The User's Perspective
How Financial Report Users Have Their Say in Standards Setting
The GASB understands that you are busy. Very busy. If you are a municipal bond analyst at a rating agency, underwriter, bond insurer, or mutual fund or other institutional investor, then using financial information about state and local governments is a demanding, full-time occupation. If you use financial information as a city council or school board member or as a volunteer in a taxpayer association, then you also have a separate day job. And you have a family. And responsibilities to your place of worship and the organizations you belong to. When, exactly, will you have the time to participate in standards setting?
Responding to a GASB survey or commenting on a proposed standard is pretty far down the list of many people’s priorities. But standards setting is vitally important to you, whether you realize it or not, in both your professional and personal lives. Standards determine in many ways what information you will receive to support making important business decisions—assessing the credit-worthiness of a government selling bonds, allocating a town’s budget resources—and personal decisions—where to buy a home or send your child to school, how to vote on a public referendum. Clearly, you have a lot at stake in the process.
That process works best when the users of governmental financial information participate. After all, who knows best what information is most crucial for making decisions and assessing governmental accountability than the people actually using the information? Traditionally, though, it has been difficult for the GASB to engage users in standards setting to the level of its other main constituencies—preparers and auditors of government financial statements. Although to some degree the problem may be a lack of awareness of the standards setting process or of the opportunity to take part in it, the more likely culprit is the difficulty in finding time to participate.
In light of this situation, the GASB has taken the initiative to make it easier for users, and constituents in general, to get up to speed on standards setting issues and get involved. This article highlights the ways in which having your say in the standards setting process has gotten a lot easier. It is our hope that, after reading this article, you will be motivated to play a (more) active role.
For two reasons, it can be difficult to read GASB’s pronouncements. First, their subject is accounting and financial reporting, which can be highly technical. Second, the standards are written in a manner that is intended to ensure that the specific requirements are clearly delineated. Neither characteristic recommends GASB’s standards as summer beach reading.
That is why the GASB has made a priority of communicating as plainly as possible about its proposed and final pronouncements. Virtually every document that the GASB issues is accompanied by a brief, plain-language article that summarizes the issue that the proposal or final pronouncement is intended to address and its key requirements. For more complex proposals, such as derivatives, the GASB has prepared a “plain-language supplement” specifically for users. These documents review the main provisions of the proposed standards with nontechnical wording. They focus on the information that would result from the standards if implemented as proposed, rather than on the technical aspects of how the standards work. The supplements are available to download free along with the main proposal. The GASB also keeps an archive of its plain-language materials that you can access at any time.
When governments began issuing the new financial statements under GASB Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, the GASB took the initiative to assist users in understanding the information contained in the revamped financial reports. The GASB ultimately published seven “user guides” to financial reports, written especially for non-accountants and with a minimum of accounting jargon. Two of the guides are ideal for the layperson, three are very brief summaries of the larger guides and are intended for elected officials and board members, and the remaining two are directed at persons with some experience using financial reports. More information about the user guides is available and the guides can be purchased on the GASB website.
The GASB has taken advantage of Internet-based survey software to allow respondents to research surveys to submit their answers on line. Almost all of the GASB’s surveys offer an Internet-based form as one method of response.
The GASB has allowed comment letters on its proposals to be submitted by email for some time now. For the past couple of years, when questions have been posed to constituents in a proposal, the survey software has been used so that people wishing to comment on the proposal may submit their input via an Internet form.
The goal of these efforts is to offer quicker, easier options for constituents to offer feedback to the GASB. It is worth remembering, too, that constituent comments need not be academic masterpieces. What the GASB needs to hear from users boils down to answers to these questions: Would the information that would result from this proposal be valuable to the work you do or to your interest in government finances? How valuable would it be? How would you use it?
Roundtables and Public Forums
In addition to employing surveys and interviews and conducting archival research, the GASB has increasingly conducted roundtable discussions as part of its research. These began in earnest during the development of Statement 34. The GASB held more than two dozen “focus groups” with users to obtain their views on the proposals for revamping the financial report.
More recently, the GASB conducted roundtables as part of its research on pension accounting and financial reporting (see the article in this issue). Roundtables were held in New York City, Chicago, San Francisco, and Austin and included a wide range of constituents—preparers from governments and pension plans, actuaries, auditors in and out of government, and a variety of types of users.
