!-'.'.-.~.:'_-‘.-’o.o:00.“ "‘ ° .-_ - .:o. 04"” .' W;:Q:¢~l -'..:-:.a.7_.‘ - . .— ‘~‘. ‘ ~ APPLYt-NG mormzxccogmmo Martians m = sur: apvsmmm . Thesis far m. 099mb .5; M. A; MICHIaANsmfi umveasxry' John Q. Admm. 1916.1 ' . . . - . - . _ _ _ _ 0. “Lu-t * ‘V ‘- “'II~?"—-"nur " _ *— _ . 31m”; . -_ I‘M THE-‘45 LIBRARY Michigan State University This is to certify that the thesis entitled APPLYING PhOFIT—ACCOUE‘JTII‘JG LETHODS II\ STATE COVEMI'IEI‘IT presented by John Q. Adamson has been accepted towards fulfillment of the requirements for Master 91 A113 degree tum Q/M ML Major professgt/ Date&‘/W hi /?6 / 0-169 ABSTRACT APPLYING PROFIT-ACCOUNTING METHODS IN STATE GOVERNMENT by John Q. Adamson Do profit-accounting methods have applicability in state government? Are profit-accounting methods being used in state government, and if not, why not? If profit-accounting methods possess features superior to those of non—profit- accounting methods, how may the use of profit-accounting rmethods be broadened in state government? =These are the divisions, sections, units, and/or groups as the work asssignments planned would dictate. It is not sufficient to state how much money is to be spent for various classes <1f nnaterial, for various classes of service, for various jcfl: <21assifications. The important point is what is to be accomplished with these various expenditures. Burkhead puts it this way: A1: a broad definitional level, performance budgeting can be most appropriately associated with a budget classification that emphasizes the things which govern- ment does, rather than the things which government bulls. Performance budgeting shifts the emphasis from 64 the means of accomplishment to the accomplishment itself. The kind of classification required must therefore be very different from the one based on objects of expen- diture clasSified according to type. The object classi— fication shows what government purchases but not_phy; accordingly, it does not show the nature of governmental programs, or accomplishments under those programs. It is necessary to have some form or pattern of work measurement for each separate type of activity and the difficulty of determining accurate and workable units of measurement is a factor that has deterred the more liberal adoption of performance budgeting by state governments. Likewise to operate a performance budget effectively, it is «essential that a cost system be established in order that tflie cost of the actual physical performance can be maintained arui presented. This will prove to be a1 almost prohibitive prerequisite except on a segmented application. Performance budgeting, although highly difficult to administer, is cleajJned, by those who advocate its use, to have this to commend it: management responsibility and accountability l I , . . . . . tIesse Burkhead, Government Budgeting (New York: John Wiley & Sons, Inc. , 1956) , p. 153. 2For one example of how a performance budget operates, the reader is referred to "The Navy's Performance Budget-— Another Step in Military Cost Control," by Commander Eugene vv. fhtrri, USNR, Headquarters Comptroller, Eighth Naval District, bug” Otileans, Louisiana, in the February 1956 issue of the W Bulletin. 65 1 are heightened thereunder. asserted that the Joseph Campbell, Comptroller General, most enlightened and effective form of Federal budgeting is that founded upon a knowledge and revelation of operating costs and available resources. It is through accrual and cost accounting that such data can be made available. The Public Administration Review3 published a "sympo— sium" consisting of four papers on performance budgeting. Each of these papers drew pro and con conclusions as to the results, or promise, of the performance budget as experienced in.the particular chosen jurisdiction: City of Los Angeles, lflew'YOrk State Department of Health, U.S. Department of .Aguriculture, City of Cincinnati. One of the difficulties encountered with performance budgeting emphasizes a difference between the performance-type budget and the program-type Performing certain tasks is somewhat different budge t . A program usually from carrying out a program of operation. consists of many and varied tasks. The old bugaboo of keeping costs by tasks and jobs, as prescribed by the l Burkhead, op. cit., p. 155. 20' C3overnmental Accounting," an interview, The Journal of W, CIII, No. 3 (March, 1957), p. 38. 3 V01. xx, No. 2 (Spring, 1960). 66 performance-type budget in some applications, is a burden which some officials consider unjustifiable. Obtaining costs of programs is less difficult because the minute detail can be omitted. Some of these jurisdictions reported on in the symposium were said to have solved the problem of burdensome detail record keeping. l . The authors state that the Los Angeles trial suggests the performance approach "can have an effect on program planning and the central control of decisions going into the executive budget"; that "the measurement of work in a gnovernmental jurisdictiOn is practical and feasible, and tfliere are positive benefits to be gained from such measure- meuit"; and that "the performance budget need not be based on. the accounting system" (work measured in man—hours rather their: in dollars). From the negative point of View, the authors raise certain questions: (1) Since the council is continuously informed on fiscal conditions and needs, is its "participation in the budget process less important?" (Such a question is limited in its applicability to a municipality, perhaps to the City of Los Angeles. One ¥ 1 . 1&11.E@htedari and Frank Sherwood, "Performance Bud- gating in Los Angeles," Public Administration Review, XX, No- 2 (Spring, 1960), p. 63. 67 wonders why it is inferred that being continuously informed places council at a disadvantage.) (2) "If we assume that such an abdication of legislative involvement does take place, are we prepared to pay such a price for an increased grasp of budget decisions by the chief executive, plus the managerial benefits?” (Such an "iffy" question is indeed ”iffy,” especially since ”abdication" was in no sense neces- the "abdication" was by sheer sary, and, furthermore, speculation and interpretation.) (3) Can required standards be developed and such hordes of performance data be of .practical benefit? (Again, perhaps unawarely, the authors nuike a good case for the advantage of the program-type bindget. They should have been able to answer their own they seem to be questioning the veracity question. In fact, (Jf' the City Administrative Officer. The authors have already admitted that good use is being made of the per- formance detail.) (4) " In strengthening the executive, dcmas 'the performance budget also set into motion forces irmxmnfaatible with organizational decentralization?" (Is organizational decentralization imperative? Or, is lack Of decentralization, any kind of decentralization, evil, always . anywhere ?) 68 New York State's performance budget experiment, the authors1 write, was unfortunately identified "with a con- tinually declining program.” Many program administrators are still unaware that performance budgets can be of equal value "in justifying the expansion of programs requiring . . 2 greater activity." The experiment in New York State has demonstrated that performance budgeting can: (1) Speed budget estimates, (2) Speed examinations, (3) Make more timely projections, (4) Focus both departmental and Budget Division thinking on program needs and costs, (5) Show up causes of high costs, (6) Encourage decentralization (conflicts with one of the comments on the Los Angeles trial), (7) Increase cost-consciousness at several levels. "Viithout question, performance budgeting has many advantages over the object budgeting system, particularly within operating agencies." Based upon experience with the I'USDA's Pioneering Performance Budget," according to the author,3 performance Inarion L. Henry and Willis Proctor (New York State Department of Health), "New York State's Performance Budget ExPeriment," Public Administration Review, XX, No. 2 (Spring 1960) . p. 74. “ 2Editor's note: Since this article was submitted, the IRerfOrmance budget experiment in New York State was ended. Iiowevfar, there is a possibility that program budgeting will be adopted by the state government. ,, U 3Ralph S. Roberts (U.S. Department of Agriculture), R SPA' S Pioneering Performance Budget," Public Administration evlew. XX, No. 2 (Spring, 1960), p. 74. 69 budgeting is proving to be a valuable tool for effective budget decision—making at all levels of large complex operations. In addition, other important management needs are served by it as it is properly developed and becomes better understood. It is not a cure-all and cannot be relied upon to usurp management's own responsibility in setting policy, making decisions, and the like. It is a valuable guide and aid for making decisions and setting policy. The value and usefulness of the performance budget depends largely upon the character and quality of its .preparation. The imagination, skill, and determination (1f the user denotes the effectiveness of its application. SiJice performance budgeting is a technique, it cannot be refilied upon to reduce government expenditures automatically <3f'.itse1f. The wise and effective expenditure of funds stjmll.depends, and will always depend, upon good management exemplified in responsible public administration. :[n.the report on "Cincinnati's Budget Developments," the author1 concludes that with respect to the adequacy of Performance budgeting there is no longer debate, following ¥ 1 .. . ‘Vuarnon E. Koch (Cincinnati Budget and Research Office), (zlncldinati's Budget Developments," Public Administration M. xx, No. 2 (Spring, 1960), p. 79. 70 ten years of experience and experimentation, since the superiority of the performance budget over previous systems used has been demonstrated. It is readily acknowledged that performance budgeting has made an important contribu- tion as a tool of management to the public administrator. The performance budget has also proved to be a better instrument for the public reporting of budgetary needs and future plans. That there is disagreement as to com- parative merits of the different techniques in applying the concept for productive use, should not surprise nor dissuade anyone. Such an excuse should not be used to delay erecting the framework for the inauguration of per- formance budgeting. 4) The Program Budget. Still a fourth type of budget that is receiving some favorable attention is the program budget. As the name implies, the budget request is built up on the basis of amounts to be expended to finance par- ticular programs which the agency or department is conducting or intends to conduct, and for which it is responsible. The cost of such programs would usually cut across object lines and would involve the distribution, recording, and reporting of expenditures on an individual program basis. The program, 71 however, is much broader in scope than performance activi- ties and, in fact, may include a number of different per- formance activities. Program financial accountability indicates a cost accounting process which involves more work than most agencies and departments are staffed and equipped to handle. Especially is this so when records must be kept simultaneously on a different basis for budgetary (appro- priation) control purposes. Nevertheless the cost accounting required for program budgeting demands less fineness of detail than that required for performance budgeting. Some possibility exists that the program budget will eventually be given preference over the performance budget for the reason that it is less burdensome to apply and maintain. Burkhead asserts: Program costs are broad summary costs which may be built by aggregating the costs of performance units. On the other hand, a program budget might stop with broad program costs; it need not be extended to or built on performance units, and in some cases performance detail may serve no useful purpose.1 It should be pointed out that some uncertainty and even confusion exists as to the difference between program budgeting and performance budgeting. In fact, any number of people consider the terms synonymous and use them lBurkhead, op. cit., p. 139. ‘— 72 interchangeably. This is regrettable since there is a definite distinction between the two types and this differentiation should be maintained. Two fundamental distinctions exist—-when the terms are properly applied-— one as to the matter of time or the period involved, the other as to scope or breadth of coverage. A program generally extends over a longer period of time than a performance activity. Also a program, being on a broader scale, is of concern at the departmental level and even higher, while the performance activity comes under the surveillance, regulation, and discipline of a division head or lower in the management echelons.1 Kohler and wright do not make as emphatic a distinction between program and performance budgets as Burkhead, but still indicate that a difference is evident and recognized by many. At one time the only budget breakdown required by the Bureau of the Budget and given to the Congress was an object summary . . . together with lists, often lengthy, of position in each grade and class, and the average annual salary of each class. Since 1951 the position lists have been omitted and the Bureau has required every agency to include in its annual proposals a program schedule on an obligations or accrual basis. . . . In the meantime an increasing number of agencies have lBurkhead, op° cit., pp. 139—40. 73 adopted accrual accounting and are maintaining accounts that reflect functional costs. These changes, long overdue, have led to widespread recognition of the advantages to be gained in the universal adoption by all agencies of what has been termed the performance or program budget--as opposed to the long-sanctioned "obligations" budget. "Program" as a budget designa- tion, incidentally, has been somewhat preferred over "performance" since "program" suggests to many persons a look into the future under some sort of planned action, while "performance" to them appears to give unnecessary emphasis to past accomplishments. As an alternative interpretation of the foregoing, it might be concluded that Kohler and Wright do not recognize the difference between the two types but are simply stating that one group of persons prefer one term, another group prefer another term, for the same type of budget. If this interpretation be the proper one, then these authors have failed to recognize that the two terms should apply to distinctive types despite seeming similarity between them. Professor Gabis made an empirical study of program budget experience by the Michigan Department of Mental 2 . . . . . Health. His concluSions included the following pOints: (1) An activity cost system (approximation to program l . . . . Eric L. Kohler and Howard W. Wright, Accounting in the Federal Government (Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1956), p. 104. 2 . . . Stanley T. Gabis, Mental Health and Financ1al Manage- ment: Some Dilemmas of Program Budgeting (East Lansing: The Board of Trustees of Michigan State University, 1960). 74 budgeting) was superimposed on object codes still used for financial control and reporting, thus minimizing the impor- tance of the activity cost system. Cost was emphasized to the exclusion of programming. The performance data submitted to top management tell little about the quality and cost of the program. (2) Limited funds force the ascendancy of custody over therapy. Significant programming depends on political leadership to increase resources. Status quo programming fails to stir the imagination and enthusiasm of hospital employees. (3) The process of data collection and reporting, in its present form, might be more properly regarded as an awkward and often inadequate kind of communication. Practi- cally no instances were found, except for the laundry, where the data served a useful management purpose. Apparently a supervisor cannot reliably evaluate his activity by broader analytical reporting in Which factors of judgment and performance data are assembled. Such a formal reporting system tends to reduce the value and possibly discourage the frequency of face-to-face discussion of his staff's accomplishments and weaknesses. -_ 75 Recommendations by Professor Gabis include: (1) Information useful at hospitals should be reviewed in contrast to its usefulness at departmental level and vice versa. Careful distinction should be made between occasional reports or spot—checking and regular reports. Each report should be carefully scrutinized as to its management value. Hospital administrators should approve any formal reporting system. Objective observers should periodically evaluate reports and the reporting system. (2) Qualitative (i.e., evaluative) reporting should be used more extensively. Examine carefully the assumption that reporting "numbers of actions" is objective and can be measured precisely. An intelligently conceived training program in analytical reporting might prove useful to the mental health system in general. Bring supervisors from various hospitals together in meetings, with carefully prepared agendas and highly competent discussion leaders, to discuss their mutual problems and ways of solving them. (3) Standards of work, set in realistic terms, should be left flexible to avoid set pattern fixations. Specific goals must be established and related closely to main goals. For example, nurse-attendant training, preventive dental care, and more intensive visits for home-care patients 76 could be programmed. Qualitative achievement of these programs would be reflected in analytical reports and supplemented by statistical reporting where such statistics could be related to a meaningful standard. Hospital staff, in cooperation with the department, might develop ad hoc standards to cover an emerging program. This mental health program study leans toward a critical analysis of the program itself. A program-type budget is something else and can be applied regardless of the size, variety, or quality of the programs. It is difficult to conceive of any governmental agency or department that does not have some sort of program. The program might not be any good, nor worth-while from certain points of view, nor adequate, nor efficiently conducted, but still it is a program in the general sense, often several, possibly many. A.program budget will highlight the program nature and quality of an agency's activity. During the introductory or experimental period, it is essential to continue the accepted type budget in a dual or parallel arrangement with the program-type budget. This is a wise arrangement whenever any important or extensive system change is being made. A program budget left alone to live or die among enemies will have small chance for 77 survival just as any new system would. The success of such an installation depends largely upon the competence, patience, and perseverance of the personnel responsible for its suc- cess. Since so many officials and official groups must be convinced of its desirability, a considerable selling job confronts the advocates of the program budget in overcoming the inertia and indifference of those who prefer to "let well enough alone" and hide behind the defensive philosophy of "we've always done it this way." In his report, it is not made clear in just what manner the adherence to the line-item type budget would prevent or remedy the ills which were discovered and pointed out by Professor Gabis and attributed to the use of a program-type budget. To this writer it appears that the shortcomings in the administration and operation of the mental health pro- gram (collectively) exist despite the type of budget in use, and not specifically because of the use of a program-type budget. Despite the lack of encouragement in the Gabis report, certain officials in the Michigan Department of Mental Health informed the writer that their 1961—62 budget request was prepared on a program basis (supplementing the required line-item presentation). They found that the Ways 78 and Means Committee (on appropriations) was receptive to the program approach, showed interest in discussing program and paid little or no attention to line items as such. Since then, however, the Legislative Audit Commission, ten lawmakers from both houses appointed in the spring of 196] to watch State spending, approved a resolution recommending that the Legislature require line-item budgets from the regulatory agencies and from the Mental Health Department next year. b. The Accounting Basis The use of the accrual basis of accounting is common practice in private (profit-producing) operations. When correctly applied, it provides management with more dependable figures of period income and expense, more accurate values of assets and liabilities at any certain date. The accrual basis, for example, permits the estab- lishment of inventories whereby material and supplies when acquired can be charged to a suspense account (inventory) 1The State Journal, Lansing-East Lansing, Michigan, August 16, 1961. All agencies submit line-item budget requests now. The evident intent of the statement is that the Legislature appropriate on more of a line-item basis, less on a lump-sum basis. See Appendix A. to be recorded as an expenditure (cost or expense) as they are put into use. On a cash basis, revenues are not recognized and recorded until the money is received. Likewise, expendi- tures are not recognized and recorded until actual payment has been made. On the other hand, the accrual basis presents a truer picture of the financial condition of an enterprise in that revenue is recognized and recorded when earned, even though the money itself is not obtained until a later date, while expenditures are recognized and recorded (encumbered) when the obligation is incurred. The cash basis, for a great many years, was the only basis of accounting used in state government accounting, the same as it was in Federal Government accounting. Only within comparatively recent years have some of the states begun using the accrual basis of accounting. Historically the proprietary accounts of the Federal Government were developed, as was the case in commercial enterprises, on a cash basis, i.e., transactions were entered in the accounts on the basis of the receipt and disbursement of cash. The accrual basis has long been accepted as the standard in the commercial world and, although much progress has been made in this respect in Federal Government accounting, further emphasis on accrual accounting is needed for continued progress in increasing 1Comptroller General of the United States, Accounting Principles Memorandum No. 1 (revised September 18, 1957), p. 21. 