Fatal Disclosure

In the 14 years CE has been judging annual reports, our veteran AR watcher, Sid Cato, has taken to task [...]

November 1 1997 by JP Donlon


In the 14 years CE has been judging annual reports, our veteran AR watcher, Sid Cato, has taken to task all those ARs who have sought to mislead, obfuscate, or otherwise lull shareholders and others about a company’s true strengths and prospects. Since private industry faces such scrutiny why shouldn’t government? If the executive branch had to produce an annual report in one single concise volume under SEC rules and guidelines, how would it rate? Don’t hold your breath. It won’t happen anytime soon. McGraw-Hill publishes an “Annual Report of the United States of America” compiled by Meredith Bagby, a financial analyst at Morgan Stanley who published the annual’s first edition in 1994 while a senior at Harvard University.

In many ways Bagby offers a useful reference guide to the economic and social state of the nation. I did not realize, for example that Arthur Andersen and Co. was commissioned in 1993 as a consultant to the Treasury Department on the production of the consolidated financial statements (CFS) that the federal government is required to produce. It’s interesting that the folks at Arthur Andersen had a few problems with the way Treasury presented information. It seems Treasury’s accuracy and completeness in its reports is, uh, a tad looser than GAAP would normally allow. The reliability of the underlying information used with CFS rests with the individual federal entities. Much of this data “is not currently subject to audit or is considered unreliable as a result of audit.” One can only imagine how the auditor’s statement in an official U.S. Government AR would read.

This, after all, is a world in which a reduction in appropriation growth is called a budget cut. So management discussion and analysis already begins on the far side of Alice’s looking glass world. More disturbing is Stephen Moore’s recent policy analysis, “How the Budget Revolution Was Lost.” Despite the decline in the budget deficit in recent years, federal social spending is now at record levels, both in real dollars and as a share in national output. Moore, the director of fiscal policy studies at the Cato Institute, shows that, far from delivering on its promised revolution to shrink the size of the federal government, the Republican Congress has presided over record-breaking increases in social spending. Almost all the reductions are attributable to cuts in defense. “In their first three budgets, the Republicans have increased domestic spending by $183 billion compared to a $155 billion increase in the three years prior to GOP control of Congress. Not a single cabinet agency has been eliminated. And only a handful of the 300 federal programs that were targeted for closure has actually been terminated,” according to Moore. In other words, the impressive reduction in the deficit since the end of the 1980s has little to do with the so-called neglect of social programs. Nor has it much to do with the two income tax rate increases enacted in 1990 and in 1993.

If the Republicans are in default on the Contract with America, the same can be said for President Clinton and Vice President Gore’s claim “to reinvent” government by making it leaner and more productive. Moore documents that there are 400,000 more federal workers today than there were 35 years ago under Kennedy. Most of the force reductions that have been made have come at the expense of the military. For the first time since WW II, the postal service employment exceeds civilian defense department employment. When state and local government job increases are included, an even more staggering revelation comes into view. From 1989 to 1997, government jobs have grown more than employment in manufacturing, mining, finance, insurance, and real estate combined.

Time to call in the consultants.