in Government Accounting
GASB and the GFOA Square Off
MARCH 2008 -
Since 1984, the Governmental Accounting Standards Board (GASB) has
provided standards and guidance for accounting and financial reporting
to state and local government entities. GASB was given the task
of creating a comprehensive set of standards and developing a new
reporting model for the government accounting profession. Some,
including the Government Finance Officers Association (GFOA; www.gfoa.org),
have proposed that GASB’s mission may be complete and its
ongoing operation should be reevaluated. Recent movements regarding
service efforts and accomplishment (SEA) and performance reporting
have stirred debate concerning the necessity and future of GASB.
In November 2006, the Financial Accounting Foundation (FAF), which
oversees GASB, voted to confirm its belief that GASB has the authority
to issue standards on SEA. GASB promptly added SEA to its technical
agenda. The GFOA has been so upset by these moves that it has publicly
called for the disbanding of GASB, leaving the state of independent
standards setting in government accounting with an uncertain future.
the GFOA’s lineage in government accounting and financial
reporting guidance stretches back more than 100 years, little
attention was paid until the mid-1970s, when organizations like
the AICPA, the General Accounting Office (now the Government Accountability
Office; GAO), FASB, and the GFOA recognized a need. At that time,
the country’s infrastructure was wearing out, revenues were
slowing, services were being cut, and some major cities defaulted
on debt (New York City in 1975 and Cleveland in 1978). These forces
brought government accounting and financial reporting to the forefront
of the profession. (The original predecessor of GFOA, the National
Association of Comptrollers and Accounting Officers, was formed
in February 1906. Its name was changed in December 1931 to the
International Association of Municipal Finance Officers. In June
1932, the name became the Municipal Finance Officers Association.
The name Government Finance Officers Association was adopted in
the GFOA (then MFOA) was instrumental in the creation of the National
Council on Governmental Accounting (NCGA). By the late 1970s,
it was apparent that the NCGA couldn’t fully do its job,
due to part-time members and limited resources. Several public
interest groups, including the GFOA and the National Association
of State Auditors, Comptrollers and Treasurers (NASACT), held
public hearings to build consensus to create and fund a full-time
standards-setting body. In 1984, the GFOA, NASACT, and others
signed an agreement with the FAF that gave them a voice and appointments
in the creation of GASB. Although there is a periodic review process,
the original agreement and first technical agenda do not call
for a sunset or disbanding of GASB once its stated goals are complete.
That never seemed to be the intent. No one, however, could have
conceived of all the statements, interpretations, technical bulletins,
and issues that GASB would be dealing with over the next 23 years.
1 provides a timeline of governmental accounting and performance
reporting. For a good review of the highlights of GASB’s
first 20 years, see “Government Accounting Standards Come
of Age,” by Terry K. Patton and Robert Freeman, Government
Finance Review (April 2005).
34 Creates Friction
inception, a new financial reporting model has been on its agenda.
After six public hearings and 2 Qs years of deliberations, GASB
released its new reporting model on June 30, 1999. It included
two sets of financial statements, one at the entity-wide level
following the flow of economic resources method using accrual
accounting, and another set following traditional governmental
accounting. The most controversial aspect included reporting and
depreciation of all capital assets, including infrastructure.
a professional and a political standpoint, the issuance and implementation
of GASB Statement 34, Basic Financial Statements—and
Management’s Discussion and Analysis—for State and
Local Governments, provided the first signs that GASB’s
existence may be in jeopardy. From the professional prospective,
one could argue that the mission is accomplished. Has GASB fulfilled
its original undertaking of providing a comprehensive set of accounting
principles and reporting standards that guide and educate users?
Patton and Freeman state, “By reviewing the original technical
Agenda and the GASB’s activities and accomplishments over
its first 20 years, it becomes evident that the original agenda
was carefully considered and is now nearly complete.” One
could argue that nothing remains for GASB to achieve.
From a political
point of view, GASB 34 proved to be very divisive. GASB received
more than 400 comment letters to its exposure draft, twice as
many as any other issue GASB has ever dealt with. The feedback
was mostly negative, especially with regard to infrastructure
reporting. The AICPA, GFOA, NASACT, The International City/County
Management Asscociation (ICMA), Ernst & Young, KPMG, and Deloitte
& Touche were among the hundreds opposed to GASB 34 in part
or in whole. The AICPA stated: “The proposed dual-perspective
… tries to meet so many user needs that it fails to be effective.”
