Magazine article Government Finance Review

Improving Financial Reporting for Small Governments

Magazine article Government Finance Review

Improving Financial Reporting for Small Governments

Article excerpt

The GFOA's new Certificate of Conformance Program is an important step in the right direction.

The Government Finance Officers Association strongly encourages the use of generally accepted accounting principles. Nonetheless, a large percentage of small government financial reports do not conform to GAAP; small governments often use the cash or modified cash basis of accounting for a number of reasons, but standardizing non-GAAP financial reporting should greatly improve the quality of small government financial reporting. This article will examine these points, along with the specifics of the modified cash basis reporting model that will serve as the foundation

for the GFOA's new Certificate of Conformance Program for Small Government Annual Financial Reports.


It is estimated that thousands of small local governments in the United States do not prepare financial statements in accordance with generally accepted accounting principles. A number of factors contribute, such as having little staff time to devote to financial reporting. In this case, governments have to balance the desirability of GAAP financial reporting against the desirability of issuing their financial reports on a timely basis--and they often choose the latter. GAAP financial reporting also requires considerable expertise and ongoing training, especially in an environment of ever-changing accounting standards, and many small governments simply do not have staff with the needed training. Preparing a GAAP-basis financial report also involves significant incremental costs in compiling the necessary accrual data and converting data from one basis of accounting to another for purposes of government-wide financial reporting. Moreover, many small governments do not have accounting systems that are designed to collect the additional data needed for GAAP financial reporting, and the cost of making the data already in the system useful for meeting GAAP norms can be high.

These and other similar hurdles can make the process of GAAP financial reporting appear overwhelming. Moreover, absent a legal mandate, it is often difficult to convince a governing board that is struggling to balance the budget of the practical benefits gained by incurring additional costs to prepare GAAP financial statements, especially if the government does not issue debt.

The goal of the Certificate of Conformance program is to provide governments that are not yet able to surmount these obstacles with a practical means of improving the quality of their financial reports, while at the same time placing them in a better position to prepare GAAP financial statements in the future. Governments will not only receive the feedback associated with submitting an annual financial report to the program, but will also reap the benefits of continuous access to professional staff who are ready to answer technical accounting and financial reporting questions on a regular basis. In summary, the program encourages all governments to take ownership of and pride in their financial reports, with transparency as a celebrated outcome.


There is no single accepted definition of what constitutes a modified cash framework of financial reporting, which has a negative effect on stakeholders' ability to understand and compare financial statements prepared using this method. Likewise, the lack of uniformity in practice opens the door to accounting treatments that may be motivated by considerations other than transparency. The GFOA is convinced that a uniform set of nationally recognized guidelines should go a long way toward making these reports more comparable and transparent.

Accordingly, the GFOA has established program guidelines that define what constitutes a modified cash basis financial reporting framework and has identified additional information, beyond the basic financial statements, that should be included in a small government annual financial report. …

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