80 the contribution which accounting can make to financial management.1 Fairly recent concerted agitation and persistent recom- mendations for accrual accounting in the Federal Government would indicate the encountering of more delay than thought justified by some in the adoption of accrual accounting to the desired extent in that sector. For example, The Second Hoover Commission recommended that the accounts of the Federal Government be maintained on the accrual basis, and that departmental budgets, as well as financial reporting, should be developed from such accrual accounting practices. Like- wise, Public Law 863 (84th Congress) provided for the accounts of each executive agency to be maintained on an accrual basis.2 The Comptroller General prescribed that for: All agencies operated wholly or in part from appro- priations or other authorizations . . . expenditure data should be in terms of accrued expenditures (as used in this document, the term accrued expenditures means the charges incurred for goods and services received and other assets acquired, whether or not payment has been made and whether or not invoices have been received) unless this refinement is not significant and would serve no useful purpose.3 1Ibid., p. 20. 2 Public Law 863, approved August 1, 1956 (70 Stat. 782, 783). 3Comptroller General of the United States, Accounting Principles Memorandum No. 1 (revised September 18, 1957), p. 9. 81 The Memorandum also states that balance sheets should be prepared by all agencies, and that income and expense state- ments on an accrual basis should be prepared by those agencies which carry on business-type operations. The Comptroller General issued this specific assertion with respect to the aid of accrual accounting toward the better control of revenues: Adequate control over revenues involves not only seeing to it that the revenues are properly recorded as soon as earned but, more important, making sure that the Government collects all the revenues to which it is entitled. The use of the accrual basis will materially aid in achieving this end because accounting control is established as soon as the revenues are earned.2 The same official also presented this observation as to accrual accounting with respect to expenditures: The accrual basis makes it possible to relate accrued expenditures to the amount of work performed and thereby provides data for comparisons with standards of other agencies or of the same agency for prior periods.3 c. Inventories Under the sub-titles of accrual accounting (Accounting Basis), and cost accounting, considerable reference has been made to inventories. Inventories are the result of a lIbid., p. 9. 21bid., p. 11. 31bid., p. 12. 82 form of accrual accounting, or are established by the utilization of accrual accounting; while accrual accounting in turn is a necessary adjunct or prerequisite of cost accounting. Stated in another way, true cost accounting, in a practical sense, is dependent upon inventories. The practice of costing out material and supplies as purchased, and whether used or not, conflicts with cost accounting. This interrelationship, or interdependency, makes the use of inventories important in the realm of forward-looking governmental accounting methods which incorporate the desir- able features of profit-accounting methods. Along this line of thought, here is an accounting corollary stated in terms of the General Accounting Office's newer accounting policies: The data reflecting the purchase of a substantial supply of materials for a construction project could be most misleading, if viewed as an expense of the current period rather than as an asset to be capitalized as inventory and to be later included in the investment in a particular facility based upon the amount of such material consumed.1 Here is reference to a specific provision for the estab— lishment of working capital funds to finance inventories in 1Comptroller General of the United States, Accounting PrinciplepiMemorandum No. 1 (revised September 18, 1957), p. 21. 83 Federal Government operations: . . . in 1949, the Title IV amendments to the National Security Act [included] . . . provision for performance budgeting as well as permission to establish working capital funds to finance and set up dollar controls on inventories of various kinds.1 In the latter source it was pointed out that the Air Force obtained management benefits by the adoption of fiscal accounting control for world-wide inventories. Such account- ing developments provided information for determining inven- tory turnover in various inventory categories thereby high— lighting opportunities for reducing excessive investment in inventories. The importance to management of improved property- accounting methods is emphasized by the Comptroller General. He subsequently makes clear that property accounting includes expendable material and supplies which should be accounted for through perpetual inventory records. In general, improvements in property accounting create possibilities for enhancing the usefulness of accounting to management similar to advantages gained from other specialized phases of accounting and should be pursued with equal vigor.3 lMcEachren, op. cit., p. 31. 2Ibid., p. 33. 3Comptroller General of the United States, Accounting Principles Memorandum No. 1 (revised September 18, 1957), p. 25. 84 The operation or conduct of inventory accounts in govern- ment without resort to the enabling aid of revolving or working capital funds to implement them, proves in practice to be awkward and usually unsatisfactory. A working capital fund provides the equivalent of cash with which purchases of material and supplies for the establishment of an inventory can be accomplished. Then as such supplies and material are withdrawn for construction or consumption purposes, the requisitions are priced and charged against the appropriation and cost accounts benefited, with a corresponding credit going to the working capital fund of the inventory. Again in turn the inventory can be replenished when the balance of the fund drops as a result of issues continued for use. For example, assume a working capital fund of $30,000 for the establishment of a material and supplies inventory, meaning the account cannot exceed $30,000 at any one time, this being the absolute outside figure. Also assume the following transaction summaries: Item (1): Material and supplies costing $25,000 are purchased. Item (2): Material and supplies costing $15,000 are purchased. 85 Item (3): Material and supplies costing $18,000 are purchased. Item (4): Material and supplies costing $16,000 are issued. Then the account would appear as follows: Material and Supplies Inventory ($30,000 WOrking Capital Fund) Bglance Debit Credit Debit Credit (1) M & S purchased $25,000 $25,000 $ (2) M & S issued $15,000 10,000 (3) M & S purchased 18,000 28,000 (4) M & S issued 16,000 12,000 The entries in the credit column indicate the aggregate charges to appropriation accounts for the respective period. The agency is held accountable for all purchases and must have material and supplies on hand to the value of the cur— rent account balance. Then inventory is relieved only by proper charges against (i.e., reduction of) operating funds appropriated by the legislature. Periodic adjustments are necessary, of course, as the result of physical inventories. Such adjustments will increase or decrease the ledger control balance (Material & Supplies Inventory account, as above) to conform to the 86 physical inventory summarization of count, pricing, exten- sions, and footings. The contra account for such adjust- ments must likewise be debited or credited to an operating (or capital outlay) appropriation. The above ledger illustration is obviously simplified and condensed. The question of how much detail is required can be legislated or determined administratively, most desirably the latter. For practical purposes it would seem that a monthly basis would be satisfactory since withdrawals and purchases are being made simultaneously. Considerable detail work and appraisement would be required to maintain a control on a daily basis by recording all issues daily, as well as purchase orders, and it hardly appears justified. .A weekly basis might be considered a middle ground. But the most practical and reasonable basis would be a monthly con- trol whereby purchases would be stopped if the balance at the end of any month should exceed the maximum ($30,000 in our example), stopped until the monthly balance dropped Tbelow the maximum amount. It could be pointed out that the discipline could entail a severe hardship, perhaps delay Inuch needed operations. But management would have been .forewarned and must accept the penalty for its lack of :fioresightedness, discrimination, and control. This is Inanagement's responsibility. 87 With such adequate control it is difficult to understand what a legislature has to fear from allowing an agency the use of working capital funds where inventories are a prac— tical necessity. In fact, experience proves that it affords a tighter control than where an agency is forced to build up a legislatively uncontrolled inventory out of appropriation surpluses. Likewise it seems apparent that state officials would be aggressive in fostering such a desirable operating medium, unless they prefer the looser arrangement which they erroneously believe leaves inventory "control" almost com— pletely in their hands. This is not a preferable method from a centralized or legislative control viewpoint. It is suggested that correction of the situation is within the bounds of accounting prerogative through proper legislative persuasion. d. Cost Accounting There is a close and necessary correlation between the use of inventories (by means of working—capital funds) and the use of the accrual basis of accounting, and the appli— cation of cost accounting. In fact, without inventory accounting and accrual expenditure accounting, true cost accounting would be impossible in practice. Inventories 88 and accrual figures can be temporarily drawn up to suit the cost accounting end, but this is not cost accounting in the recognized sense of the term. It has been pointed out that cost accounting has two important functions: one is for the purpose of financial control, the other is as a guide for management planning and an index in evaluating accomplishment. Cost accounting is coming into its own in various areas of governmental accounting practices; it is a prerequisite where performance and program budgeting is in use or being planned. It is an essential requirement where grants in aid are made available through matching expenditures and other subsidies, such as the Federal highway construction program coordinated with state expenditure, and Federal reimbursement to the states of unemployment insurance administration. At the first thought or mention of cost accounting, many people, not engaged in or familiar with government work, associate such a function immediately with profit accounting and are unable to relate it in any way to governmental accounting. Numerous officials and employees in governmental accounting responsibilities share this same opinion, especially when they are in positions of general governmental duty. In the middle third of the 89 twentieth century, however, state government has taken on so many ramifications, particularly in areas of social wel- fare, general health, mental health, education, and so on, that the old concept of state government being limited to general government is completely out of date and fails drastically to present the true picture of the situation. It is due largely to these areas just named that the cost of state government has expanded so rapidly. Likewise in these areas named it is possible, if not essential, for proper financial control to be exercised by the application of cost accounting methods. It is a prime requisite for effective performance and program budgeting that a sound and practical cost accounting system be in operation. It would hardly be feasible to submit a program budget unless there was adequate and accurate knowledge of what the different programs would cost. First, it would be necessary to have cost accounting methods functioning in order to ascertain what the expected cost of each program would be. Secondly, cost accounting :methods would be required to maintain an up to date record of how the current costs were running, especially in com- .Parison.with the budgeted and appropriated funds. 90 A city budget analyst makes a case for the importance of cost accounting in municipal operations regardless of the type of budget used, but adds that cost accounting is ex- tremely valuable with performance budgeting. The city administrative officer of Los Angeles, unable to obtain desired fiscal reports from the city's chief accountant, resorted to the rather novel idea of the so- called "manhour approach” to budgeting. Instead of expressing costs in terms of dollars, costs are expressed in terms of manhours required to perform units of work. The important question, which is unanswered in the article, is why the lack of cooperation between the chief accountant and the CA0. Our guess is that there is disagreement as to principle or the accountant maintains that he lacks the necessary staff which still might be an unrevealed expression of the former. 1See lengthy footnote quotation credited to J. J. Cook in "Cincinnati's Budget Developments," Public Administration Review, XX, No. 2 (Spring, 1960L.pp. 81—82. 2Ali Eghtedari and Frank Sherwood, "Performance Bud— geting in Los Angeles," Public Administration Review, XX, No. 2 (Spring, 1960), p. 68. 91 e. Independent Audits The independent audit has become so much a recognized element of profit accounting that there was no doubt as to its appropriateness for inclusion as a section in the questionnaire. Auditing is an indispensable part of governmental accounting. In governmental accounting there is the tendency to use the term ppdip for simply the routine process of checking or double checking, usually applied to invoices and other orders for payment. The true audit is now often referred to in governmental accounting as the post audit. From the profit accounting standpoint the pre- audit could hardly be considered as an independent audit even though performed by a different division or department. It would be an internal control feature, an important function in itself. In private enterprise it is hardly likely that the Securities and Exchange Commission would consider such a checking procedure as an independent audit. Consequently, in using the term independent audits in the questionnaire, profit-accounting terminology was followed. For the most part the term was so accepted without question, but in a few instances those responding did take the pre- caution to make the distinction between the pre-audit function and the post-audit function. The series of questions 92 in this particular section, it was believed, left little doubt as to the intended meaning of independent audits, and responses were made in all instances in accordance with this understanding, it appears evident. The references to pre— audits were merely explanatory and supplementary, in no manner a substitution or replacement. It is emphasized that the term independent audits was used in preference to the term post audits in the question- naire because the important requirement of a "post" audit is that it be truly independent. The State of Illinois within recent years has had cause to regret rather costly laxity in this respect. This was occasioned by the dis- covery in 1956 of the misappropriation of some million dollars by the Auditor of Public Accounts, Orville E. Hodge. This is not a question of who audits the auditor, but rather a matter of establishing true independence on the part of the auditor in the first place. An "auditor" auditing his . . . l . . . . own work is not auditing; the title is inappropriately 1The Securities and Exchange Commission would probably not consider an auditor independent if he was also the book— keeper for the business audited. The CPA Handbook states that it is not unethical for a CPA to audit a business for which he served as bookkeeper. (CPA Handbook, Vol. I, Ch.5 [New YOrk: American Institute of Accountants, 1952], p. 19.) Undoubtedly general ledger writeup service by a CPA, not the actual handling of receipts and disbursements, is obviously the intended reference in this situation. 93 applied, a misnomer and highly misleading. An independent auditor should never be a disbursing official as the two duties are incompatible. Joel Hunter stated: Manifestly a proper job of auditing may not be done unless there is present that degree of independence which is necessary to support complete objectivity. An auditor may not be impartial if he has any interest in the organization under examination for the same reason that a judge may not determine a cause in the results of which he has the slightest personal interest.1 Although other unsuspected weaknesses in the Illinois fiscal system came to light in the post review, the fact that this public official was post auditing his own dis- bursements certainly contributed substantially to the ease, and lack of previous detection, of the misappropriation 2 . . process. There was no "independence" With respect to the post audits as is generally understood in private enterprise accounting. It will be noted that as a consequence of this unfortunate experience, the State of Illinois now has truly independent audits by certified public accountants. ‘ 1 . . . . Joel Hunter, "The Auditing Function in the Federal Government," The Accounting Review, XVII, No. 3 (July, 1942), p0 2220 2 . . . . . . Lloyd Morey, "Fiscal Reorganization in the IllinOis Government," The Journal of Accountancy, CIII, No. 4 (April, 1957), p. 37. 94 On this subject of independence, a CPA and chairman of the committee on professional ethics of The American Insti- tute of Certified Public Accountants recently included this observation in a letter for publication in The Certified Public Accountant: The CPA, like the judge or anyone involved in the public interest, should not only be impartial but appear to be impartial.1 In the following issue, the matter was mentioned in the form of a report on a discussion which took place in an Institute business meeting, in these words: Proponents argued that CPAs should not only be independent, but should not allow themselves to be in a situation which might raise any doubt about their independence in the minds of the public.2 Following is a declaration by the Comptroller General in his Statement of Accounting Principles and Standards for Guidance of Executive Agencies in the Federal Government on the subject of "Independent Audit by General Accounting Office": An independent post audit by the Comptroller General as an agent of the Congress is provided for by law and contributes to continuing improvements in the development and application of the accounting principles and 1The Certified Public Accountant, September, 1960, p. 6. 