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eobf_G 7/5/06 3:03 PM Page 350

Government Financial Reporting

operational performance and financial information. Once fund types, permanent funds (governmental) and private-
the reports are submitted by the agencies, the U.S. purpose trust funds (fiduciary). Governments must also
Department of the Treasury, in consultation with the provide a reconciliation to the government-wide financial
OMB, issues the Financial Report of the United States Gov- statements at the bottom of fund statements or in a sepa-
ernment. rate schedule.
At the state and local levels, GASB has the responsi-
bility to establish and improve financial reporting stan- A CONTEMPORARY FEDERAL
dards. Three primary user categories of government ISSUE: OMB CIRCULAR A-123
financial reports exist: citizens, legislative and oversight In response to the Sarbanes-Oxley Act of 2002, require-
bodies, and investors and creditors. The executive branch ments of which increased internal control responsibilities
and subordinate bureaus/agencies are not identified as pri- for management and auditors of publicly traded compa-
mary users because they possess the ability to obtain this nies, the OMB announced a rewrite of OMB Circular A-
information from other sources.
123 on December 21, 2004. The official title of this
Although various internal and supplemental financial circular is Management’s Responsibility for Internal Control,
reports exist, the most common is the comprehensive but it is dubbed by many government financial mangers
annual financial report (CAFR). The GASB’s 1987 Codi- as “Sarbanes-Oxley for Government.” It contains sweep-
fication of Governmental Accounting and Financial Report- ing changes to many aspects of federal financial reporting.
ing Standards stated, “every government should prepare The revision of this document is an effort by the OMB to
and publish as a matter of public record, a comprehensive help ensure that federal agencies’ fiduciary responsibilities
annual financial report.” A trend toward fiscal discipline for public funds are fulfilled by strengthening require-
in government has generated a demand for better infor- ments related to evaluation, documentation, and report-
mation on which to base decisions. Consequently, state ing on internal controls.
and local governments changed their financial reporting The specific objectives of internal controls, as defined
from basic stewardship reports on the various government
by OMB Circular A-123, are threefold: effective and effi-
funds to a more corporate-style report that offers analysis
cient operations, reliable financial reporting, and compli-
of the long-term impact of financial management deci-
ance with applicable laws and regulations. As such, the
sions. Specifically, as a result of GASB Statement 34,
changes announced in the circular were in keeping with
financial reports now include comprehensive information the objectives. Effective in fiscal year 2006, federal agen-
about the cost of providing government services and show cies must:
all of a government’s liabilities and assets, including infra-
structure. GASB Statement 34 called for government- • Assess and document their internal controls over
wide reporting, enhanced fund reporting, and a financial reporting
management discussion and analysis.
• Document their assessment of the effectiveness and
The concept of government-wide reporting was the reliability of those internal controls
most dramatic change. Until this significant change, gov-
ernment followed only the modified-accrual basis of • Provide a separate assurance statement as part of the
accounting. The change is important to potential lenders annual Federal Managers Financial Integrity Act
Section 2 (assurances asserting whether the internal
and taxpayers because of the need to capitalize and depre-
ciate general capital assets or infrastructure. Information controls over financial reporting are effective)
concerning infrastructure will include the cost and the
anticipated service life of roads, bridges, sewer and water SUMMARY
systems and other capital assets. Since state and local gov- Citizens and other stakeholders use government financial
ernments invest $1 out of every $10 ($140 billion to $150 reports to assess a government’s performance and overall
billion annually) in the construction, improvement, and financial position in order to hold a government account-
rehabilitation of capital assets, that information should be able for its actions. At the federal level, the OMB prom-
valuable to all stakeholders. ulgates reporting standards and reviews audited financial
The elements of fund reporting have not changed statements from each agency. In turn, the Department of
much over the years. Fund categories continue to apply the Treasury, in consultation with the OMB, issues the
their current measurement focus and basis of accounting; Financial Report of the United States Government each fis-
nevertheless, reporting fund types (such as special revenue cal year. In response to the Sarbanes-Oxley Act, the OMB
and capital projects) is no longer required for governmen- announced a rewrite of OMB Circular A-123, which con-
tal funds in the basic financial statements according to tains sweeping changes to many aspects of federal finan-
GASB Statement 34. This approach established two new cial reporting, effective in fiscal year 2006.

350 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION