N^648.r- STATE OF NEW JERSEY OFFICE OF STATE TREASURER DEPARTMENT OF MUNICIPAL ACCOUNTS Walter R. Darby Comml 38 loner REQUIREMENTS OF AN AUDIT Return this book on or before the ^ J , Latest Date stamped below. A i charge is made on all overdue books. - University of Illinois Library --f- = \ riMr » ft . These sheets will fit standard ring binders of various manufacture. STATE OF NEW JERSEY OFFICE OF STATE TREASURER DEPARTMENT at MUNICIPAL ACCOUNTS WALTER R. DARBY Commissioner 4 Requirements of an Audit The present edition of the requirements of an audit has been enlarged to cover the procedure on the trust and capital divisions of accounts. The former requirements have not been changed in principle but certain matters have been elaborated upon to a greater degree and more in detail. TRENTON, N. J. October, 1922. 5 ^:z.l ^ Requirements of an Audit. f _ >• rt ^ At the outset attention is particularly directed to Chapter 267, P. L. 1918, as amended by Chapter 105, P. L. 1921. I. Experience has shown that the provisions of Section 2 (b) , have not been observed as they should be. This section and the registration blank which is signed by every applicant before a license is issued require that the accountant “will honestly and faithfully audit the books and accounts of a municipality or county when engaged so to do, and report any error, omission, irregu¬ larity, violation of law, discrepancy or other nonconformity to the law, together with his recommendations to the governing body of such municipality or county.” Many accountants have failed to report matters which they have pledged themselves to report and which, under the statute, they are required to report. In this connection also, in manv instances there is a dearth of comments and recommendations. The object of the audit is not only to show the financial condition and transactions of a munici¬ pality, but also to call attention to matters which have not been handled in a proper manner with the idea that they shall not occur again. 2. Another matter which has been generally ignored is the pro¬ vision of Section 3, that the municipal accountant shall file a CERTIFIED DUPLICATE COPY of his report and recommendations, as filed with the municipality, with the Commissioner of Munici¬ pal Accounts. This does not mean that the regular certificate as to the audit shall be omitted, but that the report, as filed with the Department, shall be certified as a true and exact copy of that filed with the municipality. An affidavit is not necessary and the following form of certification is suggested: “This is to certify that the within report is a true and exact copy of that furnished the (City, Town, etc.) of (Name) County of (Name). 3. The 1918 Act has been amended so as to clarify the reasons for which licenses may be withheld. They are: a. Knowingly failing to comply with Section 2 (b) referred to above. h. Issuing false reports of audit. 3 c. Issuing reports of audit which do not show an ac¬ curate, intelligent and complete statement of the finan¬ cial condition of the municipality. d. Issuing reports of such nature as not to comply with the requirements of the Department of Municipal Accounts. e. Failing to file a copy of the report and recommen¬ dations with this Department within five days after filing it with the municipality. /. Neglecting or refusing to carry out any agreement or contract for audit. 4. The licenses are dated as issued but the period which the license covers has been changed. Licenses will be in effect from date of issue to August 31st following. 5. Section 6 provides that any person who shall make, or begin to make, any audit of accounts of any municipality or county contrary to the provisions of Chapter 268, P. L. 1918, as amended, or without a license therefor in full force and effect, shall be liable to a penalty of one hundred dollars for every audit of accounts so made. 6. Section 7 requires all reports of audit of accounts of mu¬ nicipalities to be signed by the auditor or accountant making the audit or in charge of same, holding a license as provided in the statute. This means that the accountant or auditor signing a report must have personal knowledge of the accounts covered by the report gained from experience and observation in the field. It does not mean that a licensed accountant may sign a report which has been made by someone else who may not even be subject to the direction of the licensed accountant who signs the report. It has come to our notice that some accountants have signed reports when they were not even connected with the firm or accountant who did the field work. This is not permitted by the statute and cannot be countenanced. Chapter 268, P. L. 1918, as supplemented by Chapter 106, P. L. 1921. 7. a. There has been considerable misunderstanding as to the interpretation of the provisions of this act. Section r provides for an annual audit of the accounts of ever\ municipality and county c f the State. Where the assessed valuations are $3»ooo>CKX) or over such annual audit has to be made and com¬ pleted within four months after the close of each fiscal year by a registered municipal accountant. That is to say, the audit must be made and completed each year on or before May ist. b. For those municipalities having an assessed valuation of less than $3,000,000 the annual audit may be made and com¬ pleted within four months after the close of each second fiscal year. The only difference between a municipality having an assessed valuation of $3,000,000 and over and one of less than $3,000,000 is that one annual audit may be deferred and two annual audits made at one and the same lime. The act went into effect in 1918. The first audit, therefore, which could be made under the act was the audit of the 1918 accounts. The 1919 accounts, then, did not have to be audited until they were audited with the 1920 accounts, and the reports for both years completed and filed on or before May i, 1921. The effect of this is that the audit for the odd year may be deferred and made at the same time with that of the succeeding even year. It does not mean that the audit of any year may be entirely omitted. The report of audit for each year must, therefore, be a distinct and separate and complete report just as if the report of audit for the odd year had been made or completed immediately at the close of that year and not deferred. 8. The supplement authorizes the Commissioner of Municipal Accounts, where an audit has not been made by reason of the failure or refusal of the governing body to institute and complete such audit, to make such an audit either himself or by his em¬ ployees or agents. Where an audit has not been instituted and completed as provided by Chapter 268, P. L. 1918, before a registered accountant can make the audit it becomes necessary to secure the waiver of the right on the part of the State to make the audit and consent for the employment of some other account¬ ant or auditor. 9. An audit, to be of the greatest benefit to all concerned, should be filed prior to the approval and adoption of the budget. The value of an audit filed after such time is mainly that of a record. Engagements for audit should not, therefore, be de¬ ferred, but prompt filing of the report should be insisted upon by the municipal officials in order that any deficits or deferred charges may be included in the next succeeding budget, instead of in a later budget. The point is that the report should be made and filed at a time when it contains live facts and not history. 10. Balance Sheets. a. Where it is not possible to accept the balance sheet of a previous auditor the balance sheet should contain three col¬ umns : 1. That of the previous audit as at December 31st of the previous year. 2. Revised balance sheet as at December 31st of the previous year. 3. Balance sheet as at December 31st of the year under review. » As we are accustomed to express it, it is necessary either to accept or upset the balance sheet of the previous auditor. Full comment should be made as to the reasons for the changes. b. Errors in current accounting should not be corrected through the report of audit. The report of audit should repre¬ sent the net results of the transactions for the year after the neces¬ sary corrections have been made. The corrections necessary to bring the books of account into agreement with the report of audit should be presented to the officials responsible for the books of account and the auditor should see that the corrections are made. 11. Certification. Each report of audit must be certified. See paragraph No. 2. 12. Deferred Audits. Report of audit must be made for each year separately and each report must be complete in itself. See paragraph No. 7 (b). 13. Duplicates. a. After the tax duplicates have been certified by the County Board of Taxation it does not lie within the power of any particular official to change or revise or alter the tax dupli¬ cate. Such changes or revisions or alterations must be made by the parties clothed with power, and then only in accordance with the provisions of the statutes. The governing body has the power to cancel duplicate or fictitious assessments on real estate. The governing body has the power to cancel or remit taxes assessed on personal property, and also poll taxes, when they cannot be collected. The particular point to be observed is that unless and until the governing body, by a proper resolution, remits 6 or cancels taxes they must stand as open items of taxes on the duplicates. The fact that the collector has noted after a certain tax the words “Dead,” “Moved away,” “Cannot find,” or similar notations, does not cancel the tax. The tax becomes a charge against the individual when placed on the duplicate by the assessor and certified by the County Board of Taxation. Unless the tax is paid it remains open, and must be considered as a delinquent tax until formal action is taken by the governing body. Such formal action consists of a resolution, properly passed by the governing body, dealing with each item of tax separately as to page, line, name, amount and year. (Where the assessments are by number, the assessment number may be substituted for the page and line of the duplicate.) This resolution must then be entered in detail on the minutes by the clerk. The effect of this is that every item of delinquent tax which has not been regularly written off or canceled must stand as a delinquent tax, and be so considered until written off in a proper manner by the proper authority. h. I. The collector has the power to correct mathe¬ matical errors in the extensions or totals of items of taxes with¬ out reference to anyone. It is obvious that on a certain valuation at a fixed rate there can be only one amount of tax, and that the correct amount. Because someone has entered an incorrect amount, that does not make that amount the tax which has been levied. For example, on a valuation of $5,000, at a rate of $2 00 per $100, the tax is $100. Suppose the item is extended as $1,000 or $10, as the case may be. No such tax ever existed nor ever could exist. The only tax which ever did exist is the correct tax, $100. The collector has full power to correct such errors. The proper way to make such corrections is to enter the correct amount of the tax alongside the incorrect amount, with the initials of the party making the correction and the date on which the correction was made. Similarly, if the total of the taxes on any page is incorrect, corrections should be made in the same manner. 