GOVERNMENT FINANCIAL REPORTING

Government financial reporting is the process whereby governments report their financial position and activities to the public at large. These reports are the standard that citizens, oversight bodies, and other stakeholders use to judge their government's efficiency, effectiveness, and overall financial condition. This article examines government financial reporting from a historical perspective and will discuss this contemporary issue at the federal level.

HISTORY

Government financial reporting at the state and local levels evolved throughout of the twentieth century. The National Committee on Municipal Accounting (NCMA) was established in 1934 by the Government Finance Officers

Association and began to promulgate formal standards. It issued the first "blue book" in 1936, Bulletin No. 6, Municipal Accounting Statements. From that point, government financial reporting, along with government accounting and auditing, began to develop into what it is in the early twenty-first century.

The National Council on Governmental Accounting (NCGA), which succeeded the NCMA, initiated the basic format of the current blue book, which was later officially titled Governmental Accounting, Auditing and Financial Reporting (GAAFR ). In 1968 generally accepted accounting principles (GAAP) for government were established in GAAFR. Government accountants and financial managers use the blue book to this day as a reference for current standards and practices in government financial reporting.

In the past, some confusion existed concerning who set the standards that constituted GAAP for governments. This issue became prominent when the American Institute of Certified Public Accountants (AICPA) issued an industry audit guide in 1974 that, while endorsing most, modified principles set forth by the NCGA. The AICPA later recognized NCGA Statement No. 1, Governmental Accounting and Financial Reporting Principles. Even after this statement was recognized, questions still arose. Conflicts with the standards set by the NCGA generally were associated with pronouncements issued by the Financial Accounting Standards Board. These conflicts were not resolved until the Governmental Accounting Standards Board (GASB) was established in 1984. From then on, the GASB was clearly established as the primary authority for setting government standards.

The GASB was created as a five-member board under the Financial Accounting Foundation (FAF). In addition to the GASB, the FAF also established the Governmental Accounting Standards Advisory Council (GASAC) to advise the GASB of its members' views and the views of the organizations they represent. The GASAC assists the FAF in approving appointments of GASB members. Figure 1 illustrates the relationships among these bodies.

FINANCIAL REPORTING AT PRESENT

Generally, government financial reporting is the process of communicating information concerning a government's financial position and activities. Government financial reports have several practical uses: They can be used to compare actual financial results against the legally adopted budget; assess financial condition and results of operations; assist in determining compliance with finance-related laws, rules, and regulations; and assist in evaluating efficiency and effectiveness. Although government financial reports cannot meet the needs of every user, they can be used in many ways to assess accountability and to make effective decisions.

At the federal level, the Office of Management and Budget (OMB) promulgates reporting standards. The office responsible for this function within the OMB is the Office of Federal Financial Management. Pursuant to the Chief Financial Officers Act of 1990, a deputy director for management was established within the OMB to coordinate financial management functions with the various federal agencies. Moreover, each agency of the federal government is required to specify a chief financial officer who is responsible for financial reporting, as well as all other financial management functions.

Each executive agency is required to prepare and submit audited financial statements to OMB after each fiscal year. One such report is a combined Performance and Accountability Report, which is designed to obtain a more accurate picture of agency performance in terms of both operational performance and financial information. Once the reports are submitted by the agencies, the U.S. Department of the Treasury, in consultation with the OMB, issues the Financial Report of the United States Government.

At the state and local levels, GASB has the responsibility to establish and improve financial reporting standards. Three primary user categories of government financial reports exist: citizens, legislative and oversight bodies, and investors and creditors. The executive branch and subordinate bureaus/agencies are not identified as primary users because they possess the ability to obtain this information from other sources.

Although various internal and supplemental financial reports exist, the most common is the comprehensive annual financial report (CAFR). The GASB's 1987 Codification of Governmental Accounting and Financial Reporting Standards stated, "every government should prepare and publish as a matter of public record, a comprehensive annual financial report." A trend toward fiscal discipline in government has generated a demand for better information on which to base decisions. Consequently, state and local governments changed their financial reporting from basic stewardship reports on the various government funds to a more corporate-style report that offers analysis of the long-term impact of financial management decisions. Specifically, as a result of GASB Statement 34, financial reports now include comprehensive information about the cost of providing government services and show all of a government's liabilities and assets, including infrastructure. GASB Statement 34 called for government-wide reporting, enhanced fund reporting, and a management discussion and analysis.

