Fixing Public Sector Finances:
The Accounting and Reporting Lever
James Naughton & Holger Spamann
The finances of many states, cities, and other localities are in dire straits. In this Article, we argue that partial responsibility for this situation lies with the outdated and ineffective financial reporting regime for public entities. Ineffective reporting has obscured and continues to obscure the extent of municipal financial problems, thus delaying or even preventing corrective actions. Worse, ineffective reporting has created incentives for accounting gimmicks that have directly contributed to the dramatic decline of public sector finances. Fixing the reporting regime is thus a necessary first step toward fiscal recovery. We provide concrete examples of advisable changes in accounting rules and advocate for institutional changes, particularly Securities and Exchange Commission involvement, that we hope will lead to better public accounting rules generally.
James Naughton is an Assistant Professor at the Kellogg School of Management. Holger Spamann is an Assistant Professor at Harvard Law School.
For helpful comments, we thank David Barron, Charles Fried, Michael Granof, Scott Hirst, Howell Jackson, Robert Magee, Clare Wang, and participants at the Harvard Law School Corporate Lunch and the Junior Business Law Conference at the University of Colorado Law School, especially our discussant, Robert Jackson. Christine Young provided outstanding research assistance. Professor Spamann gratefully acknowledges financial support from Harvard Law School’s Summer Research Program.