Governmental accounting: What's wrong with the status quo?;

              GOVERNMENTAL ACCOUNTING
What's wrong with the status quo?
vices have expanded, so has the
need for information that can help
internal and external users judge the
effectiveness of governmental
operations.
Finally, even the current standards
are not uniformly adhered to. As a
result, the reporting system of a
given governmental unit may be
poor, leading to the kind of problems
faced in Cleveland and New York.
In addition to these issues, there
are four changes now taking place in
our nation that have complicated
government financial planning and
created an urgent need for improved
reporting.
These four developments are:
Growth of government. The im­portance
of state and local govern­ment
grows in direct proportion to
the numbers and diversity of the
people they serve. The estimated
revenues of these 39,000 units ex­ceeded
$181 billion in 1975, not
counting federal monies of more
than $59 billion.
Increasing inflation. Citizens al­ready
feel the effects of inflation and
do not wish to carry the burden of
additional taxes. Thus, the dilemma
of either raising taxes or cutting
services. Inflation will not allow us to
stay where we are.
Aging of America. The proportion
of elderly people in the American
population is increasing. This is
going to affect not only the econo­my—
and the need for improved
reporting —but also the resources
that will be needed to meet pension
obligations.
Sale of Government Obligations.
The bond buyer does not look for a
return on that bond in the immedi­ate
future; he ordinarily buys for a
longer period of time. And so, while
it is true that financial statements
covering one year provide some
assurance that next year's interest
payments will be met, the longer
term prospects of payment are not
addressed in the financial informa­tion
ordinarily available to the bond
holder.
Search for Principles
Perhaps the difficulty of developing
financial information to meet the
needs of taxpayers and creditors
starts with the lack of a coordinated
effort. Thus, the search for principles
is conducted on two distinct levels:
on the one hand by state and local
governments, and on the other by
professional organizations.
Efforts by Governments
There has been no real agreement to
date by those inside government on
how to communicate an overall
understanding of the activities of
any particular governmental unit. A
number of attempts are being made
to achieve this. One is by presenting
financial information that combines
a number of interrelated governmen­tal
activities, thus providing the
external user with an annual financial
overview. The information could be
presented either in the annual finan­cial
statements or in a separate
presentation.
This approach has certain bene­fits:
(1) It allows the information to
be prepared that is useful to external
users while retaining the information
needed for internal users. Thus,
continuity is achieved with financial
information provided in the past.
(2) It provides a method of obtain­ing
the views of external users on
what information was useful.
However, this combined financial
information must be carefully pre­pared.
Otherwise, it will confuse
rather than enlighten readers of
financial statements.
What are the methods being used
to develop such financial informa­tion?
Three different approaches
have been taken.
Compilation. As the name implies,
this adds together existing fund
based financial information. While
the compilation gives some idea of
the magnitude of the total opera­tions,
using different bases of ac­counting
makes compilation the
most confusing method of present­ing
combined financial information.
Particular care must be taken to
disclose that the information has
been prepared on different account­ing
bases.
Aggregation. This method also
provides a sum of fund balances.
However, when appropriately done,
certain funds can be grouped on the
same accounting basis. Additionally,
inter-fund transactions are elimi­nated
to prevent the inflating of fund
balances.
Comprehensive. This approach
uses one accounting basis for all
material items appearing in the
financial statements. Such a presen­tation
is valuable to taxpayers and
others because it puts all activities of
state and local governmental units
on the same footing.
Efforts by Professional Organizations
A number of professional organiza­tions
are working on accounting
proposals in answer to the needs for
improved financial reporting, with a
particular emphasis on external
reporting. The two most prominent
efforts are those by the National
Council on Governmental Account­ing
and by the Financial Accounting
Standards Board.
The NCGA is completing its revi­sion
of the existing reporting stan­dards
(essentially compliance report­ing).
It is also developing a reporting
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