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About 20 years ago, Reagan administration OMB Director David Stockman told a congressional committee that the federal government's budget accounting was a disgrace. Stockman said that they would all be in jail if the Securities and Exchange Commission, which oversees corporate financial accounting, had the same responsibility over the federal budget.

Interestingly, Stockman's remarks ring much truer today than when he made them more than two decades ago.

One can't read the business section of any major daily newspaper these days without seeing a story about some corporation that has had to restate its financial results because of a worse-than-expected performance. Many of these restatements are the result of the new and much tougher reporting requirements of the landmark Sarbanes-Oxley Act, or SOX, which was enacted last July in response to the various corporate scandals of the previous few years and is already having a positive impact.

The corporate restatement stories usually cause at least a temporary drop in the price of a company's stock, produce huge questions about internal controls and - as happened most recently at Freddie Mac - sometimes result in wholesale changes in senior management.

But the biggest material restatement of all - the federal government increasing its projected losses in the current fiscal year by almost 33 percent, from a $300 billion to a $400 billion deficit - has been little more than a one-day story that has caused few if any serious repercussions.

One has to wonder whether the restatement would have been as large, or the consequences for those involved so small, if even the basic principles of SOX were applied to the federal budget.

For example, one of the most basic changes made by Sarbanes-Oxley is a requirement that auditors report to someone other than the company's management. The board of directors appointed an audit committee to perform this task because the company's management prepares the financial statements, and someone whose livelihood is not dependent on the approval of the CEO and CFO is needed to review them.

When it comes to the federal budget, however, the board of directors and management are the same, and that makes independent financial reporting all but impossible. Even if there were an independent external audit of the budget, it is hard to see who would pay attention if significant differences were found from what management said.

A case can be made that both the General Accounting Office and the Congressional Budget Office provide independent assessments of federal budget estimates. But, unlike the situation created by SOX, federal budget management does not need to abide by the judgment of either of these organizations, and neither GAO nor CBO has an audit committee to advise when their concerns are ignored, let alone when they discover fraud.

In addition, although both GAO and CBO fiercely guard their independence, there will always be some question as to exactly how independent they truly are, as what they get paid each year depends on a Congress that - like now - wants to support management, or one that is devoted to bringing it down.

A second major change put in place by SOX is that senior management now must take personal responsibility for a company's financial reporting. A CEO is now subject to criminal penalties if the reports are determined to be inaccurate. This has led to significant changes in many companies because executives have demanded more information and assurances from lower level officers than ever before.

When it comes to the federal budget, however, no one person has the responsibility for accurate reporting. Even if you look only at those parts of the budget that can be controlled, excluding changes that result from unanticipated legislation, no one - including the director of OMB and the Treasury secretary - generally believes that he or she bears any personal responsibility for getting the spending and revenue numbers right. Indeed, those directors seldom even admit that the government divisions they head bear any the blame for inaccuracies. This is the case even when it is shown that they ignored warning signs or went with assessments that had a low probability of being correct.

A SOX-like requirement would force the government's CEO - the president - to confirm the accuracy of the numbers. That clearly is not something that happens now, even though the budget that is sent to Congress each year is put together in the president's name.

A third major SOX requirement - that a company have an internal control system in place and that the value of that system be attested to by an outside audit firm - may be the one place where Washington comes closest to what the law expects of private companies. As most federal employees and anyone trying to do business with agencies and departments will tell you, extensive internal controls do exist on the day-to-day aspects of what the government spends. They are not, however, reviewed annually by any outside auditor.

But the existence of these controls at the lower levels of federal budget management only emphasizes where the SOX-like additional focus needs to be placed. More importantly, it also shows where the burden of proof lies for federal budget numbers that turn out to be wrong.

Try to imagine how different the situation would be if the budget director were held personally liable for a budget outlook that turned out to be more than 10 percent different from OMB estimates. Then ask yourself how this year's 33 percent restatement would be treated.

Question Of The Week

Last Week's Question. I now know how a teacher feels when all term papers to be graded are substantially the same. Many of the answers submitted to last week's question, which asked you to explain where the $ symbol came from, were copied verbatim from the same web sites. Some of you admitted it up front; others made it look like you had done extensive research.

The answer is that no one is completely sure. The sign has never been officially designated as the sign of U.S. currency, even though it is the most recognized emblem or logo in the history of the world. The use of the sign developed slowly and informally. Some believe that it is an abbreviation for Spanish pesos or piastres, on which much of the early U.S. currency was based. Others claim that the two lines over the S represent the pillars of Hercules, which stand on either side of the Straits of Gibraltar. The third major theory is that the $ is a bastardized version of an "8" because the Spanish Real, which was widely used in the colonial America, was informally known as "pieces of eight."

Because there is no definitive answer, anyone who responded with any of these three was eligible to win the incredible, fantastic and much talked-about "I Won A 2003 Budget Battle" mouse pad. There are two winners this week. Janet A. Bruning, who works for the Washington Area Power Administration in Arizona wins for coming up with one of the three probably true answers. Janet was selected at random from the many people who submitted similar responses. The second winner, is Loretta M. Haley, who works for the Defense Contract Management Agency in the Washington, D.C. area, for her fanciful answer that the $ sign was developed by a frustrated musician who went to work for the U.S. Treasury and started using a musical clef sign in official documents.

This Week's Question. It's time to repeat one of the most popular questions of the week that Budget Battles has ever asked. The question: If a restaurant served a sandwich called "The Federal Budget," what would it be? Your answer must be received by 5 p.m. PDT on Saturday, June 28, 2003. If there are similar answers, the "I Won A 2003 Budget Battle" mouse pad will go to the person selected at random from all those who submit the same winning response. You must include your mailing address so the mouse pad can be sent if you are the winner. Click here to send in your response. Note to government employees: Because of security procedures at many offices and facilities, your home address will be the best way to make sure the mouse pad actually gets to you.

COMMENTS

• This is a very good example of the lower workers being the scape goats and management not being accountable for their mistakes instead. Talk about fraud,waste and abuse, it's in the FAA also. GovExec.com reader Posted July 9, 2003 8:24 AM
• The article is an example of comparing apples and oranges. The constant reference to the private sector restatement and the government restatement refer to two different things entirely! The restatement in the corporate sector that is mentioned has to do with the restatement of actually reported financial results. The government number is a forecast or budget number. Every time the assumptions of economic activity and government action changes—budget numbers have to be revised. The actual result in government is not reported or reviewed because, as in the corporate sector, the results are history and it is too late to do anything about it. The emphasis should be on budgets, and budgets always will be restated everytime there is a new exercise because that is the nature of budgets—government or corporate. You never report corporate budgets, and I guarantee you they change even more that the restatement of financial results that are referred to in the article. GovExec.com reader Posted June 25, 2003 6:58 AM
• Do you really think an administration that cooks the intelligence to fit its ideology is worried about misrepresenting the deficit? Leo Dohogne Posted June 25, 2003 10:31 AM