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

Return to Blog

Government or For-Profit Accounting

I regret it has been quite sometime since I’ve been here; however, I hope to be rectifying that soon, starting with this post.  I’ve allowed myself to get behind on a lot of things, including my reading; however, today I read an EXCELLENT article in the August, 2013 issue of Accounting Today by Herbert M. Chubin, CPA, MBA, formerly the internal auditor of the public school system of Trenton, NJ, and an adjunct professor of accounting.  The article was entitled: “Time to abandon fund accounting in government”.

As Mr. Chubin put very succinctly: “Fund accounting is used to account for transactions of nonprofit entities and for governments at all levels…” which “is different from accounting used by for-profit businesses.”  Where financial statements prepared under fund accounting compare actual revenue and expenses against budgeted revenues and expenses, statements prepared for private sector businesses compare revenues against expenses to arrive at a bottom-line number, a profit or loss depending on which is higher, revenues or expenses. In essence, governments are ignoring “the efficiency of operations and personnel”, with their method of accounting focusing on actual against budget as opposed to profit or loss.  With the fund accounting paradigm, “Department heads protect their departments from across-the-board budget cuts by spending the entire amount allocated to their area of responsibility. They also spend their full budget every year, because otherwise the assumption is that they did not need all those funds, which causes less money to be allocated to their department in the following year”. As was laid bare in recent IRS hearings in front of Congress concerning lavish spending on a conference in California, “an IRS official appearing before Congress testified that another conference location would have cost $1 million less, but “the funding was there,” so they chose Anaheim.”  As Mr. Chubin states, “The goal should not be to spend all the revenue, but to spend less, end with a surplus, and reward those who make it happen”, just as business in the private sector is run, where incentive plans are created to eliminate waste, operating as or even more efficiently with less.

A change of this nature would not happen overnight; “ending fund accounting will not be like waving a magic wand”.  This method of accounting has been the government way for eons and changing something this ingrained in the system will not be easy, “but as we have seen in the recent revelations about IRS conference spending, we will be much worse off if we allow the present system to continue”.

To end this post, I will say that a lot has been happening in the IRS, not including its problems with scrutinizing certain factions.  I plan on making a point of highlighting many “other” pertinent IRS happenings in future posts.