2. The collector also has the power to add taxes to the duplicate which have been omitted by the assessor. When such additions are made, the County Board of Taxation should be notified of the additions. c. The amount of all taxes outstanding at the be¬ ginning of the year under audit must be established for each year for which there are any delinquent taxes. The changes during f the year due to collections, remissions, deductions, sales, etc., 1 must be shown, together with the amount outstanding at the end j of the year. 7 d. The current duplicate must be added and proved. Remissions and deductions must be supported by proper author¬ ity—not merely entries in the duplicate. The cash collections, remissions, deductions, transfers of taxes to tax title liens, etc., together with the taxes outstanding, must equal the total of the duplicate. 1 ^ 0 te —(i) The report of audit must contain a definite state¬ ment to the above effect. This is particularly necessary where no supporting schedules of outstanding taxes are required. (2) Taxes on property the tax title of which is owned by the municipality are not delinquent taxes, but are tax-title liens. Therefore such taxes must not be included in the lists of delin¬ quent taxes, but in the lists of tax-title liens. (3) It has developed that some accountants are accepting the lists of delinquent taxes furnished by the tax collector without verification. This is a dangerous procedure, and is almost cer¬ tain to prove disastrous to those who practice it. 14. Tax Title Liens. a. All delinquent taxes are liens, but a further distinction is made between tax title liens and ordinary liens. Section 32 of the Tax Sale Revision, Chapter 237, P. L. 1918, provides that where a parcel of land is held by the municipality under a sale not redeemed, then until the right of redemption is barred, all subsequent taxes shall be assessed in the name of the owner, as if no sale had been made, and shall be additional liens on the land and be added to the amount of the sale. The effect of this is that when a tax sale is held and a parcel of real estate is knocked down to the municipality, the amount of the tax sale certificate is set up as a tax title lien. The next year that parcel of real estate is assessed in the name of the original owner, but the taxes receivable for the year should be credited with the amount of the tax on this parcel and charged to the tax title lien account. The result is that the list of delinquent taxes contains only items of taxes on real estate which, unless collected, subject the property to sale, not those items the title of which has already been purchased by the municipality. b. In accordance with the preceding paragraph, the value of the original certificate is set up as the amount of the original tax title lien. The principal of the tax for each succeed¬ ing year on each parcel of real property should be added to the value of the original certificate. The taxes receivable for each year should be credited with the amount so transferred and the tax title lien account charged with the same amount. N. B. If the ta^v title lien accounts are not in proper shape and complete it becomes the duty of the accountant to make them complete and intelligible. c. In this connection we wish to urge the desirability of cleaning up old tax lists not only because it simplifies the work of the accountant, but also because delinquent taxes from five to fifty years old are assets of questionable value. Action should be taken either to collect or otherwise dispose of such delinquent taxes in accordance with the statute. d. The interest and costs accrued on tax titles which are included in the tax sale certificate are a direct credit to the surplus revenue account for the year in which the sale is made. 15. Revenues and Receipts. a. The revenues accruing to the municipality for the period under audits must be established and verified. All receipts of revenues must be verified as to source and disposition. b. It must be understood that revenues in many in¬ stances are different from receipts. For instance, the revenue from poll tax is the amount of poll tax levied according to the duplicate. If there has been no receipt on account of any poll tax the revenue would still be the amount of such tax shown on the duplicate. c. Miscellaneous revenues realized on account of items stated in the budget as anticipated are considered only with respect to the aggregate amount of such realization. No regard is paid to whether the individual items are in excess of the antici¬ pation or not. In other words, if there are six items of antici¬ pated miscellaneous revenues in the budget and only one of the items realized is in excess while the other five are deficient, still if the aggregate of the amounts realized is in excess of the total of the items anticipated there is no deficit. On the other hand, where the aggregate amount realized is less than that anticipated, such deficit must be carried as a deferred asset to be covered by an appropriation in a succeeding budget. d. Miscellaneous revenues not anticipated are items of current revenue which have not been set forth in the budget. They cover only items of revenue accruing during the fiscal period under review. For instance, additional taxes of prior years would not be miscellaneous revenues not anticipated for the current fiscal year. They would be direct credits to the surplus revenue account. e. Interest on bank deposits should be accrued up to December 31st of the year under review and taken as a revenue for that year. Interest on deposits accrued on balances in the capital division should also be taken as a current revenue and should not be placed to the credit of the capital improvement account. 16. Expenditures and Disbursements. 4 a. All disbursements must be verified: 1. As to correctness of amount. 2. As to being a proper charge to the account (not only as to purpose but also as to fiscal period). 3. As to proper authorization. 4. As to method of payment. 5. As to legality. Note item i6a2. It is not proper to charge an appro¬ priation account of any year with a disbursement for any other year. b. Sections 15 and 16 apply not only to the accounts of the Collector and Treasurer, but to any and all accounts of any and all officials of the county or municipality as the case may be. such as Sheriff, Surrogate, Register, Mayor, Clerk, Overseer of the Poor, etc., etc., and to any and all boards or departments, such as Board of Health. Park Commission, Library, Almshouse, ^ Hospital, Water and Electric Light Departments, etc., etc. Note: The only exception to the above is the Sinking Fund Account. There is no objection, however, if it is desired, to have an audit of this fund made by the municipal accountant, but it must be thoroughly under¬ stood that the only official audit of any sinking fund is that made by the Department of Municipal Accounts as provided by statute. c. Disbursements should be shown itemized as to pur¬ pose as well as to fiscal period. For instance, if the balance sheet at the beginning of the period shows a certain liability due on account of local district school taxes and that liability is satisfied during the period under review, it should be stated separately and not combined with any payments made on account ot the same purpose or object for the current period. The same holds true with regard to the disbursements made which are chargeable to reserves which have been set up as liabilities, or, i:i fact, any disbursements cn account of prior years. 4 17. Budget. d. It will be noted from the accompanying form that it is necessarv to set up the budget and comp)are with the budget 10 the operations and transactions of the fiscal period. It is axio¬ matic that the total of the anticipated revenues must equal the appropriations, then as noted on the form the excesses or deficits in the revenues and appropriations are treated separately and recapitulated under specific heads. h. Overexpenditures of appropriations or expenditures in the absence of appropriations to which such expenditures can properly be charged is a misdemeanor under the laws of the State and as such is punishable by a fine of not more than Si,ooo and three years in prison. In order to minimize such overexpendi¬ tures, section 19 of the Budget Act provides for transfers, be¬ tween appropriation accounts during the last two months of the fiscal year. Such transfers must be made by resolution of the governing body transferring a certain definite sum from a par¬ ticular item of appropriation to another particular item of appro¬ priation. Such resolutions should be embodied in the minutes. In the absence of such resolutions regularly passed and recorded the appropriations must stand as originally made in the budget. Any overexpenditure of any appropriation must be shown as such and carried as a deferred asset to be covered in a succeeding budget. It is not permissible to wash overexpenditures of certain appropriations against unexpended balances in other appropria¬ tion accounts. Transfers were either made or they were not made. If not made and made properly they cannot be considered. In this connection it is necessary to state that the law does not permit of transfers either to or from the contingent expense appropria¬ tion. Therefore, no such transfers should be shown on the reports even though they were properly authorized. The govern¬ ing body not having power to authorize any such transfer, the result is the same as if it had not been made. 18. Cash—All cash balances must be verified by the depository or depositories and the balances shown by the books reconciled with those of the depositories. 