Policy Oct 1, 2009

Is Account­ing that’s Good for Gen­er­al Motors Good for Detroit?

Busi­ness and gov­ern­ment account­ing prac­tices diverge

Based on the research of

Allan Drebin

Back in the hey­day of the Amer­i­can auto­mo­bile indus­try, one quote summed up the pow­er of U.S. car man­u­fac­tur­ers: As goes Gen­er­al Motors, so goes the nation.” The indus­try — and GM in par­tic­u­lar — was so mas­sive that its for­tunes exert­ed great influ­ence over the U.S. econ­o­my and gov­ern­ment poli­cies. In the late 1970s many accoun­tants took this axiom to its log­i­cal con­clu­sion: account­ing prac­tices for a firm as mas­sive as GM ought to work equal­ly well for oth­er large enti­ties — gov­ern­ments. The Kel­logg School’s Allan Drebin (Pro­fes­sor of Account­ing Infor­ma­tion and Man­age­ment) dis­agreed, and took on the issue in his clas­sic paper Is Account­ing That’s Good for Gen­er­al Motors Good for Detroit?

Pub­lished in 1981, the paper assert­ed that the dif­fer­ences between finan­cial prac­tices in busi­ness and gov­ern­ment mil­i­tate against apply­ing busi­ness account­ing to gov­ern­ment. While the argu­ment was set­tled soon after the paper appeared, it has risen again recent­ly as munic­i­pal­i­ties try to use busi­ness-style account­ing approach­es to deal with their short-term finan­cial difficulties.

Drebin addressed a rel­a­tive­ly sim­ple issue in his paper. The Finan­cial Account­ing Stan­dards Board (FASB), the inde­pen­dent non­prof­it body that sets account­ing stan­dards for all orga­ni­za­tions bar­ring gov­ern­men­tal ones, was press­ing to over­see gov­ern­men­tal account­ing as well. There were a lot of arti­cles in the lit­er­a­ture at the time say­ing: Why should we have a dif­fer­ent account­ing method for the gov­ern­ment?’ ” Drebin recalls. In his paper, pub­lished in the Gov­ern­ment Accoun­tants Jour­nal, he set out rea­sons why that would not work. The object of the paper, he says, was to show the need for sep­a­rate account­ing methods.”

An Argu­men­ta­tive Approach
Unlike many schol­ar­ly arti­cles, Drebin’s paper pre­sent­ed his opin­ion rather than his research. I was work­ing on a gov­ern­ment account­ing frame­work at the time, and did some research on what users need­ed from gov­ern­ment account­ing,” he recalls. But this paper was large­ly ana­lyt­i­cal rather than sta­tis­ti­cal; it was argu­men­ta­tive. The gist is that the needs of users of gov­ern­ment account­ing are dif­fer­ent from busi­ness account­ing and require dif­fer­ent types of reporting.”

Drebin con­cedes that pro­po­nents of the FASB’s pro­pos­al offered rea­soned argu­ments for a sin­gle account­ing board. They boiled down to say­ing that every­one under­stands busi­ness account­ing, while gov­ern­ment account­ing is a strange ani­mal,” he says. But as he saw the sit­u­a­tion then — and still sees it now — three main argu­ments coun­tered that view.

First, while gov­ern­ment account­ing is no sim­ple task, nei­ther is busi­ness account­ing the sim­ple pro­ce­dure that its pro­po­nents made it out to be. Over the last decade, two com­pa­nies — GM and Enron — have proved this point. FASB requires that com­pa­nies include all sub­sidiaries in which it has more than 50 per­cent own­er­ship in its account­ing state­ments. Three years ago, GM sold 51 per­cent of its GMAC sub­sidiary. As a result, it did not have to con­sol­i­date GMAC into its accounts the fol­low­ing year, even though it still owned 49 per­cent of the com­pa­ny. The account­ing sys­tem thus made it appear that GM had rid itself of mil­lions of dol­lars in debt — a ghost trans­ac­tion that sub­stan­tial­ly improved its debt-to-equi­ty ratio. A few years before that, Enron had applied FASB’s prin­ci­ples in a sim­i­lar way, using spe­cial pur­pose enti­ties to move debt off its books. Enron, how­ev­er, took the process to crim­i­nal lengths.