2The Certified Public Accountant, October, 1960, p. 2. 95 standards incorporated in properly designed accounting systems which are a vital factor to the effectiveness of such an audit. This is done through the review and evaluation of the accounting and related processes in actual operation.1 The number of Federal agencies which require independent audits on the part of those quasi-public concerns which they regulate has steadily increased. NOW over twenty Federal regulatory agencies make use of competent independent auditors in the process of insuring that the applicable regulations are being observed.2 Most of the states now do their own post auditing, it will be noted, usually through a special department for the purpose, such as an elected state auditor or auditor general, according to the title preferred or as happened to be specified by statute or constitution. The American Institute of Certified Public Accountants, as well as the various state associations of certified public accountants, have for some time been advocating the audit of government accounting by certified public accountants. They take the position that 1Comptroller General of the United States, Accounting Eflginciples Memorandum No. 1 (revised September 18, 1957, p. 5. 2Lyman Bryan, "Federal Use of Independent Audits," The éEflfirnal of Accountancy, CX, No. 5 (NOvember, 1960), p. 22. 96 they can in a truer sense, by reason of their special training and professional stature, and due to their lack of any conflict of interest, bring a spirit of independence to the assignment which can hardly be equalled by other qualified personnel. A survey by The American Institute of Certified Public Accountants' committee on local government accounting resulted in the following findings: There has been a noticeable if slight increase in the use of independent accountants by states, counties, municipalities, townships and school districts in recent years, the local government accounting committee found in a recent survey. In the face of this trend, however, a number of states show a decline in the use of independent account- ants during the past five years. The work performed by independent accountants appears to be evenly divided between CPAs and non-CPAs-— with most of the auditing at the state level being con- ducted by CPAs. The survey disclosed that competitive bidding is still a serious problem, and the practice is followed, at least in part, in nearly one-half of the states. Most states, the survey shows, do not require that their chief auditing official be a CPA.1 Many authorities have urged governmental use of certified LJublic accountants for post audits, a recent recommendation lbeing made by Professor Tidwell in his book on Public School 1The Certified Public Accountant, December, 1958, p. 9. 97 l . . . . Fund Accounting. Although his viewp01nt is primarily toward that of public school accounting, the arguments he makes in favor of audits by certified public accountants could apply, to a considerable extent, to all or any part of state government as well as to individual school districts. 1 . . Sam B. Tidwell, Public School Fund Accountingy Principles and Procedures (New York: Harper & Brothers, 49 East 33rd Street, New York 16, N.Y., 1960), pp. 207-18. 98 CHAPTER III ARE PROFIT-ACCOUNTING METHODS BEING USED IN STATE GOVERNMENT, AND IF NOT, WHY NOT? A. ARE PROFIT-ACCOUNTING METHODS BEING USED IN STATE GOVERNMENT? l. The Questionnaire a. Content In an effort to find the answer to the question: Are profit-accounting methods being used in state government?, it was decided to consult representatives of the 50 states by means of a questionnaire because of the practical impos- sibility of making personal calls on representatives of all the 50 states to obtain the information firsthand. In drafting the questionnaire, however, it was finally decided that in order to obtain responses, the content of the questionnaire must necessarily be limited and of simple practicality. For that reason the questionnaire did not include any direct reference to why profit—accounting methods vwere not being used if not, but it was resolved that the answer thereto would be attempted through the process of deduction which is made a second Part B to this Chapter III. 99 l) The Five Major Subjects. The next step was to decide upon the particular areas in which the questions should be asked in order to bring out the desired infor- mation. In making this choice the primary criterion was in which areas the use of profit-accounting methods would likely show themselves and be most beneficial in the state government sector. On this basis it was decided that the questionnaire should cover the following five major subjects: The Budget The Accounting Basis Inventories Cost Accounting Auditing Selection of the particular five major subjects to form the basic outline of the questionnaire was prompted more or less by current discussions and writings on the subject of governmental accounting needs and improvements, particularly in the realm of applying profit-accounting methods. The five subjects named are believed to be cornerstones of profit— accounting methods as well as areas in which governmental accounting improvements have been tending. A recent article in The Journal of Accountanpy, although aimed particularly at local government accounting deficiencies, 100 pointed out two weaknesses applicable to state government. One weakness was the lack of independent auditing, the other the lack of the use of accrual accounting. 2) Depreciation. Some question might be raised as to why the subject of depreciation was not included in the group. In some quarters debate does break out now and then as to whether depreciation should or should not be computed and recorded on government owned fixed assets. The argument has fairly well resolved around the compro- mise conclusion that depreciation should only be recog- nized and recorded in those agencies or departments where operations of a profit-producing nature are conducted. we believe that even here the recording of depreciation is a waste of time, hence the taxpayers' money, unless the operation itself is financially autonomous. A profit- producing agency that turns all of its receipts into the state treasury and must rely upon legislative appropria— tions for its operating funds as well as its capital outlay funds, would be going through needless motion by keeping 1Robert L. Leonard, "Accounting Needs of Local Govern- ment," The Journal of Accountancy, CVIII, No. 5 (November, 1959), p. 55. 101 depreciation records. Noticeable was the lack of suggestions or recommenda— tions in the current literature to the effect that the Federal Government should institute the practice of com- puting and recording depreciation in those departments or agencies which have no profit—producing operations. It is understandable why depreciation accounting would be prac- ticed in such departments and agencies as the Post Office Department, the Tennessee Valley Authority, etc., which operate on an autonomous, or quasi-autonomous basis. The Task Force for the Hoover Commission took the position that industrial and commercial-type installations in the Federal Government should be depreciated.2 3) Automatic Data Processing. The question might also be raised as to why automatic data processing (A.D.P.) or electronic data processing (E.D.P.) was not included as one of the methods in the questionnaire. It was because A.D.P. and its punched-card accounting machine predecessor, is not lThe Liquor Control Commission of the State of Michigan falls in this category. It has discontinued recording de— ,preciation for the reason stated plus the fact that no Federal income tax benefit can be derived therefrom. The extra work served no beneficial purpose. 2See Task Force Report on Budget and Accounting in the United States Government (U.S. Government Printing Office, 1955), p. 73. 102 a method in the intended sense as the other subjects. A.D.P. is a tool or device; it is a piece (or pieces) of hardware, no matter how sensitive, speedy, or intricate. This elaborate and astronomically expensive computing device has presumed to replace the adding machine, the calculator, and the typewriter due to its fantastic speed, versatility, and other technical advantages. Whether this replacement has been at a saving in cost is doubtful or at least debatable.1 Furthermore, government has not been too backward in adopting these specialized mechanical or electronic devices since the development of A.D.P. variations has been so rapid that the obsolescence factor is almost bewildering. There are those, of course, who can make quite a case of government's derilection in this area, and one is likely to find the producers and marketers of such equipment, as well as a growing, self-justifying corps of "management special- ists,’ very much in the vanguard of this group. But the type of method. that is dealt with in this thesis does not lSee Joseph A. Vignali, "Potential of Automatic Data Processing in the Federal Government," N.A.A. Bulletin, XLII, No. 6 (February, 1961, Section 1), pp. 63—72. Vignali mentions that justification can be effected by putting addi- tional work on A.D.P. But how important or necessary is this new output? It could be a form of rationalization. 103 include the tools and devices of implementation, but the basic methods themselves. b. Procedure 1) Sample of Transmittal Letter and Questionnaire. A sample of the transmittal letter and of the questionnaire will be found in Appendix B. 2. Shortcomings of Questionnaire One of the more noticeable shortcomings of the question- naire was its lack of ability to probe its subjects in depth. This was particularly observable in the section on the type of budget in use. A simple ypp answer to the question as to use of the performance or program type budgets is not very revealing. Little was learned as to the extent or quality of such applications. Questions immediately arise as to how much? To what extent? With what success? How was success measured and how substantiated? And so on. Reliable judgments of the quality, scope, and true efficacy of program budget applications were deemed to be unobtainable for the comprehensive area of this study. It would be almost an impossibility to obtain a purely objec- tive report without making a prolonged, detailed, and 104 intimate study at each location, a task too formidable to complete for even one state with many agencies to approach on the five different subjects. Target studies in some depth have shed critical and searching light on segmented experience with the program budget concept. These were done more or less through analyses of particular situations with resultant appraisals . . . l and corrective suggestions or recommendations. 3. Test and Release In order to pre-test the questionnaire before releasing it to all 50 states, it was decided to try it out first on only two states to ascertain the reaction to the inquiry and to learn if the recipients would exhibit any difficulty with either the contents or the mechanics thereof.2 The State of Ohio responded with satisfying promptness but the lSee Stanley T. Gabis, Mentai_Health and Financial Managpment: Some Dilemmas of Program Budgeting (East Lansing: Bureau of Social and Political Research, College of Business and Public Service, Michigan State University, 1960). See also Frederick C. Mosher, Program Budgeting: Theory and Prac- tice with Particular Reference to the U.S. Department of the Army (Public Administration Service, 1954). See also John P. Donovan, A Study of Performance Budgetipg:hia Hoppital Ward, University of Southern California, Master's thesis (1957). Pauline D. Young, Scientific Social Surveys and Research (2nd ed.; New York: Prentice-Hall, Inc., 1949), p. 241, recommends such testing. 105 second state did not respond. No difficulty whatsoever with the questionnaire was expressed or indicated by the State of Ohio, nevertheless, confirmation as to its applicability seemed desirable, so a third state was chosen. The State of Wisconsin responded promptly and thoroughly, likewise indicating no difficulty in com- pleting the questionnaire. With this double assurance, the questionnaire without revision was dispatched to all of the remaining states. The questionnaire was mailed out in duplicate to all of the 50 states.1 From these, a total of 35 marked copies in all were returned.2 This amounted to a gratifying response of 70 per cent. In addition, one state declined to answer the questionnaire for the reason that no rela— tionship existed between their state's accounting methods and profit-accounting methods. A follow-up request brought no further response. An effort was made to simplify the questionnaire to the fullest extent possible in the matter of mechanics and 1The District of Columbia was omitted since its govern- mental processes would hardly be analogous to those of a state. 2The infant State of Hawaii is particularly to be com- mended in that it was represented among those responding despite the fact of its newness surely overburdening it with organization and administrative problems at the time. 106 interpretation in order to minimize the work of responding, with the hope thereby of encouraging a larger number of replies. The form of the questionnaire provided that a simple check-mark would indicate an affirmative answer, and the absence of the check—mark constituted the negative. In addition, space for comments and explanations were provided for those willing to supply such supplemental information and many of them did. For every state, the questionnaire was addressed to: "Comptroller (or Chief Accounting Officer).” The older spelling was used in preference to the newer form of £93- troller since it was believed that the older form would be predominantly still in use in governmental circlesl although the older form is rapidly giving way to the new spelling in business. It appeared reasonable that should some other state official be in a better position to answer the questionnaire, the state comptroller would pass the letter and questionnaire to this other official. As a matter of fact, the transmittal letter requested the state comptroller to do just that. It was also believed that should the lAlthough immaterial to our investigation, it will be noted from Table I that this was not conclusively borne out due to the use of other titles and to other officials replying. 107 TABLE 1. A summary, according to title, of the officials replying to the questionnaire Stated title Number using stated title State Comptroller State Controller Budget Director or Officer State Auditor or Examiner Supervising Administrative Analyst General Auditor, State Comptroller's Office Assistant to the Director, Department of Finance, and Superintendent of Budgets Director, Accounting Division, Department of Administration Director, Division of Accounts Deputy Director, Department of Finance and Administration Director, Legislative Research Committee Director of Finance Director, Department of Finance and Administration Director of Accounts, Governor's Office of Administration Chief Accountant Director, Bureau of Finance Title of official not given Total l—‘l-‘LoUlvPfl 1 1 1 A 37* *One state submitted two questionnaires by different officials, while another state footnoted the letter to the effect that the questionnaire was inapplicable to that jurisdiction. 108 accounting head of a particular state bear some other title than comptroller, such official would receive the letter in the manner it was addressed. Even though no letters were returned undelivered, this fact was no assurance that the‘ letter did reach the proper person. 4. Analyses of Responses a. The Budget Of the 35 states participating, 14 of them report but a single type of budget used; 11 states report two types of budget used; 6 states report three types of budget used; 4 states report four types of budget used. Schedule A Number of Different Types Number of of Budget Used: States One 14 Two 11 Three Four 6 A Total states reporting 35 109 Schedule B Type of Budget Used Number of States Line Item Partial 16 Complete 7 Lump Sum Partial 12 Complete 2 Performance Partial 9 Complete 3 Program Partial 15 Complete 6 A line—item budget is used partially by 16 states of the 35 participating. The line—item budget was supple— mented or duplicated by other types, as shown in Schedule C. 110 Schedule C Type of Budget in Addition to Line-Item Number of States None 4 Lump-sum--partial l Performance—-complete 2 Program--partia1 3 Lump-sum--partial, and program--partia1 2 Lump-sum--partia1, performance--partia1, and program--partia1 4 Total states reporting 16 A line-item budget is used completely by 7 states out of the 35 states participating. In this group of seven, the line-item budget was supplemented or duplicated by other types as shown in Schedule D. Schedule D Type of Budget Used in Conjunction Number of with Line-Item-—Complete States None 3 Program--complete 1 Performance--complete, and program-—partia1 l Performance-~partial, and program-~partia1 _g__ Total 7 Twenty-three states used a line—item type budget, either eXClusively or in conjunction with other types as shown in 111 Schedules B and C. Fourteen states use a lump-sum type budget, either exclusively or in conjunction with other types. Twelve states use a performance type budget in con- junction with other types. Twenty—one states use a program type budget, either exclusively or in conjunction with other types. b. The Accounting Basis (Cash or Accrual) A summary on the 35 states reporting as to the account- ing basis used is shown in Schedule E. Schedule E Accounting Basis Used Nugiziezf Cash basis By choice 3 Required 10 Partial cash basis 9 Accrual basis Complete 1 Partial 20 Actually there is no difference between a partial cash basis and a partial accrual basis, but the questionnaire 112 allowed for a difference in recognition due to custom, familiarity, or interpretation. Eight states indicated more than one method. Only one state indicated a required cash basis combined with another which was partial accrual. Five states indicated partial cash combined with partial accrual which two bases comple- ment one another. The other 2 states indicated cash by choice combined with partial accrual. One of these explained that the cash basis was used completely except in educational institutions where the partial or modified accrual basis was used. The other state explained that the cash basis was used except in some instances when the accrual basis was required to determine the cost of operation. Arizona reporting the cash basis required, stated that revenues are reported on a cash basis while expenditures are reported on a modified accrual basis in that claims are paid for a period of one month after the close of the fiscal year if the material and services were received prior to June 30. Idaho reported the cash basis required in central office accounting but that an accrual basis is used in some depart- Inents combined with a cash basis for budgetary control. Massachusetts reported a partial accrual basis with income being recorded and reported on a cash basis while 113 expenditures are recorded and reported on an accrual basis. At one time they had a cash basis system under Which liabilities were estimated to determine the amount of a reserve that was provided. This system was unsatisfactory. Now all encumbrances are recorded as they are incurred, then they are liquidated when they are paid. As to further improvements desired, it was explained that the Comptroller installs the uniform accounting system of the Commonwealth of Massachusetts. Since accounting is a tool of budgeting, changes affecting budgeting must first be suggested by the Budget Bureau. Montana, which is on the cash required basis, explained that funds and appropriations must have sufficient balances before claims can be approved and warrants written in payment. New Jersey reported to be on a partial accrual basis, explaining that they made an accrual for receivables and encumbrances. This modified accrual basis gives a more accurate and realistic statement of financial condition than the strict cash basis formerly used. Complete accrual 'though desirable is lacking, however, since there are no adjustments for inventory or depreciation. North Dakota reported a partial cash basis in use with 114 funds sometimes considered encumbered when allocated to a definite program but no true accrual. Under this basis it is difficult to obtain timely information that is truly accurate but changes are contemplated effective July 1, 1961 under the new Department of Accounts and Purchases. Ohio operates on a partial cash basis as revenues are accounted for as received. Expenditures for certain items under $50 are on a cash basis while expenditures over $50 are on an accrual basis. Certain accounts like travel are encumbered quarterly. Oregon described the accounting systems as partially on a cash basis. This method is said to be an improvement over a fairly recent former basis in that it incorporates encumbrance accounting. Rhode Island uses a partial accrual basis, adding by way of explanation that revenue is on a cash basis while expenditures are on an accrual basis. The superiority of this method over a former was described by the one word: conservative. South Dakota uses a partial accrual basis, explaining that in some instances the accrual basis is used to deter- mine the cost of an operation when required. 