The Federal Accounting Standards Advisory Board is facingseveral interrelated controversial issues that may ultimately determine thefinancial viability of the U.S. government.
On the surface, it's a squabble, but the repercussionscould be tectonic. The primary issue could be summed up in one word:independence. But within that overarching concept are questions that relate tohow the board's members are chosen, to what extent a nongovernmentalorganization can tell the government what to do (and vice-versa), how muchfinancial information Americans (and other interested parties) are entitled to,and to what extent the government is consciously trying to deny the likelihoodof a fiscal catastrophe.
FASAB sets accounting standards for the federalgovernment. The American Institute of CPAs recognizes FASAB standards asgenerally accepted accounting principles, which means that those standards can beused as the basis of audits of federal agencies. If the government doesn't meetFASAB standards, it can't receive an unqualified audit.
AICPA recognition, however, is posited on theindependence of the board. If it isn't independent - that is, free to setstandards without fear of reprisal, loss of financing, or political pressure -then it cannot set GAAP.
The independence issue is coming to a head as the AICPAbegins to evaluate FASAB's performance and independence. If the board fails thetest, its GAAP status could be revoked, throwing into turmoil not onlygovernmental accounting, but also that portion of the CPA profession thataudits the federal books.
Mary M. Foelster, director of governmental auditing andaccounting for the AICPA said that the institute review panel has begun to"evaluate FASAB for continued recognition under Rule 203 of the AICPA Codeof Conduct," which is done every five years. Rule 203 is what determineswhether an entity is a GAAP-setter. The panel looks at not just independencebut due process, domain and authority, human and financial resources, andcomprehensiveness and consistency. A recommendation will be made to the AICPACouncil by May 2010.
The question of FASAB independence heightened during a2006 project to write a standard on reporting the costs and unfundedliabilities of social insurance, including Social Security. Such a change wouldput the federal books so deeply into the red that a balanced budget would seemall but impossible. Most other federal expenditures would be dwarfed incomparison.
During deliberations on the project, the board consistedof four members from the federal government and six members from the public.The four government members are appointed by the Office of Management andBudget, the Government Accountability Office, and the Treasury Department - theso-called sponsoring agencies or "principals" - and the CongressionalBudget Office. The three principals have the power to veto any FASAB standardwithin 60 days of its approval by the board. This veto power prevents unelectedindividuals from setting rules for the federal government.
FASAB's government-side representatives did not want tosee tens of trillions of social insurance liabilities adding to an alreadyoverstrained federal balance sheet. On a decision to issue an exposure draft ofthe standard, the voting split along the government-public sides, with the sixpublic members voting yea and the four government members voting no.
In deliberations over the ED, Robert Reid, the board's representativefrom the U.S. Treasury, said that social insurance was more of a contractualobligation than a recordable liability. According to the minutes of the meetingof March 29, 2006, Reid "repeated that getting a solid majority behindthis was essential. He said he did not think the board would survive having itgo the way it was. He said he thought it would be very dangerous."
David Mosso, FASAB chairman at the time and author of"Early Warning and Quick Response: Accounting in the Twenty-first Century,"took Reid's comment as a threat that compromised the board's independence. Theperceived threat seemed to be reiterated at the subsequent meeting, when theminutes stated that [then-U.S. Comptroller General David Walker] "said thelast thing he wanted was a veto but feelings on this issue are verystrong."
Mosso took this as a reminder that the GAO was reluctantbut willing to use its power if it disagreed with a board decision.
Was the government trying to manipulate the board?
"Manipulate is too strong a word," Mosso said."But the government has certainly tried to influence decisions throughtheir representatives on the board and through their overseer at Treasury andthe GAO."
Mosso said that the government members of the boardobjected not only to reporting social insurance liabilities, but also anydisclosures about them in footnotes.
The board eventually voted to include some part of socialinsurance liabilities, but it could not agree on which part or how.
But then the imbalance of power shifted.
During redeliberations, the term of one board memberended after 10 years of service. Another member reached the end of herfive-year term. Though eligible for re-appointment, for the first time in FASABhistory, a five-year member was not re-appointed.
On the issue of reporting social insurance liabilities,the two new members sided with the government representatives. On the socialinsurance issue, the board was evenly split.
Given the way the votes on the board shifted toward the governmentside, concerned citizens, including some former FASAB members, are warning thatthe appointment process is less than ideally independent, and as a consequence,the American people are being denied full and accurate financial information.
