Improving Financial Management




Article I, Section 9 of the U.S. Constitution requires that ". . . a regular statement and account of the receipts and expenditures of all public money shall be published from time to time." However, the federal government's existing financial management infrastructure is so inadequate that no such reliable report can be made. The Department of the Treasury has been preparing prototype financial statements for the last 20 years, and still cannot provide any assurances regarding their accuracy.


The U.S. Securities and Exchange Commission (SEC) requires that corporations meet very strict standards of financial management before their stocks can be publicly traded. All such companies are subject to rules requiring disclosure of their financial condition, operating results, cash flows, long-term obligations, and contingent liabilities. They are also required to be audited by independent certified public accountants (CPAs). These requirements exist to provide a certain level of assurance to investors in the stocks of these companies. These requirements are considered to be common business practices. They are common not just because the SEC requires them, but because they instill a level of financial discipline that enhances the financial viability of the firm. It's the right thing to do. Unfortunately, these common business practices are very uncommon in the federal government.

The growing public outcry over the financial management of the federal government, the ever-increasing national debt, and the concern regarding taxes have created an environment where the government is being held more accountable for its actions than ever before. The information age we live in provides unprecedented opportunities to inform the nation of the performance of its government. The public expects an informative response when accountability is demanded. Our recommendations address the challenges put to the government to explain its spending decisions, and the ramifications thereof. These recommendations are facilitated by the Chief Financial Officers (CFO) Act of 1990, requiring audited financial statements of major departments and agencies.[Endnote 1]

The CFO Act of 1990 found that "current financial reporting practices of the federal government do not accurately disclose the current and probable future cost of operating and investment decisions, including the future need for cash or other resources. . . . "[Endnote 2] The President's budget discloses contingent liabilities of the federal government guarantees and their estimated costs. An experimental balance sheet and report on claims on future budgetary resources have also been published. However, these documents are neither readily available to the general public nor easily understood. Therefore, the public is not aware of the kinds of exposure to which the federal government may be liable nor the magnitude of these contingencies and future claims.

When contingent liabilities move from the category of being contingent to actual, they seem to occur as a surprise to the public, as in the case of the savings and loan scandal. They also seem to come as a surprise in the budgetary process, as in the case of accounting for guaranteed loan programs. Before the Credit Reform Act of 1990, guaranteed loans were budgeted at no cost to the government until later years when loans defaulted and federal payments were made. Under credit reform, an estimate of future losses has to be budgeted at the time the guarantees are extended. Other contingent liabilities against the federal government--such as deposit insurance, pension guarantees, and other insurance--can be estimated through financial analysis and could be budgeted at the time the contingent liabilities are incurred or assumed.[Endnote 3] Expected costs could be recognized as a liability in financial statements, and footnotes could contain information on dollar ranges for contingent liabilities where exact amounts are uncertain. Federal retiree benefits could also be budgeted as they accrue. The government could also report on expected claims on future budgetary resources based on existing legislation.


1. Provide a consolidated annual report on the finances of the federal government, including contingent liabilities. (1)

The Department of the Treasury should continue to issue prototype consolidated financial statements, and should set a goal of 1997 as the first year to drop the prototype disclaimer and issue audited (to the extent possible) consolidated financial statements on the federal government. While not all components of the federal government would be required to be audited by that time, this goal would drive the improvement in data quality toward a definite destination. These statements should include addenda with information on the financial statements of government sponsored enterprises and governmental trust funds, all of which have some contingent liability aspect for taxpayers. The Federal Accounting Standards Advisory Board (FASAB) is currently addressing accounting standards for claims on future budgetary resources of the federal government. FASAB should expedite its standards development process on this issue in order to provide timely guidance for this report.

2. Issue an annual financial report to the taxpayers. (2)

The Department of the Treasury should develop a simplified version of the consolidated financial statements for distribution to the public by the President by June 1995. In order to provide an accounting to the public, an annual statement of the government's revenues, expenditures, investments, contingent liabilities, and financial condition should be provided to the public in terms that are easy to understand. This would provide some much-needed accountability from the government to its citizens. The report could be called the Annual Accountability Report to the Citizens, and its publication should be codified in a Presidential Executive Order in order to ensure its ongoing publication.[Endnote 4] This information could be provided in printed and electronic form to provide wide accessibility to thepublic.

3. Develop a method of identifying and budgeting for the expected costs of contingent liabilities of the federal government. (2)

OMB, in consultation with the Federal Accounting Standards Advisory Board (FASAB) and the CFO Council, should perform a study proposing a strategy for identifying and budgeting for future claims and contingent liabilities by September 1994. Similar to efforts to recognize and fund the costs of loan programs under the Credit Reform Act of 1990, contingent liabilities of the federal government should be costed up front and budgeted for based upon expected loss or subsidy rates.


1. The Chief Financial Officers Act of 1990 also requires that OMB "provide complete, reliable, and timely information to the President, Congress, and the public regarding the management activities of the executive branch." Public Law 101-576 (November 15, 1990).

2. Ibid.

3. The importance of recognizing these contingent liabilities as accrued costs is explained in "Sound Fiscal Management in the Public Sector," a report by Arthur Anderson & Co., prepared in 1976: "The cost of pension plans [for example] is an additional employment cost incurred during the period worked by the covered employees and should be accounted for on that basis. If any one period is not charged with the total pension costs applicable, some later period must bear the burden of pension costs which are unrelated to its activities. In such a case, the financial statements of both periods are misstated. It is equally necessary to improve financial statement disclosure of pension plans, unfunded liabilities, and the methods of cost determination. Such disclosures help to minimize the potential for abuse and call attention to unwise postponement of potentially dangerous funding problems."

4. A title suggested by the Association of Government Accountants (AGA) in its preliminary "Status Report on AGA Task Force--State of the Nation Report: Federal Financial Statements for Taxpayers," presented on June 22, 1993.

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