Government accounting has come a long way in the past several decades, in large part due to the efforts of GASB. But the standards setter operates under inherent constraints, and it cannot advance practice too quickly without the help of supporters and stakeholders. Better reporting is possible, but it requires looking to fundamental objectives and focusing on the information that matters most. By embracing the possibilities presented by existing technologies, the future of government reporting could be more transparent and user friendly for citizens and stakeholders.
In its April 2020 issue, The CPA Journal observed the 35th anniversary of the Government Accounting Standards Board (GASB) with “GASB at 35, A Look Back, A Look Forward” by David R. Bean, GASB’s longtime director of research and technical activities. Bean celebrated GASB’s many accomplishments and made a persuasive case that the board has fulfilled its objective, as set forth in its mission statement:
To establish and improve financial accounting and reporting standards to provide useful information to investors and other users of financial reports and educate stakeholders on how to most effectively understand and implement those standards.
Reflecting, perhaps, my recently completed 10 years as a member of the GASB board and resultant biases, I am in full agreement with the sentiments expressed by David Bean. Government accounting is appreciably improved over what it was 35 years ago. Much of the credit goes to GASB (and indeed to Bean personally).
GASB, however, is only one element of a comprehensive system of financial accounting and reporting, and its role in this larger universe is quite limited. Stepping back and assessing the universe of financial accounting and reporting from a broader perspective—one that captures other components as well—might leave an independent observer considerably less sanguine as to the progress made. Were an alien from another planet to try to make sense out of our current institutional arrangements and practices, it would most assuredly reject any notions of “intelligent” design—at least by sentient humans—and wonder how and why we got to where we are today.
While GASB may have primary responsibility for establishing government accounting and reporting standards, its influence and authority is limited, both de jure and de facto. It is limited de jure by its being under the supervision of the Financial Accounting Foundation (FAF). The FAF oversees and finances GASB’s operations, and appoints its members. It also “consults” with GASB on its agenda and thereby is able to exert considerable influence on the issues that the board opts to address.
GASB is limited de facto by it being dependent for its very existence on the support of its main constituents—the governmental entities for which it establishes standards. State and local governments have ultimate authority over the standards they adopt. Were GASB to get too far ahead of them in advancing practice (i.e., become too “progressive”), it would be leading a parade with no marchers. Accordingly, the key weaknesses in the extant financial management structure and reporting practices cannot be laid at the feet of GASB.
As recognized by the FAF, GASB need not consider accounting and reporting issues that other parties have already addressed satisfactorily. In a 2013 policy statement, GASB Scope of Authority, Consultation Process Policy, the FAF identified as one of the factors to be considered in determining whether a particular issue is within the GASB’s purview “whether any other group or entity is involved, better equipped to, or more appropriately positioned or designed to standardize information reporting and disclosure.” Implicit in this criterion is that in assessing the efficacy of any accounting practice, the emphasis should not necessarily be on whether it has been adopted as the result of a GASB standard; rather, it should be on whether it is appropriate under the circumstances, irrespective of whether it is mandated or recommended by GASB itself or another body. The benefits to governments’ constituents will be the same. In assessing the world of accounting as it is today and looking forward to the next 35 years, the focus should not be exclusively on GASB accounting standards. Instead, it should be broadened to include all accounting standards and reporting practices, regardless of who mandated them or if they were adopted voluntarily.
Relating Reports to Objectives
To highlight the extant limitations of government accounting and reporting today, one can start with the basics. Assume that our aforementioned alien popped into the introductory session of a course in governmental accounting. The professor is likely to start the class by posing some form of the following question: Which inherent characteristic of governments justifies differences in accounting and reporting between business and governments? A responding student might point to the obvious: the goal of a business is to earn a profit; that of government is to provide services.
