A Brand New Outsourcing Market
The Government Accounting Standards Board (GASB) is responsible for establishing accounting principles for governmental agencies. The GASB Statement 34 redefines the basic financial reporting framework that governmental agencies currently use, requiring them to conform to accrual accounting. It also requires infrastructure asset valuations to be included in the financial statements of the reporting agency. Many budgets that balance today will not balance under the new rules.
GASB 34 actually started out as GASB 14. It came out for discussion and remained such a hot topic over the years that 20 subsequent statements were written, set aside, and then held out to finally become Statement 34. The changes have been debated for 10 years, and GASB has chosen this point in time to release the new standards because it believes there is now enough acceptance to achieve majority status and become generally accepted accounting principles (GAAP).
The transition to the new model laid out in Statement 34 is expensive, often requiring new accounting systems and software, management and budget practices, and an expensive inventory and valuation of all infrastructure assets. For many local governments, outsourcing is the only means by which they will be able to implement the requirements of GASB 34.
Assisting Public Agencies with GASB 34
Caporicci, Cropper & Larson, a California accounting firm, has teamed up with Charles Abbott and Associates, a California engineering and infrastructure management services firm, to form the GASB Statement 34 Strategic Alliance. They are beginning to assist California’s local government agencies with GASB 34 implementation, including asset inventories, infrastructure valuations, conversion of financial statements to the new corporate-style format, new budgetary comparison schedules, and new accounting systems to accumulate the required financial data. The Strategic Alliance offers local governments the expertise of private sector accounting and budgeting, as well as reduced costs.
The Alliance tested its methodology with the City of Corona as its beta site in March through May of 2000, met with great success there and is now ready to roll out the offering to other clients. “We have at least five other cities that we have relationships with already that have said they want to be next,” says Gary Caporicci, partner with the accounting firm forming the Strategic Alliance. “And the engineering firm that is our alliance partner serves over 50 cities and has a number of clients saying they want to be next on the list.” At the same time, he says other clients have said they prefer waiting until all is said and done and the bugs are worked out. There is little time to waste, though. Deadlines for implementation are based on revenues and start in fiscal years beginning after June 15, as follows:
- Phase 1: governments with annual revenue over $100 million – year 2001
- Phase 2: governments with $10 – $100 million – year 2002
- Phase 3: governments with under $10 million – year 2003.
Retroactive reporting of infrastructure is required four years after the effective dates. Additionally, one set of financial statements will include a comparison of current to the prior year’s financial position, which means governments will need to upgrade to the GASB 34 requirements a year before they actually implement the new reporting standards.
The Exception Clause
Caporicci admits he has heard some grumblings about adding the infrastructure assets to the balance sheet and comments that some governments might choose to issue the audit with the “exception clause.” But he strongly recommends not doing that. “As CPAs in the audit reports, we will be forced to take an adverse opinion on lack of accounting and presenting financial reporting on infrastructure. And that is a serious qualification in our report – that is next to the worst. There are only four reports we can give. One is the best, and the exception clause is number three. It says that it clearly doesn’t conform to generally accepted accounting principles. It will clearly be an adverse opinion. And that is pretty bad.”
He says that when those organizations go out to the debt financing market, the opinion will be read and they will be asked “What’s going on here? You have infrastructure – how much is it? You don’t know? So how can I compare you when I put my underwriting people and my credit analysis people through the review of your financials? They are not going to be able to compare you to industry numbers.”
This, after all, is one of the primary reasons for this government-wide approach to reporting. Most municipal bonds finance capital assets, so the relevance of the information to the finance professionals is high. One of GASB 34’s goals is to provide more information about the cost of government services, and that includes infrastructure assets.
Caporicci believes the primary reason some officials are considering the exception clause is the cost of implementing the process internally. “They will have to spend money to hire an engineering firm to come in and do an inventory and then have to set up internally a maintenance and management system for that and have to hire people just to keep track of all of the infrastructure,” he says. “I think we will also see that there will be some people thinking this way and deciding not to do it, but they will really stand out. If they put it to the test, they will lose. These are the accounting standards that we will have to follow.” The solution, then, is to outsource the implementation.
Branching Out In the New Market
Besides the market that has opened up to private accounting and engineering firms, GASB 34 presents a wealth of opportunities for other outsourcing suppliers. Once the assets are inventoried and valued and balance sheets don’t balance, governments are likely to opt for privatizing an asset or outsourcing the maintenance or service. “Not many cities will want to bring on permanent, expensive maintenance staff in the public works area, for instance,” says Caporicci. “This would seem to be a natural offshoot for outsourcing opportunities.” The GASB 34 Strategic Alliance is currently finalizing its business and marketing plans and is considering expanding the alliance partners to take advantage of these new opportunities just around the corner.
About the Author: Ben Trowbridge is an accomplished Outsourcing Consultant with extensive experience in outsourcing and managed services. As a former EY Partner and CEO of Alsbridge, he built successful practices in Transformational Outsourcing, Managed services provider, strategic sourcing, BPO, Cybersecurity Managed Services, and IT Outsourcing. Throughout his career, Ben has advised a broad range of clients on outsourcing and global business services strategy and transactions. As the current CEO of the Outsourcing Center, he provides invaluable insights and guidance to buyers and managed services executives. Contact him at [email protected].