115 Texas is on a required cash basis of accounting, explain- ing that the various agencies may encumber but in the Comp- troller's Office all expenditures are recorded on an actual disbursement basis. This method, it was stated, does not provide a record of outstanding encumbrances against appropriations in the Comptroller's Office making it difficult to compute the outstanding obligations when pre- paring estimates. Utah claims a partial cash basis in that purchase orders and contracts are encumbered when approved. Vermont, in the required cash basis category, explained that although the cash basis was required, encumbrances are applied during the last three months of the fiscal year for the control value. Washington reported a partial cash basis. Local Trust and Agency Funds are on a cash basis. Business Enterprise and WOrking Capital Funds are on a full accrual basis, including both expenditures and revenue. All other funds accrue expenditures but treat revenue on a cash basis. The accrual basis for expenditures provides up—to-date allotment balances and an accurate monthly and fiscal period cost for comparison with work performed, and program costs facilitate analysis of agency operations. 116 Wisconsin reported as on the partial accrual basis, explaining that all expenditures are accrued to August 15 of the succeeding fiscal year. Revolving revenues are similarly accrued. General-purpose revenues are on a cash deposit basis, not accrued. Formerly the cut-off date for accruals was August 31. Advancing the date to August 15 permits earlier closings and more timely annual fiscal reports and biennial budgets. They are well satisfied with the present basis of an August 15 closing. c. Inventories (Through Working-Capital Funds) Schedule F States Having a Free Use of WOrking- Number of Capital Funds for Inventories States In all agencies using inventories 4 In only certain agencies specified by statute 19 In only certain agencies limited by administrative restrictions 5 States That May Use Inventories by Means of Cost-Based Budgeting and Appropriations 7 States That Provide for Inventories Out of Regular Appropriations In some cases 17 In all cases 14 117 Schedule G States Making Any Effort To Obtain Authority Number of for the Establishment of Inventories States States which are 5 States not indicating ;g Total states reporting 35 d. Cost Accounting A summary of the reports from the 35 states participa— ting shows the following with respect to cost accounting: Schedule H . Number of C t A t Stat 03 ccoun ing us States Permanent basis 11 Temporary basis 3 Not indicated .2; Total states reporting 35 Schedule I . N b Where Cost Accounting Used um er 0f States Social welfare Department . 10 Health Department 9 Highway Department 24 Hospitals 13 Penal System 14 State Utilities 6 Bureau of Purchases (or Purchasing Department) 2 Where Cost Accounting Used (cont'd) Liquor Control (or State Liquor Stores) Conservation Department (or Fish and Game) State Industries (or Prison Manufacturing) State Insurance Fund Forestry Commission Central Supply Room Institutional Farms Auto Pool Cement Plant Tax Commission All Institutions Teacher Colleges Bureau of Engineering Aeronautics Commission Various WOrking Capital Funds (This latter category could include any number of funds. Others specifically mentioned above could be so categorized, such as Auto Pool, Central Supply Room, etc.) Schedule J Cost Methods Used Actual Cost Estimate Cost Standard Cost Other* *Pennsylvania explained their method of cost accounting "varies from system to system, e.g., Liquor Stores value inventory at current market value." 118 NMmber of States H re #4 H‘ H re re #4 P‘ H id re A) u» m Number of States 24 6 2 1 119 Schedule K . . Number of Evaluation of Cost Accounting Used States WOrth-while value 22 Doubtful value Definitely no value Undecided as to value Opinion not stated Not using cost accounting Total number of states participating w U'IU'INU'IOl-J 1) Comments. Several states reported using more than one cost accounting method. For example, California reported that all three methods were in use with variations in many agencies. Under "other agencies," California reported "various-- especially working capital and utility funds," which is informative but cannot be dealt with statistically. The same applies to Florida's comment. ”Largely, the only cost accounting is done by the State Auditor in making an annual audit and then only in a few instances. In view of this explanation, Florida was classified as not using cost accounting methods. Montana, under "other agencies," reported cost account- ing methods were applied in "all others [agencies] except Liquor Control Board." 120 reported in North Carolina, under "other agencies,‘ restricted areas in some agencies." Texas reported "no cost basis is maintained in the Comptroller's Office" by which statement it had to be adjudged as without cost accounting methods. 2) Remarks and Opinions Expressed. California—-As to worth-while value of cost accounting practiced: "Some is done so data can be used for management decisions. Some is done so costs can be properly reported by programs or fund." In the nature of contemplated improvements: "More uniformity required," also, "possible refinement of system at San Francisco Harbor to find more accurate (but still practical) method of prorating some costs." Florida—-The State Auditor consistently recommends the application of cost accounting methods. Hawaii--Undecided as to the value of their cost account- ing but are contemplating improving and extending it. Idaho-—Contemplating improvements by broader applica— tion with electronic data processing equipment. Illinois-—Contemp1ating improvements to some extent in State Hospitals. Louisiana--As to worth—while value of cost accounting 121 practiced: "No comprehensive evaluation has been made." Improvement is a desired step but is as yet unrealized. No extension contemplated at present. Maryland--w0rth-While when used. Contemplating improvements. Massachusetts-—The Department of Public werks has retained Stone and webster as consultants to make an administrative study. This subject (cost accounting improvement) no doubt, will be covered. No extension contemplated.. Michigan——Contemplating improvements. No extension contemplated immediately. Nevadae-The State Highway Department is the only department on a strict cost accounting basis. General fund appropriation agencies are not on a cost accounting basis. Improvement would be in extension of cost accounting to other agencies. Some thought has been given to this, how- ever, other improvements are of more importance than cost accounting. North Dakota--Cost accounting considered valuable in areas where used, and should be expanded to other limited areas. Some additional agencies use it for temporary spot checks. Improvements contemplated are as may be prescribed 122 by the State Auditor and the new Department of Accounts and Purchases. Oregon-—Contemplating extending to other agencies. Pennsylvania——Improvement and expansion planned, par- ticularly in state teacher colleges, correctional industries, mental and tuberculosis hospitals, and other institutions. Wisconsin-—Improvements contemplated are for program and performance data improvement. e. Independent Audits A summary of the reports from the 35 states participating in this study shows the following information with respect to independent audits. Schedule L Conduct of Audits Number Of States For all agencies 26 For some agencies 6 Not indicated _§. Total states reporting L») U‘l || 123 Schedule M Number of Audits Conducted By States All by state employees Of a different agency 24 Of the same agency 0 Some by state employees Of a different agency 10 Of the same agency 4 All by public accountants Some by public accountants 1 All by certified public accountants 1 Some by certified public accountants 13 Schedule N Responsibility for Audits Nu:h::82f The Legislature 10 The Governor 3 The State Auditor 18 The State Comptroller (Controller) 9 Other 9 Those states which checked the "other" category, either singly or in conjunction with other category or categories, were good enough to give the following explanations: Arizona—-The Post Auditor conducts the audits and reports to the Legislature. Delaware--The Budget Commission conducts the audits. 124 Maryland—-The State Controller conducts the audits with certain exceptions (undesignated) provided by law. Minnesota—~The Public Examiner conducts the audits. Montana--The State Examiner conducts the audits. North Dakota--Audits are conducted by the State Auditor, the State Examiner, and the Board of Auditors. Oklahoma—-The State Examiner and Inspector conducts the audits. Oregon--The Secretary of State and the State Auditor conduct the audits. Wisconsin--In addition to the Legislature and the State Auditor, local authorities are named as responsible for audits of local units of state government. Other comments as to audits include the following: California--Internal audit is by the Finance Audits Division (State Controller) while independent post audits are by the Legislature's Auditor General. Idaho--Statutes authorize both the Auditor and the Governor to require audits. Kentucky—-Auditor of Public Accounts is the title given. Nevada--Legislative Auditor is the title used. Pennsylvania--The elected Auditor General makes regular audits of all state agencies, state-owned institutions, and 125 state-aided institutions. The Governor audits the Auditor General. The Governor may audit any agency or institution. Rhode Island--The general state audits are conducted by certified public accountants. South Dakota--The Department of Audits, authorized by statute, conducts the audits. Texas--Interna1 pre-audits are made by state employees either in the same or a different agency. Post audits are conducted by the State Auditor. Vermont—-The Auditor of Accounts makes comprehensive audits of all departments and installs accounting methods to be used in all departments. The Legislative Committee, known as the Emergency Board, selects a "competent account- ant" to examine the books and records of the Treasurer, the Auditor of Accounts, and the Tax Department. B. . . . AND IF NOT, WHY NOT? In an encouraging number of states, the questionnaire responses revealed, profit-accounting methods are being used, yet most states are using such methods only to a limited extent, a few apparently not at all. It is difficult tO conclude specifically why profit—accounting methods are 126 not being used more extensively. In response to the questionnaire, few specific reasons were supplied as to why profit-accounting methods were not being used. 1. What Questionnaire Responses Revealed In the foregoing pages we have analyzed and tabulated the responses to the questionnaire and have come up with results which show that some states are using some profit- accounting methods, as we defined them for our purpose, at least to some extent, the question of extent being proble- matical. New follow brief analytical comments as to why The five categories of profit-accounting methods are not more widely and more thoroughly used. a. The Budget The analysis of responses to the questions concerning types of budget indicates a practical interest in and possibly a trend toward experimentation, at least, with the profit-accounting method type of budget, that is, cost-budgeting in the form of performance and program-type budgets. There is strong implication that these more advanced or sophisticated budget types are primarily supplementing or duplicating the earlier line-item and lump-sum types; the newer types are being approached 127 evidently with some timidity in a sort of probing or exploratory action. Such a cautious approach is not to be condemned but rather to be commended. The fact that any effort at all is being applied toward the use of improved accounting methods is laudatory. The foregoing conclusion is based on reports that 12 states use a performance-type budget either completely or partially while 21 states use a program-type budget either completely or partially. These numbers of states are out of the total of 35 states which cooperated in the study. They are rather substantial and even if about three times as many states use the performance or program—type budgets on a partial basis as on a complete basis, such fact would still not detract from the indication of the trend, such as it is. Admittedly there is no incontrovertible assurance of the direction of the trend, nor as to the depth of the trend. The indicated popularity of the cost-based budgets might partly be based on curiosity and the desire to experiment with something new. The thoroughness of such use, however, is not explained, nor has any comment been made as to the question: with what efficiency and success the experience has been exercised. It is difficult, if not impossible, 128 therefore, to place any objective evaluation upon the application of so intricate a process as a cost-based budget without informative detailed information. One of the problems is that the state comptroller is seldom in a position to know all of the details about what goes on in every state agency. The budget director or state auditor through his investigative staff and procedures is in a somewhat better position to become more acquainted with the detail workings but, without making a specific objective study, it is doubtful if he is as well informed as he might be. In the investigation it was impractical to expect questionnaire responses from every agency in every state, so it was not even attempted. Even if the response had been direct from the agency, this would have been no guarantee of an objective evaluation as an agency head is apt to look upon his own jurisdiction's endeavor in a more optimistic light than is often justified by the actual facts. b. The Accounting Basis Three states reported use of the cash basis by choice. Having the opportunity of selection, did they find that the cash basis was superior and better suited to their needs? Not necessarily. They could be guided by custom. As in 129 the physical world, a great deal more power is required to overcome inertia than to travel the present course, so resistant is habit to change. Although out of the 35 states responding, only one state was declared to be on the complete accrual basis, there were 20 states on a partial accrual basis. On balance this appears to lend a preferential practice to the accrual basis. Special credence can be credited to this conclusion, since it is a rather safe hypothesis to assume, that without exception the trend started from a straight cash basis. c. Inventories (Through WOrking-Capital Funds) The inclusion of this section was an attempt to eval- uate the extent to which working-capital funds are readily available for the establishment of inventories by depart- ments and agencies. In many situations the use of inven- tories makes for more accurate accounting, more accurate records, a better control of unused material and supplies. Sizeable agencies usually have a supply room in which suspense materials are stored for orderly safekeeping, and from which supplies are issued as needed. Without inven~ tory accounting, however, the materials and supplies are charged as an appropriation expenditure when purchased regardless of when used. This practice overstates current 130 periodic costs, and appropriation expenditures, by the value of the unused supplies held over for future use when periodic costs, and appropriation expenditures, will be understated. A sort of makeshift inventory operation, which is cumbersome and has other obvious disadvantages, can be evolved in the following manner. Assume a large depart- ment of, say, four divisions, A, B, C, and D. Division A's appropriation (or allotment) would be charged with all supplies purchased. Then when Divisions B, C, and D withdraw supplies for their particular use, requisitions are written and priced for preparing month-end journal— vouchers for crediting Division A's allotment and debiting the allotments of Divisions B, C, and D respectively, in accordance with the value of their withdrawals. This part of the questionnaire, therefore, was for the purpose of ascertaining to what extent the states were contending with this problem and what they were doing to solve it. There seems to be a reluctance on the part of state legislatures to provide working-capital funds in numerous instances for the maintenance of inventories in the properly accepted manner according to profit—accounting methods. 131 d. Cost Accounting Out of the 35 states participating in the study, 21 of them did not indicate whether their cost accounting status is on a permanent or temporary basis. Of these 21, 5 states did not use cost accounting which left 16 noncommital or uncertain as to its status. The high incidence of cost accounting application is found in Highway, Penal Systems, Hospitals, and Social welfare. It is not surprising that Highway is well out front. Highway costing presents some rather challenging problems, not only in the matter of overhead allocation, but in the allocation of equipment costs as well. It can be believed that Highway is not only the leader in popu- larity in the application of cost accounting methods in state government, but also chronologically, although data on the latter conclusion were neither requested in the questionnaire nor volunteered in the responses. NOr is it surprising that the actual cost method is the type most frequently applied; it is being named 24 times compared with 6 for the estimate cost method and 2 for standard cost. It is understandable that the actual method could be more readily applied to general government activities than other types of costing. 132 e. Independent Audits The Comptroller General strongly contended that the General Accounting Office possessed the fullest degree of independence in its relationship to the other agencies which it audited. Although the independent emphasis was somewhat directed toward independent contractors, the Comptroller General made it clear that independent status was maintained toward Government corporations and agencies as well. As to agencies, it was pointed out, perhaps rather paradoxially, that it was essential to preserve good relations in order to succeed in the accomplishment of systems revisions since cooperation of the agencies was needful and under such circumstances a personality problem was usually involved. Assuming, however, that a complete independent status does exist insofar as the GAO is concerned, does it necessarily follow that such independence is likewise present in the state government situation? The obvious answer is that it would exist only in those states where circumstances are identical or superior, and these would be few indeed, if any there were at all. An important two-phase question with respect to state "post" audits is by whom the audits are made and to whom 133 is the auditor responsible? Is the audit for the governor to assure him that his executive program has been properly carried out? Is the audit for the legislature to assure that body that its appropriations have not been exceeded and the expenditures correspond with the legislative intent? Or is the audit for some other official or official body? It was reported that the legislature was responsible for the audits in 10 states, the governor in 3, and the state auditor in 18, the state comptroller (controller) in 9, and other officials or official bodies in 9. These figures reflect the considerable overlapping and dupli- cation in several states. The largest single category is that of state auditor,1 usually an elected official and so in a sense responsible to the electorate. If the state auditor's office has nothing to do with the receipt, banking, and disbursing of cash, securities, and other monetary paper, functions being limited to the examining and verifying of fiscal transactions, there should be no difficulty with such an arrangement. Again, however, it is hardly likely that the auditor general could bring the 1But the use of the title varies and the title is sometimes loosely applied. In Louisiana, for instance, the State Auditor does not audit but the Supervisor of Public Accounts performs this function. 