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GAO-11-267R: 

United States Government Accountability Office: 
Washington, DC 20548: 

January 18, 2011: 

The Honorable Tim Johnson:
The Honorable Richard C. Shelby:
United States Senate: 

The Honorable Spencer Bachus:
Chairman:
The Honorable Barney Frank:
Ranking Member:
Committee on Financial Services:
House of Representatives: 

Subject: Dodd-Frank Wall Street Reform Act: Role of the Governmental 
Accounting Standards Board in the Municipal Securities Markets and Its 
Past Funding: 

This letter formally transmits the documents used for an oral briefing 
we gave to your offices on January 12-13, 2011, in response to the 
Dodd-Frank Wall Street Reform and Consumer Protection Act.[Footnote 1] 
See enclosure 1 for a copy of our briefing slides. 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 your offices, 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? 

To address these objectives, we: 

* Reviewed academic studies and other documentation derived from 
numerous sources, including GASB itself. 

* Consulted with key stakeholders through structured interviews, a 
roundtable discussion held at GAO headquarters, teleconferences, and 
meetings. As required by the mandate, these consultations included 
organizations representing state governors, legislators, local elected 
officials, and state and local finance officers. To ensure that we 
obtained the perspectives of a broad base of knowledgeable and 
interested stakeholders, we also consulted with users of state and 
local governments' financial statements, such as investors, rating 
agencies, and bond insurers; auditors; and other participants in the 
municipal securities markets, including GASB and the Foundation. 

* Obtained and reviewed audited financial statements of the Foundation 
and other financial data specific to GASB. 

As further elaborated in the attached briefing slides, stakeholders 
expressed a range of views on the role and relevance of GASB in the 
municipal securities markets. This discussion was framed around the 
following topics: the use of GASB's accounting principles, benefits 
and limitations of GAAP reporting, GAAP use after the credit crisis, 
and GASB's continuing role in the municipal securities markets. For 
example, while some stakeholders indicated that GASB's responses to 
the evolving needs of the securities markets have been appropriate, 
others indicated that GASB could do more to alleviate the burden that 
the cost and complexity of preparing GAAP-basis financial statements 
places on governments. With regard to the manner and level at which 
GASB has been funded, our briefing slides include an overview of the 
Foundation's financial responsibilities with regard to GASB as well as 
information on GASB expenses and sources of funding for 2006 through 
2009. In our consultations with stakeholders on GASB funding issues, 
they expressed a range of views. For example, while most stakeholders 
agreed that GASB needed a steady, sustainable stream of funding, 
several stakeholders were concerned with the level and nature of 
GASB's expenditures as well as a perceived lack of transparency 
associated with its budget process. 

We conducted our work from September 2010 to January 2011 in 
accordance with all sections of GAO's Quality Assurance Framework that 
are relevant to our objectives. The framework requires that we plan 
and perform the engagement to obtain sufficient and appropriate 
evidence to meet our stated objectives and to discuss any limitations 
in our work. We believe that the information and data obtained, and 
the analysis conducted, provide a reasonable basis for any findings 
and conclusions. See enclosure 2 for further details on our scope and 
methodology. See enclosure 3 for a list of organizations that 
participated in our study. Enclosure 4 provides an overview of 
academic research on the impact of GAAP on municipal securities 
markets. Enclosure 5 provides a schedule of GASB's program expenses 
from 2006 through 2009. Enclosure 6 provides GAO contact information 
and acknowledges contributors to this report. 

We are sending copies of this report to the appropriate congressional 
committees, the Chairman of the Board of Trustees of the Financial 
Accounting Foundation, the President and Chief Executive Officer of 
the Financial Accounting Foundation, the Chairman of the Governmental 
Accounting Standards Board, and the Chairman of the Securities and 
Exchange Commission. We are also sending copies to the roundtable 
participants, the stakeholders with whom we consulted, and other 
interested parties. This report will also be available at no charge on 
our Web site at http://www.gao.gov. Should you or your staffs have any 
questions concerning this report, please contact either of us at 
rasconap@gao.gov or (202) 512-9816 or williamso@gao.gov or (202) 512- 
8678. Contact points for our Offices of Congressional Relations and 
Public Affairs may be found on the last page of this report. 

Signed by: 

Paula M. Rascona:
Director:
Financial Management and Assurance: 

Signed by: 

Orice Williams Brown:
Director:
Financial Markets and Community Investments: 

Enclosures: 

[End of section] 

Enclosure 1: 

Dodd-Frank Wall Street Reform Act: Role of the Governmental Accounting 
Standards Board in the Municipal Securities Markets and Its Past 
Funding: 

Briefing for offices of the: 

Committee on Banking, Housing, and Urban Affairs:
United States Senate: 

Committee on Financial Services:
House of Representatives: 

January 12 and 13, 2011: 

Overview: 
* Introduction:
* Objectives:
* Scope and Methodology:
* Background:
* Results:
* Enclosures:
2: Scope and Methodology:
3: Organizations That Participated in GAO's Study:
4: Academic Research:
5: GASB Program Expenses:
6: Contacts and Acknowledgments: 

Introduction: 

The Dodd-Frank Wall Street Reform and Consumer Protection Act included 
a requirement for GAO to study the role and importance of the 
Governmental Accounting Standards Board (GASB) in the municipal 
securities markets and the manner and level at which GASB has been 
funded. 

GASB establishes standards of accounting and financial reporting for 
U.S. state and local governmental entities. 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. 