19. Current Duplicate. a. Under this head should be shown only the prop¬ erty (real and personal) and poll taxes. Franchise and gross receipts taxes are not part of the duplicate and should not be shown as such. On the other hand, the bank stock tax due to the method of its assessment and collection is taken into con¬ sideration with the levy of the property tax. The County Board of Taxation has before it when the tax levy is made the amount of Bank Stock Tax levied which is due to a particular taxing district. This amount is deducted from the “Amount to be raised by Taxes” certified to the Board and the rate is struck on the balance. Thereafter the amount of the Bank Stock Tax is paid to the collector of the taxing district by the County Treasurer and in this way the full requirement of the “amount to be raised by taxes” should be realized. It will be seen from the above that the Bank Stock Tax, therefore, must be added to the property taxes yielded by the duplicate in order to arrive at the proper figure for comparison with the “amount to be raised by taxes” as stated in the budget. b. The Second Class Railroad Tax is a property tax, pure and simple, differing from other real estate taxes only in the manner of its assessment, levy and collection. The tax is levied on the second class railroad property at the municipal rate. This item is shown as a separate item on the accompanying form merely to make it stand out and so that it will not be overlooked. c. So far as this department is concerned, it is not necessary to show any “Added Taxes” on the current duplicate. In other words, this department is not concerned with how the taxes got on the duplicate, but with the amount which the duplir cate yields, as it stands, with clerical and mathematical errors corrected. When this amount is arrived at, by deducting the stated requirements for other purposes, such as State Road, State School, County, Local School, etc., the amount of taxes yielded by the duplicate available for local municipal purposes is deter¬ mined. This is the amount which is comparable with the “amount to be raised by taxes” as set forth in the budget. 20. Unexpended Balances Account. a. This account normally should be subject to two credits and one debit. The credits are “additional taxes” and “unexpended balances of appropriation accounts.” The debit is “taxes remitted.” b. The “additional taxes” may be a deficit instead of an excess, in which case the deficit would appear as a debit in¬ stead of a credit. The unexpended balances of appropriations is just what the name implies. Taxes remitted include all losses of tax revenue for all years such as remissions, cancellations, abate¬ ments and discount for prepayment of taxes. If the credits in this account exceed the debits, the difference is a credit to the surplus revenue account. If, on the other hand, the debits exceed the credits, the balance must be carried forward as a deferred asset, to be covered by an appropriation in a succeeding budget under the head of “Deficit Unexpended Balances .\ccount 19—.” c. If the unexpended balances account shows a deficit for two succeeding years it is not proper to combine these deficits into one amount. The balance for each year must stand as a separate item until covered by an item of appropriation in some succeeding budget. 21. Surplus Revenue. a. This account is not subject to any debit other than “Surplus Revenue Appropriated” in the budget. This statement must, of course, be modified by the provisions of sections 8 and 17, covering transfers to surplus revenue reserve and a loan in the last month of the year to cover a deficit in miscellaneous revenues anticipated, respectively. On the other hand, the sur¬ plus revenue account is always open to credits. As noted in the report, these credits are summed up under certain specific heads. The item of “other or additional surplus revenue” is to cover revenues realized during the year which for one reason or an¬ other were not taken into consideration in the surplus revenue at the beginning of the year. Schedules should always be furnished showing the items which make up “other or additional surplus revenue.” h. Surplus revenue is the excess of assets over liabili¬ ties in the current division of accounts. It is not proper, there¬ fore, to have any account such as “surplus” or “general surplus,” in addition to the surplus revenue account in the current division. 22. Local School District Taxes. a. There is no essential difference between Article VI (city) and Article VII (country) school districts, so far as the accounting or report is concerned. There is a difference in the results shown; that is, there is practically certain to be a balance due the schools on December 31st of any year in Article VI dis¬ tricts. This is proper and legal, and the balance should be shown as a liability in the current division. On the other hand, it is neither proper nor legal for the books to show a balance due the school account in Article VII districts, as the statute explicitly commands the payment of all school taxes “on or before De¬ cember 15th.” Of course, if the liability exists it must be shown, but there should be no liability on December 31st in Article VII districts on account of schools, and if the law is complied with there will be none. difiference, then, for reporting purposes is that a liability in Article VI districts is proper, while in Article VII districts it is^ not proper. A schedule should be furnished in Article VI districts, and in Article VII where the law has not been observed, to show the transactions of the year. Such a schedule would show: Balance due schools beginning- of yeai,. . $25,000 School tax levied for year, . 75,000 $100,000 Paid School Account during year, .... 89,000 Balance due account school taxes,. $11,000 c. In this connection it is well to furnish a statement showing in a similar manner the transactions in connection with other running accounts, which occur in many places, such as franchise and gross receipts taxes, which never seem to be paid in full at the close of any fiscal period. 23. Emergency Appropriations. a. These appropriations have proven troublesome to many. Being appropriations, they are credits. The correspond¬ ing debits are “Emergency Revenues.” The appropriation may be distributed and shown in addition to the regular appropriation of the same name, e. g.: The regular appropriation for police is $10,000. It is found necessary to create an emergency appro¬ priation of $1,000 for preservation of public order. This may be shown as follows: Police (E). $1,000 directly beneath the regular appropriation for Police purposes. In a similar manner emer¬ gency appropriations may be shown for Streets and Highways, Health, etc., or for any purpose for which an emergency appro¬ priation may be lawfully made. The result will be then that the total of the appropriation side of the budget will be the sum of the original budget appropriations plus the emergency appro¬ priations. To bring the two sides of the budget into balance it is necessary to add to the total of the anticipated revenues as contained in the original budget the amount of the emergency appropriations under the head “Emergency Revenues” either as one item or several items, thus: Total anticipated revenues (budget), $65,000.00 Emergency revenues,. 3,000.00 Total, . $68,000.00 The emergency appropriations were as follows: Police (E), . $1,000.00 Streets and Highways (E). 1,600.00 Health (E), . 400.00 These appropriations would appear singly directly beneath the regular appropriations of the same name and the total would be the original budget appropriations of $65,000 plus the $3,000 emergency appropriation or $68,000, which equals the amount of the total anticipated revenues. b. Emergency appropriations are subject to the same treatment as regular appropriations as to reserves and the unex¬ pended balances lapse into the unexpended balances account. Emergency appropriations are not subject to transfer. c. In this connection a word may not be amiss as to: 1. When may emergency appropriations be made? Section 25 of the Budget Acts answers this in the open¬ ing w^ords of the section—“Upon the happening of any event, etc.” This is clear and unmistakable. It does not mean ten months later nor six months later nor a w eek later but when the emergency happens. That is w^hen an emergency appropriation can lawfully be made. 2. What is an emergency? This is also defined in the same section (25) of the Budget Act. It is not to enable a municipality to do something in July which was omitted either knowingly or otherwise from the January budget. It is not a means of adding to an ap¬ propriation which is running or has run short. There seems to be a tendency to make up for deficiencies in foresight by stretching the emergency section to the limit and even beyond. The language of section 25 is broad but it has its limits and these should not be ex¬ ceeded. 24. Tax Overpayments. Payments of taxes which are in excess of the amount due should be scheduled and the total set up as a liability in the balance sheet. Then, if the refund is made the charge is made to the open balance sheet account—a simple matter. If the lia¬ bility is not set up the question arises as to what account can be charged. The usual answer is “Surplus Revenue Account,” which is not correct. Any other procedure than that outlined above is irregular. Subsequently, if it develops that the refunds do not have to be made the amounts of overpayments may be closed out to the Surplus Revenue Account. 25. Reserve Accounts. a. A distinction is necessary between “reserve accounts’' and the “reserve division of accounts.” A reserve from a cur¬ rent appropriation account to meet a “purpose unfulfilled there- under” is simply a liability in the current division and should be so shown. No result is obtained by transferring such “reserve accounts” to the “reserve division” except confusion and com¬ plication, and it should be avoided. The “reserve division of accounts”' is for pension funds and sinking fund accounts where a reserve is accumulated over a term of years to meet a future liabilitv. b. Under paragraph i6a2 expenditures and disburse¬ ments must be verified as to being a proper charge to the account, not only as to purpose but also as to fiscal period. It appears that this matter has not been taken seriously but it is very important, and the accountant must assure himself that no charges of prior years have been charged to the appropriation accounts of the current vear. Where it is found that sufficient reserves have not been set up to meet the charges of former years, it will be neces¬ sary to revise the previous balance sheet and set up sufficient reserves showing the resulting overexpenditures if there be any. At the close of the year under audit it is necessary to establish the necessary appropriation reserves for outstanding commit¬ ments. If the reserves should prove to be insufficient it is neces¬ sary to withhold payment until a specific appropriation has been made for each individual claim in a succeeding budget. 26. Appropriations. a. Reference has been made to overexpenditures of appropriations and exi>enditures without appropriation. This leads to the subject of appropriations and how and when and for what purposes they may be made. Appropriations may be made in three ways and onlv three: 1. Budget. 2. Emergency Resolution. 