Unrest in Government Accounting
GASB and the GFOA Square Off

By Craig Foltin

GASB’s History

Although the GFOA’s lineage in government accounting and financial reporting guidance stretches back more than 100 years, little attention was paid until the mid-1970s, when organizations like the AICPA, the General Accounting Office (now the Government Accountability Office; GAO), FASB, and the GFOA recognized a need. At that time, the country’s infrastructure was wearing out, revenues were slowing, services were being cut, and some major cities defaulted on debt (New York City in 1975 and Cleveland in 1978). These forces brought government accounting and financial reporting to the forefront of the profession. (The original predecessor of GFOA, the National Association of Comptrollers and Accounting Officers, was formed in February 1906. Its name was changed in December 1931 to the International Association of Municipal Finance Officers. In June 1932, the name became the Municipal Finance Officers Association. The name Government Finance Officers Association was adopted in April 1984.)

In 1973, the GFOA (then MFOA) was instrumental in the creation of the National Council on Governmental Accounting (NCGA). By the late 1970s, it was apparent that the NCGA couldn’t fully do its job, due to part-time members and limited resources. Several public interest groups, including the GFOA and the National Association of State Auditors, Comptrollers and Treasurers (NASACT), held public hearings to build consensus to create and fund a full-time standards-setting body. In 1984, the GFOA, NASACT, and others signed an agreement with the FAF that gave them a voice and appointments in the creation of GASB. Although there is a periodic review process, the original agreement and first technical agenda do not call for a sunset or disbanding of GASB once its stated goals are complete. That never seemed to be the intent. No one, however, could have conceived of all the statements, interpretations, technical bulletins, and issues that GASB would be dealing with over the next 23 years. Exhibit 1 provides a timeline of governmental accounting and performance reporting. For a good review of the highlights of GASB’s first 20 years, see “Government Accounting Standards Come of Age,” by Terry K. Patton and Robert Freeman, Government Finance Review (April 2005).

Statement 34 Creates Friction

Since GASB’s inception, a new financial reporting model has been on its agenda. After six public hearings and 2 Qs years of deliberations, GASB released its new reporting model on June 30, 1999. It included two sets of financial statements, one at the entity-wide level following the flow of economic resources method using accrual accounting, and another set following traditional governmental accounting. The most controversial aspect included reporting and depreciation of all capital assets, including infrastructure.

From both a professional and a political standpoint, the issuance and implementation of GASB Statement 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, provided the first signs that GASB’s existence may be in jeopardy. From the professional prospective, one could argue that the mission is accomplished. Has GASB fulfilled its original undertaking of providing a comprehensive set of accounting principles and reporting standards that guide and educate users? Patton and Freeman state, “By reviewing the original technical Agenda and the GASB’s activities and accomplishments over its first 20 years, it becomes evident that the original agenda was carefully considered and is now nearly complete.” One could argue that nothing remains for GASB to achieve.

From a political point of view, GASB 34 proved to be very divisive. GASB received more than 400 comment letters to its exposure draft, twice as many as any other issue GASB has ever dealt with. The feedback was mostly negative, especially with regard to infrastructure reporting. The AICPA, GFOA, NASACT, The International City/County Management Asscociation (ICMA), Ernst & Young, KPMG, and Deloitte & Touche were among the hundreds opposed to GASB 34 in part or in whole. The AICPA stated: “The proposed dual-perspective … tries to meet so many user needs that it fails to be effective.” NASACT asserted: “This new practice … brings into question the relevance, reliability, and even integrity of financial reporting for governments.”

If the GFOA wasn’t the strongest opponent of GASB 34, it was certainly the most outspoken. It said: “Governments cannot be asked to incur significant costs to provide information of no demonstrative value.” GFOA members even referred to GASB as arrogant and militant. In May 1999, they voted to authorize their board to cut off funding of GASB. At the time, GFOA contributed $400,000 per year to GASB’s $3.5 million budget. Despite the controversy, GASB stood by its position and enacted the standard, and GFOA continued its funding of GASB. The conflicts between GASB and GFOA that followed remained minor until SEA reporting became a central topic of discussion.

