Should provisions of the Sarbanes-Oxley Act of 2002 apply to local governments in order to improve accountability and transparency?

Elson, Raymond J. ; Dinkins, Chuck

INTRODUCTION

Overview of the Sarbanes-Oxley Act

The Sarbanes-Oxley Act of 2002 (SOX) was enacted in response to management fraud in Corporate America. Fraud at such premier companies as Enron, WorldCom and Tyco, resulted in misleading financial statements which caused huge losses to investors when the fraud was unraveled. Currently, SOX only applies to public companies; private companies, not-for-profit organizations and governmental entities are specifically exempt.

Some of the key provisions of SOX specifically Sections 301 (audit committee's oversight of issuers accounting, internal controls and auditing procedures), 302 (annual certification of the financials by the CEO and CFO) and 404 (management's assessment of the effectiveness of internal controls over financial reporting) have increased the role of the board of directors and management in the oversight and reporting process within organizations (Lander, 2004). This has resulted in an increase in accountability and transparency within public corporations so that the ultimate owners (i.e., shareholders) have a better understanding of the business practices and financial transactions within such organizations.

For example, Deloitte & Touche chief executive noted that as a result of SOX, audit committees are more involved and have deepened their understanding of the financial reporting process and accounting policies within their organizations. The executive also noted that SOX has enhanced transparency and reduced the risk of corporate fraud in many organizations (Martin, 2003). In addition, an audit committee chair noted that audit committees have doubled the time spent on audit related matters and that boards are more deeply involved in controls and are better informed of the organization's performance as a result of SOX (Stainburn, 2006).

In terms of financial reporting, one study found that 1,118 US companies and 90 foreign companies--one in every 12 companies with US listed securities--filed a total of 1,342 material weaknesses disclosures in 2006 (Zhang & Pang, 2008). Arlinghaus (2007) reported that twenty seven of the 201 respondents in its study of SOX compliance reported material weaknesses in internal control in the tax area in their annual report on management's assessment of internal control. A material weakness in internal control is a combination or combination of deficiencies that results in a reasonable possibility that a material misstatement in the financial statements would not be prevented or detected on a timely basis (Louwers, Ramsey, Sinason & Strawser, 2008).

Gullapalli (2005) noted that the Heron Consulting Group identified 414 companies with error driven financial restatements in 2004. This was a sharp increase from the 323 in 2003 (Gullapalli, 2005) 330 in 2002 and 270 in 2001 (Farrell, 2005). The 28% increase from 2003 to 2004 was primarily attributed to the significant amounts of time and money spent by public companies to comply with the requirements of SOX, and the accounting mistakes caught in the process (Bryan, Lilien, Ruland & Sinnett, 2005). The number of companies reporting earnings restatements ballooned to approximately 1,200 in 2005 primarily due to the implementation of SOX Section 404 (Farrell, 2005). Section 404 requires the outside auditor and the company's top brass to annually certify the soundness of internal financial-reporting controls (Gullapalli, 2005). However, 56% of the accounting mistakes identified was simply the result of human errors (Plourd, 2008).

Montana (2007) noted that most corporate commentators concede benefits of various kinds from SOX especially in the financial controls and reporting areas. This led private companies and not-for-profit organizations to recognize the effectiveness of various SOX provisions and have applied certain requirements (such as an audit committee and independent internal control assessments) as best practices (Elson, O'Callaghan & Walker, 2007)

The Sarbanes-Oxley Act and Local Governments

Most local governments are not as proactive and instead rely on existing structures and controls to ensure accountability and transparency in the management of taxpayers' resources. General purpose local governments rely on taxes levied upon their citizens as their primary revenue source. Too often the assumption is that if taxpayers do not face tax increases then the local government is exercising its fiduciary responsibilities. However, this assumption is flawed as local government faces tremendous pressures to identify and control the financial abuse and political pressures faced by elected and appointed officials.

Local governments may not have adequate internal controls over financial accounting and reporting in such areas as the awarding of contracts and access to cash and sensitive data. The lack of adequate controls has led to scandals and corruptions in local government which in turn has reduced taxpayers' confidence in their elected officials. It is important to remember that citizens invest in governments through taxes and receive dividends in the form of a well run government (J. Fretti, personal communication, July 19, 2007).