As the class discussion continues, students might note that, consistent with its goal, a business reports profit as the “bottom line” of its income statement. The instructor may then point out that the bottom line of a government’s equivalent of an income statement (i.e., a statement of activities or a statement of revenues and expenditures and changes in fund balances) is quite similar—the excess of revenues over expenses or expenditures (adjusted for selected other events and transactions). Neither this statement itself, nor any other statement or note in a government’s Comprehensive Annual Financial Report (CAFR), provides any information as to the extent the government is providing the services expected of it. In no way does it speak to the quality and quantity of services provided or to the relationship between costs incurred and benefits received. The alien from afar might legitimately be puzzled as to how and why a key financial report of a government—its CAFR—fails to link the entity’s objectives to the resources expended to achieve them.
GASB has long recognized that the main aim of a government is to provide services and a key goal of financial reporting is to indicate the extent to which the government is realizing that aim (i.e., its accomplishments). In its very first concept statement, Objectives of Financial Reporting (1987), it set forth the following as an unequivocal objective:
Financial reporting should assist in fulfilling government’s duty to be publicly accountable and should enable users to assess that accountability by providing information to assist users in assessing the service efforts, costs and accomplishments of the governmental entity.
It subsequently followed up on this statement of objectives with two concepts statements devoted entirely to “service efforts and accomplishments” (SEA). In Concepts Statement 2, Service Efforts and Accomplishment Reporting (1994), GASB asserted that the provision of services is, indeed, the main function of governments:
The primary purpose of governmental entities is to maintain or improve the well-being of their citizens. To achieve that purpose, governmental entities are responsible for providing a wide variety of services. The entity’s efficiency and effectiveness in providing those services is an essential part of its performance.
In this same concepts statement, GASB went on to identify the key elements and characteristics of SEA and called for “extensive experimentation in measuring and reporting SEA before the GASB considers establishing SEA reporting standards.” In the second concepts statement pertaining to SEA, Concepts Statement 5, Service Efforts and Accomplishment Reporting, an amendment of GASB Concepts Statement No. 2 (2008), it clarified and expanded upon the provisions of the earlier concepts statement.
Between issuing the two concepts statements, GASB produced a series of 12 studies, each of which is directed to a specific service area (e.g., fire, road maintenance, public health) that identified appropriate performance measures and proposed how they might be reported upon. Furthermore, GASB researchers carried out, and published, case studies of 25 state and local governments to determine how they obtained and used SEA information. In culminating its extensive research effort in 2010, GASB issued Suggested Guidelines for Voluntary Reporting, SEA Performance Information. To this day, GASB maintains a website dedicated to SEA, the only topic to which it accords such recognition.
Our alien might wonder, “Why, after all this effort and the apparent importance attached to SEA, has GASB not yet issued a standard mandating SEA reporting?” The answer, of course, rests with opposition from powerful constituent groups. In 2007, eight major state and local government interest associations strenuously objected to a GASB plan to undertake a formal project on performance measurement. One went so far as to suggest that responsibility for government standards-setting be transferred from GASB to FASB.
To the credit of these public interest groups, none is opposed to SEA reporting per se. Rather, they don’t believe that it constitutes financial reporting as it applies to GASB’s mission of establishing and improving “financial accounting and reporting standards.” If indeed these organizations actively encouraged governments to report on SEA and there was evidence that governments in fact did so, then the need for GASB standards might well be unnecessary. Although there are governments that voluntarily issue exemplary reports of performance measures, most do not. Such reports are as essential today as they were when GASB issued Concept Statement 1 in 1987; they will be no less essential 35 years from now.
Most governments are subject to seemingly rigorous balanced budget mandates. Absent equally rigorous budgetary standards, however, these mandates can easily be circumvented.
Standards for What Really Matters
If the aforementioned alien remained in the introductory government accounting class, it would likely hear the professor ask the students to identify the most significant financial document issued by a government as opposed to a publicly owned business. In response, and after some discussion, the students would make it clear that, whereas the most significant financial document of a business is its annual report, that of a government is its budget. GASB, in its Concept Statement 1, explicitly acknowledged the primacy of the budget, noting that it is not only a financial plan but also an expression of public policy. Indeed, the budget encapsulates virtually all decisions of consequence made by the government, determining who receives the benefit of government services and who pays for them.