3. Bond Ordinance. h. An appropriation may be made in the budget for any purpose for which the municipality may lawfully expend moneys. There is no statutory limit to the amount of the budget appropriation. The time limit is the approval of the budget. After the budget is approved no new item of appropriation other than mandatory appropriations may be added except by discard¬ ing entirely the budget which has been approved and starting anew. c. An appropriation may be made at any time by reso¬ lution to provide for an emergency. There is no limit, by statute, of the amount of an emergency appropriation. The purposes for which such an appropriation may be made are defined in section 25 of the Budget Act. d. An appropriation may be made at any time by ordi¬ nance. The purposes for which such an appropriation may be made are those for which bonds may be issued. The amoimt may not be in excess of the debt limit. (See Chapter 252, P. L. 1916, its amendments and supplements, on this matter.) 27. Fire and Light Districts. a. Districts for fire and light purposes are authorized by statute for specific objects, namely, to render a specific service to a limited territory at the expense of the taxpayers of that territory. There is no support, therefore, either in law or as a business proposition to put upon the township at large any portion of the cost of the particular service rendered to the district. It is equally true that any excess tax levied upon the property in the district belongs to the district and not to the township at large. The treasurer of the township is, however, the custodian of the funds of the district, holding such funds for the disposal of the authorities of the district. The result is that a distinction must be made between general township taxes and district taxes. The taxes of the district should be turned over to the treasurer of the township by the collector by means of a separate check and the treasurer should deposit them in a separate fund subject to the orders of the commissioners of the district, thus throwing this matter into a “Trust” account. It should be noted that the col¬ lector has no authority to pay any collections of district taxes to anyone but the general treasurer of the townships—not to the treasurer of the district. In fact, there should be no treasurer of the district, for as stated above, the township treasurer is the cus¬ todian of the district funds. b. This means that a separate accounting must be made of district funds. The amount of the levy must be established in the same manner as that of the general township is established and the amount of collections on account of such levy, remissions and any other credits noted; also the amount of the warrants or orders honored by the township treasurer on account of the dis¬ trict. The delinquent district taxes must be established as well as the cash in the hands of the township treasurer belonging to the district. In fact a complete audit of the finances of the dis¬ trict must be made along the lines of a general audit of the town¬ ship’s finances and the results incorporated in the township audit. This holds no matter how many districts there may be in any township. Note: While sewerage districts are not numerous their finances should be handled as indicated above. 28. Every report of audit must contain: 1. Certification to the effect that the report submitted is a true and exact copy of that furnished the governing body. 2 . (a) Comments on the manner and method of conducting public business in the municipality or county w’hose financial affairs and transactions are under review. (h) Bear in mind you have pledged yourself to “report any error, omission, irregularity, violation of law, discrep¬ ancy or non-conformity to the law.” (c) Specific answers to the following: 1. Names of officials who were in office during the period covered by the audit—Mayor, Clerk, Col¬ lector, Treasurer, Custodian. 2. Are all officials who handle funds of the municipality bonded? In what amounts? 3. Has a Surplus Revenue Account been set up and is it properly kept? 4. Are general books of account—Cash book, journal and ledger—kept? By whom? 5. Have the proper divisions of accounts been established, i. e., Current, Trust, Capital, and is a separate bank account being maintained for each? 6. What officials sign the instruments of payment? 7. Are all disbursements made by the general treasurer for all boards and departments? If not, what are the exceptions? 8. Are notes issued in compliance with the statutes? Exceptions? 9. Are transfers between appropriation accounts au¬ thorized by proper resolutions of the governing body and recorded on the minutes? 10. In case of overexpenditure of appropriation have the officials been notified of the possible results of their action? 11. Have payments been made by the collector contrary to the provisions of Chapter 62, P. L. 1921 ? 12. Have the provisions of section 610, Chapter 236, P. L. 1918, been observed? 13. Has the publication required by section 2, Chapter 268,. P. L. 1918, been made? 14. Is the treasurer of a township a member of the town¬ ship committee? 18 15- Has the current duplicate been added and proved, > and have the taxes outstanding for current and all • prior years been established? 16. Have all remissions, exemptions, deductions, etc.^ been checked as to proper authorization? 17. Have tax title liens been properly established and have transfers of taxes for subsequent years been accumulated to the original tax title certificate? 29. The report on the “Current^' division of accounts must contain: 1. Balance Sheet—January i. 2. Balance Sheet—December 31. 3. Revenues and Expenditures. 4. Unexpended Balances and Surplus Revenue Accounts, 5. Receipts and Disbursements. 6 . Cash Reconciliation. 7. Statement of taxes for every year for which there are any taxes outstanding which have not been lawfully remitted, etc. 8. Statement of duplicate for the current year. 9. Analysis of Property Tax. 10. Statement of Taxes Remitted, etc. 11. List of overpa3^ments of taxes. 12. Statement of tax title liens. 13. Statement of Indebtedness. And for municipalities of $8,000,000 assessed valua¬ tions or less: 14. List of delinquent taxes for each year for which there are any taxes outstanding which have not been lawfully remitted, etc., giving page, line, name and amount of each item of tax for each and every year, and the amount of the total of such lists for each and every year. 15. List of Tax title liens on each and every parcel of real estate, the tax title of which is owned by the munici¬ pality. 19 ^ ' T UT'i|€iin*ivi€» srvsnM ^j^y^Tonija^if K^, ; i(^ES0H irm j^it ^4 ?flr' 1 ia«o tgjil • ■fc- 2 inr;p 5 oA ^Tfi vltul' % -.^ > 1 r/« '.‘fiif i^nm I i-TJf, yuH, ‘ijWK* hi’iju^jl hi f^-Sl il^' •X• 4 i’^C' 7 V. •#>.'.!»*(:• *■ * ^ t BR- ■*• ■.• I - ■■'.v*«v.'''.'; "k; CASH RECEl BALANCE JAN. CASH DISBURSEME CHART OF ACCOUNTS. 20 The following sample audit is submitted as a form for the general setting up of the audit. Particular attention should be paid to the setting up of tax statements, tax duplicates and analysis of property tax as these forms have proven their worth and should be followed. The same general form of balance sheets, receipts and dis¬ bursements, statements, etc., should apply to all divisions of accounts, and all auditors should follow this form in setting up reports of audits. BALANCE SHEETS, 1920. ASSETS. January i. December jj. Cash, . $3,232 48 $2,637 33 Taxes, 1917, . 4 51 4 51 1918,. 1,387 66 918 37 1919, . 12,858 54 675 29 1920, . 11,207 32 Franchise Tax, . 469 78 1,140 00 Gross Receipts Tax, . 278 22 400 87 Tax Title Liens,. 670 10 1,318 06 Deficit Miscellaneous Revenues, IQ 20 .. ... .. 338 65 .. ..I..I..I. . . . . . . . . . . Overexpenditure Appropria- tions, 1920,. 200 00 Emergency Revenues, ........ 1,000 00 Deficit—Unexpended Balance Account, 1920,. 211 03 $18,901 29 $20,05143 EIABITITIES AND SURPLUS. January 7. December j 7 . Tax Revenue Notes, . $6,000 00 $10,500 00 Overpayments of Taxes, .... 14 53 II 52 Reserves (appropriation), ... 897 63 1,540 40 Emergency Note, . 1,000 00 Surplus Revenue, . 11,98913 6,999 51 $18,901 29 $20,05143 21 REVENUES, 1920. Surplus Revenue Appropriatec^.. Miscellaneous Revenues Antici¬ pated: Licenses. Fines and Penalties, . Tax Search Fees,. Sewer Permits, . Interest and Costs,. Franchise Taxes, . Gross Receipts Taxes, . Poll Taxes,. Dog Taxes,. Bank Stock Tax,. Second Class R- R. Tax, .... Budget. Realized. Excess. $5,000 00 $5,000 00 $500 00 $580 50 $80 50 200 00 147 00 100 00 ^ 00 600 00 691 46 91 46 300 00 332 06 32 06 4,000 00 4,564 46 564 46 1,000 00 1,037 87 37 87 500 00 510 00 10 00 100 00 None 400 00 None 600 00 None $8,300 00 $7,961 35 $816 35 Miscellaneous Revenues not An¬ ticipated: Refund Personal Telephone Calls, . $10 38 Amount to be Raised by Taxa¬ tion, .$29,700 00 $28,659 56 Total Budget Revenues, .$43,000 00 Emergency Revenues (Police), . 1,000 00 Total Revenues, .$44,000 00 recapitulation. Surplus Revenue Appropriated. Excess Miscellaneous Revenues Anticipated (Deficit), Miscellaneous Revenues not Anticipated. Additional Tax Revenues (Deficit), . Emergency Revenues (Police),. Expenditures, 1920. Appro¬ priations. General Government: Administrative and Executive, .$3,500 Assessment and Coll. of Taxes,. 1400 Interest on Current Loans, . 500 Streets and High¬ ways, .15,000 Preservation of Life and Property: Police, . 5,000 Police Emergency, . 1,000 Fire. 4,600 Transfers. Expenditures. To. From. Reserved. Disbursed. • • • • • • • • $3,248 41 • • • • • • • • 1,400 00 • • • • • • • • 348 00 • • • • $400 $1,180 73 13,007 54 $300 • • • • 5,232 66 • • • • • • • • 67 990 00 200 • • • • 359 4,340 33 Deficit. $53 00 2 00 100 00 400 00 600 00 $1,155 00 $1,040 44 $5,000 00 338 65 10 38 14140 44 1,000 00 Unex¬ pended Balance. $251 59 151 20 41 1 73 67 34 10 00 100 00 22 Appro- Transfers. Expenditures. Unex~ Health and Charities: Health, . Poor, . Sewer Maintenance, Free Public Library. priations. To. From. Reserved. Disbursed. Balance. » . 1,000 • • • • • • • • 1,159 86 *159 86 600 • • • • • • • • 640 *40 14 . 3,000 • • • • 200- 2,764 S 3 35 47 . 1,000 • • • • • • • • 966 12 33 88 . 5,500 100 • • • • 5,542 97 57 03 700 • • • • • • • • 691 89 8 II . 1,200 • • « • • • • • 1,176 00 24 00 $44,000 $600 $600 $1,540 40 $41,509 25 $1,150 35 *Overexpenditure. Recapitulation. Appropriations, Budget, . $43,000 00 Appropriations, Emergency, . 1,000 00 Overexpenditures, $44,000 00 200 00 Reserved, . Disbursed, . Unexpended Balances, $1,540 40 41.509 25 1,150 35 $44,200 00 $44,200 00 1920. UNEXPENDED BALANCES AND SURPLUS REVENUE ACCOUNTS. Unexpended Balances Account. Additional Tax Revenues Unexpended Balances Ap- (Deficit),^. $1,04044 propriations, . $1,150 35 Taxes Remitted, . 320 94 Balance Dec. 31st, 1920, .. 211 03 $1,361 38 $1,361 38 Surplus Revenue Account. Surplus Revenue Appro¬ priated, . $5,000 00 Balance Dec. 31st, 1920, ... 