Checks and Balances in Governmental Accounting

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Since Enron erupted onto the front pages, the focus has been on regulating and enforcing financial reporting and governance standards for public companies. Fiscal management in government has received less attention, even though our federal, state, and local governments have enormous budgets and employ thousands of citizens. (New York State and New York City each have more than 220,000 full-time employees.)

In general, the government sector is very different from the corporate sector, and our governments are fiscally well managed. They are also generally more open, with checks and balances, including the Freedom of Information Act (FOIA), built into the system.

Government accounting and auditing standards tend to be byzantine and less than perfect in their specifics, but they also generally tend to function effectively. There is, however, much room for improvement. For state and local governments, the Government Accounting Standards Board (GASB) fills the same role that the Financial Accounting Standards Board (FASB) does for other sectors, and in some ways GASB’s standards for reporting are more extensive than FASB’s are. Governments that receive funds over a certain amount must be audited and report their financial status based on Generally Accepted Auditing Standards (GAAS), Government Auditing Standards (the Yellow Book), and Single Audit Requirements based on OMB Circular A-133 (which I wrote about in January). At the federal level, the U.S. Comptroller General, who heads the General Accounting Office (GAO), can audit federal agencies. But at present there are no mandated annual audits of all federal government agencies.

Internal controls, which are a key focus of the Sarbanes-Oxley Act and the Public Company Accounting Oversight Board (PCAOB), actually existed in government auditing standards long before they were adopted for public companies. In general, financial management of governments functions with a clearer and stronger separation of powers. For example, the chief executive of a government body, who may be independently elected, will usually have a double check in the form of a legislative body.

Certainly, reading and understanding government budgets and financial reports requires education and perseverance. Many state and local governments have faced financial trouble, but the problem is less that information hasn’t been shared than that political leaders are sometimes reluctant to face financial realities and take corrective action. A typical case is Social Security, which is occasionally used as a political football to serve a partisan agenda. On the local level, matters are often more direct. For example, oversight by the New York State Comptroller’s Office and the legislature sometimes leads to control boards being established to help get certain localities back on track and avoid bankruptcy.

The New York State Comptroller has a constitutional responsibility to audit all state expenditures, but doesn’t do this annually. Although most local governments and their agencies conduct independent audits, they aren’t annually reviewed by the New York State Comptroller. The public authorities, of which New York State has more than 640, are one particular area where there are considerable concerns about adequate oversight.

Louis Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA




















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