Chapter

7 Government Accounting: Promise and Performance

Editor(s):
A. Premchand
Published Date:
June 1990
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Author(s)
ELMER B. STAATS

In considering the many aspects of budgeting and expenditure control, what relevance does a topic entitled “Government Accounting: Promise and Performance” have? Doesn’t budgeting relate to future priorities and total outlays? Yes, it does. Don’t budgeting and expenditure control concern themselves principally with the impact of total spending on the economy, how public funds are to be raised, and decisions on the projected deficit or surplus in the treasury? Again, the answer is in the affirmative.

Why then is the subject of accounting systems on our agenda? Do financial statements for the public sector have the same relevance as they have for the private sector, important to measure profits and losses, stockholder equity, and financial conditions? The answer is yes and no. There are important similarities and important differences. My remarks will attempt to examine why good accounting provides essential information needed for expenditure control.

Budgeting and accounting have been closely linked in the United States. The Budget and Accounting Act of 1921 and the Budget and Accounting Procedures Act of 1950 established the basic framework for fiscal control in the Federal Government and continue today to recognize this close linkage. In Section 106 of the 1921 Act, the head of each executive agency is required to take whatever action may be necessary to achieve, insofar as possible, (1) consistency in accounting and budget classifications, (2) synchronization between accounting and budget classifications and organizational structure, and (3) support of the budget justifications by information on performance and program costs by organizational unit.

Responsibility for prescribing “appropriation and fund accounting in the several departments and agencies” was placed in the Comptroller General of the United States. He is head of the U.S. General Accounting Office, an agency located in the legislative branch. The maintenance of these systems and the preparation of financial reports, however, were made a responsibility of the executive branch. Thus, the Congress wanted to preserve authority in the legislative branch for determining the extent to which accounting and related financial reporting fulfill the purposes specified, financial transactions have been consummated in accordance with laws, regulations or other legal requirements, and adequate internal financial control over operations is exercised.

Pursuant to requirements of the Comptroller General, each agency must establish and maintain systems of reliable accounting results to serve as the basis for preparation and support of the agency’s budget requests, for controlling the execution of the budget, and for providing financial information required by the Bureau of the Budget, responsible for assisting the President in preparing and executing the Federal budget. These systems are required to be maintained on an accrual basis to show the resources, liabilities, and costs of operations of such agency with a view to facilitating the preparation of cost-based budgets to be used by all departments and agencies in the preparation of their budgets.

I will return to the subject of accrual accounting and cost-based budgets later, but one should note at this point that this provision has not been fully implemented after nearly seventy years of debate and nonacceptance of this requirement in executive preparation or congressional consideration of appropriation requests.

In some respects, accounting is retrospective and historical. It tells us where we have been and is designed to give the budget preparer an up-to-date and accurate picture of financial performance. It provides accountability for funds previously appropriated and a point of departure for future budgets. It lends credence to the old adage: “You don’t know where you are going if you don’t know where you have been.”

This same division of responsibility prevails in the 50 states, although responsibility for standards at the local level vary considerably, depending on provisions of state laws and constitutions. A major challenge, therefore, has been agreement on common standards and objectives. This responsibility currently is placed in the Governmental Accounting Standards Board (GASB), which began operating in 1984. This five-member board serves under a common board of trustees with the Financial Accounting Standards Board, which has a similar responsibility for the private sector.

The GASB strongly embraces the concept of accrual accounting, or, in its words, the “flow of financial resources.” Among other objectives, accounting should show whether revenues were raised in an amount sufficient to pay for the services provided in the fiscal period and demonstrate adherence to budgetary authorizations and limitations. An important objective of accrual accounting is that current-year citizens should not be able to shift the burden of paying for current-year services to future-year taxpayers. In other words, the principle is one of interperiod or intergenerational equity. On a larger scale, the large deficits and the increasing federal debt in the United States pose an issue of intergenerational equity of major proportions—an issue of nothing less than national ethics and morality.

