Experts Suggest Deficient Reports Mask Serious Red Ink

Sean Griffith in Bloomberg BNA, January 27, 2012

NEW YORK--Deficient, misleading government financial reporting of U.S. government spending justifies reform in official accounting methods in order to stop masking the true, albeit sobering financial picture of the country, two experts on federal government accounting suggested at a conference Jan. 23.

At a forum held at Fordham University's law school, David Walker--former U.S. comptroller general and former long-time head of the U.S. Government Accountability Office--warned that the United States is on a “burning platform” fiscally speaking, owing to looming debt and deficit problems that effectively are hidden under current, cash-basis and off-balance-sheet accounting policies.

Trillions of dollars in liabilities facing the federal government are under-reported, said Walker and David Mosso, former chairman of the Federal Accounting Standards Advisory Board, or FASAB.


According to Walker and Mosso, Trillions of dollars in liabilities facing the federal government are under-reported.


“We could have a debt crisis in this country in two to three years,” said Walker, who has become a strong advocate of fiscal responsibility as head of the Comeback America Initiative, with offices in Bridgeport, Conn. He argued strongly for taking decisive action--and taking action quickly--in dealing with those fiscal problems.
Walker said he agrees with Mosso “on a lot,” including that “what the government pushes out as our official liabilities and financial condition significantly understates where we're at.”

The former comptroller general might approach the topic of “fiscal facts” differently, “but the bottom line is the numbers are big and bad and getting worse by the minute,” said Walker, who served as head of the GAO from 1998 through 2008.
'Fragmented' Federal Government Reporting.

Present reporting on federal financial accountability is fragmented in that no single consolidated financial report covers the entire federal government in all of its economic dimensions,” said Mosso--who also is a former vice chairman of the Financial Accounting Standards Board.

The cash-basis accounting underlying the president's budget “obfuscates federal financial accountability,” Mosso said.

That accounting method and other reporting choices result in, for example, omission of accrual transactions and of tax expenditures. The reporting is also marked by what is effectively in off-balance-sheet treatment of big-bill social insurance costs and obligations of government-sponsored enterprises and of the Federal Reserve, the former FASAB chair suggested.

Several speakers cited the huge, long-term costs and obligations presented by social insurance programs, such as Medicare--costs that they said are not being reported or are under-reported in the president's budget and the Financial Report of the U.S. Government. The financial report is published by the executive branch's Office of Management and Budget and the Department of the Treasury.

“It seems to be an incontrovertible conclusion that the ship of state is being steered with a severely broken compass,” said Mosso, commenting on the accounting methods on which the president's budget is anchored.

“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 about federal financial health,” he said.

Financial Report of U.S. Government Faulted.
Joseph Marren, head of investment advisory firm KStone Partners LLC and, with his wife, Joan Marren, a co-sponsor of the conference, also faulted the Financial Report of the U.S. Government.

Although the report is built on FASAB principles, it suffers from “two major flaws,” he said.

“It does not consolidate numerous material, government-controlled entities”--for example, the Federal Reserve System, Fannie Mae and Freddie Mac--according to Marren's Power Point presentation. In addition, he noted, “It omits the cost of our social programs other than current-year payments.”

'Monsters Out of the Shadows.'
To bring fiscal “monsters out of the shadows,” Mosso proposed that a comprehensive, consolidated set of financial statements of the U.S. government should be set on the accrual basis of accounting and should include tax expenditures, social insurance costs, and assets and liabilities presented by dealings of the Fed and the GSEs.

By his calculations, which he stressed include some significant, layer-on-layer estimations by which “the prodigals come home,” liabilities under the above-described set of books would total some $74.5 trillion against expenditures of $8.8 trillion. In contrast, the president's cash-basis budget for fiscal year 2012 records $9.1 trillion in liabilities against $3.5 trillion in spending, according to Mosso's conference paper.


Under the president's current budget, liabilities as a percentage of gross domestic product stand at 62 percent, Mosso said. Under his blueprint, which includes elements of spending and obligations that effectively are off-balance-sheet, liabilities as a percentage of GDP would be 508 percent.


