Accelerate Federal Accounting Standards

Accelerate the Issuance of Federal Accounting Standards

BACKGROUND

The federal government is the only major entity in the United States
operating without generally accepted accounting standards. This is so
despite repeated legislative requirements for standards and numerous
unsuccessful efforts by both the executive and legislative branches to
develop standards, agree on them, and implement them.

The Budget and Accounting Procedures Act of 1950 directs the comptroller
general--in consultation with the Office of Management and Budget (OMB)
and the Department of the Treasury--to prescribe accounting principles,
standards, and related requirements for executive agencies.[Endnote 1]
In response to that legislation, the General Accounting Office (GAO)
issued accounting standards in its Policy and Procedures Manual for
Guidance to Federal Agencies (Title 2). Subsequently, the constitutional
question of whether the legislative branch can issue standards for the
executive branch to follow and then audit against those standards
surfaced. As a result, GAO, OMB, and the Department of the Treasury
never reached agreement on accounting standards.

Agency accounting procedures and systems have consequently evolved
unevenly and inconsistently over the years, contributing to the
financial management problems that exist today. Agency financial audits
have been subject to varying and conflicting interpretations of
accounting standards. Agency financial systems and processes have been
developed by government employees with varying levels of accounting
sophistication and expertise. Also, agencies have often been caught in
the middle of the continuing arguments on standards between GAO, OMB,
and the Department of the Treasury.

In the fall of 1990, even as the Chief Financial Officers (CFO) Act of
1990 was in the final stages of debate, agreement was finally reached
between GAO, OMB, and the Department of the Treasury on a process to
resolve this omission and establish federal government accounting
standards and principles.[Endnote 2] A memorandum of understanding (MOU)
was signed by the three parties in October of 1990 to establish a
Federal Accounting Standards Advisory Board (FASAB).[Endnote 3] FASAB is
composed of nine members selected from both the federal government and
private industry; the MOU principals- GAO's comptroller general, the
Director of OMB, and the Secretary of the Treasury--provide
oversight.[Endnote 4]

Subsequently, provisions were included in the CFO Act that require
agency financial systems to comply with applicable accounting
principles, standards, and requirements. OMB's deputy director for
management was directed to establish governmentwide financial management
policies and requirements for executive agencies. Further, the CFO Act
requires that audits of financial statements prepared under the act are
to be done in accordance with generally accepted government auditing
standards. Those standards are issued by the GAO in its Government
Auditing Standards.

Currently, FASAB plans to develop and recommend nine sets of standards
and two concept statements that would address all federal assets and
liabilities to be included in a consolidated financial statement for the
federal government.[Endnote 5]

FASAB recommended its first set of standards--Accounting for Selected
Assets and Liabilities--in December 1992. The MOU principals agreed to
this recommendation by late March 1993. In May, OMB issued Circular
A-134, Financial Accounting Principles and Standards, which established
policies and procedures for approving, publishing, and interpreting
federal financial accounting principles and standards.  Finally, in June
1993, OMB transmitted this first set of accounting standards to the
executive branch.

In June, the board approved two more sets of standards and one concept
statement --Inventory and Related Properties, Direct Loans and Loan
Guarantees, and Statement of Objectives of Federal Financial Reporting.
FASAB principals were considering these recommended standards in the
autumn of 1993. Four additional sets of standards and statements are
under development and could be considered for issuance in 1994 to early
1995. They include Liabilities and Future Claims, Capital Expenditures,
Financial Reporting Model, and Cost Accounting Standards.

NEED FOR CHANGE

Even with the establishment of FASAB and the cooperative efforts by GAO,
OMB, and the Department of the Treasury, only three sets of accounting
standards and one concept statement were recommended by the board in
almost three years of existence. Moreover, plans published by OMB
indicate that FASAB will not be done with its work until as late as
1997.[Endnote 6]

The ability to improve financial management depends on the establishment
of a strong financial infrastructure on which to build financial
processes and systems. The issuance of generally accepted accounting
standards is a critical feature of the financial infrastructure.
However, FASAB cannot simply adopt accounting standards established for
private sector entities or state and local governments because the
federal government is different from other entities and it needs
standards that reflect its own environment and objectives. While these
unique characteristics must be reflected in virtually every accounting
standard, efforts must be made to accelerate the development and
issuance of accounting standards. This step is crucial to reinventing
government, since many other National Performance Review (NPR)
recommendations rest on the assumption that the costs of services can be
determined.

Under the existing process, the board can only recommend standards to
the principals, and the standards are not final until the principals
unanimously agree on and sign them. Subsequently, these standards must
be published by both GAO and OMB.

The current structure and process of establishing accounting standards
should be changed to:

--issue a comprehensive set of standards within 18 months, and

--provide more dedicated resources to standards development.

Finally, if standards cannot be issued within 18 months, consideration
should be given to provide more independence to the board to issue
standards.