6,9<;9 51 $11,999 51 Detail oe “Other Added Taxes of the Year 1918,. Balance Jan. ist, 1920, .... $11,982 8i Miscellaneous Revenues not Anticipated,. lo 38 Other Surplus Revenue, .. 6 32 Sii ,999 51 Surplus Revenue." . $6 32 23 1920 . CASH RECEIPTS AND DISBURSEMENTS. Receipts. Cash Balance January ist, 1920, .. $3,232 48 Taxes, 1918, . 42 90 Taxes, 1919, . 11,981 50 Taxes, 1920, . 99,815 50 Franchise Tax, 1919, . 369 78 Franchise Tax, 1920, . 3,524 46 Gross Receipts Tax, 1919, . 278 22 Gross Receipts Tax, 1920, . 637 00 Licenses, . 580 50 Fines and Penalties, . 147 00 Tax Search Fees, . ^00 Interest and Costs, . 332 06 Sewer Permits, . 691 46 Telephone Calls (Refund). 10 ^ Bank Stock Tax, . 372 13 Tax Titles Redeemed, . 31 64 Overpayments of Taxes, .• •. 4 99 Tax Revenue Notes, 1920, . 10,500 00 Emergency Note. 1,000 00 $133,650 00 1920. CASH RECEIPTS AND DISBURSEMENTS. DISBURSEMENTS. Administrative and Executive, . $3,248 41 Assessment and Collection of Taxes, . 1400 00 Interest on Current Loans, . 348 80 Streets and Highways, 1919 a/c. ^7 63 Streets and Highways, 1920 a/c, . 13,007 54 Police. 5,232 66 Police Emergency, . 990 00 Fire, . 4,340 33 Health, . 1,159 86 Poor, . 640 14 Sewer Maintenance, • •. 2,764 53 Free Public Library, . 966 12 Street Lighting, . 5,542 97 Shade Trees, . 691 89 Contingent Expense. 1,176 00 Tax Overpayments Refunded, . 8 00 Tax Revenue Notes, 1919, .• •. 6,000 00 State Taxes, Road, . 3418 16 State Taxes, School, . 8,371 06 County Taxes. 21,517 81 Local School Taxes, . 49,290 76 $131,012 67 Balance December 31, 1920. 2,637 33 $133,650 00 24 CASH RECONCILIATION. Certificate of Depository, Checks Outstanding— No. 6351. No. 6352, . No. 6379, . $3737 33 $50 00 50 00 1,000 00 - 1,100 00 $2,637 33 STATEMENT OF TAXES, 1920. 1917. Outstanding January i, 1920, . $4 5 ^ Balance December 31, 1920, . $4 5 i 1918. Outstanding January i, 1920, . Taxes added in 1920, . Collected in 1920, . Remitted in 1920, . Transfers to Tax Title Liens, Balance December 31, 1920, . 1919 - Outstanding January i, 1920, . Collected in 1920, . Transfers to Tax Title Liens, . Balance December 31, 1920, . Duplicate for 1920. Property, Real and Personal, . Taxes added by Collector, . Second Class R. R. Tax, ... Poll Taxes, . $1,381 34 6 32 $1,387 66 $42 90 241 14 185 25 918 37 $1,387 66 $12,858 54 $11,981 50 201 75 675 29 $12,858 54 $110,226 38 lOI 00 557 84 $110,885 22 510 00 Total Duplicate, . $111,395 22 Collected in 1920, . $99,815 50 Remitted in 1920, . 79 80 Transfers to Tax Title Liens, . 292 60 Outstanding December 31, 1920, . 11,207 32 - $ 111,395 22 Analysis of Property Tax. Property Tax, . $110,885 22 Bank Stock Tax, . 372 13 „ - $111,257 35 State Road Tax, . $3,418 16 State School Tax. 8,371 06 County Tax, . 21,517 81 Local School Tax, . 49,290 76 . . - $82,597 79 Tax for Local Municipal Purposes, . 28,659 56 $111,257 35 25 Taxes Remitted (Recapitulation). For the year 1918, . $241 14 For the year 1920, . 79 So $320 94 Statement of Tax Title Liens. Balance January i, 1920,. $670 lO Transfers from 1918 Taxes. 185 25 Transfers from 1919 Taxes, . 201 75 Transfers from 1920 Taxes,. 292 60 mm., , ^^'349 7e Tax Titles Redeemed,. $31 64 Balance December 31, 1920,. 1,318 06 $ 1,349 70 Statement of Franchise Taxes. Balance Unpaid January i, 1920,. $469 78 Levy of 1920,. 4,564 46 - $5,034 24 Collected in 1920, on account 1919,. $369 78 Collected in 1920, on account 1920,. 3,524 46 - 3,894 24 Balance Unpaid December 31, 1920,. $1,140 00 New Jersey Gas Co.,. $100 00 Union Traction Co.,. 1,040 00 - $1,140 00 Statement of Gross Receipts Taxes. Balance Unpaid January i, 1920,. $278 22 Levy of 1920, . 1,037 87 -$1,316 09 Collected in 1920, on account of 1919,. $278 22 Collected in 1920, on account of 1920,. 637 00 - 91S 22 Balance Unpaid December 31, 1920,. $400 87 New Jersey Gas Co., . $50 23 Union Traction Co.,. 350 64 - $400 87 Statement of Indebtedness. Issued. Mature. Tax Revenue Notes, 1920.December 28, 1920 Demand, 5,500 00 Emergency Note, 1920, .June 10, 1920 Demand, 1,000 00 26 TRUST ACCOUNTS. 30. General. a. Any municipal enterprise or utility is handled in the trust division of accounts. The reason for this is that a munici¬ pal enterprise is supposed to be conducted without being a burden on general taxation. If the income from the enterpr-'^e, after providing for operating and maintenance charges and debt serv¬ ice, is not sufficient, the deficit must be made up from general taxation by a specific item of appropriation in the budget; on the other hand, if the enterprise yields a profit, such profit, or any portion thereof, may be used, when available, to reduce general taxation by means, of an item of miscellaneous revenue in the budget. In other words, the net result of the operation of the enterprise only should appear in the budget as use of surplus or provision for a deficit, as the case may be—the budget should not contain both the anticipated income and an appropriation for any municipality enterprise or utility. (See section 12 e. Chap. 192, P. L. 1917, as amended.) b. Any improvement or service rendered for the benefit of a portion of the taxpayers or of all the taxpayers of a mu¬ nicipality for which the municipality acts simply as trustee or agent is classified as a municipal enterprise, and, therefore, comes under the above classification. Under this head are included water plants, electric light plants, gas plants, assessment improve¬ ments and other items of similar nature from which the munici¬ pality derives a rental or revenue for service rendered or from assessments against property specially benefited. On the other hand, any improvement which is to be financed entirely from general taxation should not be handled in the trust division but in the capital division. c. Little comment is needed as to the precedure in con- A. nection with municipal utilities such as gas, electric or water ac¬ counts, as the precedure in connection with these accounts is so closely allied to commercial accounting procedure. It has been found necessary, however, to stress the importance of establish¬ ing the income from such utilities on an accrual basis and making the proper division between operating surplus and capital surplus. The utilities accounts must be properly supported by a statement of income and expenditure. In this statement the income of the year must be properly establi.shed and all expenditures for the year must be charged against this income in order to carry out the provisions of section 12 e of the Budget Act regarding the use of trust surplus or provision for a trust deficit in the municipal budget. 27 d. All charges for debt service on account of the utility should be included in the expenditures of the utility account. Where an appropriation has been improperly made in the current budget to cover debt service the appropriation should be trans¬ ferred to the trust division and treated as income from appro¬ priation. In a similar manner if an appropriation has been made in the current budget to cover an operating deficit this also should be taken in the account of the utility as an income. e. It should be noted that debt service includes not only interest and principal of the utility debt, but also sinking fund where same is required. /. Trust surplus does not automatically become a part of the current surplus revenue. Trust surplus remains undis¬ turbed unless and until such surplus or a portion of it is included in a current budget as an item of anticipated revenue. There¬ fore, if the surplus of a utility for any year is greater than the amount anticipated as a miscellaneous revenue in the current budget, only the amount anticipated in the budget should be transferred from the trust division to the current division. Simi¬ larly, if the amount appropriated in the current budget to cover a deficit or an anticipated deficit is not sufficient, only the amount appropriated should be transferred from the current division to the trust division, leaving the balance to be appropriated in a suc¬ ceeding budget. g. As stated above, operating surplus and capital sur¬ plus should be kept separate, due to the fact that the former only may ]ye used through the budget to reduce taxation, while the latter cannot by its very nature be used for such a purpose. h. The use of trust surplus to reduce taxation through anticipation as an item of miscellaneous revenue in the budget as provided by statute should be given very careful consideration, as while the accounts may show a surplus it may be only a book surplus and thus not available for the reduction of taxation. This is particularly true of assessment accounts; for instance, on the sale of assessment bonds $30,000, the amount required, might be obtained from the delivery of twenty-nine $1,000 bonds. This would create a book surplus of $1,000, but this surplus will not become available for transfer to the current account until all the assessments have been collected. Unless due consideration is given to this point the outcome may be disastrous. 31. Assessment Improvement Accounts. a. Any improvement, financed by a municipality, the cost of wffiich is to be borne in whole or in part by property spe- 28 cially benefited conies under the trust classification. The account¬ ing steps, in sequence, of an assessment improvement are: 1. Ordinance authorizing the improvement, making the necessary appropriation to cover the whole cost thereof and providing for the temporary financing thereof. 2. Improvements in progress necessitating payments therefor. 3. Confirmation of assessments and fixing of munici¬ pality's share. 4. Transfer of municipality’s share to capital division. 5. Division of temporary indebtedness. 6. Issuance of bonds, if necessary. b. Before any contract can be let for any improvement or any work done on the improvement there must be an authori¬ zation and appropriation to cover the cost or estimated cost thereof. One ordinance may embrace both authorizations—that for the improvement itself and that for the incurring of the indebtedness or appropriation—and also authorize the issuance of temporary notes or bonds in an amount not to exceed the amount of the appropriation. Attention is directed to the fact that expenditure for every trust and capital improvement is sub¬ ject to the limitation of the appropriation fixed by the ordinance. It is necessary when the appropriation fixed by ordinance is ex¬ hausted to cease work or to provide an additional appropriation in the same manner as was done in the case of the original appro¬ priation. It is just as improper and illegal to exceed the limits of an appropriation fixed by ordinance as it is to exceed those of budget appropriations. c. Under section 2 of the Bond Act which provides that permanent bonds covering assessments levied against prop¬ erty cannot be issued until the assessments have been confirmed it becomes necessary to finance assessment improvements by means of the issuance of temporary notes or temporary bonds. This is the economical plan on which to finance all improvements, but as stated, it is absolutely necessary in the case of assessment improvements. The improvement should be financed by notes issued as and when required and payable on demand or at the option of the issuing municipality. It is simpler particularly where the number of assessment operations is not great to issue notes for the exact amount of bills to be paid and periodically to take up a number of smaller notes by the issuance of one or more notes of larger amount preserving the identity both as to amount and purpose of the old notes in the new. By this method when an improvement is completed the exact cost of the improvement 29 will be represented by an equal amount of notes and the subse¬ quent operations will be simplified. 