SEA in Government Has a Checkered Past

Since GASB’s inception, SEA reporting has been a topic of discussion. Early on, GASB began espousing the concept of public accountability. In 1989, GASB started publishing research reports on SEA. In April 1994, GASB took it one step further and issued Concepts Statement 2, Service Efforts and Accomplishments Reporting. This was a clear reminder that SEA reporting could someday become a requirement. More pressing issues, such as a new reporting model, were the primary focus, however, and SEA requirements seemed a distant future consideration.

In 1997, almost obscured behind the GASB 34 debate, GASB began an unprecedented six-phase project accelerating government performance research that included a clearinghouse website (www.seagov.org), interviews and focus groups of officials and citizens, and the publication of findings and recommendations in a report.

The reaction to this SEA report was mixed. A study by Richard E. Brown and James B. Pyers (“Service Efforts and Accomplishments Reporting: Has Its Time Really Come?,” Public Budgeting and Finance, Winter 1998) found “that such data (SEA) are extremely difficult to gather and present correctly.… Even if such data are technically solid, they are very powerful and lend themselves to misuse, even outright abuse.” They concluded: “Requiring SEA reporting either might not be possible or would not succeed. Indeed, it may even do genuine harm.”

Not surprisingly, the GFOA voiced opposition to GASB’s efforts on SEA, issuing an official policy statement, “Performance Measurement and the Government Accounting Standards Board,” on June 18, 2002. GASB still progressed with SEA, and in August 2003 issued “Special GASB Report—Reporting Performance Information: Suggested Criteria for Effective Communication,” authored by James Fountain, Wilson Campbell, Terry Patton, Paul Epstein, and Mandi Cohn. This publication presented 16 suggested criteria for developing external reports on performance information. The report also included background information, research data, and an explanation of the importance of reporting SEA information.

Not all of the feedback was negative. The Association of Government Accountants (AGA) embraced GASB’s research and created a new Certificate of Excellence in Service Efforts and Accomplishments Reporting. Although that certificate program does not evaluate baseline performance, it does encourage state and local governments to issue performance reports based upon GASB’s 16 suggested criteria. Reports in accordance with a specified criterion receive the certificate. AGA also provides a similar certificate for federal agencies. For more about the program and entities that have successfully used GASB’s criteria in their reports, see www.agacgfm.org/performance.

At the federal level, several governmental agencies, such as the General Services Administration (GSA), issue performance and accountability reports. GSA administrator Lurita Doan has stated: “I am committed to developing sound metrics that demonstrate our performance.” Doan’s report can be found at www.gsa.gov.

Despite some displeasure about SEA, GASB continued to move forward in promulgating governmental accounting and financial reporting. Things seemed somewhat quiet. Just as disputes from GASB 34 had settled down, the Enron and WorldCom scandals occurred and the Sarbanes-Oxley Act of 2002 (SOX) was passed. Issues of governance, internal controls, risk management, and performance measurement received considerable attention in private-sector accounting regulation. Discussion of these issues spilled into the government arena. Talk of these issues in relation to government financial reporting coincided with GASB concluding its experimentation and assessment phases of SEA reporting, bringing even more attention to the SEA challenge.

The GFOA Objects to Potential Requirement of SEA Reporting

Although there had been some animosity between GASB and GFOA in the wake of GASB 34, such as GFOA’s opposition to GASB’s derivatives hedge accounting proposal, tempers were relaxed until talk of required SEA reporting resurfaced. GASB had planned to officially add SEA reporting to its technical agenda. The GFOA tried to block the move with strong protests directly to FAF officials. (See “GASB Cleared to Proceed on Performance Measurement,” GFOA Newsletter, December 8, 2006.) On November 28, 2006, the FAF confirmed that GASB had jurisdictional authority to include SEA in its standards settings if it so chooses, essentially giving the board the green light it wanted.

