Can There be Government Accounting
Michael H. Granof
Ernst & Young Distinguished Centennial Professor of Accounting
McCombs School of Business, The University of Texas at Austin
October 31, 2011
Michael Granof is a member of the
Governmental Accounting Standards Board (GASB), the independent
not-for-profit organization that establishes and improves financial
accounting and reporting standards for state and local governments. He
is the Ernst & Young Distinguished Professor of Accounting, McCombs
School of Business, The University of Texas at Austin and a former
chairman of its Department of Accounting. He is also a Distinguished
Teaching Professor of Business and Public Affairs, Lyndon Baines Johnson
School of Public Affairs, the University of Texas at Austin. Prof.
Granof's research interests include governmental accounting,
not-for-profit accounting, financial accounting, and auditing. He is
the author, or co-author, of articles in many of the leading academic
and practitioner journals, including: Financial Accounting: Principles and Issues; Accounting for Managers and Investors; and Government and Not-for-Profit Accounting,
now in its fifth edition. He is a frequent speaker at professional
conferences, where he has addressed ethical issues in business and
public accounting; including bank bailouts and underfunded pension
funds. Prof. Granof has been a workshop leader for the State of Texas,
the City of Austin and several private organizations. He has won
numerous teaching excellent awards, including membership in The
University of Texas Academy of Distinguished Teachers. Prof. Granof
earned a Bachelor of Arts degree from Hamilton College; a Master of
Business Administration from Columbia University and a Ph.D. from the
University of Michigan.
**The views expressed in his lecture are strictly his own. They do
not necessarily represent those of the Governmental Accounting Standards
Board or the Federal Accounting Standards Advisory Board.**
Can There be Government Accounting Without Accountability?
I am especially honored to be here tonight and to have been
invited to give the Emanuel Saxe Distinguished Lecture in Accounting.
In part, this is for the expected reasons. Baruch College has an
outstanding history of being a leader not only in accounting education
and research but also in the development of accounting standards and
thought. Moreover, I am also, of course, pleased to be included among
the long-line of other accountants who have delivered the Emanuel Saxe
But beyond these reasons are those that are more personal.
First, David Saxe, Emanuel's son, was a classmate of mine in
P.S. 82 Junior High School and again at the Bronx High School of
Science. David's career as both a practicing attorney and then as an
eminent appellate court judge has been no less illustrious than that of
Second, Baruch's own Emanual Saxe Emeritus Professor, Abe
Briloff, has long been one of my heroes. I am firmly convinced that
Abe has been the single most influential academic accountant of the past
sixty years. When Abe speaks both Wall Street and accounting
standards-setters listen. They may do so reluctantly and they usually
don't like what they hear, but what he ways is too powerful and
persuasive for them to ignore.
Third, and perhaps most saliently, this invitation strikes an
emotional chord. Both my mother and my father were graduates of the
City University of New York (CUNY). My mother was a graduate of Hunter
College and had a career as a teacher in the New York public schools.
My father was a graduate of CCNY - what is now Baruch -- in 1932. He
came to the United States from Russia just a few years earlier. He had
no family in the United States save a distant relative and he did not
speak English. He attended Baruch at night and supported himself by
delivering newspapers. His route included some of New York's most
luxurious townhouses including that of your college's namesake. My
father earned New York State CPA certificate #4850 (they are now up to
#108,000) and spent his career as an independent practitioner.
Owing to Baruch College, both my brother and I have had the
opportunity to realize the American dream. As first generation
Americans we have had the best of educations and we have had unbounded
I mention this not merely to express gratitude to Baruch, but also because it is directly relevant to my talk today.
Governments today, at all levels, are in fiscal crises. One
result is that few, if any, tuition-free institutions of higher
education, remain in the United States. Hence, for both immigrants,
their children, and many, many others, the American Dream may become
nothing but a hallucinatory aspiration.
If governments –– those at all levels –– are to continue to
provide the services expected of them they will have to become more
efficient and more effective. Here is where accounting can play a major
role. Accounting can and should provide discipline, accountability and
transparency. As Prof. Briloff, has so often emphasized by quoting
from Justice Brandeis, "sunshine is the best disinfectant."
