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Why is the Auditor So Concerned With My Budget?

CPAs & Advisors

Daniel Beard
Daniel Beard CPA Manager CPAs & Advisors

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Management must formally adopt a budget to adhere to the law.

The legislative body must pass a budget for the general fund and each special revenue fund to comply with the Uniform Budget Manual issued by the Michigan Department of Treasury.

Treasury requires that specific requirements be reflected in local governments’ budgets. Although this may sound like a daunting task, adopting and monitoring the budget helps guide decision-making, all while meeting requirements set by the State. In this article, you will find how a budget can help your government and which approach may be best according to your needs.

Budgetary requirements of a local government

  • State the total mills to be levied and the purpose for each millage levied (truth in budgeting act).
  • Include amounts appropriated for expenditures and amounts to meet liabilities for the ensuing fiscal year in each fund.
  • Include estimated revenues by source in each fund for the ensuing fiscal year.
  • Be consistent with the Uniform Chart of Accounts issued by the State Treasurer (or by the Michigan Department of Education for school districts, intermediate school districts and public school academies).
  • The budgeted expenditures, including an accrued deficit, shall not exceed budgeted revenues, including available surplus and the proceeds from bonds or other obligations issued under the Fiscal Stabilization Act (Act 80 of 1981 MCL 141.1001).

The budget is sometimes viewed as tedious work when really it is management’s greatest tool.

The budget serves several vital functions for the government, such as a planning, control and communication, and it can also be a motivational tool.

More detailed benefits of proper budgeting procedures include:

  • A means of opening your eyes to the ongoing and future needs of the government
  • A control over frivolous spending and waste of government resources
  • A means to identify and project shortfalls in revenues
  • A tool to assist leadership in making sound decisions

Budget-to-actual activities should be shared with the finance or other committees regularly, and management must always have the most recent board-approved budget reflected in their financial reporting system. If the correct budget is not reflected in the financial reporting system, how can finance appropriately monitor activities within the budget? This can result in a deficiency in internal controls and noncompliance.

 Which budgeting methodology is best for your local government?

  • Line item budget – identifies expenditures into groupings such as salaries, professional services, insurance, postage, etc. Preparation is simple, but this method makes it difficult to determine if goals are achieved or if programs are adequately funded.
  • Program budget – identifies expenditures by program accompanied by a narrative description of the services to be provided. Each program budget must detail line item amounts. Slightly more complex in nature, program budgets allow for the program itself to be evaluated.
  • Program performance budget – identifies the relationship between the dollars spent and units of service performed to determine a cost per unit. This approach is useful in measuring the success of a program but is typically avoided as difficulties arise in allocating unit costs appropriately. Like all the other budget approaches, line-item allocations of costs are necessary.
  • Management by objectives budget – identifies the specific programs or objectives to be accomplished during the budget year. This approach will allow management to establish target dates and costs for specific objectives and provide a means for the legislative body to measure the performance of the various departments and the management structure.
  • Zero-based budget – a method in which each department administrator must justify every dollar of their respective budget during each budget cycle.

When correctly approving and adhering to a sound budget, expect deviations from the respective budget. The budget is a benchmarking tool and will rarely equate to actual outcomes of the government’s ongoing activities. However, the legislative body must amend the budget as soon as a deviation is apparent to comply with Treasury guidelines. The budget should be dynamic and represent the financial needs and projections of the government at any point in time and should be amended not only at fiscal year-end.

Contact your Yeo & Yeo professional if you need assistance with your government entity’s budget process.

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