DOCUMENT RESUME 00301 - A10519701 Noew York City's Efforts to Improve Its Accounting Systems. FGHSD-77-15; -185522. April 4, 1977. 29 pp. Report to the Congress; by Blmer B. Staats, Comptroller General. Issue Area: Accounting and Financial Reporting (2800). Contact: Financial and General Management Studies Div. Budget Functon: General Government: Other General Government (806); evenue Sharing and General Purpose Fiscal Assistance: Other General Purpose Fiscal Assistance :"52); Miscellaneous: Financial anagement and Information Systems (1002). Organization Concerned: New York, NY; Department of the Treasury. congressional Relevance: House Committee on Banking, Currency &nd Housing; Senate Committee on Banking, housing ard Urban Affairs; Congress. Authority: New York City Seasonal Financing Act of 1975 (P.L. 94-143). an examination of New York City's efforts to improve its accounting syste, was part of a review cf the city's progress under its 3-yaar financial plan. The credit agreement under which loans are made to the city by the Federal Government requires the city to establish an accounting system by July 1, 1977, which will enable an auditor to perform an annual audit and render n opinion. Findings/Conluasions: Although much progress has been made, the new accounting system will not be implemented by the required date. City officials have deferred implementation of the payroll subsystem and ay also defer other subsystems because of lack of time. The City will not meet requirements for producing financial statements which will allow for an auditor's unqualified opinion because of poblems in the system including inaccurate ard icomplete data. Recommendations: The Secretary of the Treasury should examine the city's progress in meeting requirements and authorize reasonable extensions of time where it is needed for orderly completion of work. (HIM) REPORT TO THE CONGRESS BY THE COMPTROLLER GENER4 : ~",.: OF THE UNITED STATES New York City's Efforts To Improve Its Accounting Systems Department of the Treasury At least some aspects of the city's new ac- counting system will not be implemenried Dy July 1, 1977, as required by the credit -gree- ment with the Department of the Treasury. Th- credit agreement contains the terms under which loans are made to the city by the Federal Government. The credit agreement also requires the city to include those records and controls in the new accounting system which will enable an audi- tor to render an opinion on the city's fin- ancial statements for the year ending June 30,1978. The city temporarily deferred the implementation of some records and controls which will require the auditor's opinion to be st bstantially qualified. FGMSD-77 15 - 4 7 COMPTROLLER GENERAL OF TI-E UNITED STATES WASHING1'ON. D.C. 20111 B-185522 To the President of the Senate and the Speaker of te House of Representatives Pursuant to provisions of the New York City Seasonal Financing Act of 1975 (Public Law 94-143), we have been viewing New York City's re- plan. This report is oneprogress under its 3-year financial of a series which we will to the Congress. submit Appendix I contains our observations on the city's efforts to improve its accounting these efforts systems. We reviewed have confidencebecause present and potential creditors in the accounting information must the city. produced by Reliable accounting information factors which will influence is one of many a viable fiscal posture the city's ability to establish tion is used as a basis in the long-term, for such informa- budget and program plans.for formulating and executing the The credit agreement under city by the Federal Government which loans are made to the lish an accounting system requires the city to estab- an auditor to perform an by July 1, 1977, which will enable ion. 1/ The objective of annual audit and render an opin- our review was --to determine the city's plans for improving its counting systems, ac- --to determine the status of improvements as of Octo- ber 1976, and --to evaluate the problems which may prevent the city from making the accounting system improvements which the credit agreement requires by July , 1977. 1/An auditor's opinion is the asserting whether the financ written finding of an auditor, the condition of the entity al statements fairly present under audit at the stated and the results of its operations date ending on that date. for the fiscal period B-185522 Although the accomplishmnnts of the city and its contrac- tors have far exceeded those which would normally be expected in developing such a complex system, the new accounting system will not be implemented by July 1, 1977, and the financial statements for the year ending June 30, 1978, will not meet the standards necessary to receive an auditor's unqualified opinion. Although the credit agreement does not require an un- qualified opinion, a qualified opinion, depending upon its significance as perceived by the financial community, could discourage investors and affect the city's return to the credit markets. We believe the city should do everything possible to receive an unqualified opinion. City officials have deferred implementation of the pay- roll subsystem until after July 1, 1977. They have informed Is that they may also defer implementation of the encumbrance (purchase order) control subsystem. We believe that it s highly possible that some, and maybe all, of the other sub- systems will also be eferred because of the amount of work to be completed in the relatively shcrt time remaining until July 1, 1977. The city already faces two major problems as a result of the short time remaining, one involving the readi- ness of the agency wh'ch will perform the automatic data proc- essing oerations for the new system, and the other involving the time required to train city employees who will be asso- ciated with the new system. Under the credit agreement, the State Comptroller may authorize a certified public accountant to make the audit for the year ending June 30, 1978. Such an auditor of financial statements would be concerned with whether they fairly present the city's financial position and results of operations and whether they conform with generally accepted accounting prin- cioles; therefore, we believe that the city sho.uld have de- signed the new system to include all information that a cer- tified public accountant would need to express an unqualified opinion on the city's financial statements. The city, however, did not do so. Problems in the system which we believe will prevent the city from producing adequate financial statements for the year ending June 30, 1978, and receiving an auditor's ungualified opinion are (1) inclusion of probable inaccurate payroll data in the statements, (2) lack of required financial statements for intragovern- mental and enterprise funds, (3) inclusioun of inaccurate data in the financial statements for the Capital Projects Fund, and (4) lack of a required statement of general fixed assets. B-185522 We recommend that the Secretary the city's progress toward completion of the Treasury examine auditing requirements under the of the accounting and credit ing due consideration to the interests agreement, and, giv- ment, authorize reasonable extensions of the Federal Govern- where additional time is needed of time in those cases orderly and effective manner. to complete the work in an On page 19 of Appendix I, we suggest some actions that could be authorizeJ Ly the Secre- tary to accomplish this. In October 1976 we provided the State, and city with a draft report Treasury Department, nary conclusions and