The Municipal Securities Rulemaking Board (MSRB)[Footnote 2] reported 
that there were over 10 million trades of municipal securities in the 
secondary market amounting to approximately $3.8 trillion in 2009. 

* Issuers of municipal securities include states, counties, cities and 
towns, school districts, and special government districts, such as 
public benefit corporations and authorities, public employee retirement 
systems, governmental utilities, public hospitals and other public 
health care providers, and public colleges and universities. 

Objectives: 

In accordance with the mandate and discussions with committee offices, 
our study addressed the following key questions: 

* Objective 1: What are key stakeholder[Footnote 3] views on the role 
and relevance of GASB in the municipal securities markets? 

* Objective 2: What is the manner and the level at which GASB has been 
funded? 

Scope and Methodology: 

Objective 1: To obtain key stakeholder views on the role and relevance 
of GASB in the municipal securities markets, we: 

* Consulted with key stakeholders through structured interviews and a 
roundtable discussion held at GAO headquarters. The roundtable 
discussion was organized around the following four general topics: 
Topic 1: Use of GASB's accounting principles:
Topic 2: Benefits and limitations of GAAP reporting:
Topic 3: GAAP use after the credit crisis:
Topic 4: GASB's continuing role in the municipal securities markets: 

* Reviewed academic studies that analyzed the impact of financial 
statements prepared in accordance with GAAP on municipal securities 
markets. 

Objective 2: To describe the manner and level at which GASB has been 
funded, we: 

* Obtained and reviewed audited financial statements of the Foundation, 
which included certain key financial data of GASB. 

* Interviewed officials from GASB to obtain and discuss unaudited 
financial data specific to GASB, including separate operating financial 
data and the percentage of the Foundation's allocation of common costs 
to GASB. 

* Provided key facts related to GASB funding to Foundation officials 
for their confirmation. 

* Consulted with key stakeholders through teleconferences and meetings. 

For both objectives: 

* As required by the mandate, we consulted with the principal 
organizations representing state governors, legislators, local elected 
officials, and state and local finance officers. 

* To obtain the perspectives of a broad base of knowledgeable and 
interested stakeholders, we also consulted with users of state and 
local governments' financial statements, such as investors, rating 
agencies, and bond insurers; auditors; and other participants in the 
municipal securities markets, including GASB and the Financial 
Accounting Foundation. 

The summary of views included in this report captures the collective 
discussion of roundtable participants and the comments made by 
stakeholders in numerous interviews and consultations. The views 
summarized are not attributable to any individual or organization and 
do not necessarily represent the views of any single organization, 
including GAO. 

Enclosure 2 includes details on our scope and methodology. Enclosure 3 
provides a list of organizations that participated in our study. 

We conducted our work from September 2010 to January 2011 in accordance 
with all sections of GAO's Quality Assurance Framework that are 
relevant to our objectives. The framework requires that we plan and 
perform the engagement to obtain sufficient and appropriate evidence to 
meet our stated objectives and to discuss any limitations in our work. 
We believe that the information and data obtained, and the analysis 
conducted, provide a reasonable basis for any findings and conclusions. 

Background: 

GASB's mission is to establish and improve standards of state and local 
governmental accounting and financial reporting that will result in 
useful information for users of financial reports, and guide and 
educate the public, including issuers, auditors, and users of those 
financial reports. 

* GAAP encompasses the conventions, rules, and procedures necessary to 
define accepted accounting practice at a particular time. It includes 
not only broad guidelines for general application, but also detailed 
practices and procedures. Those conventions, rules, and procedures 
provide a standard by which to measure financial presentations. 

* An independent auditor's report may contain an opinion as to whether 
the financial statements present fairly an entity's financial position 
in conformity with GAAP. 

* Audited financial statements are used by a variety of stakeholders in 
the municipal securities markets. See figure 1 for a description of the 
key steps in the issuance of a municipal security and the stakeholders 
that typically use issuers' audited financial statements in their 
review of a security. 

Background: 

Figure 1: Issuance of a Municipal Security: Key Steps and Stakeholders: 

[Refer to PDF for image: illustration] 

A municipal issuer, such as a state or local government, a school 
district, a transportation authority, etc., decides to issue a debt 
security in the municipal market in order to finance certain public 
activities. 

The issuer prepares an official statement, a document that discloses 
material information on the offering of the securities, such as 
financial information. In doing so, the issuer may receive guidance 
and opinions from the following: 

* The financial advisor advises the issuer on matters pertinent to the 
issue, such as structure, fairness of pricing, terms, and bond ratings. 

* The bond counsel is an attorney or law firm that provides a legal 
opinion as to the issuer's authority to issue the proposed security, 
its compliance with legal requirements necessary for issuance, and 
other matters related to the security to be issued. 

The issuer may approach one or more rating agencies to assess the 
relative credit quality of the security it plans to issue.[A] 

The issuer may also approach a bond insurer to guarantee the payment 
of principal and interest on the security in case of default.[A] 

The municipal issuer is ready to issue the security in the public 
market. 

An underwriter (or municipal securities dealer) purchases the security 
from the issuer for resale to one or more investors.[A] 

An investor purchases the security from the underwriter.[A] Investors 
can include households, mutual funds, insurance companies, commercial 
banks, and others. 

The investor has the option to hold the security until maturity or 
sell it in the secondary market, where trading may continue throughout 
the life of the security. 

Sources: MSRB (data); stakeholder interviews (data); GAO (graphic). 

[A] At these points in the process, analysts typically review audited 
financial statements as part of their evaluation of the security. 
These statements may or may not be prepared in accordance with GAAP 
standards. 

