This is getting rediculous! http://www.chron.com/cs/CDA/story.hts/page1/622064 July 31, 2000, 11:52PM Controller questions mayor's budget math By MATT SCHWARTZ -- Houston Chronicle City Controller Sylvia Garcia on Monday accused Houston Mayor Lee Brown of "cooking the books" by counting $3 million the city has yet to receive as revenue for the fiscal year that ended a month ago. Questions over the revenue numbers arose yet again with the latest monthly financial report, in which the administration estimates fiscal 2000 revenues will fall some $31 million short of budget. The revenue gap has grown by about $13 million in the last three months of the fiscal year. The shortfall does not mean the city is in the red. The city budget includes a cushion of about $80 million -- 7.5 percent of the general fund -- to satisfy creditors and credit-rating agencies. The $3 million in dispute represents advance franchise fees from three cable television companies planning to do business in the city. But the companies' franchise agreements have not yet been approved by City Council. Even if the agreements are approved, those advances are not due to the city until Aug. 25. "They're basically cooking the books. It's misleading to council. It's misleading to the public," Garcia said. "It's just an attempt to prop up the revenues to make a balanced budget." Sara Culbreth, acting director of Finance and Administration, denied the controller's accusations and said it was not an unusual practice. "There was no attempt to cook anything," she said. "We had been working on negotiations on terms of the agreements back in late April, first of May. There are other items that have accrued as revenue where the actual cash has not been received by June 30." Because the activity expected to generate the $3 million began in fiscal 2000, she said, those revenues can be included in the fiscal 2000 ledger. Culbreth said similar situations have occurred in which revenue was "booked" to a previous fiscal year. At the end of the fiscal year, she said, there is a 60-day accrual period for revenues due to the city. Any cash that comes in during that 60-day period and that is related to activity of the previous fiscal year is counted toward that year's revenues. The final tally on fiscal 2000 will not be available until at least the end of this month. Counting the $3 million toward last year's income represents, at the very least, optimism on the administration's part. That is because two of the cable TV companies' franchise agreements are in the approval process by City Council, but the third has been delayed. The agreements require three readings by council. Two are headed for their second readings on Wednesday. The third agreement was withdrawn by the administration last week and is not on this week's agenda. The accounting for the $3 million is sure to raise the eyebrows of council members at today's fiscal affairs committee meeting. "I think that would be inappropriate accounting at a minimum, because those agreements won't be approved till fiscal '01," Councilman Carroll Robinson said Monday. "And there's no need to try to dress up the fiscal 2000 budget results by a mere $3 million. It's better to learn our lesson and use that experience to go through the '01 budget period and be as prepared as possible." He later added, "Somebody's got to explain where June ends and July begins." Councilwoman Annise Parker also expressed doubt about the legitimacy of counting the $3 million toward last year's revenues. "That would be padding the books," she said. "We haven't executed these contracts yet. We're in the new fiscal year. Any funds attributable to these new franchise agreements, in my opinion, would be collected in the current fiscal year, not the previous fiscal year. How can we count them if we haven't even executed the contracts yet?" George Scott, head of the Tax Research Association of Houston and Harris County, called the accounting "bizarre." Scott acknowledged he was not an accountant, but said, "I think that the burden of proof is on the Brown administration to prove conclusively such an accounting maneuver is not only ethical and legal, but that it is like Caesar's wife -- beyond reproach." Garcia, whose office is projecting a $35 million shortfall in the general fund, said the fund balance will fall $5.2 million below the required 7.5 percent. But Culbreth's office insists the ending fund balance will be $81 million, above the required threshold. ------------------ Stay Cool...
Yeah but the key is: "But the companies' franchise agreements have not yet been approved by City Council" So it is tough to have a revenue earned when there is no agreement. The mayor seems to be saying that the deal is done, which technically it isn't. ------------------
Hey - don't want to get nitpicky - especially since this article doesn't really spell out all the essential details, but: No agreement? Then what is the council reading? There are agreements in place, signed by the appropriate parties - just not ratified by the council. It would help if we had more details - but like I said, I am positive that this is more political grandstanding than anything else. Please take note of these facts - we're talking about a mere $3M (that won't even get you half of an Austin Croshere!) & Sylvia Garcia is throwing out accusations of "cooking the books" (which is a "nice" way of saying FRAUD). Looks like Sylvia's trying to prop herself up as a potential mayoral candidate. I really don't know enough about the situation to make a judgement (the article doesn't have enough detail about the approval process). But if it is likely to pass City Council (maybe it is, maybe it isn't) - then I think it should definitely be accrued for in the previous year. How about construction companies? Do they record revenue only when a building is completed? Or do they accrue for the building's revenue during construction? The answer is B. Maybe the building won't pass inspection by the City's building code inspectors upon completion. Does that mean that the construction company's accountants are acting fraudulently? Surely not! Us accountants have tons of fun and exciting ways to record revenue that really doesn't exist yet - its based on assumptions, estimates, and professional judgement. ------------------
The revenues should be recognized in the fiscal year in which they were earned. The problem with this is that it appears that the revenues aren't to be earned until after fiscal year 2000. If that is truly the case, then it is improper to recognize those revenues in fiscal year 2000. But, if all or part of those contracts (whether approved or not) includes time within fiscal year 2000, then those revenues should be recognized in the fiscal year 2000 budget even though the cash doesn't come until fiscal year 2001. From reading the story, it looks like those fees are for future services (franchise fee from cable operators planning to do business in the city), so it would be improper accounting to book those in FY2000 as revenues because those revenues would cover a period of time beginning in FY2001 (I am assuming that the franchise fees cover a specified period of time rather than being a one-time fee.) On the other hand, if the fee is a one-time fee that has no definite start or end date (i.e. the franchise fee itself is an upfront payment required to operate a cable franchise and doesn't have any specified time period then the accounting here could be acceptable. Even though the contracts have not been approved by the council, they have been signed. As far as I know, it is entirely proper to book the revenues as if earned on the date the contract is signed even though it has another layer of approval (from the city council) left to overcome. So the moral of the story is: I don't know whether Mayor Brown is right or wrong. There isn't enough information in the story to make a determination. And even if there were more information, Mayor Brown's people might be able to make a case that those revenues belong in FY2000. And they say Accounting isn't a creative endeavor. ------------------ www.houstonsportsboard.com
This appears to be more of a political pissing match more than anything else. There is nothing unusual about recording revenue prior to receiving cash. (Helloo???? Anyone ever hear of accounts receivable?????). As long as the amounts were estimable and earned in the prior year, there is nothing wrong with the accounting treatment used. It is not clear if the City Council approval process is a "rubber stamp" procedure - but I'm sure it isn't too tough. As far as the part about 1 of the contracts being pulled from review - in that case, an incorrect assumption may have been used in accruing for that franchise fee. If that contract does not ever get approved, a restatement of the prior financials would only be warranted if the amount was material ($1M is not material for the City of Houston, I think). The funny part of the article is how incredulous some of these people are over such a small amount of money and how nobody seems to understand rudimentary accrual accounting. ------------------
