of the first and third villages rated the item as "Immaterial** while the auditor of the second village did not contribute a rating of itj because of the tardiness of the township*s response, no questionnaire was mailed to the auditor. Labor Costs In the second cost item the respondents were asked to evaluate the effect of Act 2 on the labor costs paid by the municipality in the form of salaries to those individuals who are associated with its accounting and bookkeeping operations. The average ratings of .26 from the data from the units and .35 from the data from the auditors place the item in the "Immaterial" category but not very far below the top. The dispersion in the rating pattern is indicated below. Number of Unitsi Data from Units Data from Auditors 5 5 12 10 + ^ + 1 0 69 38 - 1 - i. Totals 0 1 0 0 86 54 _________________ Ratings A small city reported a total item cost in Year 2 of $8,000, which was completely associated with Act 2, and rated it as a "Small Cost." Another small city reported a total item cost in Year 1 of $3,000, of which $7 50 was associated with Act 2, and a total item cost in Year 2 of $3,875, of which $969 was associated with Act 2. The city rated these as "Immaterial," A large village reported a total item cost in Year 1 of $12,000, of which $4,000 was associated with Act 2, and a total item cost in Year 2 of $16,000, of which $8,000 was associated with Act 2. The village rated these as "Large Costs." Another large village reported a total 221 item cost in Year 1 of $10,500, of which $5,250 was associated with Act 2, and a total item cost in Year 2 of $17,100, of which $8,550 was associated with Act 2. The village rated these as "Large Costs." A large township reported a total item cost in Year 2 of $7,200, of which $200 was associated with Act 2, and rated it as a "Small Cost." Another large township reported a total item cost in Year 1 of $13,200, of which $10,090 was associated with Act 2, and rated it as a "Large Cost." The unit has not acquired a second year of experience with the Act 2 requirements. Another large township reported a total item cost in Year 1 of $6,873, of which $1,500 was associated with Act 2, and a total item cost in Year 2 of $8,003, of which $2,000 was associated with Act 2. The township rated these as "Large Costs." Another large township reported a total item cost in Year 1 of $900, of which $180 was associated with Act 2, and a total item cost in Year 2 of $950, of which $200 was associated with Act 2 . The township rated these as "Small Costs." A small township reported costs associated with Act 2 of $500 in Year 1 and $500 in Year 2; however, it did not report a total item cost in either year. The township rated these as "Large Costs." Another small township reported a total item cost in Year 1 of $1,000, of which $200 was associated with Act 2, and a total item cost in Year 2 of $1,000, of which $200 was associated with Act 2. The township rated these as "Small Costs." Another small township reported a total item cost in Year 1 of $100, which was completely associated with Act 2, and rated it as a "Small Cost." One city replied that it had been in the process of converting to a 2 22 system with more detail than that required by Act 2 just prior to the enactment of Act 2. Another city stated that it is too difficult to separate and total the cost of all clerks, payroll clerks, bookkeepers, etc., assigned to departments and activities other than the small staff in the city accountant's office. However, no new people were hired; no overtime was paid; and most of the conversion was done by the city accountant with some assistance, costing approximately $1 ,0 0 0 , from the city's CPA firm. Another city declared that its accounting procedures had always been based on the principle of Act 2; the city always used departmental controls. Another city indicated that it has always had CPA audits. No effects resulted, cost-wise, as a result of Act 2 in terms of space, equipment, or manpower. The second unit rated the item as "Small Cost" while the remaining units did not contribute ratings of it. The auditors of the first, third, and fourth units rated the item as "Immaterial" while the auditor of the second unit rated it as "Large Cost The clerk of one village disclosed that her salary had risen from $2.00 per hour in 1971 to $2.25 in 1972, $2.50 in 1973, and $3.00 at present. Another village revealed that the elected treasurer and clerk received increased salaries, based on an amount agreed to by council. The increase was very small, approximately $200. Its respondent continued, "Increases have occurred over the past three years, but they are not based on the additional work load only." The auditor of another village declared that the village's labor costs have increased a great deal because of Act 2. The first unit rated the item as "Immaterial" while the second and third units did not contribute ratings of it. The 223 auditors of the second and third units rated the item as "liana ter ial" and "Large Cost,*' respectively, while the auditor of the first unit did not respond to the questionnaire. One township replied that the bulk of the cost increase was the result of a labor contract and the upgrading of skills. Its auditor added that there was no increase in the number of employees. Another township stated that the figures are not available; they are included in the clerk's salary. Another township indicated that the clerk does all of the accounting. The salary was increased from $4,800 to $6,000, to some extent due to extra duties in connection with Act 2. The auditor of another township declared that the accounting function is performed by elected officials; therefore, there is no increase in cost. Another township complained that there is just additional work for the clerk. Another township disclosed that the clerk's salary had been increased $500 due to the bookkeeping. In addition, new journals and ledgers had cost $100; and a new calculator had cost $275. Another townshio asserted that the clerk should receive a great deal more for all the extra work applied in such a small township. The salary is presently $2,200 per year. Another township stated that there was no increase as it does not employ a bookkeeper. The clerk does the bookkeeping as an elected official. Another township indicated that it had incurred no great expense— just the clerk's regular salary. Another township asserted that all of the extra work was done for the salary received. The first and third units rated the item as "Small Cost” while the sixth unit rated it as "Large Cost” ; the remaining units did not contribute ratings of it. The auditors of the first, fourth, seventh, eighth, and tenth units rated the item as "Immaterial** while the auditor of the 224 sixth unit rated it as HSmall Cost"j the auditor of the second unit did not contribute a rating of it* The auditors of the third and ninth units did not respond to the questionnairej because of the tardiness of the fifth unit's response, no questionnaire was mailed to the auditor. Bookkeeping Services In the third cost item the respondents were asked to evaluate the effect of Act 2 on the cost of bookkeeping services performed by a CPA firm or other outside accounting firm. The average ratings of .10 from the data from the units and .41 from the data from the auditors place the item in the ’•Immaterial'* category, approximately \ of the way below the top. The dispersion in the rating pattern is indicated below. _______ +• 2 + 1 Ratings________ ___________ Totals - 1 - 2 0 Number of Unitst Data from Units Data from Auditors 3 4 6 19 75 26 1 5 1 0 86 54 A small city reported a total item cost in Year 1 of $4,000, none of which was associated with Act 2, and a total item cost in Year 2 of $1,000, representing a cost saving associated with Act 2 of $3,000 in Year 2. However, the city rated this as a '*Small Cost.**! Another small city reported a cost associated with Act 2 of $50 in Year 1; however, it did not report a total item cost. The city rated this as a "Small Cost." A large village reported a total item cost in Year 2 of $4,000, of which $400 was associated with Act 2, and rated it as a "Small Cost." A large township reported a total item cost in Year 1 of $20,000, of which $9,000 was associated with Act 2, and a total item cost in Year 2 of $20,000, of which $9,000 was associated with Act 2. However, the township rated these as "Large Cost Savings"* Another large 225 township reported a total item cost in Year 1 of $750, all of which was associated with Act 2, and a total item cost in Year 2 of $1,000, all of which was associated with Act 2, The township rated these as "Large Costs." A small township reported a total item cost in Year 1 of $550, of which $150 was associated with Act 2, and a total item cost in Year 2 of $550, of which $150 was associated with Act 2. The township rated these as ,fLarge Costs,” One city stated that the cost for assistance with Act 2 was approximately $1,000, Any other small increase in Year 2 was simply anticipated inflation increase. One village replied that all the CPA does is the annual audit. The auditor of another village disclosed that an outside CPA firm with computer services programmed for Public Act 2 is utilized by the village. Another village declared that it was worth the money to set up the accounting system. The auditor of another village asserted that costs have increased under Act 2. The city and the third village rated the item as ”Small Cost” and "Iranaterial," respectively, while the remaining units did not contribute ratings of it. The auditor of the city rated the item as "Small Cost" while the auditor of the first village rated it as "Immaterial"; the auditors of the second and fourth villages rated it as "Large Cost" while the auditor of the third village did not respond to the questionnaire. The auditor of a township replied that no bookkeeping services are performed by the CPA. The auditor of another township reported that the township’s records are generally in better condition. Another township indicated that the cost of bookkeeping services is included in the audit cost. Another township disclosed that the costs for bookkeeping 226 services were 51,000 In 1974 and $1,300 in 1975. The auditor of another township asserted that bookkeeping is not done by the CPA firm. Another township explained that the cost of the CPA is for audits only} bookkeeping services are not performed by the CPA. The auditor of the second unit rated the item as "Small Cost Saving” while the auditors of the fifth and sixth units rated it as ,(Imiaterlal>($ the auditor of the first unit did not contribute a rating of it. Because of the tardiness of the response of the fourth unit, no questionnaire was mailed to the auditor; the auditor of the third unit did not respond to the questionnaire. The first and second units rated the item as "Immaterial” while the fourth unit rated it as "Large Cost” ; the remaining units did not contribute ratings of it. Record Books, Journals, and Supplies In the fourth cost item the respondents were asked to evaluate the effect of Act 2 on the cost of record books, journals, and supplies used in the accounting and bookkeeping operations. The average rating of .30 from the data from the units places the item in the "Immaterial” category but not very far below the top. However, the average rating of .54 from the data from the auditors places the item in the "Small Cost" category but close to the bottom. The dispersion in the rating pattern is indicated below. Number of Units; Data from Units Data from Auditors 6 3 14 23 + t + 1 0 66 28 - 2 Totals 0 0 0 0 86 54 _________________ Ratings A small city reported a total item cost in Year 2 of $200, of which $7 5 was associated with Act 2, and rated it as "Immaterial.” 227 Another small city reported a total item cost Ln Year 1 of $200, all of which was associated with Act 2, and rated it as a "Small Cost." Another small city reported a total item cost in Year 1 of $55, all of which was associated with Act 2, and a total item cost in Year 2 of $18, all of which was associated with Act 2. The city rated these as "Small Costs *" A small village reported a total item cost in Year 1 of $200, of which $195 was associated with Act 2, and rated it as a ••Small Cost." A large township reported a total item cost in Year 1 of $200, all of which was associated with Act 2, and rated it as a ••Small Cost." The unit has not acquired a second year of experience with the Act 2 requirements. Another large township reported a total item cost in Year 2 of $3,040, of which $140 was associated with Act 2, and rated it as a •'Small Cost." Another large township reported a total item cost in Year 2 of $100, all of Which was associated with Act 2, and rated it as a '•Small Cost." Another large township reported a total item cost in Year 1 of $153, all of Which was associated with Act 2, and a total item cost in Year 2 of $25, all of which was associated with Act 2. The township rated these as "Large Costs." Another large township reported a total item cost in Year 1 of $260, all of which was associated with Act 2, and rated it as a '•Small Cost." A small township reported a total item cost in Year 1 of $100, all of which was associated with Act 2, and rated it as a "Large Cost." Another small township reported a total item cost in Year 1 of $140, all of Which was associated with Act 2, and a total item cost in Year 2 of $32, all of which was associated with Act 2. The tcwnship rated these 228 as “Immaterial." Another small township reported a total item cost in Year 1 of $100, all of which was associated with Act 2, and a total item cost in Year 2 of $100, all of Which was associated with Act 2. The township rated these as “Large Costs." Another small township reported a total item cost in Year 1 of $250, all of which was associated with Act 2, and rated it as a ,rLarge Cost.” Another small township reported a total item cost in Year 1 of $40, all of which was associated with Act 2, and rated it as a “Small Cost." Another small township reported a total item cost in Year 1 of $8 6 , all of which was associated with Act 2, and rated it as a “Small Cost.” Another small township reported a total item cost in Year 1 of $75, all of which was associated with Act 2, and rated it as a “Small Cost One city pointed out that, since it switched to a computer at the time of Act 2, an answer would not be comparable. Another city indicated that most or all of its supplies used both pre- and post- implementation remained at the same level of consumption. Another city stated that, because of its decentralized system, it is difficult to accumulate costs in total; and just the city accountant*s cost would understate the facts. However, it always opens new books each year; and, not being automated, it was able to use its remaining inventory of forms and supplies. The auditor of a village reported that costs have increased under Act 2. The second and third cities rated the item as "Immaterial" while the first city and the village did not contribute ratings of it. The auditors of the first and second cities rated the item as "Immaterial" while the auditors of the third city and the village rated it as “Small Cost" and “Large Cost," respectively. 229 One township replied that it is not possible for it to determine this cost* Another township disclosed that it had received three initial materials at the first workshop, which it had attended at a fee of $300. It has purchased only a few extra ledger and journal sheets since. The auditor of another tcwnship reported that his client had purchased the recommended journal forms and ledgers; basically, they were the same as it had used prior to Act 2. Another township stated that it could not find the records prior to the setting up of the new system. The second and third units rated the item as "Small Cost" and "Immaterial," respectively, while the first and fourth units did not contribute ratings of it. The auditors of the third and fourth units rated the item as "Small Cost" and "Immaterial," respectively, while the auditor of the first unit did not contribute a rating of it* the auditor of the second unit did not respond to the questionnaire. Copying Machine In the fifth cost item the respondents were asked to evaluate the effect of Act 2 on the purchase or rental of a copying machine. The average ratings of .06 from the data from the units and .17 from the data from the auditors place the item solidly in the "Inmaterial" category. The dispersion in the rating pattern is indicated below. ________ + 1 + 2 0 Ratings_____________________ Totals - 1 - 2 Number of Unitsi Data from Units Data from Auditors 0 1 5 7 81 46 0 0 0 0 86 54 A small city reported a total item cost in Year 1 of $330, of which $165 was associated with Act 2, and rated it as a "Small Cost." None of the villages provided any dollar amounts for this item. 230 A large township reported a total item cost in Year 1 of $1,000, of which $250 was associated with Act 2, and rated it as a "Small Cost." The auditor of one city disclosed that an outside computer is used by the city. Another city replied that it simply continued to use the machines it had previously owned and rented. Two other cities reported that they had already acquired copying machines. The auditor of the second unit rated the item as "Small Cost" while the auditors of the remaining units rated it as "Immaterial." The second unit rated the item as "Small Cost" while the auditors of the remaining units rated it as "Immaterial." The second unit rated the item as "Small Cost" while the remaining units did not contribute ratings of it. One village stated that the equipment items do not pertain to its operation. The village has purchased new equipment and updated its bookkeeping, but Act 2 did not necessarily force it to do so. The auditor of another village replied that no additional equipment had been acquired. Neither of the units contributed a rating of the item. The auditor of the former village rated the item as "Immaterial" while the auditor of the latter village did not contribute a rating of it. The auditor of one township stated that no copying machine had been acquired. Another township indicated that it had purchased a machine which was not necessarily used for accounting. The auditor of another township reported that no copying machine had been purchased. None of the auditors contributed ratings of the item. The first and second units rated the item as "Immaterial" while the third unit did not contribute a rating of it. Bookkeeping Machine, Accounting Machine, or Calculator 231 In the sixth cost item the respondents were asked to evaluate the effect of Act 2 on the purchase or rental of a bookkeeping machine, an accounting machine, or a calculator. The average ratings of ,09 from the data from the units and ,31 from the data from the auditors place the item solidly in the "Immaterial'* category. The dispersion in the rating pattern is indicated belew. ________________ R a t i n g s ______________ "+~~S + T - \ ^”5 5 Total! Number of Units* Data from Units Data from Auditors 2 3 A 11 80 40 0 0 0 0 86 54 None of the cities provided any dollar amounts for this item, A large village reported a total item cost in Year 2 of $400, all of which was associated with Act 2, and rated it as a "Small Cost." A large township reported a total item cost in Year 1 of $2,500, of which $250 was associated with Act 2, and rated it as a "Small Cost." A small township reported a total item cost in Year 1 of $300, all of which was associated with Act 2, and rated it as a "Large Cost.” Another small township reported a total item cost in Year 2 of $275, all of which was associated with Act 2, and rated it as a "Large Cost." Another small township reported a total item cost in Year 2 of $169, of which $50 was associated with Act 2, and rated it as "Immaterial." One city declared that no special machines had been purchased to implement Act 2. Its respondent continued, "Your assumption that extra benefit and therefore extra work is in error. Benefit was small, and extra effort was negligible. Implementation involved a transfer (shift) of efforts but no net increase." Another city replied that it had used existing equipment. Another city stated that it had always used this 232 equipment. The auditor of a village reported that none of this equipment had been purchased or rented. The first city rated the item as "Immaterial'' while the remaining units did not contribute ratings of it. The auditors of the first and third cities rated the item as "Immaterial" while the auditor of the second city rated it as "Small Cost*'} the auditor of the village did not contribute a rating of it. The auditor of a township disclosed that, although a machine had been owned prior to Act 2, the printing of different ledger cards had been required. Another township indicated that two small calculators had been purchased. Another township stated that equipment had been purchased for tax use only. The auditor of the first unit rated the item as '^Small Cost" while the auditors of the second and third units rated it as " I m m a t e r i a l T h e first and second units rated the item as "Immaterial” while the third unit did not contribute a rating of it. Computer or Computer Time In the seventh cost item the respondents were asked to evaluate the effect of Act 2 on the purchase or rental of either a computer or computer time. The average ratings of .03 from the data from the units and . 