, . ~»\\ ‘. ‘I‘I-IIEEIS'”L ' ," x o ..> ‘ ‘ [I I. ~ I ‘a I. ‘ I. \ L I o n V ' t I . I v i 1 l I . | ‘1. i I a ‘4 I I I l I l I l . v \ I .. ‘ \ « I I ' II "A :. a r, n ACC3Hnt¢Hb Stpnunrds .nfi 'l' lChi“? §I__‘ 2" ‘ " 1" fill. Iiplt'r L‘. .1989)“: 1 r ‘ --s benfi ".‘I (‘J 1-.) "a <\ c f- ”J [(11 A“ .'. O 1" degree in Tcnvomic D ‘0. 4.. C‘ Q fvlfilreht ACCOUNTING AND STANDARD PRACTICES IN THE SELECTED MICHIGAN COUNTIES ACCOUNTING AND STANDARD PRACTICES IN TIE SELECTED MICHIGAN COUNTIES by Walter Joseph Cesarz A THESIS Submitted to the Graduate School of Michigan State College of Agriculture and Applied Science in partial fulfilment of the requirements for the degree of MASTER OF ARTS Department of Economics 1942 '«THESIS ACKNOWLEDGMENT The writer is grateful to Mr. E. A. Gee for his helpful suggestions and criticisms in directing the preparationLof this thesis. 1412500 CHAPTER I. II. III. TABLE OF CONTENTS INTRODUCTION. . . . . . . . . . . . . . . . . A. History of State Control and Support of County Accounting and Budgeting Procedure. . . . . . . . . . . . . . . Present Status of State Supervision. . Nature and Activities of the Municipal Finance Officers' Association. . . . . Standards Established by the Municipal Finance Officers' Association. . . . . Counties Studied . . . . . . . . . . . éethods of Comparison and Analysis Used in this Study . . . . . . . . . . FINANCIAL: ORGANIZATION. . O O O O O O O O O O A. B. C. D. Treasury Duties. . . . . . . . . . . . Accounting Duties. . . . . . . . . . . Ideal Financial Organization . . . . . Conclusions and Recommendations. . . . BUDGETING O O O O O O O O O O O O O O O O O O A. B. C. D Preparation of Budget. . . . . . . . . Adoption of Budget . . . . . . . . . . Budgetary Control. . . . . . . . . . . Conclusions and Recommendations. . . . iv. PAGE 12 15 2O 25 26 28 46 49 52 CHAPTER IV. ACCOUNTING SYSTEM. . . . . . . . . . A. Records . . . . . . . . . . . . B. Accounts. . . . . . . . . . . . C. Summary and Recommendations . . v. ACCOUNTING SYSTEM (Continued). . . . . A. Funds . . . . . . . . . . . . . B. Accounting Procedure. . . . . . C. Conclusions and Recommendations VI. FINANCIAL REPORTS. . . . . . . . . . . A. Monthly Financial Report. . . . B. Annual Financial Report . . . . Financial Section . . . . . . Statistical Section . . . . . C. Conclusions and Recommendations VII. POST-AUDITING. . . . . . . . . . . . . A. General . . . . . . . . . . . . B. Conclusions and Recommendations VIII. CONCLUSIONS AND RECOMMENDATIONS. . . . BIBLIOGMPHY O O O O O O O C O 0 vi. PAGE 55 60 65 69 72 72 82 98 101 105 117 117 134 137 140 140 152 155 162 CHAPTER I INTRODUCTION The administrative 'headlessness” of county government can be well illustrated by the accounting and financial practices in use. Very few county accounting systems have been moder- nized or “streamlined" to meet the considerable changes in financial activities that have taken place, especially within the last decade. Most county officials believe they have adequate accounting systems. On the other hand, officials of some counties have thought otherwise and have taken the initiative in the improvement of their accounting policies without the aid of the state and with a consequent raising of the standards employed. Incidentally, one of the primary purposes of this study will be to study the influence of state supervision upon county accounting practices and to suggest further improvements in such supervision. Hewever, no matter how good state supervision may be, it is the counties which must undertake a self-imposed task of coordination and improvement of accounting activities and procedures, for as long as they remain the “dark continent” of American politics, adequate services cannot be expected of them. A. History of State Control and Sgppor; 9f County Accounting and Budgetggy Procedgrg. The initial provision for the state control of the Michigan county accounting systems 1 l/ is found in the state constitution, which states that the legislature shall provide by law for the keeping, superb vising, and auditing of public accounts in the counties by a competent state authority. It further provides that accurate and uniform records of all receipts, disburse- ments, and other financial records of all county officials shall be maintained. Finally, all these public records and audits are to be Open to public inspection. In 1911 an Act was passed which provided for county uniform accounting under the authority of the Auditor GeneralQE/ It specified, however, that these records were to be utilized only in those counties that desired state supervision of their accounting, auditing, and record- keeping activities. Since this statute did not require cOOperation on the part of the counties, as a result, not a single county in Michigan came under its provision. Various difficulties arose between the state and the counties on the care of county patients in the state- institutions. There was no method of ascertaining how much a county paid the state nor from what fund the money was drawn. Haphazard systems of accounting existed. In most instances, the payments were made as long as there was any money in the county's till, regardless of the fund to which the money belonged. The reconciliation of l Michigan State Constitution - 1908, Article X, Section 18. 2 Act 185, P. A. 1911; C. L. 1915, Sections 265-275. the County Treasurer's books with his balances in deposita- ries was an exception rather than a rule. These diffi- culties led to the enactment of mandatory legislation in 1919 for all counties requiring that they come under the standardized and uniform system of fiscal procedure, accounting, and reportingié/ At present the Auditor General is the proper authority for installing any system that he sees fit, as long as it is within the limits of the constitution. Before this Act was passed, the Auditor General, Oramel B. Fuller, appointed a public accountant, Fred Griswold, to go to various counties and study their records and practices for the purpose of adopting some uniform system for all counties. On July 1, 1919, this Act, under the supervision of Mr. Griswold, was first put into Operation in Ingham county. Within a year, this system was installed in all the counties of the state with the exception of Wayne county. In the case of wayne county, the Auditor General considered an adequate record— keeping and reporting system was already functioning. Three counties-~Berrien, Cheboygan, and Lenawee - refused to subscribe to this Act, but the threat of removal of county officials from office led them to accept the prescribed standards. The County Audit Staff was organized to carry out the provisions of the Act. Of the auditors hired at the outset of the program, only 3_, Act 71, P. A. 1919; C. L. 1929, Section 299. Mr. Griswold was an accountant. Later, most of the auditors employed were former county officials who had been defeated at the polls. An attempt was made to write a manual of instructions for the county Officials on the use of forms, accounts, and records. Before this could be done, Mr. Griswold was given another state position to standardize the accounting systems for the state commissions and institutions. The result has been that for twenty years, the Michigan counties Operated without such a manual. No new improvements concerning the financial admin- istration and accounting had been attempted (during the first decade) by the state. Genesee county was Operating under the state statutes which provide for County Auditor and Purchasing Agentré/ Back in 1927, a County Controller Act had been passed,6 and Genesee and Macomb counties elected to come under this law. In January, 1955, a new Auditor General, John K. Stack, Jr., took office. He felt that the County Audit Staff of twelve members was not competent and replaced them with six appointees of his own. A.huge shortage in connection with tax collections was discovered in Jackson county, but the new appointees could not cope with the 4 Act 275, P. A. 1915; C. L. 1929, Sections 1205 et seq. 5 Act 58, P. A. 1921; C. L. 1929, Section 1154. 6 . Act 257, P. A. 1927; c. L. 1929, Section 1135. situation. 80 one of the old members of the County Audit Staff was rehired to help in the audit work. In June of that year, the Auditor General awarded an auditing contract to a firm of certified public accountants, (Lawrence Scudder and Company), the low bidder. This contract covered a general audit of all counties in the state. The firm made an ordinary commercial type of audit, unsatis- factory in view of the needs for system improvements as well as for verification of records. Since this firm was the lowest bidder, it did not work well, as a private organization cannot afford to put too much time in its auditing if it is to make a profit for itself. In 1955, the County Audit work was again taken over by the new Auditor General, John J. O'Hara, and nearly all the members of the County Audit Staff under the late Oramel B. Fuller were rehired. In 1957, another Auditor General, George Gundry, took Office. He removed all the assistants and replaced them with his own men, only the heads of the departments remaining. In 1958, he ordered every cOunty to use the prescribed budget form of Calhoun county. This form was complete in every detail for nearly every type of expense that the county would encounter as far as the General, Poor, and Health Funds were concerned. This form was never put in Operation, and when the present Auditor General, Vernon J. Brown, took Office in 1959, the county officials were advised that it was not mandatory for them to use the budget form. As a result, today only Calhoun county uses this form. In 1941, the present Auditor General decided to improve the audits by hiring a public accountant, Richard C. Shepler, as the Supervising Auditor. The audits are now “streamlined“ so as to give the totals of funds and accounts instead of showing exhaustive detail. Another improvement in state supervision has been produced as a result of the publication of “Manuals on the Standardized and Uniform System of Fiscal Procedure, Accounting, and Reporting for the Counties of Michigan“. These manuals have been drawn up for the following county Offices: County Clerk, County Treasurer, Register of Deeds, Judge Of Probate, and Sheriff. Another manual has been written by the Michigan Department of Health for the County Health Units. The State Department of Social Welfare issued a memorandum of instructions to the Social Welfare Depart- ments on accounting procedure in the counties. The latest deveIOpment has been to place audits by the state staff on a calendar year basis. This meant, of course, that some audits for the year ended December 51, 1940, covered fiscal Operations of fourteen months' duration, while others were for only three months. Budgets have come into existence during the past decade. No definite dates can be determined for the beginning of budgeting for any county. B. 7 Present Status of State Supervision. In most respects the state supervision is administrative, but the constitutional, and the legislative aspects are also reflected in the organization and procedure of county operations. The Auditor General prescribes the books and forms for each department except for the Social welfare (under the Super- vision Of State Department of Social Welfare) and the Health Units (under the State Department Of Health). Books and forms are prescribed for each department by the Auditor General, but the counties pay for printing and binding. There is no state supervision of budgeting and reporting, but financial reports are given to the County Board of Supervisors annually and also whenever the latter requests them. These reports must be approved by the Auditor General but the cost is borne locally. They are not published by the state. The main supervision lies in the annual external auditing, conducted by the County Audit Staff of the Auditor General with the expense borne by the state. The State Department of Social Welfare audits the records of the County Department of Social Welfare. Their audit reports and those of the Auditor General are the best that can be found at the present time. R t re d Activities of the Muni 1 Finance Officers' 7 Association. This is a national organization, composed 7 Hereafter will be designated: M.F.O.A. D. of twelve hundred comptrollers, treasurers, auditors, and accountants of counties, cities, other local units and states.