History of the Governmentwide Financial Report

The Chief Financial Officers (CFO) Act of 1990 was landmark legislation that required the preparation of audited financial statements for major federal agencies. The CFO Act established the framework for modern federal financial management and set the stage for the development of a consolidated governmentwide financial report.

The CFO Act created the position of Chief Financial Officer at major federal agencies and required the Office of Management and Budget (OMB) to develop and maintain a financial management system for the federal government. This legislation was the foundation upon which FASAB's work would be built.

The Federal Accounting Standards Advisory Board (FASAB) was established in 1990 by the three Principals — the Secretary of the Treasury, the Director of the Office of Management and Budget (OMB), and the Comptroller General of the United States (GAO). FASAB was created to develop accounting standards for the federal government.

FASAB operates under the general oversight of its three sponsors: Treasury, OMB, and GAO. These three agencies, along with the Congressional Budget Office (CBO), finance FASAB's operations. The Principals have the authority to veto any recommended standard — a power that has shaped the course of federal accounting standards development.

The first consolidated Financial Report of the United States Government was issued for fiscal year 1997. This report represented a major milestone in federal financial reporting — for the first time, the financial position and results of operations of the entire federal government were presented in a single consolidated document.

The preparation of the consolidated report required the development of governmentwide accounting standards by FASAB, including standards for recognition, measurement, and disclosure of federal assets, liabilities, revenues, and costs. The report is prepared by the Department of the Treasury and audited by the Government Accountability Office.

In 1999 the American Institute of Certified Public Accountants (AICPA) granted FASAB the authority to set accounting standards for the accounting profession (Rule 203 status). This was a huge development because it gave FASAB credibility as a legitimate organization that could set generally accepted accounting principles (GAAP) for federal entities.

Rule 203 recognition meant that FASAB's standards became GAAP for federal reporting entities. This elevated the status of the Governmentwide Financial Report and the agency-level financial statements prepared under FASAB standards. The AICPA indicated it would review FASAB every five years to ensure its actions were those of an independent standard setting body.

FASAB was reviewed by the AICPA in 2004 and no change in Rule 203 status resulted. The AICPA review examined whether FASAB continued to operate as an independent standard setting body. FASAB had taken numerous steps since 1999 to enhance its independence, including changing its membership to provide for a majority of non-federal members and limiting veto authority to OMB and GAO.

FASAB has been warned that if a recommended standard were vetoed by a Principal, FASAB's status as a standard setting body for the accounting profession would be revoked. Another review by the AICPA was scheduled for 2009. The independence of FASAB — and by extension the credibility of the Governmentwide Financial Report — depends on the Principals not exercising their veto authority in a manner that undermines FASAB's independence.

Today the Financial Report of the United States Government is eagerly anticipated and highly valued. Required by law and the subject of annual congressional hearings, it is a major product of the Financial Management Service, and substantial resources are directed to preparing it. This focus on the report is new although the idea of preparing Governmentwide statements has been around for a long time.

It all began with an article entitled "An Annual Report for the Federal Government" by Carol Loomis for Fortune Magazine in 1973. Chairman Harvey Kapnick of Arthur Andersen & Co. (AA & Co.) noticed the article and decided to prepare and publish Consolidated Financial Statements of the United States Government (CFS) as a publicity project. AA & Co. partner Charles Bowsher (later Comptroller General of the United States) was put in charge of the project. Bowsher had been Assistant Secretary of the Navy for Financial Management and was aware of agency reports that could be used to prepare a CFS. On September 10, 1975 under Bowsher's direction AA & Co. published a CFS for fiscal years 1973 and 1974 (fiscal years ended June 30 at that time). Kapnick knew Treasury Secretary William Simon and convinced him that the Department of the Treasury should follow AA & Co.'s lead and produce a CFS.

On December 8, 1975 Secretary Simon approved a plan that called for the development and publication of a CFS on an annual basis. Treasury Fiscal Assistant Secretary David Mosso (now Chairman of the Federal Accounting Standards Advisory Board) carried out the decision using resources of the Financial Management Service (then the Bureau of Government Financial Operations). FMS Deputy Commissioner Gerald Murphy (later Fiscal Assistant Secretary) and Assistant Director Michael Smoovich of the Government Accounting Systems Staff (later Deputy Commissioner of FMS) were tasked with making the Treasury CFS a reality.

An Advisory Committee on Federal Consolidated Financial Statements chaired by Kapnick was established to provide expertise, counsel, and varied views necessary to develop statements responsive to divergent user perspectives. Mosso was the committee sponsor. The 15 members of the committee included the Comptroller General Elmer Staats, former Director of the Bureau of the Budget and soon to be Chairman of the President's Council of Economic Advisors Charles Schultze; Senior Partner of Price Waterhouse & Co. John Biegler; and other prominent leaders in the academic community, the accounting profession, and the world of business. On April 25, 1976, the committee held its first meeting at which Treasury Secretary Simon provided a keynote address. Loomis, who began the process with her Fortune article and who was a member of the committee, noted that she had initially proposed her idea for the article in 1965 but her managing editor didn't think anybody cared. The committee met several times during 1976 and 1977. Task groups were formed to address conceptual issues and presentations were made at the meetings. (Some of the conceptual issues considered then are currently being revisited by the Federal Accounting Standards Advisory Board established in 1990.)