After the FAF confirmation, when it became evident that GASB was moving forward with SEA, the GFOA called for a reassessment of GASB and in March 2007 issued a position statement with questions and answers. This did not deter GASB; SEA was officially added to its technical agenda on April 6, 2007. Adding it to the technical agenda means GASB will begin actively deliberating the issue.

The GFOA warned: “GASB’s plans will inevitably prove both counterproductive and a waste of scarce taxpayer resources.” Furthermore, “the move amounted to a unilateral and unwarranted expansion of the GASB’s authority … and thus constituted a major violation of the 1984 agreement that established the GASB.”

GASB tried to curtail criticism by saying: “GASB does not intend to require governments to report SEA information.” GASB says that any guidance is only to help entities that wish to voluntarily report information. GFOA Executive Director Jeff Esser responded skeptically to such claims: “They are a standard-setting body and when they put their rubber stamp on something, it carries weight.”

The GFOA says it is trying to garner support for reassessment from other government interest groups. One specific alternative that the GFOA espouses is transferring standards-setting responsibility to FASB. Another is to have GASB go into a maintenance mode, and promulgate standards on a demand basis only. The GFOA thinks GASB is simply looking for issues to set standards on, even if no need exists, which could lead to an endless list of projects that will only complicate financial reporting. The bottom line, GFOA says, is that “GASB’s time has now come and gone, and some other vehicle would better meet the need.”

GASB Chairman Robert Attmore has responded to the criticism: “I think [the GFOA is] misguided and misinformed and I think they have a different agenda than what they’re conveying on their website. I don’t think they enjoy dealing with an independent standards setter.”

GASB contends that many issues need to be addressed and that there is a need to move forward. When it comes to SEA reporting, GASB argues that two decades of research show that SEA reporting provides useful information that helps officials and citizens better operate and assess their governments’ performance. GASB further asserts that because there is no profit motive as there is in the private sector, this is the only way to understand and evaluate how a government performs.

GASB bolsters its position with information available from its website (www.gasb.org), the publication in August 2003 of “Reporting Performance Information: Suggested Criteria for Effective Communication,” and a listing of more than 100 government entities that have implemented performance measurement initiatives. GASB’s bottom line is that SEA is part of its mission, SEA is essential for good government, GASB’s standards will continue to be subject to due process with public comment, and that, after 20 years of discussion and research, it is finally time to move forward. Exhibit 2 provides an outline of the GFOA’s and GASB’s points of view.

The Controversy Continues

In another recent development, the SEC may be getting more involved in the operation of the FAF and its subordinate organizations, GASB and FASB. It has suggested that the 1994 structural agreement be renegotiated. Beginning in 2007, the SEC has interviewed and reviewed GASB appointments. The Wall Street Journal quoted former SEC Chairman Arthur Levitt as saying, “FASB and GASB must be reconfigured to keep our markets healthy. These boards have fallen captive to constituent groups, slowing their progress or even diverting their efforts to keep pace with critical issues” (David Reilly and Kara Scannell, “SEC Is to Get More Sway Over FASB,” Wall Street Journal, March 28, 2007). Levitt called for public, rather than private, funding of GASB. Greater potential SEC involvement with GASB, along with the GFOA’s call for reassessment, will make for challenging times ahead.

Where does this leave GASB and the SEA project? For starters, implementing the GFOA’s call to disband GASB will be difficult. The GFOA has far to go and hasn’t built a consensus for opposition. The GFOA’s alternative—shifting governmental accounting standards setting to FASB—does not include a plan, a study, or a platform detailing how this transition will take place. Further research and specific proposals would provide better justification for the GFOA’s position. Public dialogue and input from the GFOA’s counterparts prior to its condemnation of GASB would also have been helpful.

Another prominent cofounder of GASB that has appointments to FAF and has traditionally allied with the GFOA, NASACT, has crossed sides and aligned with GASB on the SEA issue. On March 30, 2007, NASACT wrote a letter to the FAF stating: “We believe that GASB is the proper body to address the unique aspects of government accounting. We do not favor moving the GASB function into the FASB. GASB and its staff … have done an admirable job throughout the GASB’s history to establish and improve financial reporting for state and local governments.” For its biggest collaborator to be on record disagreeing with the GFOA’s position is a setback to the GFOA.