Another frequently overlooked stakeholder is the municipal bond holder. Many local governments issue municipal bonds as part of the approximately $2.4 trillion municipal bond market (Greenhouse, 2008). These bonds are purchased by individual investors who are relying on the integrity of the financial accounting and reporting controls in the governmental entity. Therefore, it is critical for local governments to have adequate controls in place to ensure accountability and transparency of financial information.

Perhaps the solution resides in SOX. We believe that certain requirements in SOX could be adapted by local governments without any significant cost increase to taxpayers. The benefits are tremendous: an increase in oversight, accountability and transparency in the operations of a local governmental entity.

Other researchers notably Czaja (2005) and George (2005) explored extending SOX reforms to nonpublic companies. However, the researchers addressed establishing audit committees and the impact of SOX on the nonpublic organizations' independent accountants and not the themes explored in this paper.

This paper discusses some of the recent scandals within local government and current practices that are in place to ensure accountability and transparency. Since these practices are not always effective, we offer an alternative approach based on SOX to improve oversight and accountability. These are establishing an audit committee, obtaining the CEO/CFO certification of financial reports, management's assessment of internal controls, and adopting a comprehensive code of conduct policy.

LOCAL GOVERNMENT SCANDALS

Scandals and local government seems to coexist in harmony and seem to thrive in some cities. For purpose of this paper, scandals refer to the different types of corruption found in local government--bribery, extortion, embezzlement (misappropriation of assets), nepotism and patronage systems. Atlantic City New Jersey, with its glistening casinos, poor constituents and on going political scandals is one example of the challenges faced by local governments. New Orleans, Louisiana, is another major city with public disclosure of government corruption in recent years. In fact, its city council senior member pleaded guilty to federal charges for accepting approximately $19,000 in bribes and kickbacks from a local businessman who was trying to keep a city parking lot contract (Nossiter, 2007).

Yet, the abuse of funds and power in local government varies and is seen across government of all sizes. The daily papers are filled with stories of local governments and their officials caught up in corruption scandals often involving the misuse of taxpayers' funds. One of the most spectacular problems in local government occurred in December 1994 involving Orange County, California. It became the largest local government in U.S. history to declare bankruptcy. This bankruptcy resulted from the loss of approximately $2 billion from a highly leveraged and risky derivatives strategy, not fully understood by county managers (Trujillo, 1996).

While the above may be an extreme situation, there are many other examples of corruption which resulted from poor oversight and accountability in local government. One recent example occurred in early 2007 in the City of San Francisco, California. Its mayor was engrossed in a political scandal involving a married woman, his former appointments secretary, and the wife of his campaign manager. Certain termination benefits of approximately $10,000 received by the secretary (who resigned) are being challenged by constituents to ensure their legitimacy. The campaign manager also resigned from the mayor's reelection team (McKinley, 2007). In a separate case also in 2007, the elected treasurer of Alcona County, Michigan embezzled approximately $1.2 million from the county's investment accounts. The funds were invested and lost in a Nigerian investment scam (Schaefer & Lam, 2007).

In 2007, the city of Camden New Jersey, reported that the payroll for its approximately 1,300 employees was kept manually and that there was no mechanism (e.g., time clocks) in place to track employees' starting and finishing times (Capuzzo, 2007). Clearly, this situation could lead to payroll related fraud. Another recent example is the 33 count fraud and corruption charges filed against the former mayor of Newark, New Jersey. The charges against this 20 year mayor included misusing his office, billing taxpayers at least $58,000 for personal travel and entertainment including stays at the Ritz-Carlton in Miami and the rental of a Rolls-Royce to go shopping for a new yacht (Kocieniewski, 2007). This mayor was recently convicted on five counts of fraud including conspiracy to rig the sale of nine city lots to his mistress, who quickly resold them for hundreds of thousands of dollars in profit (Whelan & Martin, 2008).