134 degree of independence to the auditing assignment as, say, a firm of certified public accountants. If the state comptroller is responsible for the conduct of "post" audits and such duty is performed by his own staff, does it place him in the position of auditing his own work as the chief accounting officer of the state? Such audits are probably performed for, and at the offices of other agencies, the relationship corresponding to that of the Comptroller General when he audits federal agencies and departments. It will be noted that the use of public accountants (non-certified) is almost non-existent although audits by certified public accountants are sometimes conducted. It is a fairly customary practice to have audits of the prin- cipal fiscal officers conducted by certified public account- ants while the audits of the various agencies are done by state personnel in most states where certified public accountants are used. 2. Reasons and Deductions a. Resistance to Change Perhaps the foremost reason or deduction as to why profit—accounting methods are not applied in state government 135 more widely and more thoroughly is the well—known habit in human nature to resist change. This characteristic is deeply rooted in employees of state government as it is in all human organizations and institutions. Certainly it exists to some extent in all, but in some individuals it is developed, or allowed to develop, to a more substantial degree than in others. It takes will power, vigor, and fortitude to overcome the inertia. This resistance shows itself in numerous ways, such as, a lackadaisical attitude, lack of incentive, skepticism, lack of self—confidence, lack of initiative, readiness to succumb to discourage- ment, idealistic contentment with the status quo, stubborness, laziness, and so on. Variations on these themes and others are almost as plentiful as the individuals themselves since no two of us are exactly alike in every way. b. Lack of Pressure Within Government Next should be listed the failure of administrative leadership in government itself which should recognize its inherent obligation to constantly seek better, more effi- cient, and more economical procedures-—ways of doing things. Often changes come about through legal imple- mentation, constructive action on the part of the legislature. 136 Yet there must be the idea, the stimulus to bring about action in such a relatively large body which is incapable of acting automatically or spontaneously. It cannot be expected to be all knowing, all wise, about all things. Sometimes the spark originates at or near the bottom in an agency's echelon in the form of a suggestion or recom- mendation. It travels upward through the proper channels until it reaches the receptive level which has the author- ity to require that the change be made. Pressure for reform can and often does originate within government. The failure for such pressure to germinate, whatever the cause, this writer feels, is one plausible reason why profit- accounting methods are not more widely and more thoroughly used in state government. As Eghtedari and Sherwood put it: It is interesting that an approach which has seemingly yielded so much in Los Angeles and is so well packaged in the U. S. Bureau of the Budget publication, A Work Measurement System: A Case Study (U. S. Government Printing Office, 1950), has caught on so little elsewhere.l c. Lack of Citizen Interest The voters and taxpayers should show more interest and actively urge that improvements be more vigorously pursued. lEghtedari and Sherwood, op. cit., pp. 68-69. 137 It seems only fair that the regular citizenship should share a part of the blame for the delay in the adoption of profit—accounting methods in state government. Too many people are not aware of the advantages to be gained. Despite all the publicity given to the Hoover Commission Reports, their full significance is lost on most citizens. The possibility of making similar applications in state government has not occurred to them with the impact it should have. d. Other Reasons Doubtless several other reasons might be added. For instance Ellsworth Morse writes: Sheer size of operations themselves can be an important deterrent to changes designed or intended to promote efficiency and economy. The inertia of plain bigness has to be overcome. Problems of changing programs, changing technology, shifting emphasis, organizational conflicts, personnel changes, the natural human resistance to change--a11 have a bearing on the effort to improve.1 l . . . Ellsworth H. Morse, Jr., “The JOlnt Financ1a1 Manage— ment Improvement Program in the Federal Government," Ihg Accounting Review, July, 1961, p. 372. 138 CHAPTER IV IF PROFIT-ACCOUNTING METHODS POSSESS FEATURES SUPERIOR TO THOSE OF NON-PROFIT—ACCOUNTING METHODS, HOW MAY THE USE OF PROFIT-ACCOUNTING METHODS BE BROADENED IN STATE GOVERNMENT? In Chapter II the case was presented for the applicability of profit-accounting methods in state government, showing perhaps with some persuasion and conviction that profit— accounting methods possessed superior traits to those of non—profit-accounting methods. Now follows a presentation of how the use of profit-accounting methods may be broadened among state governments. Here again one must necessarily resort to deductions and assumptions as tried in Chapter III with respect to the question why profit-accounting methods are not being used, or not being used more, than they are, in state government. 1. Possibilities Under the Five Categories A. The Budget It is possible to use more than one type of budget, con- sequently supplementing and overlapping can occur and does. It is probable that several of the legislatures still insist upon a line-item budget presentation supplementing other 139 types.1 One way, perhaps the only way in many situations if not all, is for agencies to submit performance or program- type budgets partially or completely supplementing the standard form. This procedure is likely necessary until the legislatures are sufficiently sold on the advantages of the newer types that they are willing to accept the new presentation alone. The problem is one of education and conviction, with the burden of proof or teaching falling upon the budget director who must be aided by the particular agencies sufficiently interested to make the exertion no matter how frustrating the opposition. It may be too much to venture at this time, on the basis of the data which have been submitted by the 35 states, that there appears to be enough interest, trial,and experi- mentation to vouch for sufficient strength in the potential merit in the performance and program-type budgets to justify a prediction that they will eventually replace the simpler types perhaps altogether on a permanent basis in the years to come. Peculiarly enough, the Chief of the Finance Section in the Health Department of the State of Michigan admitted 1Department of Mental Health, Michigan, budget request for fiscal 1961—62. 140 recently that under the urgency of austere appropriations their department was being forced into the use of a program budget for their own use if for no one else's. When appro- priations were more generous, the allocation of funds between their different divisions was hardly necessary. New with funds greatly limited it is essential for them to allocate allotments as well as their expenditures accord- ing to their organizational breakdown and within the divi~ sions to the various programs. b. The Accounting Basis The assortment of cash and accrual combinations are not so surprising. This could be interpreted as an indication that many states are going through a transition period in changing over from the cash to the complete or partial accrual basis. It is quite possible that this transition will be completed in the not too distant future. The impetus supplied by the new Federal accounting practice is likely to have an accelerating effect on the action by the states. The advantages to be gained by the transition have already been presented and comments of some states gave recognition to such advantages in their responses. The shorter the time required for the conversion, the 141 sooner the benefits will be forthcoming for the states fol- lowing the adoption of this profit-accounting method as exemplified by the Federal Government. c. Inventories (Through working—Capital Funds) The urgency for better inventory management and control is far greater in the Federal Government than on the state government level, but only for the simple reason that the money values at stake are vastly greater. The amounts implicated in the state governmental area, nevertheless, are quite sizable, so the necessity for proper control does exist and should not be overlooked nor lightly dismissed. The responses to the questionnaire, however, do indicate a lack of genuine interest-—or is it helplessness?--in regard to a better ordering of the inventory situation. This con- clusion seems to be justified due to the fact that only 4 states, out of the 35 participating in the study, possess the administrative freedom desirable for the establishment of monetarily controlled inventories, through working- capital fund applications, as found needful. Also, 5 states indicated that they are concerned enough to be making any effort to obtain the necessary authority for the establish- ment of inventories with working-capital funds. Possibly 142 the minority weight of even these few could be considered a helpful sign of progress toward the adoption of profit- accounting methods in this particular area. d. Cost Accounting It is gratifying to see that 22 states considered their cost accounting application of worth-while value. Five states were undecided as to its value, only one declared its cost accounting of doubtful value, while not a single state judged it to be of no value. That a relatively large number of states contemplate or desire improvements in, or extension of, their cost account- ing practices is quite noteworthy and encouragingly signifi— cant. Consequently it can be concluded with some confidence that the cost accounting area of profit—accounting methods has a fairly firm foothold in state government accounting but has a long road ahead before it will be developed to its fullest potential. e. Independent Audits State legislatures and officials are apparently generally of the consensus that the cost of audits when performed by certified public accountants is greater than if performed by state staff personnel. This could be true but perhaps 143 the basis for arriving at such a conclusion should be examined more carefully. One difficulty is the proneness of state officials to insist on certified public accountants (and other qualified professionals) bidding for the work, a practice which is being more and more frowned upon by certified public accountants who consider the practice as contrary to professional ethics. In this particular area of profit-accounting methods, the states do not have the Federal Government to show the way, except as applied to directed audits to situations outside the Federal Govern— ment proper. 2. Central Agency Responsibility Morse pointed out that the Joint Financial Management Improvement Program in the Federal Government provides a pressure for continuous effort and attention to better financial management practices."1 Since such a practice has proved to be productive in the Federal Government, it appears logical that a similar program in state government should have a relatively corresponding effect could such a management improvement program be organized. l Ellsworth H. Morse, Jr., "The Joint Financial Manage- ment Improvement Program in the Federal Government," The Accounting Review, XXXVI, No. 3 (July, 1961), p. 372. 144 In state government the reluctance and delay are likely to be in lack of leadership, referring to those states which do not have the equivalent of the three central Federal agencies: Treasury, Budget, and General Accounting Office with the proper incentive, authority, and legislative backing. Morse put it this way: The circumstances which led to the evolution of this joint program are not necessarily peculiar to the Federal Government. The review, evaluation,and revision of out— moded fiscal practices is a continuing need in all organ~ izations in order to meet the requirements of good management. The mechanism of a cooperative and con~ structive improvement program conducted jointly by several organizational units directly concerned in such practices has had considerable success in the Federal Government. Although jurisdictional responsibilities for financial management functions may vary considerably, the same general approach, however, may be appropriate in other public organizations, such as state and munici- pal governments, as one means of focusing attention on needed improvements and stimulating action in those needs."1 3. Agency Management Responsibility To overcome this lack in government, the new trend in governmental accounting is toward correcting a lackadaisical situation by instilling management with a progressive attitude whereby the need for fiscal control and an enterprising com~ petitive spirit is developed and spread throughout the agency. Admittedly no profit motive can be created where 1Ibid., p. 373. 145 none exists, but it is believed that management can be made more aware of the significance of costs and imbued with a desire to meet a challenging goal in the form of a realis- tic cost-based budget. As to agency management responsibility, Morse said this: The installation and operation of effective systems of financial management are agency management respon- sibilities. Although the three central agencies in the joint program can provide leadership, advice, and some stimulus to the making of improvements in financial management practices, effective progress itself depends upon the agencies directly concerned and must come primarily from the efforts of these agencies. Such progress requires recognition of needed changes and taking the necessary steps to make them. It is reasonable this point of view would apply equally well in the case of the state government, that is, progress depends largely upon the agencies directly concerned al- though it would be most helpful if some central authority could provide leadership, advice, and some stimulus. 4. Other Pressures Toward Improvement Morse catalogues "pressures that are present which have the effect of promoting desirable changes in financial management practices of Government agencies." These include: (1) the inherent drive of management officials, at varying levels, to do a good job, 1Ellsworth H. Morse, Jr., op. cit., p. 372. 146 (2) internal and external audit, investigative, or other review operations, (3) congressional interest in agency operations, (4) the effect of public disclosure of waste, impro— priety, or other deficiency in the manner in which agency's responsibilities are carried out, and (5) over-all national budget considerations."l Some of these could be carried right over into the state government sector without modification; items (3) and (5) would need slight paraphrasing. Although the Congress has implemented the improvements in the Federal agencies by mandatory legislation, it yet remains, in most states at least, for state legislatures to enact corresponding relevant legislation. Some public spirited organizations exist for the purpose of obtaining a better quality of government for the tax- payers. Such organizations as the Citizens' Research Council could, if they could be made aware of the need, stimulate interest in the use of profit-accounting methods in state government. The Hoover Commission Reports did create interest along this line in various states. In fact, the Hoover Commission Reports were followed by a rash of state government studies—-for which there always seems to be an open season--some of them resulting in what became 1Ibid. 147 known in street parlance as the Little Hoover Reports. For one reason or another, most of them mis—fired or turned out to be largely ineffective because of emphasis on political or less consequential matters. State CPA organizations, particularly the state CPA associations or societies (the state counterpart of the American Institute of Certified Public Accountants on the national scale) could take the initiative in persuading the use of profit-accounting methods in state government even as the Institute pointed the way for the application or profit—accounting methods in the Federal Government. In October 1958, The American Institute of Certified Public Accountants established a committee on Federal budgeting and accounting. Its duties were to keep informed on all developments in Federal budgeting and accounting; to advise and assist Federal agencies in improving their bud- get and internal accounting practices, embracing the profit- accounting methods advocated by the task force of both Hoover Commissions.l Why should not the various state associations of CPAs follow a similar course in their respective states? 1The Certified Public Accountant, January, 1959, p. 10. 148 5. The Desire for Making Improvements Is Contagious The idea of, as well as the determination for, making improvements is contagious. werd, both oral and printed, gets around in numerous ways. The observation of what contemporaries are doing in different agencies of the same state as well as in other states, comes to the attention of the alert and discerning official. Rumor and knowledge of developments have a tendency to circulate. Meetings and conferences contribute to and foster the exchange of ideas. writers for periodicals in the public administration field would do well to bring attention in their articles to developments and improvements worthy of consideration. The ambitious supervisor with imagination and discern- ment is usually eager to do a better job, to improve the quality of the work for which he is responsible and directs. There is a competitive spirit among individuals in enter- prise, even in government enterprise, whether latent or active, which can be stirred and stimulated by those in higher authority, or even by those in lesser positions. 