About SEA Reporting Performance Measurement
The following text is adapted from a letter to the Trustees of the Financial Accounting Foundation in August 2002.
“In 1971 and 1972, the AICPA established two study groups to address criticism of the standards-setting process and the work of the Accounting Principles Board (APB). One study group, often referred to as the Wheat Committee, studied the structure of the accounting standards-setting process and recommended the establishment of what became the FAF, the FASB, and the FASAC.1 The Wheat Committee report recognized that “before a judgment can be arrived at as to how accounting principles should be established, it is necessary to inquire about the scope and nature of the task. What does ‘the establishment of accounting principles’ mean?” (page 13). The report found the term accounting principles to be elusive (page 13) and indicated that the work of the APB was more closely aligned with the establishment of accounting standards (page 19). It stated that “financial accounting and reporting are not grounded in natural laws as are the physical sciences, but must rest on a set of conventions or standards designed to achieve what are perceived to be the desired objectives of financial accounting and reporting” (page 19). The report proceeded to state that “the work of the ongoing standard-setting body [which became the FASB] should be to develop standards for preparing financial accounting information that will be consistent with these objectives” (page 19).2
The identification of objectives for financial reporting was the primary goal of the second study groupoften referred to as the Trueblood Committee. The Trueblood Committee’s report3 stated that the “basic objective of financial statements is to provide information useful for making economic decisions” (page 13). It recognized that “accountability is a broad term that encompasses stewardship” (page 25) and that management (of a business) is accountable for progress toward the principal goal of a commercial enterpriseto maximize cash return to owners. Therefore, financial statements should provide information that assists users in assessing whether management is using “resources effectively in achieving the primary enterprise goal” (page 26). In Chapter 8, the committee addressed the issue of objectives of financial statements for governmental and not-for-profit organizations. They recognized that maximizing return of cash was not the central goal of these organizations, but that financial statements nonetheless should provide information that serves users’ needs (page 49).
The Trueblood Committee commented that indicators of earning power have limited value for assessing the performance of governmental and not-for-profit organizations. More useful are indicators that provide information about the achievement of the organization’s principal goal(s), whether it be reducing poverty, encouraging research, or providing a quality education. They recognized that measures of performance useful for one organization might be meaningless for another, but that performance must be measured for each. They noted that “in government, spending on poverty programs or agricultural supports should be assessed in terms of changes in the poverty level or improvement in the agricultural economy” (page 50); these measures have come to be called program outcomes. The committee recognized that reporting on accountability for performance and attainment of goals is as important for not-for-profit and governmental organizations as it is for commercial enterprises, except that the goals are different and, therefore, the financial reporting information needed is also different. Consequently, they recommended that:
An objective of financial statements for governmental and not-for-profit organizations is to provide information useful for evaluating the effectiveness of the management of resources in achieving the organization’s goals. Performance measures should be quantified in terms of identified goals. [page 51]
The Trueblood Committee then returned to the relationship of business enterprise goals to social goals. Here they recommended that financial statements “report on those activities of the enterprise affecting society which can be determined and described or measured and which are important to the role of the enterprise in its social environment” (page 55).
FASB Concepts Statement No. 1, Objectives of Financial Reporting by Business Enterprises (November 1978), established the objectives of general purpose external financial reporting by business enterprises. The Statement noted that financial reporting is “not restricted to information communicated by financial statements” (paragraph 5). It then noted that the scope of financial reporting was “extremely broad” and that “the [FASB] will draw boundaries, as needed, in other parts of the conceptual framework project or in financial accounting standards” (paragraph 5). The Statement also noted that “financial reporting includes not only financial statements but also other means of communicating information that relates, directly or indirectly, to the information provided by the accounting system” and that “information communicated by means of financial reporting other than financial statements may take various forms and relate to various matters” (paragraph 7). Included as examples were descriptions of an enterprise’s social or environmental impact. The Statement went on to mention that such reports may give financial information other than financial statements or may give only nonfinancial information (paragraph 7).
During the seven years following the issuance of Concepts Statement 1, which was based in significant part on the Trueblood Committee’s work, the FASB proceeded to issue Concepts Statements on the qualitative characteristics of accounting information (Concepts Statement 2), the elements of financial statements of business enterprises (Concepts Statements 3 and 6), the objectives of financial reporting by nonbusiness organizations (Concepts Statement 4), and recognition and measurement in financial statements of business enterprises (Concepts Statement 5). Concepts Statement 5 included a table illustrating the relationship between basic financial statements, the areas directly affected by then-existing FASB statements, financial reporting, and all information useful for investment, credit, and similar decisions. (See the attached copy of Table 5 from FASB Concepts Statement 5.)