And still other examples exist. A Hollywood, Florida county commissioner was charged with five felony corruption counts for helping a sewage processing company win an $18 million contract from the city (Holland & Wyman, 2006). In 2005, A Draper, Utah city employee was charged with diverting city funds of approximately $43,000 to her own bank account (Utah, 2005). In 2004, the mayor of Cecil, Georgia, a town with a population of 265, was forced to resign after receiving loans of approximately $42,000 on behalf of the town which he converted into personal use (Agostin, 2004).

Also in 2005, a former Salt Lake City county manager was charged with using public funds to hire an employee to work for her daughter at a private, nonprofit group (Utah, 2005). A former Davie, Florida town administrator was charged in 2005 with stealing approximately $500,000 of taxpayer funds (Waller, 2006).

LOCAL GOVERNMENT STRUCTURE

The number of local governments within the United States is fairly large with a variety of structures e.g., urban such as New York City, New York and rural such as Bulloch County, Georgia. The 2002 United States Census reported 87,525 local government units, which includes 3,034 counties, 19,429 municipalities, 16,504 towns and townships, 13,506 independent school districts and 35,052 special district governments (U.S Census Bureau, 2002). For instance, New York has approximately 57 counties while the State of Georgia, a smaller state, has 159 counties. The state of Georgia also has approximately 485 unique cities listed on its website.

In terms of this paper, local government refers to general purpose local governments such as cities, counties, villages, towns and townships and component units; the number of which will vary by state and size. Since local governments vary by size, there will be some flexibility and inconsistency in their organizational structure. This lack of uniformity creates some challenges in any reform that is proposed. However, the local government's organizational structure will be similar to the discussion that follows. The organizational structure of the city council for a large local government is provided for illustrative purposes as Appendix A.

Each county is governed by a Board of Commissioners ("the board"), elected by the citizens within that county. The numbers of commissioners are determined by the number of districts within the county and usually there is one commissioner per district. A commissioner is generally elected by the constituents or selected by the other commissioners to serve as chairperson of the board, and this person presides over all board meetings. The board's responsibilities include determining the annual budget of the county, and voting on all proposed loans, grants, bond issues, land acquisition and sales, zoning changes, traffic control issues and mayoral appointees.

The day to day running of the county is the responsibility of the county manager or equivalent who acts as the chief executive officer (CEO). A finance director, the equivalent of a chief financial officer (CFO) in a for-profit organization, supports the board by advising it and the county manager on the financial status of the county. In some counties, the finance director reports directly to the board. The finance department manages the financial transactions of the county government on behalf of the taxpayers and the board. A basic organization chart for a county government is depicted in Figure 1.

[FIGURE 1 OMITTED]

Most cities are headed by an elected official, the mayor, who serves for a specific term as defined by the city's charter. This individual is equivalent to the Chairman of the Board in a for profit organization. The mayor is supported by a body of elected officials representing different constituents within the city, called the city council ('board"). The actual chief executive (CEO) of a city government is the city manager or equivalent (this role is performed by the mayor in larger and very small cities) who runs the city on a day to day basis. The city manager is supported by a finance director or equivalent (e.g., treasurer) which is similar to a CFO in a for profit organization. A basic organization chart for a city government is provided in Figure 2.

[FIGURE 2 OMITTED]

CURRENT OVERSIGHT REGULATIONS

Local governments generally prepare an annual fiscal budget of their estimated revenues and appropriations (estimated expenses) prior to the start of the fiscal year. There is a public meeting (as required by state law) in which the budget is discussed prior to its approval and constituents are encouraged to attend the meeting and voice their concerns. These meetings are generally poorly attended unless there are some controversial items such as tax increases proposed in the budget. Once the public has a chance to discuss the budget, it is approved by the city council, adopted into law and authorizes the local government to transact business on behalf of its constituents. More information on the legislative process for a large local government is provided as Appendix B.

Often elected officials are asked to approve complex and sophisticated financial transactions as part of the budget and financial reporting process. However, they may not have the appropriate skill sets and must rely on management personnel (of the local government) for advice on such transactions. This creates a potential conflict of interest because the elected officials are obtaining advice from the same managers they are expected to oversee.