§/ It serves as an exchange bureau Of information and ideas on government finances and accounting. It publishes from time to time reports covering special tOpics on governmental accounting. The Association's Committee on County Accounting represents the auditors, controllers, accountants and other county officers whose goal has been the improvement of methods of county and finance standards so that greater comparability between financial statistics may be secured. In 1957, the committee published a pamphlet entitled “COUNTY FINANCE AND ACCOUNTING STANDARDS“. At this writing it is still a guide to approved practices in county finance and accounting. Stggdagds Established by the Municipal Finagce Officers' Association. Standards are more than mere bookkeeping and financial devices. Standards are goals of achieve- ment which apply to all governmental units regardless of size.9 The standards are carefully scrutinized in this report, and are adapted from the principles formulated by the Committee on County Accounting. 8 Letter of August 18, 1941, and signed by Carl W. Tiller, to the writer. 9 Minimum Accounting Standards for Tennessee Counties ggd Smgll Municipalities, Knoxville: The University of Tennessee, 1940, P. 6. F. Countigs Studied. To secure a better representation as to the finance and accounting standards in the Michigan counties, several of these were visited in various sections of the state. Those studied and the classification that can be made of them as to accounting supervision are: 1. Baraga, Berrien, Clinton, Eaton, Houghton, Otsego and Sanilac -- decentralized system whereby each office keeps its own records and is responsible for its financial trans- actions. 2. Calhoun, Genesee, and Macomb -- County Controller. 5. Gogebic -- Auditor with limited accounting duties. 4. Oakland -- County Board of Auditors. Each Of these counties will be discussed in further detail as to the merits of their accounting and financial standards, and as to their methods of maintaining accounting records. Methods of Comparison gpd Anglysis Used in This Study. In order to secure the material on the general accounting and financial practices of these counties, each was visited sometime during the period between April 1 and August 1, 1941. The records and financial statements of all LIT-116 lO IHHI {IIIIiIgI 'IIIIrfl' glut.“ I : wn J i goose-:5“: in ”t i J c I | _-- -.___. 1 ' II F '''''''' I I ‘A.(. I it- up ' i i : ' i I —-I I I l . _- W1 I ' mini (. _.-:L: i'c‘T-‘AT 27.51 I I I r. ----------- '—-1 I I I _L ......... I. . L ............. A I I In ‘ I I i"I i {_._-_ _-I' I ! _ iF-‘t’o-‘I H ’ :1. . I . .._J I Key to Counties { Studied and their Methods of «A Acooun t1 ng. ic no I: {unison I Flt! .Awi i c All (vb- I l I _- :-:: IL. _-—ru;iiflfl‘i3:fiio'7'r'z—'—T_' _-.-- Audi tor “u.” I fifi I! ---- “WI nnnnnnnn c- - etc o c on 1:- L —-_— .‘~ _ifirél- 9“” Y~VIII ' I I ‘ I I I ' I I _fifi‘tjal-cono Unl'fiu-tt lo!COIIIIO~' Noon-AI- I' --__.-‘ .___. I ! ! e o O O | , ! l o o e O I I I I :::: Controller "‘T ', t“. (gli_rghnfiTg7- 0 o o O ' I | o e c O I I {a uuuuu I 5 y; 7— : ' ° Iutco Ins”..- u 0 Ti I I I I _._._ —:-;"¢"' ' I I i uuuuuuu F" n a " **** Beard _ _______ : IL L _JI—I'L._1J ’ ”NI. . v“ , ' L— _ _._._ _._. , - r“ . **** Auditors _f I I _figfifiglurgafi 0 'II‘IA'.“ I : '0 A ' ! :55: DecentralizeoanJ.-rn+eWiW“ifan,FMW“{*z*§, ! “nan Method. j I i I , I? III ‘ . H - L..- 7'0" u 100 ‘c can 1 nnnnnnnnnnn U”- I. i. O o .I i - '1 ° I -'_I I" ‘0 o! . l q o o o e. I .IIII ' I I ___.__J.-_— K {F'- I n I! Jo|(I—-+iTAn(-n using I [it cut! i ‘° I - ' I - . ! ! I '- unuw 9 l I I l' 1' l I I ' l l MAP SHOWING;THE MICHIGAN COUNTIES Note: The numbers on the counties studied are those which come in alphabetical order when all the counties of Michigan are considered. 11 departments for the fiscal year, 1940, were examined. To get as much data as possible, various county officials and citizens, as well as some members of the State Depart- ment of Social Welfare and of the County Audit Staff of the Auditor General were interviewed. Statements and opinions of many persons who did not wish to be quoted are made in this report without reference, if in the opinion of the writer, they are worth stating. In each chapter or each section of the chapter, the M. F. O. A. Standards of the Committee on County Account- ing are given. Then the actual procedures, policies, or standards of the Michigan counties and sometimes of counties in some other states are given to show the variations. Finally, the conclusions are drawn and suggestions made which, in the opinion of the writer, will, if adopted, bring some improvement in accounting standards and practices in Michigan counties. CHAPTER II FINANCIAL ORGANIZATION MFOA Standards. The number and types of transactions together with the constitutional and statutory provisions should be considered in formulating the type of financial organization applicable to all counties. Those activities, which are recognized as essential in financial administration involve (l) the collection, disbursement,-and custody of county funds, (2) accounting and internal audit, and (5) purchasing and storing. The assessment procedure is important but will not be treated in its entirety. All these functions are separate and distinct, and, if the volume of work warrants, each should be performed by separate individuals. In smaller counties, where volume of work is not large, all accounting and purchasing may be done by the same person. ‘égtugl Standards. Centralized administrative control does not exist in the Michigan county government. The legislative\ vand.executive powers pertaining to major financial authority rest with the board‘of supervisors, inasmuch as the board determines the tax rate and makes general appropriations.y Some functions - such as welfare and medical assistance 1 Act 156, P. A. 1851; C. L. 1929, Section 1130. 12 13 roads, and schools - are partly controlled by them. The Treasurer, Clerk, Sheriff, Register of Deeds, Probate Judge, and local Justices of the Peace are financial officers of the county and are responsible for certain types of revenue. Each official works independently of others and feels that he is responsible to the peOple and to no other county office. The main treasury duties are performed by the County Treasurer.' The authorization to spend is vested in the board of super- visors, who adjust, audit and allow accounts, and draw warrants on the county treasurer for payment of all claims against the county.g/ These claims are presented to the board by the county clerk, or the board of auditors, or the controller, depending upon their method of accounting. The general procedure wherever the controller or board of auditors does not exist is for the county officials to purchase and send bills to the county clerk, who submits the bills on a voucher to the board of supervisors for approval. The board of supervisors determines the tax levy which is sent to the assessed units to be spread. The assessment of all preperty liable to taxation is made annually in every township by the supervisor of each. Cities have their own assessors. The assessing officers place in a separate column on the assessment roll all taxes voted by school district. Nearly all drains are 2 Michigan Historical Survey, The. Inventory of County Archives in Michigan. No. 13. Calhoun County, May, 1941. pp.77. 14 financed by special assessment. Assessments for county roads, wherever they occur, are made by the road commission.§/ The function of collecting taxes is vested in the township or city treasurer, who demands payment, gives notice of default, advertises, and finally levies on the property. The county treasurer collects all delinquent taxes and makes returns to the State Auditor General. The local units must file a statement of delinquent taxes with the treasurer.é/ The collection of other revenues, fees, licenses, permits, court costs - is distributed among the several offices, as prescribed by statutes. The county treasurer is the disbursing officer. All county funds are paid out of this office except for fees which are retained by the individual offices in some counties and not turned to the treasurer. The accounting for receipts of revenues is performed by each department and (except for some fees retained) deposited with the county treasurer, for which an official receipt is issued by the treasurer and countersigned by the county clerk. The accounting for the disposition of money is made by the treasurer and the clerk, or the controller. The internal audit for any expense is made by the finance committee of the board of supervisors, or the board of auditors, or controller, or auditor, whichever the case _:‘- 5 Ibid. pp. 76-77; as Amended by Act 251, P. A. 1941. Section 59 and 53. 4 Ibid. Section 56a. 15 may be. Purchasing exists according to the policy of each county or its set-up. The county controller or auditor does all the purchasing and internal auditing for all the departments except road, health department, board of social welfare, and schools. In Oakland county the board of auditors not only performs the same type of purchasing but also does internal auditing duties in all departments. Great savings are made in these counties because of some degree of centralized purchasing. In the remaining counties studied, purchasing and accounting are decentralized, each department head purchasing materials and supplies as he sees fit. However, in Houghton county, some check on purchases is secured by delegating to the county clerk the responsibility of acting upon the need for purchases requested by the several department heads. The internal audit is made by the finance committee of the board of supervisors. A. Treasury Duties. M.F,O.A, Standagds. The collection, disbursement, and custody of the county's funds involves the following duties: 1. Keeping a record of the receipts, disburse- ments, bank deposits, and balances of the county's cash. 2. Receiving and depositing daily to the credit of the county cash turned over by other departments or paid by the public, recording 4. 