suggestions. containing our prelimi- A official, the Deputy to the Assistant Treasury Department Finances, said that Treasury had Secretary for New York no comments on the report. The State's response, dated November 9, 1976 (App. II), and the city's response, dated November considered in the preparation of 23, 1976 (App. III), were this report. We are sending copies of this report the Treasury, Director of the to the Secretary of Office of Management and Budget, Governor of New York, Mayor of New ested parties. York City, and other inter- Comptroller General of the United States 3 APPENDIX I APPENDIX I OBSERVATIONS ON NEW YORK CITY'S EFFORTS TO IMPROVE ITS ACCOUNTING SYSTEMS The credit agreement under which seasonal loans are made to New York City by the Federal Government requires, among other things, that the city and New York State Emergency Financial Control Board "pursue with diligence the design and implementii- tion of [a] new accounting system and * * * that by July 1, 1977 the City will have established an accounting system which will establish adequate records and controls which would enable an auditor to perform an annual audit and render an opinion thereon." The credit agreement also requires the city and the board to improve the reliability of the city's existing financial rec- ords and the reports generated from them, and to adop- a sys- tem of internal controls over the receipt and disbursement of city funds. Our review was conducted under authority of the New York City Seasonal Financing Act of 1975 (Public Law 94-143). We reviewed the city's efforts to improve its accounting systems because the improvements are essential to the city's internal management and its return to the credit markets. SCOPE OF REVIEW Our review was conducted in New York City, where we ex- amined pertinent documents. Interviews were held with city officials responsible for the accounting systems improvements, and contractors engaged to improve the city's accounting sys- tems. Our review was limited to a determination of the city's plans for improving its accounting systems; the status of the improvements as of October 1976; and an evaluation of problems which may prevent the city from making the accounting system improvements which the credit agreement requires by July 1, 1977. 1 APPENDIX I APPENDIX I IMPROVEMENTS NEEDED IN EXISTING SYSTEM Numerous weaknesses have been identified in the city's ,ccounting system since mid-1975 by various organizations responsible for overseeing the city's financial management. Although we know of no complete listing of the weaknesses, many of them were identified in a report dated December 29. 1975, to the Secretary of the Treasury from the certified public accounting firm of Arthur Andersen & Co., which was engaged by the Department of the Treasury to obtain certain financial and accounting information about the city. Some of the more serious weaknesses identified in the report are as follows: -- Inadequacies and lack of controls in the overall ac- counting systems and procedures. -- Lack of good accounting and systems discipline in the agencies and data processing centers, and the absence of a capable internal systems staff. -- Fund control structure not useful for control of revenues, expenditures, and fund balances. -- Program budgeting and accounting procedures cumbersome and uncontrolled. -- Expenditures recorded on a cash basis and revenue on an accrual basis. -- Agency processing of vouchers delayed. -- Expenses for contracts not recognized until vouchers are processed. -- Inherent controls in municipal fund accounting weakened by allowing transfers of moneys between funds. --Two funds for special and miscellaneous revenues not under the normal budgetary control system, -- Accounting and financial data processin%, systems n- adequately integrated, redundant, inconsistent, and unreconciled. --Bank balances not reconciled for several years. 2 APPENDIX I APPENDIX I -- Information on cash balances maintained troller and the Director by the Comp- of Finance differing eral million dollars. by sev- -- Inadequate controls over data entering processing system, the disbursement rejected vouchers, disbursemnent requests. and the timing of CITY'S PLAN FOR IMPROVING ACCOUNTING Weaknesses in the city's accounting nized when the New system were recog- York State Legislature pal Assistance Corporation created the Munici- 1975 to provide a for the City of New temporary source of York in June confidence could be credit until investor restorei. The act requited the adopt improved accounting city to ing audited financial methods and employ them in statements produc- June 30, 1978, and thereafter. for the fiscal year ending The city elected to get new budgeting and accounting contractual assistance to define principles which conformed those prescribed by the to and management financial State Comptroller, develop new public cept for new budgeting reports, and develop a and systems con- were awarded on December accounting systems. Two contracts and the other to American 5, 1975, one to Touche Ross & Co. Management Systems, Inc. The two contractors collaborated produced a report, "City and on January 15, 1976, Policies, Procedures, of New York Financial and Systems," to provide Management for the design and implementation the framework ment process for the city. of a new financial manage- four subsystems: The plan called for the design of -- Budget. This subsystem and expense budgets and is to provide separate revenue establish monthly revenue recognition. cash collection, revenue budget will identify and spending plans. The funds and responsible each separate source of organization. The expense will be by organizational unit. budget -- Encumbrance control. This subsystem is to provide tral accounting for commitments cen- brances (purchase orders), (requisitions), encum- will permit the availabilityand expenses (vouchers). It by the computer before of funds to be determined an encumbrance is incurred. 3 APPENDIX I APPENDIX I --Accounting and financial reporting. This subsystem is to be the basic management tool for nonitcrinq the city's financial position. The ubsystem will include the following accounting operations: cash disburse- ments, revenue recognition, cash collections, general ieoger maintenance, and financial reporting. The sub- system will provide monthly reports comnaring revenue, cash collections, and spending against plans provided by the budget subsystem. --Payroll. This subsystem is to be an integrated system which will perform all of the bzcic fnctions of a pay- roll system and maintain certain . s,anel information. In February 1976 the city awarded cntracts to American Management Systems, Inc., Touche Ross & Co., and LErnst & Ernst. The contracts required each of them to assist the city in es- tablishinq financial management policies, defining teoortinq requirements, and strengthe inq organization structures and personnel skills as reqilireu. In addition te these general requirements, each contractor was given specific assignments. American Management Systems, Inc., was to repare a general design for the four subsystems and provide automatic data oro- cessin support. Touche Ross & Co. was to assist in the de- sign of the four subsystems and in the develooment of the overall implementation plan, and orepare rocedures for im- pro:-ing control over Federal and State aid revenues and cer- tain types of encumbrances. Ernst & Ernst was to develop an implementation plan for installing the new subsystems and pre- pare the documentation needed to convrert the city's depart- ments to the new system. Although the nw accounting system was not expected to be implemented until July 1, 1977, the three contracts were limited to that work to be erformed up to September 15. 