Things Are Worse Than Previously Reported

The 2005 Financial Report of the U.S. Government has just been released. The picture it paints is not pretty. According to Kleinrock (subscription required):

According to the report, under GAAP [Generally Accepted Accounting Principles] the federal deficit for last year would have been $760 billion. The Treasury reported a deficit of $319 billion for that year. Differences were due to accruals (such as pensions and health care owed to veterans and government employees) not being accounted for under the Treasury method. Because of full disclosure rules placed on companies, especially those that are publicly traded, accruals must be accounted for to help ensure investor trust.

In other words, if we apply the accounting rules that businesses use, the deficit is far worse than previously reported. As noted in This Is My Blog Test, the report contains significant disclaimers concerning its reliability:

* Material deficiencies in financial reporting (which also represent material weaknesses and other limitations on the scope of our work resulted in conditions that, for the ninth consecutive year, prevented us from expressing an opinion on the federal government’s consolidated financial statements.

* The federal government did not maintain effective internal control over financial reporting (including safeguarding assets) and compliance with significant laws and regulations as of September 30, 2005.

Three major impediments to our ability to render an opinion on the consolidated financial statements continued to be

(1) serious financial management problems at the Department of Defense,

(2) the federal government's inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and

(3) the federal government's ineffective process for preparing the consolidated financial statements.

Moreover, as a result of the material deficiencies we found, readers are cautioned that amounts reported in the consolidated financial statements and related notes, certain information contained in the accompanying Management's Discussion and Analysis, and other financial management information that is taken from the same data sources as the consolidated financial statements, may not be reliable. Until the problems discussed in our audit report are adequately addressed, they will continue to have adverse implications for the federal government and the taxpayers, which are outlined in our report.

(My emphasis.)

That is, things are worse than previously reported, but things may even be worse than that.

Kleinrock reports that:

Earlier today members a part of the Blue Dog Coalition spoke out against Treasury's actions. Blue Dogs are comprised of fiscally conservative Democrats who in the past have broken ranks with fellow liberals and supported tax cuts. They, like many on Capitol Hill, are growing extremely tired of catching the administration hiding vital information that could help Congress better determine what bills should be passed and which ones shouldn't.

"Once again we find the administration grossly misrepresenting the truth and intentionally misleading the American public," said Congressman Mike Ross (D-AR), the Blue Dog Whip. "The Treasury's annual but little known report, complete with the signature of Secretary Snow, uses real accounting practices that all American companies follow, and states that the deficit in 2005 was $760 billion, more than double the claim of the administration. The time to restore honesty, accountability, and transparency in our nation's fiscal house is long past due."

I await with bated breath the WSJ's spin.