5. 7. 8. 9. 16 the amount and source of each receipt, and promptly reporting all receipts to the appropriate accounting officer. Collecting, recording, and reporting to the appropriate accounting officer interest on investments and on bank balances. Making deposits only in depositories legally selected and only up to the maximum amount permitted by law or good Judgment. Seeing that depositories are properly bonded or that sufficient and good collateral is pledged. Securing the maximum possible return on the county's investments consistent with safety. Seeing that paid coupons and bonds are properly canceled. Making disbursements only upon properly authorized Warrants. Transmitting to other units promptly money collected for them. Actual Standard . The property tax and the grants-in- aid are the counties' chief sources of income. Another source includes fees, licenses, and permits of which some are deposited to the county treasury or retained by the collecting office, depending upon the ordinance of the 17 §/ . said county. The statutes prescribe that each fee receiving office must report the fees to the county treasurer and county clerk at the end of each monthIé/ In many cases the fee officers actually refuse to report their collections because the State Auditor General would have too many civil cases on hand or there is no way of having some political official force them to do so. Obviously, these fees are costs of county government and should be included in the statement of expenditures. With reference to Point 1, the county treasurers keep the records of daily and departmental receipts, disbursements, bank deposits of each fund, and effect the reconcilement of bank statements, as this is prescribed under the uniform accounting act. Regarding Point 2, it was discovered that the county treasurers receive monthly, bi—monthly or weekly to the credit of the county all the cash turned over by other departments and give the serially numbered official receipt for it, including that of the county treasurer. The departments issue the serially numbered departmental receipts for each item of cash received daily unless otherwise provided. While turning money to the treasurer, the departments also submit an accompanying E?— C. L. 1929, Section 1546, as amended by Act 202, P. A. 1931, Section 1. 6 C. L. 1929, Section 1547 and 15429. 18 revenue voucher (original). The duplicate is sent to the county clerk and the triplicate is maintained for their own record. The nature of this voucher is to indicate the source of revenue receipts, total fees collected, and the amount submitted to the county treasurer. The original of the official receipt goes to the depositing department, the duplicate to the county clerk, and triplicate is retained by the treasurer. This receipt is the posting medium for Cash Receipts Books in the county treasurer's and the county clerk's office. It was found on Point 5 - collecting, recording and reporting to appropriate accounting officer interest on investment or bank balances - that Macomb, Eaton, and Oakland counties were the only counties which conformed to these standards. Point 4 — making deposits in legally selected depositories - impounded accounts in closed banks as result of the depression of 1955. Oakland county has a policy of having deposits in twenty different banks, which in the estimation of the County Audit Staff of the State Auditor General's Department is too many. It is seldom found that the depositories are not in legally selected banks. At the present time, most banks do not wish to bid on deposits because of their huge cash surplus. 19 The statute provides for Point 5 that the depositories are pr0perly bonded by a bonding company and paid by the county upon approval of county board. Concerning section 6, only Macomb and Oakland counties have any investments, but they are very small. Therefore, it would be rather difficult to obtain maximum returns on their investments. For Point 7, the coupons are audited externally as to their cancellation by the State Auditor General's staff, although road commissions have the most of the outstanding bonded indebtedness. Macomb county has a controller, who keeps watch on maturity dates of all county bonds, except those of the road commission. The suggestion in Point 8 is well carried out in all counties. In Macomb and Calhoun counties the controller issues the warrants which are signed by the county clerk and the county treasurer. In Genesee county the controller issues and signs the warrants which are counter- signed by the county clerk and county treasurer. In Oakland county the board of auditors issues warrants which are signed by the county clerk and the treasurer. In the rest of the counties studied the treasurer issues warrants which are signed by him and countersigned by the county clerk. 20 On Point 9, the counties transmit the agency money promptly as the benefitting units always know what money is due them. B. Accounting Duties. M.F.O.A. Standards. The duties involved in accounting and internal audit control are as follows: 1. 2. 4. 5. Producing all of the information essential as a basis for the management of the county's finances. Designating the methods of accounting to be followed by all departments, prescribing the records to be kept, and providing for ‘ standardized accounting documents, such as purchase orders, invoices, and payrolls as well as forms of reports. Keeping all such records as are necessary to control adequately the financial transactions of the county. Seeing that the county receives all revenues to which it is entitled and that all receipts are properly accounted for. Pre-auditing all expenditures to see that they are made in accordance with law and that no payment is made without the written approval of the proper authorities. 21 6. Maintaining an up-to-date digest of state laws and county ordinances governing accounting, budgeting, and reporting. 7. Preparing all the financial statements needed to show the financial condition and the financial operations of the county, monthly, annually, and at any other time when requested by the chief executive, adminis— trative officers, or members of the county board for their guidance in carrying out their duties. Actual Standardg. The accounting and the internal control methods depend upon the type of accounting control provided in the counties studied. With minor exceptions, the legal requirements that pertain to accounting are general because all the counties, except Wayne, come under the County Uniform Accounting Act. In discussing Point 1 of the accounting duties, which involves the procurement of all financial informer tion for proper management, much can be said about the present scheme of decentralization. Since each office keeps its own records of cash receipts, the fees which are retained by the office are not included in the statement of revenues and expenditures. This point will be discussed more in detail in the chapters that follow. 22 Concerning Point 2, the methods of accounting that are to be followed in all departments except Social Welfare, and the Health Units are prescribed by the State Auditor General. The State Department of Social Welfare supervises the Standards for the Social Welfare Department, and the State Department of Health designates the methods for the Health Units. The accounting documents are standardized in all the departments, but the Health Units, although the latter will soon have uniform accounts. Purchase orders, invoices, and payrolls are not uniform among the counties, but they are maintained, especially in the road departments. On Point 5, records do control the receipts except fees retained by the departments, but not the expenditures, because the system is on the cash basis instead of accrual basis, as will be discussed in Chapter IV. Many expenses may be encountered in one administration but paid by their successors. Macomb and Calhoun counties come nearest to an adequate control by including the Vouchers or Bills Payable accounts in their expenditure reports to the county board. Concerning Point 4, Macomb, Oakland, and Genesee counties seem to receive all the revenues to which they are entitled by having (1) addressograph machines to print the tax rolls and avoid mistakes of descriptions, (2) dOg warden on percentage basis to collect all dog 25 taxes possible, (5) all county officers turn their fees to the county, and (4) cash register system of recording actual receipts whereby each amount of cash received is simultaneously recorded on the tape of the cash register and the payer's receipt. The accounting for those revenues is done by the county clerk or the county controller in these counties. At this writing Calhoun county is contemplating the installation of addressograph machines for tax rolls. This is for the purpose of avoiding charge- backs, whereby the taxpayer cannot be forced to pay taxes when there is a wrong description of property. Dog tax collections in Otsego, Eaton and Clinton counties are very good, but in Gogebic, Houghton, Baraga and Sanilac counties they are poor. It is difficult to check up tax receipts of the county treasurer. Wherever some officers are kept on a fee basis (as in Baraga, Berrien, Clinton, Houghton, Otsego and Sanilac) there is a tendency for county officials not to report certain fees which are prescribed to them by law. Sometimes no receipts are made for those fees making it impossible to audit them. In Point 5, all the expenditures are pre-audited by the finance committee, controller, or the county board of auditors. In all these counties the payments are made with the written approval of proper authorities. In some counties, the road commissions issue and sign 24 their own warrants. The same can be said of some Social Welfare departments. Sometimes counties make illegal expenditures, such as Red Cross, but no effective attempt has been made by the State Auditor General to stOp it. On Point 6, it has been discovered that there is no up-to-date digest of state laws on budgeting. There are manuals for fiscal procedure, accounting and reporting for the following offices: County Clerk, County Treasurer, Judge of Probate, Sheriff and Register of Deeds. Concerning the county ordinances, one would have to read the proceedings for the past several years to get all the county ordinances. It has