[End of figure] 

Results: Objective 1: 

Topic 1: Use of GASB's accounting principles: 

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. 

* While all state governments use GAAP for state-level financial 
reporting, GAAP use by local governmental entities varies. Some states 
require, either by state law or regulation, that the local governmental 
entities within those states use GAAP. Other states, however, do not 
require GAAP use by their local governments. 

* We identified no definitive studies quantifying the use of GAAP by 
municipal issuers. However, representatives of several institutional 
investors and rating agencies agreed that most of the issuers whose 
securities they evaluate use GAAP. 

* In states where GAAP use is not required for local governments, local 
governments preparing GAAP-basis financial statements tend to be: 

- larger, or: 

- more frequent debt issuers. 

Topic 2: Benefits and limitations of GAAP reporting: 

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.[Footnote 4] These views 
included: 

* GAAP-basis financial statements provide a fuller, more transparent 
picture of a government's financial position than those prepared in 
accordance with other bases of accounting. 

* GAAP-basis financial statements provide important information on 
topics such as pensions, post-employment benefit plans, and 
derivatives. 

* The statistical reporting section in GAAP-basis financial statements 
provides helpful longer-term trend information, and the management 
discussion and analysis section and enhanced disclosures in the notes 
sections provide context on an issuer's financial position. 

Stakeholders generally agreed that use of GAAP's reporting framework 
provides consistency and facilitates comparability of financial 
information across different municipal issuers and securities. 

A few analysts stated that they might bypass a security from an issuer 
that does not have GAAP-basis financial statements because of the 
greater amount of analysis required to understand its financial 
position. 

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. 

* For example, several analysts stated that they value budgets for 
forward-looking financial information. 

* A few representatives of rating agencies and bond insurers pointed 
out that, unlike other market participants, they are able to ask 
issuers for any additional information they need to conduct a credit 
assessment. Therefore, the lack of GAAP-basis financial statements does 
not necessarily lead to a higher credit risk determination. 

* A few stakeholders commented that analysts and investors should take 
caution to not confuse GAAP-basis reporting with a good financial 
position or good credit quality. 

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. 

* Several issuers stated that they do not know exactly how GAAP impacts 
their borrowing costs, but they hope or believe their costs are lower 
as a result of using GAAP. 

* A few stakeholders, including issuers and investors, stated that many 
factors impact borrowing costs, such as strong financial management, 
income tax revenues, and use of bond insurance, and that isolating the 
impact of GAAP use on borrowing costs is difficult. 

* Enclosure 4 discusses the key findings and limitations of several 
studies that evaluate the impact of GAAP-basis financial statements on 
the municipal securities markets, including borrowing costs. 

Stakeholders stated that GAAP-basis financial statements are complex 
and expensive to prepare, particularly for small, infrequent issuers. 

* A few stakeholders told us that preparing GAAP-basis financial 
statements requires issuers to hire or outsource accounting 
professionals with an advanced skill set. This can be cost-prohibitive 
for many small issuers with limited resources, particularly those that 
do not issue debt on a regular basis. 

* A rating agency analyst and several issuers stated that governments, 
if 
given the option of whether to use GAAP or another basis of accounting, 
must weigh the cost of preparing GAAP-basis financial statements 
against potential benefits, such as potentially reduced borrowing 
costs. 

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. 

* Issuers and analysts explained that the delay in completing GAAP-
basis financial statements is due to: 

- the complex and comprehensive nature of GAAP; 

- the complexity of state and local governments; 

- limited staff time and resources; and: 

- higher priority placed by elected officials on the preparation of the 
annual budget. 

A National Association of State Comptrollers survey found that states 
completed their Fiscal Year 2009 audited financial statements in an 
average of 206 days, or nearly 7 months, from the end of their fiscal 
year. Seven states took over 9 months to issue their financial 
statements.[Footnote 5] 

* Untimely financial statements may require analysts to rely on 
outdated information or to try to obtain additional, unaudited 
information from issuers. 

Issuers noted that they are aware of the timeliness issue, and some are 
taking steps to address the problem. For example, the National 
Association of State Auditors, Comptrollers, and Treasurers (NASACT) 
has established a working group to identify states' top obstacles and 
opportunities with regard to issuing faster annual financial reports. 

* Unlike corporations, state and local governments also often post 
annual budgets, board meeting agendas, and meeting minutes online; and 
public hearings are frequently accessible online or through the news 
media. Such publicly available information may mitigate the lack of 
timeliness to some extent, according to two issuers. 

Topic 3: GAAP use after the credit crisis: 

According to a study by a rating agency and discussions with bond 
insurers, the percentage of newly issued securities with insurance has 
decreased from over 50 percent in 2005 to less than 10 percent of newly 
issued securities in 2010.[Footnote 6] As the use of bond insurance has 
decreased, analysts and investors may be more reliant on GAAP-basis 
financial statements to determine the quality of municipal securities. 

* A few analysts said that, rather than focusing strictly on the bond 
insurer's rating in cases where issuers purchase insurance, they have 
always evaluated the credit quality of the underlying bond they are 
considering. In conducting this analysis, GAAP-basis financial 
statements have been important to them. 

* Several analysts said the decrease in the availability of bond 
insurance forces analysts and investors to look more carefully at the 
credit quality of issuers. As such, they will likely place more 
importance now on the issuer's financial statements and other 
disclosures. 

Topic 4: GASB's continuing role in the municipal securities markets: 

Stakeholders discussed several issues related to GASB's ongoing 
standards setting and outreach efforts. 

