With the national debt approaching five trillion dollars, annual deficits exceeding 250 billion dollars, and the interest alone on the debt now in excess of 200 billion dollars each year, the need for a concise, independently audited report on the operation and financial condition of the U.S. government, using meaningful accounting principles, has never been more obvious.
Nevertheless, some accounting professionals believe that the federal government is an entity so different from any other, with its virtually unlimited (except through political constraints) taxing and borrowing authority, that conventional accounting, budgeting, and reporting standards do not apply to it. Others throw up their hands and say that because there is no Moodys' and Standard and Poors' rating on federal bonds, political, not economic, considerations control the flow of federal funds and their accounting, budgeting, and reporting. And the most cynical among us argue that the federal government is really driven by Congressional taxing and spending legislative authority, and since Congress is controlled by self-serving politicians who have exempted themselves from much of the important legislation imposed on the private sector (for instance, Securities and Exchange Commission enforcement mechanisms), financial accountability based on fairness, independence, and objectivity is impossible. But I believe these are the very reasons that the accounting profession, particularly professors of accounting, need to take the lead in bringing financial accountability to Capitol Hill.
The public is becoming increasingly aware of the problem, and public attitude may be summed up by the following funny story circulating in these days of higher deficits and an ever-escalating national debt: A survey was taken in which several professionals were asked, ''What happens when the outflow exceeds the inflow?" An accountant responded that the result was a "DEFICIT." A banker answered "OVERDRAFT." An electrician said ''BLACKOUT." And a congressman, not surprisingly, replied, "WHAT'S THE PROBLEM?"
"Well, Congressman, believe it or not there is a problem! But first let me say that accountability is not a Republican, Democrat, liberal, or conservative issue. It is a good government issue, which must be resolved in a non-partisan way and for the public's benefit, including future generations. Now, having said this, I will begin to make the case for truth in federal budgeting, accounting, and reporting based on the fact that the U.S. government controls and directs cash resources in excess ofl.5 trillion dollars each year. And, at a time when Congress must make important decisions on current and future priorities and commitments, the financial information necessary to make those decisions is defective or even lacking.
Weak government-wide budgeting, accounting, and reporting systems produce insufficiently reliable information about how the federal government spends its funds and how decisions made today will affect tomorrow's taxpayers. The budgeting process commonly relies on imaginary revenues, ignores unfunded obligations, and makes use of numerous other practices lacking economic and accounting reality. The absence of meaningful federal accounting principles leaves the government using an accounting system that emphasizes cash flow, even though major new financial commitments are made and new liabilities incurred. This easily leads to the manipulation of deficit reduction targets by moving payroll checks and other payments from one fiscal year to another.
HONEST ACCOUNTING, BUDGETING, AND CLEAR REPORTING
As an accountant in private practice, I often found myself trying to straighten out clients who had good intentions but bad bookkeeping practices. After twenty-two years at Arthur Andersen & Co., I found that the best approach is to make up a step-by-step list of what it takes to convert a poor set of books into a good set. This is no secret. Every good CPA does the same thing, making use of appropriate accounting principles and practices.
Admittedly, applying Generally Accepted Accounting Principles (GAAP) to the federal government is much more difficult and uncertain than applying them to a large multinational, multi-industry private sector enterprise. And when it comes to providing useful information to 535 members of Congress, the process by which budgetary decisions are made would require even greater attention.
Nonetheless, I believe basic reforms can and should be made right now. Refinements, enhancements, and the quest for perfection can come later on. What follows is a step-by-step program for getting the federal government back on track.
Install Accrual Accounting
The federal government must abandon its antiquated mom-and-pop style cash accounting system in favor of more sophisticated accrual accounting, which reflects actual liabilities and future commitments. Since cash accounting ignores government obligations to spend money in the future, it gives a disastrously incomplete and inaccurate picture of where the government really stands. It also predictably allows legislators to favor today's voters at the expense of tomorrow's taxpayers.
Congress's motto seems to be "out of sight, out of mind" whenever the question of accrual accounting is raised. Unfortunately, what is out of sight today tomorrow's bills will surely come back like Marley's ghost to haunt future Congresses and taxpayers alike. With rigorous accrual accounting principles we are forced to face the true financial facts now, instead of enduring sudden and ugly surprises, including bailouts, later.
In October 1990 a breakthrough agreement was reached on the creation of a Federal Accounting Standards Advisory Board (FASAB) to define GAAP for the federal government. The Board is composed of representatives from Office of Management and Budget (OMB), General Accounting Office (GAO), Treasury Department, Congressional Budgeting Office (CBO), Department of Defense, Department of Energy, the Government Accounting Standards Board, and the accounting profession. To date FASAB has agreed on a mission statement, interim financial standards, and several exposure drafts on financial resources.
FASAB must work expeditiously to agree on a set of Generally Accepted Accounting Principles for federal government operations. Such principles will likely require the use of accrual-based accounting, including realistic treatment of all unrecorded and contingent liabilities.