The GASB has used similar arrangements for obtaining comments on due process documents as well. As a supplement to the traditional public hearing format, the GASB has held public forums comprising a range of users of various types. User forums were held on the Invitation to Comment issued on fund balance reporting and on the both the Preliminary Views and Exposure Draft on derivatives. A public forum was conducted in November as part of the due process on the Request for Response on suggested guidelines for voluntary reporting of service efforts and accomplishments information (see the article in this issue).
The common elements in the roundtables and forums are that they allow constituents to offer feedback in a more relaxed setting and do not require the preparation of formal testimony. A valuable aspect of such discussions is that they allow for dialogue among the participants, which tends to raise issues that otherwise might not have been mentioned. In the case of public forums, the format also allows for exchange between the participants and the GASB members.
In recent years, the GASB has made both public hearings and forums more accessible to its constituents by allowing participation by telephone. Now you can take part, with a minimal time commitment, no matter where in the country you are located.
If just a fraction of the users of governmental financial information completed just one survey, or commented on one proposed standard, or participated in one roundtable discussion or interview—and if current participants did just one more of any of those things—then the level of user involvement would grow significantly. And, conceivably, the GASB’s standards would lead to even more useful information as a result.
If you did not realize that you can help to shape the type of information you receive in state and local government financial reports, then you should know that a single, convincing argument from any quarter can influence the decisions made by the GASB members. If you thought sharing your views is too time consuming, then we encourage you to take advantage of the changes the GASB has made to make your participation much easier.
Think about making participation in standards setting one of your New Year’s resolutions for 2009.
In this Part, we discuss financial reporting in the public sector, including the importance of independent standard-setting.
Financial reporting is how public entities account for their stewardship of – that is, the care they take with – public money and other assets.
Financial reporting helps in decision-making and in increasing accountability, openness, and transparency. It also helps to improve the performance of, and trust in, the public sector.
Each year, my Office audits more than 3800 public entities, from large government departments to small rural schools and cemeteries. Our 2014/15 work programme theme, Governance and accountability, reflects the importance of public entities operating and accounting for their performance in the way that Parliament intended.
The public sector is made up of a diverse range of organisations and agencies, including government departments, local authorities, Crown entities, State-owned enterprises, district health boards, tertiary education institutions, schools, and cemetery trusts. There are also public entities outside these broad categories, such as the Reserve Bank of New Zealand.
Many public entities are funded by money from taxpayers, ratepayers, donors, local and overseas investors and lenders, and others to achieve their intended outcomes. Public entities are accountable to the providers of money and to the recipients of the goods and services the entity delivers.
The primary objective of most public entities is to deliver services to the public rather than to generate a commercial return for investors. These entities are referred to as public sector public benefit entities.
Some public entities have a greater focus on achieving a commercial return. These entities are referred to as public sector for-profit entities. They include State-owned enterprises (such as New Zealand Post Limited), mixed ownership model companies (such as Mighty River Power Limited), and Crown Research Institutes (such as National Institute of Water and Atmospheric Research Limited).
As well as having entities with different purposes, the public sector also has several different ownership and governance models. For example, a local authority represents the interests of a particular community, while mixed ownership model companies have both private sector and public sector shareholders.
In all instances, people outside the public entity are interested in, and/or need to know, how the public entity is spending the money it manages. This includes knowing whether the entity is performing effectively to achieve what was intended with the money.
General purpose financial reports
Financial reports provide basic information to people interested in the performance of an entity (the users).1 They allow the entity to be held accountable for how it manages and uses the money it receives.
Many individuals with an interest in the performance of a public entity do not have the power to require the entity to produce customised financial or performance information. Instead, they rely on the general purpose financial reports that public entities provide.
General purpose financial reports are designed to provide financial and, where required, performance information to a range of users. To be relevant, the information must meet the accountability and/or decision-making needs of the users.
Figure 1 shows the information that general purpose financial reports provide.
Information provided in general purpose financial reports
Users of a public entity's general purpose financial reports might want to find out about:
- the goods and services the entity has delivered;
- what the entity has achieved;
- revenue generated and expenses incurred by the entity;
- the level of assets the entity controls and the liabilities it has incurred;
- the amount of equity the entity has; and
- other matters that help users to understand the entity's financial position and performance.
