Mr. Chairman, Ladies and Gentlemen, at the outset of my little talk I want to set the record straight by stating that I am not presumptions enough to think I have the answers to municipal accounting in Illinois. All I am anxious to do this morning is to put together the outstanding points of systems and procedures I have found in the last two years through visting several Illinois cities, talking to finance people and working out a system in my own city.

In a short span of two years I have found an increasing interest in good accounting practices and I feel that the Municipal Audit Committee has in large measure been responsible for setting the spark to such interest. Our continued cooperation with the State Auditor and this committee will bring a new and enlightened look to accounting practices in Illinois, I am sure.

Throughout our country today there is a movement afoot to take away the secrecies of public administration. The journalism profession is keenly active in this program. A few days ago I had the opportunity to hear a federal official speak at a luncheon meeting and he made one statement that really hit me, being a finance officer. He said, "History has not recorded a free government that is secret nor a secret government that is free." To me, that is the basic philosophy that should underlie our municipal accounting systems and procedures. Our budgets, monthly reports, annual reports and periodic studies, should be aimed at removing all veils or cloaks from public administration. This involves not only presenting a pile of figures which are arithmetically correct, but, equally important, requires presenting them in easily understandable form so that they relate services and work programs to the dollar amounts.

The text books tell us that municipal accounting is to provide for the recording of financial information so that it can be utilized:

(1) as a basis for managing the municipality's affairs
(2) in determining the fidelity of persons administering municipal funds
(3) as a means of informing interested parties of the municipality's financial condition and operations

Text books place no priority on this information but in my studies and observations I found that in far too many cases Number 2 was being given top priority and Number 3 was practically forgotten.

Our auditing colleagues may criticize this approach but this morning I want to discuss municipal accounting practices as they effect Number 1 and 3. I would like to look at an accounting system first as a tool for management and, second, as the three R's for the citizen.

There are three main processes to accounting: Record Information, Classify Information, and Summarize Information. The system that will do these three things for you the fastest, simplest and most accurate is the system you want because it will enable you to do a good job on points one and three.

Every place I have visited and nearly everyone I have talked to is struggling to accomplish this. In order to crystalize this effort I shall call it "Methods Improvement." Some are going from manual to machine accounting; others are refining their machine accounting, and before I leave I want to point out that shortly some of us will be studying the transition from machine to electronic accounting.

I guess Methods Improvement is like mowing your lawn—it must be done weekly. In 1912 R. E. Olds ran this ad for his Reo, the Fifth. "After 25 years—here's the best I know. I call it my farewell car. It is my finest creation." But, as you know, Olds went on for many years building better and better cars.

Also, in 1912 the Goodyear Company advertised its No-Rim-Cut Tires. "After 13 years of constant improvement, we have brought these tires close to perfection. It will never be possible, in our estimation, to make a better tire."

Most of us today are riding on tube-less tires which is the latest innovation in the tire industry. There is no such thing as the best possible tire or car—there is only today's best. If a procedure has not been studied for a year, it is likely to be obsolete. One of the surprising things I found was that in several places excellent methods have been developed for performing jobs that no longer need to be done.

I have developed sort of a hobby collecting anecdotes concerning obsolete methods. There was the clerk in a U. N. office who spent her day stamping all purchase orders "Sufficient Funds." When the system had been established the controller was to certify that there was sufficient monies to cover all purchase orders. To eliminate a routine duty he had a stamp made and turned the custody of it over to this girl. The methods analyst asked her what happened if she missed one. She promptly replied, "They would send it right back for my stamp."

It was only a short time ago that the British Navy abolished the lookout who was posted to watch to see if Napoleon would hazard a crossing of the channel. One evening Lord Northrup, owner of the London Times, as he was leaving his office noticed a small man dodge into a room with a satchel. He followed the man and questioned him. It seems the man was from the bank and he came every Friday night and stayed until Monday morning and brought with him a satchel of money. Upon further investigation, Lord Northrup discovered that it all started at the time of the Battle of Waterloo when a London Times reporter was assigned to cover the happening, and since it occurred on a Friday night he was unable to get gold to pay for his crossing. To prevent a reoccurrence of this incident the London Times arranged with the bank to have a messenger bring money to the paper's offices every weekend. The need for such service long since ceased but not until the night of Lord Northrup's apt meeting with the messenger was the practice discontinued.

