Association of Local Government Auditors

In this article, I will clarify the many varieties of fun that can be had with SEA in the hopes that local government auditors will not be left out.

The Government Accounting Standards Board (GASB) is the standards-setting body for state and local governments’ external financial reports. Through its SEA effort, the GASB seeks to address the concern that traditional financial reports do not provide enough information on the bottom-line of government success or failure. The GASB defines service efforts and accomplishments to mean performance measures of effectiveness and efficiency. Although the GASB addresses internal uses of data, many believe the primary use of such data is for external users such as the public and bond rating agencies.

SEA stresses financial accountability through a comprehensive cycle: planning, performance measurement, budgeting, management, evaluation, and reporting. The following table shows the history of SEA reporting and its influences.

When the GASB encouraged state and local governments to experiment with SEA reporting, Portland, Oregon was one of the first to respond. They hoped to improve the public accountability of the City of Portland by providing objective
information and to aid the Council and managers to improve the performance of programs.

In August of 2003, the GASB issued a special report: Reporting Performance Information: Suggested Criteria for Effective Communication. The purpose of this report was to provide guidelines to state and local governments to improve SEA reports through use of sixteen criteria. These are:
1. The purpose and scope of the external report on performance information should be stated clearly.
2. The report should clearly state the major goals and objectives of the organization and the source of those goals or objectives.
3. The report should include a discussion of the involvement of citizens, elected officials, management, and employees in establishing goals and objectives.
4. Performance measures should be presented at different levels of the organization.
5. The report should include an executive or management analysis that discusses the major results and challenges.
6. The report should focus on key measures that provide a basis for assessing results and major goals.
7. The report should contain reliable information.
8. Performance measures should be relevant to what the organization is trying to accomplish and linked to mission, goals, and objectives in the strategic plan,
budget or other source.
9. The report should include information about resources used or costs of programs and services.
10. Citizen and customer perceptions of quality and results should be reported.
11. Comparative information should be presented.
12. The report should include significant external and internal factors.
13. Reported information should be aggregated or disaggregated according to the needs of the user.
14. Reported measures should be consistent. If methodology has changed it should be reported.
15. The report should be easy to find, access, and understand.
16. Reports should be produced regularly, usually annually.

SEA reporting stresses the quality of performance measurement data. The GASB wants data that is relevant, understandable, comparable, timely, consistent, and reliable. If the GASB eventually requires reporting of specific performance measures, the benefits of measurement will be compared to the costs.

There are several possible approaches to performance reporting, each of which has potential benefits and costs associated with them. These include the following:
• The GASB could require performance reporting for major departments, agencies, programs, and services without specification of what should be reported. Explanatory information for all major goals and objectives would be presented with comparisons over time and targets for the future.
• The GASB could establish a minimum set of performance measures for each major department, agency, program or service.
• The GASB could focus on one or more significant agencies, programs or services and establish performance measures for these leaving other major areas open for self-selective reporting.

Barriers to Implementation
Many have been opposed to standards that would require reporting requirements of non-financial information. Jean Harris, in Public Budgeting and Finance, proposed a slower approach to SEA reporting.

In 1995, Harris said that it would take decades to reach a consensus on SEA reporting. It was important The researcher advocated an experimental reporting phase that would identify the user needs (particularly citizens). All interested organizations should be included on the SEA task force. Harris proposed
cross-disciplinary studies be conducted and a broader concept of accountability (rather than the fiduciary one of citizen as owner) be developed. The author also thought the GASB should be working on specifying disclosure requirements for presentation of SEA information rather than defining what measures should be included in SEA reports.

Others worry about the consequences of reporting data that was collected for managerial use being used by external users. Some fear political use of outcome measures. Some jurisdictions only report input, output, and efficiency measures because of fear of misrepresentation. Some accounting systems do not capture relevant performance data. Most financial systems are not performance-based.

These opponents consider the basic question to be “Is SEA data the domain of the GASB and external reporting, or is it really internal managerial data?”
Others point to problems with the data quality. One of the problems with standardized measures is that community problems, resources, and expectations are externally determined. Critics point to the difficulty in measuring these externalities. No one community is exactly alike another in its expectations for governance. Some oppose costly standards that would be an “auditing nightmare.”

Auditing the data would be very costly. If not audited, then they could be highly inaccurate. Some government officials object to reporting data they cannot fully control. Disaggregated data may lead to data overload while aggregated data may be inaccurate.