2 0 from the data from the auditors place the item solidly in the "Inmaterial" category. The dispersion in the rating pattern is indicated below. Number of Unitst Data from Units Data from Auditors 1 4 1 3 + ^ + 1 0 84 47 - 1 - 2 Totals O 0 0 0 86 54 _________________ Ratings None of the cities provided any dollar amounts for this item. A large village reported a total item cost in Year 1 of 52,700, all of which was associated with Act 2, and a total item cost in Year 2 of $2,700, all of which was associated with Act 2. The village rated these 233 as "Large Costs," None of the townships reported any dollar amounts associated with Act 2 for this item. One city replied that, since it had switched to a computer at the time of Act 2, an answer would not be comparable. The auditor of another city disclosed that the general ledger and other related accounting functions are not on a computer yet. Another city reported that it has always used a hand posting system. The auditor of another city stated that no computer had been used. None of the units contributed ratings of the item. The auditors of the first and second units rated the item as "Small Cost" while the auditor of the third unit rated it as "Immaterial"; the auditor of the fourth unit did not contribute a rating of it. The auditor of a village revealed that an outside CPA firm with computer services programmed for Public Act 2 is utilized. The auditor of a township replied that no computer had been purchased, and the auditor of another township stated that a computer had not been used. The auditors of the first and second units rated the item as "Large Cost" and "Immaterial," respectively, while the auditor of the third unit did not contribute a rating of it. The first unit rated the item as **Large Cost" while the second and third units did not contribute ratings of it. Classes, Conferences, Workshops, or Instructional Materials In the eighth cost item the respondents were asked to evaluate the effect of Act 2 on the attendance by representatives of the municipalities at in-service training sessions, such as classes, 234 conferences, or workshops, or the purchase of manuals or other Instructional materials. The average rating of .30 from the data from the units places the item in the "Inmaterial" category but not very far below the top. However, the average rating of .69 from the data from the auditors places the item in the "Small Cost" category but not very solidly. The dispersion in the rating pattern is indicated below. Number of Unitsi Data from Units Data from Auditors 5 3 18 31 61 20 2 0 0 0 86 54 + 2 + 1 Ratings________ - 1 " - 2 0 Totals A large city reported a total item cost in Year 1 of $300, all of which was associated with Act 2, and rated it as a "Small Cost." Another large city reported a total item cost in Year 1 of $600, all of which was associated with Act 2, and a total item cost in Year 2 of $400, all of which was associated with Act 2. The city rated these as '•Small Costs." Another large city reported a total item cost in Year 1 of $500, all of which was associated with Act 2, and a total item cost in Year 2 of $300, all of which was associated with Act 2. The city rated these as "Small Costs." Another large city reported a total item cost in Year 1 of $400, of which $300 was associated with Act 2, and a total item cost in Year 2 of $400, of which $300 was associated with Act 2. The city rated these as "Small Costs." Another large city reported a total item cost in Year 1 of $200, of which $50 was associated with Act 2, and a total item cost in Year 2 of $250, of Which $50 was associated with Act 2. The city rated these as "Immaterial." A small city reported a total item cost in Year 1 of $500, all of which was associated with Act 2, but rated it as a "Small Cost Saving"! 235 Another small city reported a total item cost in Year 2 of $200, all of which was associated with Act 2, and rated it as "Inmaterial." Another small city reported a total item cost in Year 1 of $700, all of which was associated with Act 2, and rated it as a "Small Cost," Another small city reported a cost associated with Act 2 of $40 in Year 1; however, it did not report a total item cost. The city rated this as a "Small Cost." A large village reported a total item cost in Year 1 of $1,000, all of which was associated with Act 2, and rated it as a "Large Cost." A small village reported a total item cost in Year 1 of $250, of which $200 was associated with Act 2, and rated it as a "Small Cost." A large township reported a total item cost in Year 1 of $10, all of which was associated with Act 2, and a total item cost in Year 2 of $10, all of which was associated with Act 2. The township rated these as "Large Costs"! Another large township reported a total item cost in Year 1 of $400, all of which was associated with Act 2, and a total item cost in Year 2 of $200, all of which was associated with Act 2. The township rated these as '^Small Costs," Another large township reported a total item cost in Year 1 of $500, all of which was associated with Act 2, and rated it as a "Small Cost." The unit has not acquired a second year of experience with the Act 2 requirements. Another large township reported a total item cost in Year 1 of $300, all of which was associated with Act 2, and rated it as a "Small Cost." Another large township reported a total item cost in Year 2 of $100, all of which was associated with Act 2, and rated it as a "Small Cost." Another large township reported a total item cost in Year 1 of $300, all of which was associated with Act 2, and rated it as a "Small Cost.** Another large township reported a total item cost in Year 1 of $200, all of which was associated with Act 2, and rated it as 236 "Inmaterial. ** A small township reported a total item cost in Year 2 of $150, all of which was associated with Act 2, and rated it as a "Large Cost." Another small township reported a total item cost in Year 1 of $200, all of which was associated with Act 2, and rated it as a **Large Cost." Another small township reported a total item cost in Year 1 of $100, all of which was associated with Act 2, and rated it as a "Small Cost," Another small township reported a total item cost in Year 1 of $150, all of which was associated with Act 2, and rated it as a "Large Cost .** One city reported that in the last several years its representatives have attended classes, conferences and workshops and have purchased manuals and books. The estimated total cost is $800, 75Z of which was associated with Act 2. Another city complained that it is very difficult to obtain local training for bookkeeping personnel. The auditor of another city declared that both the clerk and treasurer need to attend more workshops. The auditor of another city pointed out that this cost may continue when the clerk’s office changes personnel. The first unit rated the item as "Small Cost" while the second unit rated it as "Immaterial"; the third and fourth units did not contribute ratings of it. The auditor of the first unit rated the item as '*Large Cost" while the auditors of the third and fourth units rated it as "Small Cost” | the auditor of the second unit did not respond to the questionnaire. 237 The auditor of a village reported that the firm has provided many workshops and training sessions for its clients. Its managing partner has taught two years of accredited courses at the local conmunity college and has been a member of the Blue Ribbon Committee since 1968. The firm continues to train individual clients in its offices as required. Another village replied that the clerk and the treasurer had conferred with a CPA firm for training. The auditor of another village lamented that representatives of the village had not attended in-service training sessions. The auditors of the first and second units rated the item as "Small Cost" while the auditor of the third unit did not contribute a rating of it. None of the units contributed ratings of the item. One township stated that its indicated cost had been for the governmental accounting-bookkeeping course and books— three people. Another township reported that its cost had been incurred in 1973 and 1974 only— for the training of a new clerk and treasurer. Another township pointed out that its CPA has set its books up for the township. The auditor of another township declared that the township had purchased manuals, with no material effect. His client would have purchased educational material, anyhow. The respondent from another township indicated that she had learned the uniform accounting system on her own time. Another township replied that the indicated cost had been for mileage to the class, which had been sponsored by the township*s CPA firm. Its auditor explained that the firm has provided many workshops and training sessions for its clients. Its managing partner has taught two ten-week courses at a local college. The firm continues to train individual clients in its office a? required. It has been a member of 238 the Blue Ribbon Commission since 1968. The auditor of another township pointed out that the educational costs will continue if a new clerk or treasurer is elected. The first and seventh units rated the item as "Small Cost" while the sixth unit rated it as "Immaterial**; the remaining units did not contribute ratings of it. The auditors of the second, fourth, fifth, sixth, and seventh units rated the item as "Small Cost" while the auditor of the third unit rated it as "Imnaterial**; because of the tardiness of the first unit's response, no questionnaire was mailed to the auditor. Contributions by Respondents In the ninth cost item the respondents were asked to contribute and to evaluate additional costs which their units might have incurred as a result of the accounting and reporting requirement of Act 2^ The items contributed were scored strictly on the basis of the quantity submitted, with no particular attempt being made to judge their quality. It should be understood that the various items contributed were not of equal importance with respect to one another. The average ratings of .12 from the data from the units and .39 from the data from the auditors place the item in the "Inmaterial" category, approximately \ of the way below the top. The dispersion in the rating pattern is indicated below. Please observe that in this case the numbers in the table reflect the number of individual items contributed rather than the number of units responding. Number of Iternsi _______ + 2 + 1 R a t i n g s ________ - 1 0 - 2 Totals Data from Units Data from Auditors 3 4 4 13 2 4 0 0 0 0 9 21 None of the cities provided any dollar amounts for this item. 239 A small village reported a total item cost in Years 1 and 2 combined of $400, all of which was associated with Act 2, and rated it as a "Large Cost.” The cost was incurred in connection with changing to the accrual method and changing to a general ledger, both of which are now in process. A large township reported a total item cost in Year 1 of $500, of which $375 was associated with Act 2, and rated it as a "Small Cost.” It also reported a total item cost in Year 1 of $5,000, all of which was associated with Act 2, and rated it as a "Large Cost." The $500 cost was incurred in connection with the complete re-working of the internal controls; the $ 5 , 0 0 0 cost was incurred in connection with the complete re-working of the accounting systems. The unit has not acquired a second year of experience with the Act 2 requirements. The auditor of a city stated that an additional cost was represented by the time to familiarize the staff with the new account numbers. The auditor of another city indicated that an additional cost was that of hiring a CPA firm to install the system. According to the respondent from another city, ’T h e only meaningful comoent that can be made refers to the reduction in flexibility and lack of choice by the government in terms of budgeting and financial reporting. The actual positive impact is small. Perhaps the benefit exists at the State level, where uniform reporting may be helpful. The uniform system will probably be most beneficial to elected finance officials who have little or no professional accounting, finance, or administrative training." Another city reported that additional costs include those tor telephone, travel, CPA assistance, and payroll. There have been costs associated with in-house training of existing bookkeeping personnel. Some printing 240 and binding type costs were incurred in-house. Its auditor added that an additional cost was that of setting up the chart of accounts. Another was that of a study of the entire system for additional control and the elimination of duplicate work. The auditor of another city disclosed that additional audit costs were incurred due to the poor shape of the records and the additional requirements of Act 2. The auditor of another city revealed that the clerk and/or treasurer would not look up accounts and set up new funds using the uniform chart of accounts. The auditors of the first, second, and fifth units each contributed a "Small Cost" rating of the item while the auditor of the fourth unit contributed two "Large Cost" ratings of it* the auditor of the sixth unit contributed a "Large Cost" rating of it while the auditor of the third unit did not contribute a rating of it. The fourth unit contributed three "Small Cost" ratings of the item while none of the remaining units contributed ratings of it. The auditor of a village pointed out that an additional cost was that of the chart of accounts designed by his firm. The auditor of another village disclosed that the village is in the process of additional system changes as the result of sewer services and not necessarily Act 2, The auditor of the former unit contributed a **Small Cost" rating of the item while the auditor of the latter unit did not contribute a rating of it. The units did not contribute ratings of the item. The auditor of a township indicated that an additional cost was that of developing the chart of accounts. The auditor of another township stated that any changes would have been made regardless of Act 2. The auditor of another township pointed out that an additional 241 cost was that of slightly higher audit fees. Another township complained that the CPA costs are too much in relation to the services received. Another township declared that, although there has been very little extra cash cost, there has been considerably more cost in time. The auditors of the first and third units each contributed a "Small Cost" rating of the item while the auditor of the second unit did not contribute a rating of itj because of the tardiness of the fourth unit's response, no questionnaire was mailed to the auditor while the auditor of the fifth unit did not respond to the questionnaire. The fourth unit contributed a "Large Cost" rating of the item while the fifth unit contributed two "Immaterial" ratings of it! the remaining units did not contribute ratings of it. The auditor of another township indicated that an additional cost was the initial set-up expense of the CPA. The auditor of another township pointed out that the township did not have an audit fee prior to Act 2. Another township stated that there was no additional cost that requires an amount that can be defined. However, its auditor disclosed that additional costs have been incurred for calls to the CPA, workshops held locally by the CPA firm, and State workshops and programs. The auditor of another township stated that there were no significant additional costs. The auditor of another township declared that there has been an increased cost for journals, ledgers, etc. Also, there has been a generally increased auditing cost. In addition, there has been a higher education and training cost. The auditor of another township revealed that an additional cost was that of the three-part voucher checks. Also, there were some negligible communication costs. The auditor^ of another township indicated that an additional cost was 242 that of increased insurance coverage. The auditors of the first, second, and seventh units each contributed a "Small Cost” rating of the item while the auditor of the third unit contributed two "Immaterial” ratings and a "Small Cost" rating of it. The auditor of the fifth unit contributed two "Small Cost" ratings and a "Large Cost" rating of it while the auditor of the sixth unit contributed a '^Small Cost" rating and an "Immaterial" rating of it; the auditor of the fourth unit did not contribute a rating of it. None of the units contributed ratings of the item. Auditing by CPA Firms In the tenth cost item the respondents were asked to evaluate the effect of Act 2 on the total cost for auditing by CPA firms. The average ratings of .53 from the data from the units and .61 from the data from the auditors place the item in the "Small Cost" category but not very solidly. The dispersion in the rating pattern is indicated below. Humber of Units* _______ + % + 1 R a t i n g s ________ - 1 0 - 2 Totals Data from Units Data from Auditors 21 3 5 31 59 17 1 2 0 1 86 54 A large city reported a total item cost in Year 1 of $18,000, of which $3,000 was associated with Act 2, and a total item cost i Y e a r 2 of $2 5,000, of which $5,000 was associated with Act 2. The city rated these as "Large Costs." A small city reported a total item cost in Year 1 of $8,000, of which $2,000 was associated with Act 2, and a total item cost in Year 2 of $8,000, of which $2,000 was associated with Act 2. The city rated these as "Large Costs." Another small city reported a total item cost in Year 1 of $2,787, of which $1,132 was associated with Act 2, and 243 rated it as a "Large Cost A large village reported a total item cost in Year 1 of $2,459, of which $727 was associated with Act 2, and a total item cost in Year 2 of $2,396, of which $895 was associated with Act 2, The village rated these as "Small Costs." Another large village reported a cost associated with Act 2 of $1,232 in Year 1; however, it did not report a total item cost. The village rated this as a "Small Cost." A small village reported a total item cost in Year 1 of $955, all of which was associated with Act 2, and rated it as a "Large Cost." A large township reported a total item cost in Year 2 of $1,940, of which $500 was associated with Act 2, and rated it as a "Large Cost." Another large township reported a total item cost in Year 1 of $2 5,000, of which $5,000 was associated with Act 2, and rated it as a "Large Cost." The unit has not acquired a second year of experience with the Act 2 requirements. Another large township reported a total item cost in Year 2 of $800, all of which was associated with Act 2, and rated it as a ,rLarge Cost.” Another large township reported a total item cost in Year 1 of $1,200, of which $1,000 was associated with Act 2, and a total item cost in Year 2 of $1,600, of which $1,2 00 was associated with Act 2. The township rated these as "Large Costs." Another large township reported a total item cost in Year 1 of $1,477, of which $500 was associated with Act 2, and a total item cost in Year 2 of $1,810, of which $600 was associated with Act 2. The township rated these as "Large Costs,” Another large township reported a total item cost in Year 1 of $950, all of which was associated with Act 2, and a total item 244 cost in Year 2 of $1,082, all of which was associated with Act 2. The tcamship rated these as "Large Costs." Another large township reported a total item cost in Year 1 of $92 5, of which $750 was associated with Act 2, and a total item cost in Year 2 of $650, of which $475 was associated with Act 2* The township rated these as **Large Costs." Another large township reported a total item cost in Year 2 of $500, all of which was associated with Act 2, and rated it as a "Small Cost." Another large township reported a total item cost in Year 1 of $625, all of which was associated with Act 2, and a total item cost in Year 2 of $550, all of which was associated with Act 2. The township rated these as "Large Costs." Another large township reported costs associated with Act 2 of $525 in Year 1 and $400 in Year 2; however, it did not report a total item cost in either year. The township rated these as "Large Costs." A small township reported a total item cost in Year 1 of $900, of which $600 was associated with Act 2, and a total item cost in Year 2 of $575, of which $200 was associated with Act 2. The township rated these as "Large Costs." Another small township reported a total item cost in Year 1 of $1,000, all of which was associated with Act 2, and a total item cost in Year 2 of $750, all of which was associated with Act 2. The township rated these as "Immaterial." Another small township reported a total item cost in Year 1 of $750, all of which was associated with Act 2, and a total item cost in Year 2 of $750, all of which was associated with Act 2 . The township rated these as ,fLarge Costs." Another small township reported a total item cost in Year 1 of $650, all of which was associated witjp Act 2, and a total item cost in 245 Year 2 of $545* all of which was associated with Act 2. The township rated these as "Large Costs." Another small township reported a total item cost in Year 2 of $1,140, of which $640 was associated with Act 2, and rated it as a "Large Cost." One city replied that Act 2 has resulted in no audit fee savings. The question is difficult to answer because of city growth. Another city disclosed that there had been an additional auditing cost of about $1,000 in 1970-71 prior to implementing Act 2. 1971-72 was the first year in which the city changed its audit firm. The auditors did not charge for all of their time. Another city reported that it has always had a CFA annual audit, adequate space, equipment, and personnel. The most significant change as a result of Act 2 has been a change in attitudes among older politicians and department heads— an awareness of the importance of record-keeping, accurate reporting, and internal control. Another city stated that the amount of cost associated with Act 2 was for the setting up of the books and for instruction. Another city indicated that it is unable to break down the auditing costs. The auditor of a village revealed that the auditing costs have increased under Act 2. The second city rated the item as "Immaterial" while the third and fourth cities rated it as "Large Cost"j the remaining units did not contribute ratings of it. The auditors of the five cities rated the item as "Small Cost" while the auditor of the village rated it as "Large Cost." The auditor of a township disclosed that the increase in auditing costs is due to shifting to the modified accrual basis of accounting. Another township indicated that the auditing costs apply to both the Water Fund and the General Fund. Another township reported that it had 246 incurred the following auditing costs* 1968— $325; 1971— $1,400? 1972— $925; 1973— $975; 1974— $1,250; 1975— $1,250. According to the auditor of another township, "It would appear that the effect of added procedures would offset the effect of time savings from uniformity." Another township complained that the audit cost is too high; it increases each year. Another township pointed out that prior to 1970 its audit cost had averaged $175. The auditor of another township revealed that Act 2 — to date— has increased the township's auditing costs. Another township revealed that it had not previously paid for an audit. Also, Years 1 and 2 represent different auditors. It had regarded Year 1 as having come before the new system of bookkeeping. It experienced difficulty in making a comparison because the township had different CPA firms before and after the new system. The auditors of the first, third, seventh, and eighth units rated the item as "Small Cost" while the auditor of the fourth unit rated it as "Immaterial"; because of the tardiness of the responses of the second and fifth units, questionnaires were not mailed to the auditors while the auditor of the sixth unit did not respond to the questionnaire. The first, second, fifth, and sixth units rated the item as "Large Cost" while the fourth unit rated it as "limaterial"; the remaining units did not contribute ratings of it. THE EFFECT OF TIME ON THE DOLLAR AMOUNTS OF COSTS The dollar amounts of costs reported in the preceding section of this chapter have been considered without particular attention to the patterns of changes between Years 1 and 2. This section focuses on the patterns of changes between Years 1 and 2 as another means of attempting to explain the effects of Act 2 on the local units of government in 247 Michigan. Of the 41 units which reported dollar costs resulting from Act 2, the responses from 37 divided the reported costs between Years 1 and 2. This section compares the reported costs between Years 1 and 2 by listing them in the order in which they appeared on the questionnaire. Space None of the units reported space costs associated with Act 2 for both Years 1 and 2. Labor Costs Ten units reported labor costs associated with Act 2 for both Years 1 and 2. In seven units the costs increased; in one unit they declined; and in two units they remained unchanged. These effects were reported as given below. Increasesi Year of Adoption of Uniform System 1 9 6 9 1 9 7 1 1 9 7 2 it it 1 9 7 3 1 9 7 5 1 9 7 4 1 9 7 2 1 9 7 2 Declinet Unchanged! Bookkeeping Services Year 1 5 1 , 5 0 0 $ 4 , 0 0 0 5 7 5 0 5 5 , 2 5 0 $ - 0 - 5 1 8 0 S — 0 — 5 1 0 0 5 5 0 0 5 2 0 0 Year 2 5 2 , 0 0 0 5 8 , 0 0 0 5 9 6 9 5 8 , 5 5 0 5 2 0 0 5 2 0 0 5 8 , 0 0 0 5 -0- 5 5 0 0 5 2 0 0 Five units reported costs of bookkeeping services associated with Act 2 for both Years 1 and 2. In two units the costs increased; in two units they declined; and in one unit they remained unchanged. These effects were reported as given on the next page. 248 Adoption of Uniform System Increases* Declines* Unchanged* 1973 1974 1971 1975 1971 Record Books, Journals, and Supplies Year 1 $ -0 - s 750 50 $ $ -0 - $ 150 Year 2 400 $i , 000 $ -0- ($3 ooo r \ * $ 150 Fifteen units reported costs of record books, journals, and supplies associated with Act 2 for both Years 1 and 2. In three units the costs increased; in eleven units they declined; and in one unit they remained unchanged. These effects were reported as given below. Increases* Declines* Unchanged* Copying Machine on of Unform System 1 9 7 1 1 9 7 4 1 9 7 5 1 9 7 0 II 1 9 7 1 1 9 7 2 (1 tf M 1 9 7 3 «• • • 1 9 7 4 1 9 7 2 Year 1 - 0 - $ $ - 0 - $ - 0 - Year 2 1 4 0 $ $ $ 1 0 0 7 5 $ $ $ $ $ $ $ $ $ $ $ $ 1 4 0 8 6 2 0 0 5 5 2 6 0 1 0 0 4 0 1 9 5 1 5 3 7 5 2 5 0 1 0 0 3 2 $ $ - 0 - $ - 0 - $ 5 - 0 - 1 8 $ $ $ $ - 0 - - 0 - - 0 - 2 5 - 0 - $ $ - 0 - $ 1 0 0 None of the units reported costs of a copying machine associated with Act 2 for both Years 1 and 2. Bookkeeping Machine, Accounting Machine, or Calculator Five units reported costs of a bookkeeping machine, accounting machine, or calculator associated with Act 2 for both Years 1 and 2. In three units the costs increased, and in two units they declined. These effects were reported as given on the next page. Increases! Declines! Year of Adoption of 1970 1971 1972 1971 1972 Computer or Computer Time 249 Uniform System Year 1 5 -0- $ -0 - $ -0 - $ 300 $ 165 Year 2 5 50 S 400 $ 275 $ -0 - $ -0 - One unit reported costs of a computer or of computer time associated with Act 2 for both Years 1 and 2, and the costs remained unchanged. This effect was reported as given below. Unchanged; Year of Adoption of Uniform System 1972 Year 1 $2,700 Year 2 $2,700 Classes, Conferences, Workshops, or Instructional Materials Twenty units reported costs of classes, conferences, workshops, or instructional materials associated with Act 2 for both Years 1 and 2. In three units the costs increased; in fifteen units they declined; and in two units they remained unchanged. These effects were reported as given below. Increases; Declinesi Unchanged; on of Uniform System 1 9 7 2 1 9 7 4 1 9 7 5 1 9 6 8 1 9 6 9 1 9 7 0 t« 1 9 7 1 h It 1 9 7 2 M 1 9 7 3 Vt It ft 1 9 7 4 91 1 9 7 1 1 9 7 2 Year 1 $ - 0 - $ —0 — - 0 - $ $ $ $ $ $ $ $ 3 0 0 6 0 0 3 0 0 3 0 0 7 0 0 4 0 1 0 0 $ 1 , 0 0 0 $ $ $ $ $ $ $ $ $ 4 0 0 5 0 0 2 0 0 2 0 0 1 5 0 5 0 0 2 0 0 1 0 50 Year 2 $ 1 5 0 $ 1 0 0 $ $ $ $ $ «■ > $ 2 0 0 - 0 - 4 0 0 - 0 - - 0 - - 0 - - 0 - $ - 0 - s - 0 - $ 2 0 0 $ $ $ $ $ $ $ $ - 0 - - 0 - - 0 - - 0 - 3 0 0 - 0 - 1 0 5 0 Contributions by Respondents 2 50 None of the units contributed additional costs associated with Act 2 for both Years 1 and 2. Auditing by CPA Firms Twenty units reported costs of auditing by CPA firms associated with Act 2 for both Years 1 and 2, In nine units the costs increased; in nine units they declined; and in two units they remained unchanged. These effects were reported as given below. Increases; Year of Adoption of Uniform System 1 9 6 9 •t *1 1 9 7 1 1 9 7 2 ft 1 9 7 3 1 9 7 4 *1 1 9 7 0 It 1 9 7 1 M 1 9 7 2 It «• II 1 9 7 3 1 9 7 1 1 9 7 2 Declines* Unchanged* Year 1 5 1 , 0 0 0 5 9 5 0 5 - 0 - 7 2 7 $ $ - 0 - $ - o - $ 5 0 0 $ 3 , 0 0 0 $ - 0 - $ 7 5 0 5 1 , 0 0 0 $ 1 , 2 3 2 $ 6 5 0 $ 1 , 1 3 2 $ $ $ $ 6 2 5 5 2 5 6 0 0 9 5 5 $ 2 , 0 0 0 $ 7 5 0 Year 2 $ Y , 2 ' < K > 5 0 0 8 9 5 $ 1 , 0 8 2 $ 5 0 0 $ $ $ $ $ 5 , 0 0 0 $ 6 4 0 6 0 0 8 0 0 4 7 5 7 5 0 $ $ $ - 0 - $ $ - 0 - 5 4 5 $ 5 5 0 4 0 0 $ $ $ - 0 - 2 0 0 $ 2 , 0 0 0 $ 7 5 0 The information presented in this section is summarized in Table 11 on the next page. Summary The preceding section examined each of the ten cost items in the order in which they appeared on the questionnaire. It disclosed that "Small Cost" ratings have emerged with respect to the following items; Record Books* Journals, and Supplies (as rated by the auditors); 251 Table 11 SUMMARY OF CHANGES IN DOLLAR COSTS Type of Cost Item Increase No Change Decline Total Number of Items Space Labor Costs Bookkeeping Services Stationery and Supplies Copying Machine Machines and Equipment Computer/Computer Time Education Other Acct. & Reporting Total A c c t . 6 Reporting Auditing by CPA Firms Total Costs 0 7 2 3 0 3 0 3 0 18 9 27 0 1 2 11 0 2 0 15 0 31 _____ 9 40 0 2 1 1 0 0 1 2 0 0 10 5 15 0 5 1 20 0_ 56 20 76 Classes, Conferences, Workshops, or Instructional Materials (as rated by the auditors)* Auditing by CPA Firms (as rated by both the units and the 252 auditors). In this section it may be observed in Table 11 that 37 of the local units of government reported a total of 76 cost items associated with Act 2 for both Years 1 and 2. Of these 76 items, 27 increased from Year 1 to Year 2; 40 decreased from Year 1 to Year 2* and nine remained u n c h a n g e d between the two years. In particular, decreases from Year 1 to Year 2 are especially evident in the cases of Record Books, Journals, a n d Supplies and of Classes, Conferences, Workshops, or Instructional Materials. Of the three cost items which received an overall rating of "Small Cost," only Auditing by CPA Firms did not decline from Year 1 to Year 2; and this item remained unchanged. ADDITIONAL COMMENTS AND REACTIONS In addition, to the earlier comments in connection with individual items, a number of comnents and reactions were received which were of a more general nature. These are presented below. From the Cities One city expressed the belief that its accounting system before Act 2 had been satisfactory for its needs. In particular, its respondent complained about the creation of an "activity" for the "Election Expense" item, claiming that Elections, Board of Review, and Court could all be accounted for as line items. The respondent continued by pointing out that the institution of the uniform accounting system took a tremendous amount of time and that the small cities with very limited staffs are unable to handle the terrific paperwork burden. He concluded, "In my opinion. Act 2 has not benefited .... residents but has expended staff time which could have been devoted to more worthwhile 253 projects." Another city reported that the receipt of the questionnaire had caused some "consternation" in its office because of the high rate of turnover of both municipal personnel and auditors during the period of time covered. Its respondent stated that, although the accuracy of the city's accounting was never questioned, the efficiency should be enhanced by the adoption of the uniform accounting system. However, the process of complying with Act 2 has resulted in a large increase in the cost of auditing. The respondent pointed out that certain ideas on governmental financing, such as, for example, Planning, Programming, Budgeting, cannot work well among smaller units because "alternatives have too few options at our level." Employees have been evaluated at the department head level, and employees who have not measured up have been interviewed. On several recent occasions auditors have sought extensions on filing audit reports because of delays by the Clerk- Treasurer in having the accounts fully ready for audit. Consequently, many of the auditors* recomnendations arrived too late to be beneficial; and attempts at implementation had to be postponed. The respondent concluded, "One year hence I could answer this same questionnaire with satisfactory reports upholding my support of the tenets of the uniform accounting system." The auditor of another city reported that his client had experienced considerable problems with turnover in the positions of clerk and treasurer. The individuals filling these positions, already lacking both experience and ability, had become even further confused 254 upon the arrival of the uniform account ins system. Concurrently, the city hall had been destroyed by firej although the journals and ledgers had been saved, the invoices and the daily cash receipts journal had been destroyed, resulting in the issuance of a qualified audit opinion. As an ongoing problem, the clerk and treasurer refuse to look up new accounts in the uniform chart of accounts, for which they have not yet purchased a binder. Another city replied that it has experienced little effect with respect to the costs of accounting and reporting. Increases in auditing costs have resulted primarily from inflation rather than from the requirements of Act 2, and the results of audits are not received much earlier. Only a minimal amount of additional supplies had been required. The respondent reported having benefited from a 44 hour course administered by a State agency. Although the respondent praised the uniform accounting system for its helpfulness in budget preparation and in the preparation of interim reports, he felt that the recent change from mandatory to optional might be a hindrance, at least temporarily. Another city replied that Act 2 had caused very little effect on its accounting system except for changes in account numbers and headings. The city charter has required an annual audit by a CPA for many years. Another city stated that conversion to the uniform accounting system had caused few problems— a few title changes in activities and accounts. The conversion had been easy because of the background and experience of the elected officials and because of the caliber of the previous system. From the Villages 255 One village explained that in 1969 complete reorganization had been implemented in all phases. An administrator had been hired, and the functions which had previously been performed by the clerk and treasurer had been consolidated into a newly organized accounting department. As a part of the reorganization, computerized equipment had been purchased} since Act 2 had fallen into the timing of this, it perhaps had been responsible for some of it. Auditing costs have risen from $1,500 to $6,000, partly because of Act 2 and partly because of the need for more detailed audits. Another village replied that it did not believe that the questionnaire applied to its record-keeping. The village*s CPA had set up a new form of record-keeping in 1970-71. The village is audited every two years and has a budget. The CPA takes care of things, and the village officials proceed only by his direction. The respondent from another village explained that, since the clerk had never gone to school to learn the uniform accounting system, the auditor had to set up the books. The bookkeeping is departmentalized, and information as to cost or revenue is readily available. The auditor of another village indicated in a formal letter that his client has not formally adopted the uniform accounting system. The clerk and treasurer of the village are agreed not to conform to the provisions of Act 2 on the grounds that the uniform accounting system is too complicated and that the existing system works. Although the auditor has strongly recommended the adoption of the uniform system and has offered to assist in the change, both the clerk and treasurer have replied that they would rather resign than change. The auditor enclosed copies of the last two management letters reporting both to the village grid to the State that there has been nanconfognnance with Public Act 2 of 256 1968. Another village declined to complete the questionnaire on the grounds that it has had four clerks during the past three years, and work on the new system has just begun. Another village declined to complete the questionnaire on the