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Government Accounting and Auditing

Clearing a Cloud of Confusion

Distinctly different sets of U.S. accounting and auditing standards are applicable to the financial statements of governmental entities and certain other entities that are significantly funded through government assistance. For nongovernmental entities, GAAP is governed principally by FASB, and GAAS by either the AICPAs Auditing Standards Board (ASB) or the PCAOB. Specialized accounting standards for state and local governments, however are set by GASB, while those applicable to the federal government and its agencies by the Federal Accounting Standards Advisory Board (FASAB). Along with FASB standards, all of these are considered authoritative when applicable and part of GAAP.

In addition to GAAS, generally accepted government auditing standards (GAGAS) apply to certain audits of the financial statements, primarily of those federal, state and local governments and their agencies and others that receive and expend in one reporting year federal assistance funds in excess of a statutory minimum. GAGAS are set forth in a booklet entitled Government Auditing Standards (commonly called the Yellow Book) that is issued and updated periodicall by the Comptroller General of the United States, Government Accountability Office (GAO).

When Do Government Accounting Standards Apply?

FASAB standards.

The accounting standards issued by the FASAB embody all authoritative GAAP for financial statements of the U.S. federal government, including all agencies thereof. These standards are available free online in a comprehensive PDF, FASAB Handbook of Federal Accounting Standards and Other Pronouncements, as Amended, which is more than 2,500 pages long in its most current edition as of this writing. Because there is no doubt, uncertainty, or controversy as to when FASAB standards are applicable, and because they are rarely encountered in general audit practice, they are not discussed further in this article.

GASB standards.

GASB standards constitute authoritative GAAP for state and local governments only but do not clearly define that population. In 1996, FASB and GASB agreed to a definition of government, which now appears only in certain AICPA audit and accounting guides, including State and Local Governments (para. 101) and Not-for-Profit Entities (para. 104), which, in turn, contain only nonauthoritative guidance (Category B GAAP). It appears it was never intended that this definition be incorporated directly into any authoritative GASB or FASB standards.

These AICPA guides effectively define governments (not state and local governments) as public corporations and bodies corporate and politic created for the administration of public affairs. It cites a definition of public corporation from Blacks Law Dictionary, however, as as instrumentality of the state governed by those deriving their authority from the state. Other entities are also considered governmental under the definition agreed to by GASB and FASB if they have at least one of the following three characteristics:

Popular election of officers or appointment (or approval) of a controlling majority of the members of the organizations governing body by officials in one or more state or local government.

The potential for unilateral dissolution by a government with net assets reverting to the government.

The power to enact or enforce a tax levy.

Furthermore, organizations are presumed to be governmental if they have the ability to issue directly (rather than through a state or municipal authority) debt that pays interest exempt from federal taxation. However, organizations possessing only that ability (i.e., to issue tax-exempt debt) and none of the other governmental characteristics may rebut the presumption that they are governmental if their determination is supported by compelling, relevant evidence

GASB standards constitute authoritative GAAP for state and local governments only but do not clearly define that population.

Among the series of Technical Questions and Answers (TQA) released in 2017 containing nonauthoritative guidance (discussed in further detail below), the AICPA effectively declared that the above definition of government is to be viewed as a definition of state and local government, as that term is used by GASB, that is, entities are governmental or nongovernmental for accounting, financial reporting, and auditing purposes based solely on the application of the definition of a state or local government and an entity that meets the definition should follow accounting standards as promulgated by GASB to prepare its financial statements (TQA section 9160.31).

Although not defined by either FASB or GASB in any authoritative accounting standard, state and local governments are generally understood to include, among others:

State governments

Local governments, such as cities, counties, towns, and villages

Public authorities, such as housing finance, water and other utilities, economic development, and airport authorities

Governmental colleges and universities

School districts

Public employee retirement systems, and

Public hospitals and other healthcare providers.

Certain not-for-profit organizations that are formed and controlled by a governmental entity are likewise deemed to be governments, and tribal governments (see below) generally are as well; therefore, their financial statements intended to conform to GAAP should be prepared pursuant to GASB standards.