The reasons given in opposition by the GFOA are:
• Politics and administration would be hard to be kept separate.
• Performance measures are not neutral.
• Generic values would not produce useful information.
• Additional costs of the external audit.
• Diversion of scarce resources from improving accounting and financial reporting.
Other problems deal with SEA’s confusion regarding who is the primary user of performance reporting data. The GASB claims SEA is aimed toward internal, external, and intermediate users. Internal users are government managers. External users are citizens and creditors. Intermediate users would be
politicians and others who participate in budget decisions. Critics have pointed out that information is available elsewhere for internal and intermediate users. Therefore, they believe standards that provide this information are not necessary. Also risk and rate of return information is what creditors are interested in and this is not provided in SEA reports. Critics of SEA also use voter behavior models that show that citizens are not that interested in this type of information. They are more motivated by economics, gender, race, religion, psychology, party identification, and ideology. Also, SEA does not provide
information about equity, which is very important to many citizens.

Benefits of Implementation
The GASB emphasizes outcome and efficiency measures that it believes are basic to evaluation of programs and public decision-making about program priorities. Proponents believe users can use economic, social, and political information to improve accountability. Others say SEA can provide support for program audits, internal audits, and control activities. Finally, it can improve public relations with the citizenry and build trust in government. SEA proponents say that reports can be used to improve the economy, efficiency, and effectiveness of government.

The GASB offers the following as benefits of implementation:
• Greater accountability
• Improved public official motivation
• Greater citizen interest
• Enhanced budget decision making
• Better management decision-making
• Improvement in programs and policies
• Improved communications between elected officials and service providers
• Upgraded planning

Implications for Local Government Auditors
Performance data auditing is an “activity that allows government officials to evaluate whether performance measures are providing meaningful and useable information, to gain a greater understanding of processes and programs, and to test for data accuracy, reliability, and comparability.” Performance data auditing is growing because of pressures to show operational accountability as well as financial accountability. Professional organizations have not historically emphasized verifying the accuracy of performance data as much as the financial data. It is more difficult than financial auditing for a variety of reasons including the complexity of process, rapid organizational changes, a need to interpret measures, reporting capabilities, and the functional boundaries of the organization.

Audit shops appear to have been reluctant to join in the SEA fun. A 2002 Survey of audit shops affiliated with the Association of Local Government Auditors (ALGA) showed that 81 percent used performance measures in their organizations but only 26 percent reviewed or analyzed submissions made by operating departments to verify the reliability of presentations. This was down from a high in 1996 when 30 percent said they performed performance data auditing.

 

The Institute of Internal Auditors and the Sloan Foundation sponsored a survey to identify roles of internal auditors in performance measurement. The majority of those surveyed said they used it in their work. A minority said that they used it to offer assistance to their clients. Reliability of data is one of the sixteen criteria that the GASB proposes for SEA reporting. One approach to assessing reliability might be for the internal audit organization to examine the data being used and reach a conclusion. It may not be feasible or cost effective for all information to be audited every year.

Another approach might be to use American Institute of Certified Public Accountants attestation standards and a set of criteria agreed to by management.
Several roles have been identified for the local government auditor in regards to SEA reporting. Stephen Morgan, City Auditor for the City of Austin, Texas, identified roles at the ALGA conference in 2003.

Future for SEA Reporting
The GASB has not committed to a course that would establish SEA reporting standards. Currently it only provides “nonauthoritative guidance.” It wants to continue its research into the use of performance measures by local and state governments so that the reporting of SEA information could be accomplished
without the requirement of generic performance measures. The GASB’s plan for the future is to:
• Encourage experimentation with the sixteen criteria by state and local governments.
• Provide assistance to those wishing to use the suggested criteria along with guidance and explanations on how to use.
• Evaluate the effectiveness of the suggested criteria and decide whether reporting of performance information should be considered for inclusion as an active project on the GASB agenda.

In the ten years since the GASB issued the Concept Statement No. 2 listing the elements of the SEA model, there has been an emphasis on citizen-driven performance measurement, finding performance measures that are appealing for the general public, and experimental (rather than mandatory) reporting. The GASB has prepared case studies to show how performance measurement reports have benefited various state and local governments. Improvement has
been made in the quality of accounting information with the implementation of the GASB 34.

This standard was to make the annual financial reports more comprehensive and easier to understand. It requires financial statements to be presented on the accrual basis, which is more like the private sector and is necessary to provide full costing information for comparison of efficiency measures.

Perhaps, SEA fun is only beginning for the local government auditor. Mark Funkhouser, City Auditor for Kansas City, Missouri, and SEA taskforce member thinks it is, “SEA reporting is imperative for good government. We should hold government accountable for more than simply putting together an acceptable set of financial statements, we should expect them to deliver efficient, effective, and equitable services as well. Absent a set of good performance measures, independently verified, there is no way to do this.”

About the Author
Martha Rogers is the Internal Audit Director for Guilford County. She is a Certified Internal Auditor and a Certified Public Accountant. She has a BS in Accounting and a MBA from the University of North Carolina at Greensboro. She is currently working toward a PhD from North Carolina State University. Her current interests are performance measurement in local government, collecting old postcards with government buildings on them, and her five grandchildren.

For a list of sources, contact Martha Rogers at This e-mail address is being protected from spambots. You need JavaScript enabled to view it