The act also amended the Antideficiency Act to achieve simplification in the administrative subdivision of appropriations or funds by requiring each agency to work toward the objective of financing each operating unit through minimum administrative subdivisons consistent with operational requirements for each appropriation or fund. SENATE ACTION ON PUBLIC LAW 84-863 S. 3199, to implement the Second Hoover Commission's recommendations on budgeting and accounting, was introduced in the Senate on February 14, 1956. The Subcommittee on Reorganization of the Committee on Government Operations held hearings on S. 3199 and three related bills, S. 2480, S. 2369, and S. 3362, in March 1956. During the hearings, it was agreed that some of the objectives of the bill could be attained by administrative action and, therefore, no additional legislation was required in these areas. On the other hand, the bill did not provide for the submission of budget requests to Congress based on an accrued expenditures basis, one of the important recommendations of the Hoover Commission. At the conclusion of the hearings, the staff of the committee, in collaboration with representatives of the General Accounting Office, the Bureau of the Budget, and other Government agencies, redrafted the bill. Those objectives which could be attained by administrative action were omitted and specific language authorizing the submission of budgetary requests on an annual accrued expenditure basis was added. The revised bill (S. 3897) was introduced on May 21, 1956, by the chairman of the subcommittee with 30 Senators as cosponsors. Further hearings were held by the subcommittee and, on June 7, 1956, the bill was unanimously reported (S. Rept. 2265, 84th Cong.) by the full committee. It passed the Senate on June 20, 1956. PROVISION FOR STATING APPROPRIATIONS ON AN ANNUAL ACCRUED EXPENDITURE BASIS ELIMINATED BY THE HOUSE OF REPRESENTATIVES Accrued expenditures represent charges incurred for goods and services received and other assets acquired, whether or not payment has been made and whether or not invoices have been received. The provision for submission of budgetary requests for appropriations on an annual accrued expenditure basis was eliminated by the House Government Operations Committee in reporting H.R. 11526, a companion bill to S. 3897. In its report (H. Rept. 2734, 84th Cong.) the committee stated: The bill as originally introduced contained a provision instituting the submission of budgetary requests for appropriations on an annual accrued expenditure basis. The committee heard strong testimony from the chairman of the Committee on Appropriations of the House and the ranking minority member of that committee objecting to the accrued expenditure device primarily on the ground that it would necessarily lead to contract authority for programs which extend beyond 1 fiscal year. It was felt that contract authority weakened congressional control, and it The question of whether the stating of appropriations on an annual accrual expenditure basis would affect the existing statutory authority of the executive departments to contract for or make commitments for capital expenditures in future fiscal years was raised before the Senate Committee on Government Operations during its hearings. The Department of Defense had suggested a clarifying amendment to S. 3897, i.e., that the authority of the President to submit requests for authorizations to create obligations in advance of appropriations would not be affected by the section dealing with annual accrued expenditures. The Comptroller General was asked to comment on this amendment and in his reply dated June 16, 1956, he stated: *** it should be noted that the legislative history of this bill already has made it clear that contractual authorizations for long lead-time programs will be required when the appropriations therefor are stated on an annual accrued expenditure basis. This was pointed out in the Hoover Commission Report on Budget and Accounting. It thus seems very clear to us that the existing authority to include requests for contract authorizations in the budget would not be abrogated by this bill and that the clarifying language suggested by the Department of Defense is un necessary. 8 The House of Representatives passed S. 3897 on July 13, 1956, after amending it by inserting the language of H.R. 11526 in lieu of the text of the Senate bill. The Senate disagreed to the House amendment and asked for a conference. The conferees met on July 19, 1956, at which time the House insisted on striking out the provisions that budgetary requests be submitted to Congress on an annual accrued expenditure basis. As a result, three Senate conferees refused to sign the conference report. The remaining Senate conferees agreed to the report after receiving assurances from the House conferees that this requirement would be reconsidered during the next Congress. The House conference report (H. Rept. 2872, 84th Cong.) filed on July 23, 1956, made no reference to reconsideration in the next Congress, whereupon serious objection was raised by several Senators on the floor of the Senate on July 25, 1956, before the conference report was approved. Two days following approval of the conference report, Senator Margaret Chase Smith, ranking minority member of the subcommittee, who had refused to sign the report, "*** because the heart of the bill had been killed by the House when it deleted the section providing for stating appropriations on an accrued expenditure basis***" introduced S. 4306, to provide for the restoration of the 7 Congressional Record, vol. 102, pt. 8, June 19, 1956, p. 10557. 8 Congressional Record, vol. 102, pt. 11, July 25, 1956, p. 14340. • Congressional Record, vol. 102, pt. 11, July 27, 1956, p. 15028. accrued expenditure provision eliminated from S. 3897, but time did not permit committee action before adjournment. At the beginning of the 85th Congress, several bills were introduced to provide for stating appropriations on an accrued expenditure basis which finally resulted in passage of Public Law 85-759, approved August 25, 1958, details of which follow on page 98 of this report. IMPLEMENTATION OF SECOND HOOVER COMMISSION RECOMMENDATIONS The enactment of Public Law 84-863 implemented seven recommendations of the second Hoover Commission contained in its report on "Budget and Accounting" (H. Doc. 192, 84th Cong.) as follows: That for management purposes, cost-based operating budgets be used to determine fund allocations with the agencies, such budgets to be supplemented by periodic reports on performance (recommendation No. 3). That the executive budget continue to be based upon functions, activities, and projects adequately supported by information on program costs and accomplishment, and by a review of performance by organizational units where these do not coincide with performance budget classification (recommendation No. 4). That the agencies take further steps to synchronize their organization structures, budget classifications, and accounting systems (recommendation No. 5). That executive agency budgets be formulated and administered on a cost basis (recommendation No. 6). That the allotment system be greatly simplified. As an objective each operating unit should be financed from a single allotment for each appropriation involved in its operations (recommendation No. 13). That Government accounts be kept on the accrual basis to show