It Costs Nothing To Adopt GAAP

Posted on May 7, 2012. Filed under: Uncategorized | Tags: , , , |

Have you heard about the recent brouhaha regarding our state’s ability to “make good” on Governor Malloy’s Executive Order #1 to adopt Generally Accepted Accounting Principles (GAAP)? Our political leaders are now balking at the characterized $1.7 billion “cost” of adopting GAAP.

As Certified Public Accountants, of course, we have a responsibility to correct any mischaracterizations regarding GAAP. So here is a very simple declaration for our leaders: it costs nothing to adopt GAAP.

At the present time, because the State is not employing GAAP, many costs and expenses are not recorded until they are paid. As a result, when they are incurred, the State simply defers payment into future year(s) in an unmeasured and unmanaged fashion.

Because the State is nominally required to balance its budget each year, the timely recording of these costs and expenses would force our leaders to fund these commitments in a transparent manner. Indeed, it might even encourage them to act prudently by avoiding such commitments if the resources are not available to finance them.

GAAP is simply a set of measurement principles. If our costs appear to be higher under GAAP accounting than under an alternative method of accounting, we can’t blame GAAP for the additional costs. If we do, then we’d only be “blaming the messenger” (or, in this case, the “measurer”) for our own profligacy.

Contributed by Michael Kraten, PhD, CPA, Accounting Professor at Providence College and President of Enterprise Mgt. Corp.

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