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Accurate Accounting.  It's Not Optional... It's ESSENTIAL!

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Government: Cash or Accrual Accounting

Back in early October, I posted “Government or For-Profit Accounting“, where I quoted an article from Herbert M. Chubin, CPA, MBA, former internal auditor of the public school system of Trenton, NJ and current adjunct professor of accounting: “Time to abandon fund accounting in government“.  In this article, Mr. Chubin made the case for governments switching from their current method of accounting:

  • comparing actual revenue and expenses against budgeted revenue and expenses

to the for profit method of accounting:

  • taking expenses from revenues to arrive at a net gain or loss;

i.e.: governments knowing whether they are operating in the black or the red as opposed to how they are operating against their budgeted operations.

In this post, I will be quoting from an October 17, 2013 article in HuffPost Business written by Hon. Joseph J. DioGuardi, a former CPA, two term member of the House of Representatives and the original author of the Chief Financial Officer Act, signed by President George H.W. Bush in 1990.  In this article, Mr. DioGuardi states: “While the U.S. Financial Statements for the fiscal year ending September 30, 2012 show a national debt of $18.8 trillion, it is well known that liabilities for Social Security, Medicare and federal pensions, if properly shown on our nation’s “balance sheet”, would add about another $40 trillion to the national debt (not including bad government loans and guarantees that have yet to be written off the government’s books)”.  All the numbers are there, they just aren’t pulled together for a clear picture of where things actually stand.  Just like the Federal Unemployment numbers; we know the number of employed against the number of folks looking for work and we know the number of folks that have stopped looking for work, but very few ever pull together all the numbers to show an actual number of able body folks not working in the country against those that are working.  In-other-words, in “accounting speak”, the U.S. government is operating on a “Cash Basis” of accounting, where only revenue received and expenses paid are documented, as opposed to the “Accrual Basis” of accounting, where ALL revenues and expenses are documented; revenues received and “earned” against expenses paid and “obligated” to be paid.  Again, we know the numbers are there, but the data isn’t presented in a format to give a clear, concise picture of where the actual bottom-line resides.  Some of the numbers are in one set, others in another set, but the sets aren’t pulled together to make a clear picture of what the actual bottom-line is.  DioGuardi makes four recommendations in his article:

  1. “Adoption of accrual based “Generally Accepted Accounting Principles” (GAAP) for the federal budget process and fnancial reporting;
  2. Independantly audited and simplified consolidated financial statements for the U.S. Government;
  3. Budget process reforms including a capital budget for the asset and infrastructure expenditures benefiting the future (as already adopted by 37 states); and
  4. Improvement of federal financial management through enhancement of the CFO Act of 1990″.

DioGuardi adds that based on his “experience as a CPA and former Member of Congress, adopting the accrual basis of accounting is by far the most important thing that can be done to make the U.S. government more fiscally responsible and financially accountable”, and that “GAAP accounting is considered the only fair and accurate way to measure a large and complex entity’s financial condition and the results of its operation, not only in financial terms, but in an economic sense”.  He adds that “four major countries (Australia, New Zealand, Canada and the United Kingdom) which have adopted the accrual basis of acocunting…have fared much better in fiscal responsibility and financial sustainability than other countries that have not done so”.  He quotes statistics from the 2011 Soverign Fiscal Responsibility Index ranking “Australia, New Zealand, the UK and Canada #1, #2, #9 and #11 respectively” in fiscal responsibility, and “the U.S. a dismal #28 (out of 34) behind fiscally troubled Italy, Spain and France – barely ahead of fiscally very troubled Portugal and practically bankrupt Greece”.  With these facts, in my opinion, DioGuardi basically establishes “Washington’s complete lack of fiscal sanity, poor financial management and the use of grossly inadequate accounting principles for budgeting, bookkeeping and financial reporting” causing politicians to “continue to make legislative decisions today that do not reflect a concern for the long-term economic and financial condition of our nation”.  DioGuardi closes his article with “after nearly 70 years of discussion and endoresment by four presidents (Truman, Eisenhower, Johnson and Nixon” … both Republican and Democrat), “it is high time that accrual accounting be implemented for all agancies and departments of the federal government so we can know the truth about how much our federal government is really spending (and obligating us to pay) and how this is raising our national debt far beyond our nation’s ability to sustain”.  In my opinion, based on Mr. DioGuardi’s comments and my ability to step back to look at the whole picture from an accounting perspective, it’s almost as if the folks in Washington are passing over going to an accrual basis of accounting simply so that only those so inclined to put it all together can ever know where the country’s actual bottom-line resides just by looking at a particular set of numbers.  Sure, the numbers are all there, in different sets, but separate from one another, and as long as it stays that way, the folks in Washington can continue to spend and commit to spend because only a select few will ever really know where it’s all taking the country, except when it’s too late.