At the request of Connecticut State Comptroller Nancy S. Wyman, the state's General Assembly has voted to allow the comptroller to set generally accepted accounting principles for the state, starting in 2009.Wyman, however, said that she has no intention of modifying GAAP, as set by the Governmental Accounting Standards Board, for external reporting.
In order to move the state toward reporting its budget in GAAP, however, she said that she needs to use modified cash-basis accounting while the state pays off an accrued deficit of about $1 billion.
Connecticut officials have said that under GASB's accounting rules, it is difficult to achieve a balanced budget, and like other states, Connecticut requires a balanced budget.
"At least there's a chance now for Connecticut to get on the road to doing all its accounting under GAAP, which we've never gotten close to doing," Wyman said.
The bill that Governor Jodi Rell is expected to sign, however, gives the comptroller the power to prescribe GAAP for external reporting as well.
The move has caused concern at Norwalk, Conn.-based GASB. Robert J. DeSantis, president and chief operating officer of the Financial Accounting Foundation, which oversees GASB, asked why the statute allows the comptroller to set GAAP for financial statements if the comptroller has no intention of doing so.
"We're somewhat skeptical of the state's intentions with regard to financial reporting, although the comptroller and the staff have stated to GASB, the FAF and the press that they intend to follow GASB standards for purposes of financial reporting," DeSantis said. "But that begs the question of why they have such broad-reaching change in the final version of the bill."
DeSantis suspected that lack of communication and understanding underlies the passage of the bill. He finds it encouraging that while the bill recently passed the State House of Representatives unanimously, the subsequent Senate vote was a lot closer, passing 22 to 14.
State Senator Bob Duff, who represents GASB's headquarters district, voted against the bill. He feels that the senators were better informed than their colleagues in the State House of Representatives.
"I think this is one of those issues that legislators don't know enough about," Duff said. "I didn't get enough information about it until after it passed the House."
GASB project manager Dean Mead said that the accounting used for budgetary purposes "is completely beyond the realm of our responsibility," but that "in the course of trying to accomplish what she wants on the budgeting side, they've crafted a bill that endangers the transparency of their financial reporting."
Though Wyman said that she has no intention of prescribing GAAP for external reporting, Mead said that a comptroller's power to do so "raises the specter of political meddling with accounting principles, and even if she doesn't do it, who's to say that her successor won't?" That legal possibility, Dean warned, leaves open the possibility of accounting standards becoming a political football.
NOT AS FAR AS TEXAS
Connecticut is the second state to move away from GASB GAAP this year. Texas took a much more radical step, allowing (but not requiring) municipal, county and state governmental entities to prepare financial statements that do not comply with GASB Statement 45, on accounting for post-employment benefits other than pensions. GASB 45 requires governmental entities to report the estimated future cost of providing post-employment benefits as liabilities - which in Texas amount to a whopping $50 billion.
But Wyman is quick to point out that Connecticut is far from going the way of Texas. "We are not even thinking about hooking this up to the OPEB liability," she said. "We're not changing anything we're doing except moving closer to implementing GAAP accounting for the state budget."
DeSantis said that GASB and the FAF fully intend to keep the dialogue open with lawmakers, but that if sometime after 2009 a comptroller starts setting accounting rules for the state, it will lead to trouble. First, auditors will start issuing qualified audit opinions. Then investors will start to take advantage of that weakness.
"Investors do whatever they can to increase the basis points on their interest earnings on bond issuances," he said. "Having been in the bond arena for years, as an investor and as an issuer, I can tell you that investors will find a way to use those qualified opinions to their advantage for higher interest costs to the detriment of taxpayers."
State Sen. Duff said that the lopsided votes for the bill did not indicate a likelihood of the legislature amending the bill next year.