32. Improvements in Progress. a. “Improvements in Progress” should be debited with the cost of the improvement and should be supported by a de¬ tailed statement permitting ready checking of the account from balance sheet to balance sheet. It will be necessary, therefore, to show in detail the charges made against the improvement, which charges will comprise engineers’ fees, advertising costs, interest during period of construction, payments to contractors and any other charges which are rightfully a part of the cost of the im¬ provement. The reductions in this account will be assessments confirmed, transfers to municipality’s share, etc. Where the provision of the statute that interest during construction period and for six months thereafter shall be deemed part of the cost of the improvement is availed of the fact should be definitely established and noted. b. It is necessary to keep all interest on improvements in progress separate from interest on assessments, as the former charge is a proper charge against the improvement account itself as a part of the cost of the improvement, while the latter is avail¬ able for the payment of interest on assessment improvement indebtedness. (See par. 38.) 33. Confirmation of Assessments. Upon the completion of the improvement and the determina¬ tion of the total cost of the improvement the assessments are fixed and when confirmed by the governing body become a levy against the property. The difference between the total cost and the amount assessed is the municipality’s share, while the assess¬ ments levied become “Assessments Receivable.” 34. Municipality’s Share. When the amount of the municipality’s share is ascer¬ tained the cost of the improvement should be split into the com¬ ponent parts—assessments receivable and municipality’s share. The latter should then be transferred to the capital division. The reason for such transfer is that the collection of assessments together with interest on deferred and delinnuent assessments should be sufficient to meet the assessment obligations both as to principal and interest, while the obligations issued against the municipality’s share must be retired through budget appropria¬ tions both as to principal and interest. 30 35* Division of Temporary Indebtedness. a. The temporary indebtedness issued to finance the cost of the improvement should also be divided in the same man¬ ner as the “improvements in progress” into amounts correspond¬ ing to the assessments receivable and the municipality’s share. The indebtedness issued against assessments receivable should be termed “Temporary Assessment Improvement Notes,” while the amount of the municipality’s share should be covered by “General Improvement Notes” and transferred to the capital division as an offset to the municipality’s share of “improvements in progress.” h. It is necessary to submit proper supporting detail in connection with the transfer of any trust assets or liabilities from the trust accounts to the capital accounts in order that the pro¬ cedure may be clearly understandable. 36. Issuance of Bonds. In the issuance of permanent bonds for assessment im¬ provements it should be noted that bonds cannot be issued in excess of the amount of assessments levied and uncollected. The time limit fixed by statute for temporary indebtedness is six years, so that in many instances it will be found necessary to issue permanent bonds, but when the number of instalments in which assessments can be paid is limited to five, it is possible to finance assessment improvements without issuing permanent bonds. Furthermore the bonds must mature within two years after the date when the last assessment instalment falls due. 37. Assessments Receivable. Assessments receivable should be supported by a de¬ tailed statement showing the changes which have occurred in same during the period under audit in substantially the following form: January i ^ December 31 Outstanding Assessments Cancellations, Transfers Assessment Outstanding Assessments Rec. Confirmed. Remissions, etc. to Liens. Collections Assessments Ree. It should always be possible to check the additions to assessments receivable through coniinnation with the reduction of “improvements in progress” under the same heading. Any cancellation of assessments or transfers to assess¬ ment liens should be definitely established and shown on the statement of assessments and the assessment liens should be sup¬ ported by a schedule. In this connection it should be noted that any cancellation or reduction of any assessment automatically creates a debit which should be covered by a budget appropriation. 31 38. Interest. Interest received on deferred or delinquent assessments is credited to the interest account and payments of interest on assessment obligations are charged to the same account. If the interest received for any year is not equal to the interest paid the difference should be borrowed on an Interest Deficiency Note which must be redeemed in the next budget. 39. Assessment Liens. a. The value of any delinquent assessment which is sold and purchased by the municipality should be set up as an assess¬ ment lien. In the lien should be included also interest on the assessment to date of sale. Both taxes and assessments on the same parcel of real estate may be included in one certificate but the certificate and record should show clearly the amount of the tax lien and the assessment lien. All costs should be accounted for in the current division whether the sale is for one or more kinds of liens or for assessment liens only. h. That part of the assessment lien which represents the accrued interest should be separated and set up as a separate account taking under the head “assessment liens” only that portion of the assessment sold for non-payment and the interest portion set up as “assessment lien interest.” The assessment lien interest will form a part of the trust surplus but will not l^e available for use until the redemption of the assessment liens. 40. Assessment Collections. a. Art. XX. Sec. 44, Chapter 152, P. L. 1917, provides that all assessments as collected shall be immediately placed in an account to be known as “Local Improvement Assessment Ac¬ count.” Such moneys shall be used only to pay indebtedness in¬ curred for such improvements, whether by temporary or perma¬ nent certificates, notes or bonds; provided, that when a sinking fund is maintained, upon a vote of the governing body, such moneys as collected shall be paid into such sinking fund and kept in a similarly designated account, and used for the purposes herein described.” h. Where the above provisions of the statute are fol¬ lowed it will be necessary to show in the Trust Section of the accounts as an asset the amounts of such funds collected and turned over to the sinking fund by the inclusion of an asset “Assessment Collections in Sinking Fund” in order to maintain the equilibrium between the trust assets and the liabilities for these particular improvements. However, it is recommended that payment of collections of assessments to the sinking fund be con¬ fined only to collections of assessments which are pledged to the retirement of term bonds and that other collections be retained in the municipal treasuiy^ “in trust” for the redemption of “indebt¬ edness incurred for such improvements” as provided in the statute. 41. Procedure. a. Ordinarily where assessments are pledged to the re¬ demption of certain indebtedness the collections are used for the retirement of same through the trust division of accounts direct, and the procedure, therefore, will be that the collections will be held “in trust” until the indebtedness comes due or can be called for payment and then disbursed for the retirement of the indebt¬ edness. In the balance sheet, therefore, there will necessarily have to be cash and assessments in an amount equal to the amount of indebtedness for any particular improvement. It is not deemed necessary to segregate all cash on hand as to the par¬ ticular improvements to which same applies, but it can readily be seen that should there be any misuse of any collection there will be a resultant deficit sooner or later in the trust group of accounts. h. Where assessments are pledged to the sinking fund for the redemption pf serial or temporary bonds it will be neces¬ sary to carry separate controls on the balance sheet for “Assess¬ ments Receivable Pledged to Serial Bonds” and “Assessments Receivable Pledged to Term Bonds.” This is necessary in order that the receipts from assessment collections may be placed to the credit of the proper liability. 42. Other Trust Items. Under the head of “trust” come also items such as sewer openings, street openings, bid deposits, etc., where a de¬ posit is received for permission to open a street or connect with a sewer and the deposit held until the work is completed satisfac¬ torily, after which the deposit is returned. In certain instances the deposit charge may also include a municipal inspection fee which is not returnable but which will become current revenue and which should be turned over to the current account the same as the deposit does if conditions do not merit the return of the deposit. In addition there may be the accumulation of a trust fund for a certain particular purpose or there may be a legacy or gift for a particular purpose which also is trust. 33 43- ^he report on the “Trust’' division of accounts must con¬ tain : 1. Balance Sheet—January i. 2. Balance Sheet—December 31. ’♦'3. Statement of Income and Expenditure. 4. Statement of Receipts and Disbursements. 5. Statement of Indebtedness with particular attention given to listing dates of issue, dates of maturity, pur¬ pose, etc. 6. Statement of assessments outstanding in substantially the following form: a. Assessments Cancellations Assessments outstanding Jan. I. Confirmations during year. and Remissions. Transfers to Liens. Collected. outstanding. Dec. 31. b. Statement of Assess¬ ment I^iens. Liens Outstanding Jan. I. Transfers to Liens. Cancellations, etc. Collected. Liens Outstanding Dec. 31. c. Statement of Assessment Lien Interest. Assessment Lien Int. Jan. I. Transfers by Sale. Cancellations, etc. Collected. Asst. Lien Interest Dec. 31. 