The title of my talk today is Can There be Government Accounting Without Accountability? But I considered an alternative: "Must Government Accounting's Future
Be in Its Past." The answer to both questions should be both
noncontroversial and obvious - a clear and resounding "no."
Regretably, this negative answer to my two questions is not
obvious to all. In my talk today I would like to address two
initiatives by which the Governmental Accounting Standards Board, the
GASB, is attempting to bring accounting into the 21st century. In both,
however, it is being thwarted by powerful interests that believe that
what was seemingly good enough for the past is also good enough for the
future. The first initiative will enhance accountability for
governments' performance – that is for achieving their goals; the second
will enhance accountability for their fiscal sustainability – for
assessing whether their current policies are adequate to enable them to
continue to provide the services expected of them in the future. Then, I
would like to suggest a means of facilitating the implementation of
The Government Finance Officers Association (the GFOA) is the
primary professional association of municipal accountants and budget
officers – those charged with preparing the budgets and financial
statements of local governments. In a 2006 resolution the association
made it clear that with respect to governmental accounting, it believes,
to paraphrase what the head of the U.S. Patent Office supposedly said
in 1899, "everything that can be invented, has been invented." (1) To quote from the GFOA's explanation of that resolution:
After operating for more than 20 years, the GASB has
essentially completed the major tasks that it was originally created to
accomplish (e.g., financial reporting model). The GASB's success has
left it with something of a dilemma. Either the board must transition
into more of a "maintenance mode" and focus primarily on addressing the
demand for accounting guidance as it arises naturally in practice, or
the board must actively seek creative new outlets for its
Not surprisingly, the GFOA opined that the GASB should opt for
the former – moving into a maintenance mode and leaving current
practice more or less as it was rather than seeking new outlets for its
standard-setting energies. According to the GFOA:
The GASB appears in recent years to be attempting more and more to find
an accounting solution to every financial problem (“to a man with a
hammer, everything looks like a nail,”). Thus also the GASB's insistence
that its charge extends not just to accounting, but to all aspects of accountability [emphasis added], thereby staking out a claim to set future reporting
standards for virtually all aspects of public administration, both
financial and nonfinancial. (2)
The GFOA has never backed away from that resolution and its
position is still representative of that of other preparer-oriented
It is precisely this issue of accountability that is central to my talk today.
For our purposes today I define accounting as the reports
that are in accord with generally accepted accounting principles and the
processes that generate such reports. Accountability, by contrast,
is the obligation to accept responsibility for one's actions. As it
relates to accountability, accepting responsibility for one's actions
includes providing the information by which interested parties can
assess not only whether they have achieved their objectives, but also
whether they have done so efficiently and effectively.
The primary goal of a typical business is to earn a profit,
and the “bottom line” of business accounting financial statements is
therefore profit or loss. Hence, with respect to entity performance,
the conventional business accounting report serves as a report on
accountability. Accounting equals accountability.
As is made clear in the first chapter of most any government
accounting textbook the objectives of a government are quite different
than those of a business. The objectives of a government are mainly to
provide various types of services to its constituents. If the financial
statements of a government are to report exclusively on monetary-type
historical transactions they cannot possibly provide the information
necessary to assess whether the entity has achieved its objectives.
Moreover, inasmuch as efficiency is defined as the ratio of inputs to
outputs – that of costs to productivity – neither can they facilitate an
assessment of efficiency. To me – and indeed to the GASB – these
purposes are not merely ancillary to accounting. They are its very
What I'm suggesting is hardly new. As early as 1913 the Metz Fund Handbook of Municipal Accounting declared in the third sentence of its introduction that one of the key
functions of accounting "is to locate responsibility for waste,
inefficiency, and infidelity; another is to make and preserve the
evidence of efficiency and proper regard for the duties and
responsibilities of office." (3)
Herman Metz, who provided the funding for the handbook and on whose
managerial achievements the work is based, was the controller of the
City of New York from 1906 to 1910. His office was a stone's throw from
where we are gathered today. Whereas it may be a stretch to say that
Metz was a proponent of the type of full-scale performance reporting
that I will argue for today, his handbook nevertheless included exhibits
of statements that related inputs (i.e., costs) to outputs – in other
words reports on what today we call service efforts and accomplishments.
