Accounting and the U.S. Constitution: The Evolution of Federal Financial Accounting and Reporting Practices

The Constitution of the United States of America (the Constitution) stipulates that “a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time” (U.S. Constitution, Article I, Section 9, Clause 7). The aim of this clause was to promote accountability and transparency in the federal government on the basis that citizens have a right to know how public funds are spent. Although it contains this reporting mandate, the Constitution does not convey specific reporting requirements, such as those pertaining to the form, content, or timing of federal financial reports. In addition, research exploring federal financial reporting practices is scarce and limited to primarily legal inquiries or arguments that the federal government has failed to satisfy its obligation to the public to report on its receipts and expenditures of all public funds (e.g., Cleveland 1912; Harris 2014).

Against this backdrop, the objectives of this study are to trace federal financial reporting developments and highlight the federal government's path and progress toward fulfilling the reporting mandate established by the “statement and account” clause in the Constitution. Our analysis primarily focuses on the period beginning approximately 100 years ago through the federal financial reports issued for the 2020 fiscal year-end. Limiting our analysis to the past century generally reflects the lack of progress before 1900. For instance, Frederick A. Cleveland, a prominent expert in governmental accounting and reporting, observed and lamented the fact that the federal government provided minimal and insufficient financial information from the signing of the Constitution in 1787 through the early 1900s (Cleveland 1912).

One of the earliest and most significant turning points in the development of federal financial reporting practices occurred approximately 100 years ago. Specifically, the Budget and Accounting Act of 1921 established the Office of Management and Budget (OMB, known as the Bureau of the Budget before 1970) and the U.S. Government Accountability Office (GAO, known as the United States General Accounting Office before 2004).¹ The Budget and Accounting Act mandated for the first time an annual, consolidated budget system as well as an independent audit of government accounts. The leaders of OMB, an executive branch agency, and GAO, a legislative branch agency, have been instrumental in shaping the development of federal financial reporting practices.

For example, the Budget and Accounting Procedures Act of 1950 provided the Comptroller General of the GAO the authority to establish principles, standards, and other accounting and financial reporting requirements for executive branch agencies. The Budget and Accounting Procedures Act, as amended, also indicated that executive branch agencies should, in accordance with the GAO's principles and standards, adopt the accrual basis of accounting as soon as practicable. The GAO's accounting principles and standards were delineated in Title 2 of its Policy and Procedures Manual for Guidance of Federal Agencies. However, some federal agencies argued it was unconstitutional for a legislative branch agency to dictate the actions of executive branch agencies, and OMB did not require executive branch agencies to follow the GAO's principles and standards. As a result, the GAO's principles and standards were not as widely adopted and uniformly implemented as initially intended (e.g., Staats 1976).

Although progress toward improving federal financial reporting practices was modest during much of the 1900s, substantial advances were achieved beginning with the Chief Financial Officers Act of 1990 (CFO Act). As discussed in Section IV, the CFO Act designated certain federal agencies—initially 23, but later 24—required to furnish annual audited financial reports, covering some or all of their accounts. This legislation was subsequently amended by the Government Management Reform Act of 1994 and the Accountability and Tax Dollars Act of 2002 to be broader in scope, including coverage of all accounts and many more federal agencies. As a consequence of the CFO Act's requirement that agencies prepare financial statements in accordance with applicable accounting standards, the Federal Accounting Standards Advisory Board (FASAB) was established by a coalition that included the GAO, the Department of the Treasury, and OMB. These three entities continue to serve on and influence the activities of the FASAB. The FASAB has been recognized by the American Institute of Certified Public Accountants as the authoritative source of federal financial accounting and reporting standards.

While the FASAB establishes generally accepted accounting principles (GAAP) for federal agencies, the OMB's guidance determines the form and content of federal financial statements and the GAO's standards guide government audits. Interestingly, the consolidated financial statements of the U.S. federal government, first issued for the fiscal year that ended on September 30, 1997, have never received an unmodified (“clean”) audit opinion.² Most CFO Act agency financial statements have received an unmodified audit opinion in recent years, though there has been much progress since the 1990s (see Section V). However, financial reporting issues remain. Some agencies—such as the Department of Defense and the Department of Housing and Urban Development—have been plagued with financial reporting and internal control problems. Their shortcomings have hindered progress for the federal government as a whole (e.g., Anthony 2000; Mosso 2000; Harris 2014).

This study contributes to the governmental accounting literature in multiple ways. First, this study will help establish a baseline understanding of significant federal financial reporting developments for scholars interested in exploring the financial reporting machinery of the United States federal government. While much academic accounting literature focuses on financial accounting and reporting in the corporate sector, and to a much lesser extent by state and local governments, there is a dearth of academic inquiry into federal financial reporting practices. We believe that there is tremendous potential for future governmental accounting research to extend into this area. We discuss in Section VI potentially promising questions and ideas that can be addressed in this relatively unexplored area of accounting research.

