Government isn't an enterprise. Though it raises and spends money, owns things, has pension funds, works with budgets, and reports to stakeholders, it is fundamentally different from a business. And so its accounting must take a different form and serve a different purpose.Oddly enough, many accounting professionals in the private sector don't even know there's a difference, or if they do, they don't know why.
To clear up such misperceptions and misunderstandings, the Governmental Accounting Standards Board has issued a white paper titled, "Why Governmental Accounting and Financial Reporting Is - and Should Be - Different."
GASB Chairman Robert Attmore said that the paper does not offer a lot of new information, though to professionals who are educated only in business issues, much of it may indeed be new.
"You need to understand that accounting and financial reporting are all about communicating decision-useful information," Attmore said. "The obvious question is, decision-useful to whom? It's the stakeholders, and as we
try to explain in this paper, the stakeholders in government have different information needs and make different kinds of decisions than stakeholders in for-profit entities."
The paper has become available just as many towns and states on a July-to-June fiscal year begin to hammer out their annual budgets, a time of year when taxpayers at town hearings inevitably ask what they're getting for their money.
As the GASB paper explained, it's governmental financial reporting, not an armful of consumer products, that informs taxpayers what they are getting for their money - and whether they are getting their money's worth.
Questions about governmental accounting, it turns out, are no small matter.
According to federal data, in 2002, state and local government revenues totaled some $1.8 trillion, or 20 percent of U.S. gross domestic product. These governments account for 12 percent of total U.S. employment.
Attmore said that in his first several months as GASB chair, what surprised him most wasn't the difficulty of technical issues, but the sudden awareness that many accomplished financial professionals, including corporate accountants, didn't understand why governments need specialized accounting standards. At the same time, elected officials and those who elected them often did not understand why governments issued certain kinds of financial information.
Government finance officers and auditors understand the differences, of course, but until now they have had no single source of explanatory information, nor have they had a reference document that they could share with others or use to articulate explanations.
"I think this will be useful as a reference for anyone who's explaining ... the environmental differences between the public and private sectors and why those factors drive different types of information needs for people who pay attention to government financial statements versus business enterprise statements," Attmore said.
Scott Reeser, generally accepted accounting principles project manager for the State of Illinois, has read the paper and has plans for it.
"I'll be referring to it in training sessions," Reeser said. "For people who want more details about why governments have different accounting standards, I'll refer to it. I'll refer to it when I get the occasional questions from citizens and legislators as to why the State of Illinois reports things in a certain way."
William Kilmartin, former comptroller of the Commonwealth of Massachusetts and current senior manager for the government finance and administration industry at global consultancy Accenture, would like to see the paper distributed to accounting and public administration department chairs at colleges and universities.
"Institutions of higher education are not training the next generation of governmental financial managers," Kilmartin said. "When you look at accounting programs, they used to carry elective courses in governmental financial reporting. You don't see that as often anymore. Where's the new crop coming from?"
The white paper pointed out an obvious - but rarely recognized - difference between the business of government and the business of business. For-profit organizations are subject to the whims and demands of the market, they have owners, and bankruptcy is always an option, always a threat. Governments, good or bad, efficient or not, have no equity owners, and they are expected to continue existing.
"Consequently," the GASB report continued, "information on fair values of capital assets [of governments] is of limited value, and measures of net income and earnings per share have no meaning to users of governmental financial reports. Instead, users need information to evaluate the manner and extent to which resources are devoted to specific services, and the costs of providing those services."
Unlike profit-making enterprises, governments use capital assets not to contribute to future cash flows, but to provide services to citizens. Citizen demands for financial information require fund accounting and appropriate budgetary reporting. It could be said, with a little poetic license, that enterprises use accounting principles, while governments use accountability principles.
"For governments," the report stated, "accountability is the government's responsibility to justify to its citizenry the raising of public revenues and to account for [their] use."
The white paper reiterated that much work remains to be done on governmental accounting standards. Research projects and potential new technical projects exceed ongoing projects by a ratio of two to one. The conceptual framework that underpins those standards is still far from finished.
Among areas that need addressing are an assessment of how electronic reporting could affect stakeholder needs; how governments should report fiduciary activities; how to report changes, statements of activities, revenues, fund balances, and fiduciary net assets; how to account for consolidations; how to account for in-kind contributions; and how to report changes in asset condition levels.
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