* A few stakeholders noted that GASB has improved the quantity and 
quality of its education materials and has worked hard to teach 
stakeholders more about financial statements and GAAP. 

* A few stakeholders also indicated that GASB-issued standards have 
made government accounting more complex and expensive and that GASB 
could do more to facilitate discussion about the relationship between 
the costs and benefits of GAAP-basis financial reporting. Others 
commented on the complexity of Financial Accounting Standards Board 
(FASB) standards and noted that complex financial reporting is a 
reflection of the complexity of the organization being reported 
on.[Footnote 7] 

* According to a GASB official, drivers of new standards or revisions 
to existing standards included user needs, internal research, and 
conformance with global or FASB standards. 

* One issuer said that slowing down the rate at which GASB changes its 
standards so that smaller governments and other issuers can keep up 
would be helpful. Recently, GASB has issued new accounting standards 
almost every year. 

* One issuer recommended that preparers and users of financial 
information conduct additional discussions on the costs and benefits of 
GAAP compliance. 

Results: Objective 2: 

Overview of GASB Funding: 

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.[Footnote 8] 

* For each of the 4 years that we reviewed, the Foundation's 
independent auditors, McGladrey & Pullen, LLP, issued unqualified 
"clean" opinions for the Foundation's financial statements. 

* The GASB and FASB Chairmen are responsible for preparing annual 
budgets, with advice of their respective members, for review and 
approval by the Foundation's Board of Trustees. 

* Establishment of the FASB annual accounting support fees through the 
Foundation's annual budget process is subject to review by SEC. 

The Dodd-Frank Wall Street Reform and Consumer Protection Act granted 
SEC the authority to require a registered national securities 
association to establish: 

* a reasonable annual support fee to adequately fund GASB, and: 

* rules and procedures to provide for the equitable assessment and 
collection of the support fee from the members of the national 
securities association.[Footnote 9] 

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: 

* provide the Foundation, FASB, and GASB with sufficient reserves to 
fund expenditures not funded by accounting support fees or 
subscription and publication revenues; 

* operate the Foundation, FASB, and GASB during any temporary or 
permanent funding transition periods; and: 

* 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. 

Foundation officials have said that they have had to use Foundation 
funds from the Reserve Fund to compensate for annual shortfalls in 
GASB's funding. The officials said that in recent years additions to 
the Reserve Fund have primarily resulted from (1) revenue from the sale 
of subscriptions and publications that exceeded operational needs and 
(2) investment income. 

As described in the notes to the Foundation's audited financial 
statements, the Foundation presents its Statements of Activities based 
on the concept that standard setting is the sole program of the 
Foundation. Accordingly, these statements set forth separately the 
revenue, cost of sales, and certain program expenses of FASB and GASB, 
as deemed appropriate by management. 

Table 1 provides information on GASB's voluntary monetary contributions 
and related program expenses as reported in the Foundation's Statements 
of Activities and related notes, along with unaudited information 
provided by Foundation officials on allocated support expenses. The 
allocation reflects additional Foundation services for accounting and 
finance, human resources, facilities management, technology and 
information systems, legal, development, and general administrative 
operating assistance. 

Table 1: Selected Foundation Information on GASB Funding: 

Voluntary monetary contributions to GASB[A]: 
2006: $2.1 million; 
2007: $1.6 million; 
2008: $1.5 million; 
2009: $1.2 million. 

Less: GASB program expenses[B]: 
2006: $4.5 million; 
2007: $4.4 million; 
2008: $5.0 million; 
2009: $5.3 million. 

Less: Allocation of Foundation support expenses to GASB: 
2006: $1.5 million; 
2007: $1.3 million; 
2008: $1.2 million; 
2009: $1.3 million. 

Excess of GASB expenses over GASB revenue from voluntary monetary 
contributions: 
2006: ($3.9 million); 
2007: ($4.1 million); 
2008: ($4.8 million); 
2009: ($5.3 million). 

Source: GAO analysis of 2007, 2008, and 2009 Financial Accounting 
Foundation Annual Reports and additional unaudited information 
provided by Foundation officials. Reported amounts are rounded. 

[A] According to GASB officials, the Foundation's reported 2006 
contributions include contributed services of $14,000, Contributed 
services were not included in the other years' financial statements. 
For comparability, we have eliminated contributed services from the 
2006 data presented here. 

[B] See enclosure 5 for detail on GASB program expenses. 

[End of table] 

The Foundation's audited financial statements reported net subscription 
and publication revenues for FASB and GASB related product offerings of 
$10.7 million, $9.1 million, $10.2 million, and $8.2 million for 2006 
through 2009, respectively. According to Foundation officials, the 
Foundation has used these revenues to fund the GASB funding shortfall 
indicated in table 1. 

As shown in figure 2, contributions from state governments are the 
largest single source of voluntary monetary contributions, and have 
remained steady in each of the 4 years. 

Combined contributions from state governments totaled $1 million in 
each of the past 4 years. According to an official of the National 
Association of State Auditors, Comptrollers, and Treasurers (NASACT), 
the amount is not based on a written or contractual agreement. 

The total contribution is remitted by NASACT, which handles the 
administrative responsibilities of determining annual assessments for 
each state, invoicing and collecting the amounts, and remitting 
quarterly payments of $250,000 to the Foundation. Assessments are 
calculated for each state based on a fixed amount per state and a 
variable amount calculated based on the state's population. 