The GASB, in its statement “Objectives of Financial Reporting,” places major emphasis on accountability and interperiod equity:

Accountability is the cornerstone of all financial reporting in government.

Accountability requires governments to answer to the citizenry—to justify the raising of public resources and the purposes for which they are used … applying the broad concept of public accountability to financial reporting by state and local governments creates the potential to extend reporting beyond current practice.

If being accountable means being obliged to explain one’s actions, what are the limits of disclosure? How does one balance the cost of providing information against the value of the public’s “right to know”?

With this question as a point of departure, I turn now to other important questions or issues.

First, are the traditional financial statements adequate to meet the needs of those responsible for expenditure control? In the United States, the President’s budget contains much historical and factual information and trend analyses. It summarizes current and proposed outlays for such programs as education, health, research and development, and trust funds. All of this is valuable; some say it is essential. But is it enough? I think not.

Our Treasury Department, in cooperation with the General Accounting Office and the Office of Management and Budget, has for several years developed a prototype “Consolidated Financial Statements of the United States Government,” which includes much information beyond the balance sheet and operating statement. It includes, for example, a statement of loans receivable from the public, net borrowing and from what sources, commitments and contingencies, tax benefits and subsidies, and other relevant information for the public and the Congress.

In the private sector there is evidence of the value of similar information. It is becoming increasingly evident that the traditional financial statements are not adequate to provide investors and other users with the information on which they need to base important decisions. At least one major public accounting firm is well advanced in preparing a set of financial statements—an “information model”—to meet this need.

Second, how can accounting provide data needed to improve the evaluation of the performance of governmental programs? Much progress has been made but more needs to be done.

The statement of “Government Auditing Standards” by the U.S. General Accounting Office (originally issued in 1972) has provided a stimulus for increased emphasis on performance audits embracing audits for economy, efficiency, and compliance with laws and regulations. “Value-for-money” audits in Canada and the United Kingdom have similar objectives. Our Congress has mandated audits with this objective in numerous statutes.

State and local governments have felt a similar need to seek information and analyses beyond traditional financial reports. The Governmental Accounting Standards Board has a current project to determine the feasibility of measuring government services to encourage state and local governments to develop indicators of performance in their financial reports. Twelve areas such as public health, economic development, education, fire and police protection, and sanitation are included.

Accounting data can help, for example, in measuring performance by comparing the costs per ton of collecting garbage and other wastes or the cleaning of streets or maintaining highways between one jurisdiction and another. It can also tell us whether these costs are increasing or decreasing from one budget period to another. Again, accrual accounting is essential for measuring these costs.

Can measures to evaluate performance be improved, and what can the accounting profession do to advance what I believe is now recognized as an important aspect of expenditure control?

Third, and closely related, is whether the use of accounting data can help in deciding whether to perform services and activities directly, using government employees, or contracting for them with nongovernmental organizations.

In the United States, “contracting out” has been widely used. For example, approximately 60 percent of our defense budget is devoted to contracts for goods and services. In many of these instances—particularly such activities as repair and maintenance, computer design and operations, research and development, and similar activities—budget decisions are based on comparative costs. These cost comparisons are frequently difficult and highly controversial. Without good cost data, these decisions can be subjective, or thought to be subjective, and subject to charges of political influence.

Fourth, how do we measure and disclose the commitments made for post-employment benefits? Benefits such as retirement, health care, and life insurance have become increasingly popular for employees in a society where people live longer; for employers, they are attractive in that they reduce current outlays, deferring them to the future. From the standpoint of expenditure control, the danger is that these costs become “hidden costs” that become all too real in future years.

The role of the accountant is to devise reasonable ways to measure these commitments and disclose them for those authorizing these benefits. This task is not easy, given the uncertainty of the cost of providing these benefits, changing needs of retirees, employee turnover, and differing contractual arrangements. Some of these plans are funded in advance; relatively few are adequately funded. Some share the costs with current employees; others are financed entirely by the employer. These accumulated costs are huge and growing. The accountant and the budget analyst need to find ways both to measure and to control these costs and to establish policies for funding and sharing them with employees.