Implement Capital Budgeting
We badly need capital budgeting and accounting that more accurately matches the cost of capital outlays (and in some cases inflated replacement value) with the useful life of the asset purchased. This is, in a sense, the flip side of the unrecorded liability-in effect, the "one-year lifetime" asset. (Unfortunately, from a solvency standpoint, our unrecorded liabilities far exceed our unrecorded assets.)
It is obviously ridiculous to "expense" major capital items-write them off in only the first year when they may have a 30- or 40- year service life. Not only is this false accounting, but it results in a bias against capital investment. If the budget has to take the full hit the first year, the chances of Congress approving the expenditure are reduced. And, as a result, the federal government develops a bias toward renting instead of buying or building, which clearly would be more economical over the useful life of the asset.
Integrate Budgeting and Accounting Standards
When implemented, audited financial statements would normally be due nine months after the end of a fiscal year. Budget formulation usually begins as much as 18 months (if not more) before the beginning of a fiscal year. Thus the life span from budget initiation to final accounting and reporting is usually as long as four years. Because of this long-time span, final accounting occurs far too late to have any impact on misleading budget practices and spending authorizations that occurred many months earlier in the process. I encourage the FASAB (in conjunction with OMB and the Chief Financial Officer) to develop and administer budgeting standards consistent where possible with FASAB accounting standards and to apply audit oversight for compliance during the budget formulation and execution stages. In this way, unsupportable budget requests and spending authorizations can be identified at a point in time when corrective action can most effectively be taken and misleading or manipulative budget and spending practices can be eliminated.
Adopt Separate Budgets for General Funds, Trust Funds, and Government-Sponsored Enterprises
Under present budgeting practice, enterprises as diverse as the National Park System, Social Security, NASA, food stamps, weapon purchases, home mortgage insurance, and the Export-Import Bank are lumped together in one budget document, even though their activities are vastly different. Most current federal operating expenditures are made from annual receipts; other financial activities are supposedly based on actuarial considerations; yet other government enterprises are commercial operations similar to private business.
In October 1989, the Comptroller General proposed that the federal government should account for and report on separately for general funds, trust funds, and government-sponsored enterprises (GSE), instead of treating all three as economically equivalent. Under such a reporting plan, trust fund surpluses (notably those of Social Security) could no longer be used to reduce deficits in the General and GSE parts of the budget. The GSEs could be run more like business enterprises, without the constant threat of fiscal demands driven by a political need to show a smaller "budget" deficit. Overall, such tripartite reporting would give Congress and the public a far more accurate picture of the federal government's spending activities.
Adopt Biennial Budget Cycles
A two-year budget cycle, corresponding to a Congressional term of office, would require Congress to authorize spending only once in two years. Since about 60 percent of votes in Congress are budget related, stretching the process over two years would leave a great deal of time for badly needed program oversight. In the second year of the cycle, Congress would only have to pass appropriations bills carrying out the terms of the previous year's budget resolution. The adoption of this reform must be accompanied by strict discipline so that supplemental budget amendments and appropriations bills are not used to augment the basic budget decisions in the first year of the cycle.
Publicize the True Financial Condition of the Federal Government
While the Treasury's Financial Management Service (FMS) has made important steps forward in recent years in presenting the state of the nation's finances, the absence of meaningful accounting principles and capital budgeting, the complexity of the often inconsistent information collected through the many different accounting systems used by the federal agencies, and the inaccessibility of reports have made the FMS statement of interest only to financial specialists.
A concise, independently-audited, GAAP-consistent report on the operation and financial condition of the U.S. government, including its revenues, expenditures, assets, and liabilities, as required by the Chief Financial Officers Act, ought to be made readily available to the public and to the news media. Consideration should be given to including more extensive information as part of the brief summary report that appears at the beginning of the annual 1040 individual income tax forms and instructions package distributed to all taxpayers each January.
Strengthen the Chief Financial Officer System
The CFOs Act, enacted by Congress and signed by President Bush in 1990, offers an opportunity for the most comprehensive and far-reaching financial management reform since the Budget and Accounting Procedures Act of 1950. It does so by establishing a financial management leadership structure in the 23 agencies covered by the Act and in OMB, providing for a long-range financial management planning process, requiring verified financial information and strengthening accountability reporting.
The chief financial officers appointment in each agency pursuant to the CFOs Act should be professionally competent in applying the budgeting and accounting standards established by the FASAB. The CFOs should be subject to the same high-level performance qualifications required of the Deputy CFOs. (The statute unfortunately requires high-level professional qualifications only for the Deputy CFOs). The CFOs must be given the full support of the President and the Office of Management and Budget.
THE ACCOUNTING PROFESSION MUST DRIVE REFORMS
America sorely needs a spark plug to bring the financial management structure of our national government back under control. The overarching, crying need is to generate an explosion of citizen demand for a government that is not only up front and candid, but honest with its numbers. As long as the federal government-Congress and the executive branch-continues to falsify the true accounting of our nation's taxing, borrowing and spending, none of us can have any clear idea of where we stand and what we must do. Honest accounting, the essence of public accountability, is at the heart of every needed reform.
