The GFOA Wants to Reassess the GASB's Role

The GFOA Executive Board believes the time has come to reassess the GASB’s continued role as the authoritative accounting standard setter for state and local governments.


The GFOA’s position on the Governmental Accounting Standards Board (GASB)

Did the GFOA’s Executive Board recently adopt a new position regarding the Governmental Accounting Standards Board (GASB)?

Yes.  The GFOA’s Executive Board voted in December 2006 to begin to work together with the other major state and local government organizations to reassess the GASB’s continued role as the authoritative accounting standard-setting body for state and local governments. One specific alternative to be explored is the possibility of transferring responsibility for setting accounting standards for state and local governments from the GASB to the Financial Accounting Standards Board (FASB), which currently sets accounting standards for business enterprises and not-for-profit organizations.

What has led the GFOA to question the GASB’s ongoing role as a standard-setting body and to call for its “sunset”?

The GFOA has come to believe that the GASB’s determination to move beyond the traditional boundaries of accounting and financial reporting is a symptom of a much deeper underlying condition. After operating for more than 20 years, the GASB has essentially completed the major tasks that it was originally created to accomplish (e.g., financial reporting model). The GASB’s success has left it with something of a dilemma. Either the board must transition into more of a “maintenance mode” and focus primarily on addressing the demand for accounting guidance as it arises naturally in practice, or the board must actively seek creative new outlets for its standard-setting energies.

The GFOA naturally favors the first option because it believes that the notion of cost benefit requires that the supply of accounting standards be justified by real demand. The GASB, on the other hand, clearly seems to have opted for a more “supply-driven” approach, which presumes that demand for the board’s services is essentially limitless.

Thus, the GASB appears in recent years to be attempting more and more to find an accounting solution to every financial problem (“to a man with a hammer, everything looks like a nail”). Thus also the GASB’s insistence that its charge extends not just to accounting, but to all aspects of accountability, thereby staking out a claim to set future reporting standards for virtually all aspects of public administration, both financial and nonfinancial.

All of these developments have led the GFOA’s Executive Board to conclude that the GASB’s time has now come and gone, and that some other vehicle would better meet the authentic need of state and local governments for accounting standards.

What caused the GFOA to take a new position at this particular time?

While the immediate stimulus for action was the GASB’s insistence on proceeding toward the establishment of a formal project on performance measurement reporting (which the GASB refers to as “service efforts and accomplishments reporting” – SEA), over the strenuous objections of the GFOA and the seven major state and local public interest groups (the National Governors’ Association, the Council of State Governments, the International City/County Management Association, the National Association of Counties, the National Conference of State Legislatures, the National League of Cities, and the U.S. Conference of Mayors), other factors were of equal if not greater importance. In particular, GFOA members have voiced growing frustration at a seemingly endless list of projects that appears destined more to complicate financial reporting than to provide additional information of real value to decision makers (e.g., the GASB’s recent guidance on sales of future revenues and pollution remediation). Likewise, the seven major public interest groups share the GFOA’s concern about the GASB’s plans to develop standards on economic condition reporting.


Isn’t this new position a big change for the GFOA?

Yes and no. The GFOA spearheaded the efforts that eventually led to the creation of the GASB in 1984. Since then the GFOA has contributed more than $7 million to support the GASB. Moreover, the GFOA’s educational efforts, particularly its Certificate of Achievement for Excellence in Financial Reporting Program, have contributed immeasurably toward gaining acceptance for GASB standards. The GFOA’s goal throughout has been to ensure the highest quality accounting and financial reporting for state and local governments. That objective has not changed. What has changed, however, is the GFOA’s view of the best means of achieving that goal.

In 1984, the GFOA called an end to the distinguished career of the National Council on Governmental Accounting (NCGA) because the GFOA had come to believe that the GASB offered a more effective means of achieving its goal of improved accounting and financial reporting for state and local governments. After almost 25 years, the GFOA now believes a similar change from the GASB to the FASB is in order for this same reason.


Is the GFOA suggesting that governmental accounting be replaced by commercial accounting?

