A government finance watchdog is warning that a bill on Gov. Bruce Rauner’s desk could allow local governments to use accounting practices shunned by many private businesses.
Senate Bill 2638 would allow local governments to file annual reports to the Illinois Comptroller based off cash accounting. Truth In Accounting Research Director Bill Bergman said that’s different from accrual accounting, the standard that all publicly traded U.S. companies are required to use.
“Effectively it’s a way to kick the can down the road and accrual accounting, in theory, should help you recognize those expenses at the time they occurred, not when the cash goes out,” Bergman said.
An example of this is Illinois’ $130 billion unfunded pension liability, which isn’t accounted for in the state’s annual budget.
A growing number of governments worldwide have moved to accrual accounting and away from cash accounting, according to the authors of a 2016 technical manual for the International Monetary Fund.
“Pure cash accounting has a number of weaknesses from the point of view of government financial transparency, integrity, and accountability,” the authors wrote. “Under cash accounting, transactions are recognized only when the associated cash is received or paid and economic events are not reported if there is no immediate exchange of cash. Governments have been tempted to exploit this weakness by deferring cash disbursements or bringing forward cash receipts as a means of artificially inflating their financial balance.”
The Illinois Municipal League, which advocates for municipalities, supports Senate Bill 2638.
“In summer 2017, Comptroller (Susana) Mendoza’s Office notified local governments that audit statements using cash basis accounting would no longer be accepted and that the failure to file audit statements on an accrual basis would result in a fine,” IML President Mark Eckert said in a letter to Rauner last month.
Eckert said that would introduce unnecessary complexity “and result in expensive conversion costs for no appreciable benefit to local governments or taxpayers.”
Bergman said cash accounting actually means long-term pain for short-term gain for taxpayers.
“Governments can tax lower amounts (based on cash accounting) and therefore in the short run taxpayers were better off by cash-focused budgeting and financial reporting practices,” Bergman said. “But in the long run, it’s allowed governments to kick the can down the road and taxpayers are facing that consequence now.”
The IML said in its policy position supporting the measure that the initiative clarifies that local governments can continue filing annual audited statements using a cash-basis mention, rather than an accrual method and if governments file accrual method after June 30 next year they’d be obligated to continue that going forward.
The measure also is supported by the Illinois Certified Public Accountants Society. In a letter to the governor earlier this month, ICPAS Vice President of Government Relations Martin Green said “there is no greater degree of likelihood of overlooking financial reporting mistakes or errors in the audit if cash basis financial reporting is used.”
Both the IML and ICPAS said the measure is necessary to clarify the law that they said the Illinois comptroller was interpreting to require accrual-based reports. Mendoza’s office said it’s neutral on the bill.
The Governmental Accounting and Standards Board said most public utilities and private companies use accrual accounting.
“It measures not just current assets and liabilities but also long-term assets and liabilities (such as capital assets, including infrastructure, and general obligation debt),” a GASB pronouncement from 1999 said. “It also reports all revenues and all costs of providing services each year, not just those received or paid in the current year or soon after year-end.”
Rauner’s office said it’s one of 600 bills the governor has received and it isn’t in a position to comment.