To leap to relatively modern times, in 1987, the Governmental
Accounting Standards Board in its very first concept statement
established as a key objective of financial reporting that "Financial
reporting should assist in fulfilling government's duty to be publicly
accountable and should enable users to assess that accountability." It
went on to proclaim:
Financial reporting should provide information to assist users
in assessing the service efforts, costs, and accomplishments of the
governmental entity. This information, when combined with information
from other sources, helps users assess the economy, efficiency, and
effectiveness of government and may help form a basis for voting or
funding decisions. The information should be based on objective criteria
to aid interperiod analysis within an entity and comparisons among
similar entities. Information about physical resources .... should also
assist in determining cost of services. (4)
From 1989 to 1992 the GASB issued a series of reports
demonstrating the feasibility of establishing meaningful and measurable
operational objectives and of reporting on the extent to which they were
achieved. They did so for 12 different governmental functions,
including fire, police and sanitation. These were summarized in a 1990
report with a title that now seems ironic: Service Efforts and Accomplishments Reporting: Its Time Has Come. (5) Then, in 1994, it issued Concepts Statement No. 2, Service Efforts and Accomplishments Reporting. (6)
In this Statement the Board identified and developed the key
characteristics and elements of service efforts and accomplishment(SEA)
Since then the Board has conducted extensive research on the
appropriate means of SEA reporting. This research included surveys,
interviews with academicians and experienced professionals, and case
studies. Based on its research, and in an effort to encourage
municipalities to voluntarily provide SEA information, it has issued
reports and maintained a website that enabled governments to share their
experiences with others. Most notably, in 2008 it amended its earlier
concept statement to incorporate the most up-to-date thinking on the
issues and in 2010 issued, Suggested Guidelines for Voluntary Reporting of Performance Information, a comprehensive set of SEA guidelines. (7), (8)
The basics of SEA reporting are reasonably simple. For each
of the major services that they provide or activities in which they
engage, governments would establish and report measures of inputs,
outputs, outcomes and efficiency. Inputs are the financial as well as
nonfinancial resources applied to a service or activity. For a division
of a highway department responsible for road maintenance, inputs might
include dollar costs, personnel hours or tons of material. Outputs
might be the quantity of the service or activity provided, such as
number of lane-miles of roads repaired. Outcomes, which are closely
tied to outputs, add a qualitative dimension to the outputs and measure
the results associated with the service or activity. For the highway
department, they might include the percentage of roads in good or
excellent condition per specified objective criteria or even less
objective criteria such residents' ratings of the quality of the roads.
Efficiency measures are simply the ratios of the various inputs to both
the outputs and the outcomes. (9)
Today, almost twenty-five years after it issued Concept
Statement No. 1 the objective of reporting on service efforts and
accomplishments has not yet been achieved. Owing in large part to
opposition from preparer groups, the GASB has not yet issued a standard
that requires governments to report SEA information.
To put that in perspective, the Manhattan Project was
initiated in 1941 and the first atomic bomb was dropped in 1945.
President Kennedy announced the goal of landing a man on the moon in
1961 and we did so in 1968. Developing informative SEA reports is
neither atomic nor rocket science. But as we've seen in many other
contexts, political problems are often far less tractable than
Opposition to linking SEA and accounting measures can no
longer be justified as a rational reluctance to venture into the
unknown. In the United States, for more than two decades the federal
government has mandated SEA reporting. Its 1993 Government Performance
and Results Act has required federal agencies to establish performance
goals and to measure and report upon the extent to which they have been
Moreover, Concepts Statement No. 2 of the Federal Accounting Standards
Advisory Board (FASAB) (which establishes accounting standards for the
federal government at-large and each of its components) explicitly
directs that agencies include in their general purpose federal financial
reports a "statement of program performance measures." (11)
Today most federal agencies satisfy the FASAB requirements by
issuing a combined performance and accountability report (and actually
entitled "Performance and Accountability Report") that includes both
their traditional financial statements and the information mandated by
the Government Performance and Results Act.
United States standard setters are not the only ones that
recognize that financial information cannot be divorced from performance
measures. The International Federation of Accountants has also issued a
study in which it explicitly declares that the main constituents of
government's financial statements have an interest in nonfinancial data
and presents guidelines as to how the data should be measured and
Moreover, other countries, most notably New Zealand, require
that both national government agencies as well as local authorities
incorporate performance measures into their annual reports.
