Improving Financial Management

Build a Strong Financial Management Infrastructure

FM01: Accelerate the Issuance of Federal Accounting Standards

BACKGROUND The federal government is the only major entity in the United States operating without generally accepted accounting standards. This is so despite repeated legislative requirements for standards and numerous unsuccessful efforts by both the executive and legislative branches to develop standards, agree on them, and implement them.

The Budget and Accounting Procedures Act of 1950 directs the comptroller general--in consultation with the Office of Management and Budget (OMB) and the Department of the Treasury--to prescribe accounting principles, standards, and related requirements for executive agencies.[Endnote 1] In response to that legislation, the General Accounting Office (GAO) issued accounting standards in its Policy and Procedures Manual for Guidance to Federal Agencies (Title 2). Subsequently, the constitutional question of whether the legislative branch can issue standards for the executive branch to follow and then audit against those standards surfaced. As a result, GAO, OMB, and the Department of the Treasury never reached agreement on accounting standards.

Agency accounting procedures and systems have consequently evolved unevenly and inconsistently over the years, contributing to the financial management problems that exist today. Agency financial audits have been subject to varying and conflicting interpretations of accounting standards. Agency financial systems and processes have been developed by government employees with varying levels of accounting sophistication and expertise. Also, agencies have often been caught in the middle of the continuing arguments on standards between GAO, OMB, and the Department of the Treasury.

In the fall of 1990, even as the Chief Financial Officers (CFO) Act of 1990 was in the final stages of debate, agreement was finally reached between GAO, OMB, and the Department of the Treasury on a process to resolve this omission and establish federal government accounting standards and principles.[Endnote 2] A memorandum of understanding (MOU) was signed by the three parties in October of 1990 to establish a Federal Accounting Standards Advisory Board (FASAB).[Endnote 3] FASAB is composed of nine members selected from both the federal government and private industry; the MOU principals- GAO's comptroller general, the Director of OMB, and the Secretary of the Treasury--provide oversight.[Endnote 4]

Subsequently, provisions were included in the CFO Act that require agency financial systems to comply with applicable accounting principles, standards, and requirements. OMB's deputy director for management was directed to establish governmentwide financial management policies and requirements for executive agencies. Further, the CFO Act requires that audits of financial statements prepared under the act are to be done in accordance with generally accepted government auditing standards. Those standards are issued by the GAO in its Government Auditing Standards.

Currently, FASAB plans to develop and recommend nine sets of standards and two concept statements that would address all federal assets and liabilities to be included in a consolidated financial statement for the federal government.[Endnote 5]

FASAB recommended its first set of standards--Accounting for Selected Assets and Liabilities--in December 1992. The MOU principals agreed to this recommendation by late March 1993. In May, OMB issued Circular A-134, Financial Accounting Principles and Standards, which established policies and procedures for approving, publishing, and interpreting federal financial accounting principles and standards. Finally, in June 1993, OMB transmitted this first set of accounting standards to the executive branch.

In June, the board approved two more sets of standards and one concept statement --Inventory and Related Properties, Direct Loans and Loan Guarantees, and Statement of Objectives of Federal Financial Reporting. FASAB principals were considering these recommended standards in the autumn of 1993. Four additional sets of standards and statements are under development and could be considered for issuance in 1994 to early 1995. They include Liabilities and Future Claims, Capital Expenditures, Financial Reporting Model, and Cost Accounting Standards.


Even with the establishment of FASAB and the cooperative efforts by GAO, OMB, and the Department of the Treasury, only three sets of accounting standards and one concept statement were recommended by the board in almost three years of existence. Moreover, plans published by OMB indicate that FASAB will not be done with its work until as late as 1997.[Endnote 6]

The ability to improve financial management depends on the establishment of a strong financial infrastructure on which to build financial processes and systems. The issuance of generally accepted accounting standards is a critical feature of the financial infrastructure. However, FASAB cannot simply adopt accounting standards established for private sector entities or state and local governments because the federal government is different from other entities and it needs standards that reflect its own environment and objectives. While these unique characteristics must be reflected in virtually every accounting standard, efforts must be made to accelerate the development and issuance of accounting standards. This step is crucial to reinventing government, since many other National Performance Review (NPR) recommendations rest on the assumption that the costs of services can be determined.

Under the existing process, the board can only recommend standards to the principals, and the standards are not final until the principals unanimously agree on and sign them. Subsequently, these standards must be published by both GAO and OMB.

The current structure and process of establishing accounting standards should be changed to:

--issue a comprehensive set of standards within 18 months, and

--provide more dedicated resources to standards development.

Finally, if standards cannot be issued within 18 months, consideration should be given to provide more independence to the board to issue standards.

It is anticipated that FASAB principals will have adopted three sets of standards (covering 16 accounting standards) and one concept statement by January 1994. Plans now in place would also project that FASAB would issue three more sets of standards and another concept statement by September 1994. Those issued standards would constitute over 70 percent of the board's planned standards. Given that progress, it is possible that the board could--within another six months--complete the last 30 percent. Issuing these standards is key to consolidated and consistent financial information reporting and statements. These standards will provide the basis for the development of integrated budget and financial systems that can then provide managers with good financial information for decisions on their programs.

OMB's recently published policies and procedures for interpreting statements of federal financial accounting standards (Circular A-134) raises the question of whether interpretation would be more appropriately handled by an independent board. The current process, as outlined in the circular, requires that agencies and individuals request interpretative guidance from OMB. Further, if OMB determines that an interpretation of the accounting standards is needed, OMB initiates a process that includes formal consultation with GAO and the Department of the Treasury, and results in a final interpretation signed by the OMB Director. This process allows for separate responses published by the Comptroller General and the Secretary of the Treasury.