In a slang phrase, "It ain't funny McGee." In 1946 the Village of Oak Park had a complete survey made of its accounting system and it installed machine accounting. Somehow or other parts of the old system were left untouched. For example, while installing a new remittance control machine this summer I ran across a cash book being kept. The clerk, who came in after the war, said that he had been shown how to post it and he had always done it. The posting was excellent yet the need for such book ceased to exist in 1946. I might say it has now been discontinued.

Methods improvement always seems to rub people the wrong way. I have been attending a course given by IBM and most of my colleagues are cost accountants or controllers from industry, and, to the man, they have said their hardest job in methods improvement is the resistance to change from top level personnel on down.

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* A paper delivered at Annual Convention of the Illinois Municipal League, November 14, 1955.

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This resistance to change stems from four mental factors that have to be overcome. They are complacency, habits, criticism and insecurity. Once you have the answer to these mental blocks you have a clear road to methods improvement.

At about now you are probably wondering what method improvements has to do with you. Well, an indispensable aid to effective management is a good accounting system. Much of the information upon which management must depend for its decision-making will be produced in the accounting records. Unfortunately, however, the accounting systems of many of us are not considered a management aid but as only a device for achieving legal accountability. While this latter function is extremely important, too much emphasis on this point often hides the ability of the accounting system to produce useful facts for management. In order to attain the management approach, the following six points should be considered in the appraisal of your accounting system.

1. Accounting should be on an accrual basis so that management can know at all times the funds actually available for future commitment. This means that income should be recorded as earned, not as received; and expenditures should be recorded as obligated, not when money is actually paid out. Accounting records kept on such a basis will provide helpful information both for budget preparation and budget control.

Some of you have accrual accounting, some only accrue at the end of the year and some, such as Oak Park, had it and gave it up. I wanted an accrual system modified to meet my operating capacity. I found that many businesses and institutions had already solved this problem. At one place all purchases under $2500 are not encumbered. At another all materials and supplies are not encumbered. So, I wanted a system whereby I could charge some items to direct expense and others I could encumber, yet come out with accurate balances. That system I now am in the process of installing.

The second point is that a simple and logical classification of accounts should be developed. It is particularly important that accounts be kept on a basis of activity or work programs. This classification of accounting records is particularly helpful in providing facts for performance budgeting.

Thirdly, there should be as few fund classifications as possible. The multiplicity of funds raises many serious problems of administration, not the least of which is the preparation of a comprehensive yet understandable budget.

Fourth, wherever possible, unit cost accounting should be installed. This system, which simultaneously records cost as the work is performed, is the most accurate for providing data on program performance. While installation of such a system can be quite expensive, its value cannot be overemphasized.

In my ramblings around I have come up with a plan that I would like to explore with you. Too many of us try to make our general accounting do our cost accounting as well. I have found that it is feasible to key punch original cost data than send it to one of the electronic service bureaus to summarize. To me, this is the most workable way for small communities to cost account.

Fifth, another device which some of you use, and which I believe all of us can utilize far more, is the working capital fund or revolving fund device. The working capital fund is created to provide a method to carry out a cycle of operations. The amounts expended from the fund are restored thereto from earnings from operations or by charges to other funds, so that it is always intact, either in the form of cash, receivables, inventory or other assets.

Such funds may best be used for such service activities as stores and supplies, equipment pools, and printing.

Sixth, most important of all points is that it should be realized that maximum effectiveness of the accounting system will depend to a great extent on mechanization. Many accounting operations, which provide helpful information to management, are too time consuming and costly to be done by hand.

In many places, immediate conversion of the accounting system is not possible or practical. Lack of central control over accounting or cost of such extension of accounting may block any change and, as I have pointed out, resistance of present accounting personnel to changes may indicate a gradual approach, based on a long range improvement plan. However, it must be constantly borne in mind that requirements of factual accuracy and prompt reporting demand that consistent effort be made to improve the accounting system. It requires working constantly at methods improvement.

The rewards are well worth the effort. They will result in releasing personnel from archaic and sometimes useless routine; they will produce reports which are essential to sound management decisions; and they will go a long way towards convincing the average citizen that his tax dollars are being used in a business-like manner and giving him one of the best bargains available on the market today.