FASB Concepts Statement No. 4, Objectives of Financial Reporting by Nonbusiness Organizations (December 1980), was preceded by two research reports that were considered in its preparation. The first was published in 19784 and discussed a series of issues related to the concepts of financial accounting in nonbusiness organizations and identified the need for information about management performance including an interest in how well money was spent (page 50). The research report also highlighted the difference in goals between profit-oriented and nonprofit organizations as a factor affecting the information needed by users (pages 166 and 167).
The second research report focused on the reporting of service efforts and accomplishments for certain types of nonbusiness organizations.5 The research report concluded that “to the extent that general purpose external financial reporting aims to provide information about organizational performance, service efforts and accomplishments information would be an appropriate component of financial reporting” (page ii). The report also recognized that “standard setting for service efforts and accomplishments reporting would involve many complex issues and might take a long time.” (page ii).
FASB Concepts Statement 4 noted that “general purpose external financial reporting focuses on providing information to meet the common interests of external users who generally cannot prescribe the information they want from an organization” (paragraph 10). The Statement also mentioned that “nonbusiness organizations generally have no single indicator of performance comparable to a business enterprise’s profit. Thus, other indicators of performance usually are needed” (“Highlights” page).
While recognizing that there are many similarities between nonbusiness organizations and business organizations, FASB Concepts Statement 4 further recognized that there are certain inherent differences in the primary goals of these types of organizations that lead to the need for additional (or perhaps slightly different) information. The Statement noted that “financial reporting should provide information to help present and potential resource providers and other users in assessing the services that a nonbusiness organization provides and its ability to continue to provide those services. They are interested in that information because the services are the end for which the resources are provided. The relation of the services provided to the resources used to provide them helps resource providers and others assess the extent to which the organization is successful in carrying out its service objectives” (paragraph 38).
The Statement further noted that information included in financial reports should also be useful in assessing management stewardship and performance. “Managers of an organization are accountable to resource providers and others not only for the custody and safekeeping of organization resources, but also for their efficient and effective use” (paragraph 40). The Statement stated that “financial reporting should provide information about the performance of an organization during a period” and that “information about the service efforts and accomplishments of an organization” are a major part of “the information most useful in assessing its performance” (paragraphs 40 and 47). The Statement concluded that financial reporting should provide information about the service efforts of a nonbusiness organization and that “techniques for measuring the costs of significant programs or services are well developed” (paragraph 52). The Statement also concluded that, ideally, financial reporting should provide information about service accomplishments, but did recognize that measures of service accomplishments were “generally undeveloped” and might not then satisfy the qualitative characteristics of accounting information. But if such measures were developed and satisfied the qualitative characteristics, they should be included in financial reports (paragraph 53).
In 1981, the National Council on Governmental Accounting (NCGA), which preceded the GASB, published a two-volume research report.6 This research study, which was funded by a U.S. Department of Housing and Urban Development grant to the Municipal Finance Officers Association (now the GFOA), looked at the structure and environment of state and local government and identified potential users and their decision and information needs. Based on this research, the study set forth objectives of accounting and financial reporting for governmental units.
The study stated that the “overall goal” of accounting and financial reporting was:
To provide (1) financial information useful for making economic, political and social decisions, and demonstrating accountability and stewardship, and (2) information useful for evaluating managerial and organizational performance. [Vol. I, page 107]
The study limited the type of information to be provided for decision making to “financial,” which the study stated had not been defined but suggested information measurable in monetary units (page 108). The study then noted that “information useful for evaluating managerial and organizational performance has not been limited to ‘financial’ information. This is because of the importance of performance evaluation, the lack of alternative sources of information useful for this purpose, and the generally recognized role of accounting in measuring and reporting operating results” (page 108).
The study went on to recognize that “achieving some of the proposed objectives may be beyond the current state of the art in measurement. It is important, however, to distinguish the need for information from the current capacity to provide it. These objectives are based on user needs, and if a need exists it is important to identify it and encourage the development of measures that will satisfy it” (page 109).
