Fordham Law


Corporate Law Center Conference Derides Government Accounting Practices


January 25, 2012

The checks and balances system, by which separate branches of U.S. government monitor one another, is paramount in the Constitution.

But what if those checks are ignored?
 
 Joseph H. Marren '79
Photo by Ben Asen

The "Representation Without Accountability?" conference, hosted on January 23 by the Fordham Corporate Law Center, questioned the constitutionality of the federal government's financial reporting practices.

Moderated by Sean Griffith, the T.J. Maloney Chair in Business Law and Director of the Center, the conference featured panelists

  • Hon. David M. Walker, Founder and CEO of the Comeback America Initiative and the former Comptroller General of the United States and Head of the U.S. Government Accountability Office
  • Joseph H. Marren '79, President and CEO of KStone Partners LLC
  • David Mosso, former Vice Chair of the Financial Accounting Standards Board and former Chair of the Federal Accounting Standards Advisory Board
  • Brian T. Fitzpatrick, Associate Professor of Law at Vanderbilt Law School

According to the panelists, incomplete and misleading federal financial reports repeatedly defy the Statement and Account clause of the Constitution, which stipulates "A regular statement and account of the receipts and expenditures of all public money shall be published from time to time."

In doing so, the American people are kept in the dark about the country's actual financial condition.

"Financial reporting by the federal government does not reflect economic reality," said Marren, a conference co-sponsor. "It is impossible to determine the truth about the government's financial position, as the government maintain two sets of books which individually—and in the aggregate—are grossly misleading."

These two sets of books are the President's Budget and the Financial Report of the United States Government.

The former outlines a plan for future initiatives and their means of support, and the prior fiscal year's results; the latter provides an overview of the cost of government operations and the means of financing them, a balance sheet, and an overall financial outlook.

Though politicians and the media focus on the President's Budget, the Financial Report has a more detailed and, hence, more distressing story to tell.

Two distinct accounting methods, one cash-based and the other accrual-based, are used to calculate the President's Budget and the Financial Report, respectively.

On a cash basis, income is totaled when money is received, and expenses are totaled when the payment is made. This accounting is commonly used for small business.

The accrual basis—the accounting method large corporations use—totals income and expenses when transactions occur, regardless of whether the cash has been received or paid. Unlike the cash basis, the accrual basis records transactions that have occurred on credit.

Because of these alternative methods, the two reports differ vastly, Marren said. For instance, the President's Budget reflects a government spending as $1.29 for every $1 of revenue. On the Financial Report, this figure jumps to $1.38 for every $1.

Even on an accrual basis, the Financial Report still has two major flaws: It does not include government entities, such as Fannie Mae, Freddie Mac, and the Federal Reserve System; or social programs, namely Medicare, Medicaid, and Social Security. If these were included, debt would increase to $2.71 spent for every $1 of revenue.

Consequently, neither report is an honest financial indicator.

"Restoring truthful and complete disclosure is the only solution to our nation's financial predicament," Marren said.

Mosso illustrated the discrepancies another way. The President's Budget showed that in fiscal year 2010, 24 percent of the $14.66 trillion GDP consisted of expenditures, whereas 62 percent of the GDP was liabilities.

After adding accruals, tax expenditures, social insurance, Federal Reserve costs, and government entities, Mosso calculated that 60 percent of the GDP consisted of expenditures, whereas 508 percent accounted for liabilities.

 
L–R: Sean J. Griffith, Joseph H. Marren '79, David Mosso, Hon. David M. Walker, and Brian T. Fitzpatrick
Photo by Ben Asen
"The bold faced numbers in [the President's Budget] are the numbers in the spotlight," Mosso said. "But [this] is a fiscal skeleton.

"Cash-basis accounting in the President's Budget is the spearhead of reckless fiscal policy, whether intentionally reckless or just bumbling along with inadequate and misunderstood information," Mosso continued. "As an accountability report, the President's Budget woefully shortchanges the American public."

From the legal point of view, Marren said, the Financial Report violates the Statement and Account clause.

"Given the failures of the legislative and executive branches, we need the Supreme Court to restore the rule of law," he said.

But the catch, Fitzpatrick pointed out, is that no one has yet secured the power to enforce this clause.

"We don't know what the meaning of the clause is and we don't know what it requires of the Congress, because in every lawsuit that's been brought to try to enforce the clause, the courts have held that the person who brought the lawsuit had no standing to sue," Fitzpatrick said.

For a plaintiff to have standing, he or she must

  • have been personally injured by the defendant
  • be requesting relief from the court, which will actually redress his or her suffering, and
  • the injury must be traceable to the defendant's conduct

"If we can't find someone with standing to bring the lawsuit, then it doesn't much matter what the clause of the Constitution means," Fitzpatrick said.

Though acknowledging that the judiciary needs to check the legislative and executive branches in this case, Walker doubted that this would be enough.

"If someone wants to bring a Supreme Court case, feel free to bring a case," Walker said. "But by the time it'll be considered, it may be too late."

In terms of worldwide fiscal responsibility, Walker said, the United States ranks 28th, just six spots above debt-ridden Greece.

"When you count what we owe to Social Security and Medicare...we're about two years away from where Greece was when Greece had their debt crisis," he said.

The short-term solution must include an of overhaul government financial reporting, Walker said, in part by requiring that the federal government record liabilities for social insurance and other government entities.

Long-term changes must involve structural adjustments, including the role and size of government and comprehensive Social Security and tax reforms.

"The bottom line is the numbers are big and bad and getting worse by the minute," Walker said. "The decisions that are made or not made in the next three to five years will largely determine whether America's future is better than its past."