1976. The city awarded new contracts to all three contractors in August 1976. ermitting the work to continue without interruo- tion. In June 176 the city engaged an additional contractor to assist in the accounting system improvement effort. Two con- tracLs were awarded to Bradford National Corooration, one for assistance in the automatic data processing asoects of the new system and the other for the design of the payroll subsystem. In June 1976 the city also awarded a contract to the Research Foundation of the City Universitv of New York or. be- half of the rban Academv. The contract requited the Urban 4 APPENDIX I APPENDIX I Academy, with the cooperation develop training requirements of the other contractors, to training manuals and conduct and, subsequently, to prepare training classes. STATUS OF THE PROJECT AS OF OCTOBER 1976 The cty and its contractors ress toward implementing a new have made remarkable prog- accounting 10 months since the first contracts system. In the plishments of the city and its were awarded, the accom- which would normally be expectedcontractors far exceed hose development effort. in such a complex system American Management Systems, that developing a complex system Inc., literature indicates 31 to 88 months, depending on such as this one requires whether formed sequentially or concurrently. certain phases are per- estimates are reasonably accurate. We believe that these however, mandated in June 1975 The State that extensive of New York, changes be made in the city's accounting system later. Only 18 months remained by July 1, 1977, only 24 months system when the city awarded available to develop the new 1975. the first contract in December In addition to the work on the its contractors have improved new system, the city and in the process of improving some existing systems and are others. This work was mandated by the Treasury Department. The status of the various accounting improvement project aspects of the budgeting and follows: as of October 1976 was as -- New system. Except for the payroll subsystem, the general design documentation reviewed by Touche Ross & Co. had been completed and and Ernst & Ernst for the purpose of identifying omissions had determined the requirements and errors. They for implementing the subsystems in the agencies and were preparing imple- mentation plans. American Management and Bradford National Corporation Systems, Inc., puter programs. The Uban Academy were preparing com- groups of employees to be trained, had identified the documentation to identify training reviewed the design had started preparing training requirements, and manuals. -- New payroll subsystem. The had been started by Bradford design of the subsystem National Corporation. 5 APPENDIX I APPENDIX I The city plans to implement the subsystem during the year ending June 30, 1978. -- City Comptroller's system. Touche Ross & Co. was in the process of improving the city Comptroller's present accounting system. The city plans to use the system to do the accounting for the Capital Proje.ts Fund begin- ning January 1, 1977. -- Present payroll system. American Management Systems, Inc., was in the process of improving procedures for processing information produced by this system. The city plans to continue to use the system until the new payroll subsystem is fully implemented. -- Interim encumbrance system. Touche Ross & Co. designed this system and helped the city to implement it in six agencies on July 1, 1976. The system improves ontrol over certain types of encumbrances. -- Interim Fderal and State aid revenue system. Touche Ross & Co. designed this system and was in the process of helping the city implement it in four agencies. The system improves control over revenues from grants. PROBLEMS MAY PREVENT COMPLIANCE WITH CREDIT AGREEMENT The following sections contain our observations on matters which will prevent (1) the new budgeting and account- ing system from being fully implemented on July 1, 1977, and (2) the receipt of a meaningful opinion from an auditor on the city's financial statements for the year ending June 30, 1978. The credit agreement requires the city to implement the new system by July 1, 1977. In this regard, section 6.7 reads: "T.ie City, with the approval and encouragement of the [New York State Emergency Financial Control] De'ard, has retained consultants o assist in de- signing a new system of financial and accounting oactices, records and controls to be fully imple- mented in the City's Fiscal Year beginning July 1, 1977. The City and the Board hereby agree to pur- sue with diligence the design and implementation 6 APPENDIX I APPENDIX I of such new accounting system that by July 1, 1977 the City and further agree lished an accounting system will have estab- which adequate records and controls will establish * * * .s discussed on pages with this provision. because and 10, the city will not comply certain aspects of the new will not be implemented by July system deferred implementing the payroll1, 1977. City officials have July 1, 1977, and may defer subsystem until after brance control subsystem. the implementation of the encum- We believe that it is highly maybe all, of the other subsystems possible that some, and because of the amount of wor will also be defgrred to already faces two major problems be completed. The city as a result of the short time remaining. One problem, involves the readiness of the discussed on pages 10 and 11, the automatic data processing agency which is to perform The other problem, discussed operations for the new system. on pages 11 and 12, involves training of city employees. the The credit agreement requires State Comptroller or an independent the city to permit the ant to perform an audit as certified public account- of June 30, 1978. In regard the audit, section 6.7 of the to credit agreement reads: "The City and the Board that by July 1, 1977 the City * * further agree lished at, accounting system will have estab- adequate records and controlswhich will establish an auditor to perform an annualwnich would enable audit and render an opinion thereon." In auditing a municipality, is expected to comply with a certified public accountant Public Accountants' industry the Alerican Institute audit guide entitled of Certified Audits of State and Local Governmental the-i-5ject Units. According tothie -I-_-------otle ive in- arinng uide, a municipality is as follows: gulae, "The concern of the independent on the financial statements auditor reporting fairly financial position and is that they present results of operations in conformity with generally principles." accepted accounting Generally accepted ities are prescribed in accounting principles for municipal- the guide and in Governmental 7 APPENDIX I APPENDIX I Accounting, Auditing, and Financial Reporting, published by the National council on GovernmentaT Accounting. Under the credit agreement, the State Comptroller may choose a certified public accountant to make the audit for the year ending June 30, 1978. Therefore, we believe that the city should have designed the new system to produce financial information to conform with generally accepted accounting principles. Without this information, a cer- tified public accountant would not be able to render an unqualified opinion on the city's financial statements. The city, however, did not do so. The financial tion which may not conform during the year ending June informa- 30, 1978, is: -- Payroll information. (See pp. 12 to 14.) -- Information on enterprise an, intragovernmental service funds. (See pp. 14 to 16.) -- Information n the Capital Projects Fund. (See pp. 16 and 17.) -- Information on general fixed assets. (See pp. 17 and 18.) Although the city will not comply with the credit agree- ment requirement that records and controls be established by July 1, 1977, which would enable an auditor to perform an annual audit and render an opinion thereon, it may comply with the requirement that an accounting system be established by July 1, 1977, that "* * * is in accordance with the accounting prin- ciples set forth in the State Comptroller's Uniform System of Accounts for Municipalities, as the same may be modified by the State Comptroller in con- sultation with the City Comptroller." The city will be able to comply, however, only because it requested and received authorization to defer implementing the State Comptroller's requirements regarding enterprise funds, intragovernmental service funds, the Capital Projects Fund, and general fixed assets. 