Specifically, New Zealand local authorities must include in their annual
reports information, the purpose of which is “to compare the actual
activities and the actual performance of the local authority in the year
with the intended activities and the intended level of performance as
set out in respect of the year in the long-term plan and the annual
With respect to service efforts and accomplishments reporting
as it applies to state and local governments, the future is already
here. However, due in part to economic challenges and disinterested
lawmakers, preparers are choosing to let it pass them by.
Governments must not only be accountable for performing the
functions assigned to them efficiently and effectively but they must
also be responsible for ensuring that they have the fiscal capability to
do so in to the future. Before year-end the GASB will release a
"preliminary views" document in which it proposes that governments
include in their annual financial reports "fiscal sustainability"
measures – most notably projections of future cash
flows. The rationale – seemingly incontrovertible – is that a
fundamental purpose of financial reporting is to enable users to assess
whether the government can both pay off its debts and provide the
services expected of it.
To say that this proposal is controversial is the ultimate
understatement. In fact, while the fiscal sustainability proposals were
a mere glint in the eyes of GASB, and before the Board had even begun
work on the project, the GFOA and other government-related associations
formally objected. They declared, that "the issue of assessing a
government's future fiscal sustainability clearly is beyond the scope of
accounting and financial reporting as they have traditionally and
universally been understood." (14)
While it is certainly true that "traditional" financial
statements have excluded measures of fiscal sustainability it is most
definitely not true that it is universally understood that that they
should continue to be excluded. In the United States, per FASAB
standards, fiscal sustainability information is now an integral part of
the federal government's Consolidated Financial Report. Further, the
International Public Sector Accounting Standards Board (IPSASB)
concluded in a recent report that, "the presentation of information on
long-term fiscal sustainability is necessary to meet the accountability
and decision-making objectives of financial reporting." (15)
The GASB, like the FASAB and the IPSASB, believes that
accountability for fiscal sustainability is not only within the scope of
accounting but, like service efforts and accomplishment information, is
essential to it. After all, if statement readers are not concerned
with the fiscal viability of government, then in what are they
Information on fiscal sustainability, no less than that on
service efforts and accomplishments, is consistent with the objectives
of financial accounting. As stated in Concepts Statement No. 1, Objectives of Financial Reporting, "Financial reports are commonly used to assess a state or local
government's financial condition, that is, its financial position and
its ability to continue to provide services and meet its obligations as
they come due." (16)
The idea that accounting reports should incorporate
projections is hardly radical. Accounting reports are intended to
inform decisions that will affect the future. Whereas the traditional
balance sheet and statement of activities focus on transactions and
events that have taken place in the past, they nevertheless do so with
an eye decidedly on the future. The basic accounting statements by
necessity incorporate any number of estimates and assumptions as to what
will take place in the future. Moreover, at the most fundamental level
they assume "going concerns." Further, the very definition of an asset
indicates that it is a resource that an entity owns or controls in the
expectation that it will provide future benefits. To
determine the value that we should assign an asset we forecast not only
the date at which the asset will be sold – perhaps decades in the future
– but the dollar amount that will be received upon its retirement.
Today, unfortunately, the financial statements of a state and
local government may give us no clue as to whether the government will
continue to provide services at the same level as it does today. To be
sure, the financial statements capture governments' explicit
liabilities. Bonds payable, for example, are accorded balance sheet
recognition and extensive details as to interest rates and repayment
terms are provided in the notes. Obligations derived from operating
leases, while not reported on the balance sheet, are at least disclosed
But think of all the known obligations that are not reported.
Consider, for example entitlements. Entitlements are payments in
either dollars or goods or services to which an individual or a lower
level government is entitled as a matter of law. Although the granting
government may have to appropriate the funds to support the program each
budget cycle, the enabling legislation, once enacted, remains in effect
until changed. For example, federal Medicaid laws stipulate that
states provide a specified level of medical care to eligible recipients.
Or a current law may provide that school children from families below a
specified level of income are entitled to subsidized lunches. Under
current accounting rules governments would not have to recognize either
an expense or a liability for the required payments until they are
actually due. As a consequence, payments that the government can
readily project as inevitable are not accorded recognition in either the
basic financial statements or the notes thereto.