No. The FASB now sets standards for both businesses and not-for-profit entities. In doing so, it clearly distinguishes between the two, recognizing that important differences exist between a profit-oriented business and a service-oriented organization. The same distinction would hold true for state and local governments were they to come under the FASB’s jurisdiction.


What is the advantage of moving to the FASB as the standard-setting body for state and local governments?

As a practical matter, the FASB must set accounting standards for many different types of businesses (e.g., broadcasting, banking, cable television, computer software, finance, franchising, insurance, investment companies, mortgage banking, motion pictures, oil and gas, real estate) and not-for-profits. Indeed, so great is the demand that the FASB has to make use of a special Emerging Issues Task Force to meet pressing demands for practical guidance from various quarters. In such an environment, the challenge of “supply-driven” standard setting is much less likely to emerge than in the case of a board concerned solely with a single type of entity (i.e., state and local governments).

Another practical advantage would be to eliminate unnecessary differences in accounting standards between the public and the private sectors (i.e., those that result from differences in judgment between the FASB and the GASB rather than from underlying environmental differences). For example, is it really necessary for derivatives to be accounted for differently in the public sector? In an age of global capital markets, the movement now is clearly toward a convergence in accounting standards. Minimizing unnecessary differences between public- and private-sector accounting is an important and inevitable step in that direction.

Likewise, the FASB benefits tremendously from the healthy counterbalance offered by the Financial Accounting Standards Advisory Council (FASAC), which has traditionally played a strong and active role in advising the FASB on its agenda. Unfortunately, the Governmental Accounting Standards Advisory Council (GASAC) has not been successful at carving out a similar role for itself in regard to the GASB, leaving the GASB, as a practical matter, essentially unaccountable to anyone.


Would the move proposed by the GFOA’s Executive Board jeopardize or undermine the independence of the standard-setting process?

No. Few would challenge the FASB’s independence as an accounting standard-setting body. If anything, placing state and local governments under the jurisdiction of the FASB would increase the appearance of independence. Moreover, the FASB has long enjoyed recognition as an authoritative accounting standard-setting body from the American Institute of Certified Public Accountants.


Does the GFOA plan to go ahead unilaterally in regard to the GASB?

No. The GFOA is determined to work closely with the seven major public interest groups, as well as with other organizations that have an interest in the quality of state and local government accounting and financial reporting.


Could state and local governments end up worse off under the FASB than under the GASB?

Yes. All change involves risk. There are no guarantees that the FASB would not some day make the same mistakes that the GASB is now making. However, as already explained, the GFOA believes that recent moves by the GASB are indicative of a deeper “mission crisis” that simply does not exist with the FASB. Furthermore, these same developments have persuaded the GFOA’s Executive Board that there is even greater risk (e.g., SEA reporting, economic condition reporting) in remaining with the status quo.


What is the likelihood that the GFOA will be successful?

Accounting standard setting is, and must remain, truly independent. Therefore, success requires the concerted efforts of many groups (e.g., the GFOA, the seven major state and local public interest groups, the National Association of State Auditors, Comptrollers, and Treasurers, and the Financial Accounting Foundation, which is the parent body for  both the FASB and the GASB). Right now, the GFOA would rate the chances of succeeding at transferring standard-setting authority from the GASB to the FASB at about even, at best. Still, the GFOA is persuaded that it is essential that this issue be raised, and that the inevitable result of doing so will be, at a minimum, greater accountability in the future on the part of the GASB.


Has the GFOA cut off its funding to the GASB?  If not, why not?

No. The GFOA remains convinced of the ongoing need for an independent accounting standard-setting body. Unilateral action, such as cutting off funding for the GASB, would likely hamper rather than hasten the achievement of the GFOA’s objectives. The appropriate approach, in the view of the GFOA’s Executive Board, is to seek to bring about change by going through proper channels, in close cooperation with the other concerned state and local governments groups. At the same time, the GFOA’s Executive Board does not believe that it is appropriate to undertake any new efforts to increase GASB funding until these issues are satisfactorily resolved