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Bill Gates Rips Government Accounting Practices

I would encourage you to read this short article published by the Wall Street Journal.  Last week, Bill Gates, co-founder of Microsoft and one of the richest men in the world, called out state and local government on their dubious accounting practices.   

Mr. Gates claimed that states use “tricks” to balance their budgets and the reporting is “riddled with gimmicks.”  He also said that some of the governmental accounting practices are “so blatant and extreme,” that “Enron would blush.”  Several former Enron executives are serving prison sentences for their role in the collapse of the company.  Do you think any government leaders will be facing charges for accounting improprieties any time soon?

Having practiced public accounting for the past twenty years, I agree with Mr. Gates’ general premise.  Governmental entities have some of the most bizarre accounting practices and principles.  Of course, it helps when you get to write your own rules.  Like Enron, the government may be following the technical provisions, but they may be obscuring the real financial picture.  Private enterprise would not be able to get away with the same shenanigans that our state, local and federal government perpetrates on a continual basis.

The article mentions Mr. Gates’ concern about the way states are accounting for their pension liabilities.  If you’re watching the news, you know that public workers’ pensions are a hot political issue nationwide.  Although I don’t know specifically what Mr. Gates was referring to, I do have at least one idea of what it might be – the rate of return used to calculate the future pension obligations.

A friend and former colleague of mine recently asked a state treasurer in a public forum what rate of return they were using to calculate the state’s future pension obligations.  The treasurer nonchalantly replied that it was 8%.  Without being too antagonistic, my friend queried if this was a little aggressive given the current market conditions.  The state treasurer replied that is was a rate allowed by the Governmental Accounting Standards Board.  He further explained that the rate was acceptable for governmental accounting purposes since no state had ever gone bankrupt, unlike private companies.  He also made mention that every 0.25% decline in the assumed rate of return increased the state’s current pension contribution by $___ million.

Given the current market conditions, you must invest fairly aggressively to receive an 8% rate of return.  Being aggressive is not the investment strategy most government pension plans use, nor should they.  The bottom line… a lower rate of return could exponentially increase the future obligation, making a current budget crisis worse.  Although a lower rate might be more reflective of the current market conditions, states continue to use the same rate to minimize to help balance their budgets.

Keep in mind these accusations are not coming from some uneducated, right-wing radical with a political axe to grind.  This is coming from one of the richest men in the world, who knows a little about money and financial principles.

Although it’s wonderful that Mr. Gates is raising this issue, I doubt much will change.  Accounting theory and principles can be esoteric and hard for people to understand en masse.  However, common sense is fairly simple, and the more these issues are raised, the more people will realize that this is another examples of politicians who live by a different set of rules than the rest of the world. 

We can only hope things change before it’s too late.

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