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• • ~"I1~T~CI~ I1~~'~GI~I ~.' ~~~I~I~47'I®1~ What is "financial integrity legislation"? In 1982, the federal government passed the Fed- eral Manager's Financial Integrity Act. The pur- pose of this Act was to make federal managers more aware of their responsibility for sound in- ternal controls. A number of states have followed the federal lead by passing their own financial integrity legislation. Model legislation also has been introduced at the local government level.9 In most cases, financial integrity legislation re- quires agency managers to report on the status of the internal controls of their agency. This in- cludes reporting on areas of deficiency and offer- ing recommendations to address those deficiencies. Under the Federal Manager's Financial Integrity Act, annual reports of agency heads are publicly available through request to OMB. sThis model legislation has been prepared by the National Association of Local Government Auditors. ®~lCs W ®1L -~JLy Auditing plays a critical role in public finance. Indeed, auditing is essential to the credibility of accounting and financial reporting by state and local governments. Recently, the highly publi- cized failure of the Enron Corporation and simi- lar high-profile business failures have served to underscore the importance of auditing. Yet, de- spite its importance, auditing frequently is not well understood by those outside the auditing profession. This publication is designed to provide elected of- ficials and others with clear and practical an- swers to the most commonly asked questions about auditing in the public sector. The publica- tion not only provides a simple explanation of key auditing concepts and terms in language that is readily understandable to the layperson, but it also dispels many misconceptions about auditing frequently encountered in practice. This second edition has been thoroughly revised to re- flect developments affecting public-sector audit- ing that have occurred since the publication was first released in 1992. As governments start a new century, the need to maintain public confidence in the reliability of published financial data remains as great as ever. It is our hope that this basic introduction to auditing in the public sector will help elected of- ficials to achieve this goal by playing a more in- formed and active role in the audit process. The Government Finance Officers Association (GFOA) wishes to thank Stephen Gauthier, the Director of the GFOA's Technical Services Cen- ter, for writing this publication. We hope that this booklet, along with others in the Elected Of- ficial's Series, will provide needed guidance to elected officials seeking to improve the financial management of their governments. Jeffrey L. Esser Executive Director Government Finance Officers Association August 2002 54 AN ELECTED OFFICIAL'S GUIDE vii