As basic objectives under the area of organizational and managerial performance, the study listed the following:
V. To provide information useful for evaluating managerial and organizational performance.
- For determining the cost of programs, functions and activities in a manner which facilitates analysis and valid comparisons with established criteria, among time periods, and with other governmental units.
- For evaluating the efficiency and economy of operations of organizational units, program activities and functions.
- For evaluating the results of programs, activities, and functions and their effectiveness in achieving their goals and objectives.
- For evaluating the equity with which the burden of providing resources for governmental operations is imposed. [pages 122124]
In April 1982, the NCGA issued its Concepts Statement 1, Objectives of Accounting and Financial Reporting for Governmental Units. The overall goal of accounting and financial reporting for governmental units was stated as being “to provide: 1) financial information useful for making economic, political and social decisions, and demonstrating accountability and stewardship; and 2) information useful for evaluating managerial and organizational performance” (paragraph 8). Among the objectives in the Concepts Statement was the same Objective V cited in the previous discussion on the NCGA 1981 research report.
In the discussion of this objective, the NCGA noted that “although profit is not a relevant measure of performance in governmental units, some reasonable measures of performance, both for the organization as a whole and for particular programs and activities, are necessary” (paragraph 61). They went on to recognize that measures of effectiveness had not progressed very rapidly at that time, but that it was important to distinguish a need for information from the ability to provide such information within the current state of the art (paragraph 65).
In its initial project agenda adopted in 1984, the GASB listed Service Level and Statistical Data Reporting as its project 3-5 and stated that this project “considers whether state and local governmental financial reports should include information concerning service inputs and outputs (from the viewpoint of both efficiency and accomplishments).”7 This was followed in 1985 by a Board resolution encouraging experimentation by state and local governments in reporting infrastructure assets and service efforts and accomplishments.8
In GASB Concepts Statement No. 1, Objectives of Financial Reporting (May 1987), accountability was once again (as in the Trueblood Committee report, the FASB Concepts Statements, and the NCGA Concepts Statement) noted as being the cornerstone of all financial reporting in government (paragraph 56). The Board stated that it was “aware that applying the broad concept of public accountability to financial reporting by state and local governments creates the potential to extend reporting beyond current practice” (paragraph 57). As part of identifying financial reporting objectives, the essential nature of providing information to assist users in assessing accountability and in making economic, social, and political decisions was reaffirmed, and it was noted that accountability is the paramount objective from which all other objectives must flow (paragraph 76).
The first objective listed was that financial reporting should assist in fulfilling government’s duty to be publicly accountable and should enable users to assess that accountability (paragraph 77). This major objective was supported by three subobjectives. The subobjectives stated that financial reporting should provide information to determine whether current-year revenues were sufficient to pay for current-year services and provide information to assist users in assessing the service efforts, costs, and accomplishments of the governmental entity (paragraphs 77a and 77c). The paragraph went on to explain: “This information, when combined with information from other sources, helps users assess the economy, efficiency, and effectiveness of government” (paragraph 77c).”
1Establishing Financial Accounting Standards, Report of the Study on Establishment of Accounting Principles (AICPA, March 1972).
2The objectives cited were those that had been developed by the second study group-called the Study Group on the Objectives of Financial Statements, or the Trueblood Committee. The Trueblood Committee report, Objectives of Financial Statements, was not issued until October 1973, but the two study groups worked concurrently.
3Objectives of Financial Statements, Report of the Study Group on the Objectives of Financial Statements (AICPA, October 1973). The report appears to use the term financial statements in a broad sense to identify what is now commonly referred to as financial reporting or general purpose external financial reporting. In FASB Concepts Statement 1 the FASB draws a distinction between “financial statements” and “financial reporting” which they state includes “financial statements” and other means of communicating information about an enterprise’s resources, obligations, earnings, etc. (paragraphs 5 and 7).
4FASB Research Report, Financial Accounting in Nonbusiness Organizations: An Exploratory Study of Conceptual Issues, by Robert N. Anthony (1978).
5FASB Research Report, Reporting of Service Efforts and Accomplishments, by Paul K. Brace, Robert Elkin, Daniel D. Robinson, and Harold I. Steinberg (1980).
6NCGA, Objectives of Accounting and Financial Reporting for Governmental Units: A Research Study (1981).
7Cited in GASB “Action Report” dated September 1984, page 3.
8Cited in GASB “Action Report” dated September 1985, page 5.