In a recent article in The Washington Post ("States Use Gimmicks to Tackle Deficits," June 1, 2003), Dale Russakoff lists one state after another that is engaging in accounting shenanigans. Because so many states require balanced budgets, the state governors and other officials try to make revenues cover their expenses. Of course, when that becomes politically inexpedient, one invokes the lessons learned from Enron, Adelphia and WorldCom. After all, what's a few lies among friends?
 
The most common trick is moving expenditures from one fiscal year to another. Performing that operating maneuver, of course, does not negate the fact that an expense has occurred. As any student of introductory accounting knows, expenses are not tied to cash outflows.
 
Some states are selling their buildings and then leasing them back. Probably their citizens haven't heard of Statement No. 13 and so do not realize the bogus nature of this transaction. This maneuver also helps to explain why governmental representatives have fought so hard to have a different accounting from business enterprises. It helps them cover up their fibs.
 
One of the riskier moves by state politicians and bureaucrats is to prop up grossly under-funded pension plans by borrowing lots of money and investing part or all of the proceeds in various stock investments. While the stock market might move up so that the returns cover the principal and interest payments, leaving a residual that covers pension costs, it's also possible that the stock market moves down. There will be many political earthquakes in that scenario.
 
It is no wonder that Russakoff reports that credit rating agencies have downgraded state bonds. Aided and abetted by a prodigal mindset during boom times when state officials were determined to spend every tax dollar they could (nobody in government understands the word "savings"), today's lack of discipline in achieving a balanced budget requires creative accounting procedures. My bet is that the credit rating agencies have not sufficiently downgraded these ratings and that we shall witness some defaults in the not too distant future.
 
The other ongoing insidious behavior is the continued interference by Congress in the affairs of the Financial Accounting Standards Board and the Securities and Exchange Commission. The FASB in particular has tentatively decided to require the expensing of stock-based compensation, which is clearly the only correct way of handling these transactions. Members of Congress, however, do not care about truth in corporate reports; they instead worry about their relationships with big money donors and so heed their desperate pleas. How else can you explain the incessant rhetoric that expensing stock options will destroy capitalism and the introduction of malicious legislation that would table this FASB standard for three years?
 
Except for members of Congress such as Sen. John McCain and Sen. Carl Levin, who have introduced a bill that would require the expensing of stock options, I see members caving in. I long for the day when Congress quits trashing the truth. Senators and Representatives ought to quit acting like prostitutes and performing whatever service donors request. Not only is correctness about this issue of stock-based compensation at stake, but also up for grabs is whether we really and truly want to eradicate accounting scandals. If Congress successfully thwarts the FASB in its endeavors on this issue, investors lose out not only on this one topic but also on accounting reforms in general. If this scenario unfolds, many executives will view it as a license to defraud the investing public.
 
What we need today are public representatives and administrators with some moral courage. Please stand up and fight the fight for accounting truth.