Today, budgetary principles and practices are typically within the control of either individual governmental entities or a supervisory body, such as a state educational commission. In light of the prominence of the budget relative to the annual report, the alien would understandably be puzzled as to why neither GASB nor any other national organization sets standards for budgets.
Probing further, the alien would soon become aware that the fiscal tribulations of governments today could be tied far more directly to their budgetary practices than to any shortcomings in their annual reports. Most governments are subject to seemingly rigorous balanced budget mandates. Absent equally rigorous budgetary standards, however, these mandates can easily be circumvented. Typically, for example, balanced budget requirements apply only to a government’s general fund or to a small number of other specified funds. Thus, governments can achieve statutory balance by transferring resources to the general fund from another fund, such as a rainy-day fund—the equivalent of consumers improving their fiscal well-being by moving money from their piggy banks to their wallets.
In addition, because most governments budget on a cash, or near-cash, basis, they can postpone to a future period expense recognition of costs applicable to the current period that do not require a current period disbursement. These may include, most prominently, contributions to pension and other benefit plans and payments for vacations. Similarly, they may recognize as current-year revenues receipts received in a current period but applicable to future periods. As a consequence, governments are able to side-step balanced budget mandates by engaging in the classic forms of fiscal legerdemain (e.g., delaying paychecks from the last day of a fiscal year to the first day of the next, advancing collections of sales and other taxes, and one-shot sales of toll roads and other revenue-generating capital assets).
The rationale for uniform budgetary standards is no less compelling than that for accounting and reporting standards. Uniform standards facilitate comparisons between governments and promote fiscal discipline.
Budgetary standards are currently outside of GASB’s sphere of influence because governments, particularly states, have been unwilling to yield control over their budgets to either GASB or any other outside organization. For obvious reasons, they enjoy the flexibility that goes with the absence of uniform standards that they themselves cannot establish. Lacking a major shift in political thinking, it appears fatuous to believe that this position will change.
Nevertheless, several jurisdictions have opted to budget on a GAAP basis, significantly reducing the opportunities for budgetary mischief. In the past, a fiscal calamity, such as that experienced by New York City in the 1970s, has led to budgetary reforms. The COVID-19 pandemic and the resultant fiscal tsunami that it generated may well be the impetus for more governments to require GAAP-based budgeting. If so, then even the absence of a single board with authority to establish budgetary standards, this would be a major step in the direction of sound fiscal practice. Paraphrasing Winston Churchill (among others), it would be a shame if this crisis were allowed to go to waste.
Looking to the Future
Were our inquisitive alien to wander beyond the classroom, it would almost certainly take note of the extent to which computers have permeated our environment. In the sphere of accounting, many, if not most, audit procedures previously performed “manually” are now carried out electronically. “Blockchain” links and records transactions among multiple organizations. Yet when it comes to the annual reports of state and local governments, the impact of computers is minimal—governments are still issuing what are essentially paper reports. To be sure, governments issue their CAFRs in a portable document format (PDF) that emulates “hard” paper copies. In this format they save trees and shelf space, and allow for electronic searches. But because their form and content are identical to the paper versions, they fail to take full advantage of computer capabilities. If our alien had any sense of earthly history, it would conclude that our current CAFRs are still in the technological stone age.
The rationale for uniform budgetary standards is no less compelling than that for accounting and reporting standards.
What can governments do in the next 35 years to advance financial reporting to where it should have been at the beginning of the 21st century, let alone 2055? For starters, governments can take the most obvious and most widely publicized step, in the direction of electronic reporting—that is, issuing reports in extensible business reporting language (XBRL) format. XBRL, as applied to financial statements, is an electronic reporting system in which issuers “tag” each item, such as a revenue, expense, asset, or liability, according to a common taxonomy. By ensuring that individual items of information have been similarly defined and classified, it facilitates user analysis and comparisons among entities. The feasibility of XBRL has already been demonstrated in the business world; the SEC mandates it for almost all publicly traded corporations.
