General Revenue Sharing Audit Requirements Introduction The 1976 amendments to the general revenue sharing act require, in simple terms, that all state governments, and those local governments receiving $25,000 or more in annual revenue sharing payments, be audited at least once by an independent auditor in accordance with generally accepted auditing standards, within the three calendar years 1977, 1978, and 1979. While the amended law requires that the audit is to be conducted "for the purpose of determining compliance with this title (general revenue sharing)" (Section 123, (c), (1)), the implementing regulations define the scope of the audits to include a financial audit of all monies of a recipient government, as well as a compliance audit. This enlargement of the requirements was necessary because revenue sharing money can be used interchangeably with a government's own money for any activity performed by the government. In instances when a recipient government gives revenue sharing money to another organization to spend, then the secondary recipient must also have its use of the revenue sharing money audited by an independent auditor. The specific objectives for the required audits are to: (1) perform a financial audit of all of the recipient government's funds, including a review of internal controls; (2) insure compliance with the requirements of the revenue sharing act and regulations; and (3) reconcile the information supplied to the Census Bureau with audited figures (Office of Revenue 1 Sharing, Audit Guide for Revenue Sharing and Antirecession Fiscal Assistance Recipients, December, 1977, p. 1-2). It is also expected that the audit will verify the information contained in the required revenue sharing report on use of funds. A copy of the audit report must be made available to the public and to the local news media. In addition, a copy must be filed with the Office of Revenue Sharing, except this provision is waived in those instances where a filing of the audit report with a state audit agency is required by state law, and is reviewed by the state agency for revenue sharing purposes. The 1976 audit requirements make a sharp distinction between the duties imposed on the auditor who conducts the audit and the recipient government that accounts for its money. The intent of the requirement is to impose strict duties on the auditors in performing audits, but to give wide latitude to the governments in the way they account and report their funds. The auditors, who must be independent of the recipient government, must make the audits in accordance with generally accepted auditing standards, as defined by the Comptroller General of the United States and the American Institute of Certified Public Accountants; they must also conduct the audit in accordance with the Audit Guide, issued by the Office of Revenue Sharing. In issuing an opinion on the financial reports of the government the auditors must state that the standards were followed. The government, on the other hand, has no requirements imposed on it with regard to the format or underlying accounting principles for preparing its financial statements. The government reports may vary from those prepared in accordance with generally accepted accounting principles to those prepared on a cash basis. However, it is required that the audit report disclose the extent to which the government deviates from accepted accounting principles. Despite the latitude given to governments in their systems of accounting, they must still maintain adequate internal controls, safeguard resources, and keep adequate records, so that an audit can be conducted. Failure to meet such minimum requirements could result in the government being declared unauditable. In only a very small number of instances are governments expected to be unauditable. The deadlines for compliance with the 1976 audit requirements and the penalties for failure to comply are not specifically identified in either the Revenue Sharing Act, the implementing regulations, or the audit guide. However, in a letter dated March 6, 1980 from Roger C. Altman, Assistant Secretary of Treasury, to Allen R. Voss of the General Accounting Office, a clear penalty threat is imposed as follows: "They (recipient governments) were also informed that the audit report must be submitted no later than September 1, 1980, and that, if a reply was not received by March 1, 1980, subsequent entitlement payments will be withheld until acceptable audit reports or audit plans are received." While the intent of Altman's letter seems clear, there may still be questions of interpretation. For example, in a December 7, 1979 letter to John T. Marlin, Kent Peterson, Acting Director, Office of Revenue Sharing states: "Identification of a jurisdiction's financial audit as unacceptable does not mean that the jurisdiction is in violation of the Revenue Sharing Act." Peterson goes on to point out that those governments with unacceptable audits have an opportunity to correct the problem, but he does not state a date by which this must be done. As a practical matter, threats to withhold revenue sharing payments after September 1980, are contingent on renewal of the law in its present form beyond that date. If revenue sharing for states is not renewed, then states not conforming to the audit requirements by the September 1 deadline, could be penalized only the quarterly payment due September 30, 1930. Implied Goals It is apparent that the policy implications of the revenue sharing audit requirements, at least as they have been interpreted and applied, are much greater then merely insuring compliance with the revenue sharing legislation. One report, for example, has suggested that as a result of the independent audit requirement, "Local voters would have a better idea of the reality of municipal spending. The federal government would have a better idea of the true needs and management capacity of state and local recipients of the funds. Confidence in democracy, at a low point after the Watergate crisis, would be strengthened," (John Tepper Marlin, Spending Blind: NonCompliance with the Revenue Sharing Audit Requirements, Council on Municipal Performance, July 30, 1979). program has The former manager of audits for the revenue sharing noted the effect of the program on the quality of auditing. He concludes that, "The audit requirements of the revenue sharing act have done more to improve the caliber of state and local government audits than any other action taken to date at the national level," (T. Jack Gary, Jr., "A Single Audit of Federally Assisted Programs?", Public Administration Review, No. 4., July/ August, 1979). Another revenue sharing official has concluded that, "the 1976 amend-. ments to the Revenue Sharing Act have had and will continue to have a substantial and favorable impact on the audit of state and local governments," (Glenn E. Funkhouser, "Experiences with the Revenue Sharing Audit Requirements," Governmental Finance, Vol. 8, No. 2, September, 1979). The Comptroller General, Elmer Staats, in a statement before the Senate Subcommittee on Intergovernmental Relations on March 20, .1980, pointed out that, "The Office of Revenue Sharing's quality control efforts have led to actual and planned corrective actions which are improving the quality of state and local governments' audits. State agencies and public accounting firms are placing more emphasis on internal control evaluations, audit planning, training, and personnel qualification requirements." Indeed, it is clear that an implicit purpose of the general revenue sharing audit requirement has been to generally improve the financial management of state and local governments on a national basis. However, it should be noted that many recipient governments already go much beyond the minimum requirements of the revenue sharing act. For example, of 28 large cities recently surveyed, all 28 regularly have an annual audit, and 13 had received certificates of conformity to generally accepted accounting principles from the Municipal Finance Officers Association. While not all the audits may 5 ་ |