The Violet Bay School
INTRODUCTION According to the Government Accounting Standards Board (GASB), the objective of financial reporting is to assist a government entity in fulfilling its obligation to be publicly accountable and to enable users to assess accountability (GASB 2007; Government Accountability Office [GAO] 2007). Budgeting, a process whereby government administrators forecast expected revenues and identify planned expenditures, is an integral part of accountability, and the extent to which a governmental entity adheres to its budget is a major consideration when assessing accountability. In August 2005, Violet Bay1 taxpayers were informed that their school system had run a $7 million deficit after several previous assurances that the system was fiscally sound and would finish the year with a surplus. By November 2005, an external audit determined that the actual deficit was $12.1 million. Three months later, a special grand jury report was released describing the causes of the financial crisis and addressing the means to correct the situation. What went wrong? Place yourself in the role of an auditor or a consultant and identify the problems. As you do so, you will better appreciate the importance of internal control and will gain experience in identifying and assessing client risks. While this case involves a governmental entity—a school district—no prior coursework in governmental accounting is required to complete case requirements.

PART I – THE BUDGET PROCESS The Violet Bay School District (hereinafter, the “VBSD” or the “School”) provides public primary and secondary education to local students. The VBSD, with its elected 11-person School Board, is a separate legal entity, but is fiscally dependent on the City of Violet Bay (hereinafter, the “City”). The constitution and code of the state place responsibility for developing the School budget with the