Checks
and Balances in Governmental Accounting
Since
Enron erupted onto the front pages, the focus has been on
regulating and enforcing financial reporting and governance
standards for public companies. Fiscal management in government
has received less attention, even though our federal, state,
and local governments have enormous budgets and employ thousands
of citizens. (New York State and New York City each have
more than 220,000 full-time employees.)
In
general, the government sector is very different from the
corporate sector, and our governments are fiscally well
managed. They are also generally more open, with checks
and balances, including the Freedom of Information Act (FOIA),
built into the system.
Government
accounting and auditing standards tend to be byzantine and
less than perfect in their specifics, but they also generally
tend to function effectively. There is, however, much room
for improvement. For state and local governments, the Government
Accounting Standards Board (GASB) fills the same role that
the Financial Accounting Standards Board (FASB) does for
other sectors, and in some ways GASB’s standards for
reporting are more extensive than FASB’s are. Governments
that receive funds over a certain amount must be audited
and report their financial status based on Generally Accepted
Auditing Standards (GAAS), Government Auditing Standards
(the Yellow Book), and Single Audit Requirements based on
OMB Circular A-133 (which I wrote about in January). At
the federal level, the U.S. Comptroller General, who heads
the General Accounting Office (GAO), can audit federal agencies.
But at present there are
no mandated annual audits of all federal government agencies.
Internal
controls, which are a key focus of the Sarbanes-Oxley Act
and the Public Company Accounting Oversight Board (PCAOB),
actually existed in government auditing standards long before
they were adopted for public companies. In general, financial
management of governments functions with a clearer and stronger
separation of powers. For example, the chief executive of
a government body, who may be independently elected, will
usually have a double check in the form of a legislative
body.
Certainly,
reading and understanding government budgets and financial
reports requires education and perseverance. Many state
and local governments have faced financial trouble, but
the problem is less that information hasn’t been shared
than that political leaders are sometimes reluctant to face
financial realities and take corrective action. A typical
case is Social Security, which is occasionally used as a
political football to serve a partisan agenda. On the local
level, matters are often more direct. For example, oversight
by the New York State Comptroller’s Office and the
legislature sometimes leads to control boards being established
to help get certain localities back on track and avoid bankruptcy.
The
New York State Comptroller has a constitutional responsibility
to audit all state expenditures, but doesn’t do this
annually. Although most local governments and their agencies
conduct independent audits, they aren’t annually reviewed
by the New York State Comptroller. The public authorities,
of which New York State has more than 640, are one particular
area where there are considerable concerns about adequate
oversight.
Louis
Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA
lgrumet@nysscpa.org
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