Congress and Accounting Scandals: Is the Pot Calling the Kettle Black?

• Publication year: 2021
• Citation: Vol. 82

82 Nebraska L. Rev. 365. Congress and Accounting Scandals: Is the Pot Calling the Kettle Black?

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Cheryl D. Block

Congress and Accounting Scandals: Is the Pot Calling the Kettle Black?

Table of Contents

I. Introduction ....................................................... 367
II. Congressional Compliance with Its Own Laws ........................ 373
A. Historical Background .......................................... 373
B. A Cost-Benefit Approach to Congressional
Compliance Determinations ...................................... 376
1. General Framework ........................................... 376
2. Advantages and Disadvantages of Congressional
Compliance .................................................. 377
3. Classification of Congressional Actions ..................... 378
4. Cost-Benefit Approach to Compliance:
Congressional Budgeting and Accounting ...................... 380
III. Accounting Rules ................................................. 382
A. Introduction .................................................. 382
1. Financial v. Budget Accounting ............................. 382
2. Need for Financial Accounting Standards .................... 383
B. Accounting Rules Applicable to Public and Private
Companies ..................................................... 384
1. Historical Development of Financial Accounting
Standards .................................................. 384
2. Securities and Exchange Commission ("SEC")
Authority and Rules ........................................ 386
C. Accounting Rules Applicable to the Federal
Government .................................................... 387
1. Federal Government Financial Accounting .................... 387
2. Budget Preparation and Accounting .......................... 390
3. Unique Position of Congress ................................ 392

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IV. Congressional Budget Accounting ................................... 393
A. Introduction ................................................... 393
B. Cash v. Accrual Accounting in the Federal Budget ............... 395
1. General Distinctions Between Cash and Accrual
Accounting .................................................. 395
2. Accrual Method Accounting ................................... 398

a) The Concept of Matching: Tax v. Financial
Accounting ............................................... 398
b) Present v. Face Value Accrual ............................ 401
3. Federal Budget Accounting Methods: Cash and
Obligation-Based Budgeting with a Hint of
Accrual ..................................................... 404
a) General Description of Federal Budget
Accounting Rules ......................................... 404
b) Prevalence of Cash Method Accounting in
the Federal Budget ....................................... 406
c) Cash Method Budget Accounting - Potential
for Timing Gimmicks ...................................... 413
(i) Delayed Outflows: Advance
Appropriations and Related Budget
Devices .............................................. 413
(ii) Delayed Revenue Losses: Phase-Ins and
Sunsets ............................................. 415
(iii) Cash v. Accrual Accounting in the Tax
Expenditure Budget ................................. 418
C. The "Off-Budget" Device ........................................ 421
1. On v. Off Budget: Introduction .............................. 421
2. Trust Funds and Other Specially Earmarked
Budget Accounts ............................................. 422
a) Budget Terminology ....................................... 422
b) How Congress Uses Trust and Related
Funds .................................................... 424
3. Social Security, Medicare, and Retirement Trust
Funds ....................................................... 425
a) Introduction ............................................. 425
b) Structure of Social Security and Medicare
Programs ................................................. 426
c) Social Security, Medicare, and the Budget ................ 427
d) Federal Employee Retirement Trusts ....................... 430
4. Federal Budgetary Use of Corporations ....................... 432
a) Categories of Government Corporations .................... 432
b) Wholly-Owned Government Corporations ..................... 432
c) Mixed-Ownership Government Corporations
and Related Entities ..................................... 434
d) Special Purpose and Related Entities ..................... 435
(i) Government-Sponsored Enterprises (GSEs).............. 435
(ii) Private Sector Special-Purpose
Enterprises (SPEs) as a Parallel to
Private Sector GSEs ................................. 439
D. Long-Term Leasing .............................................. 442
1. Budgetary Treatment of Government Leases .................... 442
2. Private Sector Synthetic Leasing as a Parallel to
Government Leasing .......................................... 445
E. Declaration of Emergencies That Aren't ......................... 449
F. Directed Scoring and Directed Scorekeeping ..................... 450
1. Directed Scoring ............................................ 450
2. Directed Scorekeeping ....................................... 452
V. Conclusion ......................................................... 457