Board members may not have the background necessary to understand financial issues within the government and may approve budgets without much debate or dialogue. For instance, budget discussions surrounding the issuance of municipal bonds and its impact on current and future generations, may not be fully understood. Instead, in some local governments, budget meetings quickly move away from the budget to matters that can be easily understood by board members such as zoning issues.

Audit committees are not consistently established in local governments to monitor financial accounting and reporting controls. As a result, the existence and/or effectiveness of the internal control environment may be not sufficiently addressed at board meetings. A review of selected websites supports our position on the existence of audit committees. For instance, the City of Atlanta's 2006 CAFR shows the existence of an audit committee but it had no direct or indirect interface with the city council per the organization chart (City of Atlanta, 2008). The city's internal auditor was the only direct report to the audit committee. A separate finance committee existed within the city council but its role was not defined. New York City's city council also included a finance committee but the website showed no audit committee. The finance committee which is comprised of board members, had responsibility for the executive budget review and oversight of various departments including the Department of Finance and the Comptroller's Office.

Local governments are taking some steps to increase transparency and accountability in the budget process. For instance, Rivera, (2007) noted that the City of New York identified the council members who sponsored the various discretionary appropriations for pet projects in its 2008 fiscal year budget. This amounted to 1,674 unique projects totaling more than $36 million (part of a $59 billion budget). Pet projects are a common practice in most local governments but these are often grouped with other items in the budget.

Also, local governments often operate with a small staff in order to reduce overall expenses and ultimately the tax burden to the taxpayers. As a result, incompatible functions may not be adequately safeguarded providing an opportunity for managers and other personnel to misappropriate assets. The previous section highlighted examples of fraud perpetrated by government personnel perhaps because of lax oversight.

At the end of the fiscal year, most local governments are required by governmental accounting standards to prepare a comprehensive annual report or CAFR to account for the actual revenue earned and expenses incurred. Depending on the size of the local government, an independent accountant is engaged to perform a financial statement audit. In some states, an entity at the state level performs the financial audit. For instance, in Georgia the state auditor performs an audit of entities that elect not to file a CAFR and reviews the audited statements of all local governments within the state to ensure compliance with certain programs and SPLOST referendums.

The CAFR is generally filed with the state's auditor's office and can be requested by the citizenry. Local government's are also encouraged as a best practice to prepare a simplified version of their CAFR (the popular annual report or PAFR) to be made available to the constituents. However, the reports are generally available on the government's website and are not mailed to tax payers.

In the current electronic age, states are publishing the CAFRs and other financial reports of local governments on their websites so they can be available to a wider audience. Unfortunately, taxpayers are either not aware of the existence of these documents or navigating the state's websites to view them is so cumbersome that they do not take advantage of the opportunity. Also, CAFRs are very complex and may not be understood by taxpayers who retrieve them. As a result, taxpayers do not know how tax revenue collected by local governments are actually spent and instead rely on elected and appointed managers to exercise their fiduciary responsibilities.

Although a code of ethics or conduct may exist in local governments, they are not always available to stakeholders in a public space such as websites. This was confirmed in a random review of five local government's websites (City of Atlanta, New York City, Chicago, Hudson County, New Jersey, and Fulton County, Georgia).

The internal controls within a local government are not generally subject to an independent assessment. However, local governments that receive federal grants are subject to audit under the Single Audit Act ("the Act"). Part of the Act's requirement is for the auditor to obtain an understanding, and assess and test the internal controls surrounding each major program receiving federal funds (Government, 2007). However, Single Audit procedures may not be effective in identifying control or compliance issues.

A recent study on the quality of audits conducted under the Act by external auditors estimated that only 48.6% of the entire universe of single audits was considered acceptable. The most common deficiencies reported included the auditors (a) not documenting their understanding of the entity's internal controls over compliance requirements and (b) not documenting their internal control testing of at least some compliance requirements. (Sampling Project, 2007).