Examining the progress and perils of federal financial reporting practices is important to both the academic literature and society. A deeper understanding of the federal government and its reporting practices is important due to its unique nature and broad impact. The federal government does not answer to a higher authority and is not subject to the discipline provided by competitive markets but has the power to tax, issue debt, print money, and influence most facets of daily life in the United States. The federal government annually spends trillions of taxpayer dollars to fund most government operations from social security to national security and surface transportation to space exploration. The federal government, however, is accountable to the citizenry. In light of the importance of federal financial management and a history of episodes of fraud, waste, abuse, and mismanagement in federal agencies, an improved understanding of financial reporting progress and shortcomings is critical. Financial reporting has emerged as a vital mechanism through which the federal government can demonstrate its accountability to citizens and fulfill the constitutional mandate to publicly report on receipts and expenditures. Accounting researchers can make important contributions to the federal government and the American people by conducting rigorous research examining federal financial reporting processes and procedures.

Second, in examining the development of federal financial reporting practices, this study expands a stream of research that focuses on the development of accounting, auditing, and regulatory institutions (e.g., Free, Radcliffe, Spence, and Stein 2020; Zeff 2021a). With respect to state and local government accounting institutions in the United States, recent studies, such as Roybark, Coffman, and Previts (2012a, 2012b), Patton and Hutchison (2013), and Flesher, Foltin, Previts, and Stone (2019), have traced the historical development of state and local government accounting and financial reporting standards, including the accomplishments of the Governmental Accounting Standards Board (GASB) since its establishment in 1984. The GASB is important in our context because several influential individuals involved in its work have contributed to federal financial reporting achievements, particularly through their role on the FASAB. For instance, Elmer B. Staats and Martin Ives both served as members of the first GASB beginning in 1984 and joined the maiden FASAB in 1991; Staats as chair and Ives as a non-federal representative. Others who have contributed as board members or staff of both the GASB and FASAB include Tom L. Allen, Michael H. Granof, Edward J. Mazur, and Terry K. Patton (see Table 3 for their roles on the FASAB). This study provides scholars interested in examining federal financial reporting practices, regulations, and institutions with a better appreciation for the historical events that have shaped federal financial reporting as it exists today.

As a limitation on the scope of our study, we note this paper focuses specifically on financial reporting developments and generally does not discuss other critical communication channels, such as the President's Budget and reports of the Congressional Budget Office (e.g., the Budget and Economic Outlook report). We recognize the Financial Report of the United States Government is but one vehicle through which the federal government can disseminate information to the public. However, we find federal financial reporting has evolved to become a critical source of financial information, and financial reporting is a relatively overlooked reporting mechanism in the academic literature concerning the federal government. We also recognize other reporting channels provide valuable information. In fact, the federal financial report explicitly notes the President's Budget is complementary to the financial report and discusses how the documents differ (e.g., the budget is primarily cash basis while the financial report is based on the accrual and modified accrual bases of accounting). Future research can explore the complementarities and tradeoffs among the various channels used by the federal government to report to the public, including the three primary channels (i.e., the President's Budget, the CBO's Economic Outlook, and the consolidated financial report).

The remainder of the paper generally proceeds along the timeline depicted in Figure 1, with the exception of Section II. Section II reviews the constitutional mandate to report on receipts and expenditures of all public money and accounting mechanisms established in the years surrounding the ratification of the Constitution. Section III examines initial 20th century financial reporting developments, such as the Budget and Accounting Act of 1921 and the Budget and Accounting Procedures Act of 1950. Section IV discusses the most substantial federal financial reporting developments, which mostly occurred during the 1990s (e.g., the enactment of the CFO Act of 1990 and the creation of the FASAB). Section V examines high-level financial reporting outcomes as crude measures of progress since the 1990s. Section VI concludes and offers perspectives on future research that can generate insights into the benefits, costs and concerns associated with federal financial reporting institutions and policies, including recent legislation aimed at enhancing transparency through open data portals and high-quality data standards.

In 1777, the Second Continental Congress, which consisted of delegates from the 13 original states, drafted the nation's first constitution, the Articles of Confederation and Perpetual Union (Articles of Confederation), which were ratified and became law in 1781.³ Article IX of the Articles of Confederation states:

Despite the reporting mandate established by the Articles of Confederation, Schoderbek (1999) discusses how the confederal government's treasury function had been in disarray since the outset of the American Revolutionary War. To address the problems associated with the nation's inadequate treasury operations, the Continental Congress appointed Robert Morris in 1781 to serve as the first Superintendent of Finance. In this role, Morris helped to reorganize and improve the Treasury. He also initiated the practice of distributing annual operating statements of receipts and expenditures of public monies. A primary motivation for preparing the annual operating statements was to persuade the states to meet their tax quotas, which many had failed to do since the fledgling government was facing a financial crisis due to the large sums borrowed to finance the war with Britain.⁴

Robert Morris's work in reforming the Treasury apparently was influential. For instance, a reporting requirement broader than the one included in the Articles of Confederation and similar to the reporting practices initiated by Morris was carried forward to the Constitution, which was initially endorsed on September 17, 1787. In particular, the Constitution states:

The first part of the clause—the appropriations clause—constrains federal spending by requiring that spending be authorized by legislation. The second part of the clause—the statement and account clause—creates a reporting obligation to be fulfilled by the federal government. The purpose of the reporting requirement was to ensure the public could ascertain the federal government's receipts and expenditures in order to hold public officials accountable. There is no evidence explaining why the framers of the Constitution appended the statement and account clause, which was added just three days before the signing of the Constitution at the Constitutional Convention in Philadelphia, to the appropriations clause. However, Stith (1988) and Harris (2014) persuasively argue the two clauses are complementary insofar as the appropriations clause limits spending while the statement and account clause seeks to establish a means for verifying federal spending and for comparison with the legislation that permitted the spending.

