Government Balance Sheets

The Wall Street Journal September 28, 2004 edition ran an editorial by John Steele Gordon about entitled “We'll Know When They're Serious.” The opinion piece covered the ballyhooed surpluses of the government budget and the ultimate effect on our national debt. This paragraph sums it up nicely:

Just consider. In FYs 1998, 1999, 2000 and 2001, the federal government ran up “surpluses” amounting to $558.5 billion. So the national debt was reduced by $558.5 billion in those years, right? No, it increased by $1.312 trillion.

Well, what the heck happened? It turns out that the generally-accepted accounting principles (GAAP) that businesses are required to use do not apply to the government that enforces them!

If we were dealing with a company, we would try to calculate its cash flow by taking the net income, add back depreciation expenses and accounts payable, subtract capital expenses, accounts receivable, and, if it made products, inventories.

Obviously our net income is the difference in the debt. We should compare that to the cash flow to see if there is some funny booking. Was there some sort of reserve that was being filled through debt financing? What the heck made us incur so much debt when we were supposedly spending so much less money? Were there some expenditures deferred to some future fiscal crisis so we could let out the balloon and get the crisis behind us? Was a large amount of capital written off?

You'll know when the politicians are actually serious about dealing with the federal deficit when they subject themselves to the same accounting strictures that every corporation faces. Until then, it's just talk—pay no attention.

Until some strict standards are applied to government accounting by an outside entity, we'll nevera really know what's going on. I'm glad that the government has its first MBA President ever, but he's been too busy to do the hard work to make government finances transparent to its public.

I recently had to read an article in The New York Times called “When a Rosy Picture Should Raise a Red Flag” where many of these ideas for detecting corporate shenanighans arose. Obviously something is up.

The advice I give to those reading out there is never let an organization express its financial situation in any other way than GAAP. You cannot compare it to other organizations and you can't be sure everyone's definitions are the same without it. Sure, you might have to learn a little about accounting and finance to understand it completely, but it's worth it.

In fact, start with the book How To Read a Financial Report by John A. Tracy.

Josh Poulson

Posted Tuesday, Sep 28 2004 03:05 PM

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