Who is in charge here?

I saw in the paper the other day that one of my old friends made headlines again as it proposed to exercise its uncontrolled authority to, as it has done so many times in the past, screw up our lives, our government and increase the cost to to each of us to live in these United States.  I am referring of course to GASB (Governmental Accounting Standards Board) and FASB (Financial Accounting Standards Board)  WHO?

For those of you who have not had the pleasure of watching these two organizations work their Wizard of Oz  behind the curtain magic, just a brief background.  Without going into the history of Progressive Movement efforts to professionalize government to protect us from the political sleazeballs, these two groups are perhaps today among the most glaring examples of what can happen when the professionals in a particular area of activity are put in charge of regulating what goes on through a self-perpetuating organization which answers to no one but itself. In this case, these two organizations set all the standards for accounting practices as they are applied to both public and private organizations.  Don’t yawn.

The story today was about FASB and a rule they have proposed on something called “materiality” which is the standard for what a publicly traded company has to tell the public about its financial position and outlook.  The proposal would allow companies much greater latitude in determining what is “material” and thus what they have to disclose to their stockholders and the public.  Now if that does not sound like an open invitation to more fraud and deception then you may want to stop being a person who does their own investing.

To add insult to injury here the proposed rule would alter the definition of what is material to a legal standard as opposed to an accounting standard, so the lawyers and not the accountants would make the decision about what is material.  Now this is a tough choice, but I think that I would go with the accountants rather than the lawyers being responsible for making sure members of the public and investors are told at least something about what is really going on behind the corporate wall of silence and unwillingness to tell anyone anything which constitutes today’s corporate standard for disclosure.

Probably it is just my professional experience, but I find GASB’s work even more insidious and invidious than FASB.  My guess is that in the realm of obscurity  GASB resides in an even deeper level of darkness than FASB with impacts even harder to trace. GASB edicts cost taxpayers millions of dollars that they have no idea they are paying, much less what for.

One example is when  GASB decided that all local governments had to inventory and value all of their infrastructure.  Sounds reasonable?  As one of the people who pays the taxes, what value are you getting from listing, setting value and depreciating the value of each culvert, small road bridge, fire truck pumper or town owned structure? Do you get any benefit from the hundreds of thousands of dollar it cost to create and maintain this inventory along with attempting each year for your Town audit to establish the value for each item?    Just how do you establish a current value on a one lane bridge over the river that was re-built in 1950?  What is the value of the volunteer fire department  pumper truck that was built in 1960 which the volunteers have kept together with scotch tape and bailing wire for the last fifteen years?  Replacement value?

Even more aggravating is the change that this GASB mandated accounting practice may have on your Town’s financial balance sheet. As your balance sheet is weakened because the Town does not set aside cash to cover the depreciated value of your infrastructure, the cost for you to borrow money for new or replacement infrastructure can go up because the town’s cost to borrow money goes up, due to a higher interest rate on your loans, because of your weakened financial position! Oh, and by the way, don’t think you can just walk away from the GASB standards and have your town accountant do a sufficient audit so that town residents know what is going on, but one that does not meet GASB standards.  Many lenders will not make loans to local governments that do not comply with GASB standards and have an annual audit that does not specifically state that the Town is in compliance with GASB rule.

So, who are these people? FASB and GASB each have seven member boards serving fixed terms with replacements in most cases selected by the current board members.  Board membership is a full time position.  FASB is an all male enclave while GASB has one woman serving on the Board.  The majority of the board members have their professional degree in accounting and before joining the board worked with accounting or financial services firms.  As far as I know they are all honest hard working folk. Unfortunately, they appear to work in a closed atmosphere where perceived accounting purity takes precedence over the impact of their rules and regulations on the cost of government or access of the general pubic to understandable information about the organizations for whom they write the accounting rules.

In  our democracy, the balance between full political control over governmental rules and regulations and independent boards and commissions writing rules and regulations supposedly free from political control is at best complex. Unfettered, independently followed self-interest and exercised power can create problems almost as severe as political self-interest and exercised political power with significantly less over site.   At least one major downside of the supposedly politically independent, self sustaining, Boards like FASB and GASB is that their independence becomes isolation and their actions untethered to the impact they have outside their little world of uncontrolled regulatory power. Occasionally such organizations attempt to do something so egregiously costly or just stupid that enough people hear about it and complain that they will back off the proposal for a time, but often only until the noise dies down.

If constant vigilance is one of the costs of freedom, then more of us need to spend more time paying attention to these so-called independent organizations and boards as they willy-nilly cost us millions of dollars for little or no return or deny us information that we should have.

Robert Lenna

About Robert Lenna

My professional career has been involved in bringing to Maine the financial capital to build our infrastructure of housing, schools, roads, hospitals, colleges, water and sewer districts. As Executive Director of four independent state authorities charged with putting together public financing for hundreds of infrastructure projects I was responsible for bringing billions of dollar into the Maine economy.