Guidelines for responding to proposed accounting and auditing standards: the GFOA Executive Board recently approved specific principles for responding to proposed accounting and financial reporting standards and to proposed auditing standards.

The Government Finance Officers Association (GFOA) routinely responds to proposed new guidance from the Governmental Accounting Standards Board (GASB), such as exposure drafts, preliminary views documents, and invitations to comment. Over the years, the GFOA has informally adopted a number of basic concepts and positions to which it has frequently appealed in responding to various GASB initiatives. These concepts and positions have allowed the GFOA to take principled positions that have remained consistent over time.

This past June, the GFOA's standing Committee on Accounting, Auditing, and Financial Reporting concluded that it would be beneficial to develop these informal principles into a set of formal guidelines that the GFOA could both use itself and share with state associations that might desire help in crafting their own responses to GASB proposals. The product was a draft set of guidelines that was sent to the GFOA's Executive Board for its consideration. At its fall meeting in Chicago, the GFOA's Executive Board formally approved the proposed guidelines, which have been separately communicated to each state association.

The 12 specific principles that the GFOA's Executive Board has promulgated for responding to proposed accounting and financial reporting standards are as follows.

1. Accounting is a means to an end, not an end in itself. Accounting standards should always be justifiable on the grounds that they provide information that is of practical use to decision makers. This practical use should be demonstrated.

2.Willingness to accept something for free is not sufficient evidence of genuine demand. Users of financial statements virtually always can be expected to support requirements for additional disclosure since they do not have to bear the related costs. A positive response from users to a proposed new disclosure is not, of itself, sufficient evidence of real demand.

3. Less often is more. The sheer volume of financial reporting can be a significant obstacle to users and potential users of financial statements and needs to be minimized, especially in the case of note disclosure.

4. Unnecessary differences with private-sector standards should be avoided for accrual presentations. Differences in the accrual treatment of transactions and events should always be based on significant underlying environmental differences (i.e., transactions and circumstances unique to the public sector), not just the conflicting preferences of different standard-setting bodies.

5. Resist assigning new meanings to existing private-sector terminology. The same technical term should not have different meanings in the public and private sectors (e.g., cash flows from operating activities).

6. The financial statement display of "soft" data compromises user confidence in financial statements. Softer data are best provided through note disclosure.

7. The integrity of the current financial resources measurement focus and the modified accrual basis of accounting must be preserved. Recognition and display in governmental funds should be driven by the unique measurement focus of those funds, rather than "shadowing" the accrual-based treatment used in the government-wide financial statements. A major reason the GFOA supported government-wide reporting was to "take the pressure off" governmental funds to provide information inconsistent with their primarily budgetary objective.

8. The integrity of fund accounting needs to be preserved. It is essential that fund financial statements be treated as the true equal of government-wide financial statements and not as the equivalent of supporting schedules.

9. The expansion of required supplementary information needs to be resisted. Such presentations easily could become a growth category, especially given the broad definition of the category provided in GASB Concepts Statement No. 3, Communication Methods in General Purpose External Financial Reports that Contain Basic Financial Statements.

10. Not every financial problem has an accounting solution. "Accounting" and "accountability" are not synonyms. Accounting is only one part of accountability. Accountability also incorporates budgeting and public-policy-making processes, which are beyond the scope of accounting standards.

11. Quarterly financial reporting should not be mandated in the public sector. Because governments do not issue equity securities and because defaults on governmental debt securities are extremely rare, there is no public-sector equivalent to the private-sector demand for quarterly financial reporting in conformity with generally accepted accounting principles.

12. The cost of implementing new standards should be minimized. As a rule, the implementation of new standards should be mandated prospectively rather than retroactively.

The GFOA's Committee on Accounting, Auditing, and Financial Reporting also thought it would helpful to prepare similar formal guidelines for responding to proposed auditing standards. Therefore, at its June meeting it prepared a set of draft guidelines for this purpose as well. These guidelines were subsequently reviewed and approved by the GFOA's Executive Board at its fall 2007 meeting and communicated to each state association.

The 10 specific principles that the GFONs Executive Board has promulgated for responding to proposed auditing standards are as follows.

1. Auditing standards should be justified on the basis of demonstrated needs. There is a natural temptation for standard-setting bodies to be constantly setting new standards, whether they are truly needed or not. Since governments as clients must ultimately bear the cost of any additional requirements set for the independent audit, it is important to them that the benefits of proposed changes in auditing standards clearly and demonstrably outweigh the related costs.

2. The Governmental Accountability Office should minimize differences between Government Auditing Standards and generally accepted auditing standards. Differences between public- and private-sector auditing standards should be based on substantive differences between the two environments.

3. Auditing standards should not place auditors in the position of arbitrarily substituting their judgment for that of management. Auditors, of course, must review various managerial decisions and practices as part of an audit. Auditing standards should provide identifiable criteria in such cases to avoid arbitrary judgments on the part of the auditor, especially in regard to potential waste and abuse.

4. Clients should not be unnecessarily prevented from benefiting from the services of their independent auditors. The concept of auditor independence should not be applied so narrowly as to needlessly deprive audit clients of nonaudit services from their independent auditors.

5. Auditing standards should require opinions that are consistent with the equal status accorded fund financial statements. Governments should resist any movement toward the assessment of materiality solely or primarily from the perspective of government-wide financial reporting.

6. Auditing guidance should not indirectly set generally accepted accounting principles. Audit and accounting guides issued by the American Institute of Certified Public Accountants, because of their authoritative status on the hierarchy of generally accepted accounting principles, should not attempt to settle unresolved accounting and financial reporting issues or express a preference among acceptable options.

7. The Office of Management and Budget should prevent federal grantors from indirectly setting auditing requirements beyond those of the Single Audit. The express purpose of the Single Audit Act was to eliminate the need for individual grant audits, not to provide a platform upon which to impose additional grant-specific auditing requirements.

8. Auditing standards should not define or regulate the audit procurement process. How governments engage the services of independent auditors is a managerial and public policy matter beyond the proper scope of auditing standards.

9. Auditing standards should not mandate specific control-related policies and procedures. Auditing standards may properly address how to assess the adequacy of control-related policies and procedures, but they should refrain from mandating the implementation of specific policies and procedures.

10. Auditing standards should recognize that governmental auditors can be truly independent. It is important that Government Auditing Standards continue to recognize that government auditors who maintain appropriate organizational independence are just as independent as their private-sector counterparts.

Both sets of guidelines can be found on the GFOA's Web site wwwgfoa.org.

STEPHEN J. GAUTHIER is director of the GFOA's Technical Services Center in Chicago, Illinois.