The United States Government Accountability Office revised its auditing standards in early 2007 with an effective date of January 1, 2008 for financial, attestation and performance audits. Among the revisions are guidelines to auditors on how to define and report on internal control weaknesses in government audits. However, we believe this is still inadequate since the guidance is directed at auditors and not management. Perhaps the solution to improve oversight and accountability already exists--The Sarbanes Oxley Act of 2002 (SOX).

Local government accounting standards are established by an independent body, the Government Accounting Standards Board or GASB. GASB's standards are adopted by the states on a voluntary basis and it has no enforcement authority if a local government violates the standards. Enforcement comes from the state allowing variations in the quality and level of oversight. GASB is also facing pressure on its usefulness by the Governmental Finance Officers Association, the body which provides GASB's funding. The Securities and Exchange Commission (SEC) believes that GASB is the right body for providing oversight of governmental entities and it is in the process of discussing with the United States Congress new ways of empowering GASB to perform its oversight function especially in the area of financial reporting and disclosures (Walsh, 2007).

IMPLEMENTING SOX PROVISIONS IN LOCAL GOVERNMENTS

We believe local governments could implement certain SOX requirements (specifically audit committees, certification of annual reports, management assessment of internal control over financial reporting and code of conduct and ethics policy). The adoption of audit committees in the private sector has been addressed by two oversight bodies--the American Institute of Certified Public Accountants and The Government Finance Officers Association. However, these were offered as a best practice rather than a mandate and few if any local governments have established audit committees.

We believe local governments should implement the SOX provisions in order to increase accountability and transparency and provide stakeholders with additional assurance that resources are adequately managed. Guidance on implementing the SOX provisions is provided in this section.

Audit Committee

SOX require each member of the audit committee of public companies to be independent of management. It also requires that at least one of these members be financially literate (Lander, 2004). This is important since the audit committee is responsible for the appointment, compensation, and oversight of the work of the accounting firm. In practice, the audit committee is responsible for oversight of the financial accounting practices and controls in public companies.

City councils and boards of commissioners serve as the board of directors ("boards") of local governments. As a result, they are currently responsible for financial accounting oversight such as approving annual budgets, approving the independent accountants, and reviewing and approving CAFRs and other financial reports. However, the board members are elected officials and may not have the appropriate skills required to understand the complexity of financial accounting transactions as noted in an earlier section.

The primary function of the audit committee is that it institutionalizes the governing body's involvement with internal control and financial reporting thereby ensuring that both topics are periodically addressed by the governing body (Gauthier, 2007). It may not be economically feasible for all government entities to establish an audit committee. Therefore, we believe that local governments receiving tax revenue of at least $1,000,000 should establish an audit committee of at least 3 members. This is a major change for some organizations and guidance on the role of the audit committee is provided in the following paragraphs.

The AICPA's Audit Committee Toolkit (www.aicpa.org) is an excellent resource for local governments interested in establishing an audit committee. Audit committee members should be appointed by the board and at least one member should have financial experience ('financial expert'). However, it is critical that the financial expert's education and experience be especially relevant to the government sector (Gauthier, 2007).

Similar to for-profit organizations, the audit committee would be responsible for the appointment, compensation, and oversight of the work of the independent accountant engaged by the local government for external reporting. Audit committee meetings should be held on a regular basis with a minimum of four per year with additional meetings as needed. The meetings should include separate executive sessions with the following as needed--independent accountant, the chief executive and financial officers, the chief audit/internal auditor, the general and/or outside counsel and any other personnel desired by the committee. The purpose of these meetings is to discuss any accounting and legal/regulatory issues affecting the government entity.

The audit committee should review with management policies and procedures with respect to public officials' and management's use of expense accounts, public funds and property (e.g., the use of government vehicles for personal use). The audit committee should be involved in the development of and amendment to the entity's code of ethics policy. Also, the hiring, replacement, or dismissal of the chief auditor should be reviewed and concurred on by the audit committee for those local governments with an internal audit function. The audit committee should also ensure that there is an anonymous mechanism for employees, vendors, and taxpayers to report concerns directly to the audit committee or other appropriate body. Anonymous 24 hour hotlines are offered by a number of third party vendors and are ideal for this purpose. In addition, all reports issued by the internal audit function should be provided to the audit committee.