been discovered about Point 7, that some counties make several financial statements per year while others make one or none at all. The usual statements are to give the receipts and expenditures for the preceding period. Baraga county clerk and the auditor in Gogebic county prepare monthly and annual reports. Calhoun county controller prepares financial statements for the first nine months of the present fiscal year; this is submitted to the board of supervisors during the October session to consider the budget for the following fiscal year. At the end of the year the controller makes a financial report for the last quarter, together with the report of the first three quarters of the fiscal year and the totals for the full year. Clinton, Genesee, Houghton, Macomb, CL 25 Sanilac, and Berrien counties prepare only the annual financial statements which show the financial Operations of the county, the trial balance of all funds and the abstract of all funds. Berrien county clerk keeps the recapitulation figures of all the General Fund disburse- ments. It is always easy to get any financial informa- tion in Genesee, Calhoun, and Macomb counties on all departments except Road, Social Welfare, and Health Units. Oakland county does not publish a periodical or annual statement but by request it may be obtained from the county board of auditors. The county treasurer and the county clerk of Baton county have not been issuing any financial reports for the past few years. Therefore, it is necessary to look into county accounting records or the state audit reports to find what the actual receipts and expenditures were for any year. In Otsego county, the treasurer gives only the abstract of funds to the county board, but the clerk and register of deeds (same person) boasted that he has not made an annual report for the past twelve years. Idea; Financial Organization. To establish an ideal system of fiscal control, a strong centralized system of financial organization would be necessary. A clear-cut distinction would be made between the legislative, executive, and Judicial functions. A finance department D. 26 would handle all the assessing, purchasing, accounting and treasury. All the necessary details for the performance of these duties would be included in this one department. If necessary, different individuals would handle those separate and distinct functions. Conclusions and Recommendations. To centralize the financial organization of the county, it would be necessary to change the state constitution. Accounting and treasury duties can be centralized under the present constitution by statutes without the change of organiza- tion of county offices. The counties which made some attempt to control their finances have shown progress toward better accounting and better preparation of the essential financial data. The assessment of property is poor in all the counties. To have some state organization do the assessing would be a step in the right direction. The purchasing is best in counties where it is centralized or some attempt made to check the purchases. The counties having the controller, or auditor, or board of auditors report great savings on purchases; the purchasing duties - such as requisitions, acceptance of bids, issuance of purchase orders, and delivery and inspection of items - are included. The advantages and savings from centralized purchasing do not require much stress, and the counties should adopt it. The policy in all the counties is that 27 the receipts for services in the various county offices, less legal deductions, are turned over to the county treasurer daily, or weekly, or monthly, whichever way is -convenient. Some county officers, whose compensation consists wholly or partly in fees, refuse to report the fees. They also refuse to post in their Cash Receipts Books some of the fees which are retained by them. The county treasurer keeps books of receipts, deposits, and disbursements of all county's money. The best improve- ment now would be to have all fees paid to the county treasurer. The payment for the maintenance of fee officers would be made only by the county treasurer and in accordance with the proper authorization. This would show truer receipts and disbursements of the county. The same policy concerning fees had been recommended for the Illinois counties.7 The county controller of Michigan centralizes all the accounting and purchasing in one department. The greatest improvement in the financial organization would be to have all the accounting duties centralized in one office, but separated from the treasury duties. Thus one department would do all the accounting and purchasing, while the other would do all the treasury work. 7 Allen, H. K., Control of Expenditures in the Local Governmental Unyts of Illinois. Urbana: The University of Illinois, 1940. pp. 28-29 CHAPTER III BUDGETING' MFOA Standagds. A budget is a financial plan showing proposed expenditures for a given period or purpose balanced against the probable revenues to meet the expenditures, as expressed in the apprOpriation and revenue acts, ordinances, or resolutions. There are two types of budgets; current, which covers a period of one year, and long-term, which is prepared for at least five years. The responsibility of preparing a county budget should be delegated to some official. The chief financial officer, the chairman of county board, the chairman of the finance committee, or some employee designated by the county board would be the apprOpriate individual to undertake this particular work. The chief financial officer should furnish all the information needed in budgeting and be delegated to enforce budget. The enforcement of the budget, because of experience of previous year, can be accomplished by approving all the purchases and expenditures only when they do not exceed the amount provided in this financial plan. Finally, the budget should be adOpted by the county board. Agtua; Standards. Authorities on county government agree that the first step toward the financial control and economy in county government is the adoption and the strict adherence 28 29 .1_/ to the standard budgetary principles. A county may incorporate the principles of proper budgeting, but be half-hearted in carrying them out.2 Macomb, Oakland, Genesee, Gogebic, Calhoun and Berrien counties have a contingent account set up to care for exigencies. In Berrien, the improper application of principles is shown in the fact that this account has become a reserve account to replenish usually overdrawn appropriations. Sanilac, Clinton, Eaton, and Otsego counties do not attempt to budget their expenditures. Eaton, Berrien, Sanilac, Houghton and Baraga counties' budgets consist merely of appropriations to the General Fund classification. The ills in budgetary procedure can well be blamed upon the lack of citizen interest. One of the greatest difficulties under the present county organization is that there is no central county officer who can be charged with any budget duties. It has been suggested by many political scientists that the best officers for these duties would be the board of auditors, if any, otherwise the clerkIé/ However, no regular system of budgeting exists in the Michigan counties. In fact, much time would elapse before the counties could be induced to maintain uniformly prepared budgets. As yet, no laws have been passed to put any form of county budget into operation; so there l Bromage, Arthur W., and Reed, Thomas H. Organization aad Cost of County aad Township Government. Detroit: Detroit Bureau of Governmental Research, 1955. pp. 49. 2 Ibid. pp. 50. 5 Miller, Loren B. Local Finance Procedure. Detroit: Detroit Bureau of Governmental Research, 1955. pp. 47. 50 is no way for the state to prevent a county from adopting any sort of budget it desires. In 1951 an Act was adOpted which provided for the establishment of uniform budgets for all local governments except the counties. Such budgets together with the appropriate financial reports were to be submitted to state treasurer. In the Opinion of many interested parties this law was not given a fair chance. Township supervisors strenuously Opposed this legislation on the basis of “home rule" principle. After but partial application and for reasons which cannot be held final, the repeal of this law resulted from the enactment of Act 41, Public Acts of 1955, one of the “Hartman-Brown" bills introduced by the two re-elected members of a 1951 legislative commission appointed to study state (not local) expenditures.é/ The attitude of the state legislature after repeal is that it will show interest in local budgets only when there is a state appropriation to the locality and the legislature wants to know how the money is being spent. Since all township supervisors are members of the county board of supervisors, it would be very difficult to have the counties adOpt a state-sponsored budget system at once. The controller, or auditor, or board of auditors, or finance committee of the board of supervisors may control 4 Ibid. pp. 50. 51 the budget operation since there is no chief executive in any of the Michigan counties. The responsibility of preparing a budget in every Michigan county is delegated to some committee, usually known as a finance or a budget committee, except in the county having a board of auditors. In Oakland, the board of auditors prepares the budgets, salaries schedules and other pertinent budget information. As a rule, a controller has to have some political connection because his term of office exists only at the pleasure of the board of supervisors. Therefore, in Calhoun, Genesee and Macomb counties, the controller would be reluctant to take the responsibility of preparing a tentative budget because his recommendation of certain apprOpriations would arouse the ire of some political office-holders. The same situation would hold true of the auditor in Gogebic county who does not keep any set Of books but assists in preparing a budget and in making out periodical reports. A controller, however, furnishes the appropriate committee with information for the preparation of the budget, such as actual expenditure during the past year as compared with the estimated expenditures. Despite the handicaps, the counties with controller, auditor, or board of auditors, certainly do show a better budget than counties where the budg- ets are prepared by some finance committee only. As to budget enforcement, the controller, auditor, or the 'boaafl.of auditors are the chief financial and accounting 52 Officers since they approve purchases and do the pre—auditing of all expenditures before they are audited by the apprOpriate committee. In other counties, the clerk is the chief accounting officer, but the finance committee or the board of supervisors itself controls budget expenditures, loosely or otherwise. A. Prepagation of_Budget. M.F.O.A. Standards; The budget calendar should be prepared to indicate sufficient time