Measuring Financial Stress on State and Local Governments

A Proposal for Early Detection

Khaled Abdel Ghany, PhD, CPA

A recent GASB exposure draft (ED) proposes that government accountants disclose in the comprehensive annual financial report any substantial doubt about the ability of a government entity to continue as a going concern. The ED uses the approach/methodology introduced by the AICPA's Statement on Auditing Standards (SAS) 59. A financially troubled government entity normally goes into a financial stress phase before reaching bankruptcy. A financial stress prediction model for state and local governments, presented below, can be used by government accountants and auditors in order to take the necessary corrective actions before a government entity reaches the point where it is unable to continue as a going concern or faces bankruptcy.