THE COSTS OF LOCAL GOVERNMENT SERVICES HAVE ESCALATED IN RECENT YEARS, AND IN MANY CASES, LIMITED SOURCES OF REVENUE, LOW PRODUCTIVITY RATES, AND INEFFICIENCY HAVE COMBINED TO CREATE FISCAL INSTABILITY IN MANY MUNICIPALITIES. INTERNAL AUDITORS SHOULD BE AT THE HEART OF ATTEMPTS TO RESOLVE THESE FINANCIAL DIFFICULTIES. THEY ARE RESPONSIBLE FOR THE SWIFT IDENTIFICATION OF POTENTIAL PROBLEM AREAS SO THAT REVENUE AND BUDGET DECISIONS CAN BE RESOLVED OR DIFFICULTIES AVOIDED BEFORE THEY BECOME UNMANAGEABLE. WHEN UNITS OF OUTPUT CAN BE IDENTIFIED, THE INTERNAL AUDITOR SHOULD DEVELOP DATA BASES THAT MAY SUBSEQUENTLY BE VALUABLE FOR GOAL SETTING, STANDARD-COSTING, AND PERFORMANCE EVALUATION. CITIES BENEFIT SUBSTANTIALLY FROM INTERGOVERNMENTAL REVENUES AND FROM THE ISSUANCE OF DEBT. ALTHOUGH INTERNAL AUDITORS MAY BE UNABLE TO INFLUENCE THE FORMER, THEY MAY BE ABLE TO INFLUENCE THE INTEREST COSTS OF THE LATTER. CITIES IN FINANCIAL TROUBLE OFTEN ATTEMPT TO CONCEAL THEIR PLIGHT BY BORROWING TO EASE CASH FLOW PROBLEMS. INTERNAL AUDITORS SHOULD ENCOURAGE THE DEVELOPMENT OF ACCOUNTING TREATMENTS THAT FAIRLY DISCLOSE FINANCIAL DATA, REGARDLESS OF THE CONSEQUENCES. THE INTERNAL AUDITOR MUST BE AWARE OF EARMARKS THAT SHOW DETERIORATING FINANCIAL POSITIONS, PARTICULARLY WHERE THE ACCOUNTING SYSTEM IS BEING USED TO CONCEAL THE DISTRESS. INTERNAL AUDITING RESPONSES TO POTENTIAL ACCOUNTING ABUSES ARE LISTED, AND NEW YORK CITY IS USED AS AN EXAMPLE OF SOME ACCOUNTING ABUSES. ALSO, A GENERAL AUDIT PLAN IS DESCRIBED. FOOTNOTES ARE PROVIDED. (RCB)