Chapter 4: Budgeting and Control

• Budget exceution Approaches

• Monitoring and Controlling Spending
• Allotments
• Position control
• Appropriation Controls
• Encumbrance Controls
Budget and Performance Status Reports
• Expenditure Budget Status Report
• Revenue Budget Status Report
• Action Plan Status Reports
• Performance Measures Report
 Monitoring and Controlling Spending

 The budget authorizes the raising and spending of government resources

for specific purposes.
 The three most frequently used controls to ensure that the budget is
implemented as authorized are
 Allotments,
 Appropriation controls, and
 Encumbrance controls,
 But before these controls are put into operation, final budget decisions
are transmitted to departments and budget amounts recorded in the
accounting system.
Allotments
 Once the legislative body adopts the budget, departments are not
automatically authorized to spend against their appropriations.
 Funds may be allotted on a quarterly, semi-annual or annual basis.
 This periodic release of funds serves several purposes:
 Avoids premature exhaustion of funds
 Maintains a balanced budget
 Prevents deficits; and
 Diminishes the need for supplemental budgets or amendments
Appropriation Controls
 The budget when approved becomes standard against which
actual operations are controlled.
 It is thus the critical managerial tool of execution; both guiding
agency operations and ensuring that spending not exceed
appropriations.
 Appropriation control is a form of line item authority.
 State budget law normally spells out the level of appropriation at
which a department head needs to seek permission from the
legislature in order to exceed a spending limit.
Encumbrance Controls
 An encumbrance is a commitment of appropriated funds to purchase an item or service.
 When funds are encumbered, they are set aside, or committed, for a specified future
expenditure.
 Encumbrances are established in the accounting system.
 For example, if a department executes a contract to purchase electrical repair services
during the fiscal year, an encumbrance is established in the accounting system to show
that funds needed to cover the cost of the repair services have been designated for that
purchase.
 By doing so, a department that encumbers funds avoids obligating the same funds for
another purpose.
 The encumbrance control prevents the overspending of accounts.
 Budget and Performance Status Reports
 The three control measures described above help ensure that the departments
stay within their budgets.
 To determine how well the controls and action plans that have been
implemented are working, it is common practice for the central budget office
or department finance staff to issue regular budget and performance status
reports.
 types of performance reports are normally prepared and periodically
reviewed:
 an expenditure budget status report,
 a revenue budget status report, and
 an action plan status report.
Expenditure Budget Status Report
 The expenditure budget status report provides a periodic budget
summary to managers.
 This summary serves two important purposes. It tells
 whether expenditures for a particular budget category are within the
budgeted amounts, and
 it identifies how much money is still available for expenditure.
Revenue Budget Status Report
 Revenue budget status reports serve two important purposes.
 They tell how much revenue is collected or accrued to the fund
compared with the estimates developed for the budget, and
 they identify potential revenue shortfalls in time to make spending
adjustments.
• Action Plan Status Reports
– Action plans are the departments’ work plans to ensure
successful implementation of their strategic goals and
objectives.
– In the action plan status reports, the department budget or
finance staff updates the departments’ progress toward
meeting those goals and objectives and identifies any events
or changes to the action steps that have affected their
completion.
 BUDGET CONTROL SYSTEMS OR TYPES
OF CONTROL
1. Preventive controls - these are established to lock actions that would
violate standards.
 reviewing planned purchases
 often requiring approval by multi and independent authorities before spending
occurs.
2. Feed forward controls - perform diagnostic or therapeutic actions in the
spending process.
 Variance reports may automatically place stop order on certain accounts when
differences b/n actual expenditures and budgeted expenditures exceed certain
levels.
3. Feedback controls - starts corrections for the future.
 The comparison between budgeted expenditures and actual
expenditures within the fiscal year is important information for
those preparing, reviewing and directing budgets for next year.
 Control/auditing can take two forms:
 Internal control/internal auditing and
 External control/ external auditing.
INTERNAL CONTROL/AUDIT
 is defined as the methods and procedures within the
agency established to safe guard assets, check the
accuracy and reliability of financial and other data,
promote operational efficiency, and encourage adherence
to the prescribed policies and procedures of the agency.
 Internal control represents the first line of defense against
fraud.
 Some basic methods of establishing internal control include the
following:
 Provide qualified personnel, rotate duties, and enforce annual
leaves/vacations.
 This ensures capable handling of tasks and that irregularities can be found when new
staff take over tasks on rotation or on temporary assignment.
 Separate operations and accounting.
 Divide the responsibilities for operational transactions (purchasing, receiving,
collecting etc) from maintenance of accounting records to reduce chances for error
or theft. Maintain separate reconciliation of transaction records.
 Segregate responsibility –
 to divide related duties and operating responsibilities among two or more qualified
people reduces the chance of error or fraud by providing a check and balance on
work performed.
 Assign responsibility –
 this ensures that tasks will be performed and that
the appropriate party in questions can be identified.
 Record transactions & Safeguard assets –
 properly record and accurately classify events and
transactions. Limit access to source records and
government assets to authorized individuals.
 External control/audit- Government audits may be classified
according to their objectives into two types:
 Financial and Performance audit.
 I) FINANCIAL AUDITS include Financial Statement Audits
and Financial Related Audits
 A) Financial Statement Audits –
 determines: Whether the financial statements of an audited entity present
fairly the financial position, results of operations, and cash flows or changes
in financial position in accordance with Generally Accepted Accounting
Principles, and
 Whether the entity has complied with the laws and regulations for those
transactions and events that may have a material effect on the financial
statements.
 II) PERFORMANCE AUDITS- these similarly
encompass two classes of audits:
 Economy and Efficiency Audits, and
 Program Audits
 A) Economy and Efficiency Audits - Seek to determine:
 Whether the entity is acquiring, protecting, and using its resources (such
as personnel, property, and space) economically and efficiently, the causes
of inefficiencies or uneconomical practices, and
 Whether the entity has complied with laws and regulations concerning
matter of economy & efficiency.
 B) Program Audits – examine:
 The extent to which the desired results or benefits established by the legislature
of other authorizing bodies are being achieved the effectiveness of
organizations, programs, activities, or functions, and

 Whether the entity has complied with laws and

regulations applicable to the program.
 Even if thefts from government receive expensive publicity when
discovered, the following are some of the methods that have
historically been used to steal from government:
1. Ghosting –
 receiving payment for resources not actually delivered - can take several forms.
 the ghost employee,
 payment for supplies or services that are not actually delivered.
 In voices sent by the firm show delivery but the agency never receives the
supplies or service.
 double payment for supplies or service: services are performed once, but
invoices show delivery of two shipments.
 Each method causes government to pay for resources no delivered, and each
artificially increases the cost of public service.
2. Bid Rigging –
 Potential suppliers would establish beforehand the bid
winner and the wining price: other firms would
submit noncompetitive bid firms and would cooperate
in the collusion because their turn to win would come
on another project.
 The collusions increase the profits of the wining firms
and increase the cost of government.
3. Honest graft
 'Honest' graft uses advance information to produce private profit for the
individual employee.
 use of inside information, steals from the public by forcing excess
payments for a resource.
 Honest graft may similarly involve acquisition or reestablishment of
companies to do business with a government.
 Bid specifications may be written so that company would be the only
one qualified. Requirements for the commodity or service would by
artificially increased for the enrichment of the government employee.
Diversion of Public Assets and the Service of Employees
5. Kickbacks –
 Public officials who have power to select who receives
contracts to do business with governments, may profit by
arranging for artificially high contract awards or artificial
wage payments with a portion of that payment kicked
back to the government official.
The end of the chapter