After the new members came onboard, FASAB was not able tocomplete redeliberations. The project was set aside in deference to work onwhat could be seen as a compromise project, one on reporting the fiscalsustainability of the federal government.
The standard, eventually issued in September, requiresthe government to present a report on its long-term fiscal sustainability.These reports will present information on social insurance liabilities 75 yearsinto the future. But while the public members of the board have felt thatsustainability reports should be information supplemental to the comprehensivefinancial statement of the federal government, government members feel thestandard replaces the need for reporting social insurance liabilities infinancial statements.
The board is now putting the final touches on a limitedstandard on social insurance. It does not cover the liabilities issue. Theboard expects to vote on a ballot draft of a final statement this month.
THE PRETENSE OF INDEPENDENCE
Mosso and James Patton, a former FASAB member and nowemeritus professor at the Katz Graduate School of Business of the University ofPittsburgh, wrote an article for AGA Journal, which is published by theAssociation of Government Accountants, charging that the non-re-appointment andthe subsequent two new appointments were made to influence the social insuranceproject. To them, the move ended the pretense of independence.
Mosso and Patton also cited other cases of limits to theindependence of the board. They pointed out that the Department of Defense, forexample, has effective veto power over any decisions on specialized defensesituations, and it has opposed certain decisions regarding property, plant andequipment. They also said that the OMB took unprecedented steps to delay aproject on fiduciary activities.
"Domination of the FASAB process by federal membersis incompatible with board independence," the article stated. "As aresult, even though the individual public board members may be independent inspirit, the overall board is not independent."
FASAB member Hal Steinberg, who had retired from hisposition as acting controller/deputy controller of the Office of FederalFinancial Management at the OMB before joining the board, disagreed."FASAB was set up to avoid government pressure," he said. "Themajority of the members are not federal employees. The selection of non-federalemployees are made up of a group the majority of which is made up ofnon-federal employees. During the interview process, there is no questioningwhatsoever of an individual's views on any particular issue."
Steinberg pointed out that the principals have nevervetoed a board decision or a member appointment. He said that a veto isunlikely to be necessary, since the deliberative process is fair enough for theboard to come to unarguable decisions.
Steinberg pointed out that the American government mustbe answerable to its people through elected representatives. "I don'tthink anybody wants our federal government to be in a position where it can bedictated to by a group not elected by the people," he said.
David Cotton, chairman of Virginia-based Cotton & Co.LLP, once chaired the AICPA committee on federal accounting and audits. In thatcapacity, he often commented on FASAB exposure drafts on behalf of the CPAprofession. After leaving the committee, he stopped following FASABdevelopments because, he said, it became apparent that the board would do whatit wanted to do regardless of public comment.
"The only way that FASAB can be independent is ifit's totally independent," Cotton said. "As long as there aregovernment employees who are beholden to whatever administration is in office,it just isn't independent. There is just no reason to have non-independentboard members."
Cotton does not accept the argument that FASAB needspeople from inside the government because they have unique knowledge of federalfinancial management. He also believes that the board does not need to beanswerable to elected representatives.
Sheila Weinberg, founder and chief executive officer ofthe Institute for Truth in Accounting, has long been calling for the federalgovernment to report its unfunded social insurance liabilities. She believesthat it is government interference that prevents FASAB from issuing a solidstandard on the issue.
"Our democracy is at stake," she stressed."We can't be active participants in democracy without knowing all thecorrect facts. The way FASAB is structured, we're not getting thosefacts."
Countering the argument that FASAB must be under thecontrol of elected officials, Weinberg says that if FASAB is under suchcontrol, the American people have no way to hold those officials accountablebecause financial facts are withheld from public scrutiny. The lack of arequirement that social insurance liabilities be reported in the federalbalance sheet is a case in point, and an extreme one.
FASAB chairman Tom Allen believes that the principals areunlikely to give up their veto power. But he also believes that they areunlikely to use it. He said hat FASAB and the principals are at a standoff.FASAB knows that its standards, and even its existence, can be vetoed. At thesame time, the principals know that if they ever exercise their veto power,FASAB will lose its GAAP-setting status. The government will be beyond thereach of auditors, and government officials will have a lot of explaining todo.
Allen recognizes that FASAB, like standard-settingitself, is always in process.
"My overall assessment is that's been prettyobjective," he said. "Could it be more so? Yes. Could it be worse?Yes. Is it worth preserving? Yes. Should we improve it? Yes."
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