GASB WHITE PAPER ON FINANCIAL REPORTING
The Governmental Accounting Standards Board has published a new white paper, “Why Governmental
Accounting and Financial Reporting is—And Should Be—Different”. The paper compares governmental
financial reporting to the approach used in for-profit business enterprises and outlines specific
reasons why governments should be different.
First, governments have different purposes for their operations. As a general rule, governments are
providing services that the private sector is not interested in providing and probably, cannot provide at
a profit. For-profit entities strive to create wealth. Governments are actually trying to enhance or
maintain quality of life with services that are dictated by public policy goals. Commercial services must
meet return on investment goals. Governments have to at least consider efficiency, effectiveness, and
economy when they evaluate public policy.
Second, governments have a unique process to generate revenues—they tax with statutory authority.
Sounds ominous, doesn’t it? Commercial customers, for the most part, have a choice of what services
they purchase and where they buy. Not so for the governmental customer. Governments are the only
game in town for those services and customers cannot “opt out” of the program coverage.
Furthermore, that tax is usually not measured by how much you use the public services delivered by
the government. You may have never driven in Nebraska, but you have probably contributed a few
pennies toward the interstates there with your federal income tax return.
Third, governments have stakeholders who view the government’s financial report from diverse angles.
Commercial stockholders are looking for a return on investments. Those who read governmental
financial reports are interested in service delivery, ability to meet future obligations, and legal
compliance and how to keep “dem taxes” low!
And then there is that issue of longevity. Some companies have been around for a long time, but
governments are older than paper. Mergers, acquisitions, bankruptcies, sales, and closings are a
common phenomenon in the commercial sector. A government might reorganize debt with bankruptcy
proceedings and some cities or towns vanish now and then, but for the most part, once you create a
governmental entity, it spans the centuries.
Mix those distinctive characteristics and you have a host of different reasons why you even read a
governmental report or care about a government’s financial focus.
Citizens and their elected representatives are an exceptional group of users. They are as interested in
the “why” as they are the “how much” when they read a financial report. In theory, they should be
using governmental financial reporting to support their discussions of public policy—what services can
be delivered, what resources can be used to pay for those services, and who benefits.
Even creditors take a different view on a government’s financial health. The ability to tax, even create
a new tax, provides a unique revenue stream to repay debt. Underwriters want to know what other
services might compete for the government’s resources and if the government will be likely to levy
taxes when necessary to pay debt. I just hope they don’t hear all the “no new taxes” promises in the
election campaigns.
Government stakeholders have questions that are simply not addressed in the commercial approach to
financial reporting.
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Did we pay for current year services with current resources or did we shove that burden to
our grandkids?
Do we have the legal authorization to issue any more debt? How much of our debt capacity
have we used?
What are the spending priorities? Do those priorities match the public policy or the needs of
the community?
Can we continue to provide this level of service?
Are we wasting money or are we delivering services efficiently and making a difference?
Accounting Guidance
You really have to look at one basic premise—accountability to understand the differences in the
fundamental guidelines, the Concepts Statements. Compare the FASB Conceptual Framework with the
GASB version and you will find an annoying repetition of the word, “accountability.” But you cannot
underestimate the importance of that one premise. Governmental stakeholders are, theoretically
anyway, inherently involved in the decision-making process of our democracy, making political and social
decisions.
GASB Concept Statement 2, Service Efforts and Accomplishments Reporting, illustrates that users
are also quite interest in assessing NONfinancial performance of governments. This publication
outlines the framework for reporting on the economy, efficiency, effectiveness, and sustainability of
services. This nonfinancial information has a higher degree of importance for the governmental sector.
It’s not enough to talk money issues for program delivery, constituents also want assurance that tax
resources are used wisely.
Even capital assets get a different view. Businesses are concerned about whether their capital assets
can generate revenue in the future, preferably profits. Governments, on the other hand, consider
whether capital assets support services and sometimes look for extended lives that avoid additional
cash outlay. It has been said before, “Governments use a vehicle until the wheels fall off and then we
use it as a storage facility.”