Similarly, even without the explicit legislation attached to
entitlements, governments know that they will be expected to provide a
certain level of services in the future. More often than not the cost
of providing such services is readily predictable, at least within a
range. For example, if a school district knows that its school age
population is increasing, then it is almost certain that its costs will
also increase. But nowhere in the financial statements or notes thereto
will you be told about such inevitable future costs.
There are obviously sound reasons for the extant standards
that allow for this delayed expense and liability recognition of
inevitable costs. They are consistent, for example, with accepted
concepts of interperiod equity – those they dictate that the cost of
entitlements and services be recognized in the period in which the
citizenry benefits from them. Nevertheless, it would seem fatuous to
suggest that the expectation of costs to be incurred in the future is
irrelevant to the fiscal health today of the reporting entity and should
not therefore be reported in either notes or required supplementary
Financial reports that look only to the past can easily
mislead readers into believing that the future will be as bright as the
past. Take the 2010 Comprehensive Annual Financial Report (CAFR)of my
state, Texas. The government-wide balance sheet reported a healthy net
position of $132 billion, up by about $2 billion from the prior year.
The general fund had a healthy balance of $8.4 billion, down only
slightly from the 2009. Although the Management Discussion and Analysis
(MD&A)incorporated a few words of caution, I doubt whether even the
most sophisticated reader would discern from that CAFR that in 2011 the
state would be facing what some estimated to be a $28 billion budgetary
shortfall and that without structural changes in the tax system the
outlook for the more distant future was no brighter.
Compare this with the 2010 annual report of the U.S.
Government. This report leaves the reader with no doubt that based on
current laws the federal government faces a fiscal future that is not
merely bleak, but is unsustainable. Table 1 of Required Supplemental
Information (RSI), Long Range Projections of Federal Receipts and Spending indicates that the present value over the next 75 years of non-interest
spending less receipts would be $16.3 trillion. When interest is
added, the gap becomes far wider. More telling under the major heading
"Where We are Headed" and the subheading "Fiscal Sustainability" the
MD&A states categorically, "The projections in this Report indicate
that the trajectory of current policy is not sustainable. If current
policies are kept in place indefinitely, the debt to GDP ratio is
projected to exceed 350 percent in 2085 and to rise continuously
Moreover, in the interest of even greater candor the report notes
that, per generally accepted accounting standards the projections are
based on current law. Under current law (i.e., the Affordable Care
Act), expenditures for Medicare and Medicaid are projected to decrease.
Yet neither the trustees of Medicare nor virtually anyone else believe
that current law itself is sustainable. Therefore, the report itself
states explicitly that the projections included in the report understate
the severity of the fiscal gap. There is nothing wishy-washy or
unclear about that type of reporting. This, I believe, is precisely
what users want and to which they are entitled.
Most notably, per an FASAB standard adopted in 2009, the
consolidated financial report of the U.S. Government now includes a
statement that reports:
the present value of projected receipts and non-interest spending under current policy without change,
the relationship of these amounts to projected Gross Domestic Product (GDP), and
changes in the present value of projected receipts and non-interest spending from the prior year. (18)
Although this statement is now included in RSI, starting in fiscal 2013 it will become a basic financial statement. (19)
The GASB is now proposing to remedy the serious lacuna in
state and local government reporting. The GASB will soon issue a
preliminary views document outstanding, the title of which is Economic Condition Reporting: Financial Projections. In essence the proposed standard will require governments to present
the forward looking information that, at a minimum, is necessary for
statement users to assess the government's fiscal sustainability.
"Fiscal sustainability" is an elusive concept. Governments
do not typically face legal maximums that prevent them from increasing
taxes or fees and there are generally no legal minimums below which they
are prohibited from providing services. Therefore, in that sense
governments may almost always be fiscally sustainable. They can always
either raise taxes or cut services. In practice, however, there are
obvious constraints on the abilities of government to generate revenues
and to reduce expenditures. Beyond a point, higher tax rates reduce tax
collections and decreases in services lead taxpayers to "vote with
their feet" for a more friendly public environment, thereby contracting
the government's tax base.
The Board is proposing that governments should present five
specific indicators of sustainability, each of which would be based on current policies adjusted for any known events and conditions that affect the future.