According to a NASACT official, while all states and the District of 
Columbia are assessed a portion of the total remittance, contributions 
are voluntary and not all states contribute to GASB every year. 

Figure 2: Sources of GASB Voluntary Monetary Contributions, 2006-2009: 

[Refer to PDF for image: stacked vertical bar graph] 

Year: 2006; 
State governments: $1,000,000; 
Local governments: $331,000; 
Bond fee: $448,000; 
Other GASB: $351,000; 
Total: $2,130,000. 

Year: 2007; 
State governments: $1,000,000; 
Local governments: $263,000; 
Bond fee: $249,000; 
Other GASB: $125,000; 
Total: $1,637,000. 

Year: 2008; 
State governments: $1,000,000; 
Local governments: $210,000; 
Bond fee: $149,000; 
Other GASB: $132,000; 
Total: $1,491,000. 

Year: 2009; 
State governments: $1,000,000; 
Local governments: $162,000; 
Bond fee: $12,000; 
Other GASB: $52,000; 
Total: $1,226,000. 

Source: Financial Accounting Foundation annual reports for years 
ending December 31, 2007, 2008, 2009. 

[End of figure] 

According to GASB officials, the Foundation's trustees have explored 
various options to obtain stable sources of funding for GASB over the 
past several years. Three of the larger voluntary sources of 
contributions have been (1) annual municipal government support, (2) 
the Municipal Bond Fee Assessment Program (a voluntary 3-year trial 
program that collected fees from participating issuers and concluded in 
2007), and (3) direct solicitation and grant funding. The officials 
provided the following information on these funding options and stated 
none of these options has succeeded in providing a long-term, 
permanent, and sufficient funding source to GASB: 

* A municipal government support campaign directed at the largest city 
and county governments, which peaked at nearly $150,000 in 2006, 
declined to less than $40,000 in 2009. 

* Collections from the Municipal Bond Fee Assessment Program declined 
from a high of nearly $450,000 in 2006 to residual collections of 
$12,000 in 2009. 

* Private funding by a not-for-profit organization, which totaled over 
$1 million over a 7-year period, ended in 2006. 

Stakeholder Views on the Manner and Level of GASB Funding: 

As required by the mandate, we consulted with key stakeholders on the 
manner and level at which GASB has been funded. The following is a 
summary of the stakeholder views: 

* Officials from most issuer organizations agreed that GASB needed a 
steady, sustainable stream of funding. 

* Several stakeholders were concerned with the level and nature of 
GASB's expenditures--such as the amounts spent on staff salaries and 
office space--as well as a perceived lack of transparency associated 
with its budget process. 

* Stakeholders expressed mixed views on whether certain GASB projects 
and initiatives were redundant with FASB projects or fell outside of 
what they considered the scope of GASB's mission of promulgating 
governmental accounting principles. For example, several stakeholders 
expressed concern regarding GASB's work on accounting for certain 
retirement benefits, referred to as Other Post-Employment Benefits, 
while others voiced support for it. 

[End of section] 

Enclosure 2: Scope and Methodology: 

To obtain views on the role and relevance of the Governmental 
Accounting Standards Board (GASB) in the municipal securities market, 
we consulted with key stakeholders through structured interviews and a 
roundtable forum held at GAO headquarters. These consultations included 
organizations representing state governors, legislators, local elected 
officials, and state and local finance officers. They also included 
users of state and local governments' financial statements, such as 
investors, rating agencies, and bond insurers; auditors; and other 
participants in the municipal securities market. Enclosure 3 provides a 
list of organizations that participated in our study. 

To prepare for the roundtable discussion, which was held on November 9, 
2010, we conducted 15 telephone interviews with stakeholders from the 
organizations mentioned above. We conducted these interviews to obtain 
a broad-based perspective on GASB and the municipal securities market 
and to develop relevant topics and questions for the roundtable. The 
roundtable discussion was organized around the following four general 
topics: 

* Topic 1: The use of GASB's accounting principles: 

* Topic 2: Benefits and limitations of generally accepted accounting 
principles (GAAP) reporting: 

* Topic 3: GAAP use after the credit crisis: 

* Topic 4: GASB's continuing role in the municipal securities markets: 

The roundtable was moderated by GAO officials responsible for this 
report. 

We also conducted a review of academic studies that analyzed the impact 
of financial statements prepared in accordance with GAAP on municipal 
securities markets. We limited our survey of academic literature to 
those studies using data from 1984 or later. We did this because GASB, 
the organization that determines GAAP for U.S. state and local 
governmental entities, was formed in 1984. We identified five relevant 
studies by searching the EconLit, the JSTOR, the National Bureau of 
Economic Research (NBER) Working Paper Series, and the Social Science 
Research Network (SSRN) databases.[Footnote 10] We reviewed these 
studies and identified their key findings and limitations. (See 
enclosure 4.) These studies were conducted for research purposes and 
their inclusion does not imply that we deem them to be definitive. 

To describe the manner and level at which GASB has been funded, we 
obtained and reviewed audited financial statements of the Financial 
Accounting Foundation (the Foundation) for the years ended December 31, 
2007, 2008, and 2009, which included certain key financial data of 
GASB. These audited financial statements presented comparative 
financial information for the year audited and the prior year. Thus, 
the financial statements for 2007 also included audited data for the 
year ended December 31, 2006. The scope of our work did not include 
verifying the work of the Foundation's independent public accountant. 
We provided key facts related to GASB funding to Foundation officials 
for their confirmation and incorporated their comments as appropriate. 