8 APPENDIX APPENDIX I Some aspects of new system will not be completedy Juy_ly_, 1977 City officials have deferred the implementation of some aspects of the system until after July , 1977, and may defer others. The design and implementation of a complex automated system involves a lot of time because requirements must be determined, a large volume of documentation must be prepared, and numerous computer programs must be written and tested. On the city's project, time had to be allowed for each of the numerous concerned parties--several State and city officials and representatives of each contractor--to review the documen- tation. As stated previously, it usually requires between 31 to 88 months to design an implement a complex automated system, and only 18 months remained available to develop the system when the city awarded the first contractr in December 1975. Through various means, the city and its contractors have successfully minimized slippages in the project. However, in November 1976 city officials said that implementing the payroll subsystem would be deferred until after July 1, 1977, and that consideration was being given to deferring the implementation of the encumbrance control subsystem. After evaluating the status of the project, we conclude] that it was highly unlikely that other aspects of the system will be ready for implementation on uly 1, 1977, as planned. Because of our experience with other complex designs, we thought that insufficient time was available to complete the system design, test the computerized aspects of the system, train the large number of personnel needed to operate the system, and perform the numerous tasks required to implemlent the system. Although we recognized that the system might be implemented on schedule if no major problems were encountered, every large computerized system of which we were aware had experienced major problems as it neared implementation. Most city and contractor officials agreed with out assessment of the project ai with our belief that some major problems could be expected before the system is implemented. They also agreed that the implementation of the system would have to be delayed if such problems required changes in the computerized aspects of the system. For those aspects of the system that are not implemented as of July 1, 1977, city officials will prepare to capture 9 APPENDIX I APPENDIX I and store transactions for processing when the system is capable of handling them. The deferral of the implementation of one or more subsystems will permit the city to concentrate on the re- maining subsystems, which should improve their possibility of success. The preparation of the alternative procedures will permit the city to defeL the implementation of addi- tional subsystems if they are not completely ready for operation on July 1, 1977. Although we believe that the actions taken by the city were necessary, the decision to defer the implementation of some aspects of the system should not have been made without Treasury Department authorization. The credit agreement re- quires a complete accounting system to be implemented by July 1, 1977, and therefore implementation of less than the complete system will result in a violation of the agreement. Readiness of Financial Information Services Agency que stionable We believe that the Financial Information Services Agency, which is to perform the automatic data processing operations for the new budgeting and accounting system, will not be operational on July 1, 1977, if certain actions are not promptly taken. By Executive order dated September 15, 1976, the Mayor created an agency to perform the automatic data processing operations for the new system because the city's existing facilities were inadequate. To begin operations on July 1, 1977, city officials determined that all agency personnel must be acquired and trained by May 1977. To have a complete and trained staff by May 1, 1977, the city must accomplish the following: -- Obtain the city council's authorization to establish the agency. Although city officials intend to begin staffing the agency before the council's approval is obtained, the agency will have to be dissolved if it is not authorized by the council. -- Prepare position descriptions. The city personnel department is preparing position descriptions for the 75 positions needed to staff the agency. We were informed that preparation of the descriptions 10 APPENDIX I APPEiUDIX I is expected to take several weeks because the person- nel department and project officials do not agree on how the positions should be classified and described. -- Acquire personnel. Except for the Director, who was hired on October 12, 1976, no personnel have been hired or transferred to the agency from other agencies. City and contractor officials agreed with our observa- tion that th acquisition of qualified personnel for the agency may be time consuming because of the city's hiring procedures and the fact that the skills required are infrequently found. -- Train personnel. Unless the city acquires highly trained and experienced personnel, extensive training will be required. We believe that it is unlikely that enough qualified personnel can be acquired on short notice, because highly skilled data base management personnel are relatively scarce. City officials stated that the temporary use of contractor personnel was being considered which would permit the agency to begin operating on time, and also preserve the positions for employees currently assigned to the Office of Management and Budget and the Comptroller's Office. These employees will become available when the city's present accounting systems are no longer needed. We believe that the temporary use of contractor personnel will do much to help the agency become operational on July 1, 1977. However, city officials should promptly decide. If contractor personnel are tc be used, the contract should be awarded as soon as possible so that the contractor can have a fully trained staff available by May 1, 1977. Training of personnel will not be completed by July_l, 1977 Not all city eployees affecting the operation of the new accounting system will be trained by July 1, 1977. The training task is monumental since it must address not only the accounting and computer personnel who will be directly concerned with running the system, but also all of the personnel connected with financial management who will influence the input of information to the system. City ffi- cials