Projections of major categories of cash inflows, both in dollars and as a percentage of total cash inflows
Projections of major categories of cash outflow (either by
program or function) both in dollars and as a percentage of total cash
Projections of financial obligations, including bonds, pensions, other post-employment benefits and long-term contracts
Projections of annual debt service (i.e., interest and principal)
A narrative discussion of major intergovernmental service interdependencies.
This last requirement, a narrative discussion of major
intergovernmental service independencies, is especially significant in
as much as approximately 29 percent percent of state and local
government revenues now come from the federal government. (20)
To paraphrase Prince Metternich, when the federal government sneezes,
state and local governments catch cold. We are clearly witnessing this
today. As the federal government cuts its expenditures, the costs of
providing services are passed down to the states. And as the states cut their expenditures – for education, for example – the burden must be assumed by local school districts.
Note that the proposed pronouncement calls for projections,
not forecasts. As a consequence, even if the standards were in effect
in 2007, the reports of state and local governments would not have
projected the downturn in tax revenues attributable to the recession
that began in 2008. The GASB is not demanding that state and local
finance officers become seers.
Relative to the federal government, state and local
governments face a special issue relating to projections. Unlike the
federal government, almost all state and local governments are required
to balance their budgets. Accordingly, if the projections reveal a gap
between revenues and expenses, they cannot, by law, be considered
reliable. Changes will have to be made. Either revenues will have to
increase or expenses decrease. That, however, is the very purpose of
requiring that projections – those based on current policy – be made and reported. They demonstrate that insofar as the expense
line on a graph is consistently above the revenue line, then current
policies are unsustainable and changes are in order.
From the perspective of a standard setter, a projection requirement raises a myriad of technical issues:
Over how many years should the projections be made? The federal
government projects revenues and expenses for a period of 75 years.
That makes sense for the federal government because its expenses are
driven in large part by social insurance entitlements, such social
security and Medicare, which by their very nature have to be assessed
over generations, not merely years. Local governments, however, have a
drastically shorter time horizon. The GASB has tentatively proposed
that the projections extend over a minimum of five years.
Should they be on a cash basis or an accrual basis? Governments,
like businesses, fail because they run out of cash. The GASB believes
that users are more concerned with flows of cash rather than flows of
income-type measures. Therefore the projections should generally be
cash based, with the exception that financial obligations should be on
an accrual basis.
Should capital outlays be reported separately from other expenses.
State and local governments typically budget for, and finance, their
capital outlays apart from other outlays. The GASB has tentatively
decided that they should be broken out from functional outlays (e.g.
public safety, sanitation, education).
For certain, any standards eventually issued by the GASB will
be principles based, allowing governments wide discretion in their
assumptions and means of making projections. Moreover, they will be
given ample opportunity to explain, justify and comment upon all aspects
of their projections.
Fiscal sustainability information is another example of the
importance of greater accountability and the need to bring accounting
into the 21st century.
Electronic Financial Reporting
To be fair to those who object to the GASB proposals
pertaining to both service efforts and accomplishments and fiscal
sustainability reporting, it must be noted that they do not suggest that
governments should not be accumulating information in those areas or
even that it should not be made public. Rather, they believe that it
should be separate and distinct from traditional financial reporting.
Their view is motivated, at least in part, by the difficulty of
interfering with the typical organizational boundaries within individual
governments. Whereas traditional financial information typically is
accumulated and reported by one department – that of a comptroller, for
example, – performance data are scattered among various functional
departments, and financial projections are often within the province of a
budget or economics department.
Twenty-first century technology can and must be marshaled so
as to achieve twenty first century accountability. Both computers and
access to the Internet are now nearly ubiquitous and that means that
financial reporting must advance beyond paper and the printing press.
Cyberspace is virtually unrestricted by either internal or external
informational boundaries. The technology is now in place to
dramatically increase not merely the amount of data, but more importantly the amount information provided to users. Best of all, this can be done without causing
information overload, for users will be able to pick and choose
precisely the types of data that they want.
Today, all but the smallest of governments post their annual
financial reports on the Internet. Often the reports are in Pdf format.
In this format the computer and the Internet serve little more than as
a high-speed postal service, delivering on screen what was previously
delivered in a spiral-bound book.
