Improving financial reporting for small governments.

• Position: NEWS & NUMBERS

The GFOA's new Certificate of Conformance Program is an important step in the right direction.

The Government Finance Officers Association strongly encourages the use of generally accepted accounting principles. Nonetheless, a large percentage of small government financial reports do not conform to GAAP; small governments often use the cash or modified cash basis of accounting for a number of reasons, but standardizing non-GAAP financial reporting should greatly improve the quality of small government financial reporting. This article will examine these points, along with the specifics of the modified cash basis reporting model that will serve as the foundation

for the GFOA's new Certificate of Conformance Program for Small Government Annual Financial Reports.

ENVIRONMENT

It is estimated that thousands of small local governments in the United States do not prepare financial statements in accordance with generally accepted accounting principles. A number of factors contribute, such as having little staff time to devote to financial reporting. In this case, governments have to balance the desirability of GAAP financial reporting against the desirability of issuing their financial reports on a timely basis--and they often choose the latter. GAAP financial reporting also requires considerable expertise and ongoing training, especially in an environment of ever-changing accounting standards, and many small governments simply do not have staff with the needed training. Preparing a GAAP-basis financial report also involves significant incremental costs in compiling the necessary accrual data and converting data from one basis of accounting to another for purposes of government-wide financial reporting. Moreover, many small governments do not have accounting systems that are designed to collect the additional data needed for GAAP financial reporting, and the cost of making the data already in the system useful for meeting GAAP norms can be high.

These and other similar hurdles can make the process of GAAP financial reporting appear overwhelming. Moreover, absent a legal mandate, it is often difficult to convince a governing board that is struggling to balance the budget of the practical benefits gained by incurring additional costs to prepare GAAP financial statements, especially if the government does not issue debt.

The goal of the Certificate of Conformance program is to provide governments that are not yet able to surmount these obstacles with...