6. Employment of Improvement-Minded Personnel One means would be the employment of more aggressive and improvement-minded personnel where such are lacking. This 149 would mean, of course, that those with authority to hire and fire must be in favor of a campaign for improvement in financial management through the adoption of profit-accounting methods. Where a civil service board or commission lays down the ground rules for hiring and firing, and sets the standards for qualifications demanded for filling the various positions, the challenge is somewhat up to such boards or commissions. It is usually possible, however, for the agencies themselves to make their wishes known with respect to the standards they demand. Either the civil service commission or the agency can take the initiative but to obtain the best results the venture should be made a cooperative one. It is believed that a civil service commission would be ready and willing to upgrade the qualifications for certain positions if the agencies can show the necessity, and the value to the state, for doing so. Needless to say that those who believe financial management improvement is unnecessary and a "waste of the taxpayers' money," will voice objection to such a plan. 150 APPENDIX A EXAMPLES OF APPROPRIATIONS EXAMPLE 1. Relative line-item appropriation For Fiscal Year Ending June 30, LIQUOR CONTROL COMMISSION 1958 Regulation and Administration Division Chairman $ 10,000 Commissioners (4) 38,000 Other Salaries and Wages (124 positions) 552,494 Overtime and Seasonal Help 7,500 Contractual Service, Supplies & Materials 207,380 Rental-—Lansing 45,388 Lincoln Park 11,760 Equipment 10,400 Sub-total 882,922 Licensing Division Salaries and wages (39 positions) 163,873 Overtime and Seasonal Help 22,000 Contractual Service, Supplies & Materials 29,778 Renta1--Lansing Office 10,782 Equipment 300 Sub-total 226,733 Enforcement Division Salaries and Wages (106 positions) 572,802 Contractual Service, Supplies & Materials 167.704 Rental-~Lansing Office 12,766 Equipment 1,000 Sub-total 754,272 151 For Fiscal Year Ending June 30, 1958 Merchandising Division Salaries and Wages (583 regular positions) $2,556,802 Overtime and Seasonal Help 40,000 Contractual Service, Supplies & Materials 295,850 Rentals 323,529 Wholesale and Retail Liquor Dealers Special Tax Stamps 24,750 Equipment 151000 Sub-total 3,255,931 Total for Liquor Control Commission 1 $5,119,858 EXAMPLE 2. Relative lump-sum appropriation For Fiscal Year Ending June 30, 1962 LIQUOR CONTROL COMMISSION Chairman $ 10,000 Commissioners (4) 38,000 Other Salaries, Wages, Contractual Service, Supplies & Materials 5,175,437 Rentals 439,114 Equipment 10,000 Longevity 102,449 Total fOr Liquor Control Commission $5,775,0002 1Enrolled House Bill No. Legislature, 2Enrolled House Bill, No. Legislature, 633, Regular Session of 1957. Regular Session of 1961. State of Michigan, 208, State of Michigan, 69th 71th 152 APPENDIX B SAMPLE OF TRANSMITTAL LETTER AND QUESTIONNAIRE 153 Re: Applying profit-accounting methods in state government Dear Sir: With the cooperation of faculty members in the College of Business and Public Service, Michigan State University, I am making a study of what efforts the different state governments are making toward the application of profit- accounting methods. Increasing attention has been focused on this type of program for some years, highlighted in the activity of the two Hoover Commissions resulting in recommendations for improving accounting methods in the Federal Government. Emphasis has been placed in various governmental juris- dictions in varying degrees on performance and program budgeting, cost accounting applications, accrual basis of accounting, and so on, methods theretofore associated almost exclusively with profit-motive accounting as applied to private business. It will be greatly appreciated if you would be so kind as to fill in the attached questionnaire for me and return one copy in the enclosed envelope as soon as possible. An extra copy of the form is enclosed for your own file. A copy of my final tabulation will be furnished you if you would be interested in receiving it. You may indicate your wish on the questionnaire. In the event you are not in a position to complete the questionnaire, please see that it promptly reaches the officials who are. Sincerely yours, John Q. Adamson Comptroller lSL QUESTIONNAIRE REGARDING PROFIT-ACCOUNTING METHODS IN STATE GOVERNMENT (Please complete and return promptly to John Q. Adamson, P.0. Box 1260, Lansing, Michigan) I. Name of state II. The type of budget you use is: iii; 1. Line item - partial? ____ 2. " " - complete? __ 3. Lump sum - partial? .___. 4. " " - complete? ,____ 5. Performance - partial? ____ 6. " - complete? ,— 7. Program - partial? 1.... 8. " - complete? a... 9. Are budget type changes planned or contemplated? 1....J. 10. Explanation relative to above answers: III. The basis of accounting you use is: 1. Cash basis - by choice? r__., 2. " " - required by statute or ruling? ‘F"" 3. ” " - partial or modified? ,p___ 4. Explanation: 5. Accrual basis - full or complete? - 6. " " - partial or modified? - III. (Cont'd) 7. Explanation: 8. In what way have you found your present basis superior to a fairly recent former basis employed? 9. In what way is your present basis inferior to the one you would like to adopt? IV.-.Are you permitted a free use of working capital funds for ] inventories: SEE: l. a. In all agencies where inventories are used or needed? ‘___1 7 b. In only certain agencies specified by statute? .....v c. In only certain agencies limited by administrative 1.... restrictions? ‘____ 2. Are you able to use inventories by means of cost-based .___. budgeting and appropriations? ‘____ 3. Do you provide for inventories out of regulal'appropriations: a. In some cases? b. In all cases? \___q. 4. .Are you making any effort to obtain authority for the establishment of inventories? a. If so, by what means? Va Do you use cost accounting methods? I. 15. 16. On a permanent basis? On a temporary basis? In department of social welfare? In department of health? In highway department? In state hospitals? In the state penal system? In state utility enterprises? In other agencies? (name below.) The cost accounting methods you use are: a. Actual? b. Estimate? c. Standard? d. Other? (Describe) Do you consider your cost accounting of a. 'Wbrthwhile value? b. Doubtful value? c. Definitely no value? Are you undecided as to its value? Yes lllJll 156 V. (Cont'd) 170 18. .Are you contemplating improvements in your cost accounting methods? Explanation: Are you contemplating extending the application of cost accounting methods to other agencies? VI. Do you have independent audits: ‘ For all agencies and departments? For some agencies and departments? Are all audits conducted by state employees? a. In a different agency from the one audited? b. In the same agency as the one audited? Are some audits conducted by state employees? a. In a different agency from the one audited? b. In the same agency as the one audited? Are all audits conducted by an outside firm not CPAs? Are some audits conducted by an outside firm not CPAs? Are all audits conducted by an outside firm of CPAs? Are some audits conducted by an outside firm of CPAs? Are audits the responsibility of, and conducted at the instigation of: a. The legislature? b. The governor? c. The auditor general? d. The state controller? e. Other? (Name) 15 Yes J f VII. If use of direct references are found to be desirable in my final report need these be limited to name of state, or by the use of: l. a. Name of state and official title? b. Name of state, official's title and name? 2. Title and name to be used: VIII. Official to whom further inquiries should be directed: Name: Official title: Mailing address: IX.- Would you like a copy of my final tabulation? X. Please attach, or send separately, any statutes (legislative acts), forms, schedules, orders, memos, directives, instructions, reports, references, manuals, etc., that may help to explain your procedures, what your goals are, what progress you have achieved, and so on. ‘Yesn 158 159 APPENDIX C DIGEST OF RESPONSES 160 ALABAMA Budget. Alabama partially uses a line-item budget but does not indicate what type supplements it. No budget type changes are planned or contemplated. Accounting Bagig, The cash basis of accounting is required by statute or ruling. Inventorieg. These are permitted in all agencies where inventories are used or needed. Use of inventories is enabled by means of cost-based budgeting and appropriations. Inventories are provided for out of regular appropriations in all cases. Cost Accounting. It is used on a permanent basis in the following agencies and state institutions: Social welfare HOspitals Health Penal System Highway Utility Enterprises An estimate method of costing is followed which is con— sidered of worth-while value. No improvements in cost accounting method, nor the extension of costing to other agencies, are now contemplated. Auditing. Independent audits are conducted of all agen— cies by state employees of a different agency from the one audited. Audits are the responsibility of, and are conducted at the instigation of, the Legislature. 161 Acknowledgement is gratefully made to Mr. John Graves, State Comptroller, State Capitol, Montgomery, Alabama, for the above information. 162 ARIZONA Budget. Arizona partially uses a line-item budget but does not indicate what type supplements it. No budget type changes are planned or contemplated. Accounting Basis. The cash basis of accounting is required by statute or ruling subject to the following: "Revenues are reported on a cash basis. Expenditures are reported on a modified accrual basis. The State pays claims for a period of one month after close of fiscal year if material and services have been delivered or rendered prior to June 30th." Inventories. Apparently working capital funds are not used for agency inventories. Inventories as needed are provided for out of regular appropriations. This explana— tion was given: "The State has no central purchasing depart- ment. Each state agency receives regular appropriations." Cost Accounting. Apparently no use of cost accounting is made in any agency or state institution. Auditing. Independent audits are conducted for some agencies. Some audits are made by a firm of certified public accountants. Audits are the responsibility of the Post Auditor who reports to the Legislature. 163 §gpplemental Information. "State of Arizona has no bonded indebtedness. The State's Constitution provides: 'The State may contract debts to supply the casual deficits or failures in revenues, or to meet expenses not otherwise provided for; but the aggregate amount of such debts, direct and contingent, whether contracted by the virtue of one or more laws, or at different periods of time, shall never exceed the sum of $350,000; and the money arising from the creation of such debts shall be applied to the purpose of which it was obtained or repay the debts so contracted, and to no other purpose.'" Acknowledgement is gratefully made to Mrs. Jewel W. Jordan, State Auditor, State House, Phoenix, Arizona, for the above information. 164 CALIFORNIA I Budget. Based on line item estimates but unit costs and program costs are used to evaluate and substantiate such estimates. Line item control is exercised by the Department of Finance. Appropriations are limited only in that funds for salaries are segregated from those for other categories. Accounting Basis. A partial accrual basis of account— ing is used. The accrual basis for expenditures is used for all funds. The accrual basis for receipts is used for almost all funds except the General Fund and special revenue funds. Conclusion: "Full accrual on revenue before 1950 caused problems because it was hard to get the Legislature to keep from wanting to appropriate accrued revenue, thereby causing greater chance of cash shortage." Ingentories. No agency is permitted a free use of working capital funds for inventory purposes. Agencies must purchase stores from their own appropriations. These are bought either from vendors or out of central stores maintained through a revolving fund. Only the Highway Fund and a few other non—revenue funds are permitted to use inventories by means of cost—based budgeting and appropriations. 165 gggthccounting. It is used on a permanent basis in some funds and on a temporary basis in other funds. The Departments of Social welfare and Health base their costs on program. Other agencies and funds using cost accounting include Highway, Correction Industries, miscellaneous agencies, especially working capital funds and utility funds. Cost accounting methods used are actual, estimate, and standard. The cost accounting is considered to be worth-while. Some is done so data can be used for manage- ment decisions. Some is done so costs can be properly reported by programs or fund. Changes contemplated are the possible refinement of the system at San Francisco Harbor to find more accurate (but still practical) method of prorating some costs. Auditing. An internal audit of all agencies is con- ducted by the Finance Audits Division. The State Controller makes a test check audit of invoices before payment. An independent post audit is conducted by the Legislature's Auditor General. Some utility funds, in accordance with the bond indenture, are post-audited by a firm of CPAs. Acknowledgement of the above information is gratefully made to Mr. K. W. Blankenburg, Supervising Administrative Analyst, Organization and Cost Control Division. 166 CALIFORNIA II Budget. California utilizes a combination of four different types of budget: line item, lump sum, perform- ance, and program. No budget type changes are planned or contemplated. Accognting Basig. A partial cash and a partial accrual basis of accounting is used explained as follows: "During the fiscal year the records are maintained on a cash basis. At close of year the records are adjusted to accrue revenues and expenditures." Conclusion: "Modified accrual basis provides for better year to year comparisons than cash basis." lpyentories. werking capital funds for inventories are permitted in only certain agencies specified by statute. Use of inventories is enabled by means of cost—based bud- geting and appropriations. Inventories are provided for out of regular appropriations in all cases. Cost Accounting. It is used on either a permanent basis or a temporary basis in the following agencies and state institutions: Social welfare Hospitals Health Penal System Highway Utility Enterprises 167 Actual, estimate, and standard methods are in use with variations in many agencies. The cost accounting is con- sidered of worth—while value with the recognition that more uniformity is required in the nature of improvement. Auditing. Independent audits are conducted of all agencies. Some are conducted by state employees of a different agency from the one audited, and some audits are conducted by a firm of certified public accountants. Responsibility for the audits is shared by the Legislature, the Governor, the Auditor General, and the State Controller. 168 CONNECTICUT Budget. The type of budget indicated is completely line item gag completely program without explanation. It could be assumed that the budget, therefore, is prepared by programs with all proposed expenditures thereunder by line item. Accounting Basis. The basis of accounting followed is a partial or modified accrual basis. Inventories. A free use of working capital funds for inventories is permitted only in certain agencies specified by statute. Qggt Accounting. The cost accounting method used actual with application limited to the state penal system and the purchasing department. The cost accounting is considered of worth-while value. Auditing. Independent audits are made of all agencies and in every case are conducted by state employees of a different agency from the one audited. These independent audits are the responsibility of the Legislature. l6 9 DELAWARE Budget. The budget is a completely performance type yet partially line item, evidently in a supplementary manner. Accounting Basis. The cash basis of accounting is required by statute or ruling. No evidence of any accruals whatsoever is indicated, either as to expenditures or revenue. Inventories. These are provided for in all cases out of regular appropriations. Cost Accounting. No cost accounting whatsoever is used. Auditing. Some post audits are conducted by state employees of a different agency than the one audited while other audits are conducted by a firm of CPAs. Audits are the responsibility of, and conducted at the instigation of, the Auditor General and the Budget Commission. 170 FLORIDA Budget. The budget is a partial lump—sum type, or perhaps a quasi-lump—sum type, since it is explained that the Legislature appropriates funds in lump sums for salaries, expenses, operating, capital outlay, etc. Accountinngasis. The cash basis of accounting is required by statute or ruling. ”The statutes and appro- priations do not provide for accrual accounting. Some funds are kept on the accrual basis at the departmental level. While we have changed from manual to IBM in the past few years our basic accounting is the same." Inventories. A free use of working capital funds is permitted only in certain agencies specified by statute. In other agencies inventories are provided for out of regular appropriations. Cost Accounting. Cost accounting is mostly limited to that done by the State Auditor in making annual audits, and then only in a few instances. The State Auditor consis— tently recommends the application of cost accounting methods by various agencies. Auditing. Although the State Controller pre—audits accounts, the State Auditor is responsible for and conducts 171 post audits of all agencies. Some audits are conducted by a firm of CPAs. Acknowledgement is made to the General Auditor in the office of the State Comptroller, with appreciation for the above information. 172 HAWAII Budget. A complete program budget is said to be the type used. AccountinggBasis. A partial accrual type basis was put into effect for smaller agencies on July 1, 1959. It was yet too early to evaluate its usefulness. Inventggies. A free use of working capital funds for inventories is permitted by statute in certain agencies. Other agencies with inventories provide for them out of regular appropriations. Cost Accounting. Cost accounting is used only by the Highway Department and that on a permanent basis. The actual method of costing is used. The value of cost accounting is as yet uncertain. Improvements are con- templated in the cost accounting methods as well as their extension to other agencies. Auditing. Independent audits are conducted of some agencies by employees in a different agency from the one audited. These audits are the responsibility, and are conducted at the instigation, of the State Controller. 173 IDAHO Budget. Partially line item, partially lump sum, and partially program type of budget is used. The line item type applies to general government administration. The lump sum type applies to restricted revenue or special purpose funds. The program type applies to special programs or projects. Accounting Basis. The cash basis of accounting is required in central office accounting. An accrual basis is used in some departments combined with a cash basis for budgetary control. The present basis has been used for several years so no comparison with a former basis would be useful. Inventories. A free use of working capital funds for inventories is permitted by statute in the Department of Liquor Control only. The Department of Fish and Game as well as the Highway Department establish material and supplies inventories by means of cost-based budgeting and appropriations. State Institutions provide for inventories out of regular appropriations. gggt Accounting. Cost accounting is used on a per- manent basis by the following departments: Social Welfare, 174 Health, Highway, Fish and Game, State Insurance Fund, and Liquor Control. The last named uses standard costs, all other departments use actual costs. The cost accounting is considered of worth—while value. Improvements contem- plated are in the nature of broader application of elec- tronic (IBM) equipment. Auditing. All post audits are conducted by state employees in a different agency from the one audited. This arrangement is subject to change at any time. Statutes authorize both Governor and State Auditor (Controller) to require audits. 175 ILLINOIS Budget. The budget is described as a partial program and major object type. The Appropriations Book fixes the objects and purposes for which appropriations are made. These are then classified and standardized by item as fol- lows: Personal Services, Contractual Services, Travel, Commodities, Equipment, Permanent Improvements, Land, Contingincies, Reserve. Other line item descriptions and appropriations can be added for specific purposes other than the standard classifications. The "partial program" feature comes about by depart- ments budgeting and obtaining appropriations for certain specific over-all programs. For example, the Department of Agriculture is divided into approximately twelve sec- tions, each with its own program and separate appropriation. From experience this type of budget and corresponding appropriation is considered to be the equal of, if not superior to, any other type studied. It provides ample control and at the same time is not too rigid, allowing a certain amount of flexibility. As far as is known no change is planned or contemplated in the budget document at this time. 176 Accounting Baggg. The basis of accounting used is partial or modified accrual and partial or modified cash in which there has been no recent change. Studies leading to prospective changes have not been made. Inventories. A free use of working capital funds for inventories is permitted only in certain agencies specified by statute. These are maintained by means of cost-based budgeting and appropriations. In some cases inventories are provided for out of regular appropriations. No effort is being made at this time to obtain authority for the establishment of inventories. Cost Accounting. Cost accounting is practised on a temporary basis by use of the actual cost method. The agencies and institutions involved are: Social Welfare, Health, Highway, Hospitals, State Penal System. The application of cost accounting methods is considered to be worth-while. Improvements in cost accounting methods are contemplated to some extent in State Hospitals. Auditing. Some procedural audits are conducted by state employees in the same agency as the one audited. Post audits of all agencies are conducted by an outside firm of CPAs. Post audits are the responsibility of, and are 177 conducted at the instigation of, the Legislature and the State Auditor General. Acknowledgement for the above information is gratefully made to the Superintendent of Accounting, Springfield, Illinois. 