It is anticipated that FASAB principals will have adopted three sets of
standards (covering 16 accounting standards) and one concept statement
by January 1994. Plans now in place would also project that FASAB would
issue three more sets of standards and another concept statement by
September 1994. Those issued standards would constitute over 70 percent
of the board's planned standards. Given that progress, it is possible
that the board could--within another six months--complete the last 30
percent. Issuing these standards is key to consolidated and consistent
financial information reporting and statements. These standards will
provide the basis for the development of integrated budget and financial
systems that can then provide managers with good financial information
for decisions on their programs.

OMB's recently published policies and procedures for interpreting
statements of federal financial accounting standards (Circular A-134)
raises the question of whether interpretation would be more
appropriately handled by an independent board. The current process, as
outlined in the circular, requires that agencies and individuals request
interpretative guidance from OMB. Further, if OMB determines that an
interpretation of the accounting standards is needed, OMB initiates a
process that includes formal consultation with GAO and the Department of
the Treasury, and results in a final interpretation signed by the OMB
Director. This process allows for separate responses published by the
Comptroller General and the Secretary of the Treasury.

OMB's interpretation process is largely outside the FASAB standard-
setting process. It uses scarce OMB staff for accounting standard
interpretation and creates the potential for decisions to be made that
could be in direct conflict with board actions. Further, it limits the
vital flow of information back to the board on interpretation of its
published standards--feedback that would lead to refinement of those
standards. Due to the short deadlines recommended for issuing all
standards, we are not recommending a change in the interpretation focus
at this time, but if an independent board is ultimately required, the
board should be responsible for standards interpretation.

Beyond the nine members of the board, resources dedicated to the
development of standards include a FASAB staff that prepares draft and
final documents, reviews public hearings and comments, and staffs
monthly board meeting deliberations on the draft standards. FASAB,
through authority given in the MOU, can dedicate more resources to
projects through task forces and supplemental staff. Considering the
urgency of establishing the standards, it would seem appropriate to use
this authority to accelerate development. Cost accounting is a prime
example where the issuance of accounting standards is essential for the
delivery of improved financial management. With the recent passage of
the Government Performance and Results Act of 1993--which requires
governmentwide performance measurement, budgeting, and results
monitoring--the demand for consistent cost information across government
will rise dramatically. Many of NPR's recommendations will rely heavily
on the ability to deliver cost information about programs. This places
even more importance and urgency on the board to develop and issue cost
accounting standards. With the current level of staff, action on that
standard is not expected to be completed until 1995.

Additionally, significant staff effort is required to prepare for the
board's monthly meetings. Consideration could be given to reducing the
frequency of those meetings to bimonthly or quarterly. More staff
resources could be then dedicated to development of standards and less
to preparation for board meetings.

Finally, should accounting standards not be issued within the time
period recommended in this report, the administration should consider
introducing legislation to give the board more independence to issue
standards. A precedent exists in the financial community to have
independent standards-setting boards establish accounting principles and
standards. Subject to oversight and review by the Securities and
Exchange Commission (SEC), the Financial Accounting Standards Board
(FASB) issues standards for corporations that wish to trade stock
publicly. The SEC requires that to trade stock, these companies must
abide by these standards and be audited annually against them.
Additionally, the Governmental Accounting Standards Board (GASB) issues
standards for state and local governments.

An independent board to set federal accounting standards could
immediately issue and publish standards upon approval by the board and
principals, eliminating the duplicative processes now in place.  This
would not preclude OMB from setting policy guidance for agencies to
comply with the published standards.

ENDNOTES

1. The Budget and Accounting Procedures Act of 1950 (31 U.S.C.
3511(a)).

2. The Chief Financial Officers Act of 1990, Public Law 101-576
(November 15, 1990).

3. This MOU cited the Joint Financial Management Improvement Program
(JFMIP) and the Federal Advisory Committee Act, as amended (5 U.S.C.
App.) as the basis for establishing the board.

4. The nine FASAB members are representatives from GAO, OMB, the
Department of the Treasury, and the Congressional Budget Office (these
four are permanent board members); a representative of the defense and
international agencies; a representative from a civilian agency; and
three nonfederal members selected from the general financial community,
the accounting and auditing community, and academia. Except for the
permanent representatives, the members and the chair are selected
jointly by the JFMIP principals (GAO, OMB, Treasury, and the Office of
Personnel Management). Current board members are the four permanent
representatives, representatives from the Departments of Defense and
Interior, and two private citizens.  Elmer Staats, former comptroller
general of the United States, is the current FASAB chair.

5. The Federal Accounting Standards Advisory Board defines the 11 sets
of standards and concept statements as the following: 1) Selected Assets
and Liabilities; 2) Direct Loans and Loan Guarantees; 3) Inventory and
Related Property; 4) Statement of Objectives of Federal Financial
Reporting; 5) Financial Reporting Model; 6) Liabilities & Future Claims;
7) Capital Expenditures; 8) Cost Accounting Standards; 9) Revenue
Recognition; 10) Consolidating Principles; and 11) Disclosures of
Financial Information.

6. U.S. Office of Management and Budget, Federal Financial Management
Status Report and 5-Year Plan, (Washington, D.C., August 1993), p.  11.

7. The Government Performance and Results Act of 1993, Public Law 103-62
(August 3, 1993).