grounds that it did not have sufficient clerical staff for the undertaking but replied that it had not experienced any effects as a result of the uniform accounting Act. Its auditor refused to release any information about the village on the grounds that it would not be "legal" for him to do so. From the Townships One township disclosed that, since it has "just now” implemented Act 2, many of the questions are not applicable to it. The township changed auditors as of February, 1975. Prior to that date, it took eight months to obtain an audit] and very few Act 2 principles were followed. The population of the township has increased rapidly during the past five years, and its officials "are now trying to catch up everything." The auditor of another township reported that his client is still in the development stage in the growth of township activity and services. Although the cost of record-keeping has increased, the township has had competent working knowledge of Act 2 since its initiation; and it has not incurred material cost as a result of the uniform accounting system. The auditor of another township stated that the cost system of the 257 township was not adequate to answer the "Questions on Costs'* section of the questionnaire. The auditor continued that the effects of Act 2 would be just as difficult to determine as the effects of inflation. He suspects that some costs have gone up as the result of Act 2, and some may have cane down. The respondent from another township replied that the township’s accounting and bookkeeping are good since the books always "balance to the penny." Another township indicated that it has had an audit every two years and has budgeted previously in each fund. However, prior to Act 2, it did not record expenditures by activity. Its respondent asserted that Act 2 has been more beneficial to the larger townships than to the smaller ones since in the smaller units it has merely created a lot more work for the clerk. In addition, by having adopted the uniform accounting system, the clerks are doing a lot of the work that should be done by the auditors. The clerk of another township reported that the uniform accounting system is great for all information in all departments. The problem has been that the people of the township have not been educated to accepting the system. The township Board is very unhappy with all of the bookkeeping that must be done; and its members want to return to a simplified system that requires less work, resulting in a poor set of records. According to the clerk, the surrounding townships have not adopted the uniform accounting system; consequently, the Board feels that, if other units are permitted to be in violation of Act 2, all units should be. The clerk feels that CPAs should not be allowed to 258 audit a local unit of government unless it has adopted the uniform 2 accounting system. The clerk suggested that the convention of the Michigan Tovnships Association should be the vehicle for informing township officials of the importance of adopting the new system. Another township replied that, since it is only in its second year of experience with the uniform accounting system, it has not yet begun to obtain any benefits from it. Its respondent observed that the questionnaire is primarily geared toward larger units of government. Its auditor added that neither the township nor the CPA firm has a cost system good enough to measure cost increases or decreases resulting from Act 2. Another township responded by stating that the questionnaire does not concern it. The respondent from another township observed with respect to the questionnaire that "this is ridiculous for a small township"! Another township replied that it has a good set of books set up by an accountant years ago. It has never had red figures such as those experienced by our State and Nation! SUMMARIZATION OF THE RESULTS Average Scores per Unit In Table 12 are presented the average scores per unit for each of the twenty benefit items and ten cost items in the order of their respective magnitudes. Each of the twenty benefit items is ranked within its own category, and each of the ten cost items is ranked within 2 In a personal interview on October 8 , 1975, Mr. James Bolthouse indicated that this possibility would not be acceptable to the Department of Treasury. 259 Table 12 ALL BENEFITS AND COSTS Average Scores per Unit in Order of Magnitude Benefits Data from Units Data from Auditors Type of Benefit Item "Accuracy*' Completeness of Reports Recording by Activity Budgeting by Activity Promptness Audit Recommendations Correlation Understanding of Report Cash Management Conversion of Accounts Fixed Assets Valuation Modified Accrual Basis Receipt of Information Discontinuing Reports Promptness of Reports Other Acct. & Reporting Interim Reports Program Budgeting Other Auditing Evaluation of Output Rank 1 2 3 4 5 6 7 8 9 1 0 11 12 13 14 15 16 17 18 19 2 0 Average Score per Unit .98 .98 .88 .81 .77 .74 .70 .62 .41 .40 .37 .28 .28 .26 .24 .22 .19 .12 .07 .02 Rank T ~ 3 6 4 9 2 7 8 17 15 12 13 14 16 11 1 0 1 8 19 5 2 0 Average Score per Unit 1.09 1.04 .85 .94 .59 1 . 0 6 .76 .76 .26 .30 .37 .35 .33 .28 .41 .46 .24 .07 .94 .04 Costs Data. from Units Data from Auditors Type of Cost Item Auditing by CPA Firms Stationery and Supplies Education Labor Costs Other Acct. 6 Reporting Bookkeeping Services Machines and Equipment Copying Machine Computer/Computer Time Space Rank I 2 3 4 5 6 7 8 9 1 0 Average Score per Unit .53 .30 .30 .26 .12 .10 .09 .06 .03 .01 Rank 2 3 1 6 5 4 7 9 8 1 0 Average Score per Unit .61 .54 .69 .35 .39 .41 .31 .17 .20 .15 260 its own category. It may be observed that small beneficial effects appear in the first eight items on the list of potential benefits! "Accuracy,” Completeness of Reports, Recording by Activity, Budgeting by Activity, Promptness, Audit Recommendations, Correlation, and Understanding of Report. Moreover, the assessments by the units and those by the auditors are in approximate agreement on all eight of these items. Also, an additional small beneficial effect appears in connection with the Other Auditing item as a result of open-ended contributions by the auditors. Further, both the assessments by the units and those by the auditors are in approximate agreement that the effects of the remaining eleven items on the list of potential benefits may be regarded as immaterial. Within the **Small Benefit" category, the assessments by the units and those by the auditors are in precise agreement with respect to the relative positions of "Accuracy," Budgeting by Activity, Correlation, and Understanding of Report. At the bottom of the list of potential benefits, they are also in precise agreement with respect to the relative position of Evaluation of Output. Of the twenty benefit items, fourteen were assessed higher by the auditors; five were assessed higher by the units; and one was assessed equally by both the units and the auditors. On the list of potential costs, the assessments by the units and those by the auditors are in agreement with respect to a small cost effect in just one item* Auditing by CPA Firms. Although the auditors* assessments also attribute small cost effects both to Stationery and Supplies and to Education, the units* assessments indicate that the effects of these two items may be regarded as inmaterial. However, both the units* assessments and the auditors* assessments are in agreement 261 that the effects of the remaining seven items on the list of potential costs may be regarded as immaterial. Within the "Immaterial1* category* the units* assessments and the auditors* assessments are in precise agreement with respect to the relative positions of Other Accounting and Reporting* Machines and Equipment* and Space. All of the ten cost items were assessed higher by the auditors than by the units. MYesH Responses* Total Scores* and Average Scores per Unit In Table 13 are presented the "Yes" responses* total scores, and average scores per unit for each of the twenty benefit items and ten cost items in the order in which they appeared on the questionnaires. The data listed under the "'Yes* Responses" heading appears only for those items for which the respondents were asked to reply to "Yes or No" type questions. They were not used at all in the Costs section of the auditors* questionnaire. For example* 32 of the units in the sample indicated that they had placed valuations on their fixed assets; and 23 of those responses were substantiated by the auditors of those units. It may be observed that the overall assessment of ,48 for Accounting and Reporting benefits by the units is very close to their overall assessment of .50 by the auditors. However, the overall assessment of .79 for Auditing benefits by the auditors is considerably higher than their overall assessment of .42 by the units. The overall assessment of .56 for total benefits by the auditors is slightly higher than their overall assessment of .47 by the units. The overall assessment of .36 for Accounting and Reporting costs by the auditors is substantially higher than their overall assessment of .14 by the units. However* the overall assessment of .61 for Auditing costs by the auditors is only slightly higher than their overall 262 Table 13 ALL BENEFITS AND COSTS "Yes'* Responses, Total Scores, and Average Scores per Unit Type of Benefit Item "Accuracy** Promptness Conversion of Accounts Fixed Assets Valuation Modified Accrual Basis Discontinuing Reports Interim Reports Completeness of Reports Recording by Activity Budgeting by Activity Correlation Program Budgeting Evaluation of Output Cash Management Receipt of Information Other Acct. & Reporting Number of '*Yes" Responses U A 32 30 35 15 56 67 64 8 4 28 2 2 23 23 21 12 43 46 43 5 2 16 18 Total Acct. & Reporting 36l 7s7 Promptness of Reports Audit Recommendations Understanding of Report Other Auditing Total Auditing Total Benefits 36T T s T Number of "Yes" Responses Type of Cost Item Space Labor Costs Bookeeeping Services Stationery and Supplies Copying Machine Machines and Equipment Computer/Computer Time Education Other Acct. 6 Reporting Total Acct. & Reporting Auditing by CPA Firms Total Costs U 2 12 13 5 33 65 ” 65 Total Score Average Score per Unit U 84 6 6 34 32 24 22 1 6 84 76 70 60 1 0 2 35 24 19 658 I T 64 53 6 144 802 A 59 32 16 2 0 19 15 13 56 46 51 41 4 2 14 18 25 431 ~ ~ n 57 41 51 I T T 602 Units ,98 .77 .40 .37 .28 .26 .19 .98 .88 .81 .70 .12 .02 .41 .28 .22 .48 .24 .74 .62 .07 .42 .47 Auditors 1.09 .59 .30 .37 .35 .28 .24 1.04 .85 .94 .76 .07 .04 .26 .33 .46 .50 .41 1.06 .76 .94 .79 .56 Total Score Average Score per Unit U 1 2 2 9 26 5 8 3 2 6 1 0 1 1 0 46 156 a 8 19 22 29 9 17 11 37 21 173 33 J 0 6 Units .01 .26 .10 .30 .06 .09 .03 .30 .12 .14 .53 .18 Auditors .15 .35 .41 .54 .17 .31 .20 .69 .39 .36 .61 .38 assessment of *53 by the units. The overall assessment of .38 for total costs by the auditors is substantially higher than their overall 263 assessment of .18 by the units. Benefit/Cost Ratios In Table 14 are presented the computations of the benefit/cost ratios, all of which are positive, and all except one of which are greater than one. In the Accounting and Reporting category the ratios of 3.36 and 1.40, respectively, indicate a net benefit as assessed by the units and by the auditors, with the net benefit effect being perceived as stronger by the units than by the auditors. In the Auditing category the ratio of .78 indicates an assessment of net cost by the units while the ratio of 1.30 indicates a belief of net benefit by the auditors, as might be expected! Relative to each other, the net benefit assessment by the auditors is slightly stronger than the net cost assessment by the units. In the Total category the ratios of 2.57 and 1.46, respectively, indicate a net benefit assessment by both the units and the auditors, with the net benefit effect being perceived as substantially stronger by the units than by the auditors. Additional Considerations As a matter of judgment, it might be projected that the cost effects of Act 2 would tend to decline over time after the units have incurred the initial installation and other start-up costs of the uniform accounting system. Concurrently, it might be projected that the benefit effects of Act 2 would tend to become more apparent over time as the units eventually enjoy the positive results of both the uniform system and the audits by CPA firms. 264 Table 14 BENEFIT/COST RATIOS Accountins and Reporting Itemsi Units Auditors Benefits* Number of Items Total Score Costs* Number of Items Total Score Benefit/Cost Ratio* Auditing Itemsi Benefits* Number of Items Total Score Costs* Number of Items Total Score Benefit/Cost Ratio* Total Items* Benefits* Number of Iterns Total Score Costs* Number of Items Total Score Benefit/Cost Ratio* 16 658 9 110 16 431 9 173 658 llo * t- 16 9 = 3.36 431 ♦ 16 173 * 9 = 1.40 4 144 1 46 4 171 1 33 144 46 ♦ *■ 4 1 ~ = .78 171 * 4 33 r 1 = 1.30 2 0 802 1 0 156 2 0 602 1 0 2 0 6 802 156 * * 2 0 1 0 602 f 2 0 i 06 * 1 0 = 1.46 265 It should be recalled at this point that the results presented in this section should be regarded primarily as part of an illustration of the methodology developed in this research. The study has assumed that the various benefit and cost items m ay be weighted equally with respect to one another. It has also assumed that the various local units of government may be weighted equally with respect to one another. Further, it has assumed that the respondents to the questionnaires have been able to interpret accurately the marginal effects of Act 2 upon the benefit and cost items and that the perceptions of those respondents may be relied upon. Although a stratified random sample was employed in the process of selecting the municipalities to be included in the study, because of the nature of the data it is possible to make only judgmental inferences with respect to the entire population of municipalities. This chapter has examined the data obtained from the questionnaires in terms of the individual benefit and cost items. The next chapter will consider in more detail the effects of the control variables employed in the study. Chapter VI EXAMINATION OF THE EFFECTS OF TOE CONTROL VARIABLES INTRODUCTION As explained in Chapter III of this study, the environment into which Public Act 2 of 1968 was introduced contained elements which might have influenced the results and might help to explain their realization. This research has attempted to consider such constraining elements in the form of control variables by considering the degrees to which they exist in different municipalities. The variables of type of municipality and size of municipality were known from the beginning of this research and entered into the process of selecting the stratified random sample of units to be studied. The information for five additional control variables was obtained from the responses to the municipalities’ questionnaire, and the information for the final control variable was obtained from the responses to the auditors’ questionnaire. The purpose of this chapter is to illustrate how each of these control variables might be associated with the effects of Act 2 on the local units of government. This potential association is developed by individual benefit and cost items, by overall benefits and costs, and by overall benefit/cost ratios, all of which have been derived from the self-assessments of the local units. In each case for comparative purposes the assessments for all units are also presented, and the 266 benefit and cost items are listed, respectively, in the order of 267 magnitude of those assessments. ASSOCIATIONS BETWEEN CONTROL VARIABLES AND AVERAGE SCORES PER UNIT Type of Municipality In Table 15 the average scores per unit and the benefit/cost ratios are associated with the three types of local units of government, namely, cities, villages, and townships, as defined in Act 2. In terms of the overall benefit items, the villages are assessed above the average of all unitsj the townships at the average; and the cities below the average. In terms of the overall cost items, the townships are assessed above the average of all units while the villages and cities are assessed below the average. In terms of the benefit/cost ratios, the cities and villages are assessed above the average of all units while the townships are assessed below the average. However, as indicated on the bottom line of the table, the assessments by the auditors are in substantial disagreement. The auditors have assessed the townships above the average of all units and the cities and villages below the average. Moreover, the perceptions of the auditors indicate a net cost, rather than a net benefit, for the cities and villages. In general, therefore, the attempt to associate the assessments developed in this study with the three types of local units of government must be regarded as inconclusive. Quartile of Municipality In Table 16 the average scores per unit and the benefit/cost ratios are associated with the relative sizes of the municipalities which 268 Table 15 AVERAGE SCORES PER UNIT RELATED TO TYPE OF MUNICIPALITY Type of Benefit Item "Accuracy** — Completeness of Peports Recording by Activity Budgeting by Activity Promptness Audit Recommendations Correlation Understanding of Report Cash Management Conversion of Accounts Fixed Assets Valuation Modified Accrual Basis Receipt of Information Discontinuing Reports Promptness of Reports Other Acct. & Reporting Interim Reports Program Budgeting Other Auditing Evaluation of Output All Benefit Items Data Provided by Units Benefits Average Cities .79 .7 5 .58 .58 .71 .75 .58 • 46 .42 .58 .33 .25 .33 • 46 .13 .50 .13 .08 .04 .00 .42 Villages 1 . 1 8 .94 .94 .82 .94 .53 .88 .76 .53 .41 .18 .41 .41 .06 .53 .12 .24 .18 .24 .06 .52 Score per Unit Townships 1 . 0 0 1.11 1.02 .93 .73 .82 .69 .64 .36 .29 .47 .24 .20 .22 .20 .11 .20 .11 .02 .02 .47 All Units .98 .98 .88 .81 .77 .74 .70 .62 .41 .40 .37 .28 .28 .26 .24 .22 .19 .12 .07 .02 .47 Type of Cost Item Cities Auditing by CPA Firms Stationery and Supplies Education Labor Costs Other A c c t . & Reporting Bookkeeping Services Machines and Equipment Copying Machine Computer /Computer Time Space All Cost Items .25 .08 .29 .13 .13 .08 .00 .08 .00 .00 .10 Cost s Average Score per Unit Villages .29 .12 .24 .35 .12 .12 .06 .06 .18 .00 .15 Townships .78 .49 .33 .29 .11 .11 .16 .04 .00 .02 .23 All Units .53 .30 .30 .26 .12 .10 .09 .06 .03 .01 .18 Source of Ratio Data from Units Data from Auditors Benefit/Cos t Ratios Villages 3.38 .84 Cities 4.06 .95 Townships 2.01 2.17 All Units 2 .57 1.46 269 Table 16 AVERAGE SCORES PER UNIT RELATED TO QUARTILE OF MUNICIPALITY Data Provided by Units Benefits Type of Benefit Item ••Accuracy" Completeness of Reports Recording by Activity Budgeting by Activity Promptness Audit Recommendations Correlation Understanding of Report Cash Management Conversion of Accounts Fixed Assets Valuation Modified Accrual Basis Receipt of Information Discontinuing Reports Promptness of Reports Other Acct. & Reporting Interim Reports Program Budgeting Other Auditing Evaluation of Output All Benefit Items Cells C1,V1,T1 Combined 1.09 1.13 1.06 1.09 .66 .88 .81 .78 .63 .47 .69 .25 .22 .25 .16 .22 .25 .19 .03 .06 .55 Average Scores per Unit Cells C3,V3,T3 C ombined .83 1 . 1 1 .83 .83 1.06 .94 .83 .50 .56 .67 .11 .39 .39 .11 .22 .11 .17 .06 - .11 .06 .48 Cells C4,V4,T4 Combined .85 .70 .55 .45 .65 .45 .55 .60 .25 .00 .25 .25 .25 .35 .30 - .05 .05 - .05 .10 - .05 .32 Cells C2,V2,T2 Combined 1 . 0 6 .88 1 . 