Financial Reporting in Government (preface)

Preface to Financial Reporting in Government
By Dr. John Sacco , George Mason University
Revised Saturday, October 11, 1997

Focus

The focus of this text is on both a critical analysis of governmental accounting and financial reporting at the state and local level and a presentation of the main tenets of the current model for financial accounting and reporting. A critical analysis is important because of the century long controversy over the best approach to the subject of governmental accounting. It is also important as a way of advancing or challenging present thinking in this area. Coverage of prevailing tenets is equally as important since critical analysis depends on understanding what is in use and what is accepted in daily practice.

Critical Analysis

The core of the critical analysis is whether government can generate candid and thorough financial reports in a non market environment , that is, in an environment in which other entities typically are not competing to deliver the same products. Fire protection, police, street maintenance, for example, are often offered solely by the government. Assessing and conveying performance of sole providers in financial reports may be difficult in a non market situation where there is no agreed upon bottom line. Additionally, the provision of services or promises, such as health, pensions, and sick leave, may not be clearly stated or clearly though out in terms of future burdens if those paying and consuming are not adequately informed on full costs and benefits. Professionalism, rules, standards and other regulatory and educational devices may or may not be adequate substitutes for market competition to assure candid and through financial reporting. In all fairness the professionalism and rules associated with government may actually be too demanding or more demanding than market forces and in fact produce the necessary information when cost exceeds benefits.

Present and Prevailing Tenets of Governmental Accounting

Formal discussion of the best methods for governmental accounting and financial reporting has a long history at the state and local level, at least since the late 1800s. Although critical analysis has typically been a part of this history, the resolution has usually been in favor of drawing a clear distinction between government and business approaches. In other words, the resolution has been to accept a model that gives attention to legal compliance and balancing the annual budget associated with the government environment. Promises, future costs, and items that do not fall within these two elements (i.e., legal compliance and a balanced annual budget) are often covered by the full faith and credit of the government as well as the concerns of citizens and professional -- not adequate revenue collection or savings. Use of a business model for governmental accounting has, for the most part, only been discussed, never widely accepted or adopted.

The Clash, Compromise, and Consensus

This text is then very much about the clashes, compromises, and consensus surrounding governmental accounting and financial reporting, particularly the government or fund model and the business or accrual model. As in any democratic society, there is a non finality to a controversy. Clashes are often followed by a compromise or consensus then more disagreement. As result, some of the details of the prevailing model of state and local accounting and financial reporting might be given less attention in this text to offer more attention to the clashes and compromises and to the alternative model.

Glossary

compliance: Compliance assesses whether actual money raised and spent adhere to budget mandates set by the legislative body. Any the financial statements can help judge compliance, but one in particular, called budget versus actual, is used to assess compliance. Historically, annual compliance with the budget has been the main factor shaping governmental financial reports.
financial reporting: The financial reports are a large category that include many types of reports, one of which is a financial statement. The budget is another. A prospectus for the sale of municipal bonds is one more. These reports are designed to capture different aspects of past financial performance and future financial prospects.
full faith and credit of the jurisdiction: Ordinarily, certain types of bonds or borrowed money (often called general obligations bonds) are covered by a promise of the jurisdiction to raise the necessary revenue or cut back on other expenditures to cover these bonds. However, many types of obligations (vacation and sick leave) can be covered by such as promise. It is the word of the government to make every effort to pay the obligations.
governmental accounting: In general, accounting is designed to capture detailed financial transactions and then report on financial performance. State and local governments have their own set of rules apart from business. While there are many differences one major one is that governments focus heavily on judging legal compliance and business focuses on profit and loss.
market forces: Where there is competition to provide a service, that is, where there are many providers such as a situation is called a market. Market forces include the supply (the number of providers) and demand (consumers). Market forces also include the ease of entering into the market. Starting a tailoring business might be easier than starting a new airline.
non market environment: When there is little or no competition in selling or providing services such as situation is called a non market environment. A community may have one fire department or one ambulance service. As such there is essentially no competition or no market that offers many fire departments or ambulance companies. In other words, there is only one supplier.