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«The GASB as a Contentious Accountability and Governance System in US Local Government By Daniel Masterson & Professor Ken Smith ABSTRACT The ...»

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Evans School Review Vol. 2, Num. 1, Spring 2012

The GASB as a Contentious

Accountability and

Governance System in US

Local Government

By Daniel Masterson & Professor Ken Smith


The Governmental Accounting Standards Board (GASB) has sought

to expand its standards setting into new areas of accountability

reporting, including performance reporting. However, some of these standards have not been widely implemented. This article seeks to understand the contentious nature of accountability reporting areas through an application of accountability and voluntary club theories.

We find that the different intended uses of accounting information, the complex nature of the accountability concept and the divergence of views of the objectives of accounting contribute to the dispute over public reporting in the US. These diverging views are especially consequential due to the voluntary, or club-like, nature of the U.S. public sector accounting system.


The priorities of public governance and the accountability movement (e.g. transparency, openness, public participation, responsiveness, creating value, etc.) depend on reliable information and an effective means of communication. The appeal of accounting as a tool to improve information for these purposes is strong (Trueblood Committee 1973). Accounting can create consistency in measurement and presentation as well as highlight the costs and benefits of governmental activities (K. Smith and Schiffel 2006). Accounting standards are intended to further improve the reliability and credibility of information (Governmental Daniel Masterson will complete his MPA in June with an emphasis in public sector finance and administration. While in school he has worked as a research assistant for an investigation of the Governmental Accounting Standards Board, and on projects with the King County Assessor's Office, and the King County Parks Division.

85 Evans School Review Vol. 2, Num. 1, Spring 2012 Accounting Standards Board 1987). But efforts to apply accounting standards to new areas of public accounting, including performance reporting, have been vigorously contested and not widely implemented (McCall 2009, 1).

This article begins with an overview of public sector accounting standards and their uses in the United States. The body of the article consists of two parts. The first part describes the perspective of those who support a more expanded role for accounting in public governance and accountability, drawing on public administration accountability theory. The second part describes the view of those who prefer a more limited role and discusses implications of accountability club theory for voluntary accounting standards systems. The final section discusses the findings of our analysis and directions for future research1.


Public sector accounting standards are often created by independent, non-governmental organizations that aim to serve the public interest rather than the political or economic goals of a particular government, political party, or interest group. The independence of standards setters helps ensure that standardized information is useful for resolving problems resulting from the principal-agent relationship between a government and its citizens (as well as their chosen representatives). In systems with dispersed governmental authority, like the numerous state and local governments within the United States, accounting standards can provide consistency and comparability across reporting governments, thereby increasing the usefulness of all reports.

The Governmental Accounting Standards Board (GASB), which creates state and local government accounting standards in the United States, has embraced the public governance and accountability movement (GASB 1994; GASB 2006). The GASB is an independent, not-for-profit organization that sets accounting and financial reporting standards for state and local governments and governmental not-for-profit organizations (e.g., public 1 This article was inspired by a research project on the scope of the GASB. The views expressed are those of the authors and not of the GASB or the Financial Accounting Foundation (2011).

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colleges, universities and government hospitals) in the United States. To provide transparency in their own activities, the GASB uses a conceptual framework and a clearly defined due process to guide standards development. Consistent with Public Governance principles, the GASB’s conceptual framework focuses on providing information that is useful for decision-making and accountability purposes (Governmental Accounting Standards Board 1987). There is relatively little disagreement over the GASB standards created for financial uses2. However, GASB’s constituents are divided over accounting standards created for accountability and other public uses3. Consequently, the GASB’s standards and guidance in these areas have not been widely implemented.

The GASB was created in 1984 after extensive negotiations by representatives of nineteen organizations, most of them non-governmental professional associations. The GASB was a solution to political pressure for state and local government financial reform and was an alternative to governmental standards setting by the Financial Accounting Standards Board (FASB), an organization that already oversaw standards setting for privatesector financial reports (Chan 1985, 5-11). Although the GASB was created to respond specifically to the unique environment of public sector reporting, it largely retained the private sector conceptual framework with its focus on user-needs and decision-useful information4.

GASB constituents have publically disputed the scope of topics for which it should set standards (Government Finance Officers Association, n.d.). These controversial topics include: 1) Other Post-Employment Benefits, 2) Infrastructure Reporting, 3) Financial Projections, and 4) Service Efforts and Accomplishments. The dispute is partly driven by scepticism of the GASB’s capacity--as a financial accounting organization--to adequately FINANCIAL USE – any usage of information leading to a financial transaction. Typical users 2 include the budget staff, bond market, agency management and business community.

PUBLIC USE – any usage of information about an organization. Typical users include the media, 3 political parties/politicians, taxpayers, and interest groups. A common use is “accountability”, which is discussed in greater detail later.

GASB’s vision identifies “accountability and well-informed decision-making” as primary purposes 4 of its standards. Its mission is to create standards that result in useful information for users of financial reports and that guide and educate relevant constituents (Governmental Accounting Standards Board).

