Truman wanted it, so did Eisenhower, Johnson and Nixon. And, while the States already are required to do it, the federal government is not, even though it has been discussed for over 60 years and a public law was actually passed in 1956 requiring it. Only now is Congress seriously considering it -- that is, if it's not buried by politics once again. The "it" I am talking about is the accrual system of accounting, used in the private sector and enforced by the Securities and Exchange Commission to protect investors in publicly traded companies.
The need for accrual accounting, recently introduced in the U.S. House of Representatives (H. Res. 545), is better-known to professional accountants as Generally Accepted Accounting Principles. Under GAAP, expenses are recorded when government is obligated to pay, either when billed or contractually liable, even before payment is made. So, for example, under GAAP, the unfunded obligations that the U.S. government has incurred for programs such as Social Security, Medicare and federal pensions must be treated as expenses from the day those promises are made. They must also be shown as liabilities on the books of the U.S. government and in its financial reports. But the federal government does not use accrual accounting for its budgeting or in preparing its annual financial reports. It uses the cash basis of accounting instead. At its core, the cash basis system is a disastrous way to measure our government's financial condition, because it does not account for the real costs of programs and assets.
Accrual accounting more accurately measures a large and complex entity's financial condition and the results of its operation in both financial terms and in an economic sense. But elected officials in Washington are inclined to use cash basis accounting because it allows them to curry favor with today's voters at the expense of tomorrow's taxpayers by understating our annual budget deficits and the real size of our national debt. In essence, it means that politicians can make promises to their constituents that commit the federal government to pay out future benefits, without currently recognizing the future costs of these commitments.
These costs affect us in the short term, as baby boomers collect Social Security and Medicare benefits. Long term they unconscionably balloon our national debt. Promises made by current politicians under long-term, mandated programs, put our children and grandchildren on the hook for trillions of dollars in unfunded obligations. Their future is mortgaged because higher taxes are inevitable, in order to fund those programs that have been enacted without their consent -- a modern-day example of "taxation without representation."
Thomas Jefferson wrote:
We might hope to see the finances of the Union as clear and intelligible as a merchant's books, so that every member of Congress, and every man [and woman] of any mind in the Union, should be able to comprehend them, to investigate abuses, and consequently to control them.
Jefferson understood that to maintain a representative form of government requires that financial information be transparent and accurate. Without it, there's no electoral accountability. Operating under an easily manipulated cash basis system of accounting for federal budgeting has enabled elected officials to disguise the real numbers from the people. The by-product is not only a fast-growing and unsustainable national debt, but a debased democracy in which those responsible for incurring the bills are not held accountable for their actions.
I believe that it is our moral duty to not pass on such severe financial burdens. Slowing this juggernaut begins with knowing the actual size of the national debt of the United States. Why should our nation's future be held hostage to a grossly inadequate accounting system for federal budgeting and financial reporting? Together, we must urge our elected officials to implement accrual accounting principles at the federal level so that our nation can finally have accountability based on accurate financial information.
Joe DioGuardi was the first practicing CPA elected to the US Congress and is the founder of Truth In Government.
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