Local government and GAAP accounting

It may be a surprise, but a good number of municipal governments do not use Generally Accepted Accounting Principles (GAAP) when preparing their financial reports. According to a GASB survey of 17,577 local governments (out of the over 87,000 non-federal governments in the U.S.) about 67 percent use GAAP.

Is this a problem? Publicly traded companies must be GAAP compliant but bond-issuing municipalities need not comply. A January 2011 study by GAO finds that stakeholders (analysts and issuers), consider GAAP reports more accurate and complete, but there are other sources of information on the quality of municipal securities. Interestingly the decline in the use of bond insurance – a piece of information that investors use in lieu of GAAP statements – may increase the need for local governments to comply with GAAP in their annual financial statements.

The main argument against local governments using GAAP is that it is complex and thus costs more money to prepare the reports. Having reviewed the financials of several municipal governments with looming long-term obligations I suggest GAAP accounting might have helped to better alert officials to the potential risks on their books.