GOVERNMENTAL STANDARD SEniNG IN PERSPECTIVE
The author examines the need tor a single body to set rules. by Michael H. Granof The problems of financial reporting by governmental units are unique and as a consequence the models for standards are not necessarily comparable nor can parallels always be drawn between governmental and corporate reporting. This article examines the differences between user requirements and explores the necessity for standard setting by a single body. First of ali, the sources from which investors derive information regarding securities of municipalities appear to be different from those of other types of organizations. Although there have been few research efforts to identify the factors which influence investor decisions to buy or sell specific municipal issues, it is believed that the bond rating assigned by Moody's or Standard & Poor's is the single most significant element. Available statistical evidence indicates a close correlation between the rating assigned to a bond and the price at which it is sold in the market. An improvement of one grade on the rating scale has been associated with a reduction in interest rate from 28 to 40 basis points (hundredths of a percent in interest rate).' Moreover, government securities are
1 Derived from tables in John E. Petersen, The Rating Game (New York: Twentieth Cenlury Fund, 1974), p.44. MICHAEL H. GRANOF, CPA. PhD., is associate professor of accounting at the University of Texas at Austin. He is currently teaching and conducting research at Ihe Jerusalem School of Busines.s Administration of (he Hebrew University of Jerusalem. A past director of the Austin. Texas, chapter of (be Niiiional Association of Accountants, Dr. Granof is a member of the American Institute of CPAs, the New York State Society of CPAs, tbe American Accounting Association, the Association of Government Accountants, Accountants for the Public Interest and ibe Municipal Finance Officers Association. He is also the author of numerous books and articles on professional topics. 56 The Journal of Accountancy, March 1979

generally traded in the tax-exempt market, where most of the securities are held by commercial banks, insurance companies and individuals in the upper rate brackets of taxation. As a consequence, the parties which rely on the statements to make investment decisions arc likely to be unusually sophisticated with respect to financial reports. Issues of disclosure, accounting and auditing are less readily separable in the governmental than in the corporate sector. In the business sector, despite obvious jurisdictional overlap, matters of corporate disclosure— particularly those which do not have a direct bearing on financial statements—are largely within the regulatory province of the Securities and Exchange Commission; questions of accounting are dealt with primarily by the Financial Accounting Standards Board and those of auditing (including matters of ethics and practice management) by the American Institute of CPAs. Tn the municipal area, it may not be feasible to establish boundaries that are as carefully delineated. At present, standards of mtmicipal reporting are recommended by both the National Council on Governmental Accounting (NCGA) and the AICPA through its committee on state and local government accounting. The standards of the NCGA are set forth in a single publication. Governmental Accounting, Auditing, and Financial Reporting (GAAFR). which, as its title implies, deals with issues of accounting, auditing and other disclosures to be included in the annual report.' The standards of the AICPA are articulated in Audits of State and Local Governmental Units, which, although classified as an industry "audit" guide, is in fact directed as much to matters of accounting as auditing.^ The difficulty of distinguishing among questions of accounting, auditing and disclo2 Governmental Accounting, Auditing;, and Financial Reporiint- (Chicago, HI.; Municipal Finance Officers Associalion, 1968). 3 Committee on governmental accounting and auditing, Aiidit.^ of State and Local Governmental Units (New York: AICPA, 1974).

sure can in part be attributable to the importance, in evaluating the fiscal strength of a municipality, of taking into account information other than that contained within the basic financial statements. The financial health of a government unit is as much dependent on the resources on which it can draw—that is, the private wealth within its jurisdiction—as it is on those directly assigned to it. An investor may be as concerned with a municipality's population, per capita income, industrial growth and tax base as with its direct assets and liabilities. Indeed, in GAAFR, the NCGA recommends that such information should constitute an integral section of the municipal annual report. Currently, however, when municipalities present "nonfinancial" information in their annual reports, it is generally in a statistical section that is not covered by the auditor's report. If, however, such information is included in a corporate annual report, it is assumed that it is covered by the report of the independent auditor. In addition, it is now widely recognized that the traditional financial statements are an inadequate measure of municipal performance. The General Accounting Office, in its Standards for Audit of Governmental Orgimizations, Programs, Activities and Functions, has prescribed that the full scope of an audit should include not only an examination of the financial statements but also an evaluation of efficiency and economy in the tise of resources as well as a review to determine whether goals and objectives are being attained/ The AICPA has endorsed the philosophy and objectives of the standards and has issued guidelines for CPA participation in such expanded-scope engagements.' Tt is likely that sometime in the future, reports of municipal entities, spurred by the GAO, will
* Comptroller General of the United States, Standards for Audit of Governmental Organizations, Programs. Activities and Functions (Washington, D.C: U.S. General Accounting Office. 1972). 5 Committee on relations with the General Accounting Otfice, Auditing Standards Established by the GAO— Their Meaning and Significance for CPAs (New York: AICPA, 1973), and management advisory services executive committee, Guidelines for CPA Participation in Government Audit Engagements to Evaluate Economy. Efficiency, and Program Results. Management Advisory Services Guideline Series no. 6 (New York: AICPA, 1977).

