The Debt Ceiling Debate Begins and Ends with Poor Accounting Standards

by Judi Willard

Let's look at the terminology used. 

"Debt issuance suspension period" is a fancy way to say, "We aren't selling any more Treasury bonds because we can’t borrow any more  money." 

Why can't they borrow any more money? We know why. Their budgeting process uses cash-basis accounting while ignoring the Treasury Department's annual comprehensive financial report. In a nutshell, this flawed system means they don't consider how they will pay for their proposed spending and didn't even have the correct numbers when they enacted the budget!

And "extraordinary measures" is code for "we don’t have the money needed to pay into the retirement funds of federal employees, like the Postal Benefits Fund or the Civil Service Retirement and Disability Fund," just to name a few. 

According to Janet Yellen, "extraordinary measures" are an accounting maneuver to allow the government to continue its operations for limited periods. Again it's code for skipping payments that will have to be paid back with interest, adding more to our national debt. It's an accounting shell game.

The purpose of the debt limit is to ensure fiscal responsibility. Still, our elected officials have shown no fiscal restraint on either side of the aisle, raising the debt ceiling over 90 times in the 20th century alone. 

What is the purpose of having a debt limit if Congress increases it constantly? Why are they circumventing their laws? When you and I reach the limit on our credit cards, we aren't allowed to charge anymore. Unlike Congress, we can’t just decide whether we are going to raise our credit limit. 

Our elected officials’ spending habits are like people who don't think they are gaining weight because they don't get on the scale. They need to weigh their spending habits! 

The truth is poor budgeting practices, and accounting standards allow them to continue with this fiscal mismanagement. We must demand the standards be changed!

Watch our latest video explaining accounting's reign of power and its ability to build and destroy nations.

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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?