alloted for each step in the preparation of the budget before the beginning of the year. It should include all activities carried on in the county whether through departments or semi-independent boards. Each department should be required to prepare an estimate of expenditures necessary to finance its Operations. Revenues earned by each department or county official must be included and must not be expended without proper authorization from county board. Activities to be financed from general revenues (general taxes and other revenues not allocated specifically by statutes to any particular activity) should be included in general budget. In preparing estimates of expenditures and revenues, the actual expenses and revenues of the last two years should be considered and allowance for any changes in conditions which might affect estimated revenues or expenditures. Deficits must be avoided, 55 but where they exist some attempt must be made to eliminate them. After the new budget has been prepared, it should be submitted to the legislative body for consideration and adoption. The budget document should consist of the following: 1. Budget Message which discusses the budget as a whole and in which the principal items of proposed expenditures and revenues are explained. Past year's experience, the present status and the financial trend and policy for the coming year are given attention. Budget Summary has total proposed expenditures and resources to finance them brought together. Revenues are classified by main sources, such as taxes, departmental earnings, etc.; expenditures are classified by character (current expenses, capital outlay, etc.) and object (personal services, materials and supplies, and equipment). Detailed Statement of actual revenues for each preceding two years, estimated revenues for the current year, and any additional sources for the current and the coming year. 4. 5. 6. 7. 8. 9. 54 Schedules showing the fixed and unavoidable expenditures for the coming year, including such items as interest on notes and bonds; Judgments and costs; maturing general serial bonds; contributions to sinking funds; contributions to pension funds; the estimated deficit in any fund at the end of the current year. Departmental Schedules show expenditures of each department for the past two years, estimated expenditures for the current year, departmental requests, and the amount recommended by the budget authority. Departmental Work Programs which will be determined by the changing departmental policies as well as by the amount and character of services to be performed. Debt Statement shows not only the Debt Limit, but also the total amount of debt applicable to Debt Limit (Bonded Debt and other Debt) and the Legal Debt Margin. Debt Schedule shows principal and interest requirements by years for (a) existing debt and (b) for new bonds to be issued under the terms of proposed budget. An analysis of tax delinquency. 55 10. Schedule of short-term borrowing transactions during past two years, the current year, and proposed for the coming year. 11. ApprOpriation Ordinance and tax levy ordinance to carry the budget into effect. 12. Schedule of salary and wage rates applicable to each class or position. Actual Standards. The preparation of the budget usually begins about May of each year. At that time, the State Department of Social Welfare notifies all the county boards of supervisors that they must make appropriations for the Social Welfare department in their county. Fiscal control in the Michigan counties is somewhat in the hands of the county tax allocation board, which is composed of the county treasurer, the chairman Of the finance committee of the board of supervisors, the county school commissioner, one member of school district maintaining twelve grades, and one member not officially connected with any local unit selected by Judge of Probate.§/ The last two members hold office for one year. The board selects one of its officers, as chairman and the county clerk serves as clerk of the boardié/ The principal function of the board is to review the budgets and statements of the local units of the 5 Michigan Historical Records Survey, The. 'Inventory of County Archives of Michigan, No, 7, Baraga County. December, 1957, pp. 28-29. 6 Act 62, P. A. 1955 56 county, cities, villages, townships and school districts, and determine the tax rates required according to the proposed budgets as restricted by the constitution. From these submitted budgets, the board usually determines and approves the maximum tax rates for every local unit. The meetings of this board which include the public hearings are held monthly during May, June, July, and August. Any aggrieved local unit may appeal the final order of the tax allocation board to the State Tax Commission only.2/ By August, the county knows what portion of the taxes will be allocated to it. In the meantime, the county department heads have submitted their budget requests for the next fiscal year. It is usually an exception rather than a rule to have each department transmit a schedule of proposed expenditures to the proper authority. Whenever prOposed expenditures are given by the department heads, they usually show some padded expenses so that the appropriation could be larger for the department that made the request. Revenues earned by the departments are seldom included in the budget and, if they are, there is a tendency for the county officials to understate the fees by showing them to be very small. This understatement of fees and the padding of expenditures is used to influence the county 7 Act 50, P. A. 1955, Extra Session. 57 tax allocation board to increase the millage for the county instead of other political localities, as counties and small local units are under the constitutional fifteen-mill tax limitation. These activities are usually financed out of general property taxes, all of which are seldom included in the budget. In estimating expenditures for the next budget year the present year's or the previous year's expenditures are taken into consideration, but an allowance is seldom made for any changes which are likely to affect the financial condition. The budgets usually submitted are ordinarily requests to levy some specified millage tax on property for county purposes. By August of each year, the county knows definitely how much money it will get, so that each department strives to get the most of the apportionment for itself. In Sanilac and Clinton counties, the chairman of the finance committee calls upon every department in the county to submit its estimates for the next fiscal year. In Berrien county, the finance committee itself makes Out a budget for each department for the ensuing year by making a recapitulation of total estimated expenditures for each department. In Baraga, Houghton, and Otsego counties, the finance committees themselves ask each department to submit their estimates. In Eaton county, the budget is prepared by the finance cOmmittee itself which is not detailed but very very broad in that a 58 certain portion of money is placed in a general fund; some money is put in County Social Welfare fund and the rest into the miscellaneous fund. Therefore, it is not definitely known what each department can spend but the Committees on Claims pre-audit every item before they make payments. In all these counties, Just mentioned, the Finance Committees use the records of each office for the preceding year as a guide to make out the preliminary budget. In Calhoun, Genesee, Macomb and Gogebic, the county controller or the county auditor give all the essential information for preparing the budget. As stated before, the board of auditors in Oakland county prepares the budget. The preparation of the budget in all the counties studied usually begins about May Of each year. When the budgets are being prepared in Macomb and Genesee counties, the controllers insist that for every item of expenditure, there should be sufficient revenue to cover it. The best estimates of the tax collections and delinquent taxes are shown in Macomb county because it is the only county which shows an allowance for tax losses. It has been found that in Sanilac, Berrien, Clinton, and Baraga counties, the funds were over-drawn. Because Macomb county has accrued several deficits during the depression, it shows in its report some revenues which are provided to eliminate them. 59 After these budgets have been prepared, they are presented to the board for consideration and adoption only by the committees of the county board of super- visors. In Oakland county, they are presented by the county board of auditors, who acting, in a capacity of an executive, have considered the budgets thoroughly, as well as certain usually 1. 2. investigated departments that made requests for amounts. The budget documents, as presented, consist of the following: The Statement of the Finance Committee or the Budget Committee or of the County Board of Auditors. It states that the members had considered the budget in its entirety and now are submitting it to the board for adOption. The expenditures to be considered for some of the funds, especially General Fund, whose revenues with those of other funds, come from the general source. Eaton county gives a typical example of the budgets prepared by the small counties in Michigan. The followb ing prepared budget for 1959-1940 was shown in the Official Proceedings of their board §/ of supervisors. 8 Olivet Optic, (Olivet), January 50, 1941, pp.ll - Column 5. 40 “The exact financial picture could not be determined due to a peculiar set-up of County Finances the first distribution was: County Officers' Salaries. . . . . . . .$25,000.00 Agricultural Extension. . . . . . . . . 2,000.00 Support of Insane. . . . . . . . . . . 2,000.00 Hospital. . . . . . . . . . . . . . . 5,500.00 Support of Poor . . . . . . . . . . . 9,000.00 Miscellaneous . . . . . . . . . . . . 75,025.44 Total. . . . . . . . $114,523.44 Then on Saturday the last day of October meeting the $22,900.00 was voted for Social Welfare. We were informed that a revision of budget was necessary and was as follows: County Salaries . . . . . . . . . . .$ 25,000.00 Agricultural Extension . . . . . . . . 2,000.00 Support of Insane . . . . . . . . . . 2,000.00 Hospital . . . . . . . . . . . . . . 5,500.00 Support of Poor . . . . . . . . . . . 9,000.00 County Social Welfare. . . . . . . . . 22,900.00 Miscellaneous . . . . . . . . . . . . 50,125.44 Total . . . . . . . .3114,525.44 Adding $22,900.00 to original budget and taking $22,900.00 from miscellaneous. HOwever, the $9,000.00 for support of poor was not taken out, this would make a total of $51,900.00 for poor and welfare. This is one reason we are not able to determine correctly; another is 41 that the $9,000.00 support of poor was not voted, as a matter of record we are unable to find any money apprOpriated for county use except the $22,900.00.