Accountability, Transparency and the Uncertain Future of GASB

The standards-setting board for government financial reporting has been embroiled in one controversy after another, but the latest fight could result in the gutting of GASB's influence.
by | September 30, 2013

Since its creation nearly three decades ago, the Governmental Accounting Standards Board (GASB) has been embroiled in controversy as it has sought to increase accountability and transparency in state and local government financial reporting. Some of these fights reached a level of vitriol that would astonish those who imagine auditors and accountants to be introverted, passionless bean-counters. But how you count the money matters, and accountants know that.

There is at the moment a proposal to limit the scope of GASB. The proposal's timing suggests a connection to recent federal legislation stabilizing the board's funding in that some of the trustees of the Financial Accounting Foundation, the independent body that oversees accounting standards-setting boards, may have agreed to rein in GASB in order to blunt opposition to the funding provision. But the long history of controversy surrounding GASB suggests that there is more at issue than its funding.

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Back in 1999, for example, GASB issued a new standard that required governments for the first time to provide the more comprehensive accrual-basis financial statements and include the cost of capital for their governmental activities in them. While it may seem obvious that a government's financial statements should recognize its cost of capital, there was a bitter 15-year struggle before the standard was issued.

A GASB proposal to develop standards requiring governments to report on service efforts and accomplishments didn't fare as well. It was ultimately repelled by those who asserted that it was not accounting information and would be impossible to produce and audit. And the recent GASB standard on pensions, which finally requires pension liabilities to be reflected on government balance sheets, was the result of a long fight.

That brings us to the current debate, which may have been the tipping point for those who see GASB as overstepping its bounds. Robert Attmore, who retired as GASB chairman in June, thought that it was important that people be able to judge whether a government's fiscal condition appeared to be financially sustainable. A little over a year ago, under his leadership the board put forward a preliminary document exploring the question of whether guidance or guidelines should be provided for additional information along those lines, including five-year financial projections.

You might think that requiring governments to provide more information on their financial condition and fiscal sustainability would be a no-brainer, but you'd be wrong. The proposal was met with apoplexy by some of the most important players in the government finance arena, including the Government Finance Officers Association (GFOA), the National Governors Association and the National Association of State Budget Officers, and it may be what results, finally, in the gutting of GASB's influence.

This February, the Financial Accounting Foundation (FAF) issued a proposal to "help clarify the boundaries for the GASB's authority to issue concepts, standards, and guidance. …" Clarification might sound like a good thing, but the proposal would allow the FAF to expressly forbid GASB from including certain contested areas within its standard-setting activity. Former GASB member Dick Tracy calls this move "an existential threat" to the board, and all but one of GASB's living former board members have signed a letter opposing the move. The other side of this argument is articulated by Jeffrey Esser, executive director of GFOA. Esser calls the FAF proposal "the most positive thing," saying that the problems governments have with GASB center on "when it's gone beyond traditional financial accounting and reporting."

It's certainly true that GASB has ventured into areas that some might not have anticipated when it was created in 1984. According to an independent academic study commissioned by the FAF, GASB has spent much of its first three decades as a "proactive innovator" working not only to improve traditional audited financial reports but also seeking to enhance financial management, transparency and accountability. The FAF proposal would effectively end that aspect of GASB's work, and I think that could be a huge mistake. It would make GASB's work less relevant precisely at a time when huge state and local government financial challenges make what GASB is trying to do more important than ever.

Financial accounting and reporting have a major influence on public policy, so the stakes are high -- too high to be left to the accountants. Our long years of refusing to acknowledge the cost of capital contributed to the infrastructure deficit that plagues most of our state and local governments today, and refusing to acknowledge that pensions are a debt that should be reflected in the basic financial statements has led to huge unfunded liabilities for some governments.

Those inside and outside of government have it in their power -- albeit with disagreement, debate and dialogue -- to influence elected and appointed public officials to make government more transparent, responsive and accountable. If GASB cannot be the instrument by which citizens can make their governments more fiscally responsible, then they will find some other instrument.

Mark Funkhouser  |  Director, GOVERNING Institute
mfunkhouser@governing.com

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