JURIST Guest Columnist Joseph Marren of KStone Partners LLC continues his discussion of the history of financial reporting by the federal government...
art III continues the review of the history of financial reporting by the federal government in an effort to make clear that the Supreme Court should not show deference to Congress with respect to financial reporting laws that have been passed that significantly diminish political accountability and degrade the competitiveness of the electoral process. Part III primarily explores the history of the Federal Accounting Standards Advisory Board (FASAB) and the Financial Report of the US government ("the Financial Report").
The Chief Financial Officers Act of 1990 ("the CFO Act") required, for the first time in history, that federal agencies prepare annual financial statements and submit these statements to independent audits. The law required compliance with applicable accounting principles, standards, requirements and internal control standards. However, the CFO Act did not define the source or nature of the applicable standards. At this point in time, Office of Management and Budget (OMB) officials still held to their point of view that the General Accountability Office (GAO) standard-setting provision of the Budget and Accounting Procedures Act of 1950 ("the 1950 Act") was unconstitutional because it authorized a legislative agency to define accounting standards for executive agencies.
In October 1990, the US Secretary of the Treasury, the director of the OMB and the comptroller general (the sponsors, collectively) established FASAB as an advisory committee to develop accrual accounting standards and principles for the US government. FASAB was created to bridge the constitutional divide between the legislative and executive branches. The two branches agreed to work together in an agreed framework with an open, public process to determine the accounting standards that federal agencies should follow. The resulting Memorandum of Understanding [PDF] (MOU) cited the Joint Financial Management Improvement Program and the Federal Advisory Committee Act [PDF] as the basis for establishing FASAB.
The word "advisory" was included in FASAB's name to signify the retention of legal authority by the sponsors, whose approval would be required before FASAB's standards became effective. FASAB can only recommend standards to the sponsors, while the Office of Federal Financial Management an office within OMB decides upon new principles, standards and requirements for OMB after considering recommendations from FASAB. Although the MOU indicates that the sponsors have retained their authorities, separately and jointly, to establish and adopt accounting standards for the federal government, this authority has never been used since FASAB's inception. From a practical standpoint, the sponsors have bound themselves together. No accounting principle will be adopted unless all the sponsors agree.
The Government Management Reform Act of 1994 ("the Reform Act") requires that the head of each executive agency submit audited financial statements to the director of the OMB. The Reform Act also requires that the Secretary of the Treasury and the director of the OMB submit to the president and Congress annual government-wide financial statements that contain the results of operations of the executive branch. David Mosso, who was chairman of FASAB for ten years ending in 2006, commented [PDF] about the report:
The Financial Report is the off-budget vehicle for reporting more fully, with business type accounting, on federal financial accountability but it suffers from the syndrome "out of budget, out of mind." Nobody pays attention to the Financial Report in political discourse and decision making because its accruals are not integrated into the budget process.
The determination as to which organizations and agencies will be included in the Financial Report is governed by federal laws and is also based on guidance issued by FASAB in their Statement of Federal Financial Accounting Concepts No. 2: Entity and Display
(SFFAC 2) [PDF]. "Conclusive criteria" means that if an entity is included in the president's budget, then it should be included in the reporting entity. "Indicative criteria" are:
- Exercising sovereign power,
- Being owned by the federal government,
- Carrying out missions and objectives,
- Being subject to direct or continuing control by the reporting entity,
- Determining outcome of matters affecting the recipients of services and
- Having a fiduciary relationship with the reporting entity.
However, no single indicative criterion is determinative. FASAB is currently working on a federal entity project that will define the boundaries more clearly. However, it is apparent that the executive sets the boundaries and any new rules are unlikely to change that fact.
The membership of FASAB's board ("the board") initially included one member from the Treasury Department ("the Treasury"), OMB, GAO and the Congressional Budget Office (CBO) as well as two other members representing civilian and defense agencies and three public members. In 1999, FASAB sought and received designation from the American Institute of Certified Public Accountants (AICPA) as the "generally accepted accounting principles" (GAAP) standards-setter for the federal government. The government wanted AICPA to bless FASAB in order to have their pronouncements viewed as GAAP. Approval from AICPA was deemed critical by the sponsors, as it was viewed as "the good housekeeping seal of approval" and had real meaning in the private sector. One of AICPA's major concerns was independence. Veto power, however, was retained by the sponsors. AICPA said that if veto was ever used it would rescind FASAB's status.