“ The estimated expenditures and the apportionment of tax levy for each township is usually shown, as the tax allocation board had decided what the county levy will be. Macomb county, which makes its officers turn all their fees to the county, usually makes estimates of the amount Of fees that will be collected. Gogebic county on the other hand, apprOpriates a certain amount Of money to each department but the fees and refunds which are turned to the county are also used by that department as a supple- ment to the appropriation. We will now consider other points of the MFOA Standards. Point 1 - Budget Message, and Point 2 - Budget Summary have been discussed. With reference to Point 5 — Statement of Actual and Estimated Revenues - Genesee, Macomb and Calhoun county controllers file columns of budget request which contain the following item information: Amount Expended Last Year and Amount ApprOpriated Last Year. The department head gives his request before the apprOpriate committee, whereby the committee sees whether an increase or decrease in appropriation is requested. Appropriate committee finally approves the amount it sees fit. The budget figure given by the committee is seldom changed 42 by the whole county board of supervisors. The same practice is followed in Gogebic, which has an auditor, and in Oakland which has a board of auditors. Clinton, Berrien, Houghton, Otsego, Baraga and Sanilac counties did not have the Statement of Actual and Estimated Revenues. Regarding Point 4 - Schedules Showing Fixed and Unavoidable Expenditures - it is impossible to find out how much money each county owes. The main reason is the drain obligations, especially in Sanilac, Eaton and Berrien counties. The commitments in Sanilac county are in such bad shape that it is impossible to check what the drain debts really are. The Sanilac county drain commissioner had stated that it would be beneficial to the county if someone made a study of drain finances. In Eaton county, the treasurer admitted that the books of the drain office had checked for the first time in five years. The biggest trouble is that the drain commissioner will issue a drain order which is an accrued debt, but the county treasurer does not know about it until the drain order is presented for payment because he does not receive a carbon copy of the order when issued. Concern- ing other debts, Macomb, Genesee, Oakland, and Gogebic counties show their complete debt service. Macomb county has so many bond issues and refunding bond issues that it is very difficult to determine what their debt service 45 actually is. Dr. Cline of the Economics Department, Michigan State College, had stated that even the Michigan Public Debt Commission did not give as complete debt figures as Macomb county controller in his report to the supervisors. All the bond issues of Genesee county had been retired by May, 1941. No county studied has a pension fund nor shows an estimated deficit at the close of the current year. As has been stated before, Point 5 which deals with Departmental Request forms, is not followed in its entirety. The counties which have a controller, auditor or board of auditors show each department's expenditures for the past year, estimated expenditures for the current year, departmental request and the amount recommended by the budget authority, or the final column shows how much money was actually appropriated. For Point 6 - Departmental Work Program - it can be stated that only the road commissions have any kind of a departmental work program but this work will not be discussed in this survey. Except for salaries for the Road Department employees, the budget is not followed because their expenditures depend upon the receipts of gasoline and weight tax from the state. Not one county showed in its budget report the work prOgram of the drain commission. Of course, drain departments do not 44 exist in Gogebic, Houghton, Baraga, and Otsego counties. As to the Debt Statement which is stated in Point 7 - only Macomb county shows it in its report. Otsego county had made a loan from the local bank to the amount of $7,000.00, although its debt limit in round figures is somewhere around $10,000.00. Further questioning among the various county officials had shown that the county would have borrowed the full amount if the local bank would only allow that large a loan. Since it is not known what the actual debts are, it would be too difficult to give the Legal Debt Margin (Debt Limit which is 3% of assessed valuation of the county, minus total debt applicable to Debt Limit). The Debt Schedule, showing principal and interest requirement by years for existing debt (Point 8), can only be found in the County Audit reports of the Auditor General's Department. Macomb county controller also shows that in his report. As for the new bonds to be issued under the terms of the prOposed budget, no county makes a report. One will have to look through the minutes of the board of supervisors before he can really determine it because the issue of bonds has to have the approval of the Michigan Public Debt Commission. For Point 9, only Macomb county shows Analysis of Tax Delinquencies; its information goes back ten years 45 previous. One has to read the audit reports for the past ten years to find the tax delinquencies for previous years in other counties. As for the short-term transactions for the past two years, current year and for the prOposed coming year, none of the counties show them. The larger counties would more likely show it if they made any borrowing. Therefore, not much attention was paid to Point 10. It has been found for Point 11, that there is no actual apprOpriation ordinance except that the budget is adopted by having motion carried at the meeting of the board of supervisors at October session. As for tax levies made in a county, there is a fifteen-mill tax limitation, which is apportioned among all localities, and sometimes the amount of levy is overruled by Michigan State Tax Commission. Of course, the peOple in a county may vote the increase in taxes. Usually before the new budget year begins, each county knows what its tax levies will be, and that will be on Personal and Real PrOperty. Finally, the Schedule of Salary and Wage Rates Applicable to Each Position (Point 12) is shown in the county audit reports of the Auditor General's and in the budget figures of Oakland, Macomb, Calhoun, Berrien, Genesee, Gogebic, Baraga, Houghton and Eaton counties, but in Otsego and Sanilac counties, it is now shown because the officials usually work on fees. B. 46 On October 4, 1958, the State Auditor General's Department sent out the mimeographed letters together with blank forms to all county clerks in the state to, install a county budget system. This was sent as a.part of the Uniform Accounting System set up by the Auditor General under the authority of the Uniform Accounting Act. This was a prescribed budget form of Calhoun county and the Auditor General wanted all other counties to use it. This form was complete in every detail as far as the General, Poor, and Health funds were concerned. The state election took place the following month and the present Auditor General came into Office. The county officials were advised that it was not mandatory for them to use this form, and, as a result, only Calhoun county uses this form. If this form were adopted, it would be a step in the right direction for the state supervision of county budgets. The County Audit staff would have power not only to audit the expenditures but also check the proximity Of expenditures to the budget figures. ‘aagption of the Budget. M.F.O.A. Standards. Careful consideration of each item of the budget should be made by the legislative body. The public and the department heads should be given Opportunities to be heard on the tentative budget. The budget is to be enacted into law by an appropriation 47 STATE OF MICHIGAN AUDITOR GENERAL'S DEPARTMENT LANSING October 4, 1958 To All County Clerks: We enclose herewith Uniform Accounting forms necessary to install a county budget system. We ask that you bring the matter of budget account- ing to the attention of the Board of Supervisors at the annual meeting October 10. If, after a discussion of the matter, it is decided to defer the installation of budget accounting until you have received further informa~ tion, please do not destroy the enclosed sample forms but retain them for discussion at a sub- sequent meeting of the Supervisors. This is a part of the Uniform Accounting system set up by the Auditor General under authority of the Uniform Accounting Act and our auditors will insist on its adoption and practice hereafter. Yours very truly, GEORGE T. GUNDRX Auditor General. By Deputy Auditor General JKJ:VB Encs. £2 2 P I “4 48 ordinance, which should show detailed expenditures proposed for each department and these expenditures should be divided into current expenses and capital outlay. A carefully planned budget should need no changes in appropriations during the fiscal year unless emergencies should arise. Such changes are likely to interfere with orderly financing and for that reason should be avoided. Actual Standards. The budgets are usually adOpted by means of a motion of the chairman of the appropriate committee which considered the budget, and this motion is carried by the vote of the board of supervisors. The boards, now and then before the adOption, may call upon department heads to Justify their request. The board of auditors in Oakland county considers the budget and submits it to the board of supervisors for final adoption. The departmental heads may make the final appeal to the board of supervisors for a greater appropriation. As to notices of public hearings on budgets, only those attend who are interested in appropriations. The fifteen-mill tax limitation is the reason for such poor attendance Of private individuals. The appropriations to be divided between current expenditures and expenditures for properties and equipment, are not shown in any of the budgets. In the four counties which have a controller, or auditor, the budgets are carefully planned as far as the apprOpriations are concerned, and once the budgets C. 49 are adopted, there is a great attempt to control expenditures because there is someone in position to do so by watching various expenditure records. As stated before, most counties have a contingency reserve which the supervisors hope will meet any emergency which may arise. Since the committee that pre-audits claims seldom pays attention to budgets, orderly financing exists in some counties only by accident. The main consideration is whether there is money in the till. gaagatary Control. The most important step in the control over execution of budget is the allotment of appropriations. Timeliness of expenditures is one of its problems. The county board or someone designated by it should determine how much of the prOposed expenditures should be spent each month, as the flow of revenue and