The success of the AGA’s certificate program based on the suggested GASB criteria gives some indication that this type of reporting is seen as useful. In addition, the International City/County Management Association (ICMA) has devoted considerable resources to promoting performance measurement. Even the GFOA, in its position statement, says it would “rate the chances of succeeding at transferring standard-setting authority from the GASB to the FASB at about even at best.”

In this author’s opinion, GASB currently appears to be ahead in this battle and likely to emerge the winner. The term “winner” is inappropriate, however. Even if GASB clears this impasse, the wounds will take years to heal. It is clear that ongoing concerns over GASB’s role in this dispute are valid. By virtue of the large constituency that encompasses the GFOA’s membership, the argument holds credence. The GFOA feels strongly enough to pursue its opposition even though its success will be difficult. The GFOA even claims in its position statement that if it does fail, “it will shed light on the situation and bring better accountability to GASB.”

Performance Auditing Can Strengthen SEA Concepts

One place to start exploring how to strengthen the SEA argument may be performance auditing. If a concern is that SEA is counterproductive and meaningless because of the myriad differences among different entities, then performance audits may be a constructive start. Performance audits review on an individual-entity basis whether an entity is maximizing and obtaining all revenue resources available and whether it is expending those resources effectively. Performance audits support SEA modeling by identifying areas of improvement and allowing management to analyze independent feedback and reconfigure operations. They are an objective tool that can be customized for individual government entities. Data of performance audits do not have to be required as part of a comprehensive annual financial report to be useful. The study report by Brown and Pyers stated: “SEA reporting without competent performance audits would be irresponsible … tantamount to requiring the reporting of misleading data.”

Critics may claim that such audits cost more than they are worth. On the other hand, performance auditing, a subject well researched by organizations, including the AGA, GASB, and ICMA, is not uncharted territory. The AGA provides an excellent list of supplemental websites (www.agacgfm.org/performance/sea/downloads/
SEAReportWebSites.pdf) that outline resources and entities that use performance accountability reporting.

The state of Washington has predicted that the benefits of performance auditing will far outweigh the costs, and even convinced the public to buy into the concept. On November 8, 2005, Washington state voters passed Initiative 900, which dedicates 1.6% of state sales tax revenues to fund performance audits. The program has garnered public support and has boasted early success, because it has addressed the many challenges of performance auditing and developed a comprehensive plan to deal with them. Up to $12 million a year is used for performance auditing, but the savings are anticipated to be in the billions. The state of Washington is visibly demonstrating that SEA and performance auditing are, at the very least, worthy of consideration. Exhibit 3 lists websites pertinent to SEA, performance measures, and performance audits.

The troubles between GASB and the GFOA, however, reach far beyond the disagreement over SEA. Even an alternative solution, more research, or a compromise will not solve the deep-rooted problem that leaders on both sides have laid out publicly.

What the Future Holds

It’s hard to believe that two respected organizations that have done much to advance governmental accounting can be at such odds and be publicly disparaging of one another, apparently unable to work out their differences in the boardroom instead of the media. In the author’s opinion, GASB has accomplished much, and the premise of SEA has merit. William Earle Klay and Sam M. McCall, in “Confronting the Perplexing Issue of SEA Reporting” (Journal of Government Financial Management, Fall 2005), stated: “If governments are to report SEA information, ways must be found for them to do so that do not compromise transaction-based financial reporting. Finding these ways should be a priority for research and experimentation.”

For the profession’s sake, both sides in this dispute over government accounting must sit down together and find again the spirit of cooperation that has led to so many GASB successes. They must unite to protect and advance the concept of independent government standards setting. Otherwise, the profession could be in a state of flux for years to come.

Note: For another discussion of service efforts and accomplishments (SEA) reporting, see “SEA Performance Reporting: GASB’s Focus on Accountability for Results Stirs Controversy,” by Dean Michael Mead, The CPA Journal, January 2008.

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