I. Introduction

Not long ago, scandalous fraud and improper accounting practices in the private sector forced the collapse of several major corporations, including WorldCom,(fn1) Enron,(fn2) and Enron's accountant, Arthur Andersen.(fn3) Prosecutors have charged firms, as well as individual officers and executives, with criminal fraud, money laundering, conspiracy, and obstruction of justice in connection with the accounting scandals.(fn4)

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Led by Democratic Senator Paul Sarbanes of Maryland and Republican Representative Michael Oxley of Ohio, outraged legislators on both sides of the political aisle quickly responded by adopting the Corporate and Auditing Accountability, Responsibility, and Transparency Act of 2002, often referred to as the Sarbanes-Oxley Act.(fn5) The Act created an independent board to oversee the accounting industry, amended securities laws to require greater corporate responsibility, enhanced corporate financial disclosure requirements, and increased penalties for accounting fraud.(fn6)

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Even from a Congress not known to be bashful about tough talk, public comments were especially vitriolic. Senator Chris Dodd, for example, reacted to the WorldCom accounting scandal stating, "[t]his wasn't just cooking the books, this was marinating, sauteing, and gar-nishing."(fn7) As he conducted hearings on the WorldCom accounting scandals, Representative Michael Oxley, Chair of the House Financial Services Committee, contrasted the evils of greedy corporate executives with the ideals of heroes of the American Revolution and the war on terrorism. The latter placed heroic virtues "above self-interest and

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beyond the temptations of affluence, protecting others instead of themselves. Unfortunately, we must return to the people's House today to investigate a stark and outrageous contrast to those ideals, and yet another example of the decline of ethics in American culture during the 1990's."(fn8) Responding to the Enron scandal, Representative W.J. "Billy" Tauzin, House Energy and Commerce Committee Chair,commented that "[w]e have witnessed an incredible collection of not only miscreants and potential criminal behavior, but a series of accounting abuses . . . of the American public."(fn9)

Yet, as some journalists and commentators were quick to point out, Congress itself has been guilty of using accounting devices remarkably similar to those used by Enron, WorldCom and others to "cook the books" and to mislead the public with regard to government fi-nances.(fn10) Comparisons of federal and private accounting standards are nothing new. As early as 1985, for example, Reagan Budget Director David Stockman, said that "[w]e have increasingly resorted to squaring the circle through accounting gimmicks, evasions, halftruths and downright dishonesty in our budget numbers . . . If the SEC had jurisdiction over the executive branches, many of us would be in jail."(fn11)

Private corporations, at least, bear the ultimate risk of bankruptcy in cases of extreme accounting shenanigans. This risk presumably provides some, however modest, check on corporate accounting gimmicks. The United States government, on the other hand, cannot go

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bankrupt. As a result, temptations for the government to engage in creative accounting may be even greater than those in the private sector.

Many budget commentators have complained about congressional gimmicks used to misstate or misrepresent the true state of the federal budget. To my knowledge, however, none of them has made an effort to compare the gimmicks used by Congress with those used by private-sector firms. One of the questions raised in this Article is the extent to which mere "gimmicks" in the hands of federal budget-mak-ers might be considered accounting, tax, or securities fraud in the hands of the private sector. Further, if the gimmicks would be so considered, is the double standard justified? This question takes on added importance as Congress now seeks to hold the private sector to higher standards through recent corporate accountability legislation and as Congress considers proposals for budget reform.

The subject of federal accounting is complex and nuanced, requiring an understanding of distinctions between financial and budget accounting. Congress does, for example, require most federal agencies to comply with specified financial accounting standards.(fn12) This type of accounting for financial activities generally is a backward-lookingprocess in which the agency reports its spending and receipts over a period of time, usually the...