Magazine article Government Finance Review

Taking Charge of Your Fund Structure

Magazine article Government Finance Review

Taking Charge of Your Fund Structure

Article excerpt

The use of unnecessary funds in external financial reports needlessly adds to the length and complexity of these reports and can increase audit fees. The City of Westlake, Ohio, has developed a policy to ensure that superfluous funds are not included in the CAFR.

Generally accepted accounting principles define fund as a "fiscal and accounting entity with a self-balancing set of accounts ... which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations."1 Historically, funds were the defining feature of governmental accounting and were used to control restricted resources and demonstrate compliance. While there has never been a limit on the number of individual funds a government may use, the number of funds principle holds that a government should use the least number of funds possible.

GASB 34 has forced governments to rethink the role of funds in governmental accounting. The focus of government financial reporting is now divided between fund financial statements and the new government-wide financial statements, and the principal role of funds is to demonstrate accountability.2 Recognizing the need for additional guidance on the use and number of funds under the new model, GFOA in March 2004 adopted a recommended practice entitled "Improving the Effectiveness of Fund Accounting."

This recommended practice makes a distinction between the use of funds for the purpose of internal accounting and the classification of funds for the purpose of external financial reporting. "GFOA recommends that every state and local government that uses fund accounting establish clear criteria for determining whether a given internal 'fund' should be classified and reported as an individual fund in the government's comprehensive annual financial report." The practice goes on to state that wherever possible similar internal funds should be combined into a single fund for the purpose of external financial reporting and that governments should periodically review the fund structure to ensure that superfluous funds are not included in the CAFR.


Around the time the recommended practice on funds was approved, the City of Westlake, Ohio, was confronting an all too common problem among municipalities, especially in Ohio - a complex web of funds used for accounting and financial reporting. Even though the finance department had eliminated and combined a number of funds during the conversion to new financial accounting software in 2003, the city still lacked a clear methodology for determining whether or not to create a new fund. After reviewing the recommended practice, the city decided to develop a policy on the use of funds. The policy that emerged established criteria for creating a new fund, classified funds for the purpose of financial reporting, and mandated periodic review of the fund structure.

Creating New Funds. By 2004, Westlake had nearly 100 individual funds - a number that would soon be reached unless the city did something. Some of these funds were created to account for individual grants and other revenue sources as required by the grantor or oversight agency. Others were created to account for various donations, capital projects, and other special revenues. The large number of funds used by the city added to the length and complexity of the CAFR, thus undermining this document's usefulness to important stakeholders.

To control the number of funds, the city decided to impose standards on the creation of new funds. …

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