Complacency, Complicity, or Conspiracy?

Government Accounting 101

Judi Willard  |  February 17, 2023

All of the 75 cities in our latest report and 49 states have balanced budget requirements. Vermont is the outlier.

Our governments produce two basic types of financial reports:

                                   annual reports and budgets.

Annual reports cover past results. Budgets include forward-looking plans and statements of intention.

Annual reports are developed in the generally accepted accounting practices [GAAP] framework using accrual accounting, while budgets are not. 

Here's where it gets tricky, the budgets are prepared using the cash basis accounting technique. Bah, humbug! And that's not just Truth in Accounting's position. 

Here is what the International Monetary Fund has to say about this technique.

        Pure cash accounting has a number of weaknesses from the point of view of government financial transparency, integrity, and accountability. Under cash accounting, transactions are recognized only when the associated cash is received or paid, and economic events are not reported if there is no immediate exchange of cash. Governments have been tempted to exploit this weakness by deferring cash disbursements or bringing forward cash receipts as a means of artificially inflating their financial balance. Moreover, governments that follow cash accounting tend to not maintain comprehensive and up-to-date records of the value of their assets and liabilities. This enables them to transfer assets (such as land or mineral rights) or incur liabilities (such as pensions or public-private partnership contracts) to third-parties without disclosing their financial implications for the government and taxpayer.3. 

Truth in Accounting is not alone in our call for leveling the "accounting playing field" between the government and the private sector. 

Currently, there are limitations placed on using cash basis accounting techniques for C corporations. According to the Journal of Accountancy:

      C CORPORATIONS (OTHER THAN FARMS) MUST USE the accrual method if their average annual gross receipts for the previous three years were more than $5 million. Tax shelters and general partnerships that have C corporations as partners and fail the $5 million test also must use the accrual method.

Interesting? Most governments surpass the $5 million in a three-year mark. 

For greater transparency, accuracy, and effective policies, we must start with a full accounting of our resources. To be truly active participants in our democracy, we must be thoroughly knowledgeable about the actual cost of government when debating budget issues. A bankrupt government serves no one!

To recap, there are two sets of standards. Why? 

Is it complacency, complicity, or conspiracy? 

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