Government Accountability and Financial Reporting: Are Two Reporting Models Better Than One?

• In Event: Roundtable Papers

Abstract

The primary goals of financial reporting for U.S. state governments are to provide
useful information for assessing whether governments’ fiscal performance over the short term
and the operational effectiveness of governmental activities with a longer-term perspective are
met. To meet these dual objectives, the Governmental Accounting Standards Board (GASB)
requires state governments to prepare two sets of financial statements: one prepared under a fullaccrual-
basis accounting and the other prepared using a modified-accrual-basis. The GASB
contends that providing both sets of statements increases the overall informativeness of
governmental reports. Using hand-collected data from the 50 U.S. state governments from
2002 to 2015, this paper provides empirical evidence on the contexts under which the two
financial reporting models provide information that is either redundant or incrementally useful. I
show that, on average, (1) both full- and modified-accrual-basis financial statements similarly
explain current outcomes and predict future outcomes associated with the welfare of citizens
(measured as gross state product, personal disposable income, and unemployment), and (2) fullaccrual-
basis financial statements better explain and predict current and future credit risk.
These findings support the GASB’s conjecture that full-accrual-basis financial statements
provide more useful information to creditors. They do not, however, support the conjecture that
modified-accrual-basis financial statements provide incrementally useful information about
either credit risk or citizens’ welfare.
JEL classification:

Author

• Won Jung Kim, University of Utah