Alternative Reporting Models: Compliance and Liquidity v.
Accrual and Consolidation
Stories relating to
chapter II
of
Financial Reporting in Government
By
Dr. John Sacco
,
George Mason University
Revised
Saturday, April 12, 1997
A father was very concerned that his son follow the rules in
school. Dad's affection and allowance often varied directly
with how well the son followed the rules. One instance is
particularly instructive of how following the rules can lead to
missing the big picture. Freshmen were encouraged to get in the
habit of riding the bus to school, but this boy had the
opportunity to catch a ride from one of the neighbors who drove
to school. Which choice was "cool" and which not is
obvious. It turned out that the neighbor also liked art and
would often drive to the local museum on weekends. But, a
friendship never flourished because the freshmen followed the
rules and took the bus. Governments sometimes specify exactly
how to spend budget dollars to reduce poor judgment or
favoritism, but in specifying exactly what to do opportunities
or the big picture can be lost.
A single parent wanted to make sure her son didn't miss out on
having things that other child in neighborhood had. Skates,
bikes, and the latest fashions were among the things. Of
course, the son began to expect these things. Since the mom had
a good job at first, no problem. Later she had to borrow, but
promotions and bonuses always came to pay the bills.
Unfortunately, when a down turn came in the economy, Mom
continued to use the credit card but the promotions and bonus
lagged. The ending was unhappy for everyone. Having a system
where you can make promises without the necessary savings can
spell disaster.
A government would like to continue doing its regular road
repair but is short on revenues. Someone suggests that the
repairs can last longer than a year thus warranting borrowing
for the repairs. The government follows the suggestion and
borrows on terms that do not require the government to pay back
the principal until two years later. The legislator requires
that all the repair work and related borrowing go into a
particular fund called a capital project fund. Since the
borrowing is equal to the cost of the repairs, this fund looks
to be performing fine. However, since the government is short
on revenues it does not save any money during the current year
to pay off the debt incurred by borrowing for the repairs. It
backs the debt with the full faith and credit of government
assuming that revenues will bounce back later. Revenues do not
bounce back and the government finds itself in trouble.
A government would like to built an add-on to one of its
buildings to provide daycare, but would have to borrow to do so.
Someone suggests setting up a fund to do the borrowing and the
building but also says that an other fund must be established to
save each year to pay off the debt. No one can agree on extra
taxes or where to cut to do the savings and the daycare facility
is dropped. The financial statements look fine because of the
prudence but a good project is lost.
See Also:
homework
,
project elements
,
course readings
, the
glossary
,
exercies and demonstrations
, and a
summary