The Public Policy

SOX for Uncle Sam

Shouldn't government be subject to the same reporting standards as corporate honchos?

By 3.25.13

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Strange as it may seem in today’s stalemated environment, Congress is capable of acting quickly when spurred on by crises or scandals: The U.S.A. Patriot Act in response to September 11, the Sarbanes-Oxley (SOX) Act in response to major corporate and accounting scandals.

Measurement of the federal deficit is another national scandal warranting prompt attention by the Congress. No one seems to know just exactly what the budget deficit is (mainly because we don’t have a firm federal budget, but that’s another story). 

The deficit calculation, of course, should be as simple as Accounting 101. No sophisticated mathematical solutions or algorithms are involved. Just simple subtraction. If expenditures exceed revenues, you have a deficit, the amount of which is determined by simple subtraction any 2nd grader could perform. 

Maybe Congress should pass a SOX Act for Uncle Sam to ensure proper accounting procedures are employed at the federal level and we can all know just how big the federal budget deficit really is.

SOX was passed in 2002 in response to the wave of notorious corporate corruption scandal such as Enron, WorldCom, and Tyco. The statute mandates tightened auditing procedures, verified financial reports, and personal accountability of the CEO and CFO for the accuracy of financial reports. 

The law applies to all publicly traded companies. Harsh civil and criminal penalties can be imposed for noncompliance. The purpose of the statute is to ensure the accuracy of corporate financial reports and thereby restore investor confidence which was so badly shaken by the series of scandals. It all makes perfect sense. And, it has worked.

Uncle Sam issues regular financial reports as well. Taxpayer confidence in these reports has also been shaken by bogus numbers and erroneously optimistic assumptions, designed to make the administration or the loyal opposition look more prescient and fiscally responsible.

The federal government is not covered by the SOX safeguards. Maybe it should be. After all, the same basic principles that led to the passage of SOX might bolster our own waning confidence in government. What’s good for the goose of American industry should be good for the gander of governmental accounting.

Deficit measurement at the federal level (and many states) is a function of accounting “smoke-and-mirrors.” It’s simply “voodoo economics,” to borrow what George H.W. Bush famously said in 1980. There is no accountability whatsoever for the budget deficit numbers casually thrown about by the White House, Democrats, or even the non-partisan Congressional Budget Office. A good accountant should be able to answer the question, “What’s the deficit this year?” to the last penny. And, a good auditor should be able to verify those figures or report irregularities just as easily. 

In corporate America, SOX was designed to, and has been successful in, addressing just those very same issues. Company CEOs and CFOs, who are required to certify financial reports under SOX, regularly issue “restatements of earnings” rather than risk suffering the enhanced criminal penalties under the new statute.

A SOX-style law covering the federal government might sweep the smoke-and-mirrors and voodoo out of government accounting. If the President and Secretary of the Treasury of the United States were required to certify government financial reports under threat of criminal prosecution, we would probably witness the government equivalent of a corporate “restatement of earnings” quite frequently. “Whoops, sorry, the federal deficit was underestimated. Here’s a restatement of the budget deficit.”

Regrettably, Washington operates on a hypocritical “do as we say, not as we do” philosophy. When new laws are passed regulating corporate America, Washington bureaucrats are often exempted. For example, for decades the thicket of employment discrimination, workplace safety, and other laws that heavily regulate the American workplace, carefully exempted Congress from their coverage. In 1991, the exemption was repealed and for the first time Congress was required to play by the same rules as American industry.

It’s time for Congress to lead by example rather than exemption in the financial accounting arena. A government version of SOX should be enacted to ensure truth in government accounting and help restore the faith of taxpayer investors in federal budget realities.

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About the Author

Gerald D. Skoning is a Chicago lawyer who specializes in labor and employment law.