APPENDIX 3 HISTORY OF ACCOUNTING IN THE UNITED STATES GOVERNMENT 1789-The first important legislation dealing with the fiscal authority of Congress was the Treasury Act of 1789, which created the Department of the Treasury. This Act established an auditor and comptroller within the Treasury. The Treasury was to submit an annual report to Congress. 1921-The Budget and Accounting Act was passed by Congress in 1921. This law made a number of important changes in the financial management of the Government, the most significant being the creation of the Bureau of the Budget and the General Accounting Office (GAO). The Bureau of the Budget was established in the Treasury Department to be administered by a director who was responsible only to the President. The GAO was established independent of the Executive Branch. It became the auditing department for Congress and also kept the ledger accounts for disbursing and collecting offices. 1933-In 1933, the President proposed that accounting should be the responsibility of the Executive Branch, and that auditing should remain the responsibility of the Legislative Branch. 1937-In 1937, the Senate commissioned the Brookings Institute to study the financial administration of the Federal Government. Among their findings was, "there exists no control over the preparation of govern. ment financial statements." 1939-The Bureau of the Budget was transferred from the Treasury to the Executive Office of the President. 1947-The Joint Program for Improving Accounting in the Federal Government (JPIAFG) was established in 1947. This was the forerunner of the present Joint Financial Management Improvement Program (JFMIP). 1949 The first Hoover Commission recommended the creation of an "Ac- The Federal Property and Administrative Services Act was passed in 1950-The Budget and Accounting Procedures Act of 1950 gave the establish- 1956-The second Hoover Commission made a strong recommendation for accrual accounting and this led to Public Law 84-863 which required all Government agencies to install accrual accounting "as soon as practical." 1967-The President's Commission on Budget Concepts made several recommendations as a result of its study in 1967. It recommended against a separate capital budget, but called for a unified budget which included the trust funds. The Commission recommended getting away from the singular concern with the bottom line of the budget (surplus or deficit), and emphasized the financing of the deficit. Most of its recommendations regarding the budget were adopted. However, it also recommended accrual accounting and that the annual budget be presented on an accrued expenditure basis. This was endorsed by two Presidents but was not implemented during their administrations. Again, the Congress appeared to prefer the "obligation" type budget. There were some improvements made in accruals for the year-end statements of the Federal Government, but not always at the installation or operating level. 1970 The President created the Office of Management and Budget (OMB), replacing the Bureau of the Budget. The Legislative Reorganization Act directed OMB and Treasury to modernize budget and fiscal management through installation of a new EDP system. To date, this project is still in the planning phase. 1973—The President transferred much of the Executive Branch responsibility for accounting and financial reporting from OMB to GSA. In addition, the administrator of GSA was made a member of the JFMIP. 1974 The Congressional Budget and Impoundment Act of 1974 created the Congressional Budget Office and a new budget committee for each house of Congress. The new budget committees and the Congressional Budget Office were charged with the responsibility for overseeing the Congress' work on the budget and insuring that the budget was reviewed as a whole and not just by individual appropriation. The new Congressional Budget Office is to be the OMB of the Legislative Branch of Government-coordinating and assisting the work of the two Congressional budget committees. APPENDIX 4 ACCOUNTING AND REPORTING QUESTIONS RAISED BY ILLUSTRATIVE CONSOLIDATED FINANCIAL STATEMENTS With respect to the illustrative financial statements, the following are some of the accounting and reporting questions that arise. -Are the criteria established herein for including Government and quasiGovernment entities in these statements appropriate to best reflect the overall financial position and operating results of the Government? -Should future retirement and Social Security benefits as shown be treated as liabilities? -Should increases in the official rate for gold be treated as income? -Should individual income taxes receivable be recorded on an accrual basis? -Does the Government have adequate procedures to properly account for inventory items on hand? -Have "excess materials awaiting disposition" been stated at net realizable values? -Does the Government have adequate procedures to properly account for capital assets? -Is it appropriate for the Government to capitalize and depreciate the cost of assets? -Are reserves for loan guarantee defaults and other contingencies required to reflect potential losses or present liabilities? APPENDIX 5 EXCERPTS FROM SECTION 3 OF SECURITIES ACT OF 1933 Exempted Securities Sec. 3. (a) Except as hereinafter expressly provided the provisions of this title shall not apply to any of the following classes of securities: Securities of Governments and Banks (2) Any security issued or guaranteed by the United States or any territory thereof, or by the District of Columbia, or by any State of the United States, or by any political subdivision of a State or Territory, or by any public instru mentality of one or more States or Territories, or by any person controlled or supervised by and acting as an instrumentality of the Government of the United States pursuant to authority granted by the Congress of the United States Senator WILLIAMS. There seems to be some question about whether generally accepted accounting principles exist for local units of government. Do such standards exist now? Mr. KAPNICK. Well, there's a great number of booklets that have been prepared on what the proper accounting should be, Mr. Chairman, for governmental units. For example, the American Institute of Certified Public Accountants has published an audit guide which has certain data. The Municipal Finance Officers Association has also published certain ones. The real need in this area is for leadership in getting a uniform approach to financial reporting. I believe that as outlined in your bill the leadership that the SEC would be required to give in this area in developing uniform standards is an approach that is desirable at this point in time. Obviously, there's been several points that have not been covered in some of these audit guides because the profession has not necessarily ever faced the real issue of what is it the investor needs. You're forcing them to take a look at this and this can be done within a very short period of time in getting uniform standards. Senator WILLIAMS. Now this Industry Audit Guide for Audits of State and Local Government Units prepared by the American Institute of Certified Public Accountants is an imposing document that I'm holding and showing to you. I would think that would be a very useful guide for State and local governmental units. Am I right? Mr. KAPNICK. It is a very useful guide. However, there are two or three areas which I'm sure they're going to want to be given more attention to such as consolidation statements and the appreciation of fixed assets which gets into the allocation of costs to programs and to specific generations of taxpayers. Senator WILLIAMS. This AICPA book probably in many areas is probably gathering dust on some shelf in the city hall in many areas. Mr. KAPNICK. I'm afraid so. Senator WILLIAMS. What we're trying to do is to bring the best of your profession to bear not only on an orderly basis but a required basis. Mr. KAPNICK. That's right. Senator WILLIAMS. We have two bills before us. Under either bill, the SEC would have the authority and responsibility to prescribe the forms and practices to be used in municipal accounting and reporting. Should the SEC attempt to exercise the power directly or would you recommend that the Commission play a residual role as it has in the corporate area, allowing the industry to develop appropriate standards in the first instance? Mr. KAPNICK. I would recommend that the SEC play a residual role and also a leadership role in developing these standards quickly. The merit of your bill it seems to me in one respect is to develop a uniform approach on a timely basis. That can only be done by a regulatory agency such as the SEC. They then should have the residual responsibility whereby in my opinion they retain the documents that are being filed, not necessarily on a pre-compliance basis, as your bill recommends this is the difference between yours and Senator Eagleton's bill. I believe that you and the other Members of the Congress as you get experience with what is happening as a result of |