The reluctance of governments to adopt XBRL is due in part to the difficulties of developing common taxonomies for state and local governments. After all, there are approximately 90,000 different governments; even governments of similar size and type currently aggregate and classify the elements of their reports differently. Many would be reluctant to incur the costs of changing to a uniform system of accounts. Still, progress is being made; XBRL US, a private membership organization dedicated to promoting XBRL, has issued a “demonstration” CAFR taxonomy for state and local governments, and several governments are experimenting with XBRL statements.
Moving up a level of technological sophistication, items on the basic financial statements could be linked to summary schedules, which in turn could be linked to detailed disclosures. For example, a typical government-wide balance sheet reports bonds payable by governmental- and business-type activity. The amount for business-type activity could be linked to a schedule indicating amount of debt by function (e.g., utility debt, airport debt, convention center debt). The total for utility debt could then be linked to a table showing the utility debt by specific utility (e.g., electric, water, waste water), which in turn could be linked to descriptions of each bond issued (e.g., amounts, interest rates, maturities). In that way, users who desire a specific level of detail could readily find it, while those who don’t would not be burdened with page after page of unwanted notes.
Continuing along the scale of complexity, the CAFR could incorporate electronic links to documents that are related to traditional financial reporting and relevant to users. Thus, for example, the financial statements could link a schedule of outstanding bonds to the offering statements of those bonds. This approach would have two benefits: First, it would add a measure of convenience to users who need the information included in the bond offering statement or other relevant documents, but would otherwise have to search elsewhere. Second, it could further reduce the size of the CAFR by eliminating information that is available from other sources.
If one were to build, from scratch, a government accounting model that would make sense to an outside observer, it would almost certainly be one in which annual financial statements relate to organizational objectives, budgets are subject to rigorous standards, and reporting takes advantage of modern technologies.
When this suggestion is presented to auditors, they commonly express a concern that because the financial statements contain links to information that they themselves might not have audited, they would nevertheless be held responsible for it; therefore, they fear being subject to increased risk of litigation. Such apprehensions, while most certainly understandable, could readily be put to rest if reasonable legal protections were in place. In one scenario, when users click on the link to an unaudited document they could be warned in large print, and required to acknowledge, that they are entering unaudited territory.
Although the benefits of such an enhancement to extant CAFRs are widely accepted, implementation would require the coordinated efforts of the actors involved in the reporting process: GASB, preparer organizations, and audit organizations. To date, none of these groups has publicly advanced such an undertaking.
To truly take advantage of 21st-century technology, government accountants should view traditional financial statements as but one element of a comprehensive information system that ties together virtually all aspects of a government’s activities—that is, the statements should be part of a “data warehouse.” Assume, for example, that a government’s public works department presently maintains a database indicating the condition of each street within its jurisdiction. That database could be linked to the city’s financial statements so citizens, via a series of clicks (infrastructure › streets › condition › zip code › street name) could learn the physical condition of the street on which they reside. While the practical implementation problems, including initial costs, of such a data warehouse approach to reporting cannot be minimized, it presents few, if any, technological problems that have not already been resolved in similar contexts. By way of comparison, for example, the federal government’s website (https://www.USAspending.gov) permits users to drill down from the approximately $7.4 trillion in total federal spending to a detailed description of each grant or contract awarded to an individual recipient. Although this website is not integrated with the government’s GAAP-based statements, and the reliability of the data has been questioned, it unquestionably provides a window into what citizens can, and should, expect to be the capabilities of state and local government reporting systems of the future.
If one were to build, from scratch, a government accounting model that would make sense to an outside observer, it would almost certainly be one in which annual financial statements relate to organizational objectives, budgets are subject to rigorous standards, and reporting takes advantage of modern technologies. Transforming our existing world into one that satisfies those basic criteria is not only a worthy goal, but also an attainable one—even within the next 35 years. But it is not one that GASB can achieve by itself. It will take a village.