have estimated that about 7,500 personnel will require training. The amount of training required will vary according 11 APPENDIX I APPENDIX I to an employee's duties. It will be relatively minor for some and extensive for others. Little time remains to prepare training materials and conduct the training. With some exceptions, the Urban Academy was unable to start training preparation until che system de- sign documentation was completed in July 1976. Academy offi- cials then reviewed the documentation to identify areas in which the information was insufficient for their purposes. We were informed that, although the documentation was generally excellent, about 100 such areas were identified. City officials indicated that they did not expect to com- plete the training of employees y July 1, 1977, but they ex- pect to continue training employees for some time after the new system is implemented. Technical support and supplemental procedures will be used to facilitate the operation of the new system during the startup period. We recognize that certain employees affecting the new system need not be completely trained before the system is implemented. However, the number of such employees should be relatively small because the new system will make exten- sive use of new forms, classification codes. and procedures. Such changes often result in a large number of errors which may render a new system inoperable. Accuratepayroll information may not beproduced until fiscal year 1978 The city's decision to delay implementation of the new payroll subsystem may result in the inclusion of inaccurate data in the financial statements for te year ending June 30, 1978. A new payroll subsystem was included in the new budgeting and accounting system planned for the city beca.use of exten- sive weaknesses in the old payroll system. In an assessment of the system dated January 15, 1976, American Management Systems, Inc., identified the following problems: "Lack of Controls -- Control totals, document number checks, and other controls on the flow of documents and transactions are virtually non- existent. "Lack of Auditing -- Although the Comptroller's Office is supposed to conduct audits of payroll 12 APPENDIX I APPENDIX I payments, current audits are limited in scope. The tight schedule that most demand that everyone focus on payrolls operate on obtaining the proper signatures and moving the paper at what is being transacted. rather than look "Refunds -- Not only is refund processing cumber- some but refunded amounts are not included on most reports including the recaps year expenses by budget line. which show fiscal "Budget Control -- Despite the elaborate procedures for checking current payroll expenditures against prorated appropriations, Central control methods do not catch Payroll's current before the checks are all budget overruns released. "Payroll Processing Delays in the Agencies -- For a variety of reasons, large transaction backlogs often occur in agency delays and payroll Retroactive collective bargaining divisions. example, often take as much as payments, for the payroll clerk gets around six months before to computing amount due and submits the transactions." the It was recognized by city and complete and accurate payroll contractor officials that information improve the financial management was essential to of the city and to produce accurate financial statements. tial plan for the new budgeting As a result, the city's ini- and accounting system included a payroll subsystem. The original roll subsystem to be implemented plan provided for the pay- rest of the system. on July 1, 1977, with the During our review, city officials they would implement only part had informed us that July 1, 1977, and would defer of the payroll subsystem on until January 1, 1978. They the remainder of the said this was necessarysubsystem because the subsystem could not be completed by July 1, 1977. The decision to defer implementing subsystem would require the city part of the payroll tion produced, at least partially, to continue using infocma- system until January 1, 1978. by the existing payroll make some improvements in the Although the city planned to whether the improvements would existing system, we questioned complete and accurate information.enable the system to produce payroll information probably In our view, accurate would not be produced until January 1, 1978, and as a result, the financial statements produced by the city for the year ending June 30, 1978, may be inaccurate. 13 APPENDIX I APPENDIX I City officials stated that the existing payroll system will be improved prior to July 1, 1977, and as a result, the city should have auditable payroll records for the year end- ing June 30, 1978. They said that they would consider limit- ing the audit if it appears that the records will not be auditable. The auditability of the records should not be the only basis for determining whether to audit information produced by the existing payroll system. We believe that the decision should consider the reiativ, accuracy of the records. If the information produccd b-y the existing payroll system after July 1, 1977, is grossly replete or inaccurate, the cost of the audit could be p, itive. Enterprise and intraovernmental ser ice funds have not been established The city has not established enterprise and intragovern- mental service funds even though such funds are necessary tc receive an auditor's unqualified opinion on the city's finan- cial statements. The principles of governmental accounting and reporting issued by the National Council on Governmental Accounting require establishing (1) enterprise funds to account for the financing of services to the general public where all or mosL costs involved are paid in the form of charges to users and (2) intragovernmental service funds to account for the financ- ing of special activities and services performed by a desig- nated organization unit for other units within the same gov- ernmental jurisdiction. An auditor ordinarily will not give an unqualified opinion on the financial statements of a muni- cipality which has not complied with this principle. City officials informed us that they were unable to in- clude enterprise and irtragovernmental service funds in the design of the new budgeting and accounting system because of the limited time available to develop the system. On June 8, 1976, city officials requested authorization from the Mu:. icipal Assistance Corporation for the City of New York to efer establishing enterprise and intragovern- mental service funds until July 1, 1979. The reason for this action may be found in the law creating the corporation, Which states that the city and the corporation are to 14 APPENDIX I APPENDIX I "formulate a mutually acceptable method of phasing * * * adjustments into such accounting system over such reasonable period, not exceeding ten years, as the corporation may determine to be appropriate * * * ", The corporation approved the city's request on October 29, 1976. We are aware of at least three city operations which should be accounted for as enterprise funds: Mitchell-Lama' housing, water and sewer systems, and off-street parking. The city has numerous operations which should be admin- istered as intragovernmental service funds. At the request of the city, Touche Ross & Co. made a study of the services performed by the Municipal Services Administration and recom- mended that the following be accounted for as intragovern- mental service funds: gas and electricity purchasing, build- ing maintenance, repair shops, municipal telephone service, motor