In a little-known and influential institution, a group of experts at the Governmental Accounting Standards Board (GASB) regularly update best practices and standards for government financial practices and procedures. They are best recognized for their generally accepted accounting principles. As described in their website, “GASB develops and issues accounting standards through a transparent and inclusive process intended to promote financial reporting that provides useful information to taxpayers, public officials, investors, and others who use financial reports.”
However, this year’s recommendation “to continue cash-basis-like financial reporting for governmental funds statements,” is problematic, as noted by Truth in Accounting, an Illinois-based nonprofit watchdog and friend of the California Policy Center. They explain why this recommendation is a problem:
Many states have requirements to balance their budget every year, but because of the way they prepare financial reports, budgets that appear balanced are anything but. All too often, governments’ official financial statements don’t reflect reality because they follow “cash based” accounting principles. What does that mean?
With cash-based accounting, financial reports show expenses only when money is paid, not when debt or future expenses are incurred. By only reporting cash spending, and not accumulated debt, the financial reports paint a much rosier – but far from accurate – picture of government finances.
California Policy Center’s Lance Christensen penned a short letter to GASB explaining that, “At a time when it is vital that state and local governments provide their constituents with reliable financial reporting, GASB has the opportunity to establish policies to better hold state and local elected officials accountable. A more comprehensive proposal would also prevent elected officials and otherwise earnest policymakers from making ill-advised financial decisions and reduce liabilities for current and future taxpayers.” You can read the full letter here.
We hope that GASB reconsiders the proposal and refocuses its efforts on promoting financial reporting that is useful to the public.