Alternative Reporting Models: Compliance and Liquidity v. Accrual and Consolidation

Summary of chapter II of Financial Reporting in Government
By Dr. John Sacco , George Mason University
Revised Saturday, April 12, 1997

Financial reports can have the appearance of being scientifically derived because they are filled with numbers and possess the aura of accuracy. However, a financial report can give only part of the picture, missing important elements because of the rules or model chosen. For the most part, government has selected a compliance and liquidity model for forming its financial reports. This model is very good at seeing to it that the government follows details rules and pays bills that come due that year, but this approach comes at a cost. Rules can be followed closely in individual areas but the reports can hide deteriorating financial conditions. Similarly, being able to pay this year's bill may not say much if anything about the savings needed to pay for promises made this year that do not come due until future years. The alternative model is the accrual and consolidation model . It is designed to determine whether the unit has collected enough revenue to cover all costs incurred in that period for all subunits controlled by the main unit. Business uses an accrual and consolidation model.

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