Comment by Thompson H. Gooding, Jr.
The accounting followed by state and municipal organizations is a form of fund accounting that is extremely old and not tailored to the needs of the public. Financial statements produced under existing methods are basically unintelligible to the informed, interested citizen, and changes do have to be made.
State and local governments are incurring interest rate penalties which are probably greater than the cost of installing modern accounting and financial reporting systems. . . . Where financial reporting is substandard, interest rates may increase from .125 to .25 percentage points. For a state or city selling $ 100 million of general obligation bonds with a 10-year average life, that equals $ 1,250,000 to $ 2,500,000 in penalties over the life of the bonds.
Highlighted by New York City's near bankruptcy, Cleveland's bond default, and the Proposition 13 led anti-tax movement, the financial distress facing many American municipalities has generated widespread interest in the various causes and possible cures for these financial ills. Increased awareness of the fiscal problems facing our cities has led to a call for increased financial disclosure by local governments, both in connection with the issuance of municipal securities and in general reporting to government officials, citizens, and others concerned with a city's fiscal affairs. Although there has been a wealth of commentary dealing with greater disclosure, this literature has dealt primarily with the constitutionality of any federally mandated disclosure by issuers of municipal securities and the relationship of municipal securities disclosure to the anti-fraud provisions of the Securities Exchange Act of 1934. Largely ignored by legal commentators, however, are the current deficiencies in the accounting practices employed by local governments. The accuracy and comprehensiveness of any financial disclosure is directly related to the measurement concepts, or accounting principles, used. Therefore, any attempt to improve the financial reporting of our cities must include an analysis of the past failures of municipal accounting procedures and recommendations for enhancing those practices.
This comment will discuss the relationship between municipal financial disclosure and local government accounting concepts and practices, and make suggestions on how these accounting concepts and financial disclosure may both be improved to provide better information on the financial operations of local governments. As legislatures, administrative agencies, professional organizations, and others address our cities' fiscal conditions, improvements in existing accounting and disclosure practices must be considered to produce more accurate and timely financial data. Such data will allow government officials and citizens to manage and monitor our cities' fiscal affairs more carefully, to identify future financial difficulties more readily and to formulate solutions more intelligently.
About the Author
Thompson H. Gooding, Jr. Certified Public Accountant. Member, American Institute of Certified Public Accountants.
Citation
55 Tul. L. Rev. 821 (1981)