Requirements for public entities to produce general purpose financial reports
Most public entities are formally required to produce general purpose financial reports. The requirement to do this can be set by legislation, founding documents (such as trust deeds), the parent entity, or the responsible Minister. Entities can also decide to prepare these reports, if they think that doing so would be useful.
Usually, legislation requires that the information in general purpose financial reports must comply with generally accepted accounting practice (also known as GAAP).
Generally accepted accounting practice is the overall body of accounting standards and other guidance that sets out how an entity should prepare general purpose financial reports. Importantly, generally accepted accounting practice is a set of objective principles and requirements that are not subject to the preparer's individual preference.
General purpose financial reports are more likely than other reports to be reliable because of the requirement to comply with generally accepted accounting practice.
It is important that independent standard-setters carefully consider the requirements for preparing general purpose financial reports to ensure that the reports are based on consistent, unbiased, and transparent accounting standards.
In the public sector, the Auditor-General provides assurance to users that the information a public entity reports materially complies with these accounting standards and fairly presents the performance of the entity for the period that the financial report covers.
Importance of an independent standard-setting process
An independent standard-setting process helps to ensure that accounting standards are high quality and, when applied, result in reported information that meets the needs of users. Without an independent standard-setting process, accounting standards could be poorly thought through and unduly influenced by special interest groups.
The main elements that contribute to an effective, independent process for setting accounting standards include:
- selecting independent members of the standard-setting body who have an appropriate level of technical expertise and experience;
- monitoring the performance of members of the standard-setting body;
- having a policy about managing conflict of interests;
- holding public meetings to allow views to be heard;
- having an oversight process that supports the public interest;
- giving the standard-setting body adequate resources and technical support; and
- having a transparent process to identify and prioritise changes to accounting standards.
Who sets the accounting standards?
Two international boards set global accounting standards – the International Accounting Standards Board and the International Public Sector Accounting Standards Board. They create accounting standards for for-profit and public benefit entities in both the public and private sectors. The International Accounting Standards Board created the International Financial Reporting Standards (IFRS), and the International Public Sector Accounting Standards Board created the International Public Sector Accounting Standards (IPSAS).
In New Zealand, the External Reporting Board (XRB) prepares and issues accounting, auditing, and assurance standards and guidance. The XRB is an independent Crown entity. The Governor-General appoints its Board on the recommendation of the Minister of Commerce. However, the XRB's work is not subject to direction from the Government. It prepares accounting, auditing, and assurance standards independently of the professional bodies for accountants in New Zealand and Australia.
Figure 2 shows the different roles of the independent standard-setting bodies and the accounting standards that they set.
International and New Zealand independent accounting standard-setting boards
|International Accounting Standards Board||International Public Sector Accounting Standards Board||External Reporting Board (New Zealand)|
|Overall purpose||To provide the world's international capital markets with a common language for financial reporting.||To serve the public interest by creating high-quality accounting standards for use by public entities around the world.||To set accounting, auditing, and assurance standards for use by New Zealand entities.|
|Standards designed for||For-profit entities.||Public sector public benefit entities.||For-profit and public benefit entities.|
|Name of standards the Board is responsible for||International Financial Reporting Standards.||International Public Sector Accounting Standards.||New Zealand equivalents to International Financial Reporting Standards.|
Public Benefit Entity accounting standards.
Structure of this report
In Part 2, we describe the changes in accounting standards in the public sector from 1993 to 2009. We also set out the concerns that we, and others, raised in 2009. In short, those concerns were that accounting standards set for much of the public sector were unsuitable because they were designed for the private sector.
In Part 3, we outline the significant changes since 2009, including setting up the XRB, the new Accounting Standards Framework, accounting standards for public benefit entities (PBE accounting standards), alignment of accounting standards with international standards, and legislative reforms.
In Part 4, we discuss whether the changes since 2009 have resolved our concerns. In Part 5, we discuss the challenges arising from the new accounting standards. In Part 6, we discuss next steps for financial reporting in the public sector.
1: Users of financial reports include citizens, resource providers, and service recipients or their representatives (including members of Parliament, statisticians, analysts, the media, financial advisors, public interest and lobby groups, regulators, trustees, and rating agencies).