Governmental not-for-profit organizations.

As a rule, not-for-profit organizations are not covered by GASB accounting standards for governments and instead follow accounting FASB-prescribed standards (ASC 958). In some cases, however, distinguishing between a government and a not-for-profit organization is not so simple. For example, a local government may set up a corporation that may, in fact, be tax-exempt under IRC section 501 (c)(3) and therefore has many characteristics of a not-for-profit organization. These organizations are usually considered governmental not-for-profit organizations and should follow governmental GAAP set by GASB.

Tribal governments.

Tribal governments are technically not state or local governmental entities under the above definition, so one might conclude that they are beyond the scope of GASBs authority; therefore, there are no authoritative standards expressly applicable to them. FASB (ASC 105-10-05-2) directs that, in the absence of explicit guidance in the authoritative standards, entities should first analogize to other areas of authoritative GAAP before considering nonauthoritative sources. A similar provision appears in GASB Statement 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments.

According to the AICPA audit and accounting guide, State and Local Governments, the federal government considers federally recognized tribes to be similar to state governments, and they generally report today using GASB standards (para. 12.91). It should also be noted that many tribes typically report their casino and other significant business operations as enterprise funds of a general-purpose government (i.e., the tribe), as mentioned in the guide (paras. 12.09, 12.93). (GASB standards applicable to enterprise funds differ from FASB standards only in limited respects primarily with respect to measuring postemployment benefit liabilities and certain minor presentation and disclosure matters.) Other tribal governments, however, prepare their financial statements on a non-GAAP, statutory or regulatory basis, which is considered a special-purpose framework. A standard for reporting on financial statements prepared on a special-purpose framework is provided in GAAS (AU-C 800).

The foregoing notwithstanding, some entities have sought the option to prepare their financial statements in accordance with FASB standards rather than GASB standards for the following reasons:

Banks or other third parties requested it.

Financial and accounting personnel are more familiar with them.

Tribes and other government entities view them as preferable for certain business-type activities (e.g., casinos, public utilities, hospitals) because their financial statements would be more comparable to other privately held businesses operating in the industry.

Although not acknowledged expressly by GASB in its standards or other literature, NAFOA has effectively expanded the scope of GASBs authority and recognized it on its website without qualification or exception as applicable to tribal, state, and local governments.

In a series of technical Q&As (TQA) issued in 2017, the AICPA provided non-authoritative guidance for issuing audit opinions on the financial statements of tribal governments that choose to prepare them in accordance with FASB standards rather than GASB standards. In such guidance, auditors were advised to evaluate whether the accounting principles and presentation used in the financial statements and related notes were materially different than those required by GASB. Only when the differences in presentation and disclosures were determined to be immaterial could an auditor consider providing an unmodified audit opinion with regard to GAAP compliance. If the differences were determined to be material, the auditor should modify the opinion, because the financial statements, or an element thereof, were materially misstated or misrepresented with respect to GASB GAAP.

This nonauthoritative guidance also cautioned auditors against reporting on the financial statements of tribal entities prepared using FASB standards as a special-purpose framework; instead, they provided the alternative of issuing what is termed a dual audit opinion. Under the dual opinion option, when financial statements are prepared using FASB principles (although an adverse opinion would still be issued with respect to noncompliance with GASB GAAP in the audit report, if appropriate), additional language may be added, including an unmodified opinion on compliance of the financial statements with FASB standards. An illustrative report with a dual opinion is presented in the TQAs (sections 9160.32, .3435).

In the opinion of this author, the dual opinion approach is conceptually flawed and should be highly controversial. In that regard, the Native American Finance Officers Association (NAFOA), which holds a seat on the GASBs Advisory Council (GASAC), a body responsible for consulting with GASB on concerns of tribal governments and other technical matters, objected in 2018 to the dual opinion option. It asserted that confusing opinions counteract the objectives of accounting standards and consequently impact the economic health of Indian Country