Deficiencies in Accounting and Financial Reporting of State and Municipal Governments

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

Detroit's bankruptcy highlighted what savvy observers have been warning about for years: The finances of many states, cities, and other localities are in dire straits. The authors believe that this financial calamity is partly attributable to the outdated and ineffective financial reporting regime for public entities, and that fixing this regime is a necessary first step toward fiscal recovery. The current regime omits foreseeable long-term consequences from reported financial numbers. This omission blinds citizens, and perhaps even politicians, to the long-term repercussions of policy choices. It may even prompt politicians to choose economically suboptimal measures precisely because it allows them to misrepresent their financial performance to voters.