The concept of government-wide reporting was the most dramatic change. Until this significant change, government followed only the modified-accrual basis of accounting. The change is important to potential lenders and taxpayers because of the need to capitalize and depreciate general capital assets or infrastructure. Information concerning infrastructure will include the cost and the anticipated service life of roads, bridges, sewer and water systems and other capital assets. Since state and local governments invest $1 out of every $10 ($140 billion to $150 billion annually) in the construction, improvement, and rehabilitation of capital assets, that information should be valuable to all stakeholders.

The elements of fund reporting have not changed much over the years. Fund categories continue to apply their current measurement focus and basis of accounting; nevertheless, reporting fund types (such as special revenue and capital projects) is no longer required for governmental funds in the basic financial statements according to GASB Statement 34. This approach established two new fund types, permanent funds (governmental) and private-purpose trust funds (fiduciary). Governments must also provide a reconciliation to the government-wide financial statements at the bottom of fund statements or in a separate schedule.

A CONTEMPORARY FEDERAL ISSUE: OMB CIRCULAR A-123

In response to the Sarbanes-Oxley Act of 2002, requirements of which increased internal control responsibilities for management and auditors of publicly traded companies, the OMB announced a rewrite of OMB Circular A-123 on December 21, 2004. The official title of this circular is Management's Responsibility for Internal Control, but it is dubbed by many government financial mangers as "Sarbanes-Oxley for Government." It contains sweeping changes to many aspects of federal financial reporting. The revision of this document is an effort by the OMB to help ensure that federal agencies' fiduciary responsibilities for public funds are fulfilled by strengthening requirements related to evaluation, documentation, and reporting on internal controls.

The specific objectives of internal controls, as defined by OMB Circular A-123, are threefold: effective and efficient operations, reliable financial reporting, and compliance with applicable laws and regulations. As such, the changes announced in the circular were in keeping with the objectives. Effective in fiscal year 2006, federal agencies must:

• Assess and document their internal controls over financial reporting
• Document their assessment of the effectiveness and reliability of those internal controls
• Provide a separate assurance statement as part of the annual Federal Managers Financial Integrity Act Section 2 (assurances asserting whether the internal controls over financial reporting are effective)

SUMMARY

Citizens and other stakeholders use government financial reports to assess a government's performance and overall financial position in order to hold a government accountable for its actions. At the federal level, the OMB promulgates reporting standards and reviews audited financial statements from each agency. In turn, the Department of the Treasury, in consultation with the OMB, issues the Financial Report of the United States Government each fiscal year. In response to the Sarbanes-Oxley Act, the OMB announced a rewrite of OMB Circular A-123, which contains sweeping changes to many aspects of federal financial reporting, effective in fiscal year 2006.

At the state and local levels, the process of government financial reporting evolved during the twentieth century. The blue book, or GAAFR, was established and continues as the primary reference for government financial reporting standards. The GASB was established in 1984 and is the authority for setting those standards. The most common type of government financial report is the CAFR. These reports are not merely stewardship reports, but also include capital assets and a management discussion and analysis.

see also Government Accounting; Not-for-Profit Accounting

bibliography

Berkowitz, S. J. (2005). Assessing and documenting internal controls over financial reporting. The Journal of Government Financial Management, 54 (3), 42–48.

Government Finance Officers Association. (2005). Governmental accounting, auditing and financial reporting. Chicago: Author.

Governmental Accounting Standards Board. (1999). GASB over-hauls reporting model. Journal of Accountancy, 188 (2), 4.

Hawkins, K. W., and Hardwick, K. (2005). Revised OMB Circular A-123: SOX for federal agencies. The Journal of Government Financial Management, 54 (3), 54–61.

Robert J. Muretta, Jr.