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How the Right Accounting System Can Save America's Future | Commentary

On Oct. 1, fiscal 2014 will begin for the federal government. Total spending in the president’s proposed 2014 federal budget is projected at $3.8 trillion and, before the month is out, the Treasury will be bumping up against a $16.7 trillion ceiling on the national debt. But while the current political morass is largely focused on these figures, there’s been little discussion about the real scope of the nation’s red ink.

It’s well-known that liabilities for Social Security, Medicare and federal pensions, if properly shown on our nation’s “balance sheet,” would add about $40 trillion to the national debt (not including bad government loans and guarantees that have yet to be written off our federal books). Partisan politics has consumed the federal budget process and, in the meantime, important private sector standards such as accountability, transparency, fairness and objectivity aren’t taken seriously enough in managing the cumbersome federal financial bureaucracy.

A more fiscally responsible — and more managerially sound — federal government would include a number of reforms to tell the public about the real cost of government and the true size of our national debt. Among them are adoption of generally accepted accounting principles for the annual budget and financial reporting, independently audited financial statements and a capital budget for infrastructure expenditures (as adopted in 37 states).

From my experience as a certified public accountant and former member of Congress, adopting the accrual basis of accounting government-wide is by far the most important thing that can be done to make the federal government more fiscally responsible and financially accountable.

The accrual basis of accounting (as opposed to the cash basis) recognizes as income what the government has either earned or is entitled to receive, even before payment is received; and it recognizes as an expense what the government is obligated to pay, when billed or contractually liable, even before payment is made. Accrual-based “generally accepted accounting principles,” known as GAAP, is considered the only fair and accurate way to measure a large and complex entity’s financial condition and the results of its operation — not only in financial terms but in an economic sense.

Four major countries — Australia, New Zealand, Canada and the United Kingdom — that have adopted the accrual basis of accounting (since 1990) for budgeting, financial reporting and government performance measures have fared much better in fiscal responsibility and financial sustainability than other countries that have not done so.

In fact, the 2011 Sovereign Fiscal Responsibility Index ranks Australia, New Zealand, the U.K. and Canada Nos. 1, 2, 9 and 11, respectively. The United States is ranked a dismal No. 28 (out of 34), behind fiscally troubled Italy, Spain and France — and barely ahead of fiscally teetering Portugal and practically bankrupt Greece.

I believe that the United States’ poor ranking is the direct result of Washington’s complete lack of fiscal sanity, poor financial management and the use of grossly inadequate accounting principles for budgeting, bookkeeping and financial reporting.

Since the Truman era, there have been an important series of presidential commissions calling for the adoption of the accrual basis of accounting for the federal government. Incredibly, Congress has resisted these recommendations, refusing to adopt the method of accounting it requires of the private sector’s publicly traded companies (through the Securities and Exchange Commission’s enforcement mechanisms).

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