pool, leased space, and data processing. The city will be unable to receive fied opinion on its financial statements an auditor's unquali- until enterprise and intragovernmental service funds have been established. City officials stated that they expect the audit for fiscal year 1978 to be for the purpose of determining whether the city complied with the accounting directives issued by the State Comptroller rather than for the purpose of determin- ing whether the financial statements fairly present the city's financial position and results of operations in conformity with generally accepted accounting principles. The city is not required, they say, to comply with the accounting direc- tives requiring enterprise and intragovernmental service funds because it has been authorized to defer the implementation of those directives until July 1, 1979. No comments were made on the objective of the audit to be performed for the year ending June 30, 1979. Of course, the financial statements for that year also will not fairly present the city's financial position and results of opera- tions in conformity with generally accepted accounting prin- ciples if the city does not establish enterprise and intra- governmental service funds on July 1, 1978. The city had not requested the Treasury Department to approve its decision to defer establishing enterprise and 15 APPENDIX I APPENDIX I intragovernmental service funds even though such authoriza- tion appears to be warranted. In this regard, the credit agreement requires the city to establish an accounting for the fiscal year beginning July 1, 1977, that is system in accord- ance with the accounting principles in the State Comptroller's Uniform System of Accounts for Municipalities, as modified by the State Comptroller in consultation with the city. These principles require the establishment of enterprise and intra- governmental service funds and, therefore, the city's failure to provide them would apparently constitute a violation of the terms of the credit agreement. Financial statements for the Capit 1l Projecwr be inacurafte The financial statements for the Capital Projects wll be inaccurate for a few years because of erroneous Fund data accumulated prior to July 1, 1977. The principles of governmental accounting and reporting issued by the National Council on Governmental Accounting require financial statements for capital projects funds o contain cumulative financial information about each project. Most capital projects require several years to complete, and therefore much of the information contained in the statements will have been accumulated in prior years. City officials plan to defer inclusion of the Capital Projects Fund in the new budgeting and accounting system for 2 or 3 years because of the limited time available to design the system. They recognized that the existing accounting system was not producing complete and accurate data, however, and requested Touche Ross & Co. to improve the accounting system presently operated by the Comptroller's office so it could produce reliable accounting information for the that Capi- tal Projects Fund. City and contractor officials said that the Comptroller's accounting system is basically a good system, and they believe it will produce complete and accurate information starting July 1, 1977. However, the financial information accumulated prior to July , 1977, will not be corrected. In addition to the errors caused by weaknesses in the accounting system, through the years the city has charged millions of dollars of expenses to the Capital Projects Fund which should ha ! been charged to the General Fund. Although the city will charge such expenses to the General Fund after 16 APPENDIX I APPENDIX I July 1, 1977, the financial statements for the Capital Proj- ects Fund will continue to be distorted by the expenses er- roneously charged in prior years. City officials said that accounting data accumulated prior to July 1, 1977, could not be corrected because there was no way to verify the accuracy of the amounts which had been recorded. Missing infocmation needed to verify the records' accuracy will prevent an auditor from performing an essential audit procedure. Therefore, we believe that until projects for which large amounts of costs were accumulated prior to July 1, 1977, have been completed, a meaningful audit of the Capital Projects Fund will not be possible. Financial statements will not contain a statement of _eneral -ixed assets City officials do not plan to establish monetary control over the city's general fixed assets until July 1, 1979. As a result, the city will not be in a position to receive an auditor's unqualified opinion on the financial statements until fiscal year 1980. In its industry audit guide for State and local govern- mental units, the American Institute of Certified Public Accountants said that a statement showing general fixed asset balances at the statement date is necessary for presentation of financial position. Although the inclision of certain im- provements other than buildings (e.g., streets, bridges, curbs, drainage systems, lighting systems) in the statement is optional, a certified public accountant is not to give an un- qualified opinion on the financial statements of a municipal- ity if they do not include a statement disclosing the value of the fixed assets. The city has not maintained accurate records of its fixed assets and therefore will not have the information needed to prepare a statement of general fixed asset balances until it conducts a physical inventory of all such assets and estab- lishes their value. A city official informed us that they will not make such an inventory at this time because it would require an exorbitant amount of ersonnel resources. On June 8, 1976, city officials requested the Municipa3 Assistance Corporation for the City of New York to authorize them to defer the recording of new assets until fiscal year 1978 or 1979, and to defer the development of an inventory of 17 APPENDIX I APPENDIX I existing assets for approximately 3 years. The corporation approved the city's reauest on October 29, 1976. City officials stated that they expect the audit for fiscal year 1978 to be for the purpose of determining whether the city complied with the accounting directives issued by the State Comptroller, rather than for the purpose of deter- mining whether the financial statements fairly present the city's financial position and results of operations in conformity with generally accepted accounting principles. Therefore, they believe that the absence of a statement of general fixed asset balances in the city's financial state- ments for fiscal year 1978 will not result in an auditor's qualification of the city's financial statements. The city did not comment on the financial statements for fiscal year 1979, which also will not include a statement of fixed asset balances under the city's present pan. Te city had not requested the Treasury Department to aporove its decision to defer establishigc monetary control over fixed assets even though such authorization appears to be warranted. In this regard, the credit areement requires the city to establish an accounting system for the fis-al year beginning July 1, 1977, that is in accordance ith the accounting principles contained in the State Comtroller's Uniform System of Accounts for Municipalities, as modified by the State Comptroller in consultation with the city. These principles require the establishment of monetary on- trol over fixed assets and, therefore. the city's failure to provide them would apparently