Local governments would need to allocate financial resources for the effective functioning of the audit committee. In order to achieve its mission, the audit committee should be authorized by the board to hire professional consultants as necessary. The role of the consultants should be defined in an engagement letter or agreement and they would be paid from the committee's financial resources.

Certification

SOX also require the CEO and CFO of public companies to certify the quarterly and annual reports that are filed with the Securities and Exchange Commission. The certification includes statements that (a) the individuals have read the report, (b) the report does not contain any untrue statements or omit material facts, based on their knowledge, (c) they are responsible for establishing and maintaining internal controls and they have evaluated the controls' effectiveness (Lander, 2004). SOX impose significant monetary penalties and other fines on the CEO and CEO for misleading certifications.

We believe that local governments should adopt the certification process in SOX by requiring the CEO and CFO or equivalent officers to provide an annual certification on the CAFRs or other financial reports issued by the reporting entity.

Therefore, the county and city managers (as CEOs) (or chief elected official when there is no manager) along with the respective finance director (CFO) should provide separate certification on the specific local government's financial statements at least annually to the board and taxpayers. At a minimum, the certification should include statements that (a) the individuals have read the report, (b) the report does not contain any untrue statements or omit material facts, based on their knowledge, (c) they are responsible for establishing and maintaining internal controls and they have evaluated the controls' effectiveness. The CEO and CFO should rely on the internal control assessment as part of the certification process.

The certification should be provided to the mayor and board on an annual basis and filed in the supplemental information section of the CAFR. To ensure the effectiveness of this process, the managers would face monetary penalties and other fines (as defined by the board) for providing false and/or misleading certifications.

Internal Control Assessment

One of the more controversial SOX requirements is for companies to include in their annual reports a report on management's assessment of its internal control over financial reporting. This report includes a statement a) that management is responsible for establishing and maintaining adequate controls, b) identifying the framework used by management to conduct its assessment, c) on management assessment of its controls, and d) a statement that the independent auditor has attested and reported on management's internal control assessment (Lander, 2004).

Internal control may not be an area that is fully understood by local government personnel. Internal control simply refers to a process implemented by the board, management and other personnel. It is designed to provide reasonable assurance regarding the achievement of objectives in three areas: the reliability of financial reporting, the effectiveness and efficiency of operations, and the compliance with applicable laws and regulations. There is an excellent resource (www.coso.org) for local government personnel interested in learning more about risk assessment and internal control.

A department head is responsible for the internal control environment within the business or department under his (her) control. Therefore, an internal control assessment should be performed quarterly by each department head or designee under the supervision of the finance department. The assessment should identify the key control(s) in the process and the controls should be tested to ensure their effectiveness. The assessment should be risk based with emphasis placed on areas of highest risk. An example of a high risk area is the local government's procurement function, especially the procedures and controls over the initial vender selection and approval process and the bidding process. The finance manager should provide a quarterly report to the mayor and board of any significant control weaknesses identified in the internal control assessment.

Code of Ethics

SOX also requires public companies to disclose whether they have adopted a written code of ethics for the company's principal executive and financial officers, and principal accounting officer or person performing similar functions (Lander, 2004). These codes of ethics should contain standards designed to deter wrongdoing and to promote such behaviors as honest and ethical conducts, and compliance with laws, rules and regulations. The code of ethics should be disclosed in a public place such as in the annual reports or on the company's website.

Clearly this SOX provision could easily be extended to local governments. The local government should develop a code of ethics in conjunction with the board, using the language in SOX, covering the board and all employees. The adoption of a code of conduct is important since it is a fundamental step in the attempt to improve the ethical culture and to prevent unethical and fraudulent behavior within the organization (Rotta, 2007).

The local government should ensure that at a minimum that all key personnel such as its county manager and finance director have read and signed the code of ethics. The initial code and all amendments should be approved by the board. The code of ethics should address issues such as the local government's gift acceptance policy; loans to board members, officers and employees; influence peddling; use of government resources for personal purposes; the contract bidding and request for proposal process; as well as the government's whistle blower protection policy.