0 0 .69 .81 .63 .50 .44 .00 .44 .19 .25 .31 .31 .38 .69 .25 .25 .31 .00 .47 C osts Type of Cost Item Auditing by CPA Firms Stationery and Supplies Education Labor Costs Other Acct. & Reporting Bookkeeping Services Machines and Equipment Copying Machine Computer/Computer Time Space All Cost Items Cells Cl.Vl.Tl Combined .47 .19 .47 .41 .25 .16 .09 .13 .09 ,03 .23 Cells C2,V2,T2 Combined Averagei Score pe r Unit Cells C3,V3,T3 Combined .56 .50 .11 .22 ,11 .11 .22 .00 .00 .00 .18 Cells C4,V4,T4 Combined .55 .45 .40 .15 .00 .10 .05 .05 .00 .00 .18 .63 .13 .06 .13 .00 .00 .00 .00 .00 .00 .09 All Units .98 .98 .88 .81 .77 .74 .70 .62 .41 .40 .37 .28 .28 .26 .24 .22 .19 .12 .07 .02 .47 All Units .53 .30 .30 .26 .12 .10 .09 .06 .03 .01 .18 Source of Ratio Data from Units Data from Auditors Benefit/Cost Ratios C1,V1,T1 2.39 1.43 C2,V2,T2 5.00 1 .84 C3,V3,T3 2.64 1.64 C4,V4,T4 1.84 1.13 All 2.57 1.46 270 participated in the research. The local units have been divided by population into four groups, each of which contains three of the twelve cells which were employed in the study. In terms of the overall benefit items, the first and third groups are assessed above the average of all units; the second group at the average; and the fourth group below the average. In terms of the overall cost items, the first group is assessed above the average of all units; the third and fourth groups at the average; and the second group below the average. In terms of the benefit/cost ratios, the second and third groups are assessed above the average of all units while the first and fourth groups are assessed below the average. Moreover, as indicated on the bottom line of the table, the assessments by the auditors are in substantial agreement. The auditors have also assessed the second and third groups above the average of all units and the first and fourth groups below the average. In general, therefore, it would appear that the largest net benefit may be found in the second group; the next to the largest in the third group; the next to the smallest in the first group; and the smallest in the fourth group. Absolute Size of Municipality In Table 17 the average scores per unit and the benefit/cost ratios are associated with the absolute sizes of the municipalities which participated in the research. In this case the local units have been divided by population into groups without regard to the classification of those units by type. In terms of the overall benefit items, the first and second groups are assessed above the average of all units while the third and fourth groups are assessed below the average. In 271 Table 17 AVERAGE SCORES PER UNIT RELATED TO ABSOLUTE SIZE OF MUNICIPALITY Data Provided by Units Benefits a Scores per Unit Responses Responses from from Third 252 Bottom 2 52 Type of Benefit Item "Accuracy” Completeness of Reports Recording by Activity Budgeting by Activity Promptness Audit Reccxnmendations Correlation Understanding of Report Cash Management Conversion of Accounts Fixed Assets Valuation Modified Accrual Basis Receipt of Information Discontinuing Reports Promptness of Reports Other Acct. R Reporting Interim Reports Program Budgeting Other Auditing Evaluation of Output All Benefit Items Responses from Top 252 1 . 0 0 1.07 .83 .90 .52 .90 .62 .69 .48 .52 .66 .14 .31 .28 .34 .55 .14 .10 .07 .03 .51 Averagi Responses from Second 2 52 1.05 1 . 0 0 1.09 .95 1.05 .64 .77 .50 .50 .45 .32 .45 .14 .45 - .14 .09 .45 .23 .00 .05 .50 1 . 0 0 1 . 0 0 1 . 0 0 .83 .94 .89 .83 .67 .28 .44 .22 .27 .33 .00 .33 - .11 .11 .11 .11 .00 .46 .82 .76 .59 .47 .65 .47 .59 .59 .29 .06 .12 .29 .35 .24 .47 .18 .00 .00 .12 .00 .35 Costs Average• Scores per Unit Responses from Top 2 52 Responses Responses from from Responses from All Second 2 52 Third 252 Bottom 2 52 Units Type of Cost Item Auditing by CPA Firms Stationery and Supplies Education Labor Costs Other Acct, & Reporting Bookkeeping Services Machines and Equipment Copying Machine Computer/Computer Time Space All Cost Items .38 .17 .38 .31 .21 .03 .07 .10 .00 .03 .17 .68 .18 .14 .23 .09 .18 .05 .05 .05 .00 .17 Benefit/Cost Ratios .72 .50 .33 .28 .00 .17 .22 .06 .11 .00 .24 .41 .47 .35 .18 .12 .Ob .06 .00 .00 .00 .17 Source of Ratio Data from Units Data from Auditors Top 252 3.00 1.62 Second 2 52 Third 2 52 Bottom 252 1.94 1.54 2.14 1 . 2 6 3.07 1.28 All Units .98 .98 .88 .81 .77 .74 .70 .62 .41 .40 .37 .28 .28 .26 .24 .22 .19 .12 .07 .02 .47 .53 .30 .30 .26 .12 .10 .09 .06 .03 .01 .18 All 2 .57 1.46 272 terms of the overall cost items, the third group is assessed above the average of all units while the first, second, and fourth groups are assessed below the average. In terms of the benefit/cost ratios, the first and second groups are assessed above the average of all units while the third and fourth groups are assessed below the average. In this case the assessments by the auditors are in only partial agreement. The auditors have assessed the first and third groups above the average of all units and the second and fourth groups below the average• In general, therefore, it would appear that the largest net benefit may be found in the first group While the smallest net benefit may be found in the fourth group. The data are inconclusive with respect to the relative positions of the second and third groups. Employment of Professional Manager or Superintendent Of the 86 units which responded to the questionnaire, 24 reported the employment of professional managers or superintendents. Of these 24, the auditors of fifteen responded to the questionnaire. In Table 18 the average scores per unit and the benefit/cost ratios are associated with the employment or lack of employment of professional managers or superintendents by the municipalities which participated in the research. In terms of the overall benefit items, the units not employing professionals are assessed slightly above the average of all units while those employing professionals are assessed below the average. In terras of the overall cost items, the units not employing professionals are assessed slightly above the average of all units while those employing professionals are assessed below the average. In terms of the benefit/cost ratios, the units employing professionals are 273 Table 18 AVERAGE SCORES PER UNIT RELATED TO EMPLOYMENT OF PROFESSIONAL MANAGER OR SUPERINTENDENT Data Provided by Units Type of Benefit Item "Accuracy" Completeness of Reports Recording by Activity Budgeting by Activity Promptness Audit Recommendations Correlation Understanding of Report Cash Management Conversion of Accounts Fixed Assets Valuation Modified Accrual Basis Receipt of Information Discontinuing Reports Promptness of Reports Other Acct. & Reporting Interim Reports Program Budgeting Other Auditing Evaluation of Output All Benefit Items Type of Cost Item Auditing by CPA Firms Stationery and Supplies Education Labor Costs Other Acct. & Reporting Bookkeeping Services Machines and Equipment Copying Machine Computer/Computer Time Space All Cost Items Benefits Employed .83 .88 .63 .83 .63 .83 .63 .SO .42 .42 .33 .46 .25 .29 .00 .13 .17 .17 .00 .04 .42 Not Employed 1.03 1 . 0 2 .98 .81 .82 .71 .73 .66 .40 .39 .39 .21 .29 .24 .34 .26 .19 .10 .10 .02 .48 Costs Employed .33 .04 .21 .33 .2 5 - .04 .08 .13 .04 .04 .14 Average Scores per Unit Not Employed .61 .40 .34 .23 .06 .16 .10 .03 .03 .00 .20 Source of Ratio Data from Units Data from Auditors Benefit/Cost Ratios Employed 2.97 1.08 Not Employed 2 .44 1.64 All Units .98 .98 .88 .81 .77 .74 .70 .62 .41 .40 .37 .28 .28 .26 .24 .22 .19 .12 .07 .02 .47 All Units .53 .30 .30 .26 .12 .10 .09 .06 .03 .01 .18 All Units 2.57 1.46 274 assessed above the average of all units while those not employing professionals are assessed below the average. However, the assessments by the auditors are in substantial disagreement. The auditors have assessed the units not employing professionals above the average of all units and those employing professionals below the average. In general, therefore, the attempt to associate the assessments developed in this study with the presence of absence of a professional manager or superintendent must be regarded as inconclusive. Earlier Utilization of "Blue Book** Accounting System Of the 86 units which responded to the questionnaire, only twelve reported having utilized the "Blue Booh" accounting system before the implementation of Act 2. Of these twelve, the auditors of only six responded to the questionnaire. In Table 19 the average scores per unit and the benefit/cost ratios are associated with the earlier utilization or lack of utilization of the "Blue Book" accounting system by the municipalities which participated in the research. In terras of the overall benefit items, the units using the "Blue Book" are assessed above the average of all units while those not using the "Blue Book" are assessed slightly below the average. In terms of the overall cost items, the units not using the "Blue Book" are assessed slightly above the average of all units while those using the "Blue Book" are assessed below the average. In terms of the benefit/cost ratios, the units using the "Blue Book" are assessed well above the average of all units while those not using the "Blue Book" are assessed somewhat below the average. Moreover, the assessments by the auditors are in substantial agreement. The auditors have assessed the units using the "Blue Book” 275 Table 19 AVERAGE SCORES PER UNIT RELATED TO EARLIER UTILIZATION OF "BLUE BOOK" ACCOUNTING SYSTEM Data Provided by Units Type of Benefit Item “Accuracy" Completeness of Reports Recording by Activity Budgeting by Activity Promptness Audit Recommendations Correlation Understanding of Report Cash Management Conversion of Accounts Fixed Assets Valuation Modified Accrual Basis Receipt of Information Discontinuing Reports Promptness of Reports Other Acct. & Reporting Interim Reports Program Budgeting Other Auditing Evaluation of Output All Benefit Items Benefits Average Scores per Unit Used "Blue Book" 1.08 1 . 0 0 .75 .83 .83 .75 .75 .58 .25 .58 .42 .08 .50 .42 .58 .2 5 .17 .17 .00 *.00 .50 Costs Did Not Use "Blue Book" .96 .97 .91 .81 .76 .74 .69 .62 .43 .36 .36 .31 .24 .23 .19 .22 .19 .11 .08 .03 .46 All Uni .98 .98 .88 .81 .77 .74 .70 .62 .41 .40 .37 .28 .28 .26 .24 .22 .19 .12 .07 .02 .47 Average Scores per Unit Type of Cost Item Auditing by CPA Firms Stationery and Supplies Education Labor Costs Other Acct. 6> Reporting Bookkeeping Services Machines and Equipment Copying Machine Computer/Computer Time Space All Cost Items Used "Blue Book" .33 .25 .33 .08 .00 .00 .00 .00 .00 .00 .10 Did Not Use "Blue Book" .57 .31 .30 .29 .14 .12 .11 .07 .04 .01 .20 All Units .53 .30 .30 .26 .12 .10 .09 .06 .03 .01 .18 Source of Ratio Data from Units Data from Auditors Benefit/Cost Ratios Used "Blue Book** 5.00 1.96 Did Not Use "Blue Book" 2.38 1.42 All Units 2 .57 1.46 276 well above the average of all units and those not using the "Blue Book" somewhat below the average. In general, therefore, it would appear that the utilization of the "Blue Book" accounting system prior to the implementation of Act 2 was a source of net benefit for those municipalities which did so. Year of Adoption of Michigan Uniform Accounting System (Table 20) Of the 86 units which responded to the questionnaire, 77 indicated the year in which the uniform accounting system had been adopted. Of these 77, the auditors of 47 responded to the questionnaire. The number of units adopting the system in each year are as follows. Number of Units 2 7 9 19 24 7 6 3 Year of Adoption of Uniform Accounting System 1968 1969 1970 1971 1972 1973 1974 1975 In terms of the overall benefit items, the units which adopted the system in 1968, 1969, 1971, and 1972 are assessed above the average of all units while those which adopted the system in 1970, 1973, 1974, and 1975 are assessed below the average. In terms of the overall cost items, the units which adopted the system in 1971, 1972, 1973, 1974, and 1975 are assessed above the average of all units while those which adopted the system in 1968, 1969, and 1970 are assessed below the average. In terms of the benefit/cost ratios, the units which adopted the system in 1968, 1969, and 1970 are assessed above the average of all units while those which adopted the system in 1971, 1972, 1973, 1974, and 197 5 are assessed below the average. In this case the assessments by the auditors are in only partial agreement. The auditors have assessed the units which adopted the system in 1968, 1970, 1971, 1973, and 1974 above the average of all 277 Table 20 AVERAGE SCORES PER UNIT RELATED TO YEAR OF ADOPTION OF MICHIGAN UNIFORM ACCOUNTING SYSTEM Data Provided by Units Type of Benefit Item "Accuracy** Completeness of Reports Recording by Activity Budgeting by Activity Promptness Audit Recommendations Correlation Understanding of Report Cash Management Conversion of Accounts Fixed Assets Valuation Modified Accrual Basis Receipt of Information Discontinuing Reports Promptness of Reports Other Acct. £■ Reporting Interim Reports Program Budgeting Other Auditing Evaluation of Output All Benefit Items Type of Cost Item Auditing by CPA Firms Stationery and Supplies Education Labor Costs Other Acct. & Reporting Bookkeeping Services Machines and Equipment Copying Machine Computer/Computer Time Space All Cost Items Benefits Average Scores per Unit .86 1 . 1 1 .50 1.71 .67 .56 .86 .67 .71 .57 .11 .44 .29 .57 .22 .56 .29 .14 .22 .43 .67 .57 - .11 1968 1969 1970 1971 1972 1973 1974 1975 .71 1 . 2 2 1.00 1.25 .33 -.33 .71 2 . 0 0 1.50 1.14 1 . 11 1 . 0 0 1 . 0 0 .83 .67 .86 1 . 0 0 1.43 .43 .33 .67 .78 1.16 .88 1 . 0 0 1.43 .00 1.33 .29 .78 1.05 .88 .43 .67 .33 .75 .84 1 . 0 0 .92 .67 .67 .57 .47 .57 .79 .89 .67 .17 1 . 0 0 .83 .58 1 . 0 0 .33 .58 .00 .50 1 . 0 0 .29 .58 2 . 0 0 .00 .29 -.17 .63 1.50 .00 .26 .50 .29 .13 .67 . 1 . 0 0 .68 .50 1.33 .14 .17 .00 .16 .33 .38 .67 .00 .26 .00 .50 .14 .08 .16 .00 2 . 0 0 .43 .33 .32 .00 -.67 ,00 .00 -.50 .58 .00 -.16 .00 .00 1 . 0 0 .42 .17 .04 .29 .00 . 00 .22 .00 .33 .08 .16 .43 .00 . 00 .00 .00 .33 -.33 .43 .05 -.04 .14 .00 .00 .04 .00 .00 .00 .00 .00 .00 .00 .73 .68 .46 .49 .49 .33 .30 .37 Costs Average Scores per Unit 1968 1969 1970 1971 1972 1973 1974 1975 .67 .67 .50 .33 .67 .^3 .33 1 . 0 0 .00 1 . 0 0 .33 .33 .33 .00 .33 .00 .00 .00 .33 .00 .25 .47 .00 .00 .50 .00 .00 .00 .00 .00 .00 .00 .05 .14 .11 .21 .75 .53 .32 .38 .37 .21 .29 .16 .21 .11 .32 -.04 .08 .21 .08 .05 .08 .05 .00 .00 .20 .71 .57 .29 .29 .00 .14 .14 .00 .00 .00 .21 .22 .22 .33 .22 .00 .00 .00 .11 .00 .00 .71 .00 .43 .29 .00 .00 .00 .00 .00 .00 Benefit/Cost Ratios Source of Ratio Data from Units Data from Auditors 1968 1969 1970 1971 1972 1973 1974 1975 .79 14.50 4.75 4715 2.35 2.39 1.53 1 . 2 0 .73 2.27 1.56 1.29 3.17 1.93 Unde­ fined All Units .98 .98 .88 .81 .77 .74 .70 .62 .41 .40 .37 .28 .28 .26 .24 .22 .19 .12 .07 .02 .47 All Units .53 .30 .30 .26 .12 .10 .09 .06 .03 .01 .18 All Units 2.57 1.46 units and those which adopted the system in 1969 and 1972 below the 278 average. In general, in spite of the partial disagreement of the auditors* assessments, it would appear that those units which adopted the uniform accounting system relatively early have been more able to perceive the net benefit of the implementation of Act 2, Earlier Employment of CPA Auditors (Table 21) Of the 86 units responding to the questionnaire, A3 reported the employment of CPA auditors before the fiscal year 1968. Of these A3, the auditors of 31 responded to the questionnaire. In terms of the overall benefit items, the units which did not employ auditors earlier are assessed slightly above the average of all units while those which did employ auditors earlier are assessed slightly below the average. In terms of the overall cost items, the units which did employ auditors earlier are assessed slightly above the average of all units while those which did not employ auditors earlier are assessed at the average. In terms of the benefit/cost ratios, the units which did not employ auditors earlier are assessed above the average of all units while those which did employ auditors earlier are assessed below the average. Moreover, the assessments by the auditors are in substantial agreement. The auditors have assessed the units which did not employ auditors earlier above the average of all units and those which did employ auditors earlier below the average. In general, therefore, it would appear that those units which did not employ auditors before the fiscal year 1968 derived a somewhat greater net benefit from the implementation of Act 2. 279 Table 21 AVERAGE SCORES PER UNIT RELATED TO EARLIER EMPLOYMENT OF CPA AUDITORS Data Provided by Units Benefits Average Scores per Unit Did Employ Earlier 1.07 1.02 .91 .86 .84 .74 .77 .51 .37 .44 .40 .33 .16 .23 .12 .16 .16 .07 - .07 .02 .46 Costs Did Not Employ Earlier .88 .93 .86 .77 .70 .74 .63 .72 .44 .35 .35 .23 .40 .28 .37 .28 .21 .16 .21 .02 ,48 All Units .98 .98 .88 .81 .77 .74 .70 .62 .41 .40 .37 .28 .28 .26 .24 .22 .19 .12 .07 .02 .47 Average Scores per Unit Did Employ Earlier .42 .21 .33 .37 .14 .05 .14 .12 .07 .02 .19 Did Not Employ Earlier .65 .40 .28 .14 ,09 .16 .05 .00 .00 .00 .18 Benefit/Cost Ratios Did Employ Earlier 2.45 1.21 Did Not Employ Earlier 2.63 1.76 All Units .53 .30 .30 .26 .12 .10 .09 .06 .03 .01 .18 All Units 2.57 1.46 Type of Benefit Item "Accuracy” Completeness of Reports Recording by Activity Budgeting by Activity Promptness Audit Recommendations Correlation Understanding of Report Cash Management Conversion of Accounts Fixed Assets Valuation Modified Accrual Basis Receipt of Information Discontinuing Reports Promptness of Reports Other Acct. & Reporting Interim Reports Program Budgeting Other Auditing Evaluation of Output All Benefit Items Type of Cost Item Auditing by CPA Firms Stationery and Supplies Education Labor Costs Other Acct. & Reporting Bookkeeping Services Machines and Equipment Copying Machine Computer /Computer Time Space All Cost Items Source of Ratio Data from Units Data from Auditors Year of Initial Employment of CPA Auditors (Table 22) 280 Of the remaining 43 units which did not report the employment of C P A auditors before the fiscal year 1968, 29 indicated the year in which C P A auditors were initially employed. Of these 29, the auditors of fifteen responded to the questionnaire. The number of units initially e m p l o y i n g C P A auditors in each year are as follows. Number of Units Year of Initial Employment 1968 6 196? 7 1975 8 T971 3 1972 4 1974 I In terms of the overall benefit items, the units which initially employed auditors in 1969, 1972, and 1974 are assessed above the average of all units while those which initially employed auditors in 1968, 1970, and 1971 are assessed below the average. In terms of the overall cost items, the units which initially employed auditors in 1968, 1969, 1970, and 1974 are assessed above the average of all units while those which initially employed auditors in 1971 and 1972 are assessed below the average. In terms of the benefit/cost ratios, the units which initially employed auditors in 1969, 1971, and 1972 are assessed above the average of all units while those which initially employed auditors in 1968, 1970, and 1974 are assessed below the average. In this case the assessments by the auditors are in only partial agreement. The auditors have assessed the units which initially employed auditors in 1968, 1970, 1971, 1972, and 1974 above the average of all units and those which initially employed auditors in 1969 belcw the average. In general, therefore, the attempt to associate the assessments developed in this study with the year of initial employment of a CPA auditor must be regarded as inconclusive. 