Will Connecticut Swallow GAAP Whole?

A new bill gives the comptroller of the nutmeg state the political cover to switch to accrual accounting.
Marie LeoneJune 19, 2007

What started out as a plan to cut Connecticut’s budget deficit has turned into a clash between the state comptroller and the Government Accounting Standards Board. The main trigger of the clash occurred on June 6 when the Connecticut legislature passed a bill that put the comptroller, not GASB, in the driver’s seat as the prime arbiter of how generally accepted accounting principles are used in the state.

At issue is whether a state can pick and choose among which GAAP standards to apply or adopt the accounting standards wholesale. The Financial Accounting Foundation, the parent organization of the Financial Accounting Standards Board as well as GASB, worries that states will adopt an a la carte approach to installing accounting rules.

The bill clearly states that as of July 1, 2009, GAAP will be “prescribed by the [c]omptroller” rather than GASB. The change did not sit well with the standards setter, whose members believe that the proposed law is an attempt to wrest rulemaking control from what they see as an independent standards board and place it in the hands of politicians.

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“I think this is a disturbing reminder of what can happen when politicians get involved in a process that investors depend on to protect them from self-interest,” asserted Gerard Carney, GASB spokesman. “Investors need an independent standard-setting system to get unbiased information,” Carney told

And while Connecticut State Comptroller Nancy Wyman says she has no intention of deviating from GAAP, Carney cautions that Connecticut comptrollers are elected officials and that there’s no guarantee that the next finance chief will stay true to the accounting principles as laid out by GASB. As an example, he points to a law passed this month in Texas that gives any of the state’s public entities the right to ignore GASB 45, a GAAP benefits rule.

WymanCTComptrollerGAAP True Believer: Connecticut Comptroller Nancy Wyman says she has no intention of deviating from generally accepted accounting principles.

GASB 45 forces government entities to carry post-employment benefits—other than pensions—on its balance sheet, in plain view of investors rather than buried in footnotes. Texas’s brand of GAAP implementation seems to be fueling GASB’s cynicism about the Connecticut’s bill. (The Connecticut legislation essentially affirms the state’s Constitution, which gives the state comptroller the authority to choose the method of accounting.)

But Wyman, who says that the state will continue paying GASB membership dues, thinks the standard-setter’s assertions about Connecticut are off base. “I’ve been trying to implement GAAP for years,” says the controller, who claims she was held back by lawmakers who feared the switch to GAAP would force the state to recognize a $1 billion deficit and pay it down immediately to balance its budget. The state constitution requires a balanced budget.

Forcing lawmakers to vote for paying down the deficit, instead of spending state funds on education, health care, and infrastructure, would have meant political suicide for many state senators and house representatives. So Wyman came up with a solution that the legislature could live with: Switch accounting methods, thereby “freezing” the GAAP deficit and current levels, and pay off the liability a little at a time over the next 14 years. By switching from the current “modified” cash accounting method to accrual accounting in this way, Wyman will keep the budget deficit at its current level. Then she will amortize the billion-dollar deficit and pay it off at $150 million per year—an arrangement the legislature said they would accept.

If the bill is signed into law by Connecticut’s governor, Wyman will begin report financial results to the legislature under the accrual accounting system starting in 2009. The switch would not require additional costs or time since Wyman already uses accrual accounting to report Connecticut’s financial results to the ratings agencies.

The comptroller has been advocating the use of accrual accounting for more than a decade. To be sure, this GAAP method of accounting is said to be more complex than non-GAAP cash accounting. But it’s also more transparent and tougher to manipulate than cash accounting, and generally provides a more accurate snapshot of an entity’s financial health. That’s because revenues and expenses are recognized when sales are made and expenses are accrued, respectively, thus eliminating much of the mismatches that occur under cash accounting, where revenues and expenses are booked as they’re collected and dispersed.

By contrast, Connecticut’s current modified cash method often promotes mismatches between, for example, tax revenues and outlays, according to Wyman. Tax revenue is recognized when assessed, but expenses are booked only when the state makes a payout, a system that has previously made the state budget look as if there were fewer expenses than there would be under GAAP.

Rating agencies are keen on states that use GAAP because it’s considered a best practice and enables easy comparison of state balance sheets, says Nicole Johnson, a vice president at Moody’s Investors Service and the lead analyst for Connecticut. As a result, most states, as well as the federal government, use dual sets of books. One set is reported using a version of cash accounting for internal constituents, like lawmakers, while the second set employs GAAP for external entities like ratings agencies. (Corporate controllers behave similarly: They use management accounting to track cash flows for internal purposes and GAAP when filing their companies’ financial results with the Securities and Exchange Commission.)

Wyman’s idea has garnered support from rating agencies and government finance folks. For example, Moody’s Johnson said that if Connecticut could “address the negative [deficit] number”, the state’s balance sheet “would look better.” A stronger balance sheet means a better credit rating and less expensive bond issues. Right now, Connecticut’s credit rating is Aa3, slightly below Moody’s national average for states, which is Aa2. The lower rating—which is still relatively strong, notes Johnson—is weighed down by two major factors: the deficit and depletion of the state’s “rainy day fund,” which contains uncommitted reserves.

In addition, the Government Finance Officers Association, a trade group, supports Wyman’s claim that the legislation from Connecticut and Texas are very different—and shouldn’t be compared. Texas is “picking and choosing” which GAAP rules to use, says Steven Gauthier, GFOA’s director of technical services. Thus far, Connecticut seems to be adopting GAAP in a wholesale manner, he observes.

GFOA and GASB were on the same side of the Texas debate when both organizations testified against the GASB 45 rule change during a legislative hearing. The groups, however, don’t always see eye-to-eye. Indeed, GFOA would like to believe that GASB’s days are numbered. The trade group is pushing for GASB’s sister organization, the Financial Accounting Standards Board, to take over standard-setting duties for government entities. FASB develops accounting rules and interprets GAAP for private and public corporations.

“We have nothing against GASB . . . but the whole [accounting] movement is toward a smaller world,” notes Gauthier, who pointed to convergence of U.S. and international accounting standards as one reason to unite the two American boards. He says that over the past 25 years, GASB has done “good work” in pulling together disparate government accounting standards—that catered to different states and agencies—into a single, national GAAP. But GFOA would like a consolidated standard-setting body to minimize rule differences between the two groups when that’s practical, as a nod toward simplification.

That won’t work, says Carney, who also represents the Financial Accounting Foundation, the parent organization of both GASB and FASB. “Net income is the bottom line for private companies [while] service and accountability is the bottom line for government entities,” contends Carney. “The FAF strongly believes that the users of government financial statements have different needs.”