178 KENTUCKY Budget. The type of budget is partially lump sum, partially performance, and partially program. Accounting Basis. A partial or modified cash basis of accounting is used. Inventories. In all cases the provision for inventories is made out of the regular appropriations. Cost Accounting. The actual cost method of accounting is used in the Highway Department. The value of the cost accounting is undecided. Improvements are contemplated in cost accounting methods but no comment was given as to the nature of such contemplated improvements. Auditing. Independent audits are conducted for some agencies. Some of these are conducted by state employees from a different agency from the one audited. Other audits are conducted by a firm of certified public accountants. The post audits are the responsibility of the Auditor of Public Accounts and are conducted at his instigation. 179 LOUISIANA Budget. The type of budget is designated as partially lump sum with the following explanation. The appropriation is lump sum, but the appropriation bill provides that amounts specified in the Executive Budget for the various expenditure categories will be held at those amounts unless changes are approved by the Commissioner of Administration. Revolving Fund appropriations are lump sum. Accounting Basis. A partial or modified accrual basis of accounting is used. Inventories. A free use of working capital funds for inventories is allowed in only certain agencies limited by administrative restrictions. It is explained that revolv- ing funds are maintained by colleges, the Penitentiary, State Parks, Agriculture, Administrative Services, and by several smaller agencies. The Division of Administration can establish inventories out of regular appropriations. Cost Accounting. Actual cost accounting methods are used by the Highway Department and to a limited extent by state hospitals and the Forestry Commission. The value of the cost accounting used is undecided, but no comprehensive evaluation has been made. Although improvements and the 180 extension of cost accounting are desired such forward steps are in the future. Auditing. Independent audits are conducted of all agencies. These are performed by state employees of a different agency from the one audited. Such post audits are the responsibility of, and are conducted at the instigation of the Governor. Acknowledgement for the above information is grate- fully made to the Budget Officer, Capitol Annex, Baton Rouge, Louisiana. 181 MARYLAND Budget. The type of budget is designated as partially performance and completely program. As to the latter it is explained that the budget is controlled (centrally) at the program level while the individual agencies maintain accounting control on the object level. Accounting Basig. A partial or modified accrual basis of accounting is maintained. Inventories. A free use of working capital funds for inventory purposes is permitted in certain agencies speci— fied by statute. In certain other agencies these are limited by administrative restrictions. In some cases provision for inventories is made out of regular appropriations. Cost Accounting. The estimate cost accounting method is used in the Highway Department, in the state penal system, in the University Hospital for Blue Cross, and to some extent in the Department of Health. The cost account- ing when used is considered to be of worth—while value. Improvements are contemplated in the cost accounting methods but in what manner was not specified. 182 Auditing. Independent audits are conducted for some agencies. Those conducted by state employees are performed as a post-audit by the State Auditor. Some audits are conducted by a firm of certified public accountants. Audits are generally the responsibility of, and are con- ducted at the instigation of, the State Comptroller. There are certain exceptions in which audits are required by law. Acknowledgement for the above information is gratefully made to the Hon. Louis L. Goldstein, State Comptroller, Annapolis, Maryland. 183 MASSACHUSETTS Budget. A partial line-item budget is in general the type used. Some lump-sum items provide occasional exceptions. The Budget Bureau is said to be contemplating a change in type of budget but nothing definite had been announced at the time of this release. Accounting Basis. A partial or modified accrual basis of accounting is followed. Income is recorded and reported on a cash basis; expenditures are recorded and reported on an accrual basis. Previously a complete cash basis was used when liabilities were estimated at the close of a fiscal year to determine the amount of reserve needed. This system proved unsatis- factory. wa all encumbrances are recorded when incurred and liquidated as paid. Relative to any contemplated changes the following com- ment was furnished: The Comptroller installs the uniform accounting system of the Commonwealth of Massachusetts. Since accounting is a tool of budgeting, changes affecting budgeting must first be suggested by the Budget Bureau. Inventories. A free use of working capital funds for inventory purposes is permitted in certain agencies specified 184 by statute. In some cases provision for inventories is made out of regular appropriations. Cost Accounting. The actual cost accounting method is used in the Highway Department, in State Industries of the penal system, and in the Central Supply Room which buys and sells office supplies to the various state agencies. The cost accounting followed is considered to be of doubtful value. Comment as to improvements contemplated: The Department of Public WOrks has retained Stone and webster as consul- tants to make an administrative study. This subject, no doubt, will be covered. Auditing. Independent audits are conducted for all agencies by state employees in a different agency from the one audited. These post audits are the responsibility of, and conducted at the instigation of, the Auditor General. The Comptroller is responsible for the pre—audit function. Acknowledgement for the above information is gratefully made to the Comptroller's Bureau, 109 State House, Boston, Massachusetts. 185 MICHIGAN Budget. The type of budget used is partially line-item and partially lump-sum. The following explanation was furnished: Legislative appropriations vary widely: from a single lump-sum for the Mental Health Commission and some twelve institutions, to line—items for the smaller regulatory boards. Accountinngasis. A partial or modified accrual basis of accounting is followed. Expenditures are on a full accrual basis. Revenue accrual is limited to receivables from Federal and other governmental jurisdictions. Since the present system has been in effect over twenty years there is really no basis of worth—while comparison with former methods. Inventories. A free use of working capital funds for inventory purposes is permitted in certain agencies specified by statute. The use of inventories by means of cost-based budgeting and appropriations is possible. In some cases inventories are provided for out of regular appropriations. Cost Accounting. Actual cost accounting methods are used on a permanent basis in State hospitals, in the state penal system, in the Liquor Control Commission and in State 186 Industries. The cost accounting practiced is considered to be of worth-while value. The particular improvements contemplated at this time are the attainment of acceptable "units of work" for many activities. No extension of the application of cost accounting methods to other agencies is contemplated immediately. Auditing. Independent audits are conducted for all agencies. Some are conducted by state employees in a different agency from the one audited, while some audits are conducted by a firm of certified public accountants. These post audits are the responsibility of, and conducted at the instigation of, the Auditor General. Acknowledgement for the above information is grate— fully made to Mr. Frank M. McLaury, Director, Accounting Division, Department of Administration, Lewis Cass Building, Lansing 13, Michigan. 187 MINNESOTA Budget. The type of budget in use is completely line— item. Budget type changes are contemplated but the nature of the change was not stated. Accounting Basis. A partial or modified cash basis of accounting is now in use. The allotment and encumbrance system was adopted in 1939, so comparison with the former system would be meaningless. Inventories. Inventories are provided for out of regular appropriations in all cases. Cost Accounting. Actual cost accounting methods are practiced in the Department of Social Welfare, in the High— way Department, in the state hospitals, in the state penal system. The cost accounting practiced is considered to be of worth-while value. Auditing. Independent audits are conducted of all agen- cies by state employees in a different agency fran the one audited. These post audits are the responsibility of, and conducted at the instigation of, the Public Examiner. Acknowledgement for the above information is gratefully Inade to the Public Examiner, State of Minnesota, 223 State Office Building, St. Paul 1, Minnesota. 188 MISSOURI Budget. The type of budget in use is partially line- item and partially program. Accounting Basis. The basis of accounting is completely accrual. Inventorieg. In all cases inventories are provided for out of regular appropriations. Qggt Accounting. Cost accounting is practiced only in the Highway Department where the actual method is used. No evaluation was given as to whether or not it was considered to be of worth-while value. Auditing. Independent audits are conducted of all agencies by state employees in a different agency from the one audited. These post audits are the responsibility of, and are conducted at the instigation of, the Auditor General. 189 MONTANA Budget. Depending upon the manner or purpose for which the appropriation is granted by the Legislature, the type of budget is partially line item, partially lump sum, par— tially performance, partially program. Accounting Bagig. The cash basis of accounting is required by statute or ruling. In explanation it is stated that funds and appropriations must have sufficient balances before claims can be approved and warrants written in pay- ment. This is the basis that has been employed during the past 25 years. There are no plans for adopting any other basis at this time. Inventories. A free use of working capital funds for inventories is allowed only by the Liquor Control Board which operates as a state monopoly. No effort is being made to obtain authority for the establishment of other inventories. QggpgAccounting. Actual cost accounting methods are used on a permanent basis by the Department of Health, the Highway Department, the state hospitals, the state penal system and by all other agencies except the Liquor Control Board. The cost accounting employed is considered to be 190 of worth-while value and no improvements and no application to other agencies are contemplated. Auditing. Independent audits are conducted for some agencies. Some of these audits are performed by state employees in a different agency from the one audited while others are conducted by a firm of certified public account~ ants. The audits are the responsibility of, and are con— ducted at the instigation of, the State Controller and the State Examiner. Acknowledgement for the above information is gratefully made to Mr. w. F. Koch, State Controller, Capitol Building, Helena, Montana. 191 NEVADA Budget. The budget used is a complete program type. Insofar as known there are no planned changes. Budget appropriations, it is explained, are by categories of salary, equipment, and operational with a complete quar- terly work program allotment in each category. The Budget Director and the State Board of Examiners may approve category transfers 15 days prior to each quarter. Accounting Basgg. A partial or modified cash basis is in use. The best definition, it is stated, is a modified cash basis partially defined by law and developed as a matter of precedent. The opinion is expressed that an accrual basis would be more realistic for the situation. Inventories. A free use of working capital funds for inventories is permitted in only certain agencies specified by statute. In all cases inventories are provided for out of regular appropriations. Cost Accounting. The State Highway Department is the only department on a strict cost accounting basis. There the actual cost accounting method is used. The Department of Social welfare and the Department of Health use some semblance of cost accounting, using an estimate method. 192 The cost accounting system of the Highway Department is considered to be of worth-While value. Any improvement, it is stated, would be in the extension of cost account- ing to other agencies. Some thought has been given to this, however, other improvements are of more importance than cost accounting. Auditing. Independent audits are conducted for all agencies and departments but it is not stated whether state workers are employed or outside auditors. These audits are the responsibility of, and are conducted at the instigation of, the Legislative Auditor. Acknowledgement for the above information is grate- fully made to the Nevada State Controller, Carson City, Nevada. 193 NEW HAMPSHIRE Budget. A complete line item budget is the type used. A change to annual appropriations has been proposed. Accounting Basis. A partial cash and partial accrual basis of accounting is used. The explanation states that it is a basic cash system with limited accruals. There have been no recent changes. Inventories. A free use of working capital funds is permitted in only certain agencies specified by statute. Inventories are provided for out of regular appropriations in some cases. Cost Accounting. The actual cost accounting method is used in State hospitals and at institutional farms. The value of the cost accounting employed is undecided. Auditing. Independent audits are conducted for all agencies and departments. Some of these are conducted by state employees in a different agency from the one audited while other audits are conducted by a firm of certified public accountants. The audits are the responsibility of, and are conducted at the instigation of, the Legislature. Acknowledgement for the above information is gratefully made to the State of New Hampshire--Director, Division of Accounts, State House, Concord, New Hampshire. 194 NEW JERSEY Budget. The type of budget used is described as a com- plate line item, fairly complete as to performance, and with a few programs segregated. In other words, it is in a development stage toward a complete program performance budget which is the type of budget contemplated for the future. Accountinngasis. A partial or modified accrual basis of accounting is used. An accrual is made for receivables and encumbrances, that is, both as to revenue and expendi- tures. It is found that the present basis gives more accurate and realistic statements of finance condition. Complete accrual is lacking since there are no adjustments for inventory or depreciation. Inventories. A free use of working capital funds for inventories is permitted in only certain agencies specified by statute. Inventories are provided for out of regular appropriations only in some cases. Cost Accounting. The actual cost accounting method is used and this is only in the Highway Department. The cost accounting application is considered to be of worth- while value. No improvements in cost accounting methods 195 are contemplated. The extension of cost accounting methods to other agencies is not contemplated. Auditing. Independent audits are conducted for all agencies and departments. These are conducted by state employees in a different agency from the one audited. Audits (post) are the responsibility of, and are conducted at the instigation of, the Legislature. 196 NEW MEXICO Budget. The type of budget used is described as line item complete as well as partially performance and partially program. Accounting Basig. The cash basis of accounting is used by choice in all areas except educational institutions. Educational institutions use a partial or modified accrual basis. Inventories. A free use of working capital funds for inventories is limited by administrative restrictions to only certain agencies. The use of inventories by means of cost—based budgeting and appropriations is possible. In most cases inventories are provided for out of regular appropriations. Cost Accounting. In only the Highway Department is there a cost accounting application, with the estimate method of costing used. This cost accounting application is considered to be of worth-while value. Auditing. Independent audits are conducted for all agencies and departments. Some of these audits are con- ducted by state employees in a different agency from the one audited. Some audits are conducted by an outside firm 197 of public accountants not certified. Some audits are conducted by a firm of certified public accountants. Audits (post) are the responsibility of, and are con- ducted at the instigation of, the State Auditor. Acknowledgement for the above information is grate- fully made to Mr. W. Earl Davidson, Acting Chief, Bud- get Division, Department of Finance and Administration, State of New Mexico, Santa Fe, New Mexico. 198 NORTH CAROLI NA Budget. The type of budget used is described as par— tially line item and completely performance, with no changes planned or contemplated. Accounting Basis. The cash basis of accounting is used, required by statute or ruling. Inventorieg. A free use of working capital funds for inventories is permitted in only certain agencies specified by statute. Inventories are provided for out of regular appropriations in all cases. Cost Accounting. Cost accounting methods are used in the Highway Department, in the state penal system, and in restricted areas in some agencies. The actual cost account— ing method is the one used and it is considered to be of worth-while value. Auditing. Independent audits are conducted for all agencies and departments by state employees in a different agency from the one audited. Audits (post) are the respon- sibility of, and are conducted at the instigation of, the State Auditor. 199 NORTH DAKOTA Budget. The type of budget used is described as par- tially line item, partially lump sum, partially performance, and partially program. It is contemplated that the new Department of Accounts and Purchases created effective July 1, 1961, will review the budget procedures for pos- sible improvement. Accounting Basis. A partial or modified cash basis of accounting is used. Explanation: To some extent moneys are sometimes considered encumbered when allocated to a definite program. There is no true accrual accounting system. This system has been in effect for some time, but changes are contemplated under the new Department of Accounts and Purchases after July 1, 1961. Under the present basis it is difficult to obtain timely information that is truly accurate. Inventories. A free use of working capital funds for inventories is permitted in only certain agencies specified by statute. Inventories are provided for out of regular appropriations in some cases. An effort to obtain author- ity for the establishment of inventories is represented by the plan for centralized purchasing and the maintenance of central inventories of common supply items. ZOO gggtiAccounting. Cost accounting methods of the actual type are used in the Highway Department and in state utility enterprises. The cost accounting application is considered valuable in areas used and the opinion was expressed that this should be expanded to other limited areas. Some addi- tional agencies use it for temporary spot checks. The contemplated improvements in the cost accounting methods are those as may be prescribed by the State Auditor and the new Department of Accounts and Purchases. Auditing. Independent audits are conducted for all agencies and departments by state employees in a different agency from the one audited. Audits (post) are the respon— sibility of, and are conducted at the instigation of, the Legislature, the Governor, the State Auditor, the State Examiner, and the Board of Auditors. Acknowledgement for the above information is gratefully made to Mr. C. Emerson Murry, Director, Legislature Research Committee, Capitol Building, Bismarck, North Dakota. 