281 Table 22 AVERAGE SCORES PER UNIT RELATED TO YEAR OF INITIAL EMPLOYMENT OF CPA AUDITORS Data Provided by Units Benefits Average Scores per Unit Type of Benefit Item 1968 .83 .50 .67 .67 .67 .83 .67 "Accuracy** Completeness of Reports Recording by Activity Budgeting by Activity Promptness Audit Recommendations Correlation Understanding of Report .00 Cash Management .50 Conversion of Accounts .67 Fixed Assets Valuation - .33 Modified Accrual Basis .33 Receipt of Information .17 Discontinuing Reports .50 Promptness of Reports Other Acct. & Reporting - .17 .17 Interim Reports - .17 Program Budgeting .00 Other Auditing - .17 Evaluation of Output .37 1969 l . U 1.29 1.14 1.29 1 . 0 0 1.14 .71 1 . 0 0 ~ 1.14 .29 .14 .71 .43 .14 .00 .43 .57 .43 .43 .57 .14 ■ 66 All Benefit Items 1970 .38 .63 .63 .38 .13 .50 .63 .75 .25 .00 .00 .00 .38 .38 .13 .50 .13 .00 .00 .00 .29 1971 .67 .67 .67 .00 .67 .00 ,00 .00 .00 .33 .33 1 . 0 0 .00 .67 .00 .00 .00 .00 .00 .00 .25 1972 1.56 1.50 1 . 0 0 1.25 1 . 0 0 .75 1974 i.6o 2 . 0 0 2 . 0 0 1 . 0 0 .00 2 . 0 0 1.25 - 1 . 0 0 2 . 0 0 1 . 0 0 .00 .00 .00 .00 .00 .00 .00 1 , 0 0 .00 .00 .00 .55 .50 1.50 .75 .25 .50 1 . 0 0 .50 .75 .00 .00 .00 .00 .00 .70 Costs Averagei Scores per Unit Type of Cost Item Auditing by CPA Firms Stationery and Supplies Education Labor Costs Other Acct. & Reporting Bookkeeping Services Machines and Equipment Copying Machine Computer/Computer Time Space All Cost Items 1968 i.bo .83 .33 .00 .00 .00 .00 .00 .00 .00 .22 1969 1.6o .14 .29 .43 .00 .14 .00 .00 . 0 0 . 0 0 .20 1970 .50 .88 .63 .25 .25 .25 .25 .00 .00 .00 .30 1971 .00 .00 .00 .00 .00 .00 .00 ,00 .00 .00 .00 1972 1 . 0 0 .25 .00 .00 .00 .00 .00 ,00 .00 .00 .13 Benefit/Cost Ratios Source of Ratio Data from Units 1968 1.6$ 1969 3.29 1970 .96 Data from Auditors 2.81 1 . 0 0 1.55 1972 1971 Unde­ 5.66 fined 1.50 2.17 1974 2 . 0 0 1 . 0 0 1 . 0 0 1 . 0 0 .00 2 . 0 0 .00 .00 .00 .00 .70 1974 .79 All Units .98 .98 .88 .81 .77 .74 .70 .62 .41 .40 .37 .28 .28 .26 .24 .22 .19 .12 .07 .02 .47 All Units .53 .30 .30 .26 .12 .10 .09 .06 .03 .01 .18 All Units 2.37 2.67 1.46 Quality Ratings from Auditors 282 The questionnaires which were sent to the independent certified public accountants differed in several respects from those which were sent to the municipalities included in the sample. As indicated in earlier chapters, the auditors* questionnaires did not solicit information on specific dollar costs as did the questionnaires sent to the units. However, the auditors* questionnaires did solicit one specific item of information which was not included in those sent to the units. For each unit in the response group of the sample which had been audited by his particular firm, the auditor was requested to indicate his impression of the quality of the accounting and bookkeeping operations of that unit, both before and after the implementation of the requirements of Act 2. Of the 54 responses received from the participating CPA firms, only one did not incorporate a reaction to this particular item. Fourteen of the seventeen cities, six of the nine villages, and eleven of the 28 townships were rated as consistently good, both before and after Act 2. These are shown in the Group (1) column in Table 23. At the other extreme, two cities, one village, and two townships were rated as consistently poor, both before and after Act 2. These are shown in the Group (2 ) column in Table 23. In between the two extremes, one city, one village, and fourteen townships were rated as poor before but good after Act 2. These are shown in the Group (3) column in Table 23, On the other hand, one village was rated as good before but poor after Act 2. This is shown in the Group (4) column in Table 23. This particular response, although entirely welcome, was most unexpected since I had inserted number (4) as a possible response to this item only 283 Table 23 AVERAGE SCORES PER UNIT RELATED TO QUALITY RATINGS FROM AUDITORS Data Provided by Units Type of Benefit Item "Accuracy** Completeness of Reports Recording by Activity Budgeting by Activity Promptness Audit Recommendations Correlation Understanding of Report Cash Management Conversion of Accounts Fixed Assets Valuation Modified Accrual Basis Receipt of Information Discontinuing Reports Promptness of Reports Other Acct. & Reporting Interim Reports Program Budgeting Other Auditing Evaluation of Output All Benefit Items Group C O 1.17 1 . 1 0 .97 ,90 .80 .80 .83 .73 .47 .60 .53 .27 ,10 .30 .27 .23 .13 .13 - .03 .00 .52 Benefits Average Group C3) 1.06 1.2 5 1.19 1 . 0 0 .88 1.06 .81 .69 .50 .25 .31 .31 .44 .19 .44 .00 .13 .00 .06 .06 .53 Scores per Unit No Response - 1 . 0 0 - 1 . 0 0 - 1 . 0 0 - 1 . 0 0 - 1 . 0 0 - 1 . 0 0 - 1 . 0 0 - 1 . 0 0 - 1 . 0 0 - 1 . 0 0 - 1 . 0 0 - 1 . 0 0 - 1 . 0 0 - 1 . 0 0 - 1 . 0 0 - 1 . 0 0 - 1 . 0 0 - 1 . 0 0 - 1 . 0 0 - 1 . 0 0 - 1.00 Group (4) 2 .00 .00 .00 .00 1 . 0 0 .00 .00 .00 .00 .00 .00 .00 .00 .00 .00 .00 .00 .00 .00 .00 .15 Group (2) 1 . 0 0 1 . 0 0 .80 .20 .80 .80 .80 .80 .60 .20 .40 .00 .80 .60 .00 .80 .40 .00 .00 .00 .50 Costs Group (1 ) Group (2 ) Average Group (3) Scores per Unit No Response Group (4) Type of Cost Item Auditing by CPA Firms Stationery and Supplies Education Labor Costs Other Acct. & Reporting Bookkeeping Services Machines and Equipment Copying Machine Computer/Computer Time Space All Cost Items Source of Ratio Data from Units .37 .20 .40 .30 .10 .03 .10 .13 .07 .00 .17 .40 .60 .60 .20 .40 . 0 0 .00 .00 .00 .00 .22 .69 .38 .06 .25 .00 .00 .13 .00 .06 .00 .16 Benefit/Cost Group Cl) 3.03 Group (2 ) 2.27 Ratios Group (3) 3.40 Data from Auditors 1.27 .48 2.30 .00 .00 .00 .00 .00 .00 .00 .00 .00 .00 .00 .00 1 . 0 0 .00 .00 ,00 .00 .00 .00 .00 .00 .10 Group (4) Unde­ fined - .06 No Response - 1 0 . 0 0 All Units 2.57^ - 4.50 1.46 All Units .98 .98 .88 .81 .77 .74 .70 .70 .41 .40 .37 .28 .28 .26 .24 .22 .19 .12 .07 .02 .47 All Units .53 .30 .30 .26 .12 .10 .09 .06 .03 .01 .18 284 in order to complete the set of four possible responses* The unit for which a response to this item was not received is shewn in the No Response column in Table 23* In terms of the overall benefit items* the units in Groups (1)* (2), and (3) are assessed above the average of all units while those in Groups (4) and (5) are assessed below the average. In terms of the overall cost items* the units in Group (2) are assessed above the average of all units while those in Groups (15, (3), (4), and (5) are assessed below the average. In terms of the benefit/cost ratios, the units in Groups (1), (3) and (4) are assessed above the average of all units while those in Groups (2) and (55 are assessed below the average. In this case the assessments by the auditors are in only partial agreement. The auditors have assessed the units in Group (35 above the average of all units and those in Groups (15, (2 5, (45, and (55 below the average. Moreover, the perceptions of the auditors indicate a net cost, rather than a net benefit, for the units in Group (2 5. In general, however, if Groups (45 and (55 are disregarded since they contain only one unit each, it may be observed that the relative positions of Groups (15, (25, and (35 in the units* assessments are the same as in the auditors* assessments. The highest relative benefit appears in Group (3), which showed the roost improvement from Act 2j the next highest relative benefit appears in Group (15, which was rated as consistently good; and the lowest relative benefit appears in Group (25, which was rated as consistently poor. This is precisely what might have been expected* Chapter VII OTHER EFFECTS OF PUBLIC ACT 2 OF 1968 EFFECTS OF PUBLIC ACT 2 OF 1968 ON CPA FIRMS In addition to the "quality of accounting and bookkeeping operations" item described in Chapter VI, the auditors* questionnaires also contained a series of questions which dealt with the effects of Public Act 2 of 1968 on the activities of the participating CPA firms. The 54 responses received from the CPA auditors represented 44 separate offices of CPA firms. When more than one response was received from the same CPA office, that office was counted only once. However, where separate offie^es of a given CPA firm could be clearly identified from the responses, the individual offices were counted separately. Responses without Weights As indicated in Table 24, the 44 offices included in the table audit collectively 616 municipalities, more than one third of the total number of local units of government in Michigan. The item dealing with the effect on costs produced a score of .70 per unit, falling into the lower half of the "Small Cost** category. The item dealing with the immediate effect on billings produced a score of .80 per unit, falling into the lower half of the "Small Increase" category. The item dealing with the long-term effect on billings produced a score of .57 per unit, also falling into the lower half of the "Small Increase" category but at a lower level than the preceding item. Those offices numbered (27) and 285 286 Table 24 EFFECTS OF PUBLIC ACT 2 OF 1968 ON CPA AUDITING FIR> 6 Firm No. T T T (2 ) (3) (4) (5) (6 ) (7) (8 ) (9) (1 0 ) (1 1 ) (1 2 ) (13) (14) (15) (16) (17) (18) (19) (2 0 ) (2 1 ) (27) (23) (24) (25) (2 6 ) (27) (2 8 ) (29) (30) (31) (32) (33) (34) (35) (36) (37) (38) (39) (40) (41) (42) (43) (44) Number of Municipal Clients Effect on Costs 7 1 9 15 6 2 0 6 2 6 12 15 3 6 25 14 2 0 7 6 1 0 1 36 15 7 1 11 8 50 4 8 22 12 55 3 5 36 6 2 0 4 25 12 1 0 30 15 30 616 Small Cost Small Cost Small Cost Small Cost No Response Small Cost No Response Immaterial Small Cost Small Cost Small Cost Immaterial No Response Small Cost Small Cost Small Cost Small Cost Immaterial Small Cost Inmaterial Small Cost Small Cost Small Cost Small Cost Small Cost Small Cost Large Cost Inmaterial Small Cost Small Cost Immaterial Immaterial Immaterial Immaterial Small Cost Small Cost Immaterial Small Cost Small Cost Immaterial Small Cost Small Cost Immaterial Large Cost 31 & Effect on Billings Immediate Large Increase Small Increase Small Increase Small Increase No Response Small Increase Large Increase Small Increase Large Increase Small Increase Small Increase Immaterial Small Increase Small Increase Small Increase Small Increase Immaterial Immaterial Large Increase Small Increase Small Decrease Small Increase No Response Small Increase Small Increase Inmaterial Small Increase Small Increase Small Increase Inmaterial Large Decrease Small Increase Small Increase Small Increase Small Increase Small Increase Small Increase Small Increase Small Increase Immaterial Immaterial Small Increase Small Increase Large Increase Small Increase 35 Long-Term Small Increase Small Increase Small Increase Inmaterial No Response Inmaterial Small Increase Small Increase Small Increase Small Increase Small Increase Inmaterial No Response Immaterial Small Increase Small Increase Immaterial Immaterial Small Increase Small Increase Small Decrease Small Increase Small Increase Smal' Increase Small Increase Inmaterial Small Increase Inmaterial Small Increase Small Increase Small Decrease Small Increase Inmaterial Small Increase Inmaterial Large Increase Immaterial Small Increase Immaterial Inmaterial Small Increase Small Increase Immaterial Small Increase 25 287 (44) were the only ones reporting large costs as a result of Act 2 j in both cases they also reported relatively large numbers of municipal clients. Those offices numbered (21) and (31) were the only ones reporting decreases In billings as a result of Act 2 j in both cases the decreases were reflected both immediately and over a longer period of time. Responses Weighted by Number of Municipal Clients In Table 2 5 the Costs column and the two Billings columns are weighted on each line by the number of clients appearing in the first column on the given line. The item dealing with the effect on costs produced a score of .88 per unit, remaining in the lower half of the "Small Cost" category but somewhat higher than the previous score of .70. The item dealing with the immediate effect on billings produced a score of .75 per unit, remaining in the lower half of the "Small Increase" category but slightly lower than the previous score of .80. The item dealing with the long-term effect on billings produced a score of .51 per unit, remaining in the "Small Increase" category but slightly lower than the previous score of .57. When the responses were not weighted, the effect on costs score of .88 exceeded the immediate effect on billings score of .75. When the responses were weighted, this relationship was reversed; the imnediate effect on billings score of .80 exceeded the effect on costs score of .70. In both cases the long-term effect on billings scores were the lowest. Consulting Services for Accounting Decisions The next to the final item on the questionnaire for the CPA auditors solicited their contributions with respect to the effect of 288 Table 2 5 EFFECTS OF PUBLIC ACT 2 OF 1968 ON CPA AUDITING FIRMS WEIGHTED BY NUMBER OF MUNICIPAL CLIENTS Firm No. (1 > (2 ) (3) (4) (5) (6 ) (7) (8 ) (9) (1 0 ) ( U ) (1 2 ) (13) (14) (15) (16) (17) (18) (19) (2 0 ) (2 1 ) (2 2 ) (23) (24) (25) (2 6 ) (27) (2 8 ) (29) (30) (31) (32) (33) (34) (35) (36) (37) (38) (39) (40) (41) (42) (43) (44) Number of Municipal Clients Effect on Costs 7 1 9 15 6 2 0 6 2 6 12 15 3 6 25 14 2 0 7 6 1 0 1 36 15 7 1 11 8 50 4 8 22 12 55 3 5 36 6 2 0 4 25 12 1 0 30 15 30 616 7 1 9 15 0 2 0 0 0 6 12 15 0 0 25 14 2 0 7 0 1 0 0 36 15 7 1 11 8 1 0 0 0 8 22 0 0 0 0 36 6 0 4 25 0 1 0 30 0 60 540 Effect on Billings Immediate 14 1 9 15 0 2 0 12 2 12 12 15 0 6 25 14 2 0 0 0 2 0 1 - 36 15 0 1 11 0 50 4 8 0 - 24 55 3 5 36 6 2 0 4 25 0 0 30 23 30 464 Long-Term 7 1 9 0 0 0 6 2 6 12 15 0 0 0 14 2 0 0 0 1 0 1 - 36 15 7 1 11 0 50 0 8 22 - 12 55 0 5 0 12 0 4 0 0 1 0 30 0 30 315 Act 2 on their ability to provide consulting services for accounting decisions. The following list of items was received. 289 Our aid was sought in converting the chart of accounts. Revisions of the system. Interpretation of the accounts and where to record the transactions. Help with the chart of accounts. Coding, computer installation, management services, and development of a computer system for units of government. Help with the chart of accounts* Helped them set up the Enterprise Fund and transfer the related assets and liabilities from the General Ftind. Definitions of activities and funds to which to allocate expend!ture s . Systems and procedures. We encourage and have a close working relationship with our clients on a continuous basis. Establishing additional funds and budget assistance— financial and functional. Budget process, chart of accounts, and general ledger assistance• Investment of idle cash funds and cash flow data. Installing accounting systems. Budgeting, investing, employee procurement, and accounting systems. Implementing and setting up the township records to conform with Act 2 and educating clerks, primarily to understand the double entry system* Definitions of activities and funds to which to allocate expenditures. Training township treasurers in general ledger posting and setting up the chart of accounts for cities and townships. Consulting Services for Other Than Accounting Decisions 290 The final item on the questionnaire for the CPA auditors solicited their contributions with respect to the effect of Act 2 on their ability to provide consulting services for other than accounting decisions. The following list of items was received. Setting up the chart of accounts required by Act 2. Management decisions and inter-office politics of client. Inter-unit projects— budgeting, financing, public reporting, and news releases. EFFECTS OF PUBLIC ACT 2 OF 1968 AT THE STATE LEVEL One of the secondary purposes of this research, untouched in earlier sections, has been to consider some possible effects of Public Act 2 of 1968 at the level of the State of Michigan and from its overall viewpoint. The following observations have resulted from two interviews with State officials. The former interview was conducted on June 7, 1974, with Mr. Alfred L. Westol, head of the Local Government Audit Division of the Bureau of Local Government Services. The latter interview was conducted on October 8 , 197 5, with Mr. James J. Bolthouse, Deputy Treasurer in the Bureau of Local Government Services. Cost Effects of Act 2 Development C o s t s . The development of the Michigan uniform accounting system involved five people at the State level, primarily Mr. Albert Blankenship, preceded by Mr. David Mays. The system was reviewed by personnel in the Bureau of Local Government Services and by a Blue Ribbon Committee, whose membership included independent certified public accountants. The outside members of the committee were not paid. 291 nor did they receive reimbursement for travel expenses. Although State employees were reimbursed for travel expenses which they incurred, the actual amount of these was relatively small. The cost of the paper for printing 2,500 copies of the original chart of accounts was borne by the State. Although the printing was done by State personnel, rather than being contracted out to independent parties, it was accomplished with the regular time of staff people; and no overtime costs were incurred. Installation Costs. A nominal amount of travel expense was incurred by State personnel in connection with the occasional installation of the uniform accounting system within a nearby local unit of government. Such an event might have resulted from the volunteering by a member of the conmlttee to install the system in a given community as a pilot project. In all cases the communities were within diriving distance of Lansing, and no overnight stays were involved. Costs of Handling the Reports. The costs of handling the reports from the local units of government include all of the time of Mr. Douglas Arnold, who reviews the reports and follows up on the auditors* exceptions. More help is needed in that particular area. Also, one half of the time of a secretary should be included. In addition, the costs include one half of a four man special audit crew, or two full-time equivalents, for the purpose of dealing with irregularities discovered in the local units of government, either contributed by certified public accountants or received through citizens* complaints. Further, the costs include two members of a three person systems staff. The costs of these individuals include not merely salaries but also fringe benefits and travel. In addition, a certain amount of indirect administrative time should probably be included. 