Incoming GASB chair’s lack of state audit experience prompts questions

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Joel Black will succeed David Vaudt as chair of the Governmental Accounting Standards Board on July 1. He was appointed by the Financial Accounting Foundation six months ago and will be the first GASB chair without experience serving as a state auditor.

All four of his predecessors, since the formation of GASB in 1984, had previously served in government auditing roles. Once he succeeds current chair David Vaudt, only one of GASB’s seven members will have served as a state auditor or treasurer.

After Black’s appointment, various groups of government finance officials expressed concern about this apparent turn of events. Three of them — the National Association of State Auditors, Comptrollers and Treasurers, the National Association of State Treasurers, and the Government Finance Officers Association — issued a joint statement. They noted that the FAF had “appointed an individual from the private sector” in a “historic and unprecedented decision,” and concluded that the lack of any state auditor on the GASB “fundamentally compromises the diversity of the GASB.”

Time will tell, but methinks they doth protest too much.

Black may be from the “private sector,” but he brings significant related experience and expertise to the position. He led governmental assurance practices for Mauldin & Jenkins, which has nearly 500 clients in both state and local government. The firm’s website lists 34 different types of government entity clients, including pension and other post-employment benefit plans. Black has also served as the American Institute of CPAs’ representative for the Governmental Accounting Standards Advisory Council, and has held other leadership roles for government accounting for the AICPA.

In other words, he’s been part of the system. Why might this matter for GASB independence and the value of governmental accounting standards for citizens and taxpayers?

The public choice school of economics stresses that government officials are human, like the rest of us, and are therefore “rational” in the economic theory sense of the term. We all try to make ourselves better off. Once you accept that government officials are like the rest of us, it is easy to see how well-organized special interest groups come to dominate public policy at the expense of the average citizen and the general welfare.

George Stigler, a Nobel Prize-winning economist at the University of Chicago, articulated and explored these principles in his “economic theory of regulation.” Stigler became known for his leadership of “capture theory.” Private sector businesses don’t necessarily dislike regulation under this framework. In fact, they dominate — capture — the regulatory process to their advantage.

How does this background inform the debate over Black’s new leadership for the GASB?

GASB, along with the Financial Accounting Standards Board and their parent FAF, are not formal government entities. They develop accounting standards, but are organized as private, nonprofit entities. They stress the importance of their independence in developing neutral, reliable standards that meet the needs of users. GASB’s “core values” list independence first, defined as “the autonomy to pursue the best answer for all constituents, free from undue influence or pressure.”

This may sound like a noble principle, but GASB can also be seen as a case of capture theory in reverse. Government officials and influential related special interest groups prefer their “independent” standard-setting, just as businesses often like their regulators, because they can control the standard-setting process. And Joel Black’s appointment might be seen as an example of the “revolving door” problem cementing regulatory capture.

Mr. Black’s appointment may still represent a valuable turning of the page. But his years of private-sector experience do not necessarily qualify him for true independence. And the majority of other GASB board members are former government and/or credit rating agency employees, as well. Citizens and taxpayers don’t seem to have the representation they deserve.

In August 2019, David Crane and George Schultz penned a prophetic op-ed in the San Francisco Chronicle titled “It’s Time for Truth in State and Local Government Finances.” They argued that the "next recession will expose those state and local governments that have used GASB's permissive rules to cover up deep financial problems, potentially forcing the federal government to step in to finance core public services."

Now, here we are.

Time will tell for Mr. Black. GASB’s Financial Reporting Model project will be a good thing to watch for evaluating his leadership.

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GASB Government accounting Audits Accounting standards State and local finance