In addition, we: 

* interviewed officials from GASB and the Foundation to obtain and 
discuss unaudited financial data specific to GASB, including separate 
operating financial data and the percentage of the Foundation's 
allocation of common costs to GASB; 

* reviewed management's reports on financial responsibility and 
internal controls for the years 2007 through 2009 and the report of 
independent auditors for the Foundation's annual report to understand 
internal controls over the Foundation's financial reporting; and: 

* consulted with key stakeholders through teleconferences and meetings. 

For both objectives, as required by the mandate, we consulted with the 
principal organizations representing state governors, legislators, 
local elected officials, and state and local finance officers. To 
obtain the perspectives of a broad base of knowledgeable and interested 
stakeholders, we also consulted with users of state and local 
governments' financial statements, such as investors, rating agencies, 
and bond insurers; auditors; and other participants in the municipal 
securities markets, including GASB and the Foundation. 

The summary of views included in this report captures the collective 
discussion of roundtable participants and the comments made by 
stakeholders in numerous interviews and consultations. The views 
summarized are not attributable to any individual or organization and 
do not necessarily represent the views of any single organization, 
including GAO. 

It is important to note GAO is recognized for its expertise in the area 
of accounting and auditing standard setting. GAO staff have served on 
numerous advisory panels in this area, including the Governmental 
Accounting Standards Advisory Council (GASAC). Under the bylaws of the 
Foundation, the parent organization of GASB, GASAC 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. GAO's participation in GASAC's activities is in the 
capacity of an observer. We do not believe that GAO's role in serving 
on GASAC impaired our ability to perform this engagement objectively as 
mandated by Congress. 

We conducted our work from September 2010 to January 2011 in accordance 
with all sections of GAO's Quality Assurance Framework that are 
relevant to our objectives. The framework requires that we plan and 
perform the engagement to obtain sufficient and appropriate evidence to 
meet our stated objectives and to discuss any limitations in our work. 
We believe that the information and data obtained, and the analysis 
conducted, provide a reasonable basis for any findings and conclusions. 

[End of section] 

Enclosure 3: Organizations That Participated in GAO's Study: 

State Governors:
* National Governors Association: 

Legislators:
* Council of State Governments:
* National Conference of State Legislatures: 

Local Elected Officials:
* National Association of Counties:
* National League of Cities: 

State, Local, and Tribal Government Finance Officers:
* Association of Government Accountants:
* Association of School Business Officials International:
* Government Finance Officers Association:
* International City/County Management Association:
* National Association of College and University Business Officers:
* National Association of State Auditors, Comptrollers and Treasurers:
* National Association of State Budget Officers:
* National Association of State Retirement Administrators:
* Native American Finance Officers Association: 

Others: 

Analysts:
* Association of Financial Guaranty Insurers:
* National Federation of Municipal Analysts: 

Auditors:
* American Institute of Certified Public Accountants:
* Arizona Office of the Auditor General:
* Association of Local Government Auditors:
* Tennessee Division of State Audit: 

Investors:
* American Association of Individual Investors:
* Insurance Industry Investors:
* Investment Company Institute: 

Preparers/Issuers:
* City of Carrollton, Texas, Office of the Assistant City Manager for 
Finance:
* Colorado Office of the State Controller and Department of the 
Treasury:
* Maryland State Treasurer's Office and Office of the Comptroller:
* Tennessee Office of State and Local Finance: 

Rating Agencies:
* Fitch Ratings:
* Moody's Investors Service:
* Standard & Poor's: 

Securities Firms:
* Securities Industry and Financial Markets Association: 

Standard Setting/Regulators:
* Financial Accounting Foundation:
* Governmental Accounting Standards Board:
* Municipal Securities Rulemaking Board:
* U.S. Securities and Exchange Commission: 

[End of section] 

Enclosure 4: Academic Research on the Impact of GAAP on Municipal 
Securities Markets: 

We identified five academic studies that analyzed the impact of 
financial statements prepared in accordance with generally accepted 
accounting principles (GAAP) on municipal securities markets.[Footnote 
11] The five studies we identified are: 

* A.K. Gore, "The Effects of GAAP Regulation and Bond Market 
Interaction on Local Government Disclosure," Journal of Accounting and 
Public Policy 23, 2004, 23-52. 

* A.K. Gore, K. Sachs, and C. Trzcinka, "Financial Disclosure and Bond 
Insurance", Journal of Law and Economics 47(1), April 2004, 275-306. 

* W.R. Baber and A.K. Gore, "Consequences of GAAP Disclosure 
Regulation: Evidence from Municipal Debt Issues", The Accounting 
Review 83(3), 2008, 565-591. 

* J. Marlowe, "GASB 34's Information Relevance: Evidence from New Issue 
Government Debt," Apr. 13, 2010, available at SSRN: [hyperlink, 
http://ssrn.com/abstract=1589343]. 

* E. Plummer, P.D. Hutchison, and T. K. Patton, "GASB No. 34's 
Governmental Financial Reporting Model: Evidence on Its Information 
Relevance," The Accounting Review 82(1), 2007, 205-240. 

All five studies use regression analysis to estimate the effect of 
GAAP-basis financial disclosure on municipal securities markets. As a 
result, they all take into account a wide variety of factors that 
affect these markets. The following is a summary of the key findings of 
these studies and overall limitations of their data and methodology 
that we have identified. 