Harris (2014, 510–511) indicated the statement and account clause was supported by George Mason, who argued the public had a right to know how public funds were being spent. Harris (2014) also suggests the phrase “time to time” may have been adopted as the half-yearly reporting requirements stipulated in the Articles of Confederation had proved to be challenging to maintain, and this requirement would become increasingly challenging to meet for a federal government with an expanding scale, scope, and complexity.⁵

During the first session of the 1st Congress, held in New York City from March 4, 1789, through September 29, 1789, legislation was passed that established the Department of Treasury.⁶ This legislation also required the Secretary of the Treasury, the first being Alexander Hamilton, and the Comptroller “to prepare and report estimates of the public revenue, and the public expenditures; to superintend the collection of the revenue; to decide on the forms of keeping and stating accounts.” As a result, neither the statement and account clause nor legislative actions dictated specific reporting requirements, such as the form, content, or timing of financial reports. Indeed, before 1900, relatively little progress had been made with respect to developing the financial reporting practices and processes of the federal government.

For example, Harris (2014) describes a system that lacked uniformity, omitted significant activities, and relied on the cash-basis of accounting. In 1912, at the Ninth Annual Meeting of the American Political Science Association, the prominent accountant Frederick A. Cleveland criticized federal financial reporting practices. Specifically, he lamented the fact that the federal government had failed during the 124 years since the signing of the Constitution to fulfill its duty to provide “complete and accurate information about what the government is doing,” despite the fact “every necessary constitutional provision has been made and all the machinery has been in place, throughout the entire period of our national existence.” Cleveland also noted, “this is not one of the ‘implied' duties” as “the Constitution is specific” (Cleveland 1912, 48).⁷

The Progressive Era, which began in the 1890s, featured widespread reform movements, including municipal accounting and budgeting reforms that swept across the nation (e.g., Potts 1977, 1978; Fleischman and Marquette 1986, 1987; Patton and Hutchison 2013; McDonough, Miranti, and Schoderbek 2020). During this time, as evidenced by Cleveland's comments at the American Political Science Association's Annual Meeting (Cleveland 1912), attention began shifting toward addressing the accounting and reporting weaknesses of the federal government. Progressive ideals, which heavily influenced municipal reforms, helped create a drive toward consolidating federal authority in the executive branch and improving internal controls and transparency. Although attempts were made during the 1910s—generally beginning with William H. Taft's administration and the Commission on Economy and Efficiency—to establish a new system of budgeting, controls, and reporting, pushback from Congress interrupted these efforts. Meanwhile, World War I efforts contributed to a rapidly expanding budget. Little progress was made during Woodrow Wilson's presidency (1913–1921), though increasing expenditures and debts were causes of concern. It was not until the presidency of Warren G. Harding (1921–1923) that the first landmark legislation foundational to modern federal financial reporting was enacted.

On June 10, 1921, the 67th Congress enacted the Budget and Accounting Act of 1921 (U.S. Senate 1921). The Budget and Accounting Act provided for “a national budget system and independent audit of Government accounts” as well as the creation of two federal agencies. In particular, Section 207 of Title II of the Budget and Accounting Act created the Bureau of the Budget (now the Office of Management and Budget). Section 301 of Title III created the General Accounting Office (now the U.S. Government Accountability Office). These two federal agencies have been instrumental—and at times have, to some extent, been rivals—in the development of federal financial reporting practices, as discussed in Section IV.

The Budget and Accounting Act required, for the first time, the President of the United States to submit to Congress an annual budget, thus consolidating budget responsibility in the executive branch and specifically within the President's office. The Bureau of the Budget, an executive branch agency, was established to help facilitate the budgeting process on behalf of the President. The Budget and Accounting Act also endowed the GAO, a legislative branch agency, with the authority to audit the records of the federal government, thus acting as a check on the executive branch.⁸

After signing the Budget and Accounting Act of 1921, President Harding appointed Charles Dawes, a former Comptroller of the Currency and a General in the U.S. Army during World War I, to serve as the Director of the Bureau of the Budget.⁹ The Bureau was initially part of the Department of the Treasury, but in 1939 it was reorganized as part of the newly established Executive Office of the President (e.g., Rossiter 1949). The Bureau was renamed the Office of Management and Budget in 1970. The OMB's primary function is to assist the President of the United States in producing and executing the annual budget, which requires extensive coordination with and oversight of other federal agencies (e.g., Marx 1945; Bagley and Revesz 2006; Haeder and Yackee 2015). OMB is run by a Director appointed by the President and confirmed by the Senate.

With input from the GAO, OMB is involved in matters related to the Single Audit, which has a substantial impact on state and local governments.¹⁰ More closely related to federal financial reporting, OMB contributed to creating (and continues to contribute to the work of) the advisory board responsible for establishing generally accepted accounting principles for federal agencies—the FASAB. Perhaps more importantly, OMB releases guidance (bulletins and circulars) pursuant to the authority granted under the Chief Financial Officers Act of 1990 (see Section IV) that determines the form and content of, and other reporting and auditing requirements for federal agency financial statements. For example, OMB Circular No. A-136, which is updated annually, contains the financial reporting requirements federal agencies must follow—specifically “heads of executive departments, agencies, and other entities subject to the Chief Financial Officers Act, the Accountability and Tax Dollars Act, and the Government Corporation Control Act.” Circular No. A-134 establishes the policy regarding the adoption of new accounting standards for federal agencies.