The local government's code of ethics should be provided to each new employee who must acknowledge that they have received and read it. An ethics hotline should be established so that ethical violations can be reported. To ensure it effectiveness (i.e., privacy and confidentiality of information), the hotline should be monitor by an external party such as the outside counsel (if there is an existing relationship). As an alternative, the human resources director could perform this role. Information on the ethics hotline should be include in the code of ethics and the number provided to all employees, elected officials and vendors.

Also, all elected officials and key personnel should be required to file an annual financial disclosure statement. The statement would identify and disclosure assets and income source that could create actual and potential conflict of interests between the individual's official duty and the entity. The disclosure statement should be web based to encourage its use and a deadline given to ensure its timely completion. The local entity should establish penalties (monetary and criminal) for delinquent fliers.

The finance and human resources directors should be assigned joint responsibility of ensuring that the code of ethics is current and communicated to all applicable parties. Larger governments should consider appointing an ethics officer or equivalent to establish and monitor its ethics program.

CONCLUSION

The Sarbanes-Oxley Act of 2002 (SOX) was enacted in response to management fraud in Corporate America. Private companies and not-for-profit organizations recognized the effectiveness of various SOX provisions and have applied certain requirements (such as an audit committee and independent internal control assessments) as best practices. However, local governments are generally not as proactive and instead rely on existing structures and controls to ensure accountability and transparency in the management of taxpayers' resources.

Scandals and other inappropriate business practices continue to waste tax dollars and reduce confidence in local governments of all sizes. Clearly, there is a need for more oversight to ensure accountability and transparency in order to protect stakeholders' interests. This paper suggested four areas in which SOX provisions could be implemented by local governments in a cost effective manner to increase accountability and transparency to stakeholders. The areas are establishing an audit committee, the CEO/CFO certification of financial reports, management's assessment of internal controls, and the local government adoption of a comprehensive code of ethics policy.

The potential for fraud and abuse that SOX is intended to control is not confined to publicly traded companies. Local governments should adopt the provisions of the Sarbanes Oxley Act discussed in the paper to improve accountability and transparency. This will protect citizens' investment in their government and ensure that dividends are paid to stakeholders in the form of a well run government.

Appendix A: Local Government Structure--The New York City: City Council

The Role of the City Council

The New York City Council is the law-making body of the City of New York. It is comprised of 51 members from 51 different Council Districts throughout the five boroughs. The Council monitors the operation and performance of city agencies, makes land use decisions and has sole responsibility for approving the city's budget. It also legislates on a wide range of other subjects. The Council is an equal partner with the Mayor in the governing of New York City.

Budget

The budget is the centerpiece of policymaking in government. Through the budget, the Council establishes priorities, allocates resources and sets the policy agenda for the year. It is the single most important municipal document that affects the lives of New Yorkers. While the mayor proposes the city's spending priorities for the upcoming year, the Council has final budget approval powers. During the budget process, the Council may change budget priorities and add special "terms and conditions" requiring city agencies to report to the Council on how specific monies are being spent throughout the year.

Land Use

Under the 1990 Charter revision, the Council acquired the power to review land use issues and approve zoning changes, housing and urban renewal plans, community development plans and the disposition of city-owned property. This power gives the Council the most significant voice in the growth and development of our city.

Oversight

The Council holds regular oversight hearings on city agencies to determine how agency programs are working and whether budgeted funds are being well spent.

Legislation

As the legislative body, the Council makes and passes the laws governing the city. The Council has passed landmark legislation on designated smoking areas in public places, campaign finance, anti-apartheid, solid-waste recycling and restrictions on assault weapons. Legislation pending in the Council is called an Introduction, often abbreviated to "Intro" or "Int", and is assigned a number. When an Introduction is signed by the Mayor it becomes a Local Law and is assigned a new number.

The Committee System

Most of the Council's legislative work is done in committee. It is there that proposed legislation is initially debated and the members of other government branches and the public are given a chance to comment.

Each Council Member serves on at least three of the Council's standing committees, sub- and select committees and panels. The standing committees must meet at least once a month unless the Charter mandates otherwise. Committee assignments are made by the Committee on Rules, Privileges and Elections and voted on by the entire Council.