Thomas Jefferson was right when he said to James Madison that "the accounts of the United States ought to be, and may be made, as simple as those of a common farmer, and capable of being understood by common farmers." As president, he instructed his Treasury Secretary Albert Gallatin:
"If ... there can be added a simplification of the form of accounts in the Treasury Department, and in the organization of its offices, so as to bring everything to a single centre, we might hope to see the finances of the Union as clear and intelligible as a merchant's books, so that every member of Congress, and every man of any kind in the Union, should be able to comprehend them, to investigate abuses, and consequently to control them."
Mr. Jefferson had the right idea. Unless the people can control their government, it is no longer theirs. And until the government is made to account and report honestly, fairly, and openly for what it does with the money it spends today and holds for the future, the government is not under the control of the people.
From where I sit as a CPA and former congressman, it is especially urgent that both the teachers and the practitioners of accounting bring their expertise to bear on the nation's fiscal crisis. When I left Congress at the beginning of 1989, there were 276 attorneys in the House and Senate and no practicing accountants. Today, there are 535 members of Congress who are presiding over an annual budget of more than 1.5 trillion dollars, but who are not as concerned with the bottom line as they are with their own perpetuity. Consequently, American citizens are not getting a good count. In fact, they are getting a terrible count. Without accounting reforms and budgetary discipline, the federal books will continue to be cooked and the country could ultimately collapse (or, at least, our quality of life could significantly deteriorate) for lack of a sound financial infrastructure.
The accounting profession as a whole needs to recognize that, increasingly, it is no longer political discourse, but rather economic discourse that is shaping our lives as we move into the twenty-first century. For this reason, I think that it is imperative, from ethical and strategic standpoints, that the people who are the best at thinking about accounting and financial matters become direct participants in the drive for accountability and financial management reform of our massive federal government.
THE ULTIMATE REFORM: TRUTH IN GOVERNMENT
It is time that concerned members of our profession put together a truly compelling movement to tell our elected officials loudly and clearly that we are onto their financial deceit, and will not stand for it one day longer. (Of all the groups and organizations that make up the accounting profession I truly believe that the American Accounting Association is held in the highest professional and public esteem and is best positioned to lead the way especially those AAA members who are active in the Public Interest, Government, and Nonprofit Sections.) How would such a national "truth in government" action plan work? Here are a few suggestions:
Develop and publish a very specific ''honest budgeting and accounting credo" for members of Congress, containing the essential proposals. (This would go beyond useless generalities like "support honest budgeting" and spell out specific requirements.) Accounting Horizons I June 1995
Individually invite every member of Congress to publicly subscribe to the credo. (A "Dear Colleague" letter signed by respected and influential senior members of both parties, urging other members to get on board, would be very helpful.)
Mobilize supporters in the home districts of signing members to offer political support and public approbation for making this important commitment, through personal communications, letters to the editor, etc. (Members of this action group should include accounting, political science, and economics students at local colleges and universities.)
Organize a Truth In Government Task Force or Caucus in Congress, which would meet occasionally to review current budgetary gimmicks and to plan a legislative strategy for defeating them. (It would also educate members on honest accounting, budgeting, reporting, and financial management proposals emanating from professional groups like the American Accounting Association, the Association of Government Accountants, the American Institute of CPAs, and the Financial Accounting Standards Advisory Board.)
When some unconscionably dishonest budget or accounting gimmick makes its appearance, mobilize citizens to oppose it by pressuring Congress directly and through the news media. (Similarly, organize expert testimony and public support for needed improvements, especially by supporting the Comptroller General's reports that are little noticed outside of Washington and all too often ignored inside.)
Create an ongoing and knowledgeable "shadow budget committee" to prepare annual reports on progress in budgeting honesty, just like Freedom House's annual reports on the progress of democracy around the world. (There is already a "Shadow Open Market Committee," which critiques the Federal Reserve's open market operations.)
Lavish honors on those members of Congress, Inspectors General, GAO officials, and others who have performed well. (A well-publicized award to a member of Congress as a "Champion of Honest Budgeting" will be greatly appreciated when he or she seeks reelection- especially when local members of our profession write letters to the editor.)
As uniquely informed citizens on fiscal and financial matters, accountants can improve government if our concerns are carefully and shrewdly acted upon. The ideas mentioned above are aimed at Congress, but a similar program could be developed for citizen budget watchers in states, counties, and cities across the country. Indeed, there are some taxpayers' associations and state public policy institutes that are moving in this direction.
When I speak about this subject I often use a brief but potent story to emphasize the need for acting now: A frog was put into a tank of water at room temperature. The water temperature was raised ever so slightly every day. Each day the frog noticed little difference from the day before, and eventually boiled to death. The frog didn't know enough to jump out of the tank! And, that is essentially what Congress is doing to the American people by its acceptance of the poor budgeting, accounting, reporting, and financial management systems for our federal government. It is steadily boiling us in a stew of cooked numbers, and the penalty for complacency, like that of the frog, grows larger and more dangerous every day as does the bill (national debt) our children will have to pay if we fail to act soon.
We owe it to ourselves, to our children, and to America to act-and to act now! And, as respected professionals, we must take the lead.
This Article was Originally Published in The American Accounting Association - Accounting Horizons