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Governments’ Accountability for Tax Revenue

Michele Mark Levine, CPA
Published Date:
Oct 1, 2015

While not the usual venue, there is perhaps no more logical a place to discuss government financial reporting than in a tax publication.  What is at the very core of taxation, if not the exchange of resources for the benefits of civil society?  If there were no taxes, there could be no shared support for “public goods” such as education, public health, security, justice, and a social safety net.  And, if there were no accountability, there could be no taxes; the populace would refuse to pay for the maintenance of institutions viewed as useless or, as our nation’s revolutionary forbearers showed us, might take it to even further extremes. 

Leaving to others the articulation of anthropologic and philosophic principles, the author postulates the following for the purpose of this discussion: 

- The willingness of individuals to cede authority and resources to a government is the foundation of civil society, and - The accountability for use of public resources by those charged with governing is a fundamental right of taxpayers and    all citizens.

Herein, the author will address major trends in how governments communicate financial information and impending decisions that will determine the future course of such communications.

The GASB became the authoritative body setting GAAP for U.S. state and local governments over 30 years ago, when the established financial reporting for governments could be viewed as having assumed virtually unlimited revenue potential through taxation; indeed, in its conceptual framework, the GASB saw necessary to explain why the power of taxation is not itself an asset. Even though it was stated much more broadly, the reporting model appeared designed to demonstrate a government’s short term liquidity and that its disbursements were made in accordance with legal appropriations, and not much else. This was notwithstanding evidence to the contrary, including the highly visible fiscal crisis and the inability, a decade prior, of New York City to access credit markets with general obligation debt.

Since then, it has become ever clearer that tax collection indeed has its limits; economies and taxpayers cannot and will not endure infinitely large tax burdens.  This point has been driven home most recently by a fresh crop of municipal bankruptcies and near-bankruptcies, such as those of Harrisburg, Pennsylvania; Detroit, Michigan; and Puerto Rico.  Government financial reporting needed to include measures of the fiscal sustainability of government operations and the redistribution of taxpayer resources across generations of taxpayers. 

Arguably the most significant GAAP development of the GASB’s history was the issuance in 1999 of Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments.  The reporting model introduced by GASB Statement 34 represented a paradigm shift in accounting and financial reporting for governments.  Though it retained much of the traditional fund accounting and reporting, GASB Statement 34 added a complete set of full accrual financial statements and provided the first holistic look at governments, together with many of their closely related (though legally distinct) enterprises. 

An entirely new way of representing government finances, these government-wide statements aim to provide insight into the overall financial position and results of operations.  Newly minted “Management Discussion and Analysis” sections became the go-to source for cogent treatment of governments’ financial health, the developments of the reporting period, and the required supplementary information provided for comparisons of key indicators over many years (as discussed later, the GFOA and GASB Statement 44 also encourage the addition of a wide array of financial, economic, and operational statistics across many years).

This reporting model both reflected and fed increased focus on the long-term financial implications of government policies. Subsequent standards addressed specific long-term obligations - most significantly, those for employee pensions and retiree health benefits, which had not been previously recognized in government financial statements.  Meaningful measurement and reporting of those liabilities, while only rough estimates, is fundamental to transparency and sound decision making. 

Governments are currently implementing GASB Statements 67, 68 and 71, which require recognition of employers’ unfunded pension obligations measured as of a point in time using a more standardized approach.  They will soon be implementing GASB Standards 74 and 75, which make very similar changes to the reporting of retiree health care and other non-pension retiree benefits obligations.

Interestingly, the GASB has opted to serve as ambassador to potential financial statement users, publishing a series of plain language user guides and articles aimed at helping both non-accountants and accountants without specialized knowledge of government GAAP to understand financial statements. As welcome and valuable as these efforts are, it is implicit recognition that the information of GAAP financial statements is inaccessible to many potential users. 