292 Additional costs include a small amount of office furniture, such as filing cabinets, desks, and chairs. The establishment of a central file system is pending. Material costs include expenditures for notebooks and file folders. Anticipated Future Costs. Eventually, the counties will be incorporating the same chart of accounts now utilized by the cities, villages, and townships. After this has been accomplished, the ultimate aim will be to spin out statistics by putting the input from the local units on computers via a key punch process. Thus, the costs would ultimately include the cost of computer time and the labor cost of computer operation. The Treasury Department already has a computer in operation, on which some time would be available for programming and for storage. The process could have been accomplished sooner if outside people had been utilized for the purpose of implementing it. After the computer operations have been incorporated, there will be additional costs for the purposes of evaluation and follow-up. Further, additional people are needed for the purpose of helping Mr. Douglas Arnold with respect to both reviewing the reports and following-up on the auditors' exceptions. As the supervision of the local units of government becomes closer, this process might be expected to accelerate. Benefit Effects of Act 2 Information Sharing. At the present time, information relating to individual units of government is prepared and distributed onlv at the county level. Although the sharing of information among local governments— cities, villages, and townships— is not presently being -_i.LtA.pced by the Department of Treasury, it is anticipated that this 293 might he achieved at some future point. Tn addition, comparisons among individual units of government are made only at the county level* for cities, villages, and townships such comparisons lie in the future. Moreover, the implementation of Act 2 is not currently contributing to policy formulation with respect to the local units. Revenue Sharing. Each CPA firm that audits a local unit has a list of revenue sharing payments to that unit, including federal revenue sharing, state revenue sharing, and liquor control funds. The CPA must submit a partially filled out form to the Bureau of Local Government Services, which completes the form and returns it. Both federal and state revenue sharing funds are based upon both relative tax revenues and population. In this manner, the auditing requirement of Act 2 provides a benefit at the State level by enabling the CPA auditor to oversee the collection and utilization of revenue sharing funds. Other State Agencies. The basic responsibility for the administration of the Act 2 program rests with the Deputy Treasurer in the Bureau of Local Government Services. At the present time, he is exploring the possibility of circulating among the other State agencies for the purpose of determining which of them might have a dependence upon financial information about local government. Examples of these might include the Department of Commerce, Which might be interested in payroll information, and the Department of Public Health. The Deputy Treasurer would like to get the various agencies together in order to make this determination, and his current efforts in working with the federal grants coordinator could be viewed as a step in this direction. Bond Issues and Other D e b t . Information concerning local units of government is especially useful in the process of reviewing tax 294 anticipation notes and bond issues. Specifically, within the Department of Treasury, the Municipal Finance Commission has the responsibility of approving bond issues and other debt created by a local unit. Act 2 has provided the availability of financial information on which the members of the Commission can rely, and the fact that the municipal reports have been audited by CFA firms makes them even more reliable. Prevention of a Financial Crisis. Hopefully, the data supplied by the provisions of Act 2 might become valuable in assisting a given comnunity to avert a financial crisis such as that almost experienced by Ann Arbor in recent years. Since the financial health of any one city indirectly affects that of other cities, for example, through the determination of interest rates, the strengthening of the health of any one city indirectly benefits the entire State. In the Long R u n . From a long run point of view, the Department of Treasury has been attempting for 25 years to obtain the benefits and potential benefits to be derived from this type of legislation} and Public Act 2 of 1968 has finally arrived on the scene. In general, attempts should be made to tighten the Act— not weaken it. However, the possibility is now being considered of relieving local units of government with less than 2 , 0 0 0 population of the burden of employing CPA auditors by having them audited by Department of Treasury auditors, instead. Act 2 has been generally good in every respect for State government, and in particular cases shortages have been uncovered in local units. I gratefully acknowledge the observation of Mr. Westol that my personal efforts in the conduct of this research represent an identifiable benefit to the State of Michigan. Chapter VIII SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS PURPOSES OF THE RESEARCH Essential Purpose The essential purpose of this research has been to develop an application of cost/benefit analysis to a governmental program in the following manner, (1) By identifying items of cost or benefit that have resulted from the implementation of Public Act 2 of 1968. (2) By testing the feasibility of meaningfully measuring, or assessing, the net costs and benefits of a governmental program as they have been perceived by the local units of government affected by it. (3) By attempting to diagnose the reasons for the various experiences with costs and benefits by the use of a number of control variables, such as type and size of municipality. (A) By attempting to develop an informational aid for future policy concurrently with the effort to assess the past effects. Additional Observations The conclusions which have been developed by this research relate primarily to the success of the methodology which has been employed by it since the ultimate aim of the research is to aid in the decision of 295 296 whether or not this methodology should be adopted. Because of the data- gathering limitations, this research does not represent an attempt to measure or to estimate statistically the perceived cost and benefit effects of the program; and statistically reliable conclusions cannot be drawn from it. However, the methodology in this research is employed for the purpose of demonstrating the process of how conclusions might be derived, given the data obtained. Moreover, the t^ uptation to offer subjective inferences has been yielded to frequently during the course of the research. In addition, an interesting by-product of the research has been the comparing and contrasting of the effects of Act 2 as perceived by the local units with those effects as perceived by their CPA auditors. This research does not offer a basis for a totally firm conclusion with respect to the net benefit or cost resulting from the implementation of Act 2. Given an objective standard for judgment, such a conclusion might be provided by a dollar measure of all costs and benefits together with clearly identified reasons for their existence. However, this type of precision is a luxury enjoyed by few decision­ making processes, especially in the public sector of the economy. In governmental decision-making the perceptions and reactions of those affected are of uncontested importance. Furthermore, this research also provides an opportunity to derive conclusions with respect to the methodology employed since this methodology is a proposed information system which is, itself, subject to cost/benefit analysis. With respect to this methodology, questions of the following nature should be considered. What is the benefit potential of the methodology? What information might be obtained by it? What basis for policy recommendations might be presented by it? What w o u l d be the cost of it? How workable, or feasible, is it? 297 Public Act 2 of 1968 An excellent opportunity to test this type of cost/benefit analysis has been provided by the passage in the State of Michigan on February 20, 1968, of Public Act 2 of 1968. Ths Act was intended to represent a major step forward in the process of raising the accounting, reporting, and auditing standards in Michigan municipalities, defined in the Act as cities, villages, and townships. Act 2 represented a decision on the part of the people of the State of Michigan to effect a substantial change i.. the environment of municipal accounting, and this change may be viewed as having produced results in the form of identifiable costs and benefits. For purposes of this study, the major provisions of Act 2 were classified into two separate categories, namely (1 ) accounting and reporting, and (2) auditing. Under the accounting and reporting requirement each local unit of government was required to adopt a uniform chart of accounts and to use the prescribed accounts as the basis for the preparation of an annual financial report to be filed in the offices of the Local Government Audit Division of the Bureau of Local Government Services of the State Department of Treasury within four months after the close of each fiscal year. Under the auditing requirement each local unit was required to employ a CPA auditor for the purpose of performing a certified audit at the end of each fiscal year, with two exceptions. First, units with populations of less than 2,000 needed only biennial audits. Secondly, units with populations of 1,000,000 or more (Detroit) and satisfactory internal auditing needed 298 independent audits only every five years. The foundation of Public Act 2 of 1968 was provided by Article IX, Section 21, of the Michigan Constitution, which mandated the legislature to provide for the maintenance of uniform accounting systems by units of local government and for the auditing of their accounts. At least in the earlier years of its implementation, the Act has engendered a number of complaints from smaller communities who do not relish the idea of paying for independent audits by CPA firms. Act 2 has been a positive force in the uncovering of serious fiscal problems in several Michigan ci ties, and its value for this ourpose might be expected to continue. However, the Bureau of Local Government Services has not been provided with sufficient staff to make use of the audit reports after they have been received; and in 1973 an editorial writer for The Detroit News severely criticized the State Department of Treasury for having paid insufficient attention to reviewing the audit reports after they have been submitted. Possible amendments for the future include a bill which would require independent audits of all authorities and commissions, whether created directly by a local unit or indirectly by a separate public entity created by one or more local units. In addition, a potential bill would require the Local Government Audit Division to perform the audits in local units with populations of less than 2 ,0 0 0 . Although the original target date for the implementation of Act 2 was the fiscal year 1971, many of the local units have failed to meet the target date. A typical situation, especially, but not necessarily, among the smaller units, would encompass first a period of 299 procrastination followed by a period of actual resistance. Eventually, the unit capitulates and decides to employ a CPA firm Which is qualified to expedite the conversion process. Once the qualified CPA firm has been obtained, the conversion process proceeds quickly and smoothly. METHODOLOGY OF THE RESEARCH For the purpose of carrying out the goals of this research, specific methodological procedures were adopted. Identification of Cost and Benefit Effects The first stage of the research was intended to identify as fully as possible the effects of Act 2 on the local units of government in terms of costs and benefits. It began with a long series of exploratory interviews with State officials, municipal officials, officials of municipal organizations, academicians, independent certified public accountants, and the State Senator responsible for the introduction of Act 2. The purposes of these interviews were to discuss the feasibility of employing a cost/benefit approach in attempting to determine the effects of Act 2, obtain the ideas of those interviewed with respect to the cost and benefit effects produced by Act 2, obtain endorsements of the research, and solicit reactions to the study and possible ideas for its development. These were followed by a serie* of twelve interviews with municipal officials and CPA auditors for the specific purpose of identifying the various items of cost and benefit to be included in the study. The original list of 43 benefit items and sixteen cost items was reviewed in three interviews with carefully selected municipal officials who were especially able to assist in the evaluation of them. Subsequently, the list was condensed to its eventual size of twenty benefit items and ten cost items; and these were structured into a questionnaire format. 300 Measurement of Cost and Benefit Effects in Local Units of Government The second stage of the research dealt with the question of how the effects of Act 2 on the local units of government in terms of costs and benefits might be measured or assessed. It began with the preparation of a questionnaire, based on the twenty benefit and ten cost items which had emerged from the preliminary stage. The questionnaire was mailed to 200 local units of government throughout the State of Michigan, divided among approximately 40 cities, 40 villages, and 120 towns! „ps. This was accomplished by classifying all local units of government in Michigan into cities, villages, and townships; stratifying each of these categories by population into four distinct cells; and selecting a stratified random sample from each category. Prior to the complete finalization of the questionnaire, five interviews were held with selected municipal officials for the purpose of obtaining their comments and suggestions. The major purpose of the questionnaire was to obtain the perceptions of the municipal officials to whom it was addressed in the form of their responses to ratings on a scale. In the benefit sections the respondent was asked to select one choice among **Large Beneficial Effect,” "Small Beneficial Effect," "Immaterial," "Small Negative Effect," and "Large Negative Effect.” In the cost sections the respondent was asked to select one choice among "Large Cost," "Small Cost,” "Immaterial," "Small Cost Saving," and "Large Cost Saving." The responses to these items were used to derive an overall average for each 301 item of benefit and cost contained in the questionnaire and* eventually* to compute a ratio of overall benefits to overall costs* When the questionnaire was structured* a conscious attempt was made to separate the accounting and reporting effects of Act 2 from its auditing effects. The twenty benefit items were divided between sixteen "Accounting and Reporting” items and four "Auditing" items; and the ten cost items were divided between nine "Accounting and Reporting” items and one "Auditing” item. Moreover, after the identities of the responding municipalities had been determined from hindsight* a slightly shorter but similar questionnaire was mailed to almost all of the CPA firms which had recently audited the responding municipalities* for the purpose of attempting to substantiate the results from the units. Prior to the complete finalization of the auditors* questionnaire* two interviews were held with carefully selected members of CPA firms for the purpose of obtaining their comments and suggestions. The Use of Control Variables In the process of assembling the contents of the questionnaire for the municipalities* a list of eight items was assembled at the beginning of it which served as the control variables of the research; and a ninth item was included on the questionnaire for the auditors. An important aspect of this study was the analysis of the data in the attempt to discover potential effects of these variables. The list of variables included* Cl) type of municipality; (2 ) quartile of municipality by population; (3) absolute size of municipality by population; (4) whether or not the municipality employed a professional manager or superintendent; (5) whether or not the municipality utilized the "Blue 302 Book” accounting system prior to Act 2j (6) fiscal year in which the municipality adopted the Michigan uniform accounting system; (7) whether or not the municipality employed a CPA auditor prior to Act 2; (8) fiscal year for which the municipality first employed a CPA auditor if it occurred in 1968 or laterj (9) quality rating of the municipality*s accounting and bookkeeping operations by its CPA auditor. Cost and Benefit Effects in the CPA Firms; Cost and Benefit Effects at the State Level At the conclusion of the questionnaire for the CPA auditors, a section of six questions was inserted which solicited their perceptions of the cost and benefit effects of Act 2 on their own organizations. Moreover, an attempt was made to obtain the cost and benefit effects of Act 2 at the State level by interviewing State officials who bore a heavy responsibility for the creation and implementation of the Act. Limitations of the Methodology During the course of this study it became evident that it would be impossible to obtain dollar measurements of the benefit effects of Act 2 and extremely difficult to obtain dollar measurements of its cost effects. Although dollar measurements of the cost effects were solicited in the questionnaire, a much heavier reliance was placed upon the perceptions of the respondents as expressed by their ratings on the scale since this was the only way that overall benefit and cost effects could be compared with each other. Moreover, the technique of the simple average was used both to compare the individual benefit and cost ratings with one another and to compare the ratings of the individual local units of government with one another. Primarily because of the absence of a clearly superior 303 alternative# each of the benefit and cost items in the study was weighted equally; and each of the local units of government which participated in the study was also weighted equally. In addition# it should be noted that this study contained no means for ascertaining in what way the various benefit and cost items might be interpreted by those individuals who responded to the questionnaire. It might be expected that, not only would different individuals have different interpretations of the overall benefit and cost items, but the same individual might interpret the benefit items in a manner different from that of the cost items. Further, the study made no particular attempt to identify or to assess the Importance of potential externalities such as psychological effects although it welcomed open- ended coninents of this type. Also, although the sample size of approximately 11.52 of the universe was adequate to obtain an overall assessment of the Act 2 effects in general terms, it might be expected that a larger sample size would produce results of a more solid character. Strengths. ^ of the Methodology The use of the perceptions of respondents as expressed by their ratings on a scale may be viewed as a strength of the research as well as a limitation since this type of data provides flexibility for the study. In attempting to assess the cost and benefit effects of Act 2, the perceptions of those affected by it count just as heavily as the dollar measurements would if they could be obtained. Moreover, the need to attempt to account for the externalities separately is greatly alleviated since, to a large extent, those externalities have probably exerted considerable influence on the respondents* expressed perceptions. 