Without accounting reforms,
the federal books will continue to be cooked.
When I entered Congress in 1985 and was appointed to the House Committee on
Government Operations, I thought I had been placed on the board of directors of the U.S. government. Accountability is key to a board of directors, but I found we did not have reliable financial information upon which to make decisions and report back to our shareholders - the electorate. As a certified public accountant and a former partner with 2 2 years of experience at Arthur Andersen & Co., I was shocked by the way the federal government was managing our nation's books. Many corporate executives would likely face jail sentences if they utilized the same accounting practices that are routinely- employed in hundreds of federal offices across the country. Simply put, the federal government's accounting, reporting and financial management systems are in shambles. Reform is needed, technically and politically.
As a Congressman, I witnessed, first-hand, the fiscal abuses taking place and was outraged. With several of my colleagues, we introduced the Federal Financial Management Improvement Act, which was designed to restore the financial discipline that was nowhere to be found in Washington. That legislation continues to move forward. Sound financial management practices are not just accountants' issues. They are not just Republican issues and they are not just Democratic issues. If we do not build a solid foundation of valid financial information and genuine financial discipline, the entire structure is capable of collapsing - with our children paying the bill.
Congress and the American public need more reliable information about the federal budget and deficit. Current accounting and reporting practices do not disclose the true cost of government programs or allow us to evaluate the financial condition of the U.S. government. Congress needs to adopt the generally accepted accounting principles (GAAP) currently required of all publicly held corporations as well as many state and local governments. GAAP may need some modifications for the federal government - but let's get the process started.
Without adopting the necessary financial management, accounting and reporting reforms, federal books and the budget will continue to be cooked with the American taxpayer being burned.
A chief financial officer
Currently, federal financial management is fragmented among competing agencies, including the Office of Management and Budget (OMB), the Office of Personnel Management (OPM) and the Department of Treasury. None of these entities has clear cut responsibility for oversight and direction of the federal government's financial management operations and activities.
What we have is a missing link in the federal government. The financial leadership void must be filled. A CFO within the Executive Office of the President would achieve this. In addition, each executive department should have an assistant secretary for financial management. The CFO and assistant secretaries would be appointed by the President with the advice and consent of the Senate.
In general, the federal CFO would provide leadership and direction while monitoring executive agencies in their financial management, accounting and reporting activities. The CFO also would create financial statements for the government, in much the same manner as private corporations produce annual reports. These statements should be subject to independent audits.
Reforming the budget
The federal government reported a budget deficit, for Fiscal Year 1988, of $155.1 billion. Looking at the figures another way reveals red ink in excess of $300 billion. It is just a matter of how government spending, taxes and borrowing are measured. After taking full account of the unfunded federal pension liabilities and other programs currently off-budget, the $300 billion plus looks more realistic.
If a budget is to be useful as a backdrop for economic and fiscal policy, it must give an accurate and useful description of how the federal government takes in and spends money. The existing system of accounting
Programs favor today's voters at the
expense of tomorrow's taxpayers.
hides and distorts more than it reveals, leading to bad information and, thus, bad policy.
The main problem is that the federal government uses a cash-basis budgeting and accounting system for measuring government spending. Under cash accounting, capital expenditures (such as roads or weapons systems) and current expenses (such as interest payments or food stamps) are treated in the same manner, although they have very different implications. This accounting system differs greatly from GAAP.
Although the cash-basis budget system provides important quantitative information concerning the government's cash flow, it reveals nothing about the qualitative nature of government expenditures. By treating long-term expenditures the same as current expenses, the cash budget does not make proper allowances for future costs. Also, the liabilities of entitlement programs, such as Social Security and Medicare, which obligate the government to pay benefits in the future, do not show up on the Treasury's books. Private corporations, by contrast, make provisions in their annual budgets, so that they are forced to consider the cost of assets and future liabilities, when planning for the coming year and the future.
Cash-basis financial reporting ignores government obligations and allows elected officials to adopt programs and make promises without acknowledging their full costs in the annual budget. This lack of accountability predictably allows legislators to favor today's voters at the expense of tomorrow's taxpayers. Not surprisingly, nearly all growth in federal government spending, as a percentage of Gross National Product (GNP) since World War II, derives from programs that promise future payments. Today's budget thus creates tomorrow's liabilities.
The credit budget
The biggest problem we face today, in federal accounting, is the huge amount of debt that is off the books - and being passed on to the future, in most cases, for the current operations of our government. There seems to be a mentality in Congress that the true cost of government must be disguised (perhaps, because of reelection every two years). Witness the Postal Service's current operating deficit being placed off-budget - as if it did not exist. Under the current system, if and when the Postal Service has an operating surplus, the figures could be manipulated to place the surplus on budget once again to reduce the deficit.
The area of the budget in need of the greatest reform is the federal
Before wise decisions can be made,
lawmakers must know the actual size of the deficit.
credit budget. The federal government is America's largest bank. It borrows money by selling Treasury bills, notes, and bonds and relends the money to private firms and individuals at subsidized interest rates through agencies such as the Farmers Home Administration. At the end of 1988, the government held $222- billion in direct loans, $550 billion in guarantees made to private lenders and an additional $666 billion in guarantees made to government sponsored enterprises.
Despite borrower subsidies, such as below market interest rates, generous grace periods for repayments and lower collateral requirements than are found in the private credit markets, federal agencies treat those loans as assets worth full face value. No responsible, publicly-traded corporation would or could do that: Private lenders make allowances for the likelihood that money lent might not be repaid.
Budgeting for loan guarantees is even more misleading. A loan guarantee is a government promise to pay a private lender (such as a bank) the principal and interest, in the event of borrower default. There is a perception that such guarantees cost the Treasury nothing. Thus, even though the federal government assumes liabilities with loan guarantees and will have to make payments on some of those guarantees, the cash budget.
This Article was Originally Published in New Accountant