constitute a violation of the terms of the credit agreement. CONCLUSIONS Unless some terms of the credit agreement between New York City and the Treasury are waived or amended, the city will be in violation of the credit agreement on July 1, 1977. The new accounting and budgeting system will not be completely implemented and the city will not have established some of the records and controls necessary for an auditor to perform an audit and render a meaningful opinion. We believe that the city should move with all possible speed to correct its problems and conform to the require- ments of the credit agreement, but we do not believe that it should proceed so rapidly that it does not complete the work in an orderly and effective manner. We have seen many in- stances where dogged devotion to meeting a deadline has 18 APPENDIX I A.PENDIX I resulted in ineffective, error-prone all the money put into them, do not systems that, despite achieve the desired results. New York has been making great progress i its systems design work, and accordingly, we believe reexamine the agreement. that Treasury should If it deems it necessary for orderly and effective completion of the work, Treasury should authorize the city to do the following: -- Defer implementing portions of the payroll subsystem for a reasonable period and, if necessary, the encumbrance control subsystem. defer --Defer for a reasonable period the implementation of those aspects of the system for which be inadequate on July 1, 1977. training will -- Limit the audit of the financial statements year ending June 30, 1978, to that financial for the mation which the city determines to be infor- reasonably complete and accurate, even if it would in an auditor's opinion. Such an audit not result would give the city confirmation that the implemented of the new system are operating properly, aspects save the expense of auditing data that but would be inaccurate. State and city auditors is known to tinue to audit internal controls of should con- accounting systems to identify areas all the city's requiring cor- rective action. -- Defer implementing enterprise and intragovernmental service funds until July 1, 1978. -- Exclude the Capital Projects Fund from city's financial statements until most audits of the for which large costs were accumulated of the projects 1977, have been completed. prior to July 1. -- Defer establishing monetary control over fixed assets until fiscal year 1979. RECOMMENDATION We recommend that the Secretary of the the city's progress toward completion Treasury examine of the accounting and auditing requirements under the credit agreement, and, giving 19 APPENDIX I APPENDIX I due consideration to the interests of the Federal Government, authorize reasonable extensions of time when plete the work in an orderly and effective needed to com- manner. 20 APPENDIX II APPENDIX II. STAT O NEW YORK DEPARTMENT OF AUDIT AND CONTROL 270 ROADWAY. NEW YORK CITY ARTHUR LEVITT November 9, 1976 parn Te U.S. General Accounting Office 26 Federal Plaza New York City, New York 10007 ATTN: Mr. Edward Hefferin, Project Manager Dear Mr. Hefferin: The purpose of this letter is to offer my comments on certain aspects of the draft report off"ice's Observations ON NEW YORK CITY'S EFFORTS TO "GAO IMPRO'VE ITS ACCOUNTING SYSTEMS," (B-185522), issued by the GAO recently. These comments supplement the lengthy telephone discussions I had with Mr. Jim Oliver before issuance of the draft. [See GAO note page 24] 21 APPENDIX II APPENDIX II Mr. Edward Hefferin November 9, 1976 Page 2 [See GAO note page 24] b. Page 2 of the draft notes the GAO's any comprehensive listing of the unawareness of numerous weaknesses in the City's accounting system. Your attention drawn to State Comptroller Levitt's is respectfully report of September 30, 1976 summirizing the accounting system directives (ASD's) for New York City issued by his Metropolitan Report NYC-44-77; copy attached). Area Office(Audit listing, this report does address While not a comprehensive itself to the major problem areas. It sets forth the relationship between the accounting system directives, which intended to generally accepted accounting ':o conform the City's accounting principles for municipalities, and the basic system weaknesses, as well as their effect, which led to the need for the ASD. [See GAO note page 24] The GAO 22 APPENDIX II APPENDIX II Mr. Edward Hefferin November 9, 1976 Page 3 draft report notes that the City's financial statements for the year ending June 30, 1978 will probably the new payroll/personnel subsystem be inaccurate because operation for half a year. It is not will only have been in conclude that the GAO believes such illogical to further material effect on the expression inaccuracies will have a of an auditor's opinion. We have no basis at this time for must first define "material" to evaluate such a conclusion. One degree of conditions might cause a what condition or disclosure qualification of the financial statements. comment or guidelines in this respect There are no formal for municipalities in line with the practices which have developed in the private sector. Materiality is a concept which cannot be precisely highly dependent upon judgment. The defined because it is a condition is such that primary question is whether it must be accounted for to prevent financial statements from being misleading. the proposed degree of inaccuracy with Do you measure any City payroll, the payroll within a the overall budget, the overall particular fund, or by its net effect on fund surplus or deficit? which are not deemed significant will In any event, inaccuracies not affect the financial statements although they would probably management letter accompanying the be discussed audit report. To in a illustrate the extent of this problem, approximately expenditures in New York City would .1% of payroll approximate $3.5 million based on a gross payroll of $3.5 billion. as the measure of materiality only If this were decided inaccuracies projected at more than such amount would affect in the State Comptroller's audit unit the financial statements. We matter of what materiality shall be are presently studying this financial statements. The with reference to the City's adjustments which should be matters arose with reference to taken in as part of the current year's operations, or should be recorded in the fund balance account. Moreover, the City is obviously going changes to its present payroll system somewhat slower in its continued ability to render the than in other areas to ensure able to prepare and distribute pay primary service of being checks when due. e. Page 24 of the draft Service fund. The establishmentdiscusses the Intragovernmental of such a fund is optional on the part of the City. We definitely of implementation will not result in recommended it but its lack all the requisite transactions would a lesser auditor's opinion as still be in the general fund and subject to audit. With respect to officials have requested the permission the Enterprise Fund, City of MAC to defer implementation. Such approval is within MAC's legal authority. 23 APPENDIX II APPENDIX II Mr. Edward Hefferin November 9, 1976 Page 4 I hope the above comments will be of help in the finalization of your report. Very truly yours, Arthur N. Gordon, Director Metropolitan Area Office ANG/td Enc. GAO note: Deleted comments relate to material contained in the draft report which has been revised or which has not been included in the final report. 