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Friday, March 22 , 2019, 3:26 am | Fair 47º


Harris Sherline: We Need Honest Accounting

In government, there's evidence of duplicity and manipulation in financial information

Caution: This commentary may cause you to become cross-eyed. It’s about accounting. Read with care.

Harris Sherline
Harris Sherline

Contrary to the belief of most people, accounting is not a science; it’s an art. Although there are a host of established principles that deal with the way certain types of income and/or expenditures should be reported, the way in which they may be applied can vary widely.

The primary function of accounting is to properly track the assets and liabilities of an enterprise and to report income and expenses in the period — that is, the time, say month or year, in which they occur.

It sounds simple enough, but unfortunately, that’s where reality can become fiction. As Mark Twain famously said, “Figures don’t lie, but liars figure.”

Everywhere we look in both industry and government, we see evidence of duplicity and manipulation of financial information, but nowhere is it more apparent than in government.

To begin with, government does not maintain books or report financial information in the same way that businesses and individuals do. Assets and liabilities are not necessarily reported at all, and it’s not unusual for various government entities to simply not keep track of their checkbooks.

In addition, there are trillions of dollars in liabilities — about $56 trillion to be exact — that are not included in government financial reporting. That’s the estimated total of future obligations for Social Security and Medicare that the current beneficiaries will receive during their lifetimes.

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.

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. That’s billion, with a “B.”

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.’”

Yahoo reported that the Government Accountability Office inspected the IRS’ 2009 fiscal-year financial statements and found a “few billion-dollar errors,” noting that the agency made a variety of accounting errors last year that “could adversely affect the reliability of its financial statements” and result in “duplicate or erroneous refunds.” Among the mistakes were a “failure to record the receipt of a taxpayer’s $3 million payment” and an $8 billion discrepancy between two accounting systems tracking how much money taxpayers owe. The audit also found an “unexplained variance” of $5.1 billion between the total amount the agency took in last year and the amount it said it took in.

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.”

Mismanagement of money by our political leaders was highlighted by the House banking scandal in 1992, when the public learned that the House Bank permitted 450 members of the House of Representatives to overdraw their House checking accounts without being penalized. Their checks were honored by the bank, and 22 lawmakers were singled out by the House Ethics Committee for leaving their checking accounts overdrawn for at least eight months in a period of just 39 months.

Perhaps we should have more CPAs in Congress. At the present time, there are only two, and a third is running for office. Unfortunately, given the nature of our political leaders and their lack of understanding of financial matters, more CPAs in government would be no guarantee of honest accounting or accurate financial reporting by the federal government.

— 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, Opinionfest.com.

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