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Accounting Public School Budgeting and Auditing

Budgeting, Accounting, Auditing, Future Trends

The three major financial functions in education–budgeting, accounting, and auditing–are separate, discrete operations, but they are nonetheless closely interrelated. They are required activities in providing reliable fiscal information, guidance, and accountability in the use of the $365 billion raised and expended in 2001 on preschool through grade twelve public education in the United States. Budgeting is a process and plan for determining how money is to be raised and spent, as well as a document–the budget–developed and approved during the budgeting process.

Money is organized and spent according to an accounting system, using a general ledger that standardizes each spending category and accounts for its use. The National Center for Education Statistics published the Financial Accounting for Local and State School Systems, commonly called Handbook II, Revised (1990), by William J. Fowler. Handbook II, Revised is an accounting system with line codes for each category and function to make it easier for external agencies to analyze and audit school spending to ensure the legal and appropriate use of public funds.


William Hartman, author of School District Budgeting (1999), defines education budgeting as a "working tool" for the successful operation of states and local school districts, and as a "significant opportunity to plan the mission, improve their operations, and achieve their education objectives" (p. 1). As such, the budgeting process allows various levels of government to "make better financial and program decisions, improve operations, and enhance relations with citizens and other stakeholders" (National Advisory Council on State and Local Budgeting, p. 2).

In more technical terms, a budget is a statement of the total educational program for a given unit, as well as an estimate of resources necessary to carry out the program and the revenues needed to cover those expenditures. A vertical budget includes the various income and expenditure estimates (by line item, function, object, and cost center) in a given fiscal year, while a horizontal budget will include current estimates for a given fiscal year, compared to prior audited income and expenditures, and a projection of costs into the future. Hence, the budget is a statement of purpose and a review of income and expenditures by function–with a timeline to explain past, current, and future financial practices.

Education agencies, like businesses and other enterprises, have experimented with various forms of budget organization: line-item and function/object budgeting are basic to all systems; and planning-programming-budgeting systems, zero-based budgeting, and site-based budgeting are attempts to link the budget to goals and objectives while devolving the budgeting process to the school level.

Line-item budgeting. Barry Mundt et al. define line-item, or "traditional," budgeting as "a technique in which line items, or objects of expenditures–e.g., personnel, supplies, contractual services, and capital outlays–are the focus of analysis, authorization, and control" (p. 36). While helpful in tracking costs, line-item budgeting is virtually useless for planning or management, since the functions of the expenditures are not explained and the particular need, school site, and type of students being served are lost in spending aggregated by "line." Thus, teachers' salaries, for example, is a budget line-item; but which teachers, at which schools, teaching which types of students (e.g., bilingual special needs) is not explained.

Function/object budgeting. Most districts use function/object budgeting, since it organizes spending around the basic functions of the system, such as instruction, student support, operations, administration, and transportation. In addition, functions are subdivided (e.g., into elementary instruction, high school operations), while the object being purchased (e.g., elementary textbooks, high school cleaning equipment) is also specified. Personnel services or salaries and benefits may be handled by function; that is, for instructional, support, or plant maintenance staff, for example.

While these broad categories, objects, and processes are generally the same for education budgeting across the country, a strategic attempt has also been made to determine the most effective and efficient uses of resources. These efforts have led to such innovations as zero-based, program-planning, and site-based budgeting, which attempt to be more mission-driven and constituent-friendly than traditional types of budgeting in education.

Zero-based budgeting (ZBB). Popular in the 1950s and 1960s, ZBB began with the assumption that the school system starts out yearly with a "clean slate." Thus, each function, program, and agency has to justify its expenditures annually, relating all costs to system goals and objectives to avoid habitual spending. Because so many costs, such as tenured teachers' salaries and benefits, are "fixed" across annual budgets, and because the programs are so complex, zero-based budgeting becomes more an exercise than a practical reality. As Hartman explains, "ZBB … forces comparisons of and choices among programs and activities that are often difficult to compare adequately" (p. 49). In addition, most programs are not "up for grabs" on an annual basis, since, for example, schools cannot eliminate their elementary school classes, making such a requirement difficult to justify.

Program-planning-budgeting systems (PPBS). Used by the U.S. Defense Department during the Vietnam War, PPBS seek greater efficiency by attaching spending to particular programs (e.g., the development of a new multipurpose fighter jet aircraft that might be used jointly by the Army, Navy, and Air Force–thus saving costs, but failing, in fact, to meet the needs of any of the armed services very well). While rarely used in education, PPBS would require school districts to spell out their mission and goals, lay out alternatives to reach these objectives, attribute costs to each choice, analyze the costs, select the best option, and then build the budget around this outcome, and finally feed data back to adjust the costs to the results. While this method sounds ideal, it often becomes so complex, and the programs so numerous, that school districts and states cannot readily sustain this approach.

