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Weekly UpdatesThe special theme of this issue of Government Finance Review is accounting and financial reporting. The selection of this theme was triggered by the recent release of the newest edition of GFOA's classic "Blue Book," Governmental Accounting, Auditing, and Financial Reporting. The publication of the new GAAFR is a timely reminder of the crucial role GFOA has played in improving accounting and financial reporting for state and local governments since its inception almost 100 years ago. Last June also marked the 20th anniversary of the founding of the Governmental Accounting Standards Board, which just released a strategic plan to guide the Board's future standard-setting efforts. In light of these important milestones, it seems a particularly opportune time to step back and consider the future of accounting and financial reporting standards for state and local governments.
There is little doubt that the quality of financial reporting for state and local governments has improved markedly over the past 20 years. Today, financial reports are more comprehensive than ever and compliance with generally accepted accounting principles has never been greater. Indeed, more than 3,000 governments successfully participate each year in GFOA's demanding Certificate of Achievement for Excellence in Financial Reporting Program.
Along with these accomplishments, there are also some causes for concern. Financial reports have never been more voluminous or more costly to prepare than they are today. Moreover, the rate of growth of new financial reporting requirements shows no signs of abating, despite the completion of the new governmental financial reporting model. Perhaps then, this is as good a time as any to raise the question that must inevitably arise with any standard-setting or regulatory body--"How much is enough?"
Over the years, GFOA has developed a number of general principles to which it often appeals in responding to various GASB initiatives. We believe the GASB would do well to focus special attention on these principles in its future strategic planning and standard-setting efforts.
Accounting is a means to an end, not an end in itself. Every dollar spent on accounting is not available to provide services to citizens. Therefore, ensuring a proper cost-benefit relationship between possible new accounting standards and the likely cost of their implementation is crucial. In our view, much more attention needs to be paid to this vital principle.
Willingness to accept something for free is not evidence of genuine demand. There is no real reason for investors or creditors ever to say "no" to any kind of new information that might be proposed, since such information would cost them nothing. Therefore, absent a genuine initiative on the part of investors or creditors, any perceived enthusiasm on their part for proposed new disclosure requirements should be taken with more than a grain of salt, and certainly should never be treated as de facto evidence that a proper cost-benefit relationship has been demonstrated.
Less often is more. One of the tougher challenges of the current information age is sorting out the information most relevant for decision making from the vast amounts of data generated by today's state-of-the-art information systems. Financial reports cannot simply keep growing in size indefinitely to encompass every new type of information that becomes available. Rather, the GASB needs to make hard choices to ensure that the overall volume of financial reporting remains manageable. There is an old adage that "if you want to hide a book, put it in a library." Vital information can easily be lost or obscured when it is surrounded by a veritable sea of less important information.
Not every problem has an accounting solution. To someone with a hammer, everything tends to look like a nail. The GASB must resist the temptation to seek an accounting solution for what are essentially budgetary or managerial problems. Accountability is a much broader concept than accounting and is properly accomplished using a variety of reporting devices that include not only traditional financial reports, but also the government's operating budget, capital budget, and strategic plan.
You cannot be both scorekeeper and coach. Accounting must provide decision makers with the information they need to make informed decisions. It is not the role of accounting to attempt to drive decision makers to the "right" decision. This distinction is subtle, but crucial. The GASB must resist the pressure of those constituents who would have the Board place an accounting thumb on the decision-making scale in favor of their particular public-policy preferences.
The most important users of financial reports are citizens acting through their elected representatives. There is a troubling tendency in some quarters to dismiss governments as being "preparers" of financial statements rather than their principal users. While the needs of investors and creditors are important, they can never be allowed pride of place over the needs of citizens acting through their elected representatives. Indeed, this special role of elected officials is perhaps the single most important reason why a separate governmental standard-setting body is needed. Failure to keep this fundamental fact in mind can easily lead to the inappropriate imposition of the corporate model on public-sector entities.
GFOA is gratified by the progress made to date in accounting and financial reporting for state and local governments. The GASB can take justifiable pride in the contribution that it has made during its first two decades. The success of the GASB's future efforts, however, will depend upon how well it succeeds at following the principles just outlined. Accordingly, we urge the GASB to embrace these principles as its own in planning for the decade that lies ahead.
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