The Budget and Accounting Act of 1921 established the GAO, a nonpartisan agency independent of the executive branch. The GAO subsumed the offices of the Comptroller of the Treasury and Assistant Comptroller of the Treasury, executive branch offices abolished by the Budget and Accounting Act (U.S. Senate 1921). As an agent of Congress (see Appendix A), the GAO is known colloquially as the congressional watchdog. Its primary function is to help improve the performance of the federal government while ensuring accountability with respect to taxpayer dollars. The GAO has the authority to audit government accounts and make recommendations to federal agencies regarding how to make better use of taxpayer funds. Following its audit of government accounts, the GAO submits each year to Congress its assessment of the financial condition of the federal government.

The Comptroller General of the United States (Comptroller General) is the head of the GAO. The Comptroller General is appointed by the President of the United States, with the Senate's consent. Each appointment is for a term of 15 years, without the possibility of reappointment. In 1921, President Harding appointed John McCarl to serve as the first Comptroller General. Table 1 provides a list of the eight Comptroller Generals since 1921.

Gaps between the terms of Comptroller Generals were filled by an Acting Comptroller General. For example, Richard N. Elliot served as the Acting Comptroller General from July 1936 to April 1939. More recently, Eugene Dodaro served as Acting Comptroller General from March 2008 to December 2010, at which point he was appointed as the permanent Comptroller General for a 15-year term.

The GAO is also involved in setting auditing standards. For instance, the GAO establishes generally accepted government auditing standards (GAGAS, commonly known as the Yellow Book). In addition, it has had influence over prescribing accounting principles for federal agencies, both through its policy manual and as one of the original co-sponsors of the FASAB. The GAO continues to influence the establishment of federal accounting standards through its seat on the FASAB.

Although much progress had been made following the enactment of the Budget and Accounting Act of 1921, it was not until 1950 that executive branch agencies were required to provide financial information to the Secretary of the Treasury. In particular, the 81st Congress passed the Budget and Accounting Procedures Act of 1950, which amended parts of the Budget and Accounting Act of 1921 and required executive agencies to issue reports and provide information about their financial condition (U.S. House of Representatives 1950). Part II of the Budget and Accounting Procedures Act—which is referred to as the Accounting and Auditing Act—specifically addresses accounting and reporting requirements. Section 111, which is consistent with the spirit of the constitutional reporting mandate, states:

The Budget and Accounting Procedures Act further elaborated on the assignment of responsibility for internal controls to federal agencies and gave the GAO the authority to prescribe administrative, internal control, and accounting standards. In particular, the Comptroller General was provided the authority to “prescribe the principles, standards, and related requirements for accounting to be observed by each executive agency.” However, executive agencies retained responsibility for their accounting systems and the production of financial reports. In addition, the Budget and Accounting Procedures Act, as amended, required the use of the accrual basis of accounting, specifically indicating that “the head of each executive agency shall, in accordance with principles and standards prescribed by the Comptroller General, cause the accounts of such agency to be maintained on an accrual basis to show the resources, liabilities, and costs of operations of such agency.”¹¹ The GAO's accounting principles and standards were delineated in Title 2 of their Policy and Procedures Manual for Guidance of Federal Agencies.

The Budget and Accounting Procedures Act also stipulates that executive agencies' accounting systems should be designed to provide for a “suitable integration of the accounting of the agency with the accounting of the Treasury Department in connection with the central accounting and reporting responsibilities imposed on the Secretary of the Treasury by section 114” of the act.¹² This was an important requirement because it laid the foundation for better consolidated financial reporting. In the 1970s, the Department of the Treasury began experimenting with consolidated, government-wide financial statements prepared on the accrual basis of accounting. These financial statements were labeled “prototype,” and the reports indicated they did not constitute official financial statements. The prototype financial reports were initially prepared by the accounting firm Arthur Andersen LLP. However, Treasury soon took over the project, specifically under the leadership of then-Secretary of the Treasury William E. Simon. A panel of experts was formed to provide input on the process, and the reports were disseminated for public comment.¹³ The federal government continued to publish these prototype reports from the 1970s through 1997, when the first official consolidated federal financial report was published.¹⁴

A significant legislative action that occurred in the 1980s was the Federal Managers' Financial Integrity Act of 1982, which amended parts of the Budget and Accounting Procedures Act of 1950 (U.S. House of Representatives 1982). The 1982 act required federal agencies to enhance internal controls, in part, to improve the reliability of financial reporting and required annual assessments of internal controls. During this time, federal agencies generally relied on the standards prescribed by the GAO.

Despite attempts to improve transparency, the federal government remained plagued by financial management problems at various federal agencies. For example, the GAO noted in a recent report the following:

More generally, following the passage of the Federal Managers' Financial Integrity Act of 1982 through 1988, approximately 2,200 material weaknesses in internal control systems were identified across 18 of the largest federal agencies that collectively accounted for approximately 95 percent of federal expenditures (GAO 1989). These staggering sums highlight the severity of the challenges faced by the federal government.