Most Council hearings are held in the Council Chambers or the adjoining Committee Room in City Hall. Hearings are also held in the Hearing Room on the 16th Floor of 250 Broadway. Meetings of the entire Council, referred to as Stated Meetings, are held twice a month at City Hall. A weekly schedule of Council hearings is available in the Council's Office of Communications in City Hall.

The Speaker of the Council, the Majority Leader, the Minority Leader, and Public Advocate are ex-officio members of all committee.

The Council Speaker

The Council Speaker is elected by the Council members and is primarily responsible for obtaining a consensus on major issues.

The representative for the position of Minority Leader is elected from among the party with the next largest representation.

Although not a member of the Council, the Public Advocate presides at the Council's Stated Meetings and votes in the case of a tie. In the Advocate's absence, the Speaker presides or designates a presiding officer, or the body may elect from among its membership a President Pro Tempore to preside.

The Rules of the Council

The City Council is governed by a body of rules

Source: http://council.nyc.gov/html/about/about.shtml

Appendix B: The City of New York City Council: Legislative Process

Bills

* A bill (proposed legislation) is filed by a Council Member with the Council Speaker's Office.

* The bill is then introduced into the Council during a Stated Meeting and referred to the appropriate committee. One or more public committee hearings maybe noticed and held on the proposed legislation.

* After public testimony and committee debate the bill may be amended.

* The committee votes on the final version of the bill.

* If passed in committee, the bill is sent to the full Council for more debate and a final vote.

* If passed by an affirmative vote of a majority of all Council Members (at least 26 members) the bill is then sent to the Mayor, who also holds a public hearing.

* The Mayor then chooses to sign or veto the bill.

* If the Mayor does sign the bill, it immediately becomes a local law and is entered into the City's Charter or Administrative Code. The time before a new law becomes effective will vary from law to law.

* If the Mayor disapproves/vetoes the bill, he or she must return it to the City Clerk with his or her objections to the Council by the next scheduled Stated Meeting.

* The Council then has 30 days to override the Mayoral veto.

* If the Council does repass the bill by a vote of two-thirds of all Council Members (at least 34 members), it is then considered adopted and becomes a local law.

* If the Mayor does not sign or veto the bill within 30 days after receiving it from the Council, it is considered approved automatically.

Introductions

As the legislative body, the Council makes and passes the laws governing the city. The Council has passed landmark legislation on campaign finance, anti-apartheid, solid-waste recycling and restrictions on assault weapons. Legislation pending in the Council is called an Introduction, often abbreviated to " Intro " or " Int ", and is assigned a number.

For example:, Intro 1 of 2004 would improve the NYC Pro-Voter Law by requiring all city agencies to provide training of employees on how to increase voter registration outreach efforts.

Local Laws

When an Introduction is signed by the Mayor it becomes a Local Law and is assigned a new number.

For example:, Local Law 1 of 2003 focused on creating cleaner streets by increasing fines for litter violations.

Local Laws may also be enacted over the objection of the Mayor through the veto override process. In this case, when the Mayor vetoes a proposed law, the Council can enact the law with a two-thirds vote.

For example, in 2003 the Council put in place a requirement in Local Law 24 that the Department of Education provide periodic updates on the progress of all school capital projects.

Resolutions

Resolutions are used by the Council as a vehicle for legislative action and to express the sentiment of the body on important public policy issues. These issues may or may not fall under City jurisdiction.

Resolutions are used to adopt land use decisions on matters that vary as widely as down zoning a geographic area in Staten Island to a tax exemption for an affordable housing project in the Bronx.

Resolutions are also used to adopt the annual City budget for both expense spending and capital spending.

Finally, resolutions are used to discuss issues that are of concern like Reso 866 of 2003 calling on Congress to provide New York City with a "fair share" of Homeland Security funding.

Source: http://council.nyc.gov/html/about/legislative.shtml

REFERENCES

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Raymond J. Elson, Valdosta State University

Chuck Dinkins, City of Valdosta