currently, completely, and clearly all resources and liabilities and the costs of operations. Furthermore, agency budgeting and financial reporting should be developed from such accrual accounting (recommendation No. 14). That the executive agencies accelerate the installation of adequate monetary property accounting records as an integral part of their accounting systems (recommendation No. 16). Although, as finally enacted, Public Law 84-863 did not, as a result of the insistence of the House of Representatives, include one of the major Hoover Commission recommendations (No. 7) for stating appropriations on an annual accrued basis, it did provide for cost-based budgets, an accrual accounting program, and a simplified allotment system, which is the foundation of an accrued expenditure system. ADVANTAGES OF A COST-BASED BUDGET The advantage of budgeting on a cost basis is that management and the Congress are able to review the total resources on hand, on order, and to be procured rather than limiting the budget review process to new money in the form of obligating authority. A cost-type budget has been defined as one which identifies, in terms of the goods and services consumed by each activity, the costs of the program planned by the agency. It discloses the balances of the goods and services on hand that have been obtained through use of prior appropriations, and the extent to which such available resources are planned to be used in the proposed program. Such resources generally consist of inventories of supplies and materials, and orders recorded as obligations for goods and services not yet received. A cost-type budget shows the obligating authority required to place orders for additional goods and services needed to accomplish the planned program and maintain the resources on hand at a level appropriate to the agency's operating requirements. The significance of a cost-based budget varies with the type of program conducted by the agency. When inventories and long leadtime programs are involved, the cost-based budget provides its greatest benefit because of the identification of carryovers of available resources from one year to another. In addition, the evaluation of long-range programs can more effectively be made because the accrual basis of accounting identifies the use of resources in relation to the time period involved. In agencies where the carryover of resources is not substantial the change in presentation resulting from use of the cost-based budget may be relatively minor. In such cases, however, benefits are derived in terms of the more precise budget and accounting practices required for this purpose. Prior to enactment of Public Law 84-863, agency budgets were prepared on the basis of estimated obligations incurred during the budget year. Under this system, obligations were orders placed, contracts awarded, services received, and similar transactions during a given period requiring future payment of money. Because of the nature of improvements under Public Law 84-863, the completion of such a program will in many cases take a considerable period of time. In the fiscal year 1960 annual report of the joint financial management improvement program, the General Accounting Office, the Bureau of the Budget, and the Treasury Department reported that the number of budget appropriations on a cost basis has been increasing with the development of accounting on the accrual basis. For 1957 there were only four appropriation requests on this basis in the budget document. In the 1959 budget there were 98. In the 1961 budget there were 353 covering 56 percent of all appropriation items, embracing annual budget expenditures of about $33.5 billion and another $16 billion of trust fund expenditures. The presentations of cost-based budgets are not regarded as ends in themselves; they are only generally indicative of the progress being made throughout the Government toward management use of better data. These data are produced by systems which, through coordinated accounting, reporting and budgeting practices, will provide adequate control of both funds and costs, and a basis for measuring performance against established goals. ACCRUAL ACCOUNTING SYSTEM An accrual accounting system is one which gives recognition to the receipt of goods and services and the consumption or use of resources, and reflects the assets and liabilities. In addition, to facilitate the preparation of cost-based budgets, such a system records these transactions on a basis that is integrated with records of obligations incurred as well as disbursements made. Thus, an accrual accounting system in a Government agency develops information as needed on costs of goods and services used, accrued expenditures, disbursements, and obligations. It incorporates financial controls that are consistent with management responsibilities, generally providing for broad fund controls in terms of limitations on obligations at a fairly high level of agency operations and more detailed controls in terms of estimates of specific costs attributable to each of the agency programs. In contrast to the traditional accounting system in Government, an accrual accounting system provides additional and more useful information, since it reflects not only the availability of funds, but also furnishes data on resources on hand in an agency, and the actual use of such available resources. Cost data on the use of resources are essential to agency management for effective budgeting practices. The costs of a given operation must be known to enable the most accurate determination of funds needed to finance a planned program. Similarly, in carrying out a program, cost information is needed so that these data can be related to work accomplishments and the operating officials may be advised of the progress actually being made on the job, in addition to the rate at which available funds are being used. In accordance with the principles and standards issued by the Comptroller General, the degree to which the accrual basis is applied in individual agencies varies with the kind of operations conducted. Depending on the type of program conducted by the agency, this change in the agency accounting system may involve further refinement to produce information on the cost of goods and services used, the cost of items procured or produced, or the cost of work in place. The accrual basis should be applied in each case to the extent that the additional information obtained will be more useful to agency management in the conduct of its operations, and provide for more complete and accurate disclosure of financial status and the results of agency operations. In all cases, accounting on an accrual and cost basis must be integrated with such other accounting records as are needed to provide for control and information on obligations and to provide for information on disbursements. PROGRESS OF ACCRUAL ACCOUNTING AND COST-BASED BUDGETS To determine the progress of converting accounting systems to accrual basis and budget presentations to cost basis in individual agencies, the Bureau of the Budget issued Bulletin No. 60-7 in May 1960 to all agencies requesting they submit information concerning current improvement efforts. The degree to which each agency estimated it had completed its accrual accounting and cost-cased budgeting objectives is shown in the fiscal year 1960 annual report of the joint financial management improvement program, released on November 15, 1960. |