Summary of Key Findings: 

* State laws that require municipalities to issue financial statements 
according to GAAP may have a greater effect on disclosures by 
municipalities that issue relatively small amounts of debt than on 
disclosures by municipalities that issue relatively large amounts of 
debt. In 1995, municipalities that issued relatively large amounts of 
debt tended to issue financial statements containing more of the 
disclosure elements required by GAAP, even when they were not required 
to do so by the state.[Footnote 12] In contrast, municipalities that 
issued relatively small amounts of debt did not typically issue 
financial statements containing GAAP-required disclosure elements 
unless they were required to do so by the state.[Footnote 13] 

* GAAP-basis financial statements appear to be an alternative to bond 
insurance as a means for municipalities to communicate their 
creditworthiness to bondholders. In a state that does not regulate 
municipal disclosures, municipalities that insured more of their bonds 
in 1995-1999 reported fewer GAAP-required disclosure elements on their 
financial statements in 1995.[Footnote 14] Similarly, bonds issued in 
1995-1999 by municipalities that reported a large number of GAAP-
required disclosure elements on their financial statements in 1995 were 
less likely to be insured than bonds issued by municipalities that 
reported a small number of GAAP-required disclosure elements on their 
financial statements.[Footnote 15] 

* Mandating GAAP-basis financial statements for all municipalities 
appears to be associated with lower public debt interest costs, but 
does not impact the debt market so significantly that the overall 
amount of debt issued is affected. In 1995-2002 large municipalities in 
states that required GAAP-basis financial statements issued about the 
same amount of debt as those in states that did not regulate municipal 
financial disclosure, while small municipalities in states that 
required GAAP-basis financial statements issue more debt than those in 
states that do not regulate financial disclosure.[Footnote 16] 

* In 1995-2002, public debt was a larger fraction of total debt issued 
by 
municipalities in states that require municipalities to issue GAAP-
basis financial statements than it was in states that do not regulate 
municipal financial disclosure.[Footnote 17] 

* Interest costs on new public debt issued in 1995-2002 by 
municipalities in states that required GAAP-basis financial statements 
were about 16 basis points lower than interest costs on new debt 
issued in 1995-2002 by municipalities in states that did not regulate 
financial disclosure; the difference in interest costs was smaller for 
large municipalities and larger for small municipalities.[Footnote 18] 

* Changes in the disclosure elements required by GASB in 1999, and 
phased in over 2001-2004, appear to have made GAAP-basis financial 
statements more useful to market participants. Controlling for other 
factors, credit ratings and interest costs on municipal bonds issued 
in 2003-2007 were correlated with information that became available 
when municipalities prepared government-wide financial statements on 
the full accrual basis of accounting.[Footnote 19] For example, it is 
now a GAAP requirement to report government-wide unrestricted net 
assets and revenue on a full accrual basis, whereas under the previous 
GAAP financial reporting model it was not. Controlling for other 
factors, the credit ratings on a municipality's bonds were positively 
correlated with the ratio of unrestricted net assets to total revenues 
in 2003-2006.[Footnote 20] 

Overall Limitations of the Studies: 

* To the extent that studies use data for a specific time period or 
for a subset of states, municipalities, and types of debt, the results 
may not be current or applicable to the universe of states, 
municipalities, and types of debt. 

* The reported effects of state laws requiring municipalities to issue 
GAAP-basis financial statements cannot necessarily be interpreted as 
the effects of GAAP-basis financial disclosure by municipalities. 
Studies that analyze the effects of such state laws do not measure the 
actual level of GAAP disclosure by municipalities. Because enforcement 
of these laws may not be perfect, and because municipalities in states 
that do not require GAAP disclosures may choose to prepare GAAP-basis 
financial statements anyway, what the existence of these mandates 
actually measures is not clear. State laws requiring municipalities to 
issue GAAP-basis financial statements may indicate the extent to which 
states are involved in the municipal accounting process in general, 
rather than the extent to which municipalities prepare GAAP-basis 
financial statements. 

* The reported effects of state laws requiring municipalities to issue 
GAAP-basis financial statements may be a result of other factors, 
rather than the result of municipalities issuing GAAP-basis financial 
statements. Studies that analyze the effects of such state laws do not 
fully account for differences among states that do and do not mandate 
these requirements. Specifically, states that require municipalities to 
issue GAAP-basis financial statements may differ from states that do 
not in ways that affect the quantity, type, and cost of municipal debt. 
The reported effects of these state laws may be a result of those other 
differences, rather than the result of municipalities issuing GAAP-
basis financial statements. 

* None of the studies estimates the cost to municipalities of issuing 
GAAP-basis financial statements. 

[End of section] 

Enclosure 5: GASB Program Expenses: 

Table 1 provides information on the Governmental Accounting Standards 
Board's (GASB) program expenses as reported in the Financial Accounting 
Foundation's (the Foundation) Statements of Activities and related 
notes. 

Table 1: Schedule of GASB Program Expenses, 2006-2009: 

Salaries and wages: 
2006: $2,951,000; 
2007: $3,108,000; 
2008: $3,535,000; 
2009: $3,594,000. 

Employee benefits: 
2006: $749,000; 
2007: $770,000; 
2008: $857,000; 
2009: $1,133,000. 

Occupancy and equipment expenses: 
2006: $228,000; 
2007: $224,000; 
2008: $237,000; 
2009: $218,000. 

Professional fees: 
2006: [A]; 
2007: $73,000; 
2008: $109,000; 
2009: $57,000. 

Other operating expenses: 
2006: $594,000; 
2007: $231,000; 
2008: $271,000; 
2009: $285,000. 