rate of expenditure are not uniform throughout the year. The procedure is to call for departmental allotments as soon as budget is adopted. The schedules should show monthly allotments, should be revised and approved by budget authority, and, as far as possible, should not exceed the estimated revenue for that month. The accounting system and procedure play an important part in budgetary control through budgetary accounts. Control accounts for estimated revenues and apprOpriations are in the General Ledger. Subsidiary accounts for each source of estimatedrevenue should be carried in a 50 separate account in the Revenue Ledger. The same procedure should apply for the ApprOpriations Ledger, that is, a separate subsidiary account is provided in the Appropriation Ledger for each appropriation. The budget enforcement should be under the supervision of the chief financial Officer. He charges the purchase orders to the proper appropriation account at the time orders are issued - “encumbering the appropriations". Finally, the chief financial officer should prepare quarterly or monthly statements showing the status of budget during the year to show how actual statements compare with budget estimates and to compare the actual expenditures and unliquidated encumbrances with budget estimates. These statements should be studied to determine what action he will take to insure the effective execution of budget plan. Actual Standards. In Otsego, Sanilac, Houghton, Baraga, Eaton, and Berrien counties, the budget does not seem to be employed to show its true value as a control instrument. In nearly everyone of these counties, except Otsego and Eaton, there is an overdraft in the budget estimates of expenditures. In Macomb, Genesee, Gogebic and Calhoun counties, the budget control rests in the hands of controller or auditor or board of auditors. They approve the requests for purchases, issue purchase 51 orders and pre-audit all expenditures before they are given to the finance committee of the board of supervisors for approval of payment. Otsego county and Eaton county admit that they do not have a budget but somehow or other they seem to vote for certain portions of the budget, such as tax levy, salary and wage schedule and the Social Welfare appropriation, which is required by the state. In no county is there an allotment schedule but Macomb and Genesee counties have proven that it is not necessary in many cases. These controllers have proven that reasonableness as to time of expenditures is used in approving them. The accounting system, which plays an important part in budgetary control, is not established in Michigan to show how closely each expenditure or revenue comes to the budget figures because there are no budgetary accounts. The Appropriation Ledger exists only in Calhoun county. The only time one can find out when expenditures are made for equipment and property is when one looks into the latest county audit reports of the Auditor General. No encumbrance system exists in Michigan. Although the financial officers in the counties having a controller or board of auditors do not make any monthly or quarterly statements, it is always easy to obtain these from them. Gogebic county is an exception because it makes monthly, quarterly, semi-annual and D. 52 annual statements of expenditures, as well as of revenues. Whenever any of the departments are about to exceed their budget, they are called in by the chief financial Officer to show them that they are about to exceed the budget limits. Then the department head may go before the board of supervisors and ask for a change in the appro- priation by obtaining an increase in budget figure. In this case, a transfer of funds has to be made between departments (intra-fund transfer) or between funds, if it is legal, or some means of revenue has to be made to balance the increase in apprOpriation for that department. Conclusions and Recommendations: No adequate expenditures budget can exist in Michigan counties because of incomplete knowledge of the entire county debt, especially that pertaining to bonded debt and drain orders. The adoption of the county budget as prescribed by the Auditor General in October, 1958, would have been a step in right direction for a uniform and an adequate county budget system in Michigan. Another attempt should be made for budget adoption. An added reason for this would be intended to make the constitutional fifteen-mill tax limitation fully effective. The fees of county officers are seldom included in the budgets. If they are, the tendency is to give by far lower figures. The new budget system should include 55 all fees of the county officials. The administrative supervision should rest with the State Auditor General under the County Uniform Accounting Act. The counties having a controller, auditor, or the board of auditors have a better budget control than those which have decentralized method of accounting. The person to initiate and control budgets in those counties should be the clerk. There should also be budgetary control over the county road departments, whose expenditures are controlled by three county road commissioners, who are elected by the peOple or appointed by the county board of supervisors. To give the complete picture of county obligations as well as receivables, is almost an impossible task. The uncollected taxes as well as some debts on bonds and on drain orders should be audited to put into the budgets. The approved standards as to what the budget document should contain are poorly followed because they show the disposition of tax revenues but omit other revenues such as fees or miscellaneous revenue receipts from delinquent taxes, and from bond or note sale. The Macomb county controller's report has sufficient information to come nearest to the M.F.O.A. standards. Greater interest in county budgets by the public would tend toward higher standards. 54 The main trouble in all the counties is that the preparation of the budget is not vested in any one person. The Oakland county has a board of auditors, but responsibility in one person is better than in a group Of persons. The adoption of the county controller system in all counties whereby the county controller would be appointed by the state through competitive civil service and by the county board of supervisors to prepare and control the budgets would be great improvement. The salary of this controller would be paid partly by the state and partly by the county. His term of office might be about fifteen years and he could not be removed without cause, as he would have the civil service status. Then the counties could adopt the budgetary as well as proprietary accounts in the accounting system. The goal for the adequacy and uniformity of budgets would be nearer than under the present system. CHAPTER IV THE ACCOUNTING SYSTEM MFOA Standards. General. Certain fundamental principles of accounting are established and operate in the county for the purpose Of recording financial transactions (1) as basis of management, (2) to show fidelity of persons administering county's fund, and (5) as a public record to the interested parties concerning the county's financial condition and operations. This system should be set up on a double—entry basis. It is highly desirable that the accrual basis, namely, that revenues be accounted for when earned, and expenditures accounted for as soon as the liabilities therefor are incurred be followed instead of the cash basis, that revenues be accounted for only when received in cash, and that expenditures be accounted for as soon as liabilities are incurred of accounting because it enables a more accurate accounting of revenues and expenditures by successive periods. Only those sums of money should be taken up as revenue which are certain of collection within reasonable time. For example, taxes would be recorded as revenues as soon as levied after ample deduction for losses through failure of collection have been made. Expenditures should include all bills incurred for all 56 purposes, including the operating and maintenance expense, fixed charges, capital outlay, and provision for retirement of debt. The county's accounting system should be set up and Operated in accordance with legal provisions and in such manner that facts required by law may be readily obtainable. The chief financial officer should be acquainted with the legal provisions relating to (l) budgeting, (2) number and kinds of funds to be employed, (5) the organization structure of county, (4) duties of various county employee as specified by law, (5) cOunty revenues, (6) issuance of bonds, (7) auditing, (8) reporting, (9) any others that likely affect the accounting system. It is also the chief financial officer's duty to indicate to the county board the desirable changes in the legal provisions which will result in better accounting system and in better financial management and control. ‘AQtual Standards. Since the adoption of the Uniform Accounting Law by the counties in 1921, the accounting system has been established on a double-entry basis. Such a basis is exemplified in the use made of the columnar Journals. The taxes collected under this system are debited to cash and credited to the various funds. In cash eXpenditures, the affected fund is debited and the cash account is credited. Although the accrual basis is more desirable, the accounting BYBtem is maintained on the cash basis. It has been noted 57 that only a few counties have a personnel of high enough calibre to keep records on the accrual basis. These counties have an auditor, controller, or the board of auditors. Although the board of auditors does not perform any accounting duties, this work is usually delegated to an accountant who is appointed by them. A truer financial picture could be shown, especially if the expenditures were kept on the accrual basis. Much difficulty might be encountered to keep the revenues on the accrual basis especially in the case of taxes and special assessments, particularly in less populated counties where more than twenty per cent of the lands had been deeded to the state because of unpaid back taxes. The main trouble would be to find an apprOpriate allowance for the uncollectibles. As far as it can be determined, Macomb county makes some effort to show what allowances are made for uncollectible taxes and special assessments. The accounting system in Michigan counties Operates in accordance with law, but the changes are subJect to the administrative functions of state supervision under the authority given to the Auditor General. Since cash basis is maintained, the only expenditures listed in the accounting records are those which had been paid in cash. To find the accrued expenditures, one has to go beyond the records by getting all the original evidences such as invoices, purchase Orders, or any other available source. 