Fund Accounting
There are two reasons governments rely so heavily on fund accounting. First, we frequently have strict
restrictions on the use of certain resources. When I first started in this business, we had a fund for
each pot of money. Now we are getting better at consolidating those resources where there are similar
purposes, but technology has also helped us segregate reporting and consolidate checking. The
importance of those legal compliance issues cannot be overrated. All too often, there is a specific
statute that allows a government to impose a tax or fee, with a specific purpose in focus for using
those resources. Users want to be able to open that annual report, find their pet project, and assess
whether the government has used those resources as they were intended.
Second, fiscal accountability is much more important for governmental activities than commercial
entities. Governments actually use a very unique measurement focus—current financial resource
flows—and the modified accrual basis of accounting to determine fiscal accountability for
governmental funds. Governmental funds are defined as those funds that are financed with general tax
revenues, rather than a user fee. It is a more short-term approach that allows readers to evaluate
whether the government had sufficient liquid resources to support those current out-of-pocket costs
required for governmental programs.
Fund accounting is about the only way you can address these issues.
Governmental Budgets
Governmental budgets mean something entirely different to users of the financial statements. Even if
Joe Sixpack does not read the year-end financials, he wants to know that his local government is
operating with a “balanced budget.” There are several definitions of “balanced” and he may not
understand the techno-speak definition, but he knows they should not spend more than they tax. Only
the federal government can print its own money, so state and local governments really do have to
“balance” or they will be creating new taxes to fix it.
Governments generally have separate publication requirements for budget adoption. And again,
theoretically, citizens are integrally involved in the budget process for a democratic government.
Elected representatives have the final say, in most cases, on what the “authorized appropriations”
include and those appropriations outline the services that will be delivered and how resources will be
spent. Governments adopt budgets even for the business-type activities that are funded with user
fees, water, sewer, gas or electric utilities, transit systems, ambulance services, just to name a few.
Those budgets are adopted as “laws”, with all the ramifications of illegal acts if the government’s
managers don’t follow that law. Changing budgets requires an act of Congress, literally. Well, maybe
just the town council, or the county fiscal court, or the state’s General Assembly. But it’s still a law
change and it takes as much effort to change the law as it did to enact it. Commercial entities have
nowhere near that kind of restriction on their budget process.
Using Financial Reports as Communication Tools
Citizens could be more involved in governmental budget decisions than they usually are. Sometimes
even the local officials are not getting the financial picture in focus when they choose programs or
services. If governmental financial reports were better communication tools, we might capture their
attention. Unfortunately, we spent too long in that corridor where the reports were too cumbersome,
too complex for elected officials to understand, too late in publication to even appear during the
budget process. We are playing catch-up now and the accounting profession should be more focused on
our users’ views.
In the commercial model, financials support management more often than stockholders decisions.
Stockholders care about the dividend, earnings per share, and perhaps a few other financial ratios, but
they are usually more knowledgeable than my Joe Sixpack. However, they don’t often show up for a
manager’s meeting on the department’s budget and are rarely invited to participate in that process.
Governments generally are required to give the public about a week’s notice that there is a budget
discussion on the docket. Often there are public hearings in connection with the budget process. And
very light public response.
Why not use the commercial model?
First, the research that GASB did for Statement 34 indicated that users are more interested than we
thought and if we did a better job of communicating, they would read the stuff we publish. The burden
is on the accounting profession to improve the communication, shift our focus to the citizen user
group, and translate the technical jargon to expand our audience. It really is our fault they lost
interest and we have to respond to their needs to bring them back to our library.
Second, there’s one point in the white paper that is surprising. State and local governments generate
20% of gross domestic product, employ 12% of the nation’s workforce, and issue more than $1.7 trillion
in bonds. That’s a chunka change! And more importantly, it emphasizes that financial information about
governments is significant. Readers, Joe Sixpack included, should be able to assess performance as it
relates to their issue.
Elected officials continually make choices on spending scarce resources. Every time they choose a new
policy, open a program, enact a zoning regulation, they impact the government’s financial ability to
continue services that affect our everyday quality of life. If the public really wants to stop deficit
spending or borrowing on the kids’ nickels, they have to read the financials and vote.