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In the modern financial environment, there are a number of specific purposes and tools of financial management and budgeting in the public sector designed to improve its accountability and efficiency. One of the concepts that serve such purposes is an audit follow-up system. However, it is also important to note that in terms of public sector, there are some considerable differences between audit follow-up systems of a different scope. In other words, there are certain divergences in the way such systems function at the levels of state, counties, and separate towns. Furthermore, although the implementation of audit follow-up systems at the level of a state is one of the subjects under a close financial research, it is also important to discuss the specifics of audit follow-up systems operation at the level of a particular city.
For that reason, considering the fact that cities are an important element in the budgeting and financial processes of the public sector, the cases related to audit follow-up systems incorporated into city structures are of a growing relevance. It is also paramount to underline the fact that, in the case of Springdale, budgeting and financial management of the city are guided by governmental city council and city manager.
Thus, the objective of this paper is to interpret all the implications related to the case of the city of Springdale in order to provide precise recommendations regarding the city’s audit follow-up system, in particular, and budgeting and financial management system of the city in general.
Springdale is a city of 250,000 permanent residents, and considering the number of residents and all the needs that require attendance in the city of such size, the approximate governmental expenditures for the city are 106,000,000 dollars. The employees of the local council and various public sector offices receive an annual payroll of 40,000,000 in total. It is also important to point out the fact that the city also receives the federal financial assistance in order to ensure that all the needs of residents are taken into consideration.
However, despite all the mentioned financing, the audit reports regarding the budgeting suggest that both the council and the residents are required to cut the expenses and try to economize. In the context of the absence of any prior recommendation, such following-up recommendation leaves open a question of how efficiently the system of audit follow-up operates in the city.
Also, the city council employed a new city manager, which, in a way, predetermined some changes to the financial management and budgeting of Springdale. Thus, the main problem with the findings and audit recommendations is that the city manager initiated “procedures for reconciling the sales and use taxes due from the local businesses against the amounts that were actually collected” (478). If such recommendation were implemented, it would not affect tax increases for the rest of the residents. Otherwise, saving up measures negatively influence all the residents.
Linkage to the public budgeting and finance topics or issues
This case of the city of Springdale relates to the issues of public finance and budgeting in terms of compliance between audit and audit follow-up recommendations. The major implications, in this case, concern the fact that the city council and city manager because of the downsizing of the financial department did not react timely to budgeting problems, which afterward could affect the residents of the community and result in an increase in taxes.
It highlights the problem of the lack of proper budget planning and malfunctioning in the audit follow-up systems. Various problems may arise if governments make decisions to enforce regulations that include economizing measures at the expense of the community residents.
Questions and Answers
- Ensuring the balance between revenues and expenditures in the public sector is the main role of the purpose of auditing and financial management (Smith and Hou 2). Due to tax collection from local businesses and residents, the community governmental organs are to make sure that the revenues from those taxes could be contributed to satisfying the needs of the community, including the payroll for the governmental organs of the community.
- Overall, the nature of the audit follow-up is to provide the finding of the audit process in the manner that can implicate some recommendation. Therefore, in public sector finance and budgeting, different audit follow-up procedures are aimed at producing recommendations to the finding of financial audit in order to enhance the accountability and the effectiveness of the public sector. The main aim is to balance the revenues public sector receives from taxpayers and the expenditures intended to satisfy the public’s needs.
- The main attributes of an effective audit follow-up system include a stable basis of governmental policies needed for following up the recommendations, commitment of organization or body meant to implement the recommendations, and clear distribution of responsibilities in such organization. Also, attributes are obligatory of the recommendations evaluating in terms of budgetary and other impacts, ability to create a plan of corrective actions, constant monitoring on whether the recommendations are implemented adequately to the situation with the special attention to key issues, and maintain periodic status reports.
- The first advantage is audit follow-up system sums up the findings of the audit process, which is important in the public sector because it operates considerable revenues and expenditures. Secondly, audit follow-up systems are aimed at designing recommendations that can improve the balancing revenues and expenses in the public sector. The third advantage is that audit follow-up system is meant to provide the findings and recommendations concerning financial management to the public, which ensures the integrity of a particular community. Finally, audit follow-up systems monitor the process of recommendations implementations to make sure that all the factors, system procedures, and system uses are accounted for.
- In such a way, the very concept of accountability is to bring to attention the fact that audit follow-up system should be monitored not only by the financial managers but by all the employees and researcher of the public sector (Brooks and Pariser 82).
- One survey conducted by Brooks and Pariser measured different characteristics recommendation on the audit follow-up system at the state level, the research, in this case, included all states studied in terms of their fulfillment of the criteria for an effective audit follow-up system in the public sector. According to Brooks and Pariser, 30 states showed “the monitoring compliance with law and regulations”, the same problem that concerned the case of Springdale, only 18 states were efficient in “identifying areas in need of performance audit”, and only 10 states succeeded in “determining future budget appropriation” (Brooks and Pariser 82). While the former results suggest the lack of attention to system procedures as an attribute of audit follow-up system, the latter two results imply the insufficiency in attending the system uses.
