AGA Today
02/09/04 Issue
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Federal Accounting Corner
by Simcha Kuritzky,
CGFM CPA
Upward and Downward
Adjustments Inflation
What are Adjustments?
A decade ago, OMB only required
agencies to report the net obligation activity for expired funds.
That is, de-obligations, new obligations, expenditures, and vendor
refunds were all netted together. Then OMB became concerned that
agencies were using expired funds for new spending. In order to track
this, OMB required that agencies report downward adjustments
(de-obligations and vendor refunds) separately from upward adjustments
(increases to obligations or expenditures in excess of the
obligation). The Standard General Ledger (SGL) was modified to
include separate accounts for this type of activity. For example,
obligation activity in the current year's appropriation posts to 4801
(Undelivered Orders ‑ Obligations, Unpaid), while obligation decreases
in an expired appropriation post to 4871 (Downward Adjustments of
Prior‑Year Unpaid Undelivered Orders ‑ Obligations, Recoveries) and
increases post to 4881 (Upward Adjustments of Prior‑Year Undelivered
Orders ‑ Obligations, Unpaid).
What is Adjustment Inflation?
Adjustment inflation occurs when
transactions against a single document increase both upward and
downward adjustments. In the normal course of business, it is
possible for an expired fund to build up large balances in both the
upward and downward adjustments accounts, when these activities really
should be netted against each other. Some example scenarios are:
-
A new
obligation is accidentally entered in an expired fund (causing an
upward adjustment), then the mistake is corrected by entering the
obligation in a current fund and canceling the obligation in the
expired fund (causing a downward adjustment).
-
Payroll
accruals are recorded in September when a fund is current, backed out
in October when the fund is expired (causing a downward adjustment),
and then the actual payroll is recorded in October (causing an upward
adjustment).
-
An invoice is
received against an expired fund's obligation, where the invoice is
for less than the outstanding obligation, but the order is liquidated
in full (causing a downward adjustment). Later that year, a second
invoice is received, and the order is reopened (causing an upward
adjustment) and then liquidated for the invoice amount.
Detecting Inflation
The first task is to detect cases where
adjustment inflation has occurred. While every system has its own
peculiarities, it should be possible to sort through the journal,
matching entries where the same document and line posted the same amount
as a debit to a downward adjustment account (4871, 4872, 4971, or 4972)
and as a credit to an upward adjustment account (4881, 4882, 4981, or
4982). This exercise should locate cases where a document was closed
and subsequently reopened, entered and canceled, or an accrual was
entered and reversed.
If the same document posted both upward
and downward adjustments, but not for the same amount, then it may not
be clear if these are instances of inflation, or separate transactions
that really should be reported as both upward and downward adjustments.
The agency will have to make its own determination. With accrual
reversals and actuals, the first task is to match the accrual reversal
with the actual spending. It would be best if the agency entered
accruals that referenced the spending document, or visa versa, or both
reference the same obligating document. Failing that, the agency may be
able to link the two transactions by their accounting distribution or
vendor (for payroll, SSN).
Correcting Inflation
When making corrections to reduce
upward and downward adjustments, it is important to keep in mind the
effect the correction will have on auditing these accounts. Where the
upward and downward adjustments net to zero at the detail level, it
should be possible to segregate these transactions and post a correction
at the appropriation level. Segregation could mean flagging these
entries in the journal, excluding them from the extract during the
audit, or moving them from the regular journal to an auxiliary journal.
In systems where segregation is not possible, it may be necessary to
record the corrections at the document line level, so the auditors can
offset them before they take their sample.
For cases where the upward and downward
amounts do not agree, it will not be possible to simply segregate the
original transactions, since they do not net to zero and therefore the
remaining transactions will not support the amount on the trial
balance. In these cases, only the lesser of the upward or downward
adjustment will be backed out, and the back out will need to be recorded
at the same level of detail as the determination was made (whether that
was at the document line level, accounting distribution level, or vendor
level). It is possible to segregate only the back-out transaction and
whichever adjustment was the lesser. For example, if an accrual
reversal posts a downward adjustment of $100 and the actual posts an
upward adjustment of $95, then $95 of both upward and downward
adjustments are backed out, and one can segregate out the upward
adjustment and the back-out of $95, but one must leave the downward
adjustment of $100 and its back-out of $95 (for a net downward
adjustment of $5).
Only like adjustments can be set off
against each other, so if an order is canceled posting to 4871, and then
restored posting to 4881, the correcting entry is to debit 4881 and
credit 4871. However, if a document recorded adjustments in different
types of accounts, the adjustments will have to be transferred to the
related non-adjustment accounts. So if an invoice was erroneously
scheduled for payment a second time, posting to account 4981, and then
the check was canceled or returned and deposited into 4972, one cannot
correct it by simply posting debit 4981 credit 4972, because this would
misrepresent payables and cash in the budgetary accounts. The correct
entry is to back out the overpayment adjustment with the entry debit
4981 credit 4901, then back out the cancellation adjustment with the
entry debit 4902 credit 4972.
Comments,
suggestions, and critiques are welcome. Send them to
Simcha.Kuritzky@ams.com,
and not to the AGA.