The obvious means of enhancing accountability is through
added disclosures; that is more notes and more pages. As annual
reports get lengthier and lengthier, that will no longer be a
satisfactory response. The 2010 annual report of the United States is
250 pages. That of the City of Austin is 218. Both are far too long to
be easily navigable, most definitely for non-accountants who might be
unaware of where to find the information they are seeking.
Electronic financial reporting can take many forms, ranging
from posted reports on the Internet (e.g. in Pdf format) to full scale
"data warehouses." Data warehouses (in essence large data bases
uploaded from operational systems) have the potential to fully integrate
just about all data – financial and nonfinancial – gathered and stored
by a government.
As emphasized earlier, financial information has significance
only when related to what is typically considered to be nonfinancial
information, most notably that relating to service efforts and
accomplishments. Such nonfinancial information is not typically
maintained or reported by the department of the government that is
responsible for preparing the government's annual financial statements.
Rather it is maintained by the various operating departments – in the
case of a city, for example, the police, fire, and recreation
departments. Modern computers, however, can readily link the data
systems of the department that prepares the financial reports with those
of the operating departments.
Consider the following. The annual report of a city currently
indicates the total dollar amount spent on police. That number is
certainly of relevance to many types of judgments. Of even greater
concern to many citizens is the amount spent in their own police
precinct and how it compares to expenditures both in previous years and
in other precincts. Leaving aside issues of how to allocate common
city-wide costs, that amount is either already available in computer
files of the police department or can readily be calculated. Moreover,
citizens are interested in results; that is, to what extent the amounts
being spent are accomplishing what they are supposed to. Such
information, whether on arrests, response times, complaints, etc. is
also available. The technology to provide that information, to link it
to the traditional financial data and to make it accessible, is
available today – and in fact has been for many years.
The reluctance of both governments and standard setters to
take the necessary giant steps towards developing a reporting system
based on full scale data warehouse is readily understandable. In an era
of fiscal exigency, there is little incentive for them to do so. Such a
system would be costly and would raise any number of issues as to the
responsibility of the government's independent auditors for expressing
an opinion on the new types of information.
Nevertheless, there is less excuse for failing to take at
least baby steps in the direction of enhanced electronic reporting. As a
minimum, for example, electronic versions of reports can and should
link key numbers with related notes, tables and schedules. If an item
on the balance sheet includes a parenthetical reference to a note, a
reader should be able to click on that reference and be directed to that
note. Similarly, if an expense is an aggregated amount, the reader
should be able to click on it and be presented with the relevant
Taking a mini step beyond that, reports of independent but
related entities can also be linked. For example, an employer's pension
plan is generally a fiscal and accounting entity separate from the
employer itself. Yet to understand the pension liability of the
employer it is necessary to understand much about the assets that are
held in the plan. Accordingly, much of the information reported in the
plan's financial statements is repeated in the employer's financial
Wouldn't it be more efficient, however, if the employer,
rather than reporting the same information as the plan itself would
simply contain an electronic link to the financial statements of the
plan? Not only would readers of the employer's report have immediate
access to more information, but the report would be much less voluminous
and hence considerable more manageable.
Going a step further, electronic financial reporting can
provide far more information than do extant conventional reports – but
only the information that users actually want. Electronic reporting
could enable users to "drill down" to the depth of data that they find
useful. A typical CAFR of a fair-sized municipality contains page after
page of text and schedules providing data on outstanding bonds. (21)
Among the data are issue dates, interest rates, principal outstanding
and range of maturity dates. Almost certainly these data cause the eyes
of the vast majority of statement users to glaze over. Yet other users
– perhaps bond dealers – may want even more information – perhaps, for
example, the specific maturity dates and projected cash flows associated
with each bond issue. Electronic reporting would enable the user to
click on an individual bond and then be directed to a menu of detailed
schedules or notes providing far more detail than can possibly be
incorporated into paper reports. Indeed, there is no reason why the
complete bond prospectus itself should not be more than a click away.
Similarly, electronic reporting facilitates the settlement of
disputes over preferred bases of reporting. Disregarding the costs of
making appropriate adjustments to the accounts (which admittedly may not
be trivial), the cost of providing alternative statements, each on a
different basis, now becomes minimal.