- Another survey that was more focused on the issues of financial management and budgeting in the public sector at the local level. According to the results, only in 13 states, there are “withheld funds for failure to take corrective actions on audit recommendations” meant for each county and city, as well as for audit procedures at the state level (Brooks and Pariser 79).
- The overall results at the different levels suggest that “82% of the states, 64% of the counties, and 51% of the cities” adequately implement the audit follow-up procedures (Pariser and Brooks 473).
- The major problem with Springdale’s audit follow-up system is that the majority of recommendations were not carried out. However, there are also some implications that the procedures were not entirely compliant with the applicable regulations since there were risks and concerns that the economizing measures implemented in the result of the city council and city manager’s failure to respond to the audit findings could affect the residents of the community.
- The city council of Springdale should consider three major areas of enhancing the effectiveness of an audit follow-up system. Firstly, the main criterion of an effective audit follow-up system is that it should be maintained in accordance with the applicable laws, and all the recommendations and regulations provided in the audit follow-up should consider the public interest. Thus, one of the aspects is the normative component, its compliance with the community laws and regulations
- The second component of enhancement is the identification of specific areas that need performance auditing. It will also include such specific actions as planning general audits and planning single audits. The findings should be accompanied by the recommendations that can be realistically implemented. An effective audit follow-up system should rely on the precise evidence obtained in the audit process. In such a way, it will follow the criteria of legitimacy, credibility, and accountability.
- Finally, in order to include various environmental factors, procedure, and uses of the system of finance management and budgeting, the city council needs to determine appropriations and consider impacts on the budget.
- Legislative committees are monitor whether the procedures are compliant with the applicable laws in both general and single audits. Alongside monitoring adequacy and status of recommendations, they also can utilize the system for defining budgetary impacts in present and future.
- Audit committees are to monitor the status of the recommendation implementation process for general and single audits and to maintain periodic status reports.
- Program managers can provide monitoring and evaluating services.
- Financial directors are able to utilize the system for predicting and managing the implications and impact on the budget of the public sector.
- Independent external analysts can utilize the system to use media to ensure public attention to the recommendations.
- Actions of a public agency manager to ensure effective implementation of the recommendations should rely on trying to support organizational commitment and constant monitoring of the status of recommendations. It is also important to inform the public on the matters of audit follow-up procedures in order to enhance public control.
- Of course, among the needs in the care of the public sector in Springdale, there are 50 square miles of area, including a number of community parts that need to be managed. However, considering the scope of budgeting and federal assistance, there is still an issue of whether the current audit follow-up system has enough credibility for financial management and budgeting of the city of such size. Thus, the corrective action for Recommendations 1-4 should terminate the increase in tax funding until it is confirmed that such procedures are acceptable within applicable laws.
For Recommendations 5-9, it is reasonable that there is a need for determining specific appropriations for the budgetary needs, especially considering the overdrafts. However, there is an assumption that overseeing of the risks of the financial situation and, therefore, its results in recommendations regarding saving up measures was caused by the downsizing in the financial department of the city council. Thus, corrective action is to employ independent analysts for monitoring budgetary appropriations and status of recommendations.
For Recommendations 10-12, corrective actions should be made with consideration for both environmental risks and the public who is affected by them (Hendrick and Crawford 25). For Recommendations 13-14, updating the school guidelines and equipment would cause more expenditures for the public sector. Revision of property tax collection procedure suggested in Recommendation 14 could be effective, but an increase in property tax would affect both schools and families of the children. Thus, changes to the procedure should avoid a tax increase.
In such a way, there are a number of issues related to the financial management in Springdale’s public sector. The most important implication of the governmental saving up measures is that the taxes on the residents may increase, which is a serious matter of the public concern because there is a possibility of non-compliance with applicable laws. In order to attend to all the issues, follow-up system should predetermine corrective action aimed at considering all the attributes of effective audit procedures with the consideration of environmental factors, system procedures, and system uses.
Brooks, Richard, and David Pariser. “Audit Recommendation Follow‐Up Systems: A Survey of the States.” Public Budgeting & Finance 15.1 (1995): 72-83. Print.
Hendrick, Rebecca, and Jared Crawford. “Municipal Fiscal Policy Space and Fiscal Structure: Tools for Managing Spending Volatility.” Public Budgeting & Finance 34.3 (2014): 24-50. Print.
Pariser, David, and Richard Brooks. “Governmental Audit Recommendation Follow‐Up Systems.” Case Studies in Public Budgeting and Financial Management. Ed. Bartley Hildreth. New York: CRC Press, 2003. 460-484. Print.
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Smith, Daniel, and Yilin Hou. “Balanced Budget Requirements and State Spending: A Long–Panel Study.” Public Budgeting & Finance 33.2 (2013): 1-18. Print.