I remember my very first installment of government accounting as it is taught in FAR like it was yesterday. Cranky from a 5am wakeup and not necessarily looking forward to spending an entire day stuck in CPA review class for work, I usually tuned out my overly-caffeinated boss ripping bad jokes and scribbling T accounts on a whiteboard. But that day was different. That day, he was explaining the mysteries of government accounting — one of the most heavily tested areas in FAR — and for some reason, I was fascinated.
Why, you ask? Certainly not because it's interesting. As we all know, it's one of the worst sections to slog through unless you're some sick masochist who enjoys the stuff. But as my boss wrote out the rules on that obnoxious whiteboard, I couldn't help but ask myself: HOW IS THIS EVEN LEGAL?
Some argue that the mess of expenditures and appropriations and all that other government accounting goodness – at least on a federal level – isn't:
The Constitution of the United States of America lists the powers and limitations on the Congress in Article I. One sentence in that Article reads:
No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law, and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.
The founders added this provision below others vesting tax and spending authority in the Congress. It is called the Statement and Account Clause. It was originally proposed by George Mason of Virginia, who was concerned about safeguarding government accountability.
The Constitution was adopted over 200 years ago. So why are some people arguing today that federal government accounting is so bad it is unconstitutional, in light of this provision?
In fairness, there's no way the founding fathers could have had any idea we'd be where we are today. From financial innovation to the Internet to the advent of cronuts, those poor fools did the best they could to build a solid foundation for our little country based on what they knew about the hearts of men and our tendency as human beings to muck everything up because we're a bunch of self-centered dickheads.
Despite the messiness of government accounting being news to no one (we might call it a feature, not a bug), Joseph Marren, who is President and CEO of KStone Partners, has been questioning the constitutionality of government accounting for a few years now. In one 2010 piece, he basically implies that if public companies balanced the books like our government does, the entire stock market would be worthless:
One of the difficulties that we collectively face in achieving fiscal responsibility for our government is that often our two political parties talk past one another because they don't have a common basis for discussing the government's finances. The most well-known set of accounts, and the only one that politicians want to discuss, is the budget that is cash based and has little relationship with economic reality. Under budget accounting rules, outlays are recorded only when bills are actually paid. This shortcoming is the primary reason every publicly traded company in the U.S. is required to use accrual accounting.
Marren, who calls himself a "concerned citizen" in his recently-released paper The Statement and Account Clause, the Obamacare Litigation and the FASAB’s Unconstitutional Reporting Entity Proposal, even suggests the AICPA has violated its own code of conduct:
An argument can be made that the AICPA has violated both the Constitution and its ethical principles in recognizing the FASAB as the GAAP standards setter for the federal government under Rule 203. Has the AICPA aided and abetted in the publication of financial results that do not comply with the Constitution? Has the AICPA designated an unconstitutional entity, the FASAB, as the GAAP standard setter for the federal government? What public interest has been served by blessing a rule making body that assists in the publication of misleading/incomplete financial results? What culpability does the AICPA have for the publication of financial statements that do not meet the requirements of the Constitution? What does it say about the AICPA’s integrity that they have arguably assisted in misleading the citizens of the United States with respect to the nation’s financial results and financial position?
ESCANDALO! Marren says the AICPA will get theirs when the excrement hits the air circulation device, however:
It is important to make one last observation regarding the role that the AICPA will likely play in the not too distant future. When the Nation’s finances finally go “off the cliff” and Treasury yields skyrocket Congress will do what it does best, search for someone or something to blame besides itself. It is fairly predictable that politicians will find that the AICPA fills that role perfectly.
So. Do we have a passionate advocate for fiscal responsibility or just another government-hating nut here? You decide.