201 OHIO Budget. The type of budget used is described as par- tially line item. Explanation: Budget Presentation and Appropriations Bill all in form of modified line items (i.e.--major account classifications). An attempt to get lump sum appropriation was unsuccessful. Some effort has been made in this budget to show expenditures by activity (program). In the next biennium considerable effort will be made to derive and present an accurate and meaningful program budget. Accounting Basis. A partial or modified cash basis of accounting is used. Explanation: Revenues are accounted for as received. Expenditures for certain items under $50 are also on cash basis while expenditures over $50 are on an accrual basis. Certain accounts like travel are encum— bered quarterly. Inventories. A free use of working capital funds for inventories is permitted in only certain agencies specified by statute. Inventories used in operation, such as supplies and equipment, are provided for out of regular appropria- tions in some cases. The liquor inventory, for state liquor merchandising operation, is not appropriated in dollar amount. 202 Cost Accounting. Cost accounting is used only in the penal industries with the method used not stated. No opinion is given as to whether or not such cost accounting is considered to be of worth-while value. Auditing. Independent audits are conducted for all agencies and departments by state employees in a different agency from the one audited. Audits (post) are the respon— sibility of, and are conducted at the instigation of, the elected State Auditor. 2 O 3 OKLAHOMA Budget. The type of budget used is described as par- tially line item, partially lump sum, partially perform- ance, and partially program. There was no indication that budget type changes are planned or contemplated. Accountgng Basig. The accounting basis used is the cash basis, required by statute or ruling. Inventories. A free use of working capital funds is permitted for inventories in all agencies where inventories are used or needed. The use of inventories by means of cost-based budgeting and appropriations is possible. In all cases inventories are provided for out of regular appropriations. Cost Accounting. Actual cost accounting methods are used in the Department of Social Welfare and in state hospitals. The cost accounting practiced is considered to be cf worth-while value. Auditing. Independent audits are conducted for all agencies and departments by state employees in a different agency from the one audited. Audits (post) are the respon- sibility of, and are conducted at the instigation of, the State Examiner and Inspector. 204 OREGON Budget. The type of budget used is described as par- tially lump sum, partially program. There are plans for lump sum by program budgets. Accounting Basis. The accounting basis used is stated to be a partially or modified cash basis and a partially or modified accrual basis. Explanation: Accounting systems are partially cash and partially accrual methods. The present basis is superior to a fairly recent former basis in that it incorporates encumbrance accounting. The goal is centralized encumbering for all state agencies. Inventories. A free use of working capital funds for inventories is permitted in only certain agencies limited by administrative restrictions. An effort is being made to obtain authority from the Legislature for the establish- ment of inventories. Cost Accounting. Actual cost accounting methods are used on a permanent basis in the Highway Department, in state hospitals, and in the state penal system. The cost accounting practiced is considered to be of worth—while value. Expending the application of cost accounting methods to other agencies is contemplated. 205 Auditing. Independent audits are conducted for all agencies and departments. Some of these are conducted by state employees in a different agency from the one audited while others are conducted by a firm of certified public accountants. Audits (post) are the responsibility of, and are conducted at the instigation of, the Secretary of State and the State Auditor. 206 PENNSYLVANIA Budget. The type of budget used is described as com- pletely program. The continued refinement of programs and the introduction of work unit measurements for performance- type budgets are planned. Accounting Bagig. The accounting basis used is stated to be a partial or modified accrual basis. Explanation: Modified accrual type of accounting, i.e., revenue and receipts are accounted for on a cash basis while expendi- tures are accounted for on an accrual basis, including encumbrances. The modified accrual system was made offi- cial with the revised accounting system established in August of 1956. This newer basis makes it possible to determine with greater accuracy the current financial condition; specifically at the end of the year the amount of the unappropriated surplus or deficit is quickly ascer- tained. In the line of further improvements budgetary concepts need to be extended to minor special funds, while cost concepts need to be utilized more widely by General Fund agencies and institutions. Inventories. A free use of working capital funds for inventories is permitted in only certain agencies specified 207 by statute. The use of inventories by means of cost- based budgeting and appropriations is possible. In some cases inventories are provided for out of regular appro- priations. As for effort to obtain authority for the establishment of inventories, legislative authority is needed to extend working capital concepts to revolving type activities. Cost Accounting. Cost accounting methods are used on a permanent basis in the Highway Department, to some extent in state hospitals, to some extent in the state penal system, in State Liquor Stores, and in Prison Manufacturing. The method employed varies from system to system. For example, Liquor Stores value inventory at current market value. The cost accounting employed is considered to be of worth-while value. Expansion and improvement is planned, particularly in State Teachers Colleges, in Correctional Industries, in mental and tuberculosis hospitals, and in some other state institutions. Auditing. Independent audits are conducted for all agencies and departments by state employees in a different agency from the one audited. Audits (post) are generally the responsibility of, and are conducted at the instigation of the elected Auditor General who makes regular audits of 208 all state agencies, state-owned institutions, and state- aided institutions. The Governor audits the Auditor General and may audit any agency or institution at his discretion. Acknowledgement for the above information is gratefully made to Mr. Elliott Falk, Director of Accounts, Governor's Office of Administration, State of Pennsylvania, Harrisburg, Pennsylvania. 209 RHODE ISLAND Budget. The type of budget used is described as com- pletely lump sum. Accounting Basis. The accounting basis used is stated to be a partial or modified accrual basis, with the explana- tion that revenue is on a cash basis while expenditures are on an accrual basis. This basis is considered to be superior to another type formerly used because it is conservative. Inventories. A free use of working capital funds for inventories is permitted in all agencies where inventories are used or needed. In some cases, and to a limited extent, inventories are provided for out of regular appropriations. Cost Accounting. Cost accounting methods of the actual type are used in the Department of Social welfare, in the Department of Health, in the Highway Department, in state hospitals, and in the Auto Pool. The cost accounting employed is considered to be of worth—while value. Auditing. Independent audits are conducted in all agencies and departments. Some cash audits are conducted by state employees in a different agency from the one audited. The general state audit is conducted by a firm 210 of certified public accountants. Audits (post) are the responsibility of, and are conducted at the instigation of, the Legislature. Acknowledgement for the above information is grate- fully made to the Director of Administration, State House, Providence, Rhode Island. 211 SOUTH DAKOTA Budget. The type of budget used is described as par- tially line item and partially program. Accounting Basis. The accounting basis used is mostly the cash basis as a matter of choice. In some instances the accrual basis is used when required to determine the cost of operation. There has been no change in recent years. Inventories. A free use of working capital funds for inventories is permitted in all agencies where inventories are used or needed. In all cases inventories are provided for out of regular appropriations. Cost Accounting. Cost accounting methods of the actual type are used in the Highway Department for highway work only. They are also used in state utility enterprises and in the State Cement Plant. Partial applications are used in state hospitals and in the state penal system. The cost accounting as applied is considered to be of worth-while value. Auditing. Independent audits are conducted in all agencies and departments by a special agency authorized by statute, known as the Department of Audits. Audits (post) 212 are the responsibility of, and are conducted at the insti- gation of, the Department of Audits. Acknowledgement for the above information is grate- fully made to Mr. John C. Penne, Comptroller, Capitol Building, Pierre, South Dakota. 213 TENNESSEE Budget. The type of budget used is described as com- pletely lump sum. Explanation: Appropriations (lump sum) are made by divisions within departments. AccountingiBngIg. The accounting basis used is the cash basis by choice. Explanation: Revenues and expen— ditures are on a cash basis; obligations are set out for statement purposes. Inventories. No comment. Cost Accounting. Not used. Auditing. Independent audits are conducted in all agencies and departments by state employees in a different agency from the one audited. Audits (post) are the respon— sibility of, and are conducted at the instigation of, the State Controller. 214 TEXAS Budget. The type of budget used is described as par- tially line item, partially lump sum, and partially program. Accounting Basis. The accounting basis used is the cash basis which is required by statute or ruling. Explanation: The various state agencies may encumber, but in the Comp— troller's Office all expenditures are recorded on an actual disbursement basis. This same basis has been used over a long period of time. This present basis, however, does not provide a record of outstanding encumbrances against appro— priations in the Comptroller's Office making it difficult to estimate outstanding obligations when preparing estimates. Inventories. A free use of working capital funds is not permitted for inventory purposes. In all cases where inven- tories are necessary and used they must be provided for out of regular appropriations. Some improvement has been obtained through the establishment of an Inventory Memo Section. Cost Accounting. No cost accounting is maintained in the Comptroller's Office. (It is possible that cost account- ing methods are used in some of the agencies and institutions.) 215 Auditing. Independent audits are conducted in all agencies and departments by state employees in a different agency from the one audited. Internal audits are conducted by state employees in the same agency as the one audited. Audits (post) are the responsibility of, and are conducted at the instigation of, the Auditor General. Special Comment. The number of statutes enacted governing the accounting procedures are so voluminous that no codification of these statutes has been made. Use is made of Vernon Civil Statutes consisting of 24 volumes. Some effort is being made to prepare an Office and Procedure Manual based on the many laws in effect at this time. 216 UTAH Budget. The type of budget used is described as par— tially lump sum, partially program. Accounting BasIg. The accounting basis used as a par- tial or modified cash basis. Explanation: Purchase orders and contracts are encumbered when approved. Inventories. A free use of working capital funds is permitted where inventories are used or needed in only cer- tain agencies limited by administrative restrictions. In most cases inventories must be provided for out of regular appropriations. Cost Accounting. Cost accounting methods of the actual type are used in the Highway Department, in the Tax Com- mission on a quarterly basis, and in the Fish and Game Department on a quarterly basis. The cost accounting as applied is considered to be of worth-While value. Auditing. Independent audits are conducted of all agencies and departments by state employees in a different agency from the one audited. Audits (post) are the respon~ sibility of, and are conducted at the instigation of, the Auditor General. 217 VERMONT Budget. The type of budget used is described as com— pletely line item. Accounting Basis. The cash basis of accounting is required by statute or ruling, but encumbrances are applied during the last three months of the fiscal year for the control value. Inventories. In all cases inventories are provided for out of regular appropriations. Revolving funds have been established for the operation of: the highway garage, institutional industries, the Vermont Life Magazine, the Liquor Control Board, principally. Cost Accounting. Cost accounting methods are used on a permanent basis in all state institutions and in all teachers' colleges. The cost accounting as applied is considered to be of worth—while value. Auditing. Independent audits are conducted of the Treasurer, the Auditor of Accounts, and the Tax Department by a competent accountant selected by a legislative com— mittee known as the Emergency Board. The Auditor of Accounts makes comprehensive audits of all departments and installs accounting methods to be used in all departments. 218 Acknowledgement for the above information is grate- fully made to Mr. David V. Anderson, Auditor of Accounts, State of Vermont, Montpelier, Vermont. 219 WASHINGTON Budget. The type of budget used is described as par- tially performance and completely program. Explanation: Performance data in the form of unit costs are available only for selected agencies and programs. Accounting BagIg. The accounting basis is partially cash and partially accrual. Explanation: Local Trust and Agency Funds are on a cash basis. Business Enterprise and werking Capital Funds are on full accrual basis, including both expenditures and revenue. All other funds accrue expendi— tures but treat revenue on a cash basis. The superiority of the present basis of accounting as compared to the basis formerly used is expressed as follows: The accrual basis for expenditures provides up-to-date allotment balances and an accurate monthly and fiscal period cost for comparison with work performed. Program costs facilitate analysis of agency operations. Inventorieg. A free use of working capital funds for inventories is permitted in only certain agencies specified by statute. In some cases inventories are provided for out of regular appropriations. As to what effort is being exerted to obtain authority for the establishment of inventories, it was stated that 220 legislative authority to establish WOrking Capital Funds without legislative appropriation may be requested at the next session. Cost Accounting. Cost accounting methods on a permanent basis and of the actual type are used in the Department of Social welfare, in the Highway Department, and in state utility enterprises. The cost accounting as applied is considered to be of worth-while value. Auditing. Independent audits are conducted for all agencies and departments by state employees in a different agency from the one audited. Audits (post) are the respon- sibility of, and are conducted at the instigation of, the Auditor General. Acknowledgement for the above information is gratefully made to Mr. Warren A. Bishop, Budget Director, Central Budget Agency, 100 Insurance Building, Olympia, Washington. 221 WISCONSIN Budget. The type of budget used is described as par- tially all types--1ine item, lump sum, performance, and program. As to budget type changes planned or contemplated the statement was made that more program and performance budgeting is contemplated by Wisconsin's new Department of Administration. Accounting Basis. The basis of accounting used is described as a partial or modified accrual basis. Explan- ation: Wisconsin accrues all expenditures to August 15 of the succeeding fiscal year. Revolving revenues are similarly accrued. General-purpose revenues are on a cash- deposit basis, not accrued. Formerly the cut-off date on accruals was August 31. Advancing the date to August 15 permits earlier closings, more timely annual fiscal reports and biennial budgets. For these reasons the August 15 closing has proved prefer- able to the later closing. Inventories. A free use of working capital funds for inventories is permitted in only certain agencies specified by statute. In all cases inventories are provided for out of regular appropriations. 222 Cost Accounting. Cost accounting methods are applied on an actual basis and on an estimate basis. They are used in the Department of Social welfare, in the Department of Health in hospital projects, in the Highway Department, in state utility enterprises, in the Conservation Department, in the Bureau of Purchases, in the Bureau of Engineering, and in the Aeronautics Commission. The value of cost accounting as applied is undecided. Improvements contemplated in the cost accounting are in the nature of obtaining improvements in program and per— formance data. Auditing. Independent audits are conducted for all agencies and departments by state employees in a different agency from the one audited. Some audits are conducted by state employees in the same agency as the one audited. It is likely that these latter are preaudits of an internal nature. Audits (post) are the responsibility of, and are conducted at the instigation of, the Legislature and the State Auditor, as well as local authorities. Undoubtedly the latter pertains to the audits of local jurisdictions. 223 BIBLIOGRAPHY PUBLIC DOCUMENTS Anderson, Robert B., Secretary of the Treasury. 10th Annual Progress Report Under the Joint Program To Imppove Accounting in the Federal Government, 1958. Andrews, T. Coleman. Fiscal, Budgeting, and Accounting System§_of Federal Government, a report with recom- mendations, prepared for the Commission on Organization of the Executive Branch of the Government. Washington: U.S. Government Printing Office, 1948. Buck, A. E. FiscalL Budgeting, and Accounting Systems of Federal Government, a report with recommendations, pre- pared for the Commission on Organization of the Executive Branch of the Government. Washington: U.S. Government Printing Office, 1948. Campbell, Joseph, Comptroller General of the U.S. 10th Annual Progress Report Under the Joint Program To Improve Accounting in the Federal Government, 1958. Commission on Organization of the Executive Branch of the Government. 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Fiscal, Budgeting, and Accounting Systems of Federal Government, a report with recommendations, prepared for The Commission on Organization of the Executive Branch of the Government. Washington: U.S. Government Printing Office, 1948. Stans, Maurice H., Director, Bureau of the Budget. 10th Annual Progre§§ Repgrt Under the Joint Program To Im- pgove Accounting in the Federal Government, 1958. U.S. Congress. "Expenditure Analyses by Comptroller General," Legislative Reorganization Act of 1946, Chapter 753 (Sec. 206, Public Law 601), August 2, 1946. ARTICLES AND PERI ODICALS Andrews, T. Coleman. "Advances in Governmental Accounting,” The Accounting Review, XXII (January, 1947), pp. 23-27. Anthony, Robert N. "The Trouble with Profit Maximization," Harvard Business Review, XXXVIII, No. 6 (November— December, 1960), pp. 126—34. Bartelt, E. F. "The Role of Accountants in the Adminis- tration of the Federal Government," The Accounting Review, XVII, No. 2 (April, 1942), pp. 84-88. 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