Unrest in Government Accounting

CPA Journal, The, Mar 2008 by Foltin, Craig

GASB and the GFOA Square Off

Since 1984, the Governmental Accounting Standards Board (GASB) has provided standards and guidance for accounting and financial reporting to state and local government entities. GASB was given the task of creating a comprehensive set of standards and developing a new reporting model for the government accounting profession. Some, including the Government Finance Officers Association (GFOA; www.gfoa.org), have proposed that GASB's mission may be complete and its ongoing operation should be reevaluated. Recent movements regarding service efforts and accomplishment (SEA) and performance reporting have stirred debate concerning the necessity and future of GASB. In November 2006, the Financial Accounting Foundation (FAF), which oversees GASB, voted to confirm its belief that GASB has the authority to issue standards on SEA. GASB prompdy added SEA to its technical agenda. The GFOA has been so upset by these moves that it has publicly called for the disbanding of GASB, leaving the state of independent standards setting in government accounting with an uncertain future.

GASB's History

Although the GFOA's lineage in government accounting and financial reporting guidance stretches back more than 100 years, little attention was paid until the mid1970s, when organizations like the AICPA, the General Accounting Office (now the Government Accountability Office; GAO), FASB, and the GFOA recognized a need. At that time, the country's infrastructure was wearing out revenues were slowing, services were being cut, and some major cities defaulted on debt (New York City in 1975 and Cleveland in 1978). These forces brought government accounting and financial reporting to the forefront of the profession. (The original predecessor of GFOA, the National Association of Comptrollers and Accounting Officers, was formed in February 1906. Its name was changed in December 1931 to the International Association of Municipal Finance Officers. In June 1932, the name became the Municipal Finance Officers Association. The name Government Finance Officers Association was adopted in April 1984.)

In 1973, the GFOA (then MFOA) was instrumental in the creation of the National Council on Governmental Accounting (NCGA). By the late 1970s, it was apparent that the NCGA couldn't fully do its job, due to part-time members and limited resources. Several public interest groups, including the GFOA and the National Association of State Auditors, Comptrollers and Treasurers (NASACT), held public hearings to build consensus to create and fund a full-time standards-setting body. In 1984, the GFOA, NASACT, and others signed an agreement witii the FAF that gave tiiem a voice and appointments in the creation of GASB. Altiiough there is a periodic review process, the original agreement and first technical agenda do not call for a sunset or disbanding of GASB once its stated goals are complete. That never seemed to be the intent No one, however, could have conceived of all the statements, interpretations, technical bulletins, and issues that GASB would be dealing with over the next 23 years. Exhibit 1 provides a timeline of governmental accounting and performance reporting. For a good review of the highlights of GASB's first 20 years, see "Government Accounting Standards Come of Age," by Terry K. Patton and Robert Freeman, Government Finance Review (April 2005).

Statement 34 Creates Friction

Since GASB's inception, a new financial reporting model has been on its agenda. After six public hearings and 2½ years of deliberations, GASB released its new reporting model on June 30, 1999. It included two sets of financial statements, one at the entity-wide level following the flow of economic resources method using accrual accounting, and another set following traditional governmental accounting. The most controversial aspect included reporting and depreciation of all capital assets, including infrastructure.

From both a professional and a political standpoint the issuance and implementation of GASB Statement 34, Basic Financial Statements-and Management's Discussion and Analysis-for State and Local Governments, provided the first signs that GASB's existence may be in jeopardy. From the professional prospective, one could argue that the mission is accomplished. Has GASB fulfilled its original undertaking of providing a comprehensive set of accounting principles and reporting standards diat guide and educate users? Patton and Freeman state, "By reviewing the original technical Agenda and the GASB's activities and accomplishments over its first 20 years, it becomes evident that the original agenda was carefully considered and is now nearly complete." One could argue that nodiing remains for GASB to achieve.

From a political point of view, GASB 34 proved to be very divisive. GASB received more than 400 comment letters to its exposure draft, twice as many as any other issue GASB has ever dealt witii. The feedback was mosdy negative, especially with regard to infrastructure reporting. The AICPA GFOA, NASACT, The International City/County Management Asscociation (ICMA), Ernst & Young, KPMG, and Deloitte & Touche were among the hundreds opposed to GASB 34 in part or in whole. The AICPA stated: "The proposed dual-perspective ... tries to meet so many user needs that it fails to be effective." NASACT asserted: "This new practice ... brings into question the relevance, reliability, and even integrity of financial reporting for governments."