Article II of the U.S. Constitution enables the President to bind the United States in treaties with other nations, provided two-thirds of the members of the Senate vote in favor. The Constitution includes these agreements in the Supremacy Clause, which develops the principle that the Constitution, federal laws, and treaties with other nations constitute the “supreme Law of the Land.” In financial and accounting terms, this leads to “senior” obligations for the federal government, which lead to significant financial consequences.
The modern Financial Report of the U.S. Government has been issued annually since 1998. Every year since then, the GAO (the audit arm of Congress) has delivered a “disclaimer of opinion” on those statements, effectively giving the opinion that it can’t give an opinion, given material weaknesses and other uncertainties in federal government accounting.
The GAO issued a report in July this year articulating the major weaknesses leading to this non-opinion opinion. In that report, they listed recommendations they delivered in previous years, which could help guide the government in any effort it undertook to stop getting what can be simply described as an “F” on its financial statements. This July 2016 report took note of a recommendation dating all the way back to the audit of the statements in 2002. This recommendation called for …
“… these policies and procedures should require that federal agencies develop a detailed schedule of all major treaties and other international agreements that obligate the U.S. government to provide cash, goods, or services, or that create other financial arrangements that are contingent on the occurrence or nonoccurrence of future events. …”
In turn, describing the government’s progress in implementing this 2002 recommendation, the 2016 report described the status of the recommendation as …
“Open. Until a comprehensive analysis of major treaty and other international agreement information has been performed, Treasury and OMB are precluded from determining if additional disclosure is required by U.S. generally accepted accounting principles (U.S. GAAP) in the CFS, and we are precluded from determining whether the omitted information is material. …”
Treaties aren’t the only way international entanglements can bring financial consequences.
Last month, the United States Congress passed the “Justice Against Sponsors of Terrorism Act.” This legislation was vetoed by President Barack Obama, but a sufficient majority of Congress voted to override the veto (the first time a veto was overridden in the Obama administrations), and it became law in late September.
The law broadens the scope of civil cases that can be pursued in U.S. courts by US citizens that are terrorism victims, in part because it pares back previous “sovereign immunity” for foreign governments.
Without commenting on the overall merits of the legislation, it is worth noting that some of its critics have cited how it may invite similar developments in other countries. This may lead to costs for U.S. citizens and taxpayers if other countries respond in a similar way, citing victims of military actions overseas.
A Bloomberg news story today by Noah Feldman illustrates similar concerns. In “U.S. Lawyers Fret as Saudis Bomb,” Feldman described the possible consequences of a Saudi air strike leading to significant casualties last weekend, including possible liability for the US. Feldman noted:
“It isn’t a legal stretch to say that refueling a plane that then bombs civilians is aiding and abetting the bombing. No refueling, no bombing. That’s a concern raised by Representative Ted Lieu, a California Democrat who is an Air Force reserve lawyer and knows what he’s talking about.”
Granted, this an area of significant uncertainty, but that doesn’t make accounting for costs like this impossible. Insurance companies establish reserves for future legal liability all the time, and account for the related costs, as uncertain as the exposures may be.