58 The tax levies and their apportionment among the smaller political units will usually be shown in the proceedings of the board of supervisors. The audits made by the County Uniform Accounting Division of the Auditor General show only the full tax levy. The greatest trouble concerning the taxes receivable is the fact that the tax rolls are made by the township super- visors. Thus, the county treasurer and the chief financial officer do not know what taxes have been paid during the period when the tax collections were made by the township. The tax collections usually begin about December first and continue under the care of the township treasurer until March first. Then all the county portion of the taxes collected are turned to the county treasurer, who gives the Official Receipt for all this money. The moneys collected for smaller localities and schools are kept by the local governments. The fallacy of expenditures in less populated counties because of the cash basis has been shown before by the fact that many bills are not paid until the new administration comes into some county office. This can be demonstrated by the following example: A certain department bought about a $1,000.00 worth of goods but the head of the department had lost out in the election. In order to show that his department had operated very economically, he will not issue the invoices to the chief finance officer (or county clerk) or submit the voucher for payment to the bOard of supervisOrs. Naturally, when the new 59 administration comes into office, they have a $1,000.00 payment to make, and therefore, the expenditure is made to the succeed- ing administration instead of the one which accrued the expenditure. It is not uncommon in Michigan counties to have overdrawn funds, especially the Revolving Drain Fund and the General Fund. As has been stated before, and in the strictest sense of word, there is no true budget in the Michigan counties. Number and kinds of funds employed vary among the Michigan counties. The duties of various county officials are specified by law or by the ordinances made by the county board of super- visors. The county revenues vary by source and fund, but will be enumerated in greater detail in some parts of this and the succeeding chapter. The issuance or the refunding of bonds is controlled by the Public Debt Commission of the State of Michigan after the peOple of county or board of supervisors have voted in favor of the measure to issue or refund bonds. The auditing is in charge of the County Audit Staff of the' Auditor General Department, also known as County Uniform Accounting Division. Reporting is to be made by each depart- ment at the request of the board of supervisors or some Michigan State Department. As to any laws affecting the accounting system, the state departments might see to it that the counties will conform according to law. This has been especially shown by the creation of the Department of Social 1/ Welfare in all the Michigan counties, which is under the L 1 Act 280; P. A. 1959 60 control of the State Department of Social Welfare. As has been stated before, the Operation and maintenance of the accounting system in many Michigan counties has not been materially improved in the past twenty years. At that time, Michigan seemed to have led all the other states when it adopted a uniform system of accounting, but now it seems to lag by keeping the same account— ing forms, although some improvements have been made in auditing and reporting. The logical followaup to a good uniform budget procedure is a uniform accounting procedure. The adOption of uniform budget procedure will facilitate the checking and comparison of apprOpriations, the accounting procedure carries it a step further by showing the actual results of operations performed under the authority of budgetIg/ The adoption of the uniform budget together with accrual and encumbrance system of expenditures would take some time but the results would warrant it. A. Aacounting System .MaF30aa; Standards. .229 Records. The financial information is derived from the accounting records, which form the media in which accounting transactions are displayed. Generally, there are three types of records: (1) original evidences which give details concerning accounting transactions, such as invoices and vouchers, 2 Miller, Loren B. 0p. cit. p. 49. 61 (2) the books of original entry, commonly called Journals and registers; and (5) the books of final entry, or ledgers. Every entry should be based upon some original document which should supply the information needed in recording that transaction. For example, tax collections will be evidenced by tax receipts, disbursements, by warrants; and accounts payable, by purchase orders, vendors' invoices and vouchers. Usually, an entry is recorded to the book of original entry and then is posted to the accounts. Even the smallest county must have at least one book of original entry in which transactions will be recorded chronologically. The volume and kinds of transactions should determine the number and kinds of books to be used. The following books of original entry probably are needed in a county of about 40,000 population: (1) General Journal, for assembling accounting information not recorded in any other book; (2) Cash Receipts Book, for relating all transactions for cash receipts; (5) Voucher Register, for entering all amounts approved for payment; (4) Check Register for recording checks paid out; (5) Payroll Register, used to list names and earnings of all persons employed; (6) Bond and Interest Register, which shows the full legal history of each bond issue and the amount Of interest and principal due or sinking fund requirements at various dates; (7) Contract Register, for recording contracts and (8) Purchase Order Register, for recording purchase orders. 62 Posting the figures into proper accounts in the ledgers is the final step. Of the two types of accounts, the principal accounts are carried in the General Ledger while the subsidiary accounts are contained in subsidiary ledgers. The General Ledger is indispensable as it contains all the accounts from which the balance sheet is prepared. Accounts in subsidiary ledgers support the several controlling accounts. The following are some of the essential subsidiary ledgers. The total account balances in each of these ledgers must agree with the balance of corresponding control account in the General Ledger:. (1) Revenue Ledger (2) Appropriation Expenditure Ledger (5) Tax Rolls (4) Bond and Interest Ledger (5) Property Ledger (6) Other Subsidiary Ledgers (if needed) (a) Detailed Revenue Ledger (b) Detailed Expenditure Ledger (0) Bank Ledger (d) Stores Ledger (e) Investment Ledger (f) Contract Ledger (g) Miscellaneous Accounts Ledger 65 Actual Staadards. The accounting records for some departments are specifically stated in the Manual of Instructions prepared by the Auditor General's Department. These manuals are for the following county offices: Sheriff, Judge of Probate, County Clerk, County Treasurer, and Register of Deeds. The Social Welfare Department has the most restrictions from the State Department Of Social Welfare as to the types and kinds of records it should keep. Usually there are no payroll sheets which indicate the cost of labor in any of the counties studied but the individuals, whether they are Officials or appointees, are on salary basis. Otsego and Sanilac county officials are kept exclusively on fees, but records are provided for any department which collects any kind of fees. The recording of an accounting transaction usually begins at the time it takes place. First, the department receipt is usually given to the individual who pays for a particular service. From this original evidence, the posting is made on the Daily Cash Receipts Book of the department. At the end of the day, week, or month, depending upon the size of the counties, the sum of money being collected is taken from the Department Cash Receipts Book and written on the revenue voucher which is taken over to the treasurer. This voucher shows the source of funds. The treasurer gives the department concerned the treasurer's receipt. Then the treasurer, from the carbon 64 copy of the treasurer‘s receipts, posts it on his books, known as the Treasurer's Cash Receipt Book. From there it is posted to the General Ledger into dual accounts by debiting the revenues and crediting the funds to which these sums of money belong. The following accounting records are being kept in all the Michigan counties with exceptions as noted: 1. 6. 7. Transfer Voucher which really is a Journal for transactions between funds Department Cash Receipts Book Treasurer's Cash Receipts Book Voucher Register Payroll Register is kept only in the highway department although from now on all the local units Of government are to keep the records of earnings of all the individuals for the income tax purposes. Warrant Register Bond and Interest Register The Contract Register and the Purchase Order Register could not be found in any of the counties although Macomb, Genesee and Oakland counties issue Purchase Orders. It is very difficult to find the true balance sheet accounts in any of the counties. Usually the counties like to give record of receipts B. 65 and disbursements and giving trial balance by indicating what credit amounts from funds for and what amount of money is deposited in some banks. The following subsidiary ledgers exist in the counties: 1. Tax rolls which are the life blood of all the counties. \ 2. Bond and Interest Ledger 5. Property Ledger is kept only in Macomb county. 4. The Accounts Payable Ledger is being kept only in Calhoun and Macomb counties. Since Michigan counties do not have a uniform budget procedure and the records are not kept on the accrual basis, they do not have Revenue Ledger, ApprOpriation Expenditure Ledger and Detailed Revenue Ledger. Stores Ledger is being kept only by Macomb county which works on the perpetual inventory system in the distribution of supplies. General Ledger takes place of the Bank Ledger, which is kept on the General Ledger books. Investment Ledger is also being kept like the Bank Ledger. Tao Accounts. ‘The accounts should be classified according to funds and a chart should be prepared to show all the account titles by the county. By means of code numbers, the classification and posting may be facilitated. Accounts in General Ledger are grouped by funds and each group or fund is complete in itself by having the total 66 debit and total credit balances of the accounts in each group equal. ‘A manual of instruction describes the nature of accounting transactions with proper debits and credits.) Within each fund the accounts should be divided according to whether they go to make the balance sheet or the operating statement. The balance sheet accounts relate to assets, liabilities, reserves, and surplus. The operating accounts relate to revenue accounts which are grouped by source and expenditure accounts which are grouped by function and organization unity“ fit