In addition, some federal agencies argued it was unconstitutional for the legislative branch to dictate the actions of an executive branch agency, and OMB did not require executive branch agencies to follow the GAO's accounting principles. For instance, the FASAB notes the following on its webpage.¹⁵

Thus, the GAO's accounting principles and standards were not as widely adopted and uniformly implemented in executive branch agencies as initially intended. In addition, overall progress toward implementing the accrual basis of accounting was slow (Staats 1976; Anthony 2000). In response, in the 1980s, under the leadership of Comptroller General Charles A. Bowsher,¹⁶ GAO pressed Congress for reforms targeted at federal financial reporting. Although some progress was made in the mid-1980s, it was not until 1990, after abuses were uncovered,¹⁷ that a bill was passed in Congress that would have a lasting impact on how federal agencies prepare and report their financial information.

The most substantial improvement made with respect to federal financial management and accountability since the Budget and Accounting Procedures Act of 1950 was undoubtedly the Chief Financial Officers Act of 1990 (U.S. House of Representatives 1990). Indeed, current federal government financial reporting requirements were substantially influenced by the CFO Act, passed by the 101st Congress and signed into law by George H. W. Bush on November 15, 1990. The CFO Act requires certain executive branch agencies (CFO agencies) to issue audited financial statements (for select funds and accounts). The CFO agencies are listed in Table 2.

There were initially 23 CFO agencies. The Social Security Administration was added in 1994, making it the 24th CFO agency. The Federal Emergency Management Agency (FEMA), one of the original CFO agencies, was folded into the Department of Homeland Security (DHS) in 2002. The DHS was subsequently added to the CFO Act list of agencies. Table 2 shows only DHS even though FEMA was originally a CFO Act agency, not DHS.¹⁸ The CFO Act also created the CFO Council, which consists of the CFO and Deputy CFO of each agency, as well as personnel from OMB, the Office of Personnel Management, the Department of Treasury, and the Executive Office of the President.¹⁹ The CFO Council helps coordinate the financial management activities of the federal agencies.

The purpose of the CFO act was “to improve the general and financial management of the Federal Government” (U.S. House of Representatives 1990). The act established within the OMB the position of Deputy Director for Management and created the Office of Federal Financial Management, which is headed by a Controller who reports directly to the Deputy Director for Management. The first Controller of the United States was Edward J. Mazur, who was appointed by President George H. W. Bush and confirmed by the Senate in 1991.²⁰ The Deputy Director for Management, along with the Office of Federal Financial Management, is responsible for issuing guidance to help federal entities comply with the CFO Act requirements, as amended. In particular, the OMB has the authority to determine the form and content of federal financial statements, most notably through OMB Circular A-136.²¹

Although the CFO Act generally did not initially require comprehensive financial statements for all CFO agencies, the requirement to issue audited financial statements was expanded to include all accounts following the enactment of the Government Management Reform Act of 1994, signed into law by President Bill Clinton on October 13, 1994 (U.S. Senate 1994). The Government Management Reform Act also requires the Secretary of the Treasury to produce audited annual government-wide financial statements; the GAO audits these government-wide financial statements. The Government Management Reform Act requirements were then expanded beyond the CFO Act agencies to include all executive agencies following the enactment of the Accountability and Tax Dollars Act of 2002 (U.S. House of Representatives 2002), which was enacted by the 107th Congress and signed into law by President George W. Bush on November 7, 2002.

OMB Circular No. A-136 requires certain federal agencies—i.e., agencies subject to the CFO Act and the Accountability and Tax Dollars Act—to issue either an agency financial report (AFR) or a performance and accountability report (PAR), which includes an agency's annual performance report (APR), annual financial statements, and other reports (e.g., internal control assurances and Inspector General reports). An agency that chooses to submit an AFR must also prepare and submit a separate APR.^22,23

In the light of the financial reporting requirements mandated by the CFO Act, a standards-setting body was needed to establish the generally accepted accounting principles for federal government agencies. This issue was complicated by the fact the CFO Act did not provide guidance on the source or nature of the relevant reporting standards. For example, the CFO Act indicated the chief financial officers of the agencies were required to maintain an accounting system that “complies with applicable accounting principles, standards, and requirements.” However, there was no designated standards-setter under Rule 203 of the AICPA's Code of Professional Code.²⁴ As discussed in Section III, there was also some debate among bureaucrats about what might constitute the appropriate source and nature of such federal accounting standards and whether the legislative branch had the constitutional authority to establish accounting and reporting standards for the executive branch.

As a result, in 1990, Comptroller General Charles Bowsher, Secretary of the Treasury Nicholas F. Brady, and OMB Director Richard G. Darman signed a memorandum of understanding (MOU) that laid the groundwork for the creation of the FASAB and effectively transferred standard-setting responsibility from the GAO to the newly created FASAB.²⁵ The FASAB does not dictate which agencies must issue annual audited financial statements; it only sets the financial reporting standards that enable federal agencies to meet their reporting objectives. The existence of the FASAB is notable in that the executive and legislative branches have collaborated to establish accrual-basis accounting standards for all federal entities.

