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Staff Paper Prepared for the President's Commission to Study Capital
October 30, 1998
BASIC INFORMATION ABOUT FEDERAL FINANCIAL STANDARDS AND
The Federal Government until
a few years ago made little use of financial statements and had no accounting
standards that were generally accepted throughout the Government.
Practice before 1990
Standards. -- GAO
issued accounting standards in the 1950s derived from commercial practice,
but OMB and others did not believe that a Legislative agency had the constitutional
authority to set standards for the Executive Branch. Critics of GAO's standards
did not believe they were adequately designed to provide useful information
on the operations and financial condition of the Federal Government.
Statements. -- Most
Federal agencies did not issue financial statements. Government corporations
were the main exception, required by law to issue audited financial statements
prepared according to commercial practice. The Treasury Department compiled
consolidated financial statements for the U.S. government since 1974, but
they were unaudited.
Improvements since 1990
Two interrelated steps were
taken in 1990 that laid the foundation for issuing audited financial statements
prepared according to Federal accounting standards.
Standards. -- The
first step was an agreement by the Director of OMB, Secretary of Treasury,
and Comptroller General to establish a Federal Accounting Standards Advisory
Board (FASAB), which would recommend concepts and standards to the three
principals. When accepted by all three, they become requirements for the
Federal Government. FASAB consists of nine members, one from each of the
three principal agencies, one from CBO, two from other Executive branch
agencies, and three from the private sector or state and local government.
FASAB models its operations on the "due process" procedures developed by
FASB (Financial Accounting Standards Board) for the private sector and
GASB (Governmental Accounting Standards Board) for state and local governments.
FASAB has recommended two
statements of concepts and ten statements of standards, all of which have
been signed by the principals. The concepts provide guidance for developing
standards in accordance with specified objectives of Federal financial
reporting and for developing a reporting model; the standards define recognition
and measurement of most assets, liabilities, expenses, and revenues and
the disclosure of related information. Almost all of the issued standards
are effective for the FY 1998 financial statements. The standard for property,
plant, and equipment is effective as of FY 1998 and includes a requirement
to disclose information about deferred maintenance.
FASAB builds upon other
accounting standards. However, it is setting standards for a unique entity,
the Federal Government; and it seeks to meet the information needs of internal
as well as external users, unlike other standard setters. For example,
unlike others, it has set standards for cost accounting and for supplementary
information on expenses incurred to finance R&D, human capital, and
physical assets owned by state and local governments.
The chairman of FASB must
be a public members, and both persons who have held that position had previous
experience on GASB or FASB. The first chairman was Elmer Staats, former
Comptroller General and subsequently a member of GASB. The present chairman
is David Mosso, who served two terms as a member of FASB and was vice-chairman
during part of his second term. Another public member, Martin Ives, was
vice-chairman of GASB for several years. (FYI -- Both Mosso and Ives testified
before the Commission in May.)
Statements. -- The
second step was the Chief Financial Officers Act of 1990, which required
a pilot program for agencies to begin preparing and auditing financial
statements. The Government Management Reform Act of 1994 required that
the 24 cabinet departments and major independent agencies prepare audited
financial statements beginning with 1996. The agency's Inspector General
may audit the financial statements or contract with a private accounting
firm to do the job. The quality of the audit opinions has steadily improved
but is not yet satisfactory. By 1997, 4 of the 14 cabinet departments and
6 of the 10 major independent agencies had received unqualified audit opinions
on their financial statements. Twenty of the 24 agencies are committed
to obtaining unqualified opinions on their FY 1999 statements. OMB also
requires 23 components of these agencies to prepare audited financial statements.
The Government Management
Reform Act of 1994 also required that beginning with FY 1997 Treasury prepare
consolidated financial statements (CFS) for the executive branch and GAO
audit them. GAO issued a disclaimer of opinion on the 1997 CFS, saying
they were unable to determine the reliability of significant portions of
the statements because of financial systems weaknesses, problems with fundamental
recordkeeping, incomplete documentation, and weak internal controls. For
example, the Government could not properly account for hundreds of billions
of dollars of property, equipment, materials, and supplies. The President
has committed to an unqualified audit opinion on the FY 1999 CFS.
All of the above are public
documents. An increasing number are available on the Web, and OMB's goal
is for all to be available.
Better financial information
is extremely important to meet the Commission's goal of better planning.
In particular, information on property, plant, and equipment is necessary
as a starting point in analyzing the need to acquire or dispose of capital
assets; and information on program costs needs to be matched against program
outputs and outcomes in order to evaluate program operations under GPRA.
We have come a long ways but need to go a lot further.