NASACT asserted: “This new practice … brings into
question the relevance, reliability, and even integrity of financial
reporting for governments.”
If the GFOA
wasn’t the strongest opponent of GASB 34, it was certainly
the most outspoken. It said: “Governments cannot be asked
to incur significant costs to provide information of no demonstrative
value.” GFOA members even referred to GASB as arrogant and
militant. In May 1999, they voted to authorize their board to
cut off funding of GASB. At the time, GFOA contributed $400,000
per year to GASB’s $3.5 million budget. Despite the controversy,
GASB stood by its position and enacted the standard, and GFOA
continued its funding of GASB. The conflicts between GASB and
GFOA that followed remained minor until SEA reporting became a
central topic of discussion.
in Government Has a Checkered Past
inception, SEA reporting has been a topic of discussion. Early
on, GASB began espousing the concept of public accountability.
In 1989, GASB started publishing research reports on SEA. In April
1994, GASB took it one step further and issued Concepts Statement
2, Service Efforts and Accomplishments Reporting. This
was a clear reminder that SEA reporting could someday become a
requirement. More pressing issues, such as a new reporting model,
were the primary focus, however, and SEA requirements seemed a
distant future consideration.
almost obscured behind the GASB 34 debate, GASB began an unprecedented
six-phase project accelerating government performance research
that included a clearinghouse website (www.seagov.org),
interviews and focus groups of officials and citizens, and the
publication of findings and recommendations in a report.
to this SEA report was mixed. A study by Richard E. Brown and
James B. Pyers (“Service Efforts and Accomplishments Reporting:
Has Its Time Really Come?,” Public Budgeting and Finance,
Winter 1998) found “that such data (SEA) are extremely difficult
to gather and present correctly.… Even if such data are
technically solid, they are very powerful and lend themselves
to misuse, even outright abuse.” They concluded: “Requiring
SEA reporting either might not be possible or would not succeed.
Indeed, it may even do genuine harm.”
the GFOA voiced opposition to GASB’s efforts on SEA, issuing
an official policy statement, “Performance Measurement and
the Government Accounting Standards Board,” on June 18,
2002. GASB still progressed with SEA, and in August 2003 issued
“Special GASB Report—Reporting Performance Information:
Suggested Criteria for Effective Communication,” authored
by James Fountain, Wilson Campbell, Terry Patton, Paul Epstein,
and Mandi Cohn. This publication presented 16 suggested criteria
for developing external reports on performance information. The
report also included background information, research data, and
an explanation of the importance of reporting SEA information.
Not all of
the feedback was negative. The Association of Government Accountants
(AGA) embraced GASB’s research and created a new Certificate
of Excellence in Service Efforts and Accomplishments Reporting.
Although that certificate program does not evaluate baseline performance,
it does encourage state and local governments to issue performance
reports based upon GASB’s 16 suggested criteria. Reports
in accordance with a specified criterion receive the certificate.
AGA also provides a similar certificate for federal agencies.
For more about the program and entities that have successfully
used GASB’s criteria in their reports, see www.agacgfm.org/performance.
At the federal
level, several governmental agencies, such as the General Services
Administration (GSA), issue performance and accountability reports.
GSA administrator Lurita Doan has stated: “I am committed
to developing sound metrics that demonstrate our performance.”
Doan’s report can be found at www.gsa.gov.
displeasure about SEA, GASB continued to move forward in promulgating
governmental accounting and financial reporting. Things seemed
somewhat quiet. Just as disputes from GASB 34 had settled down,
the Enron and WorldCom scandals occurred and the Sarbanes-Oxley
Act of 2002 (SOX) was passed. Issues of governance, internal controls,
risk management, and performance measurement received considerable
attention in private-sector accounting regulation. Discussion
of these issues spilled into the government arena. Talk of these
issues in relation to government financial reporting coincided
with GASB concluding its experimentation and assessment phases
of SEA reporting, bringing even more attention to the SEA challenge.
GFOA Objects to Potential Requirement of SEA Reporting
there had been some animosity between GASB and GFOA in the wake
of GASB 34, such as GFOA’s opposition to GASB’s derivatives
hedge accounting proposal, tempers were relaxed until talk of
required SEA reporting resurfaced. GASB had planned to officially
add SEA reporting to its technical agenda. The GFOA tried to block
the move with strong protests directly to FAF officials. (See
“GASB Cleared to Proceed on Performance Measurement,”
GFOA Newsletter, December 8, 2006.) On November 28, 2006,
the FAF confirmed that GASB had jurisdictional authority to include
SEA in its standards settings if it so chooses, essentially giving
the board the green light it wanted.
