Unlike FASB, the SEC has no control over GASB. But the Commission is obligated “to protect investors in the municipal markets from fraud, including misleading disclosures [emphasis added].” Taken together, the SEC’s own statements make a strong case that it is obligated to prevent fraud in state and local governments’ financial reports, which are confusing and obfuscate the truth.
The state and local governments’ annual financial reports are based on shoddy accounting practices. If confusing and misleading disclosures are considered fraud, then annual reports produce fraudulent disclosures.
It is confusing and misleading that the GASB requires state and local governments to keep two sets of books. Annual financial reports include governmental fund statements that are prepared using an accounting basis called the “modified accrual basis,” which in essence uses short-sighted cash accounting, while the consolidated financial statements are prepared using accrual accounting standards similar to those used by corporations.
Watch a recording of Truth in Accounting’s virtual event with special guest Steve Malanga, senior editor at City Journal. In this episode, we discussed the financial troubles of America’s largest cities and the effects of Biden’s infrastructure plan.
Author(s): Bill Bergman, Sheila Weinberg, Steve Malanga
The question of whether pensions and other retirement benefits should be more prominently reported by state and local governments is a burning controversy for the Governmental Accounting Standards Board.
What?s at stake is whether the public is being misled by when a governmental general fund is listed in financial statements as balanced while omitting those long-term debts.
GASB requires long-term obligations to be reported in governmentwide reports, but critics say lawmakers too often look only at cash flow funds.
?I implore GASB to stop this confusion and bewilderment,? wrote Sheila Weinberg, founder & CEO of Truth in Accounting in a comment letter. ?Our representative form of government is being harmed.?
Illinois is among the states that critics say have downplayed their tens of billions of dollars of unfunded long-term debts and should be forced by new GASB rules to become more transparent.
GASB officials, on the other hand, say that state and local governments have been required to disclose their long-term debts since the publication of GASB 34 about 20 years ago.
Although for more than half of my 53-year career in auditing, I managed to avoid any involvement with government GAAP. Yet I found myself interested in two articles about it in the April CPA Journal: “Is Government GAAP Necessary?” by Sheila Weinberg, and “The Future of Government Accounting Standards” by Joel Black. What appealed to me about both articles is that they were critical of the archaic, shortsighted, and conceptually groundless second set of “basic” financial statements prepared on the hybrid “modified accrual basis” that have been required in addition to full accrual financial statements since 1999 by GASB 34. Both authors are to be complimented.
The Black article is a scholarly summary of the long history of government GAAP and an explanation of the rationale for several differences from commercial GAAP. Accordingly, I believe the article would make a useful training tool for young staff. Black’s criticism of modified accrual basis reporting and his implied support for probable future improvements to the current model that he characterizes as “not major” follow:
Cash basis accounting allows governments to ignore long-term liabilities, such as the pension and health care promises they made to their government workers, teachers, and firefighters. It also allows governments to shift money around or borrow money to make the budget appear balanced. This method is so deceptive that the IRS does not allow corporations making more than $26 million per year to use it.
In his address, Gov. Pritzker highlighted that the budget includes the “full required pension payments,” which amounts to $9.3 billion. These payments are based upon a pension funding scheme so outrageous that an SEC official called it a “balloon payment on steroids.”
After the state was charged with securities fraud for making such claims in bond offerings, the state had to start being honest in its bond offering documents. In the official statement related to the Illinois General Obligations Bonds of October 2020 is the following quote: “The State’s contributions to the retirement systems, while in conformity with State law, have been less than the contributions necessary to fully fund the retirement systems as calculated by the actuaries of the retirement systems.” These actuaries say the amount required to properly fund the pensions is $14.5 billion, which is $5.2 billion higher than the amount included in the Governor’s budget.