In 2003, in order to persuade AICPA to continue to designate the FASAB as a promulgator of GAAP, the board was reconstructed and given greater autonomy. The reorganization resulted in four federal government members and six public members. However, as soon as the board was reconstructed with real outside members, the public members demanded that social insurance obligations be recorded in the government's consolidated financial statements. In May 2006, the board voted six to three (with one abstention) to proceed with a Preliminary Views [PDF] document that included a provision that some part of social security beyond the "due and payable" amount would be recognized on the federal balance sheet as a liability. All six public members voted in favor, and all four federal members voted against or abstained.
At the March 2006 board meeting, Treasury representative Robert Reid said that "social insurance was more of a contractual obligation than a recordable liability." He further asserted that that he did not think that the board could survive continuing down this path and that having it continue the way it is would be "very dangerous." At the May 2006 meeting, the comptroller general indicated [PDF] that "the last thing in the world that I want is for a veto to be made on a standard ... I hope it never happens, but feelings on this are pretty strong." Then, one public Board member retired after ten years and another board member was not renewed. In subsequent votes, the board deadlocked at five to five. The replacement members had both previously represented OMB. Once the board was "re-adjusted," FASAB killed the social insurance project.
Another example of how FASAB has operated is informative. The Department of Defense (DOD) was able to exercise [PDF] near-veto power with respect to accounting principles related to certain specialized defense situations. The board's deference was due to the fact that the DOD had many powerful allies in the US Congress who might be willing to provide exemptions or bring into question FASAB's role.
On December 3, 2012, the Financial Management Service (FMS), which is a bureau of the Treasury, published the combined statement of receipts, outlays and balances for the 2012 fiscal year ("the combined statement") in accordance with the provisions of 31 U.S.C. § 3513(a), which provides in part that "[t]he Secretary of the Treasury shall prepare reports that will inform the President, Congress, and the public on the financial operations of the US government." This statement presents budget results and the cash-related assets and liabilities of the Federal Government with supporting details.
David Mosso made the following remarks about the president's budget and, by implication, the combined statement at the "Representation Without Accountability" conference held at Fordham Law School in 2012:
[T]he OMB and the Congressional appropriations committees have been unwilling to change the accounting basis of the federal budget to the accrual basis ... The budget's cash basis accounting, selectively applied, hollows out the fiscal body of the federal government ...The accounting underlying the president's budget ... obfuscates federal financial accountability ... [It] understate[s] ... the headline numbers that dominate Congressional and public discussion and that form perceptions of the government's financial health. It seems to be an incontrovertible conclusion that the ship of state is being steered with a severely broken compass ... That false picture nurtures financial profligacy ... Cash basis accounting in the president's budget is the spearhead of reckless fiscal policy, whether intentionally reckless or just bumbling along with inadequate and misunderstood information about federal financial health ... As an accountability report, the president's budget woefully shortchanges the American public.
The debates at the Constitutional Convention in 1787 indicated that there was widespread agreement that, in the words of Roger Sherman, "money matters" were "the most important of all." Throughout the convention, every discussion was based on the premise that the protection of the people's money is a legislative function. Justice William Douglas echoed this notion in his dissent in US v. Richardson
. Despite this clear direction, the executive branch has complete control over the president's budget and the official "statement and account." An example of the irrelevance of Congressional input is the treatment of Fannie Mae and Freddie Mac. After the US government assumed control in 2008 of these two federally chartered institutions, the CBO concluded that the institutions had effectively become government entities whose operation should be included in the federal budget. However, OMB felt differently, and the combined statement reflected the budget's approach. The bottom line is that Supreme Court deference is wholly inappropriate to a legislative branch that has abdicated its financial reporting responsibility in an effort to diminish its political accountability. This effort has significantly degraded the electoral process as citizens must vote without the benefit of financial information required to be published by the US Constitution
This concludes my history of financial reporting by the federal government, and in Part IV, I will examine the role that AICPA has played in the massive accounting fraud that has been perpetrated on the American citizenry.
Joseph Marren is the President and Chief Executive Officer of KStone Partners, an SEC-registered investment advisor that specializes in managing funds of hedge funds. Previously he was Head of Business Development in the mergers and acquisitions departments at several firms including Sagent Advisors, Citigroup, Credit-Suisse and DLJ. He is the author of two books on mergers and acquisitions, taught at New York University Stern School of Business and is a graduate of Fordham University School of Law.
Suggested citation: Joseph Marren, The Statement and Account Clause and Citizens United: Part III, JURIST - Sidebar, Feb. 26, 2012, http://jurist.org/sidebar/2013/02/joseph-marren-citizens-part3.php
This article was prepared for publication by Stephen Krug, an associate editor for JURIST's professional commentary service. Please direct any questions or comments to him at email@example.com