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address accounting and reporting issues for public uses of information. However, our analysis suggests the dispute stems from a genuine disagreement about the appropriateness of standardization for certain topics of information and the objectives of public sector accounting standards--areas of GASB governance that were never fully resolved during its formation (Chan 1985, 28; Wallace 1985, 71-75).

Sam McCall identifies two diverging but prevailing frames of reference as the cause of this divide: the expanded view and constrained view (McCall 2009, 10). The expanded view is held by the GASB and serves as the foundation for its conceptual framework and many of its accounting standards. The constrained view describes the opponents’ perspective that the GASB should not create standards intended for public accountability uses.

We propose that the views are based on two diverging value systems. The expanded view--which focuses on providing information that is useful to those who need it and have no other means of acquiring it--gives preference to individual users at the potential expense of society as a whole. The constrained view is founded on a macro perspective of all information producers and users and gives preference to the costs of producing and processing information at the potential expense of individual users.


We propose that the first view considers useful information to be the primary--if not sole-objective of accounting standards (Coy, Fischer, and Gordon 2001; Heslop and van Staden 2004; Jones 1992; Rutherford 1992, 266). This view can be modelled using agency theory with the principals (voters and creditors) as information users and the agents (the government and its elected and appointed officials) as information preparers (Zimmerman 1977). From this perspective, it follows that accounting tools should be evaluated based on the degree to which they serve a principal’s needs.

The usefulness view can also be modelled from an ethical perspective where the government has a moral obligation to share information with its citizens and taxpayers.

GASB asserts in Concepts Statement No. 1 (1987) that citizens have a “right to know” how their government performs. In a similar vein, Behn argues that democratic institutions have an obligation of “fairness” which suggests that principals deserve improved access to information provided by accounting standards, especially when the principal lacks other The GASB as a Contentious Accountability and Governance System 88 Evans School Review Vol. 2, Num. 1, Spring 2012 means to acquire information to evaluate an agent’s performance (Behn 2001).

Prior research on the uses and users of government accounting information suggests a wide range of interested individuals and groups (Cheng 1992; Cheng 1994; Drebin 1981).

Table 1 below lists some of the more prominent uses of accounting information and places them in two broad categories: financial uses and public uses.

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Perhaps the most common use of accounting information is for credit decisions. A typical debt instrument will be sold to parties outside the government with various entities assisting on both the “sell” side (e.g. bond-rating agencies, insurance, bond counsel, underwriters, auditors, etc.) and “buy” side (e.g. analysts, media, institutional investors, insurance companies, etc.). The financial reporting model developed by the GASB includes a Comprehensive Annual Financial Report (CAFR) with Management Discussion & Analysis (MD&A), numerous schedules, statements and footnotes. CAFR’s are often 200 or more The GASB as a Contentious Accountability and Governance System 89 Evans School Review Vol. 2, Num. 1, Spring 2012 pages long.

The internal users of accounting information--the elected and appointed leaders of a governmental entity--use accounting information for financial decisions as well as other public uses. These uses include assessing accountability in terms of stewardship of public resources and the effectiveness of serviced delivery, making decisions about the allocation of resources through the budget process, and guiding the improvement of government operations (Jones 1992; Moynihan 2008, 3-5).

The proposed external users of accounting information usually include voters who would use accounting information to make political accountability decisions. Evidence suggests that few citizens currently use accounting information directly for these kinds of decisions (Rutherford 1992, 269). However, it may be the case that citizens use accounting information indirectly through media or other third-party analysts (Schiffel and Smith 2006).


Public sector accounting standards are intended to provide information that is useful for accountability. Although accountability is normatively desirable, it is an ambiguous concept with unclear boundaries. Scholars of accountability point out that it can have multiple meanings. It has been described as a mechanism, a relationship, a process and--as implied by accounting standards setters--a use of information (Behn 2001; Governmental Accounting Standards Board 1987; Kelly 2008; Koppell 2005, 95-99; Romzek 2000; Rutherford 1992;

Sinclair 1995). But what does it mean for information to be useful for accountability?

Accountability is usually associated with principal-agent relationships. Principals hold agents accountable for meeting agreed upon obligations. But, because of information asymmetry, a principal can never fully monitor the efforts of an agent. Standards for accounting information useful for accountability would presumably improve the quality of information available to principals and improve their capacity to hold agents accountable.

As scholars point out, holding an agent accountable can mean different things to different people, making a consistent model of accountability use problematic.

In response to this problem, we create a framework for classifying accountability uses based on Koppel’s five dimensions of accountability (Figure A). Koppell defines the five

notions as Transparency: Did the organization reveal the facts of its performance? Liability:

The GASB as a Contentious Accountability and Governance System 90 Evans School Review Vol. 2, Num. 1, Spring 2012 Did the organization face consequences for its performance? Controllability: Did the organization do what the principal desired? Responsibility: Did the organization follow the rules? Responsiveness: Did the organization fulfill the substantive expectation (demand/need)?

In our model, the five dimensions are arranged into three distinct phases in a sequential public accountability assessment process that informs accountability decisions.

The first phase of the process--transparency--is an assessment of whether a government has revealed the facts in its reporting.

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