Others have also heard a call to reach a broader audience, and responded with simplified representations of governments’ finances. Generally called Popular Annual Financial Reports (PAFRs), and more broadly referred to as Popular Financial Reporting (PFR), these bite-sized, non-GAAP reports emphasize “big picture” information using nontechnical language and eye-catching graphics, appealing to taxpayers and citizens unfamiliar with the complexity of GAAP financial statements.  While a PAFR falls far short of providing the wealth of information available in GAAP financial statements, PAFR readers can quickly glean the essentials of a government’s financial health and activity. The Government Finance Officers Association of the US and Canada (GFOA) began a PAFR award program to promote excellence of popular reports modeled on its prestigious CAFR program, despite remaining a strong supporter of GAAP financial reporting. Unfortunately, as non-GAAP, non-standard reporting, PAFRs are not audited; their content could be manipulated to paint a biased picture and readers must assess their reliability. Although the GFOA has put forth recommendations for the content of PAFRs and awards certificates of excellence to governments that submit PAFRs meeting its criteria, this only provides some reassurance regarding the selected content, but does not guarantee their reliability. 

Thus, the past several decades have brought clear progress in government financial reporting, but here are some important concerns to be addressed. 

As the standards for GAAP financial statements have risen, so have the costs of the accounting and reporting apparatus needed to produce them.  The trade off, if understood to promote transparency and accountability for public resources, seems reasonable; however, if the reports are comprehensible to only a small group, including the involved parties, are they really transparent?  Why are there so few people - including many with financial backgrounds - who can readily understand their governments’ general purpose financial statements?

The GASB recently announced plans to revisit the financial reporting model put in place by GASB Statement 34.  The announcement read, in part, that “the Board will continually look for opportunities to reduce the complexity of financial statements.” While improved timeliness is cited as the motive, there are other reasons for concern about complexity: Compared to earlier reporting, they can be costly to prepare as well as costly (and, based on anecdotal evidence, unprofitable) to audit. Further, based on the growing evidence of the demand for alternatives, they arguably are not meeting the needs of users and of our democracy.

The author is a long time adherent to the philosophy that the unique environment of government makes the stark differences between private-sector and governmental GAAP not only reasonable, but essential. But is there a risk of governmental GAAP being or becoming “fatally unique”? Might differences from more widely understood private-sector reporting be so great that governmental GAAP financial statements are unable to meet the needs of citizen and professional users, or even for there to be a sufficient pool of preparers and auditors to perpetuate its use?

As tax professionals and citizens, might it be the duty of Tax Stringer readers to have insight into how public resources are acquired and spent, if there is compliance with legal budgets, and how current policies will build for or burden their children and grandchildren? Please consider investing just 30 minutes skimming recent GAAP and popular financial statements posted online by your state or local government; the website of the New York State Comptroller has both CAFRs and a popular financial report called The Citizens’ Guide. Which do you find more useful? Think about how easy or difficult is it for you, a financially literate reader, to understand governmental GAAP financials. Then, when the GASB seeks public comments, spend a bit more time to give feedback. With the GASB’s reexamination, we are at a critical juncture; right now is the time to think and act. 

Citizens should be able to access financial information to knowledgably select and oversee elected officials, an essential ingredient for meaningful democracy.  It’s time to understand and let your clients know that “what do they do with all our money?” should not be a rhetorical question.

The views expressed are solely those of the author, not of the The City of New York or the Comptroller of The City of New York. 

LevineMichele Mark Levine, CPA, was appointed as Deputy Comptroller for Accountancy and The Chief Accountant of The City of New York on January 1, 2014. She oversees the City’s accounting and financial reporting including the preparation, and the coordination of the independent Audit, of the City’s Comprehensive Annual Financial Report (CAFR) which has been awarded of the GFOA’s Certificate of Achievement for Excellence in Financial Reporting for thirty four consecutive years.  Michele is also responsible for issuing and updating Comptroller’s Directives which dictate a wide range of accounting and internal control procedures for all City agencies.  Previously, Michele served as the Director of Accounting Services of the New York City Office of Management and Budget and concurrently as Comptroller of six public authorities and local development corporations.

Views expressed in articles published in Tax Stringer are the authors' only and are not to be attributed to the publication, its editors, the NYSSCPA or FAE, or their directors, officers, or employees, unless expressly so stated. Articles contain information believed by the authors to be accurate, but the publisher, editors and authors are not engaged in redering legal, accounting or other professional services. If specific professional advice or assistance is required, the services of a competent professional should be sought.