The initial FASAB included nine board members (see Table 3). Two of the initial members had also joined the inaugural Governmental Accounting Standards Board in 1984—Elmer B. Staats and Martin Ives. The first meeting of the FASAB was on January 25, 1991, and mainly focused on administrative and agenda setting matters. In approximately its first five years of existence, the FASAB issued two concept statements (Statements of Federal Financial Accounting Concepts, SFFAC) and eight reporting standards (Statements of Federal Financial Accounting Standards, SFFAS).²⁶

At the start of 1999, the FASAB's standards were not yet GAAP for federal agencies because the FASAB had not been recognized as the authoritative standards-setting body for federal government entities under Rule 203 of the AICPA's Code of Professional Conduct. Practically speaking, this meant financial statements prepared by federal agencies in conformity with FASAB's standards were, in fact, being prepared in accordance with an “other comprehensive basis of accounting.”²⁷ In October 1999, following some relatively minor required changes to the FASAB's processes, the AICPA officially designated, under Rule 203, the FASAB as the authoritative accounting standards-setter for federal entities. Thus, the FASAB's standards officially constituted GAAP for federal government entities. The FASAB subsequently issued Statement of Federal Financial Accounting Standards 34, The Hierarchy of Generally Accepted Accounting Principles, Including the Application of Standards Issued by the Financial Accounting Standards Board, to officially incorporate the federal GAAP hierarchy into its authoritative literature.

Since 2000, some governance changes have been made to enhance FASAB's independence; however, the primary mission remains intact. The primary issue was that the FASAB must maintain independence in order to be considered the authoritative standards-setter for federal entities. Because OMB and GAO had veto power over the issuance of new standards and because of issues related to the selection of Board members, there were some concerns about the FASAB's independence. In January 2002, the FASAB sponsors revised their MOU to change the Board's composition, which is evident from Panels B and C of Table 3. The three non-sponsoring federal representatives (i.e., one from the CBO and two from other federal agencies) were dropped, while three additional board seats were made available for non-federal representatives. In addition, the MOU was revised to provide for terms of up to ten years (Federal members have no term limits).²⁸

Similar to the processes adopted by the Financial Accounting Standards Board and the Governmental Accounting Standards Board, the FASAB has an established process through which its members set their agenda, educate stakeholders, solicit feedback on documents for comment, and set standards. For a new standard to be approved for issuance, the Board requires approval by at least two-thirds of its members. During its approximately 30-year history and as of June 30, 2021, the FASAB has issued nine Statements of Federal Financial Accounting Concepts, 59 Statements of Federal Financial Accounting Standards, 10 interpretations, 11 technical bulletins, 19 technical releases, and staff implementation guidance.²⁹

Because the CFO Act requires federal agencies to issue audited financial statements, it is possible to gain insights into the quality of federal financial reporting by examining the outcomes of those annual audits. Using audit outcomes of the CFO agencies, it seems that the quality of federal financial reporting has improved since the CFO Act requirements were first implemented. For instance, as noted in Figure 2, in the 1990s, around a dozen (or more, in some cases) CFO agencies had deficiencies that prevented them from receiving an unmodified audit opinion.

Currently, most CFO Act agencies receive an unmodified audit opinion. However, a couple (e.g., the Department of Defense and the Department of Housing and Urban Development) remain plagued by perpetual financial reporting weaknesses. Overall, this evidence suggests substantial improvements have been realized since the CFO Act of 1990. However, note that most of the improvements have been achieved in the 1990s, as progress (in terms of unmodified audit opinions) has been relatively stagnant for the first two decades of the 21st century, at least with respect to the CFO agencies.

As a result of financial reporting deficiencies within certain agencies, the federal government has yet to receive an unmodified audit opinion on its consolidated, government-wide financial statements. For instance, the federal government's fiscal year 2020 financial report noted the following:³⁰

This statement suggests that, in addition to the CFO agencies, other significant consolidation entities have been hampered by financial reporting issues, which is potentially concerning as the government consolidates over 100 federal entities, as shown in Figure 3.

An alternative approach to examining federal financial reporting progress includes examining the length of the federal government's consolidated financial report, which we document in Figure 4.

The dramatic increase in the length of the financial reports, particularly following the first official financial report for the 1997 fiscal year, provides some suggestive evidence indicating the federal government may be progressing toward full disclosure of its activities. As a related indicator of progress that coincides with the increase in page length, the 2009 financial report includes 142 consolidated entities, while the 2020 financial report includes 165 consolidated entities. However, some entities remain unconsolidated (e.g., Amtrak, Fannie Mae, Freddie Mac, and the Federal Reserve System) and trillions of dollars of liabilities related to social insurance programs remain off balance sheet.

Closely related to the quality of financial reporting practices are auditor-reported material weaknesses related to the CFO Act agencies. In the 2020 fiscal year, 48 material weaknesses were reported. Although the relatively large number of auditor-reported material weaknesses is a potentially worrisome indicator, it is worth considering that many of them (e.g., often around 50 percent in any given year) relate to the Department of Defense. For the last decade, the average number of material weaknesses reported per year has remained in the 30s. However, in its 2015 financial report, the federal government suggested 40 material weaknesses reflected a decline of about 30 percent from the early 2000s and that many CFO Act agencies have had no material weaknesses. For example, for the last 15 years, 10 or more CFO Act agencies per year have had no material weaknesses. Although this appears to reflect progress, the lack of an upward trend is potentially concerning as it suggests progress may be stalling.

