From time to time, the question is raised as to why state and local governments cannot apply the same set of accounting standards that for-profit enterprises apply. A white paper released by the Governmental Accounting Standards Board explains why separate standards for governments are needed. It also illustrates some of the differences between standards for governments and those for business enterprises and explains why the process of standards setting for governments is an ongoing process.
According to the white paper, the primary purpose of governments is to enhance or maintain the well-being of citizens by providing services in accordance with public policy goals. In contrast, for-profit business enterprises focus primarily on wealth creation, interacting principally with those segments of society that fulfill their mission of generating a financial return on investment for shareholders. The white paper cites several other crucial differences that generate user demand for unique information:
- Governments serve a broader group of stakeholders, including taxpayers, citizens, elected representatives, oversight groups, bondholders, and others in the financial community.
- Most government revenues are raised through involuntary taxes rather than a willing exchange of comparable value between two parties in a typical business transaction.
- Monitoring actual compliance with budgeted public policy priorities is central to government public accountability reporting.
- Governments exist longer than for-profit businesses and are not typically subject to bankruptcy and dissolution.
The white paper concludes that individuals and organizations who are interested in the financial performance of state and local governments have substantially different information needs than those who follow the financial performance of for-profit entities. The white paper is available in full at http://www.gasb.org/white_paper_full.pdf.
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