Site-based (school-site) budgeting (SBB). SBB is concerned with who will do the budgeting and where in the organizational hierarchy the decisions will be made. In attempts to bring the budgeting process closer to "end-users"–the teachers, parents, and school administrators–SBB encourages, if not requires, decision-makers in each school to examine their programs and to set their budgets to meet their particular needs as part of the process of shared decision-making. Allan Odden et al. explain that school reform may require greater decentralization, a step "in which teams of individuals who actually provide the services are given decision-making authority and held accountable for results" (p. 5). Under site-based budgeting, districts must determine who will serve on SBB committees; which decisions and resources are devolved to schools–and using what formulas; how much autonomy is granted to spend for local school needs; exactly how to analyze the budget at each school; and what training and support are needed to make SBB work effectively.

In practice, school districts or divisions thereof will utilize variations of many, if not all, of the above methods in compiling their budgets. For example, a school principal may require teachers to justify their individual budget requests (zero-based) in the development of a school (site-based) budget. A component of the district's budget may include a proposal for a new educational program, including all anticipated expenditures, revenues, and cost savings (program-planning budget). The entire district budget may be compiled onto a state-mandated format that requires line items to be categorized by fund, function, program, and object (function/object budgeting). Once the fiscal year begins, the budget is transformed from a financial plan into the initial baseline data for a working, dynamic financial accounting system.


Related to budgeting is the accounting system. If a school district's budget is a financial reflection of its educational mission, goals, and philosophies, then the accounting system becomes the method by which a district can assess the overall effectiveness of the financial plan. In fact, the accounting structure (line items, spending categories, costing and spending procedures) is reflected in the budget, and will later be used in auditing the system for legal, appropriate, and responsible spending.

David Thompson and Craig Wood explain five purposes for the use of accounting in schools. The first purpose is to "set up a procedure by which all fiscal activities in a district can be accumulated, categorized, reported, and controlled" (p. 111). The second function is to assess the alignment of the district's financial plan (budget) with the district's educational programs. An accounting system allows the district's management to assess whether a district has the financial resources to meet the needs of its programs.

The third function relates to the state and federal reporting requirements to which school districts must adhere. States have the constitutional authority for the provision of education, and, as such, they bear the final responsibility for fiscal accountability. Likewise, federal funds are distributed to local districts–through the states–and require adequate accounting and reporting procedures. These reporting requirements have led to the development and adoption of uniform budgeting procedures and accounting standards. The Governmental Accounting Standards Board (GASB), operating under the auspices of the Financial Accounting Foundation (FAF), is responsible for the establishment and revision of Generally Accepted Accounting Principles (GAAP) for local and state governments.

One significant difference in the utilization of GAAP for school districts and GAAP for private business is that school districts utilize fund accounting that classifies spending into three broad fund categories: governmental, proprietary, and fiduciary. Governmental funds represent those activities typical of district operations such as instruction, special revenues (grants), and debt service funds. Proprietary funds include those activities that are similar to private enterprise, such as food service and transportation funds. Fiduciary funds are utilized when the district is acting directly for a third party, including private trusts (scholarships), pension trusts, investment trusts, and agency (payroll) funds.

Budget preparation is the fourth purpose of accounting. By accumulating accurate baseline data, accounting provides the budget with the information necessary for a horizontal comparison (prior year, current year, and future annual revenues) of actual vertical (line-item) expenditures and budget performance. The fifth and final purpose of accounting, as proposed by Thompson and Wood, is to provide proper fiscal controls and accountability, which, in turn, build public trust and confidence.

Critics of the current system of accounting utilized in public schools have claimed that the collection and reporting of financial data no longer provides adequate information to policymakers. Jay G. Chambers asserts that the desire for programmatic cost information, the need for data compatibility, and the importance of understanding the relation-ship between educational inputs and outputs all point to the need for improving the standards for organizing and reporting educational resource data. To measure resources adequately in education, Chambers proposes a system that is related more to economics rather than accounting.

The resource cost model, which Chambers recommends, "places paramount importance on measuring productivity and the cost-effectiveness analysis, the economist's stock in trade" (p. 26). Several states, including Hawaii, South Carolina, and Rhode Island, have adopted another reporting tool that integrates with the existing GAAP accounting systems utilized at the school and district level. This financial analysis model allows expenditure data to be reported on a school-by-school basis and actually tracks dollars spent on the classroom for "classroom instruction." The reporting program allows policy-makers to "explore the equity, efficiency, and effectiveness of spending"(Cooper et al. 2001, p. 28) between schools as opposed to school districts.

Accounting is thus the tool by which school district management can structure, organize, and operationalize the district's financial plan (the budget). Accounting also provides the roadmap by which fiduciary entities, such as board of education members, public citizens, and state government officials can evaluate a school's financial status. In addition, school district accounting provides the necessary procedures and data to enable an independent, certified public accountant to conduct the district's annual financial audit.