FAF confirmation, when it became evident that GASB was moving
forward with SEA, the GFOA called for a reassessment of GASB and
in March 2007 issued a position statement with questions and answers.
This did not deter GASB; SEA was officially added to its technical
agenda on April 6, 2007. Adding it to the technical agenda means
GASB will begin actively deliberating the issue.
warned: “GASB’s plans will inevitably prove both counterproductive
and a waste of scarce taxpayer resources.” Furthermore,
“the move amounted to a unilateral and unwarranted expansion
of the GASB’s authority … and thus constituted a major
violation of the 1984 agreement that established the GASB.”
to curtail criticism by saying: “GASB does not intend to
require governments to report SEA information.” GASB says
that any guidance is only to help entities that wish to voluntarily
report information. GFOA Executive Director Jeff Esser responded
skeptically to such claims: “They are a standard-setting
body and when they put their rubber stamp on something, it carries
says it is trying to garner support for reassessment from other
government interest groups. One specific alternative that the
GFOA espouses is transferring standards-setting responsibility
to FASB. Another is to have GASB go into a maintenance mode, and
promulgate standards on a demand basis only. The GFOA thinks GASB
is simply looking for issues to set standards on, even if no need
exists, which could lead to an endless list of projects that will
only complicate financial reporting. The bottom line, GFOA says,
is that “GASB’s time has now come and gone, and some
other vehicle would better meet the need.”
Robert Attmore has responded to the criticism: “I think
[the GFOA is] misguided and misinformed and I think they have
a different agenda than what they’re conveying on their
website. I don’t think they enjoy dealing with an independent
that many issues need to be addressed and that there is a need
to move forward. When it comes to SEA reporting, GASB argues that
two decades of research show that SEA reporting provides useful
information that helps officials and citizens better operate and
assess their governments’ performance. GASB further asserts
that because there is no profit motive as there is in the private
sector, this is the only way to understand and evaluate how a
its position with information available from its website (www.gasb.org),
the publication in August 2003 of “Reporting Performance
Information: Suggested Criteria for Effective Communication,”
and a listing of more than 100 government entities that have implemented
performance measurement initiatives. GASB’s bottom line
is that SEA is part of its mission, SEA is essential for good
government, GASB’s standards will continue to be subject
to due process with public comment, and that, after 20 years of
discussion and research, it is finally time to move forward. Exhibit
2 provides an outline of the GFOA’s and GASB’s
points of view.
recent development, the SEC may be getting more involved in the
operation of the FAF and its subordinate organizations, GASB and
FASB. It has suggested that the 1994 structural agreement be renegotiated.
Beginning in 2007, the SEC has interviewed and reviewed GASB appointments.
The Wall Street Journal quoted former SEC Chairman Arthur
Levitt as saying, “FASB and GASB must be reconfigured to
keep our markets healthy. These boards have fallen captive to
constituent groups, slowing their progress or even diverting their
efforts to keep pace with critical issues” (David Reilly
and Kara Scannell, “SEC Is to Get More Sway Over FASB,”
Wall Street Journal, March 28, 2007). Levitt called for
public, rather than private, funding of GASB. Greater potential
SEC involvement with GASB, along with the GFOA’s call for
reassessment, will make for challenging times ahead.
this leave GASB and the SEA project? For starters, implementing
the GFOA’s call to disband GASB will be difficult. The GFOA
has far to go and hasn’t built a consensus for opposition.
The GFOA’s alternative—shifting governmental accounting
standards setting to FASB—does not include a plan, a study,
or a platform detailing how this transition will take place. Further
research and specific proposals would provide better justification
for the GFOA’s position. Public dialogue and input from
the GFOA’s counterparts prior to its condemnation of GASB
would also have been helpful.
cofounder of GASB that has appointments to FAF and has traditionally
allied with the GFOA, NASACT, has crossed sides and aligned with
GASB on the SEA issue. On March 30, 2007, NASACT wrote a letter
to the FAF stating: “We believe that GASB is the proper
body to address the unique aspects of government accounting. We
do not favor moving the GASB function into the FASB. GASB and
its staff … have done an admirable job throughout the GASB’s
history to establish and improve financial reporting for state
and local governments.” For its biggest collaborator to
be on record disagreeing with the GFOA’s position is a setback
to the GFOA.
of the AGA’s certificate program based on the suggested
GASB criteria gives some indication that this type of reporting
is seen as useful. In addition, the International City/County
Management Association (ICMA) has devoted considerable resources
to promoting performance measurement. Even the GFOA, in its position
statement, says it would “rate the chances of succeeding
at transferring standard-setting authority from the GASB to the
FASB at about even at best.”