Under the president's current budget, liabilities as a percentage of gross domestic product stand at 62 percent, Mosso said. Under his blueprint, which includes elements of spending and obligations that effectively are off-balance-sheet, liabilities as a percentage of GDP would be 508 percent.

Constitutional Violation?
Also at the conference, which was titled “Representation Without Accountability?” Marren and another attorney, a professor of law at Vanderbilt University, proposed that a lawsuit would be warranted to compel the answering of a constitutional question related to federal government accounting.

Marren proposed directly that current federal government financial reporting violates the Constitution. Specifically, he argued that the current accounting conflicts with Article 1, Section 9, Clause 7 of the Constitution. That provision states that a “regular Statement and Account of the Receipts of all public Money shall be published from time to time.”

“There is no other meaning that one can ascribe to the text of the second part of Article 1, Section 9, Clause 7 than it creates a right for the public to receive accurate, truthful and complete financial information and it imposes a concurrent duty for the government to publish financials that reflect economic reality,” according to Marren's formal presentation.

In his introduction to the conference, Fordham law professor Sean Griffith posed informally a central question of the forum: “Is the method by which the federal government accounts for its spending so bad that it violates the U.S. constitution?”

For reform to be brought about, a challenge to current policy might first require a ruling from a federal judge, Marren and Vanderbilt's Brian Fitzpatrick suggested.
Unlike a president or member of Congress, a judge would not face election and therefore would be able to more easily render independent judgment on a controversial issue--and without worry of repercussions at election time, Fitzpatrick said.

Marren said that current accounting practices of the federal government present constitutional issues that would warrant settlement by the U.S. Supreme Court. Griffith, director of the Fordham Corporate Law Center, called the topic of the conference an “out-of-the box idea” receiving its first airing at the school.

Marren suggested that deficiencies in the way the budgetary and financial reporting of the U.S. government are carried out by the Office and Management and Budget and the Department of Treasury--with little to no input from Congress and effectively with executive veto power over federal accounting principles--are cause for Supreme Court review.

“The end result is that financial reporting by the federal government does not reflect economic reality,” said Marren.

He also cited arguments that Congress has a duty in the federal government's financial reporting process.

“Given the failures of the executive and legislative branches, we need the Supreme Court to restore the rule of law,” Marren said.

“To date, the Supreme Court has not decided the meaning of the statement and account clause.” The Obama administration's hallmark health care legislation, the Patient Protection and Affordable Care Act (ACA, Public Law 111- 148), could provide the vehicle for a legal challenge to current federal government financial reporting, Marren suggested.

Marren's Key Assumptions.
In his speech, Marren listed four of what he called “key assumptions” serving as a backdrop to his words:

• He was not trying “to assign blame for the current state of the nation's finances to any politician or political party;”
• “No commentary is made or intended about the validity or need for any government program;”
• He was not advocating either raising taxes or cutting spending; and
• All figures that he cited are taken or calculated from the government's financial reports, which included “one clearly identified set of 'rough estimates.'”

Earlier, in his introduction to the conference, Griffith suggested that the topic of the forum and therefore the critical observations that follow are non-partisan. “We as taxpayers,” whether Democrat or Republican, “should care about not being misled by the government's accounting methods,” he said.

Issue of Legal Standing, Legal Strategy.
Griffith also outlined another question weighed at the conference: the issue of legal standing of a person who might bring a suit.

“Even if there is a substantive violation, who, if anyone, has standing to enforce the clause?” he continued. “Not everyone has the power to bring a claim to right every wrong.” He added: “If the government's accounting is so bad that it amounts to a substantive violation, who has the right to bring a claim to fix it?”

Vanderbilt's Fitzpatrick, a former clerk for U.S. Supreme Court Justice Antonin Scalia and formerly with the Sidley Austin law firm in Washington, D.C., focused on the legal standing issue with regard to who might start a constitutional case on the statement and account clause and have that suit not thrown out for lack of standing.
He spoke of, in a court's working view of standing, “a real dispute with real people seeking real relief.”

Adequacy of showings of injury have figured in previous case law, as well as, related to that, the perceptions of a “taxpayer,” a “frustrated requester” of government information, or “citizen” who brought the suit and sought to claim harm.

