Indiana passed a law requiring its large counties, cities, and towns to publish their financial statements following Generally Accepted Accounting Principles (GAAP). IC 5-1-11.5-4 requires counties with a population of over 100,000 and municipalities with a population of over 75,000 to issue bonds only if they prepare their annual financial reports using the modified accrual basis of accounting under GAAP. While the state examiner, on the request of a county or municipality, may waive this requirement, adhering to the law is in the best interests of counties, towns, and municipalities.
Annual financial reports give insights into the financial health and operational viability of organizations, including local governments. GAAP is an accounting standard for preparing these financial reports based on concepts, conventions, and practices that have evolved over time to guide financial professionals in presenting their finances.
GAAP provides a standard framework for preparing financial reports to empower stakeholders with useful information. For local governments, those stakeholders include bond investors, lenders, taxpayer associations, and unions. GAAP gives financial professionals guidance on items to recognize in financial statements (revenues, expenses, assets, and liabilities), measuring these items, and presenting them in financial statements (income statements, balance sheets, and others). GAAP also gives a framework for preparing disclosures with supplemental information on the financial statements.
The Financial Accounting Foundation (FAF) sets GAAP standards through the Financial Accounting Standards Board (FASB), which sets standards for private companies, and the Governmental Accounting Standards Board (GASB), which sets standards for governments. GASB sets GAAP standards for local governments to ensure that their financial statements are relevant, accurate, verifiable, auditable, and comparable with other governments. This gives lenders and bond investors information for making their investment decisions and the public a foundation for evaluating the use of public funds. Governments using GAAP, therefore, demonstrate better stewardship of public resources to citizens and attract financing from investors, donors, and lenders. Governments that use GAAP are also able to make better decisions because they can compare their current financial performance with previous years and with other governments.
All states in the United States use GAAP. About 50 percent of states require all of their counties to follow GAAP in their fiscal reporting, while others require only their largest counties to do so. Roughly 50 percent of states require their cities and towns to use GAAP while two-thirds require independent school districts to use GAAP. Many local governments not required to use GAAP still use it to enhance accountability and transparency. The few that do not use GAAP use a cash basis of accounting in which accountants record inflows and outflows. Others use a modified cash basis in which accountants record receivables and payables.
The problem with these methods is that they do not account for the full cost of public services since they focus on current financial resources. Long-term obligations, including debt and pensions, are not factored, resulting in financial statements that do not give a full and accurate view of a government’s fiscal health and its ability to meet future commitments. Using GAAP ensures that government stakeholders have access to the most accurate and comprehensive information to measure the full costs governments incur in providing services.
GAAP, however, is also costly. Most local governments, including those in Indiana, do not have qualified experts to prepare their statements to GAAP standards, necessitating outsourcing to other firms.