Dif­fer­ent Roles in Soci­ety
Gov­ern­ment account­ing also dif­fers from com­mer­cial account­ing because their roles in soci­ety dif­fer. Busi­ness account­ing is based on income. Gen­er­al Motors went into bank­rupt­cy because it didn’t have any income,” Drebin explains. Gov­ern­ment, by con­trast, is sup­posed to break even. Funds com­ing in must bal­ance those going out.” Drebin illus­trat­ed that dif­fer­ence in his paper with an anal­o­gy to a fish­ing trip. Although the trans­ac­tions may be the same — row­ing a boat, bait­ing a hook, pulling a line — it makes a dif­fer­ence whether the pur­pose of the ven­ture is com­mer­cial or recre­ation­al,” he wrote. The com­mer­cial ven­ture would have to be eval­u­at­ed in terms of the eco­nom­ic val­ue of the catch rel­a­tive to the costs of bait, boat, line, etc. On the oth­er hand, a recre­ation­al fish­ing activ­i­ty might be deemed suc­cess­ful even if the eco­nom­ic val­ue of the catch were less than the cost of the input factors.”

Anoth­er dif­fer­ence between busi­ness and gov­ern­ment involves the avail­abil­i­ty of funds. Mon­ey is fun­gi­ble in cor­po­ra­tions,” Drebin explains. But if gov­ern­ments col­lect a tax that is restrict­ed, they can­not spend it on oth­er issues.”

The bot­tom line’ is that the infor­ma­tion needs of per­sons inter­est­ed in gov­ern­men­tal orga­ni­za­tions are dif­fer­ent from those of investors in prof­it-seek­ing busi­ness­es,” Drebin stat­ed in his paper. It fol­lows that the objec­tives of finan­cial report­ing should also be different.”

The Issue Reemerges
The FASB’s bid to over­see gov­ern­ment account­ing — the spe­cif­ic con­cern that Drebin addressed — went away soon after his paper appeared. In 1984 the foun­da­tion that over­saw FASB cre­at­ed the Gov­ern­ment Account­ing Stan­dards Board (GASB). How­ev­er, the issue has reemerged recent­ly as the eco­nom­ic down­turn has pres­sured cash-strapped gov­ern­ments to bal­ance their books. Ear­ly this year, the Chica­go City Coun­cil approved May­or Richard Daley’s pro­pos­al to sell the city’s future rev­enues from park­ing meters for the next three-quar­ters of a cen­tu­ry to a pri­vate com­pa­ny for $1.1 billion.

That amount is con­sid­ered as rev­enue this year, to help bal­ance the fis­cal year 2009 bud­get,” Drebin points out. But they’ve giv­en away their rev­enues for the next sev­en­ty-five years. They’ve essen­tial­ly sold the right to all the park­ing fees that they receive.” In fact, the trans­ac­tion did not apply gov­ern­ment account­ing stan­dards at all. Doing so would have required the city to seg­re­gate the $1.1 bil­lion into a sep­a­rate fund devot­ed to roads and high­ways. Instead, the mon­ey went into the city’s gen­er­al fund.

FASB account­ing can also cause prob­lems for non­prof­it insti­tu­tions. Unlike for-prof­it cor­po­ra­tions but like gov­ern­ments, non­prof­its can take in rev­enues restrict­ed to spe­cif­ic uses. Their bal­ance sheets thus have tem­porar­i­ly and per­ma­nent­ly restrict­ed lines. If a donor gives a restrict­ed gift to North­west­ern Uni­ver­si­ty for its sci­ence pro­grams, the uni­ver­si­ty can’t use it for its ath­let­ic teams,” Drebin points out. Nev­er­the­less, pri­vate uni­ver­si­ties’ account­ing fol­lows FASB’s rules. Mak­ing the sit­u­a­tion more per­plex­ing, pub­lic uni­ver­si­ties — run by state gov­ern­ments — fol­low GASB rules in their account­ing. North­west­ern and the near­by Uni­ver­si­ty of Illi­nois at Chica­go, there­fore, do their account­ing in entire­ly dif­fer­ent ways.

Con­tin­ued Con­fu­sion
Three decades after Drebin’s clas­sic paper, select­ing an appro­pri­ate account­ing prac­tice is not the only source of con­fu­sion in the account­ing pro­fes­sion. Even today, he says, there’s still a lot of accoun­tants who don’t under­stand gov­ern­ment accounting.”

Featured Faculty

Allan Drebin

Professor Emeritus of Accounting Information & Management

About the Writer

Peter Gwynne is a freelance writer based in Sandwich, Mass.

About the Research

Drebin, Allan. 1981. Is accounting that’s good for General Motors good for Detroit? Government Accountants Journal, 30(1): 28-33.

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