Accounting Methods by U.S. Can Be Puzzling
January 31, 2012 (Belleville News-Democrat, Ill.) Question: When and why did the federal government change from cash-based to accrual-based accounting/budgeting?
How difficult would it be to budget government expenses on a cash basis, using the actual income received over the preceding fiscal year?
Answer: When I called the Office of Management and Budget, I hoped I would be posing a straightforward question: Does the federal government use cash-based or accrual-based accounting and when did it adopt that method?
What I got was one very puzzled press office worker.
"I don't think there's a way to answer that question in such a broad sense of the term," she said. "For any given report, it depends. There are reports that refer to obligations made or funds that have actually been paid out. The question depends on which line (of the budget) you're referring to, basically."
It's the kind of answer that seems to upset many economists and politicians. Just last March, Rep. Todd Platts, R-Pa., and chairman of the House's Government Organization Subcommittee, held hearings to see why the real 2010 federal deficit was possibly $800 billion more than the $1.3 trillion reported. One reason they investigated: The government still mixes the two accounting methods, which may produce a rosier bottom line.
Let me see if I can explain this somewhat arcane subject:
Cash-based accounting, as you imply, is similar to how the average person handles a checkbook. You normally record the date you deposit money into the bank or the date you actually write a check for an expense, not necessarily the date you receive the income or incurred the debt.
This has helped put individuals and governments in financial trouble, many argue. Let's say you take a $20,000 loan on your credit card. Anyone looking at your checkbook would see only a $20,000 infusion of cash with no indication that you now have a $20,000 debt -- probably at high interest. Similarly, a government using cash accounting would not have to show a bill it has incurred until it was paid.
As a result, many say this does not provide an accurate financial picture, which is why businesses have been using accrual-based accounting for more than a century.
In the accrual method, a construction company, for example, would record all income from a job when it is completed, not when the customer pays the bill. Similarly, expenses are recorded as soon as the company lays down its credit card for lumber, not when it pays its Visa bill.
Can you, like Rep. Platts, begin to see the hanky-panky government can play by mixing the two? For example, the cash-based method wouldn't have to take into account those down-the-road Social Security and Medicare obligations that have been promised.
"The problem with cash accounting is that there's a tremendous opportunity for manipulation," University of Texas accounting professor and author Michael Granof once told USA Today. "It's not just that you fool others. You end up fooling yourself, too."
Although federal law once required all taxpayers to use the cash-based method, accrual-based accounting was added to U.S. tax law a century ago. Now, all companies and institutions that have revenue of $1 million or more must use it.
In 2010, the International Federation of Accountants urged all governments to adopt accrual-based accounting. (New Zealand and Australia, for example, have.) They say the cash method does not conform to generally accepted accounting principles,
Others, however, argue that accrual-based accounting may not be entirely accurate, either. For example, expenses far in the future may be affected by even small changes in interest rates. So, faulty assumptions now can lead to figures wildly off the mark. Accrual accounting also may provide less insight into the precise timing of expenditures and revenues.
In any case, the federal government apparently still has not complied with a law Congress passed Aug. 1, 1956, which required "as soon as practicable" that all executive agencies adopt the accrual-based accounting method. But I hope you now have a little better understanding of the subject so you can decide whether they should.
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