Fifth, an area of great importance involves measuring the condition, age, and serviceability of infrastructure and other major physical assets. Infrastructure—streets, highways, water supply, fire protection equipment, etc.—is both expensive and essential to society. But how do we measure its current condition?

Like post-employment benefits, there is a tendency to postpone repairs, maintenance, and replacement—deferring these costs to the future. Here again the accountant can contribute to expenditure control by providing improved ways of measuring the condition of these assets, factoring in past experience, the benefits of life-cycle costing, the extent of repairs and maintenance in relation to need, and cost-benefit analyses of replacement versus maintenance.

Accounting data are needed to record how much has been spent for repair and maintenance. They are needed to disclose actual expenditures in comparison with estimated needs, and how much has been appropriated in comparison with budget requests. They are needed to help in deciding whether it is less costly to replace equipment and infrastructure or to continue to spend funds for maintenance and repair.

Physical assets are not only important in carrying on government activities and programs but are often essential for a strong private enterprise system. Decisions on acquisition, maintenance, repair, and rehabilitation need to be made in the light of the best information available. Without this information the risk is that we spend too much or too little.

Finally, and I do not need to elaborate at great length, can accounting data help in comparing budgeted with actual expenditure?

Financial reporting should show whether financial resources are obtained and spent in accordance with the adopted budget. The budget is the single most important expression of the policies, program, and plans to execute programs by a governmental entity. It is both a means of control by the legislature and the executive as well as their accountability to the taxpayer. Did government overspend or underspend budgeted amounts? Either can be a matter of concern. Conditions do change, but the reasons for change need to be fully documented; only in this way can budgets be made more accurate for the future.

It would not be difficult to enlarge on those issues where good accounting can play an important role in expenditure. For example, I have not mentioned the measurement of performance of public enterprises, obviously important in their impact on public sector budgets. Nor have I pointed out the value of accounting information in estimating revenues and expenditures for future budget periods. These areas are of importance in longer-term expenditure control.

Much progress has been made over the years in developing useful accounting systems that, in combination with modern computer technology and information systems, have made accounting systems and financial reports increasingly useful in expenditure control. In a democratic society, expenditure control will always be a part of the political process—the control over new programs, the level of existing programs, and the evaluation of the effectiveness with which legislative mandates are carried out.

The role of the accountant in government is different in many ways from the role of the accountant in the private sector. There, as pointed out previously, he plays an important part in measuring profits and losses, stockholder equity, and financial conditions. In government, the budget is the primary instrument through which political control is exercised. The legislative process itself provides a means of disclosure not present in the private sector. The accountant, in other words, can make his greatest contribution by focusing on areas that provide information needed for expenditure control—and the preparation and execution of the budget. In doing so, he has an obligation to demonstrate that the accounting system developed will help the decision maker in this important task. Focusing on such areas as I have outlined above would, I believe, help in this regard.

It should always be kept in mind that accountants, in devising accounting systems, are not decision makers on matters of expenditure control. They can play an important part, however, in developing credible and consistent information that can be relied upon by decision makers. In short, they are information suppliers, not only to the immediate decision maker but to the general public, that ultimately influence the decisions with respect to expenditure control.

In the political arena in which expenditure control decisions are made, experience indicates that the executive and the legislator will be governed by their desire to control obligational authority or financial commitments for new and existing programs, thus taking precedence over cost-based budgeting based on accrual accounting. Experience also indicates that the focus will be on cash outlays and revenues because these will be the measure of the need for new revenues or borrowing. In this setting, accrual accounting can play an important role in disclosing the financial condition of a governmental entity but will only be indirectly related to expenditure control. In the final analysis, how much time and money should be spent in improving accounting systems must be subject to the same cost-benefit analysis that is applied to program decisions.

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