Although the costs and benefits of electronic reporting are
also applicable to businesses, electronic reporting is more suitable for
governments than for businesses. In governments, as compared with
businesses, almost all information is in the public domain. In fact, in
many governments much of the information that is of interest to
citizens is already posted on their web sites. A data warehouse,
therefore, is mainly a means of linking what is already available.
Governments today face unprecedented fiscal constraints and in
light of the difficulties of merely maintaining services at their
current levels, it is understandable why neither elected officials nor
their constituents place high priority on improved financial reporting.
But that is a serious misjudgment. To minimize the impact on the
services that they provide, governments will have to operate more
efficiently and effectively. Improved financial reporting is central to
achieving that objective. Accounting matters. What we measure is what
I'm here today because of what institutions of government –
and specifically Baruch and the City University of New York -- did for
my parents. As accountants – as current and future members of a
profession dedicated to serving the public – it is incumbent upon us to
make certain that that the American dream remains the American reality.
That means ensuring that accounting of the future advances beyond that
of the past and that accounting is not divorced from accountability.
This quote is widely ascribed to Charles H. Duell, Commissioner, U.S.
Patent Office, who alleged said it in 1899. However, a web site (http://www.quotationspage.com/weblog/2005-08-26-239/) refers to the statement as "one of those classic misquotations."
(2) Government Finance Officers Association. “The GFOA's position on the Governmental Accounting Standards Board (GASB).” Government Finance Review, Vol. 23, No. 2 (April, 2007), p.3.
(3) Bureau of Municipal Research. Handbook of Municipal Accounting (New York and London: D. Appleton and Company), 1913. p. ix.
(4) Governmental Accounting Standards Board. Objectives of Financial Reporting, Concepts Statement No. 1, 1987, para. 77.
(5) Governmental Accounting Standards Board. Service Efforts and Accomplishments: Its Time Has Come, An Overview, 1990.
(6) Governmental Accounting Standards Board. Service Efforts and Accomplishments Reporting, Concepts Statement No. 2, 1994.
(7) Governmental Accounting Standards Board. Service Efforts and Accomplishments Reporting, An Amendment of GASB Concepts Statement No. 2, Concepts Statement No. 5, 2008.
(8) Governmental Accounting Standards Board. Suggested Guidelines for Voluntary Reporting of Performance Information, 2010.
(9) These definitions and examples are drawn from, Service Efforts and Accomplishments Reporting, An Amendment of GASB Concept Statement No. 2, Concept Statement No. 5, 2008, para. 8.
(10) U.S. Congress. Government Performance and Results Act of 1993, Public Law 103-62.
(11) Federal Accounting Standards Advisory Board. Entity and Display, Statement of Federal Financial Accounting Concepts 2, 1995.
(12) Public Sector Committee of the International Federation of Accountants. Performance Reporting by Government Business Enterprises, Study No. 7, 1996.
Local Government Act 2002 No. 84 Public Act, Part 6 Planning,
decision-making, and accountability, Subpart 2, Reporting, Reprint as at
27 November 2010.
(14) Government Finance Officers Association. Public Policy Statement. The GASB Should Not Set Standards for Fiscal Sustainability Reporting, June 8, 2010.
(15) International Public Sector Accounting Standards Board. Reporting on the Long-Term Sustainability of Public Finances, Consultation Paper, 2009.
(16) Governmental Accounting Standards Board. Objectives of Financial Reporting, Concepts Statement No. 1, para. 34.
(17) Department of the Treasury, 2010 Financial Report of the United States Government, p. 17
(18) Federal Accounting Standards Advisory Board. Comprehensive Long-Term Projections for the U.S. Government, Statement of Federal Financial Accounting Standards No. 36, 2009.
(19) Federal Accounting Standards Advisory Board. Social Insurance: Additional Requirements for Management's Discuss and Analysis and Basic Financial Statements, Statement of Federal Financial Accounting Standards No. 35, 2010.
(20) Edward J. Mazur, "Our Nation's Governors – Walking a Tightrope Without a Net," Journal of Government Financial Management, Vol. 60, No, 2 (Summer 2011), p. 13.
(21) Note 10 ("Debt and Non-Debt Liabilities") of the City of Austin's 2010 CAFR was 20 pages.