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The Authors Respond: Reconciling Budgetary Performance with GASB Statements

James Naughton, JD, DBA, and Holger Spamann, PhD

We are very grateful for David A. Vaudt's comments on our article and appreciate this opportunity to respond. We agree that GASB provides an enormous amount of information and that GASB standards are a work in progress. We also agree that simply adopting FASB standards without recognizing some of the differences in business practices (e.g., revenue from sale of goods versus tax collections) would be unwise. These points were clear in our article.

The core argument in our article, which was not addressed directly by Vaudt's letter, is that there are elements of an effective accrual accounting system that are currently absent from public sector reporting. In particular, one of the key differences between FASB and GASB reporting that we talk about at length in our article is FASB's requirement to produce a cash flow statement using the indirect method. This statement reconciles accrual-based performance (i.e., net income) to cash-based performance (i.e., change in cash), something that is absolutely critical to understanding economic performance.

We believe that a statement which reconciles the differences between cash-based performance on the budget and accrual-based performance on the GASB financial statements is a critical first step in improving public sector financial reporting. We acknowledge that there are many aspects of the budgetary process that will make this very difficult to implement, but we believe it is a worthwhile endeavor because this type of reconciliation would be invaluable.

It would illuminate more clearly many of the accounting gimmicks that we and others have identified in public sector finances. It would also encourage the adoption of standards that are closely aligned with the accrual principles inherent in FASB standards because any differences between the accrual measures and actual cash outlays would be captured in the reconciliation. As we noted in our article, recent GASB publications, such as its Preliminary Views, “Recognition of Elements of Financial Statements and Measurement Approaches,” suggest that GASB is presently moving away from accruals and toward more cash-based measures. This is a dangerous path, and one we hope that GASB does not pursue.

James Naughton, JD, DBA. Northwestern University, Evanston, Ill.
Holger Spamann, PhD. Harvard Law School, Cambridge, Mass.

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