7. “Improvements in Progress” supported by a statement in substantially the following form: Improvements Additional Transfers to Improvements in Progress Costs during Assessments Municipality’s in Progress. Jan. I. year. Confirmed. Share. Dec. 31. 8. Analysis of Trust Surplus. 9. List of assessments outstanding for all municipalities of $8,000,000, assessed valuation or less. This list may be required of certain municipalities above this limit where it is deemed as essential to properly establish¬ ing the amounts due from assessments. 10. List of municipal liens where any exist. Note: The “Trust” division covers assessments, dis¬ trict taxes, municipal enterprises or utilities, etc. 11. List of delinquent municipal rentals at the close of the period under audit for all municipalities under $8,000,000 assessed valuation. *Note: Item No. 3.—This statement would apply to water and light ac¬ counts, particularly as the assessment schedules will render a statement of income and expenditure unnecessary on assessment accounts. Where there are several trust accounts they should be split up and an independent accounting reported for each. That is where there are assessments, electric light and water accounts each ac¬ count should be reported separately as to balance sheets, receipts and disbursements, etc. 34 BALANCE SHEETS. trust account. Assets. Cash ... Assessments receivable . Assessments receivable pledged to term bonds Assessments receivable unpledged . Assessments cash in sinking fund. Improvements in progress . Improvements uncompleted . Overexpenditure on contract . Interest deficiency (Budget) . Liabilities and Surplvis. Bonds payable (Term) .. Improvement notes payable . Interest deficiency note payable . Contracts payable reserve . Interest reserve .. Trust surplus . January i. $3,245-58 9,876.54 5,576.74 1,177.71 9,423.26 12,345.67 1,064.42 156.76 December 31. $5,355-67 6,648.62 1,919.98 1,177.71 13,080.02 21,082.96 5,647.19 95-56 $42,834.47 $55,00771 $15,000.00 $15,000.00 25,500.00 156.76 32,478.92 1,032.21 5,742.75 640.54 1,177.71 1,145.50 $42,834-47 $55,007.71 Receipts and Disbursements. Receipts. Cash balance January i . $3,245.58 Assessments receivable . 7,005.68 Assessments receivable to sinking fund . 3,656.76 Notes payable . 19,145.55 From appropriation interest deficiency note _ 156.76 Interest . 2,251.65 $35,461.98 Disbursements. Improvements in progress . $18,181.68 Assessment cash to sinking fund . 3,656.76 Notes payable . 6,500.00 Interest deficiency note . 156.76 Interest . i,6ii.ii Cash balance December 31 . 5,355.67 $35,461.98 Assessments Outstanding January i $9,876.54 SUPPORTING STATEMENTS. Assessments Receivable. Cancellations, Condr- Remis- Transfers mations. sions, etc. to Liens. $3,77776 . Outstanding Decern- Collected. ber 31. $7,005.68 $6,648.62 35 * Assessments Pledged to Sinking Fund. Outstanding January i . $5,576-74 Collections . 3,656.76 Outstanding December 31 . $1,919.98 Assessment Cash in Sinking Fund Amount January i . $9,423.26 Payments during year . 3,656.76 Amount December 31 . $13,080.02 Improvements in Progress. Transfer to Balance Costs Assessments Municipality's Jan. I. for Year. Confirmed. Share. $12,345.67 $18,181.68 $3,77776 $5,666.63 Notes Payable. Outstanding January^ i Improvement . $25,500.00 Interest Deficiency ... 156.76 Receipts Disbursed on Acct. Improvement Notes . $6,500.00 Disbursed on Acct. Int. Deficiency Note . 156.76 Transfer to Municipality’s Share . 5,666.63 Outstanding December 31 Interest. Receipts during year . $2,251.65 Interest paid . i,6ii.ii Credit Interest Balance to Reserve . $640.54 Statement of Improvements Uncompleted and Contracts Improvements Uncompleted. Balance January i . $1,064.42 Add appropriations authorized during year by ordinance .. 22,796.66 Add contract authorizations . $23,861.08 Deduct costs during year . $18,181.68 Deduct improvement authoriza¬ tions cancelled . 32.21 18,213.89 $5,647.19 Deduct improvements authorized from contracts uncompleted . Leaving overexpenditure on contracts authorized Balance Dec. 31. $21,082.96 $25,656.76 19,145-55 $44,802.31 12,323.39 $32478.92 Payable. Contracts Payable. $1,032,21 22,892,22 $23,924.43 18,181.68 $5,742.75 5.647.19 $95-56 TrUrSt Surplus. January i credit balance . $1,177.71 Debit with uncompleted improvement cancelled.. 32.21 Surplus December 31 . $1,145.50 * See paragraph 41-b. Distinction should be made between assessments pledged to term bonds and those pledged to serial or temporary bonds. CAPITAL ACCOUNTS. 44. General. a. In considering the capital division of accounts it might be well at the outset to state briefly what is considered as belonging to this division. It is possibly as easy to do this by elimination as in any other manner. First, there is the current division which comprehends just what the name implies, that is, the current revenues and expenditures of the municipality. In this connection attention is directed to the fact that there may be included in the current appropriations items which are for capital purposes considered from a strict accounting standpoint, but which for all practical purposes need not be treated as a part of the capital expense, but may appear in any list or record of capital property. Particular reference is made to the purchase of such articles as typewriters, office furniture and items of a like nature, which are capital assets, but which are usually pur¬ chased through the medium of current appropriations. Then there is the trust division of accounts which comprehends all accounts for which the municipality acts as trustee or agent for the taxpayers as in the case of a municipal water or light plant commonly termed a municipal utility, and that class of accounts where the municipality makes certain improvements, the costs of which are borne in whole or in part by the property specially benefited termed assessment improvement accounts. This leaves as the last group all permanent improvements of a capital nature, the costs of which are to be borne by the municipality at large, usually as a charge against future taxation. The necessity of keeping this group completely separated from both the current and trust divisions of the accounts cannot be too strongly em¬ phasized. b. As the result of careful deliberation, it has been de¬ cided to show the balancing entry as relating to indebtedness for Capital Improvements as a debit under the caption—‘‘Amount to be Raised by Future Taxation.” This caption will, of course, include amounts raised by taxation for the redemption of public debt by means of sinking funds. This does not mean the entire 37 elimination of “Capital Surplus” as the following will clearly show; suppose a municipality having no capital indebtedness sells property for cash, the credit entry would be “Capital Surplus.” The same holds true if there is Capital Indebtedness, unless it is decided to apply the cash received from the sale against the out¬ standing indebtedness, in which case the “Amount to be Raised by Future Taxation” would be credited. As a matter of record, but not as an integral part of the accounts, should be carried the facts regarding capital expenditures, e. g. Purchase of land for City Hall, June 17, 1900 . $50,000 Erection of City Hall, July 15, 1902 . 200,000 Reconstruction Main Street from First Street to 20th Street, etc., etc., Aug. 20, 1910 . 300,000 Such record may be supplemented by a memorandum inventory of the municipal property in as great detail as may be desired. The plan, as indicated, is not to complicate the accounts unnecessarily with assets which may or may not mean anything but to maintain a complete record of the operations relating to public improvements. c. The liability will, of course, be the amount of notes or bonds outstanding in the name of the municipality, and there will also be other items which will enter into this section, such as the amounts of contracts uncompleted for which the municipality is liable. d. In the case of contracts not yet completed there may arise situations where the full amount of the contract liability is not yet funded. Therefore, it will be found necessary to set up an asset account for the amount of the authorizations on such contracts. Of course, where the whole amount of the authoriza¬ tion is funded at the beginning of the work the offsetting asset to the liability for the uncompleted contract is “cash,” but where the work is financed by the issuance of temporary indebtedness from time to time it will be necessary to set up an asset of “Authorizations Unfunded,” or a similar title to cover the lia¬ bility. 45. Capital Cash. Capital cash is available only for the financing of the improvement for which the cash is received. Should there prove to be a balance in any capital account after the improvement is completed it is available for no other purpose than the reduction of the principal of outstanding bonds. The balance should be taken into the sinking fund to be used for the reduction of capital 38 indebtedness or should be reserved for the payment of the prin¬ cipal of outstanding bonds. When such cash balance is not trans¬ ferred to the sinking fund but is used to pay outstanding bonds, the amount so used in any year should be shown in the budget for that year as a deduction from the required amount for ‘‘payment of bonds”: (Budget Appropriation) Payment of Serial Bonds . $50,000 Used from Capital Cash . 5,000 $45,000 46. Expenditures. Capital expenditures are limited to the amount of the appropriation in the same manner as any other account. The fact that the expenditure is made from bond funds or funds of a like nature does not in the least change the liability of the governing body for expenditures made in excess of the amount appropriated for any particular purpose. Particular attention should be paid to this matter with the distinct understanding that every expendi¬ ture in the absence of a proper authorization or in excess of the amount authorized should be set up not merely as due from other funds, but should be set up as “overexpenditure of. account,” and if funds have been advanced from the current funds for this purpose the current account should show the asset in the same manner with the added caption of “Due to Capital for overexpenditure on.account.” 