Since schools are public agencies, their raising and spending of money must be reviewed and audited on a yearly basis–and on an as-needed basis, as determined by the governing body. In addition, an effective management system would include internal reviews and audits on a continuous basis to ensure accuracy and prevent fraud. Thus, two broad categories of audits–external and internal–are important in holding schools accountable for the use of public funds.

An external audit is an objective, systematic review of resources and operations, followed by a written or oral report of findings. Robert E. Everett et al.(1995) define three basic types of external audits. Financial compliance audits address the "fairness of presentation of basic financial statements in conformity with Generally Accepted Accounting Principles (GAAP)" (p. 4). This type of audit is most commonly associated with the annual independent audit that most states require: namely, a Comprehensive Annual Financial Report (CAFR) to be prepared by the school district that conforms to standards developed by the Governmental Accounting Standards Board and state reporting requirements. It is the auditor's responsibility to render an opinion of the financial statements contained in the CAFR, based on their audit of district records.

A program compliance audit is a review of a local education agency's (LEA) adherence to the educational and financial requirements of a specific funding source, such as a discretionary federal grant. The third type of audit is a performance audit, which addresses the "economy and efficiency of the LEA" (Everett et al., p. 4), examining an LEA's internal controls for weaknesses, which would expose possible mismanagement or fraud.

Internal audits, on the other hand, are usually incorporated into a district's internal control procedures, a system of checks and balances designed to ensure ongoing accountability by requiring certain members of the organization to perform a financial audit on an individual or department. For example, board of education members perform an audit each month on the financial statements submitted to them for their approval. The requirement of multiple signatures for the approval of a purchase order constitutes an internal audit of purchasing. The accounting or bookkeeping department may also perform an audit on the general ledger prior to closing the financial statements at the end of each month.

Future Trends

The school finance system, with its budgeting, accounting, and auditing sub-systems, was designed to support the operation and improvement of public education. When a public budget is aligned to the needs and programs of the nation, state, district, or school; when the accounting structure is clear and well constructed to reflect the way money is collected and spent; and when the auditing process determines that money was managed legally and appropriately, then school should have the tools to use funds effectively, efficiently, and productively. With new technologies, a popular drive to improve the funding of education, greater interest in schools as the decision-making unit, increased privatization of education, and the growing influence of federal agencies in determining accounting and budgeting principles, the nation faces an interesting and challenging future in school finance. There are four key issues facing school finance: changing federal-state-local dynamics; privatization, expanding technology; and a move to funnel resources to students.

Changing federal-state-local dynamics. The drive to standardize accounting practices in education across the nation can lead to some interesting future develops. For example, in 1999 the General Accounting Standards Board (GASB), issued Statement 34, which requires, among other changes, that districts and states combine all funds that would account for their debt against the value of their monetary assets and fixed assets (e.g., land, buildings, and equipment). In some states, the balance between district assets and district debt is negative, although presumably the ability of districts to borrow funds (backed by the relevant cities and state) will not allow school systems to go bankrupt. However, this subtle change in accounting requirements may have far-reaching effects for school districts, as their bond ratings may be affected negatively, thus limiting the amount of funds they may borrow for capital improvements. Future developments in budgeting, accounting, and auditing will see greater standardization as the levels of government work together to improve school spending, accountability, and performance.

Increasing privatization of school provision. Private provision of education, with public tax support, appears to be increasing. The number of charter schools, for example, has grown exponentially and U.S. President George W. Bush's national policies place "parental choice" and private provision as keys to school reform. As more and more public dollars are diverted to private providers–as a result of national, state, and local political decisions–the money will be placed into the hands of private organizations unaccustomed to the budgeting, accounting, and auditing in which public schools have developed expertise.

Further, the mingling of public funding and private (even for-profit) management will make budgeting-accounting-auditing systems even more complex, blurring the lines between public and private provision, funding, and accountability. As budgets are being approved by local school boards, for example, and funding is reaching individually-managed schools (i.e., charter schools), more profit-making corporations, such as the Edison Schools or Knowledge Is Power Program, will become part of the education budgeting-accounting-auditing process.

Expanding technology and public awareness. Sunshine laws, requiring that all official meetings in publication education be announced in advance and to open to the public, are converging with advances in technology, heightening the possibility of financial information becoming real-time data for public inspection. With computers, Internet accessibility, and growing public interest, one can assume that budgeting-accounting-auditing procedures will become more systematic, accessible, and transparent to stakeholders of education nationwide.

Funneling resources to students. The future will also include an increasing interest in school-site and student-centered budgeting and accounting. Driven by interest in such devices as vouchers, whereby funding would be awarded to each student (family), future systems will include revising current budget and accounting models that link resources to students. Agencies as different as the State of Hawaii and the New York City Public Schools now account for spending by individual school, function, and program, creating greater interest in equity and productivity at the school and classroom levels. Whatever future financial structures U.S. schools adopt, the budgeting-accounting-auditing system will be required to plan, allocate, and hold decision-makers accountable for the enormous resources of the nation's largest public service: education.


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