Agenda - Council - 01/13/1981 - Laserfiche WebLink

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. a I) I ~ /' I , .' -;-> \ I I .." I ' I ~Jj Standard & Poor's , J---,I// '-- ,7", / : " / ,J " ---;....- [P)~~~[P)~CCu~~~ Copyright@ 1980 by STANDARD & POOR'S CORPORATION 25 Broadway, New York, N.Y. 1 ... 'io " ~ ~~ WHO'S WATCHING THE BOOKS? i . .. Five years have passed since budgetary gimmicks led the nation's largest city to the brink of bankruptcy. Yet governmental accounting is still undergoing major structural change. Concepts and standards are under debate. Special Interest groups vie for authority to make the rules. States and cities, worried over the specter of federal controls, attempt to police themselves, creating the perception of progress. Much still needs to be done. Says the SEC: "The market for municipal securities provides investors only limited protection compared with corporate. government or other types of issuers." In the regulated corporate market, accounting must meet stringent standards. The unregulated market for municipal bonds has no effective way to enforce uniform rules of financial reporting. Investor protection depends on voluntary practices of states and each state makes its own rules. While corporate bond investors may reasonably compare finances of one company with another, municipal accounting often leaves buyers in a quandary. Investors have become wary of general obligation bonds backed solely by a government's taxing power, while showing a preference for revenue bonds, with proven cash flows and more "business like" accounting. See chart on page 3. In another development, the market may be penalizing issuers for deficiencies in financial reporting. Poor accounting may be costing taxpayers many millions of dollars in higher interest costs, according to research recently undertaken by Standard & Poor's. Accounting Reforms . Recent attempts to improve accounting have produced results. Investors have access to more information. Financials include items previously omitted. like pension and sick leave liabilities and tax refunds owed but unpaid. Reports begin to reflect generally accepted accounting principles (GAAP) allowing comparison of bond issuers. Data is more reliable with the emergence of independent audits. Efforts to improve the municipal market's credibility have drawn a dozen brouPS into a power play for ultimate rule-making supremacy. Driving them is the prospect of a take- over by Washington. Several bills linger in Congress for a federal agency to set reporting standards-which is anathema to state and local governments.