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Financial reporting in government can be seen as a summary of the governments performance, or capacity, in raising, handling, and using public money. Another way of expressing the role of financial reporting is to say it goes hand in hand with accountability. Accountability is often considered one of the cornerstones of good democratic governments. Officials are given authority and responsibility and it is the task of the officials to clearly convey actions taken and whether these actions fall within the prescriptions of law and community wishes.
Assessing performance or accounting with respect to raising, handling, and using public money is a complex issue. The criteria are many, diverse, and sometimes conflicting. In some cases there is a recognized rule or standards making body that can cover selected aspects of financial accountability. In general, however, there may be more than one rule making body. For instance, there can be governmental and private rule making bodies. Residents of the affected jurisdiction may have their own views or oversight committees. More generally, in a democratic society there are often norms that provide guidance on accountability. These norms, too, may diverge.
As an illustration, consider the disagreement that can arise over a tax decision. Is it adequate to cover current and future obligations made by decision makers; does it relate payments to benefits received; does it impose greater burdens on one group as opposed to others; and is it difficult to collect? Financial reports can be generated on all these issues.
This text focuses more on the collectivity of financial decisions made by government, state and local government in particular. How does money raised cover spending and obligations? What is the current and future financial health of the jurisdiction or subentities covered. How do these decisions comply with the expectations of rule or standard making bodies?
Governments issue many types of financial reports, but the most encompassing and visible at the state and local level is the Comprehensive Annual Financial Report (see this chapter, lesson 2) ( CAFR ). The CAFR includes the financial statements. In this text the financial statements provide the main focus and thus the term financial statement is sometimes used interchangeably with the phrase financial report. Financial statements are fairly exacting in format and provide a quantitative look at the operating success, financial health, and compliance of the government reporting units. The financial statements are often referred to as the GPFS (General Purpose Financial Statements) and can occasionally be taken out of the CAFR and shown separately. The form of these statements and the definitions of what they seek to assess are evolving. One form or definition may make success, health, and compliance appear adequate while another, less so. For instance, with some forms and definitions borrowing can be used to boost chances for reported success; in others, it cannot. As a result, this text will look critically at the current form and definitions and examine alternatives.
Another important issue is that historically, the focus of governmental financial reporting is on how well the government did in carrying out legally authorized functions for the different subentities and funds of government. In general, financial reports for government do not cover the government as a whole, but rather the reports cover separate subentities and funds such as all the money raised and spent for recreation or all the money raised and spent for a parking garage or all the financial activity for a component of the government such as school district. Subentities and funds are at a level below the entire government body or jurisdiction. Later, more attention will be given to the separate subentities and funds that are the presently the fundamental unit for governmental accounting. The main private rule making body, the Governmental Accounting Standards Board (GASB), is considering many changes for reporting, such as a report for the government as a whole which will likely be called the entity wide perspective to perhaps supplement the fund perspective.
Theoretical controversies aside, at a given point in time, financial reports are based in part on accounting rules and other types of rules or standards that often capture the day-to-day monetary transactions and events of government. The transactions are are then summarized into financial reports. These reports typically make direct assessments of financial performance and many matters that impinge on financial performance.
Technically, one of the major goals of financial reports is to assess financial success , conditions , and compliance of the funds and other accounting subentities. With such information, one potential benefit of financial reports is to help people make better decisions about their community, their government, and their economy. These decisions may relate to the election of officials, votes on new projects, and even the decision to stay in or move away from a community. Further, the reporting may provide information so that decisions that make the jurisdiction better off.
Considerable systematic and official work on governmental financial reporting has been done for state and local governments. This text focuses on the work done for state and local governments. This text also concentrates mainly on the CAFR (this chapter, lesson 2) and the financial statements (this chapter, lessor 4) in the CAFR.
Elements of Financial Reports -- Government and Business
In general, government has significantly different accounting rules for developing financial reports than does business. Government relies more on a cash basis or liquidity and annual logic to assess annual activities, whereas business relies more on an accrual logic to integrate assessment of both annual and long term events. Besides accounting rules, government laws and regulations play a large role in the these governmental financial reports. Thus, the frequent refer to compliance.
The legally authorized budget of the jurisdiction is critical to financial reporting in government. That is, the financial reports assess the degree to which the government administration, particularly financial management, was in compliance with the budget.
Because of the importance of the importance of the annual budget in accountability, governments presently make a clear distinction between current or annual items and long term items in their financial reports, with emphasis on current items. Similarly, governments differentiate between liquid assets and fixed assets , with more attention to liquid assets.
For the most part, financial reports are intended to provide information for people outside the management of the government. These people are often referred to as external users . Because these external users do not have direct control over the content of financial reports, parts of the reports are audited, for example, the auditor seeks to attest that the financial statements are presently fairly in accord with generally accepted accounting principles (GAAP).
Regardless of where or how accounting standards are developed for financial reporting, the standard setting process is highly controversial since a good deal can be at stake in reporting financial success, conditions, and compliance. A report exuding poor results, conditions, or compliance can upset users. Thus, the standard setting process is sometimes shaped by values and political pressures to obtain favorable financial showings.
Many of the changes in accounting and reporting that have shaped business accounting standards have only begun to enter or be discussed in government. The effort to measure current and long term economic prospects and convey that information in a candid fashion so external users can allocate resources to those business they feel will profit has not made a significant impact of state and local financial reporting. Some of the reasons have to do with the legal nature of state and local government. Some have to do with political reticence to publicly display poor results. Some have to do with the questionable appropriateness of an emphasis on economics rather than a balance toward economics, social equity, interest group politics, and compliance. Recent proposal by GASB suggest as greater interest in economic success and prospects.
A List of Important Terms Associated with Financial Reports -- A Look at individual items.
Called generally accepted accounting principles ( GAAP ), accounting rules are developed through a due-process system or became accepted with common use.
The legislature annually (some biannually) authorizes what revenues to raise, what money to borrow, what promises to make, and what activities to pay for.
annual or current items v. long term
Government financial reports emphasize and generally have more rigid accounting rules for financial transactions that involve money raised, spent, or due during the current year. Long term items are set aside or de-emphasized until they come due.
In general, audits attempt to determine whether the presentation of financial information conforms to a set of criteria, with the criteria in government including both accounting rules and government laws and regulations.
Given governments' heavy reliance on legality, financial reports focus considerably on whether money was raised, handled, and spent according to legal authorizations. The word compliance becomes very significant.
Financial reports are intended to improve decision making. These decision can be economic such as a good return on investment or political such as how to vote on a candidate or issue.