OMB's interpretation process is largely outside the FASAB standard- setting process. It uses scarce OMB staff for accounting standard interpretation and creates the potential for decisions to be made that could be in direct conflict with board actions. Further, it limits the vital flow of information back to the board on interpretation of its published standards--feedback that would lead to refinement of those standards. Due to the short deadlines recommended for issuing all standards, we are not recommending a change in the interpretation focus at this time, but if an independent board is ultimately required, the board should be responsible for standards interpretation.

Beyond the nine members of the board, resources dedicated to the development of standards include a FASAB staff that prepares draft and final documents, reviews public hearings and comments, and staffs monthly board meeting deliberations on the draft standards. FASAB, through authority given in the MOU, can dedicate more resources to projects through task forces and supplemental staff. Considering the urgency of establishing the standards, it would seem appropriate to use this authority to accelerate development. Cost accounting is a prime example where the issuance of accounting standards is essential for the delivery of improved financial management. With the recent passage of the Government Performance and Results Act of 1993--which requires governmentwide performance measurement, budgeting, and results monitoring--the demand for consistent cost information across government will rise dramatically. Many of NPR's recommendations will rely heavily on the ability to deliver cost information about programs. This places even more importance and urgency on the board to develop and issue cost accounting standards. With the current level of staff, action on that standard is not expected to be completed until 1995.

Additionally, significant staff effort is required to prepare for the board's monthly meetings. Consideration could be given to reducing the frequency of those meetings to bimonthly or quarterly. More staff resources could be then dedicated to development of standards and less to preparation for board meetings.

Finally, should accounting standards not be issued within the time period recommended in this report, the administration should consider introducing legislation to give the board more independence to issue standards. A precedent exists in the financial community to have independent standards-setting boards establish accounting principles and standards. Subject to oversight and review by the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB) issues standards for corporations that wish to trade stock publicly. The SEC requires that to trade stock, these companies must abide by these standards and be audited annually against them. Additionally, the Governmental Accounting Standards Board (GASB) issues standards for state and local governments.

An independent board to set federal accounting standards could immediately issue and publish standards upon approval by the board and principals, eliminating the duplicative processes now in place. This would not preclude OMB from setting policy guidance for agencies to comply with the published standards.


1. Issue a comprehensive set of federal financial accounting standards within 18 months. (2)

FASAB should be required to develop and issue a comprehensive set of accounting principles and standards by March 1995. This comprehensive set should include the 11 sets of standards noted in this report. The board should maximize the use of task forces and a "fellows program" to augment staff to ensure successful delivery of all standards.

2. Create an independent federal financial accounting standards board with the power to develop, publish, and interpret accounting principles and standards for the federal government, if a comprehensive set of accounting standards is not issued within 18 months. (3)

The FASAB chair should report to the Vice President by December 1994 on the status of the issuance of a comprehensive set of accounting standards. Should that report conclude that issuance of those standards will not be within the 18 months required, OMB, in consultation with Treasury and GAO, should prepare legislation by March 1995 to establish an independent board to set accounting standards. This board would be structured so as to not to conflict with the constitutional division of powers between the executive and legislative branches.

This legislation should support the traditional division of powers between the executive and legislative branches by allowing an independent board to issue standards; OMB, the Department of the Treasury, and agencies to implement them; and GAO and inspectors general to audit against those standards.

Where relevant, the legislation should consider adoption of the current board structure for membership, process, and operation. Also, it should consider any relevant existing structures, such as GASB and FASB, which independently issue accounting standards for state and local governments and public corporations.

3. Dedicate staff to the Federal Accounting Standards Advisory Board (FASAB) to develop a high-level set of cost accounting standards. (2)

FASAB should temporarily supplement its current staff by recruiting a dedicated core staff of several senior financial individuals with cost accounting experience. These people should be recruited from not only the federal sector, but also state and local governments, private industry, and academia. The initial set of standards this staff develops would be high-level in nature to ensure issuance within one year and to allow experience to dictate further refinement of the standards in future years. These standards should be issued by December 1994.

ENDNOTES 1. The Budget and Accounting Procedures Act of 1950 (31 U.S.C. 3511(a)).

2. The Chief Financial Officers Act of 1990, Public Law 101-576 (November 15, 1990).

3. This MOU cited the Joint Financial Management Improvement Program (JFMIP) and the Federal Advisory Committee Act, as amended (5 U.S.C. App.) as the basis for establishing the board.

4. The nine FASAB members are representatives from GAO, OMB, the Department of the Treasury, and the Congressional Budget Office (these four are permanent board members); a representative of the defense and international agencies; a representative from a civilian agency; and three nonfederal members selected from the general financial community, the accounting and auditing community, and academia. Except for the permanent representatives, the members and the chair are selected jointly by the JFMIP principals (GAO, OMB, Treasury, and the Office of Personnel Management). Current board members are the four permanent representatives, representatives from the Departments of Defense and Interior, and two private citizens. Elmer Staats, former comptroller general of the United States, is the current FASAB chair.

5. The Federal Accounting Standards Advisory Board defines the 11 sets of standards and concept statements as the following: 1) Selected Assets and Liabilities; 2) Direct Loans and Loan Guarantees; 3) Inventory and Related Property; 4) Statement of Objectives of Federal Financial Reporting; 5) Financial Reporting Model; 6) Liabilities & Future Claims; 7) Capital Expenditures; 8) Cost Accounting Standards; 9) Revenue Recognition; 10) Consolidating Principles; and 11) Disclosures of Financial Information.

6. U.S. Office of Management and Budget, Federal Financial Management Status Report and 5-Year Plan, (Washington, D.C., August 1993), p. 11.

7. The Government Performance and Results Act of 1993, Public Law 103-62 (August 3, 1993).

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