Guest Column

Stacy Bjorhus

Former Finance Director at city of coatesville

Is the City reporting their Financial Reports in Cash Basis Accounting Method, and why does it matter?

Cash Basis Accounting Method recognizes revenues when received and expenditures when paid. Cash Basis Accounting is widely used in the Private Sector, but discouraged by Governmental Accounting Standards Board (GASB) for governmental entities. The City has reported their Audits and Financial Reports in Modified Accrual Accounting Method in prior periods, so using Cash Basis Accounting Method, as it appears the City Finance Department may currently be doing, and was used during the first months of 2012 (January & February), will give the false impression that City revenues in the first two months of the year were in a far rosier position than they actually were.

My belief that the City is using Cash Basis Accounting Method, which presents the financial data with overstated 2012 Revenues by more than $500,000 through Feb 29, 2012, is based on the January and February Financial Reports posted on The City’s web site: January

February

Revenues that should be posted to December 2011 General Ledger and deleted from the 2012 General Ledger:

January 2012 February 2012 Total

Earned Income $122,754 $280,212 $402,966

Local Service Tax (LST) 1,400 5,700 7,100

Cable Television Franchise 22,448 17,430 39,878

State Grant, Econ Devel 51,424 - 51,424

Total $198,026 $303,342 $501,368

All of these revenues were earned in 2011, and received within the first 60 days of the New Year. Earned Income and Local Service Tax for 1^St Quarter 2012 were due to be filed with City’s collectors by April 30 2012, and Cable Television Franchise Fees for 4^th Quarter 2011 are paid in the 1^st Q of the New Year. These revenues will be accrued back to 2011 by the City’s outside auditor, however until then City Council will believe that there is far more revenue earned and received in the current year. It is possible that other revenues reported in the January and February Month to Date Financial Reports should also be posted to the 2011 General Ledger; however identity of revenues earned in 2011 would only be possible with the accompanying check stub information or ACH memo for automatic deposits in the City’s General Fund Bank Account. The revenues noted above are known to be 2011 revenues based on knowledge of their remittance schedules to the City.

Just some background on this:

In 1999 the Governmental Accounting Standards Board (GASB) issued Statement 34 which stated how municipalities throughout the United States were required to report their financial reports, capital assets, liabilities, long and short term debt. GASB 34 was required to be complied with by 2004, at the latest. The goal was to be able to measure municipal performance, with comparison to other municipalities, with comprehensive financial data that is easy to read and compares municipal performance on a level basis of comparison.

One of GASB 34 Statement’s major changes that affected municipal governments on a day to day basis was a requirement to change the accounting method from Cash Basis Accounting Method (revenues are recognized when cash is received, and expenditures are recognized when cash in expended and cash assets are diminished) and move towards Accrual Basis Accounting (revenues are recognized when earned, expenditures are recognized when the liability is established).

The City of Coatesville, like many other municipalities, has opted to report their Annual Audits and Statements in Modified Accrual Basis Accounting which recognizes revenues earned in the period earned and received within 60 days of Year End, and expenditures are recognized in the accounting period in which the liability was incurred, if measurable.* (GASB accepts Modified Accrual Accounting Basis). Barbacane Thornton, the City’s outside auditors, explain how they treat revenues and expenditures in the City’s Annual Reports. See: Notes to Statements in the Annual Audits and Statements pages 17 of 40 and 18 of 40:

Now based on the above, the following question needs to be raised:

Why is the City currently in a cash crunch and pondering another withdrawal from the Trust? Has the City overspent their foreseeable revenues because the Financial Reports for January and February (and possibly March through current period) have presented financial data in Cash Basis rather than in Modified Accrual Basis and have overstated revenues? Has City Council based their actions on incorrect financial data presented in Cash Basis Accounting Method and were duped as to the City’s financial condition until it was too late to turn back?

Is Council aware that their financial reports are prepared using a Cash Basis Accounting Method and not the method that the outside auditors use, and has been used for Financial Reporting by the City since September 2009?

The City’s current Month to Date Financial Reports for 2012 (January and February) as they are posted on the City’s web site are reporting financial data to City Council using Cash Basis Accounting Basis rather than Modified Accrual Accounting Basis. Why? Is there a purpose for reporting in Cash Basis, or are the City’s Manager and City Council unaware of the requirements of GASB 34 and the City’s outside auditors?

Expenditures that should be accrued back to 2011 City Financial Software Module and Financial Reports cannot be picked out as easily as the revenues. It is possible that the City is also reporting expenditures in 2012 that do not belong there. The problem with expenditure misclassification is that the 2011 expenditures will be understated and will distort historical records, for budget preparation purposes in the future or Bonus Pay evaluation if Bonus Pay is paid out based on expenditure levels of 2011.

City Council may have made economic decisions in 2012 based on their belief that there was more revenue in the current year than there actually was.

One can only speculate what financial data Council Members are presented, for their decisions that are affecting residents, businesses and property owners alike.

For more information:

Summary of Statement No. 34Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments (Issued 6/99)

"Governmental fund financial statements (including financial data for the general fund and special revenue, capital projects, debt service, and permanent funds) should be prepared using the current financial resources measurement focus and the modified accrual basis of accounting. Proprietary fund financial statements (including financial data for enterprise and internal service funds) and fiduciary fund financial statements (including financial data for fiduciary funds and similar component units) should be prepared using the economic resources measurement focus and the accrual basis of accounting."

*********

In the addition the following was taken from Barbacane Thorntons Report presented to the City of Coatesville:

City of Coatesville, Basic Financial Statements with Supplemental Information, December31, 2010

“CITY OF COATESVILLE

NOTES TO FINANCIAL STATEMENTS

Governments/ Funds

All governmental funds are accounted for using the modified accrual basis of accounting and the current financial resources measurement focus. Under this basis, revenues are recognized In the accounting period in which they become measurable and available. Expenditures are recognized in the accounting period in which the fund liability is incurred, if measurable.

Revenue Recognition

In applying the "susceptible to accrual" concept under the modified accrual basis, revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the City considers property and earned income tax revenue to be available if collected within 60 days of the end of the fiscal period. Revenues for state and federally funded projects are recognized at the time all eligibility requirements have been satisfied. Eligibility requirements include timing requirements,

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

which specify the year when the resources are required to be used or the year when use is first permitted; matching requirements, in which the City must provide local resources to be used for a specified purpose; and expenditure requirements, in which the resources are provided to the City on a reimbursement basis.

Property tax and earned income tax receivables collected after 60 days from year end, though Measurable, are not available soon enough in the subsequent year to finance current period obligations. Therefore, property and earned income tax receivables are recorded and deferred until they become available.

Other revenues, including certain other charges for services and miscellaneous revenues are Recorded as revenue when received in cash because they generally are not measurable until actually received.

Expenditure Recognition

The measurement focus of governmental fund accounting is on decreases in net financial

resources (expenditures) rather than expenses. Most expenditures are measurable and are

recorded when the related fund liability is incurred. However, principal and interest on general long-term debt which has not matured are recognized when paid. Further, as provided in GASB Interpretation No. 6, Recognition and Measurement of Certain Liabilities and Expenditures in GovernmentalFundFinancialSfatements, certain governmental fund liabilities and expenditures, such as for compensated absences, are recognized to the extent the liabilities mature (come due for payment) each period. Allocations of costs, such as Depreciation and amortization are not recognized in the governmental funds."