24 APPENDIX III APPENDIX III THE CITY OF NEW YORK Office of the Mayor and Office of the Comptroller NEW YORK,N.Y. 10007 November 23, 1976 Mr. Francis X. Fee Regional Manager New York Regional Office U.S. General Accounting Office 26 Federal Plaza New York, NY 10007 Dear Mr. Fee: On behalf o the Office of the Mayor and the Office of the Comptroller of the City of New York, we are transmitting the enclosed statement entitled "City of New York Statement on the Integrated Financial Nitnr7e- ment System Project." It represents the City's official response to ihe GAO's proposed report to the Congress on "GAO's Observations on New York City's Effort to Im; rove Its Accounting Systems." If you have any questions please do not hesitate to contact either one of us.. Sincerely, Steven A. Clifford / Office of the Comptroller Co-Director, IFMS Project David G. Woodbridge Office of the Mayor Co-Director, IFNMS Prcject 25 APPENDIX III APPENDIX III City of New York Statement on the Integrategc inani anagemen System Project November 22, 1976 The City has reviewed "GAO Observations on New York Effort to Improve Its Accounting System" and finds it, City's in be an objective and perceptive assessment pf the progress general, to plans, and potential problems. to date, future The Credit Agreerrent bet\.-en the City and thCe ederat Government requires the City to ".. .pursue with diligence the esign of(a) new accounting system and ... that by July 1, nd implementation 1977 established an accounting system which will establish the City will have and controls which would enable an auditor to perform adequate records an annual audit and render an opinicn thereon." The City's compliance to date and continuing commitment these goals is confirmed by GAO's statement that: towards The City and its contractors have made remarkable progress toward the implementation of a new accounting system by July 1, 1977, the date mandated by the State of New York and the Treasury Department. In the 9 months since the first contracts wvere awarded, the accom- plishments of the City and its contractors far exceed those which would normally be expected in such a complex system development effort. The progress to date does not necessarily assure continued at the same high level since each phase of the Project performance differs; many of the most intricate phases of the Proj;ct lie ahead. The concerns of the GAO and expects in a systems projectCity appreciates the experience implementation problems and to continue of this magnitude to time after conversion. Nonetheless, the City believestraining efforts for sorrme it will meet the two major objectives of IFIMS. They are to: 26 APPENDIX III APPENDIX III -Improve financial manag,.lient and controls at all levels in the City; - Install auditable budget and accounting systems which are in accord with the Accounting Systcm Directives issued by theState Comptroller pursuant to the legislation which created the Municipal Assistance Corporation. In order to meet these objectives, the following steps will be .taken: - In the event that some or all of IFMS is delayed, bridging procedures will be developed which should enable the City to maintain its records in a manner that fulfills the objectives. These procedures will include but not be limited to: enhancements to the current accounting system to strengthen its control capability, to improv its auditability, and to make it compatible with the new budget format; * new modules for the current payroll system to enable it, on a short-term basis, to meet the requirements of the new standards. - The new payroll system %willbe implemented during FY1978 rather than as of July 1, 1977. This should enable orderly implementation of a most complex business application and ease the impact of IEMS implementation on the user ageacies. Consideraticn will be given to advantages and disadvantages of delaying the implementation of the Encumbrance Control System. A benefit would be to facilitate IFMS implementation in the user agencies. But, system development would not be eased. In the near future, the Miyor will hold a cabinet meeting to remind all Administrators and Commissioners of the importance to the City of the successful implementation of IFM\S and to emphasize the need for their active participation and cooperation. 27 APPENDIX III APPENDIX III - The successful staffing of the Financial Infbrmation Agency may be accomplished by using "facilities Servces ment/turn key" methods if hiring efforts re not manage- successful. It should be kept in mind that the original intent people from the Office of Management and Budgetwas to transfer Comptroller's Office data center operations to and the proving not to be feasible because of the intense FISA. This is pressure on these operations by the current need for financial By using the "facilities management/turn key" information. method, FISA will be able to begin operating on time and protect jobs for personnel currently on staff in O1MB and the FISA the Comptroller's Office. - The City will arrange to have extensive follow-up technical support and other supplementary procedures training, order to facilitate IFMS operations during the in tart-up period. The City is prepared to allocate the resources needed to take these steps. As to the City receiving an opinion on its financial statement for FY 1978, there are a number of points to be covered. Based on the steps outlined above, records. The GAO recommendation that the City should have auditable only those portions of the records maintained by IFMNS be audited will be considered cannot meet its goal of having auditable records. if it appears that the City in which most of the City's activities are reflected,As to tne General Fund appear, at this time, to be minimal. the potential problems The City intends to issue financial statements in accordance with the Accounting System Directives for FY 1978 which are Comptroller pursuant to the legislation which created issued by the State the Municipal Assistance Corpcration. The City also expects the audit opinion ASDs which some may consider to be at variance to be based or these accounting principles for municipalities. It should with generally accepted pursuant to the legislation which created be noted that MAC, to delay three requirements of the ASDs. it,They has given the City permission are budgeting and accounting for water and sewer operations as an enterprise for the operations of the Municipal Services Agencyfund, budgeting and accounting service fund, and the establishment of a fixed as an intragovernmenLal new problems of a similar nature should arise, asset group of accounts. If the from MAC. At this time, problems are not anticipated. City would seek relief 28 APPENDIX III APPENDIX III The City realizes that It will be difficult receive a clean opinion on its FY if not impossible for it to does not believe that the various 1978 financial statements. However, it potential problems preclude the receiving of an opinion. This in itself will be a giant step forward which will to restore creditability in the City's fiscal structure. do much The dawvbacks of the time requirement for [E;IS implementation are obvious; however, the benefits should in the City a sense of urgency and be considered. It gives all concerned if implementation were delayed by discipline which would not be obtainable a factor in the success to date in what year. This has been an important the City believes will be a continuing success story. 29
New York City's Efforts To Improve Its Accounting Systems
Published by the Government Accountability Office on 1977-04-04.
Below is a raw (and likely hideous) rendition of the original report. (PDF)