The Black article is a scholarly summary of the long history of government GAAP and an explanation of the rationale for several differences from commercial GAAP. Accordingly, I believe the article would make a useful training tool for young staff. Black’s criticism of modified accrual basis reporting and his implied support for probable future improvements to the current model that he characterizes as “not major” follow:
GASB recognizes that the governmental fund reporting model was built on accounting conventions developed over the past 120 years that are conceptually inconsistent, and is attempting to eliminate that conceptual inconsistency. While GASB has explored many other models, ranging from reporting governmental funds only on a budgetary basis to restructuring the fund model and introducing an economic resources measurement focus, it has tentatively concluded that the proposed basic financial statements still need to present short-term, long-term, detailed, and aggregate information, and that this information should be principles based.
I like the Weinberg proposal better, however, particularly because it strongly advocates total abandonment of the second set of “basic” financial statements required by GASB 34. I also support Weinberg’s posture on the CPA exam, because I believe few CPAs ever experience government accounting. And why should government be singled out in the CPA exam among the many special industries that have their own unique accounting practices? And why does it need its own GAAP, instead of merely a set of special provisions within GAAP covering its unique circumstances like other industries?
Black asserts that governments are accountable to three categories of stakeholders: 1) the citizenry, 2) legislative and oversight bodies, and 3) creditors (primarily bond-holders). However, government financial statements have evolved so as to become so complicated that it is highly doubtful that many in the first or even the second category can understand them. And in my opinion, the dual presentation required by GASB 34 contributes significantly to that condition.
Despite the reporting improvements introduced by GASB 34 that Black characterizes as “monumental,” (i.e., the use of full accrual accounting), it appeared on the surface when it was first issued that the GASB clung to the old reporting format primarily due to psychological anchoring (i.e., “we should keep doing that way because that’s the we always did it”). However, Weinberg implies—less than subtly—that the practice is grounded in a desire to mislead users as to the reporting government’s long-term financial health by supporting claims of balancing its budget in the short term. One might also argue that merely showing a conceptually unsound, modified accrual basis presentation as a “basic financial statement” on an equal footing with a full accrual basis presentation is misleading in and of itself. On the other hand, presentation of certain principles-based, short-term information in the notes or as supplemental information might more easily accomplish GASB’s objectives without the undue confusion of the current GASB 34 model.
I might add that the dual presentation of “basic” financial statements on both the full and modified accrual basis, as currently required by GASB 34, adds to the audit burden and either layers on unjustifiable costs or creates pressure on auditors that often results in sacrificing audit quality—certainly not in the public interest! And since the modified accrual basis financial statements presented are conceptually unsound, without regard to whether audit scope shortcuts were taken, a clean audit opinion thereon has the potential of presenting a false sense of reliability. Note that this article was written prior to the June 2020 GASB proposal referred to in the author’s response below.
The Authors Respond
I would like to thank Howard Levy for his compliment and support of my idea to eliminate government GAAP. My hope is others will join in this initiative.
Levy also mentioned that GASB is considering making changes to the “modified accrual basis” of accounting used to report governmental funds, including the general fund. In most governments, the general fund is the largest budgeted fund and the annual budget deliberations are the most important and time-consuming financial decision-making activity. An accurate accounting of the general fund, therefore, is critical.
GASB has acknowledged that the “modified accrual basis” uses a “current financial resources measurement focus” that has no “conceptual basis.” Under the modified accrual basis, the governmental fund statements report loan proceeds as inflows and do not include long-term liabilities. Included in the general fund, for example, is only what the government chooses to pay into its pension systems, not the total pension costs incurred. Those who read these governmental funds statements may find a large, positive general fund balance while the government owes millions, if not billions, of dollars to their pension systems.
These misleading budget calculations have allowed elected officials to ignore the long-term financial consequences of their budget decisions and resulted in the accumulation of hundreds of billions of dollars of pension and retiree healthcare debt.
On June 17, GASB issued an exposure draft, “Recognition of Elements of Financial Statements,” which outlines a change from the “current financial resources measurement focus” to the “short-term financial resources measurement focus.” In reality, this would entail a few small changes, but GASB would be able to claim a conceptual basis for the new focus.
One of GASB’s main arguments for keeping a shortsighted focus is that it most closely mirrors the way governments do their budget calculations. While this may be true, the desire to follow politically driven calculations that include loan proceeds as revenues and exclude unpaid expenses is saying that “two wrongs make a right.” These misleading budget calculations have allowed elected officials to ignore the long-term financial consequences of their budget decisions and resulted in the accumulation of hundreds of billions of dollars of pension and retiree healthcare debt, while elected officials claimed they had balanced budgets. Flawed general fund accounting has supported these false claims.
Governments are now experiencing unprecedented financial difficulties. The ones that had large amounts of debt before the current crisis, including unfunded pension liabilities, will most likely experience the worst problems. As these governments are seeking federal aid, concerns are being raised, but—thanks in part to shortsighted accounting rules—it may be too late. Readers are urged to read GASB’s Exposure Draft and provide comments by February 26, 2021.