OVERALL SUMMARY In the past 40 years, the government or public sector of our economy has been steadily growing from less than 10% of our Gross National Product to about 33% in 1974. If government credit, tax expenditures and "off budget" items were included, total government expenditures would probably exceed 40%. Within a few years, the combined budgets (Federal, state and local) may exceed $1 trillion. With a public sector this large, its operations have a major impact on the economy. This impact could be positive if properly planned. However, it could also accelerate economic problems if not properly coordinated. Several large cities, states and other governmental units appear to be in serious financial difficulties. These problems may produce a devastating financial crisis unless timely corrective action is forthcoming. All too often, the financial statements of governmental units have proven to be less than adequate for providing basic financial information. Decision-makers, investors and the public have been misled by not being alerted to the problems which were developing. When difficulty occurred, they were confused and frustrated in their attempts to deal with the emerging financial crises. Knowledge of current deficits and surpluses is important for the annual evaluations of our financial affairs. To be meaningful, these amounts should include all costs whether paid or accrued. Furthermore, the total accumulated deficit is crucial because this is the amount of future taxes required to pay present liabilities. To the extent that this amount exceeds the amounts that can reasonably be expected of future taxpayers, a potential for crisis develops. The crisis could become real if taxpayers are no longer willing to pay for the current costs of government or if investors become concerned that governmental units may default on their obligations. In the private sector, proper accounting controls and sound financial reporting on an accrual basis are basic prerequisites to fiscal responsibility and a meaningful understanding of a unit's financial condition. If we are to have the same degree of accountability in the public sector, similar controls should be exercised over governmental affairs and meaningful financial reporting should be implemented. • As a result of our inquiry and our conviction that sound financial reporting is required to inform both shareholders in the private sector and the electorate in the public sector of the economic results for their specific groups, we have arrived at the following conclusions: -The United States Government should provide annual consolidated financial statements on an accrual basis including all entities in the Government and all programs which may require future taxes for present liabilities. -Cities, states and other political subdivisions should be required to publish similar statements annually and in connection with sales of securities to the public. OBSERVATIONS Concerning Current United States Government The Federal Government does not have a central accounting department. The Treasury Department consolidates and reports the status of funds and certain other accounting statistics. These summaries are not on a full accrual basis and are incomplete. The General Accounting Office, as the auditing arm of the Congress, approves the conceptual design of accounting systems for various departments or agencies. The Office of Management and Budget has responsibility for budget policy and procedures. The General Services Administration evaluates and recommends improvements to financial management systems. The Joint Financial Management Improvement Program, representing the above organizations, has as its objective the improvement of financial management practices. Governmental accounting is designed to facilitate control over expenditures by limiting the amounts which each Govern. mental entity can spend. It is essentially a cash-basis system and is generally not designed to summarize and report on operating results. The underlying arrangements and systems necessary to assemble financial reports are as important as the reports themselves. The final product is useful and reliable only to the extent that the data is complete, accurate and functional. • The Government produces an enormous amount of financial data and a wide variety of financial reports. However, such information is often duplicative and is not accumulated in one place or consolidated into reports or statements which permit an assessment of the overall financial condition or operating results of the entire Government. • Both Hoover Commissions recommended accrual accounting, and this led to the passage of Public Law 84-863. This law, supplemented by related Treasury Regulations, specifies that Government agencies must prepare business-type, accrualbasis financial reports. These laws and regulations have been in existence since 1956 but have been only partially implemented. • There are no related requirements for the reports to be summarized, consolidated or disseminated to the public. Through nearly 200 years, the United States has been trying to develop and strengthen the constitutional checks and balances and has attempted to incorporate into this structure the concept of accountability. A missing link is a unified and comprehensive report of the financial results of the Government's operations. 69-141 O-76-6 QUESTIONS Related to Governmental Financial Reporting An accrual accounting system which produces sound and con. sistent financial reports is essential to the concepts of financial responsibility in the private sector of the economy. Absence of a comparable system in the public sector raises numerous questions concerning the financial status of the Government. Some of these questions are set forth below. -Would an integrated financial reporting system and the re- -Many of the elected or appointed officials responsible for -Can Government have effective long-range planning with. -Can Government properly measure the costs, efficiency, productivity and impact of its programs and develop costs for the services it provides without using accrual accounting which includes all costs? -Would improved financial control and accountability over transfer payments and major Government assistance programs, such as welfare, food stamps, unemployment, medicare and student loans, assist Government officials to better estimate and plan for these needs in order to provide proper stewardship over Governmental funds? -Could improved "early warning" systems (especially where costs start to increase significantly) be developed if adequate financial information on major programs were available? ILLUSTRATIVE CONSOLIDATED FINANCIAL STATEMENTS UNITED STATES GOVERNMENT June 30, 1974 and 1973 For purposes of illustration, we have collected financial information currently available in several publications of the United States Government and have used this information as a basis for preparing consolidated financial statements of the United States Government in conventional format as of June 30, 1974 and 1973, and for the years then ended. The amounts reflected in the following illustrative financial statements and notes thereto have not been audited by Arthur Andersen & Co., and accordingly, we do not express an opinion on them. Even though these financial statements may not be complete and accurate in all respects, they do provide the necessary background for discussion of some of the issues involved. |