The Financial Accounting Foundation fired off a letter to Connecticut Governor M. Jodi Rell on Friday, urging her to veto a bill that would give the state comptroller the authority to be the key arbiter of accounting standards in the state. FAF’s main concern is that the comptroller — an elected official — could stray from generally accepted accounting principles (GAAP).
“Any deviation from GAAP would most likely result in the [s]tate’s auditors issuing a qualified opinion with respect to the [s]tate’s financial statements,” noted the letter.
FAF is the parent organization of the two major accounting standard-setting bodies in the United States — the Government Accounting Standards Board and the Financial Accounting Standards Board. The foundation has been vocal about the proposed change, charging that the bill weakens independent standard-setting that is currently “free from political influence,” according to the letter which was penned by FAF president and chief operating officer Robert Desantis.
In effect, the bill gives the state comptroller the authority to determine which accounting principles are “generally accepted” for purposes of preparing Connecticut’s financial reports. But for the last 25 years, defining the generally accepted accounting principles that apply to U.S. government bodies has been GASB’s role. Desantis acknowledges that the bill’s objective is to aid the state’s annual budget process, but says that the change is “unnecessary” to achieve that objective, “undermines the [s]tates’s financial standing,” and puts the state “at risk of not following GAAP as prescribed by GASB.”
Desantis also charges that the proposed law would authorize the state comptroller “to do something that she/he cannot do — prescribe ‘generally accepted’ accounting principles — as only GASB, due to its recognition by the accounting profession, can prescribe such principles.”
The Financial Accounting Foundation is urging Governor Rell (pictured) to veto a bill that the group claims will undermine standard-setting independence.
Connecticut’s constitution already gives the state comptroller the authority to choose the type of accounting method used by government entities. However, the new bill, which was one of the last pieces of legislation passed by the state senate before it adjourned its 2007 session, wants to name the comptroller the keeper of GAAP.
That switch makes FAF uncomfortable in light of a law recently passed in Texas. Legislators in the lone star state made GASB 45 — an employee-benefits rule written by GASB — optional. That kind of a la carte implementation of GAAP worries FAF. As Desantis reiterated in his letter to Rell, “transparency and confidence in government financial reporting is based on adherence to uniform standards that are independently established.”
Connecticut’s Comptroller Nancy Wyman told CFO.com in a previous interview that she has no intentions of straying from GAAP. In fact, Wyman says she has been trying to implement GAAP accounting for more than a decade, and the bill gives her the political support she needs to make that change.
Wyman would like to dump the “modified” version of cash accounting she now uses to prepare financial reports for the legislature and switch to GAAP, specifically accrual accounting. However, if she does that, a GAAP budget deficit of $1 billion will be recognized on the state books. Since Connecticut law requires a balanced budget, lawmakers would be forced to allocate state funds to pay down the deficit, instead of improving schools, roads, and healthcare.
So Wyman came up with a plan that the legislators would accept: Switch accounting methods going forward, thereby “freezing” the GAAP deficit, and pay off the liability a little at a time over the next 14 years. By switching from cash accounting to accrual accounting, Wyman will keep the GAAP budget deficit at its current level. Then she will amortize that deficit and pay it off at $150 million per year.
FAF makes a different suggestion. In his letter to the governor, Desantis asks for an amended bill that simply removes the comptroller from “prescribing” GAAP. He does not ask that GASB be reinstated as the arbiter of the principles, but rather relieves the comptroller of that duty.