In this author’s
opinion, GASB currently appears to be ahead in this battle and
likely to emerge the winner. The term “winner” is
inappropriate, however. Even if GASB clears this impasse, the
wounds will take years to heal. It is clear that ongoing concerns
over GASB’s role in this dispute are valid. By virtue of
the large constituency that encompasses the GFOA’s membership,
the argument holds credence. The
GFOA feels strongly enough to pursue its opposition even though
its success will be difficult. The GFOA even claims in its position
statement that if it does fail, “it will shed light on the
situation and bring better accountability to GASB.”
Auditing Can Strengthen SEA Concepts
to start exploring how to strengthen the SEA argument may be performance
auditing. If a concern is that SEA is counterproductive and meaningless
because of the myriad differences among different entities, then
performance audits may be a constructive start. Performance audits
review on an individual-entity basis whether an entity is maximizing
and obtaining all revenue resources available and whether it is
expending those resources effectively. Performance audits support
SEA modeling by identifying areas of improvement and allowing
management to analyze independent feedback and reconfigure operations.
They are an objective tool that can be customized for individual
government entities. Data of performance audits do not have to
be required as part of a comprehensive annual financial report
to be useful. The study report by Brown and Pyers stated: “SEA
reporting without competent performance audits would be irresponsible
… tantamount to requiring the reporting of misleading data.”
claim that such audits cost more than they are worth. On the other
hand, performance auditing, a subject well researched by organizations,
including the AGA, GASB, and ICMA, is not uncharted territory.
The AGA provides an excellent list of supplemental websites (www.agacgfm.org/performance/sea/downloads/
SEAReportWebSites.pdf) that outline resources and entities
that use performance accountability reporting.
of Washington has predicted that the benefits of performance auditing
will far outweigh the costs, and even convinced the public to
buy into the concept. On November 8, 2005, Washington state voters
passed Initiative 900, which dedicates 1.6% of state sales tax
revenues to fund performance audits. The program has garnered
public support and has boasted early success, because it has addressed
the many challenges of performance auditing and developed a comprehensive
plan to deal with them. Up to $12 million a year is used for performance
auditing, but the savings are anticipated to be in the billions.
The state of Washington is visibly demonstrating that SEA and
performance auditing are, at the very least, worthy of consideration.
3 lists websites pertinent to SEA, performance measures, and
between GASB and the GFOA, however, reach far beyond the disagreement
over SEA. Even an alternative solution, more research, or a compromise
will not solve the deep-rooted problem that leaders on both sides
have laid out publicly.
the Future Holds
hard to believe that two respected organizations that have done
much to advance governmental accounting can be at such odds and
be publicly disparaging of one another, apparently unable to work
out their differences in the boardroom instead of the media. In
the author’s opinion, GASB has accomplished much, and the
premise of SEA has merit. William Earle Klay and Sam M. McCall,
in “Confronting the Perplexing Issue of SEA Reporting”
(Journal of Government Financial Management, Fall 2005),
stated: “If governments are to report SEA information, ways
must be found for them to do so that do not compromise transaction-based
financial reporting. Finding these ways should be a priority for
research and experimentation.”
For the profession’s
sake, both sides in this dispute over government accounting must
sit down together and find again the spirit of cooperation that
has led to so many GASB successes. They must unite to protect
and advance the concept of independent government standards setting.
Otherwise, the profession could be in a state of flux for years
Foltin, PhD, CPA, is the executive vice president and treasurer
of Cuyahoga Community College of Ohio, and a part-time lecturer
of accounting at Cleveland State University, Cleveland, Ohio.
For another discussion of service efforts and accomplishments
(SEA) reporting, see “SEA Performance Reporting: GASB’s
Focus on Accountability for Results Stirs Controversy,”
by Dean Michael Mead, The CPA Journal, January 2008.