By contrast, Fitzpatrick cited purchasers of government-issued securities, executives of companies that contract with the federal government, and people who rate government debt as examples of parties that might have claims of harm from deficient federal government accounting that could survive in court.

As a cautionary note, he also referred to several categories of legal cases hinging on the presence of a “political question.”

Under that legal doctrine, a court could view a potential suit as involving a political question that would cause the judiciary to steer away from an issue. A judge could rule that one of the other branches of government would be the suitable venue for settling the question--in that branch's policy-making role, for example, or to have the judge avoid being disrespectful to the other branches.

A problem, Fitzpatrick suggested, is that the doctrine underlying a court's decision on the political question is “so vague and amorphous” that it can be variously, and reasonably, applied.

He argued that the political branches of government--because of officeholders' worries about staying in elected office--will not resolve the tough issue of fulfilling the duty of ensuring that the government fully and accurately report its record of spending and the obligations it faces.

Fitzpatrick said that the courts would be deemed the only branch of government that would jump into the breach and devise an effective solution.

Referring to the federal judiciary, Fitzpatrick said, “the harder question is going to be does a court want to take on this case?” On the use of the political question doctrine and its wide berth, he suggested, “If the court doesn't want to get involved” in a constitutional case on alleged misuse of the statement and account clause, “they have the grounds to get out of it.”

Walker on Legal Standing.
“There's a very high bar for what it takes to get standing”--rightly or wrongly, he said. “I know that because I was the comptroller general of the United States”--effectively the chief auditor and accountability officer of the U.S. government--and sued Vice President Richard Cheney about a decade ago over access to records of the National Energy Policy Development Group, he said.

He was denied standing, although he was comptroller general of the United States, as well as a U.S. citizen and a taxpayer, he said.

Fitzpatrick Not So Pessimistic on Standing Issue.
For his part, Fitzpatrick noted that he is “not so pessimistic that the standing obstacle can't be overcome.”

However, he cautioned that any litigant bringing such a constitutional case on the federal government accounting issue should choose carefully the court in which a suit would be filed. He spoke of incentives for political leaders to not face decisions about drastically cutting spending or raising revenue in order to help ensure re-election. Potential litigants have to worry about a different set of incentives that judges have, he said.

“All the doctrines are ambiguous. Judges can reasonably decide one way or another,” said the Vanderbilt law professor. “And it really matters less on what the law says and more on who the judges are,” he said. “Who the judges are will drive whether they hear this kind of case.”

“The reality is the vast majority of judges do not like to do things that are going to be controversial,” Fitzpatrick added, describing general reluctance among judges to allow such a case to go forward. “In the current judiciary, I think you have to be very careful choosing which court you start your suit in.”

'The Big Issue on the Table.'
Toward the end of the conference, Marren directly proffered a simplified proposal, “to get the big issue out on the table”--namely, that he believes “it's going to take the Supreme Court to change the way that [federal government] financial reporting is done in the United States.”

”That ultimately is going to lead to reporting that tells the public exactly what the truth is,” he continued. “And that is the only thing that is going to correct the political process” in order get out of “the downward spiral that we're in.”

In response to Marren, Walker said, “First, I don't think the Court will take the case.” He added that he does not believe the statement and account clause is very clear, leading to judges' balking at accepting such a case.

“And secondly, we don't have time,” said the former comptroller general. He predicted a debt crisis would unfold here in two to three years, requiring a president--whether the current one or someone else--to face the issue that the United States is on a “burning platform” and to compel Congress to take action to reverse the trend.
OMB Responds.

Asked to respond to some of the criticism of federal government accounting at the conference, a spokeswoman for the president's Office of Management and Budget told Bloomberg BNA Jan. 25: “It is a fundamental responsibility of government to provide to the public timely, relevant, and reliable information on the nation's finances--and we take that responsibility seriously.”

The OMB spokeswoman, Moira Mack, added, “The Obama Administration has made it a priority to drive real-time transparency into how federal dollars are spent, who receives the funds, how much they receive, and the purpose for which they are received.”

The U.S. Department of the Treasury did not respond Jan. 25 to a request for comments on some of the comments made at the Fordham conference.