Provide an Annual Financial Report to The Public

Provide An Annual Financial Report To Ther Public

Background

Article I, Section 9 of the U.S. Constitution requires that ". . . a
regular statement and account of the receipts and expenditures of all
public money shall be published from time to time." However, the federal
government's existing financial management infrastructure is so
inadequate that no such reliable report can be made. The Department of
the Treasury has been preparing prototype financial statements for the
last 20 years, and still cannot provide any assurances regarding their
accuracy.

Need For Change

The U.S. Securities and Exchange Commission (SEC) requires that
corporations meet very strict standards of financial management before
their stocks can be publicly traded. All such companies are subject to
rules requiring disclosure of their financial condition, operating
results, cash flows, long-term obligations, and contingent liabilities.
They are also required to be audited by independent certified public
accountants (CPAs). These requirements exist to provide a certain level
of assurance to investors in the stocks of these companies. These
requirements are considered to be common business practices. They are
common not just because the SEC requires them, but because they instill
a level of financial discipline that enhances the financial viability of
the firm. It's the right thing to do. Unfortunately, these common
business practices are very uncommon in the federal government.

The growing public outcry over the financial management of the federal
government, the ever-increasing national debt, and the concern regarding
taxes have created an environment where the government is being held
more accountable for its actions than ever before. The information age
we live in provides unprecedented opportunities to inform the nation of
the performance of its government. The public expects an informative
response when accountability is demanded. Our recommendations address
the challenges put to the government to explain its spending decisions,
and the ramifications thereof. These recommendations are facilitated by
the Chief Financial Officers (CFO) Act of 1990, requiring audited
financial statements of major departments and agencies.[Endnote 1]

The CFO Act of 1990 found that "current financial reporting practices of
the federal government do not accurately disclose the current and
probable future cost of operating and investment decisions, including
the future need for cash or other resources. . . . "[Endnote 2] The
President's budget discloses contingent liabilities of the federal
government guarantees and their estimated costs. An experimental balance
sheet and report on claims on future budgetary resources have also been
published. However, these documents are neither readily available to the
general public nor easily understood. Therefore, the public is not aware
of the kinds of exposure to which the federal government may be liable
nor the magnitude of these contingencies and future claims.

When contingent liabilities move from the category of being contingent
to actual, they seem to occur as a surprise to the public, as in the
case of the savings and loan scandal. They also seem to come as a
surprise in the budgetary process, as in the case of accounting for
guaranteed loan programs. Before the Credit Reform Act of 1990,
guaranteed loans were budgeted at no cost to the government until later
years when loans defaulted and federal payments were made. Under credit
reform, an estimate of future losses has to be budgeted at the time the
guarantees are extended. Other contingent liabilities against the
federal government--such as deposit insurance, pension guarantees, and
other insurance--can be estimated through financial analysis and could
be budgeted at the time the contingent liabilities are incurred or
assumed.[Endnote 3] Expected costs could be recognized as a liability in
financial statements, and footnotes could contain information on dollar
ranges for contingent liabilities where exact amounts are uncertain.
Federal retiree benefits could also be budgeted as they accrue. The
government could also report on expected claims on future budgetary
resources based on existing legislation.

ENDNOTES

1. The Chief Financial Officers Act of 1990 also requires that OMB
"provide complete, reliable, and timely information to the President,
Congress, and the public regarding the management activities of the
executive branch." Public Law 101-576 (November 15, 1990).

2. Ibid.

3. The importance of recognizing these contingent liabilities as accrued
costs is explained in "Sound Fiscal Management in the Public Sector," a
report by Arthur Anderson & Co., prepared in 1976: "The cost of pension
plans [for example] is an additional employment cost incurred during the
period worked by the covered employees and should be accounted for on
that basis. If any one period is not charged with the total pension
costs applicable, some later period must bear the burden of pension
costs which are unrelated to its activities. In such a case, the
financial statements of both periods are misstated.  It is equally
necessary to improve financial statement disclosure of pension plans,
unfunded liabilities, and the methods of cost determination. Such
disclosures help to minimize the potential for abuse and call attention
to unwise postponement of potentially dangerous funding problems."

4. A title suggested by the Association of Government Accountants (AGA)
in its preliminary "Status Report on AGA Task Force--State of the Nation
Report: Federal Financial Statements for Taxpayers," presented on June
22, 1993.