Sunday, July 22 , 2018, 12:51 am | Fair 67º


Harris Sherline: Phony Government Accounting

Officials in all levels of government seem to have no qualms about routinely manipulating the numbers

Talking about numbers is a sure-fire way to turn most people off — and that includes me on occasion, notwithstanding the fact that I’m an accountant.

Unfortunately, those who don’t want the public to know what they may be doing with the assets or income of an enterprise — or both — count on the general dislike of numbers, which enables them to manipulate information to produce the results they want.

Government budgets and financial reporting are a form of fraud. If American taxpayers engaged in the sort of misleading accounting that the U.S. government does, they could be prosecuted for fraud, and business executives who engaged in such practices have been convicted of a crime and sent to prison.

Perhaps the most egregious aspect of government financial reporting is the form of financial reporting in itself, which differs materially from the balance sheet presentation that is required in business and industry. Specifically, government presentations of assets and liabilities do not include liabilities — that is, the debts of the respective agencies.

A blog post this month by Michael Hammond, former general counsel to the Senate Steering Committee (1978-89), noted: “For instance, the accounting tricks used to pass Obamacare would have, if employed by a private business, put the company’s CEO in prison for the rest of his life. ... For those who have spent the last year campaigning for candidates who would change things in Washington, these efforts to reverse those elections through a procedural cheat scheme should provoke an outrage which makes Nov. 2 pale by comparison.

Majority Leader Harry Reid used bribes, extortion and corruption to buy the votes he needed to pass vast swathes of liberal legislation, including Obamacare.

“Reid used a procedural tactic called an ‘amendment tree’ to virtually eliminate Republicans’ ability to offer amendments of interest to them for an entire year. Reid wallowed in fiscal fraud, claiming that Obamacare would reduce the deficit — and, at the same time, sneaking $250 billion in costs onto other legislation. Reid used this procedural sleaze to cram more Big Government legislation down the throats of the American people than in any Congress in the last 40 years.”

Even with audited numbers, the information in government financial reporting is generally presented in a way that is so convoluted and confusing that both average readers and professionals can’t understand them.

Mark Twain’s famous quotation, “Figures don’t lie, but liars figure,” has never had greater meaning than when it is applied to today’s politicians and government accounting practices.

Most people don’t realize that it is possible to be insolvent yet continue to operate without the formality of declaring bankruptcy. It happens all the time. All you need is the ability to either print money or borrow it, or to simply con people. The federal government, of course, “prints” money indirectly by having the Federal Reserve System adjust the reserve requirements of banks. State and local governments don’t have that particular advantage, however, so they borrow by issuing notes or bonds.

When a business can’t meet its financial obligations (i.e., pay its bills and debts), it is said to be insolvent. Expressing it another way, it is having more liabilities (debt) than assets. They do not have any net worth. That’s the situation with most government entities today, if all of their contingent and unfunded liabilities are included.

The big one, of course, is unfunded pension obligations, or pension plans, including Social Security and Medicare. If these were included, I believe most government entities would clearly be insolvent. Unfortunately, politicians have been able to get around this little problem by borrowing.

It takes time, sometimes a very long time, for the effects of insolvency to reach the point where an enterprise is forced to close its doors. Borrowing from Peter to pay Paul, shifting funds from one source to another, dragging payment of bills out over time are among the many techniques that managements employ to keep going. The finality of closing the doors is often a shock to the public, but it’s safe to say that the process has extended over a long period of time, often years, before an enterprise is finally forced to shut down.

This is currently the situation with most governments in America — local, state and federal. Upon close examination, many are clearly insolvent, with those in charge juggling funds to stay afloat, primarily by borrowing.

The accounting systems for a lot of government entities are a mess, often so bad they can’t even be audited. Amazingly, in many instances, they can’t — or don’t — even keep track of the funds they receive. Three examples serve to illustrate the point:

» In June 2001, a report titled “Government at the Brink” issued by the Senate Committee on Governmental Affairs stated, “The Education Department reported in its financial statements that it had $7.5 billion in the bank, when it actually owed that money to the U.S. Treasury,” a discrepancy of $15 billion.

How is it possible to lose billions of dollars without even having a clue as to where it went? Think that’s not possible? Think again.

» In August 2005, the Sacramento Bee noted, “In 1994, Congress found problems with the Interior Department’s administration of 260,000 Indian trust accounts containing $400 million. The Indians allege the department mismanaged oil, gas, grazing, timber and other royalties from their lands dating back to 1887,” failing “to account for billions of dollars belonging to about 500,000 Indians.”

» A July 2001 article titled “Billions Missing at Education” by Reed Irvine and Cliff Kincaid stated, “In addition to the $15 billion discrepancy at the Education Department, the report says that the Internal Revenue Service does not know how much it actually collects in Social Security and Medicare.”

Perhaps the most chilling aspect of the Irvine/Kincaid report was the observation that “neither the federal government as a whole nor many agencies can pass a basic financial audit. The books don’t add up, major expenditures are missing, large amounts of property and equipment can’t be located, and often, agencies don’t even know how much they have.”

The litany of financial transgressions and inaccurate or nonexistent financial reporting by politicians and government officials will continue year after year, in an endless cycle of deceit and misrepresentation. They like it that way.

— Harris R. Sherline is a retired CPA and former chairman and CEO of Santa Ynez Valley Hospital who has lived in Santa Barbara County for more than 30 years. He stays active writing opinion columns and his blog,

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