Opinion: The financial sky is falling

Opinion: The financial sky is falling

This article originally appeared in the McCombs Today blog.

If you listen to certain politicians and talking heads you might get the impression that the federal fiscal sky is falling. Unfortunately, unlike Chicken Little, they may be right.

The Treasury Department recently issued the 2009 financial report of the United States government. Whereas there is lots of talk in Congress and in the press about the federal budget, the annual report was released to near silence. That's too bad, not only because the annual report is untainted by creative accounting but also because its message is too important to ignore.

That message is that the sky is indeed falling.

No Creative Accounting

What is the difference between the budget and the financial report?

Most notably the federal budget is on what is essentially a cash basis. Contrast that to the federal financial report which is on an "accrual" basis and thereby recognizes revenues and expenses when they have their true economic impact, not necessarily when cash is received or disbursed.

As but one example, whereas the federal budget delays recognition of military pension costs until personnel retire and receive their payments, the annual report recognizes them as they perform their service. Similarly, the cash basis, but not the accrual basis permits the government to reduce expenses of a particular year merely by postponing payment of its bills from that year to the next.

These devilish machinations are possible in part because there are no established accounting rules for the budget or requirements that it be independently audited.

By contrast, the annual report is based on accounting principles established by the Federal Accounting Standards Advisory Board. The FASAB is an independent body of nine members, two-thirds of whom have no direct connection with the federal government. The report is subject to audit by the Government Accountability Office, an agency whose independence and integrity is almost never questioned.

Continue reading to find out why Granof concludes: "The message of the report is resoundingly clear. The federal government's course is dire."


Michael Granof is the Ernst and Young Distinguished Centennial Professor in Accounting at the McCombs School of Business. He is currently serving a five-year term on the Federal Accounting Standards Advisory Board. The views expressed herein are his own, not necessarily those of the Board.