Dodd-Frank Wall Street Reform Act:

Role of the Governmental Accounting Standards Board in the Municipal Securities Markets and Its Past Funding

GAO-11-267R: Published: Jan 18, 2011. Publicly Released: Jan 18, 2011.

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This letter formally transmits the documents used for an oral briefing we gave to Congress on January 12-13, 2011, in response to the Dodd-Frank Wall Street Reform and Consumer Protection Act. GAO was directed to study the role and importance of the Governmental Accounting Standards Board (GASB) in the municipal securities markets as well as the manner and level at which GASB has been funded. GASB establishes standards of accounting and financial reporting for U.S. state and local governments. Established in 1984 as an operating component of the Financial Accounting Foundation (the Foundation), GASB is recognized by the American Institute of Certified Public Accountants as the body that sets generally accepted accounting principles (GAAP) for state and local governments. In conducting this study, GAO was to consult with the principal organizations representing state governors, legislators, local elected officials, and state and local finance officers. Specifically, in accordance with the mandate and discussions with Congress, our objectives were to address the following key questions: (1) What are key stakeholder views on the role and relevance of GASB in the municipal securities markets? and ( 2) What is the manner and the level at which GASB has been funded? Publicly traded companies are required by the Securities and Exchange Commission (SEC) to prepare and issue financial statements based on GAAP; however, municipal issuers are not subject to this requirement. State requirements regarding the use of GAAP by local governments vary, but institutional investors and rating agencies generally agreed that most municipal issuers use GAAP.

Stakeholders viewed GAAP-basis financial statements as highly useful for assessing the quality of municipal securities. Several analysts, issuers, and other stakeholders stated that GAAP-basis financial statements are comprehensive. Analysts generally agreed that, while GAAP-basis financial statements are important, they are not the only source of information they use to assess the quality of municipal securities, nor does the use of GAAP necessarily equate to a high-quality security. Several stakeholders believed that GAAP-basis financial statements are associated with lower borrowing costs, although others stated that it is difficult to attribute lower costs to the use of GAAP alone. Stakeholders stated that GAAP-basis financial statements are complex and expensive to prepare, particularly for small, infrequent issuers. Stakeholders generally agreed that governments are not always timely in issuing audited financial statements, making them less useful to analysts and other users, although a few stakeholders maintained that other publicly available information compensates for the lack of timeliness. The Financial Accounting Foundation, the parent organization of GASB and FASB, is a private-sector non-stock corporation qualified as a tax exempt organization under section 501(c)(3) of the U.S. Internal Revenue Code. The Foundation's mission is to establish and improve financial accounting and reporting standards to foster financial reporting that provides decision-useful information to users of financial reports. Through its Board of Trustees and its executive management, the Foundation oversees FASB and GASB, including the standards boards' procedures for due process and maintaining independence. Under the bylaws of the Foundation, the Governmental Accounting Standards Advisory Council, a standing advisory committee of GASB, is responsible for providing technical and other support to GASB, including consulting with GASB on a variety of matters, such as major technical issues and providing input on GASB's agenda of projects and assigning of priorities. The Foundation is responsible for the oversight, administration, and finances for GASB and FASB. The Foundation currently receives its funding from subscription and publications revenues, accounting support fees for FASB pursuant to the Sarbanes-Oxley Act of 2002, and voluntary contributions in support of GASB. The Dodd-Frank Wall Street Reform and Consumer Protection Act granted SEC the authority to require a registered national securities association to establish (1) a reasonable annual support fee to adequately fund GASB, and (2) rules and procedures to provide for the equitable assessment and collection of the support fee from the members of the national securities association. As of January 4, 2011, SEC had not acted on this authority. According to the Foundation's annual reports, in 1981, the Foundation established a Reserve Fund, which is currently intended to (1) provide the Foundation, FASB, and GASB with sufficient reserves to fund expenditures not funded by accounting support fees or subscription and publication revenues; (2) operate the Foundation, FASB, and GASB during any temporary or permanent funding transition periods; and (3) fund any other unforeseen contingencies. The Foundation's Trustees have adopted a policy establishing a targeted year-end Reserve Fund balance equal to 1 year of budgeted expenses for the entire organization, including the Foundation, FASB, and GASB, plus a working capital reserve equal to one quarter of the net operating expenses for the entire organization. Reserve Fund investments are unrestricted assets of the Foundation. Reserve Fund year-end balances for 2006 through 2009 were $51.9 million, $54.6 million, $51.0 million, and $54.4 million, respectively.

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