304 In addition, the absence of weighting of either the individual benefit and cost items or the individual local units may also be viewed as a source of flexibility since it permits the user of the study to apply his own weights in any manner he chooses. Another strength of the study was the use of the data obtained from the auditors* questionnaires for the purpose of substantiating those obtained from the municipalities* questionnaires. In a sense, the CPA auditors also served as a "control variable" in the studyj and it should be noted that the overall data from the auditors were in general agreement with those from the units. Furthermore, although no attempt was made to obtain statistical inferences from the data in the study, a random sample drawn from a universe stratified by population was employed for the purpose of demonstrating that statistical techniques could be employed, if it should be desired to do so. CONCLUSIONS OF THE RESEARCH In general, it may be concluded that this research has successfully illustrated the employment of the methodology utilized within it to provide an overall assessment of the effects of Public Act 2 of 1968. The results of the research have been subject to the limitations of the data obtained and to both the limitations and the strengths of the methodology employed, especially with respect to the use of the perceptions of the respondents in the assessment of the Act 2 effects. At the Local Level The following conclusions have proceeded from this research with respect to the effects of the implementation of Act 2 at the local level. Individual Benefit and Cost Items. Both the units and the auditors 305 agreed that small beneficial effects arose in "Accuracy,** Completeness of Reports, Recording by Activity, Budgeting by Activity, Promptness, Audit Recommendations, Correlation, and Understanding of Report. Also, the auditors contributed a sufficient number of other auditing benefit items to suggest an additional small benefit. Both the units and the auditors agreed that a small cost arose in Auditing by CPA Finns. In addition, the auditors attributed a small cost to Education and to Stationery and Supplies. Overall Benefits and Costs. With respect to Accounting and Reporting benefits, Auditing benefits, and all benefits combined, the auditors suggested a small beneficial effect while the units suggested an immaterial effect. However, the difference between the ratings is insignificant for Accounting and Reporting benefits and very small for all benefits combined* a significant difference exists only for the Auditing benefits. Both the units and the auditors agreed that the effect of the Accounting and Reporting costs was immaterial while the Auditing item suggested a small cost; they agreed that the effect of all costs combined was immaterial. However, they did not agree on the degree of the immateriality; with respect to both Accounting and Reporting costs and all costs combined, the auditors* scores were significantly higher than those from the units. With respect to the Accounting and Reporting items, both the units and the auditors agreed that a net benefit has been produced; however, degree of the net benefit suggested by the units is considerably stronger than that suggested by the auditors. With respect to the 306 Auditing items, the units and the auditors do not agree) the data from the units indicate the existence of a net cost while those from the r -• auditors indicate the existence of a net benefit. With respect to all items combined, both the units and the auditors agreed that a net benefit has been produced) however, the degree of the net benefit suggested by the units is substantially stronger than that suggested by the auditors. Effects of the Control Variables. The attempt to associate the assessments developed in this study with the type of municipality was inconclusive. When the units are grouped Into quartiles by relative size, the largest net benefit appears in the second largest; the next to the largest net benefit in the second smallest; the next to the smallest net benefit in the largest; and the smallest net benefit in the smallest. When the units are grouped by absolute sl2e , the largest net benefit appears in the largest; and the smallest net benefit appears in the smallest. The data are inconclusive with respect to the two middle groups• The attempt to associate the assessments developed with the employment of a professional manager or superintendent was inconclusive. The utilization of the "Blue Book" accounting system prior to the implementation of Act 2 was a source of net benefit for those units which did so. To a large extent, those units which adopted the uniform accounting system relatively early have been more able to perceive the net benefit of the implementation of Act 2. One possible explanation of this result 307 is that perhaps the earlier adopters were those who were best able to perceive the benefits of the new system and wished to obtain those benefits as quickly as possible. A better explanation is thatj relative to each other, the costs and benefits of the implementation of Act 2 have emerged with different time lags. The tendency has been for the costs to have appeared immediately upon implementation and for the benefits to have been stretched out over time. The benefits are greater in those units which adopted the uniform system relatively early because there has elapsed more time in which those benefits have been able to emerge. Those units which did not employ auditors before the fiscal year 1968 derived a somewhat greater net benefit from the implementation of Act 2. The attempts to associate the assessments developed with the year of initial employment of a CPA auditor was inconclusive. When the units are grouped by quality ratings by auditors, the largest net benefit appears in those which have shown the most improvement from Act 2; the next highest net benefit in those which have been consistently good; and the smallest net benefit in those which have been consistently poor. Effects on the CPA Auditors In general, the CPA auditors incurred a small cost as a result of the implementation of Act 2, with this cost being somewhat higher in those offices which served a relatively large number of clients. The immediate effect on their billings was that of a small increase, with this increase being slightly smaller in those offices which served a relatively large number of clients. The long-term effect on their 308 billings was that of a small increase, at a substantially lower level than the immediate effect, with this increase being slightly smaller in those offices which served a relatively large number of clients. RECOMMENDATIONS OF THE RESEARCH In very general terms, this research indicates that Act 2 has produced a mild net benefit which apparently is tending to increase gradually; however, the effects of Act 2 in terms of municipal fiscal m a n a g e m e n t have been minimal. In general, the decision to enact and implement Act 2 appears to have been good as a policy decision; the costs of its implementation have tended to decline somewhat after their initial impact, and the benefits of the uniform accounting system have been most apparent to those who adopted the system relatively early. Policy Recommendations Emphasis on the Managerial Viewpoint. However, from a consideration of the benefit and cost assessments of this research, it is evident that, although some of the anticipated benefits have become apparent, many of them have failed to materialize. This is especially evident with respect to the low scores achieved by the management tools of program budgeting and techniques of performance measurement and output evaluation. Although, as indicated in an earlier chapter, the functions of the CPA auditor under Act 2 were expected to include the insuring of compliance with the legal requirements, the offering of recommendations for the purposes of enhancing fiscal control, and the encouraging of the use of budgets as management tools, the apparent tendency so far has been for the CPA auditors to emphasize compliance with the legal requirements and the enhancing of fiscal control rather 309 than the use of management tools. Therefore, one very clear policy recommendation would be that both the State Department of Treasury and the CPA auditors should place greater emphasis upon the items of program budgeting and of performance measurement and output evaluation both because of their importance in a municipal managerial accounting system and because of their present positions at the bottom of the benefit rankings. Although the supervision of legal compliance and of fiscal control may be the primary focuses of the responsibility of the CPA auditors, an important secondary focus should be the stimulation of local units, not only with respect to the adoption of budgets and the adherence to them, but with respect to the use of other management tools, as well* Adoption of a Realistic Time Limit* The time limit of four months for the filing of the annual financial report is a matter of special concern since, in my observation, the performance of a local unit with respect to its ability, or lack of ability, to meet that time limit is not necessarily an indication of the quality of its financial operations* Failure to meet the time limit may reflect the size of the local unit and the complexity of its operations. It may also reflect the inability of the unit to obtain the services of a CPA auditor sufficiently soon after the close of its fiscal year in order to obtain the required audit and certification which are prerequisites for the filing of its financial report. From the assessments received by this item in this study, it is not at all clear Whether the effect of the time limit is beneficial or negative since strong perceptions apparently exist in both directions. 310 With respect to the obtaining of a CPA auditor, the use of the calendar year is probably a severe handicap since the services of the auditor are required during his busiest period. The March through February (approximately) fiscal year of most of the townships may not be much better in this respect. Therefore, another clear policy recommendation would be that the State Department of Treasury should consider the adoption of a time limit sufficiently realistic that it can be enforced. In this connection the Treasury Department should encourage each local unit to adopt a fiscal year which would enable it to obtain the services of a CPA auditor as soon as possible after the close of that fiscal year even though in some cases legislative approval would be required for these adoptions. Education. As indicated in Chapter IV of this study, throughout the history of the enactment of Act 2 and the creation and implementation of the Michigan uniform accounting system, information with respect to the purpose and contents of the system has been disseminated either through personal contact or by means of books and other instructional materials. To a large extent, this has become an ongoing educational process as those units which employ hired accountants acquire new personnel and as new officials are elected in those units which rely on elected officials for the performance of accounting duties. Although much of the educational process in this area has been falling under the jurisdiction of the CPA auditors, it is an important reconmendation of this study that municipal officials take advantage of the continuing education services in municipal accounting offered by the Institute for Community Development, located in the Kellogg Center, at 3X1 Michigan State University. I have observed during the course of this study that those individuals who have availed themselves of the services of the Institute at Michigan State have considered them to have been well worth the time and money invested. Analysis and Dissemination of D a t a . Also indicated in an earlier chapter were the recommendations of the Governor's Special Commission on Local Government* First, the analysis of expenditures and revenues by types of local units and governmental function was recommended for purposes of intelligent decision-making at the State level. Secondly, the dissemination among local elected officials and administrators of comparative data on the expenditures of other local units was recoaxnended for purposes of evaluation at the local level. Since very little progress has ensued so far at the State level with respect to either of these objectives, it is an important recommendation of this study that the State Department of Treasury continue to anticipate the implementation of mechanisms Which would both enable the analysis of local government expenditures and revenues at the State level and make available to local elected officials and administrators comparative data for analysis at the local level. Enforcement of the Use of the Uniform Accounting System. On a number of occasions during the conduct of this research, problems involving the enforcement of the provisions of Act 2 have been brought to ray attention. To some extent, the enforcement of the auditing requirement, although undoubtedly imperfect, is far less difficult than the enforcement of the adoption of the uniform accounting system. Each local unit is required to file an annual financial report with the State Department of Treasury! the question of whether or not the report 312 actually has been filed is an easily ascertainable fact, as is the question of whether or not it actually has been certified. Since it is virtually impossible for the Treasury Department to ascertain that a given local unit has actually adopted the uniform accounting system without actually visiting the premises and inspecting the financial records, I have occasionally pondered the question of whether or not enforcement of the use of the system is possible, or even desirable. It has become apparent from the assessments in this study that the enforcement problems with respect to the uniform system are most difficult in the relatively small local units and also that those relatively small local units are enjoying the smallest net benefits from the implementation of Act 2. As noted in Chapter V of this study, Mr. James Bolthouse has rejected the possibility of not permitting a CPA audit of a given local unit until the uniform system has been adopted by it on the grounds that an audit without the system is still better than no audit at all. Also, Mr. Bolthouse has indicated his willingness to accept a situation in which, although the local unit does not actually employ the uniform system, sufficient adjustments are made by the CPA auditor to make the financial reports correspond to the reporting format required by Act 2 when they are submitted to the Treasury Department. Therefore, a recommendation of this study is that Public Act 2 of 1968 be amended or modified in order to conform to a situation which already exists so that local units would not be required actually to employ the uniform system as long as their financial reports are adjusted into the proper format by their CPA auditors. Recommendations with Respect to This Methodology 313 The basic purpose of this research has been to develop a framework and a methodology by which the benefits and costs created by the enactment and implementation of Public Act 2 of 1968 might be identified, measured, and examined. Accordingly, an important question to be considered in this study is that of whether or not such an approach might be constructively used by the State Department of Treasury for the purpose of a more comprehensive evaluation of the Act. In my observation, many of the problems which I encountered throughout the study arose for two particular reasons. First, the majority of the individuals whom I contacted during the course of the study seemed to be unprepared to deal with the question of identifying and evaluating the benefit and cost effects of Act 2. An apparent lack of interest in the subject or enthusiasm for it was probably in many cases a manifestation of surprise at the idea that anyone might want to attempt a systematic appraisal of the effects of a State statute. Secondly, the diversity of the viewpoints which I encountered in connection with various aspects of the effects of Act 2, while making the study more interesting than if similar points of view had been encountered consistently, meant that in seme cases a relatively few strong response;; could exert a relatively large influence on the final results• There are similar reasons why a similar attempt on the part of the Treasury Department might proceed more smoothly. First, discussions for the purpose of developing the ideas involved in the study would be unnecessary since the ideas involved have already been established. Moreover, discussions for the purpose of obtaining endorsements of the 31A study would be superfluous since a State agency would not need to be concerned about endorsements* To a large extent, the potential items of benefit and cost have been Identified although a subsequent researcher would undoubtedly want to make some rearrangements in them. In my judgment, the most difficult job for a subsequent researcher would be the revision of the content and, possibly, the format of the questionnaire or questionnaires. As indicated in Chapter III, it is my opinion that the overall response from the municipalities would have been both larger and faster if dollar values of cost items had not been solicited! and a subsequent researcher would want to consider seriously the possibility of dropping them. If the Treasury Department were to attempt a study similar to this, the potential respondents would probably be more prepared for the idea that an evaluation of Act 2 might be implemented; and, consequently, their responses would probably be more enthusiastic. Moreover, in spite of the two cases to which I referred in Chapter IV, in which municipal officials expressed more willingness to respond to an individual citizen than to a State agency, the Treasury Department would very probably be able to obtain a higher percentage of response with less effort required in order to obtain it. Furthermore, if the Treasury Department should select a sample sufficiently large to include most or all of the universe of municipalities, the problem of diversity of responses alluded to above should diminish considerably. Specifically, with respect to the potential costs to be incurred by a replication of this study, the Treasury Department would probably not want to adopt the procedure of sending duplicate questionnaires to the local units of government and to their CPA auditors* Although the 315 sending of questionnaires to the local units is more expensive than sending them to the CPA auditors because of the time and expense involved in getting them back, the reactions obtained would probably be more interesting since the strong reactions to Act 2 are generally expressed by municipal officials rather than by their CPA auditors. The problem of getting them back from the local units could be overcome by not mailing them out at all but instead requiring them to be completed and turned in to the Bureau of Local Government Services as a part of the audit report. In this case, the questionnaire would probably best be completed by the CPA auditor and would involve, perhaps, 30 minutes per questionnaire on his part. The cost to the unit could be kept lower if the questionnaire were required to be completed only every other year. With respect to the potential benefits to be realized by a replication of this study, it would be necessary for the Department of Treasury to provide both for the handling and reading of the questionnaires when they are turned in and also for action in response to the comments Which they contained. Since the Treasury Department is already under criticism for failure adequately to handle the present reports, the handling of an additional one would require a decided amount of extra effort on the part of State officials. 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