Total program expenses: 
2006: $4,522,000; 
2007: $4,406,000; 
2008: $5,009,000; 
2009: $5,287,000. 

Source: GAO analysis of 2007, 2008, and 2009 Financial Accounting 
Foundation Annual Reports. 

[A] The Foundation did not itemize professional fees in its 2006 
financial statements. 

[End of table] 

[End of section] 

Enclosure 6: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Paula M. Rascona, (202) 512-9816 or rasconap@gao.gov; 
Orice Williams Brown, (202) 512-8678 or williamso@gao.gov. 

Acknowledgments: 

In addition to the contacts named above, Marcia Buchanan, Paul Kinney, 
and Karen Tremba, Assistant Directors; Laura Acosta, Silvia Arbelaez-
Ellis, William Chatlos, Francine DelVecchio, Rachel DeMarcus, Abe 
Dymond, Patrick Frey, Marci Goasdone, Jacquelyn Hamilton, Eric 
Holbrook, Stefanie Jonkman, Courtney LaFountain, Edward Nannenhorn, 
Mitchell Owings, Laura Pacheco, Robert Pollard, Paul Proctor, Lisa 
Reynolds, and Kim Sureff made key contributions to this report. 

[End of section] 

Footnotes: 

[1] Pub. L. No. 111-203, §978(b), 124 Stat. 1376, 1925 (July 21, 2010). 

[2] MSRB was established by Congress to promote a fair and efficient 
municipal securities market. MSRB makes rules regulating securities 
firms (but not issuers) in the municipal securities market. The 
Securities and Exchange Commission (SEC) is charged with oversight of 
MSRB. 

[3] In this report, we use the term "stakeholder" to mean a person or 
group with an interest in GASB and its impact on the municipal 
securities markets. 

[4] For the purposes of this work, the term "analysts" refers 
collectively to institutional or retail investors, rating agencies, and 
bond insurers--entities that employ professional staff who analyze the 
credit quality of municipal bonds--that we interviewed or participated 
in our roundtable. "Issuers" refers to those state and local 
governments and associations representing state and local governments 
and their finance officers that we interviewed or who participated in 
our roundtable. Where appropriate, we attribute the comments to 
subgroups. 

[5] National Association of State Comptrollers, Time to Complete the 
States' CAFRs, Fiscal Years 2005, 2006, 2007, 2008 and 2009. Received 
from the National Association of State Auditors, Comptrollers, and 
Treasurers via e-mail on November 19, 2010. 

[6] Standard & Poor's, For The U.S. Bond Insurance Market, There May Be 
No Turning Back, January 20, 2010. 

[7] FASB, organized in 1973, establishes standards of accounting and 
reporting for private sector entities, including businesses and not-
for-profit organizations. Like GASB, FASB is an operating component of 
the Foundation. 

[8] In accordance with section 109 of the Act, FASB is funded by an 
annual accounting support fee allocated among securities issuers based 
on each issuer's proportional market capitalization. 

[9] If SEC exercised this authority, SEC said it would require the 
Financial Industry Regulatory Authority (FINRA), a registered national 
securities association under the Securities Exchange Act of 1934, to 
establish the accounting support fee. 

[10] The American Economic Association provides EconLit, an electronic 
bibliography of economics literature, including journal articles and 
working papers; JSTOR is a nonprofit service that offers a digital 
archive of academic journals; the NBER Working Paper Series is a 
database of working papers submitted by NBER researchers; and SSRN 
publishes abstracts and working papers submitted by researchers, 
journals, publishers and institutions. 

[11] See enclosure 2 for a description of our literature review 
methodology. 

[12] Gore (2004). This study examines financial statements issued by 
municipalities in Michigan and Pennsylvania in 1995. Michigan requires 
municipalities to issue GAAP-basis financial statements, and 
Pennsylvania does not. The study measures the extent to which a 
municipality issues GAAP-basis financial statements using a checklist 
of 18 disclosure elements required by GAAP. A municipality's financial 
statement may include some, but not all, of these disclosure elements. 
For example, municipalities in Pennsylvania reported a median of 13 of 
the disclosure elements in their financial statements, and 
municipalities in Michigan reported a median of 17 of the disclosure 
elements in their financial statements. 

[13] Gore (2004). 

[14] Gore, Sachs, and Trzcinka (2004). This study measures the extent 
to 
which a municipality issues GAAP-basis financial statements using the 
same method as Gore (2004); see footnote 2. 

[15] Gore, Sachs, and Trzcinka (2004). 

[16] Baber and Gore (2008). The study did not examine municipalities in 
states that regulate financial disclosure but that do not require all 
municipalities to issue GAAP-basis financial statements. 

[17] Baber and Gore (2008). Municipalities can issue public debt in the 
form of municipal bonds or they can negotiate arrangements with private 
lenders, such as banks, insurance firms, or pension funds. 

[18] Baber and Gore (2008). 

[19] Marlowe (2010). In 1999, GASB issued Statement 34, "Basic 
Financial Statements--and Management's Discussion and Analysis--for 
State and Local Government," which established a new requirement that 
state and local governments present, among other information, a set of 
government-wide financial statements prepared on an accrual basis, in 
addition to the fund accounting previously required. This study 
examined the relevance of information presented in the government-wide 
financial statements of municipalities to credit analysts and 
investors. 

[20] Marlowe (2010). Plummer, Hutchison, and Patton (2007) found a 
similar result: municipal credit ratings for Texas school districts in 
2003 were correlated with some of the full-accrual disclosure elements 
in their 2002 financial statements. 

[End of section] 

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