47. Bond Sales. a. In the sale of bonds no more bonds are to be sold than will produce the sum needed and not more than $1,000.00 addi¬ tional. It may not be necessary to sell the full number of bonds authorized, but no premium in excess of $1,000.00 will ever be received on any sale. Situations such as the following will arise and many auditors apparently do not understand the procedure: “The City of B.proposes to fund temporary improvement notes issued to finance the erection of a municipal building; the sum required is $100,000.00 and advertisement is made for pro¬ posals for the sale of 100 bonds at $1,000.00 each. The firm of A.agrees to pay $100,500.00 for 98 of these bonds. The result is that $100,000.00 is received for the required purpose and a premium of only $500.00 is received. So far as accounting procedure goes 100 bonds were issued but two were immediately cancelled. The $500.00 premium is available for the purpose ot meeting the expense of advertising, printing, issuance, sale, etc., 39 and any balance over and above this is current revenue only, and should be taken into the current division. Many accountants would treat the $2,500.00 as premium and not the $500.00 only, but the fact is that under the statute the premium can never exceed $1,000.00, and any bonds which are not required for the purpose of raising sufficient funds to meet the requirement of the particular improvement are treated as a cancellation. Fur¬ thermore, the actual premium received is never available for the financing of the improvement. b. Under this system the excess of $2,000 received on the sale of these bonds would be a credit to the ^‘Amount to be Raised by Future Taxation” and would naturally affect a cor¬ responding reduction of this Asset. 48. Premiums and Accrued Interest. a. Premiums have been dealt with in the preceding par¬ agraph, and it is only necessary to restate here that any balance of moneys received as a premium over and above the amount necessary to defray the lawful expense of issuing the bonds will be a current revenue. b. Accrued interest is always a current revenue, and particular attention is directed to the necessity of treating this as a current revenue and not as a credit to a current appropria¬ tion. The fact that interest on general public debt is a charge in the current budget makes it necessary that one hundred per cent, of all anticipated interest charges must be appropriated at the time of making up the budget, and it therefore follows that all accrued interest should be a revenue of the current account and not an appropriation credit. 49. Interest on Deposits. Interest on deposits in the capital accounts should be treated as a current revenue of the mimicipality and not as an income in the capital account and a credit to the improvement fund. 50. Capital Liabilities. The liabilities appearing in the capital group of accounts will ordinarily be bonds or notes payable, contracts payable, etc. These should be supported by such schedules as will make it easily possible to work from balance sheet to balance sheet without diffi¬ culty. The statement of bonds payable should follow the form laid down in the requirements, and the statement of contracts payable should be in such form as to be readily analyzed. 51. Capital Receipts. a. Capital receipts will be from the sale of bonds or notes, from appropriations, from the sinking fund or from the conversion of a capital asset into cash. b. The sale of bonds or notes is the usual source of capital funds. Almost all transactions in the capital account derive the needed funds from this source, and no particular com¬ ment is needed except that the moneys received from this source are available only for the purpose for which the funds are author¬ ized to be raised. c. Where funds are appropriated in the current budget for the retirement of capital indebtedness or for aid in some par¬ ticular capital expense the funds should show as a disbursement in the current division of accounts and likewise as a receipt in the capital division. The indebtedness should be paid off through the capital account. Funds appropriated in the current budget for carrying out some capital purpose should show as a current disbursement and a corresponding capital receipt. Attention is directed, however, in the latter case to the fact that the above outlined procedure should be followed only in true capital trans¬ actions, as the transfer to capital funds of current appropriations for every small item which might be termed a capital purchase is simply complicating the accounting procedure. d. Receipts from the sinking fund for payment of maturing term bonds should give no trouble as, under the Sinking Fund Act, these are directed to be paid over to the financial official of the municipality and the indebtedness retired by him which simplifies this procedure and should cause no confusion. 52. Capital Funds from Other Sources. These funds would usually be income from the sale of capital assets; for instance, the sale of old fire equipment where it was decided to apply the proceeds to the purchase of new equipment or the sale of land or buildings where the funds re¬ ceived are to be used in a further capital expenditure. Particular attention should be given to such items as they would net be available for expenditure for any capital purpose except through the medium of appropriation under proper procedure, i. e., by ordinance; otherwise, they would 1^ revenues of the capital account and could be made available for current purposes through the medium of the budget. For example, a municipality pur¬ chases a piece of property having buildings thereon with the idea of erecting a new municipal hall and sells the buildings already on the land. The sum received for such sale should be treated as 41 a capital revenue, but may be used to reduce the sum needed for the construction of the new building, but only when properly authorized. 53. Capital Disbursements. Capital disbursements are ordinarily for the cost of capital improvements, payments of capital indebtedness and for no other purposes. In certain cases where an improvement is financed through the issuance of temporary instruments interest during construction period will be a charge to the improvement and will be a capital disbursement, but all interest charges on per¬ manent indebtedness will be a current disbursement. 54. The report on the “Capital” division of accounts must contain: I. Balance Sheet—January i. 2 Balance Sheet—December 31. 3. Statement of receipts and disbursements. 4. Statement of indebtedness in the following form: Dates and Amount Date of Purpose. Amount of Rate of Amounts of Outstanding Issue. Issue. Interest Maturities. December 31. Note: The total capital indebtedness should be shown as a liability in this account and no deductions should be made for the amount of funds accumulated in any Sinking Fund for the retirement of said indebtedness when due. RESERVE. 55. General. The reserve division of accounts needs but little com¬ ment. This division comprehends for the most part sinking funds only, and these are audited periodically by the representa¬ tives of the Department of Municipal Accounts as required by statute. The accounts should be maintained, however, as a part of the accounts of the municipality and should show the condi¬ tion of the sinking fund as to assets. The details as to amorti¬ zation requirements, sufficiency or insufficiency of the sinking funds with regard to statutory requirements, etc., are reflected on the books of the sinking fund. It is necessary to report the receipts and disbursements of the sinking fund and give sufficient detail so that it may be possible to check from balance sheet to balance sheet. If the accountant does not audit the sinking fund accounts he should obtain the necessary statements from the Sinking Fund Commission and state in his report the source or sources of his information. In som*e instances, where the situation is complicated by assessments pledged to retirement of term bonds, or when there are other complications, it is suggested that the matter be taken up with the Department. 56. The report on the ‘‘Reserves” division of accounts must contain: 1. Balance Sheet—January i. 2. Balance Sheet—December 31. 3. Statement of receipts and disbursements. Note: In the “Reserve” division there should be listed only the actual assets in this division of accounts, no attention being paid to any surplus or deficit which may exist in any Sinking Fund or Pension Fund. What should be furnished is substantially the following: That there were so much cash and investments on hand as at January ist, the amount of cash received during the year; the amount disbursed, and the amount of cash and investments on hand as at December 31. 43 / \ \t 2 - ,n iC 1 - h e. s- In )n Id ri¬ le n, ve id it le s e (JKITICIZE SYSTEM OF JERSEY FINANCES! _ i ti ol Investigators Find Only One- ol third of State Expenditures ti Are Checked by Budget. i to di er ai re Impossible to Ascertain Financial Condition, Report Says—$ 65 ,- 966,050 Spent in Year. a i: p n C a NO UNIFIED ACCOUNTING Special to The New TorJc Times. TREI)TTON. N. J., Nov. 20.—New Jer¬ sey’s expenditures during the fiscal year ended June 30 were $65,966,050, of which only about one-third was subject to legislative review through the budget system, according to a report given out today by the Brighton Investigating Committee. The report was prepared by J. G. Robinson, an accountant em¬ ployed by the investigators, with the aid of State Controller Newton A. K. Bugbee. Of the total outlay $45,596,300 came from the State’s regular sources of revenue, while the balance was taken care of by bond issues. The report declared that any private concern imitating New Jersey in keeping its accounts would soon be forced out of business. Actual operating expenses for the year were $23,672,767, which Is the part of the general expenditures covered through the budget system. Of this amount, more than 31 per cent., or $7,480,561, went for institutional purposes. Nearly 20 p^ cent., or $4,699,459, was expended for education. Th'fe remainder of the $65,966,050 was 0 made up by fixed charges, totaling I $8,166 136, while capital outlay, includ¬ ing such items as new road and insti¬ tutional construction, accounted for $34,127,147. , Detailing the State’s revenues of about l$45,000,000, the report show’ed that taxes accounted for $28,361,577, while licenses,, nhiefly issued to automobilists, brought ih .$10,561,332. Other fees totaled $1,292,014, and .$2,217,613 was received a.-^ Federal aid for roads, schools, and the like. No attempt has been made to provide a lunlfied accounting sy.stem for the State Government as a whole, the re¬ port says, adding that the present meth- odA are designed solely to safeguard •the! handling of cash and to prevent exp\inditures in excess of appropriations. N'H only is there no orderly assembly of llinanclal data, the report declares, but \information that will convey any ideal of financial conditions is entirely lacking, or can be obtained only with the greatest care. “Riports of the Controller and the Trea^rer, because of the present sys¬ tem, kre unintelligible and give no con- denset picture of the State’s finances,” the retort says. ‘‘It is not possible to ascerta in at any time the amounts due to aniJ