This paper traces the 100-year history of federal financial reporting progress, highlighting the active role of important institutions. The current climate in some ways echoes that of the World War I period over 100 years ago, with elevated federal spending and debt levels that prompted calls for reforms initially addressed by the Budget and Accounting Act of 1921. Today, federal spending is at all-time highs, partially due to substantial pandemic-related economic stimulus programs. Meanwhile, widespread concerns about the sustainability of social security programs, increasing healthcare costs, deteriorating infrastructure, and the effects of climate change continue to weigh on the nation's outlook—the impacts of which may be reflected in future federal financial reports. The CFO Act, as amended, undoubtedly has had a profound impact on federal financial statements, financial management, and transparency, thus potentially assisting federal agencies in better allocating resources and responding to changing needs. Significant challenges (known and unknown) remain to be addressed.

This paper may yield more questions than answers. Part of the objective of this study is to inspire further inquiry into federal financial reporting practices and outcomes. Future research can explore many different aspects of the financial reporting processes and procedures of the federal government, as there generally is a dearth of rigorous academic research in this area. For example, and at a high-level, future research can further probe the academic literature by developing a comprehensive literature review that organizes the multi-disciplinary literature by topical areas, such as federal auditing, budgeting, cost accounting, financial reporting, and systems and technology, in order to identify common themes across different topical areas and gaps in the literature.

Future research can also contemplate the benefits, costs, and unintended consequences of the CFO Act (and related) requirements as well as the FASAB's standards. Have the FASAB's standards and OMB's reporting requirements increased the decision usefulness of agency and government-wide financial reports? What factors influence the FASAB's agenda- and standards-setting activities?³¹ What obstacles have prevented some federal agencies from improving their financial reporting practices, despite widespread improvements following the CFO Act? Which aspects of federal financial reports are most relevant or deficient for decision-making purposes? For example, one notable feature of federal financial reports is the inclusion of additional information beyond what is found in financial reports outside the federal government, such as information about deferred maintenance. Deferred maintenance is an issue becoming increasingly important among state and local governments but not required to be reported on by those governments (e.g., Zhao, Fonseca-Sarmiento, and Tan 2019). The GAO, Treasury, OMB, and FASAB would benefit from increased scholarly attention and research into federal financial reporting. The Financial Accounting Standards Board, for instance, has a long history of engaging academics and using academic research in their deliberations (e.g., Zeff 2021b). In addition, the Securities and Exchange Commission maintains an academic fellowship program (Linsmeier 1996; Jorgensen, Linthicum, McLelland, Taylor, and Yohn 2007; Krische, Martin, and Wilks 2013) and routinely cites academic research in its proposed rules (e.g., Geoffroy and Lee 2021). The GASB also supports academic research, for instance, through Gilbert R. Crain Memorial Research Grants.

As the federal government modernizes its financial reporting infrastructure, there is tremendous potential to examine the benefits and costs of various technologies and approaches to reporting information to the public. For example, several statutes enacted since the turn of the 21st century have sought to improve federal transparency in ways that complement the government's consolidated financial reports. The Federal Funding Accountability and Transparency Act of 2006, introduced by Senator Tom Carper and then-Senators Tom Coburn, John McCain, and Barack Obama, was signed into law by George W. Bush on September 26, 2006. This legislation was intended “to require full disclosure of all entities and organizations receiving federal funds” (U.S. Senate 2006). This act led to the launch of the open data portal known as usaspending.gov, which went live in December 2007 and is managed by OMB. The website is not so much directed at federal financial reporting per se, but dramatically increases transparency around financial transactions involving federal agencies (e.g., Kitching, Coble, and Phillips 2021). Researchers can utilize this data to better understand the determinants and consequences of government contracting decisions and requirements (e.g., Heese and Pérez-Cavazos 2019; Dahlström, Fazekas, and Lewis 2021; Samuels 2021).

In 2014, a bill to expand the Federal Funding Accountability and Transparency Act of 2006 was enacted and signed into law by President Barack Obama. This bill was titled the Digital Accountability and Transparency Act of 2014 and is often referred to as the “DATA Act” (U.S. Senate 2014). The DATA Act primarily did two things—it enhanced (1) the Federal Funding Accountability and Transparency Act by expanding the scope and streamlining the reporting requirements of the earlier act, and (2) data quality by establishing government-wide data standards and holding agencies accountable for their data submissions. The DATA Act requires the Secretary of the Treasury and Director of the OMB to coordinate the implementation of new requirements and ordered the Comptroller General of the GAO to review the data submitted by federal agencies as well as the data standards established by the Treasury and OMB. Future research can explore the benefits and costs of enhanced data standards and quality.