Meantime a project team of six FMS employees supervised by Smokovich was busy determining a way to prepare a CFS even while providing extensive support to the committee. The first step was to obtain the AA & Co. work papers for copying. The papers were translated into operating procedures for the team to use to prepare a CFS. Team members were authorized unlimited paid overtime to publish the first prototype CFS by October 1976. Mosso indicated that the initial prototype would (1) focus on major items; (2) be limited to actual results of operations to minimize competition with the budget; (3) be prepared with existing staff; and (4) be deemed acceptable although less than perfect.

In fact, the first prototype CFS was published in October 1976 for fiscal years 1974 and 1975. The fiscal year was changed in 1976 to end on September 30, so the second prototype CFS published in July 1977 had to accommodate a transition quarter. Much had changed by the time the second prototype CFS was published. Jimmy Carter was the newly elected President and W. Michael Blumenthal was Treasury Secretary. Mosso left Treasury during 1977 to become a member of the Financial Accounting Standards Board. During 1976 Representative Phil Crane had sponsored legislation with many others to require a CFS. However, it had become apparent by 1977 that such legislation would not be enacted into law. With Secretary Simon gone, the committee process lost its momentum and eventually ended. The preparation and publication of the CFS then became a low-profile operation.

Murphy, FMS Deputy Commissioner, was a strong advocate for the CFS. As Deputy Fiscal Assistant Secretary in 1979, he was well placed to keep the CFS operation going. This was reinforced in 1986 when he became Fiscal Assistant Secretary, a position he held until 1998. In 1990, the Chief Financial Officers Act was passed and the Federal Accounting Standards Advisory Board was established. The act was the most significant federal financial management legislation in 40 years. When it was amended by the Government Management Reform Act of 1994, an audited CFS became a statutory requirement. The final prototype (unaudited) CFS was published for fiscal 1996, since the new law required Treasury to prepare an audited CFS starting in fiscal 1997. In 1994, the central financial agencies began to plan for the preparation and audit of the fiscal 1997 CFS. Under Murphy's leadership as well as that of FMS' Assistant Commissioner for Financial Operations Mitch Levine and FMS' Chief Accounting Officer Bill Patriarca, the 1997 CFS was prepared and audited by the statutory due date of March 31, 1998. The following day, Murphy testified before a congressional subcommittee. He noted that the U.S. Government Standard General Ledger and the ability to collect agency data electronically were responsible for the timely preparation of the CFS.

FMS has continued to prepare the CFS on a timely basis for fiscal years 1998 and 1999. Beginning in fiscal 1998, the CFS became the Financial Report of the United States Government. In 1998 Larry Stout became FMS Assistant Commissioner for Governmentwide Accounting, a new area responsible for preparing the report. Don Hammond became Fiscal Assistant Secretary in 1998 and Robert Reid became Deputy Assistant Secretary for Accounting Operations in 1999. Hammond, Reid and Stout have major executive responsibilities for the report. Hammond testified before a congressional subcommittee in 1999 and 2000 regarding the report. It has been nearly 25 years since Secretary Simon, who died in the spring, approved the idea of preparing a CFS. Thanks to the dedication of a few people the process survived over the years when there was no statutory requirement. The seemingly impossible task of receiving agency data on March 1 and preparing and publishing an audited report by March 31 is accomplished each year although it is far from a routine exercise.

This has been about the past and present. The future pertains to receiving a "clean" opinion on the report. Hopefully, that's not too far away. Loomis, the Fortune writer who inspired a government annual report, could write a follow-up piece.

The most significant controversy in the history of the Governmentwide Financial Report involves the accounting for social insurance programs — primarily Social Security and Medicare. The question of whether actuarially determined obligations for these programs should be recognized as liabilities on the government's balance sheet has profound implications for how the financial condition of the federal government is presented and understood.

At the January 2006 FASAB meeting, FASAB voted 6-4 to recognize actuarial liabilities on the balance sheet for social insurance programs, with all six affirmative votes coming from non-federal members. The Principals — through their representatives and through direct letters from the OMB Director, the Secretary of the Treasury, and GAO's Comptroller General — vigorously opposed this recognition. The controversy ultimately resulted in a 5-5 deadlock at the February 2009 FASAB meeting, with no new standard recognizing actuarial liabilities for social insurance programs.

The outcome of the social insurance debate means that the Governmentwide Financial Report does not recognize actuarially determined liabilities for Social Security and Medicare on the balance sheet. Instead, these amounts are disclosed in a Statement of Social Insurance as required by SFFAS 17. This is a significant limitation on the usefulness of the Governmentwide Financial Report as a measure of the true financial condition of the federal government.