Auditors say state’s computer systems aren’t ready for GAAP

The state’s bipartisan auditors warned this week that technical issues with state government’s core financial computer network “represent a significant problem” for the conversion to a more transparent and accountable budgeting system, but Comptroller Kevin Lembo said the issues are “fixable.”

Auditors John C. Geragosian and Robert M. Ward also warned that the failure to fully implement the CORE-CT system across all of state government also could hinder the transition to generally accepted accounting porincipals, or GAAP–a linchpin of Gov. Dannel P. Malloy’s plan to improve fiscal accountability.

“There are significant costs and difficulties involved,” the auditors wrote in their latest audit of state financial operations, though they didn’t detail specific expenses.

Lembo, however, said Thursday that he’s convinced modifications to the CORE-CT system not only can be completed to allow full conversion to GAAP by the July 1, 2013 statutory deadline, but most of the costs should be covered by a previously planned upgrade that starts later this year.

CORE-CT was launched in 2003 under Lembo’s predecessor, Nancy Wyman, who was Malloy’s running mate last fall and now serves as lieutenant governor. The system, which has cost about $131.4 million so far, was designed to unify dozens of agency accounting and human resource systems–many written in different programming languages–and link them with central state financial networks.

Established by the Government Accounting Standards Board, GAAP requires expenses to be promptly assigned to the fiscal year in which they were incurred. Similarly, revenues are counted in most situations in the year in which they were received.

That’s not always the case under the modified cash basis system state government operates under, and CORE-CT–as it operates right now–isn’t ready to meet GAAP standards, the auditors wrote.

For example, purchase orders that are placed in one fiscal year but not completed until the next simply are rolled over, under CORE-CT, into the year when the goods or services actually arrive.

“Similar issues are found to affect revenue accounting,” the auditors wrote. Revenues earned shortly before the fiscal year ends on June 30, but not deposited until July or August, also tend to be assigned to the later year–a move that doesn’t meet GAAP standards.

Though that is a problem, Lembo noted that the irony is that CORE-CT was launched in 2003 to accommodate an eventual transition into GAAP rules. Wyman, who served as comptroller from 1994 through 2010 and now is lieutenant governor, has been one of the most vocal advocates for a GAAP conversion in state government.

“All of the tweaking that had to go on then with CORE-CT was to make it conform to our current situation,” Lembo said. “Frankly, all we have to do now is move in the direction that this product was built for.”

Lembo said the auditors’ characterization of CORE-CT as a “significant problem” on the path to GAAP conversion as a “reasonable observation,” but “this is fixable and–relatively speaking–not costly.”

CORE-CT has been upgraded numerous times since its inception and the next upgrade, planned to begin later this fiscal year, should be able to address the auditors’ concerns within the tentative project budget of about $20 million.

A second problem, according to Geragosian and Ward, is that a significant portion of state government never fully joined the CORE-CT system. Connecticut’s public colleges and universities, as well as the Legislative and Judicial branches, process transactions through their own accounting systems and then periodically enter the information into CORE-CT.

Lembo conceded some changes might need to be made to ensure the state’s system, under GAAP, receives information in a timely fashion. This could require both upgrades and staff training. “It’s a challenge, but it’s an anticipated challenge,” he said, adding that converting to GAAP has long been “a hard sell” in state government.

The legislature enacted a law in 1993 ordering a conversion, then routinely waived that requirement year after year as lawmakers and governors used an array of accounting gimmicks that pushed expenses into future years to balance finances in the short-term.

According to both the comptroller’s office and the legislature’s nonpartisan Office of Fiscal Analysis, state government would need an extra $1.5 billion on hand to fully follow GAAP principles. And that GAAP differential grows each year because of inflation.

The new budget Malloy and the legislature adopted during the regular legislative session would dedicate $75 million this year and $50 million in 2012-13 from projected surpluses to cover the inflationary growth and effectively freeze the GAAP differential at its current level.

Malloy and lawmakers also agreed that, starting in 2013-14, agencies would begin keeping their books under GAAP rules and Connecticut would pay down that $1.5 billion differential at the rate of $100 million a year for 15 years.