Recently, the federal government has been experimenting with modernization projects with the objective of bringing federal financial reporting processes into the 21st century. For example, the Bureau of the Fiscal Service has an Office of Financial Innovation and Transformation (FIT). FIT helps federal agencies increase their efficiency and transparency, primarily through the adoption of new technologies. For example, in November 2020, FIT launched a project with the Office of Fiscal Accounting to explore the use of machine learning and natural language processing to reduce the burden on human accountants in interpreting appropriations documents (e.g., identify the appropriation amount, period of availability, and purpose).³² FIT also began initial testing in 2017 to determine the use of robotic process automation and distributed ledger technologies in federal agencies.³³ These technologies have the potential of becoming critical tools that enhance the efficiency, effectiveness, and economics of government operations, as well as increase federal transparency and advance federal financial reporting capabilities. Future research in this area would be complementarity to related research considering the potential for big data and emerging technologies in corporate auditing and financial reporting settings (e.g., Warren, Moffitt, and Byrnes 2015; Moffitt, Rozario, and Vasarhelyi 2018; Cooper, Holderness, Sorensen, and Wood 2019; Munoko, Brown-Liburd, and Vasarhelyi 2020; Christ, Emett, Summers, and Wood 2021).

Together with ever-improving financial reporting capabilities and technologies, the relatively recent innovations related to open government data promise to usher in a new era of federal government transparency and accountability. The benefits, costs, and unintended consequences of these new developments remain open empirical questions for academics to explore.

The federal government is divided into three branches—legislative, executive, and judicial—as outlined by Articles I, II, and IIII of the Constitution of the United States of America. The table below highlights the federal agencies most relevant to this paper. See https://www.usa.gov/branches-of-government for a more complete discussion of the branches of government and corresponding federal agencies.

This appendix is based on the first prototype consolidated financial report published by Treasury for the fiscal year 1975, which can be found at: https://www.fiscal.treasury.gov/reports-statements/financial-report/previous-reports.html.

This appendix provides a listing of the Statements of Federal Financial Accounting Concepts (SFFAC) issued by the Federal Accounting Standards Advisory Board, as described in the FASAB's Handbook of Federal Accounting Standards and Other Pronouncements (FASAB 2021).

This concepts statement describes the objectives of federal financial reporting—budgetary integrity, operating performance, stewardship, and systems and control. It focuses on the uses, user needs, and objectives of such reporting. The objectives are designed to guide the Board in developing accounting standards to enhance the financial information reported by the federal government to (1) demonstrate its accountability, (2) provide useful information, and (3) help internal users of financial information improve the government's management. In addition to guiding the Board, the objectives may serve as useful guidance to others involved in federal financial reporting. For example, the objectives may be useful in developing accounting policy, designing reports, and writing narratives and notes to financial reports.

This concepts statement describes the basis for defining a reporting entity for the general purpose financial reporting performed by the Federal government and/or entities thereof. This concepts statement also describes the items that should be included in Federal financial reports and presents illustrative statements depicting desirable displays of financial information.

This document describes the concepts on which the Board relied in recommending standards for Management's Discussion and Analysis (MD&A) to be included in general purpose federal financial reports (GPFFR).

In this concepts statement, the Board has identified the intended or primary audience for the Consolidated Financial Report (CFR) of the U.S. Government. The Board also has described the characteristics of the audience and the qualitative characteristics the Board believes will aid in meeting financial reporting objectives for the CFR. The Board has identified five audiences for the CFR: Citizens, Citizen Intermediaries, Congress, Federal Executives, and Program Managers. However, the Board believes that the external user groups, Citizens and Citizen Intermediaries, are the primary audiences for the CFR.

This concepts statement defines five elements of accrual-basis financial statements of the federal government. Items that meet the definitions also are elements of accrual-basis financial statements of the relevant component entity. The elements are asset, liability, net position, revenue, and expense. This statement establishes two basic recognition criteria that an item must meet to be a candidate for recognition in the body of a financial statement: (1) the item must meet the definition of an element and (2) the item must be measurable, meaning a monetary amount can be determined with reasonable certainty or is reasonably estimable. An item that meets the definition of an element but is not measurable is a candidate for disclosure in the notes to financial statements or as supplementary information.

This concepts statement amends SFFAC 2, Entity and Display, to provide guidance for use by the Board in determining whether information should be basic information, required supplementary information (RSI), or other accompanying information (OAI). Although each of these categories communicates information to readers of financial reports, each may be subjected to different procedures and reporting requirements under generally accepted government auditing standards. This Statement describes the process the Board may apply in selecting one of these categories for communicating an item of information.

This concepts statement addresses the measurement of the elements of accrual-basis financial statements of federal government entities in periods after amounts are initially recorded. It identifies and elucidates conceptual issues for the Board to consider when deliberating measurement standards in the future.

This concepts statement discusses the role of financial statements and required supplementary information (RSI) and their relationship to other reported financial and non-financial information. This Statement also discusses 1) the content and presentation of financial statements and RSI for government-wide and component reporting entities, 2) the presentation of budgetary information in component reporting entity financial statements and RSI, 3) the presentation of performance information in financial statements and RSI, and 4) the summary-level information relating to financial statements and RSI.

This concepts statement updates concepts related to the application of materiality in the federal financial reporting environment. Through amendments to SFFAC 1, Objectives of Federal Financial Reporting, and SFFAC 3, Management's Discussion and Analysis, this SFFAC clarifies implementation of materiality concepts in the issuance of federal financial statements.

This appendix provides a listing of the financial accounting standards issued by the Federal Accounting Standards Advisory Board, the issue date, the original effective date (i.e., at issuance), and the title of the statement, as described in the FASAB's Handbook of Federal Accounting Standards and Other Pronouncements (FASAB 2021). That statements were originally effective for fiscal periods beginning after the date listed in the “Effective Date” column.