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Cooking the Nation's Books

Many clever devices were used by Enron to create artificial earnings and to hide. debt on a massive scale. Chief among them was a series of off-balance-sheet partnerships referred to as special-purpose entities vehicles set up to make a woefully bankrupt Enron appear financially attractive to Wall Street and credit-rating agencies.

Most taxpayers are unaware (and most politicians don't discuss) that governmental entities use devices similar to Enron 's special-purpose entities to hide deficits and huge amounts of public debt. In Washington, these devices are called government sponsored enterprises, such as the Resolution Trust Corporation, which was used to implement the massive off budget bailout of the savings and loan industry in the late 1980s.

In Albany, N.Y., and in other state governments, these devices are often called authorities, such as New York's Metropolitan Transit Authority. As with government-sponsored enterprises, they are used to keep enormous amounts of public spending and debt out of sight and mind, particularly when politically sensitive budget deficits are on the increase.

Even though the U.S. government is the largest public issuer of notes and bonds in the world, Washington has avoided using the Generally Accepted Accounting Principles, known as GAAP. that it mandates through the Securities and Exchange Commission for all other entities that issue stock and/or debt instruments to the public.

In a recent egregious example of deceptive accounting and huge government waste, Secretary of Defense Donald Rumsfeld called for the replacement of an aging fleet of airborne refueling tankers through an off-the-books and off-the-budget leasing program. This would nearly double the cost of this important program to current and future taxpayers, from $18 billion to $30 billion.

An April 20 New York Times article aptly summed up the problem in its headline. "Creative Deal or Highflying Pork?" and went on to describe it as creative accounting disguising political patronage.

In recent testimony before Congress, Federal Reserve Chairman Alan Greenspan supported the accrual method of accounting for federal government budgeting and reporting. This method, which is mandated under GAAP, records expenses when they are incurred, not merely when payments are made, as is the case with the easily. manipulated cash basis of accounting currently used in Washington.

Greenspan has recently-and rightly- pointed out that the accrual method more clearly lays out the "true costs and benefits of changes to various taxes and outlay programs." He further maintained that the method would "help shift the national dialogue and consensus toward a more realistic view of the limits of our national resources."

It may surprise many to hear that the federal government is legally on the accrual system of accounting already. In published remarks dated May 6, 1976, Elmer Staats, then comptroller general of the United States. stated: "When the Budget and Accounting Procedures Act of 1950 was passed, the General Accounting Office made it a requirement that agency accounting systems be maintain( d op an accrual basis in order 'to secure Comptroller General approval. Accrual accounting was recommended in 1949 by the First Hoover Commission. In 1956, based on the Second Hoover Commission Report, Congress amended ·the 1950 act and specifically directed that agencies maintain their accounts on an accrual basis."

No doubt, in signing the Budget and Accounting Procedures Act of 1950, President Harry Truman thought he was instituting the accrual system and bringing a new era of accounting and fiscal sanity to Washington. Unfortunately, for more than 50 years, the federal government simply ignored the 1950 act and, as a practical matter. there appears to be no legal means to enforce its implementation.

Hopefully, Greenspan's bold statement in support of accrual accounting will renew public debate on this important issue and push Congress to deal with it.

In calling for accounting reform in Washington. Greenspan echoed what I had said in 1992, in a book I wrote about the massive accounting and budgeting irregularities tolerated by Congress. In the 10 years since. the national debt (on the cash basis alone) has risen from $3.6 trillion to $5. 7 trillion. But, incredibly accounting professionals estimate that the true national debt now exceeds $20 trillion when calculated on the accrual basis, which would require the inclusion of unrecorded liabilities in budget and debt calculations (principally to cover Social Security and federal retirement pension obligations).

If the current generation of politicians fails to adopt the accounting reforms recommended by Greenspan, our children's financial stability and quality of life will be at risk in the future. We can only hope that the corporate governance debacle epitomized by Enron's accounting shell game leads to real systemic change in Washington, in order to protect taxpayers and their children as we are now doing for corporate shareholders.

This Article was Originally Published in The National Law Journal

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