comment on whether selected government departments have achieved their financial and operating objectives. The GAO has for many years conducted "economy," "efficiency" and "effectiveness" audits. Traditions and Organizational Loyalties The traditions and organizational loyalties of municipal auditors, accountants and financial executives are substantially different from those of their counterparts in the corporate sector. When the business community was engaged in its tiiost recent examination of the process by which reporting standards were established—that which resulted in the creation of the FASB—corporations had for

many years accepted the authority of regulatory agencies, such as the SEC and the Accounting Principles Board, to establish principles and rules of reporting. State and tnunicipal governments, by comparison, so far have not been exposed to such direct pressure from governmental agencies although the current scrutiny of accounting and auditing by several metnbers of Congress promises to place more of a spotlight on fiscal accountability in all sectors—business or nonbusiness notwithstanding. The NCGA has developed comprehensive principles and standards of accounting and reporting, but it has no powers of enforcement. The AICPA, through its committee on state and local government accounting, has endorsed many of the NCGA principles, has modified others and has deThe Journal of Accountancy, March 1979 57

veloped a few of its own. Because AICPA guidelines are contained in an industry audit guide, they supposedly influence members of the Institute and, indirectly, therefore, their municipal clients. A Coopers & LybrandUniversity of Michigan study of the financial reports of 46 American cities provides persuasive evidence, however, that neither the NCGA guidelines nor the AICPA additions and modifications are being observed. Indeed, as many as 93 percent of the cities failed to comply with selected provisions of the pronouncements.' Corporate accountants have traditionally looked to the AICPA and more recently to the FASB for guidance and leadership in matters of financial reporting. By contrast, however, the ties between municipal accountants and those groups have been considerably weaker. Municipal finance officers have their own organization, the Municipal Finance Officers Association (MFOA), a group whose sphere of influence encompasses all areas of financial management, including public reporting. In fact, some municipal controllers resent the increased interest in governmental affairs on the part of the AICPA and the FASB, believing them to be newcomers to the field. In addition, accounting for commercial enterprises is characterized by a strong tradition of research—one that has largely been absent in governmental accounting. Within the last several decades, a considerable amount of academic and professional effort has been exerted in an attempt to develop the theoretical underpinnings of corporate accounting. By comparison, the quantity and quality of research and basic inquiry with regard to municipal accounting is relatively meager.'' Although many of the underlying issues of municipal accounting are essentially the same as those of corporate accounting, those that are common to the two sectors have generally been explored in a business context. At present, there is an effort on the part of some organizations, such as the MFOA, to make up for lost time in the area of research. But given the limited amount of funds that have been committed to municipal research as well as the small number of qualified researchers
* Coopers & Lybrand and the University of Michigan, Financial Di.^closure Practices of the American Cities: A Public Report (New York: Coopers & Lybrand, 1976). '' For supporl of ihis statement, see Michael H. Granof. "Municipal Accounting Research: Some Observations," Working Paper 77-46 (Austin, Texas: Bureau of Business Research, The University of Texas, 1977). 58 The Journal of Accountancy, March 1979

who have an interest in the field, it will likely be many years before parity with the corporate sector is attained. In summary, any changes in the way governmental and municipal reporting standards are established should be effected so as to recognize the special nature of the tax-exempt bond market and its generally sophisticated investors and well-established practices of trading and analysis. The changes must be consistent with certain legal requirements and the constitutional protection afforded local governments against certain types of federal encroachment. They also must take into account the special difficulties of separating issues of accounting, auditing and disclosure, the organizational loyalties of municipal finance officers and other interested parties, the tradition of freedom from outside regulation enjoyed by municipalities and the absence of a well-developed theory of accounting in the government area. Let me now briefly describe the current status of regulation with regard to disclosure, accounting and auditing and review current proposals for change. Current Regulatory Environment Disclosure. Municipalities are subject to minimal requirements of disclosure. Before the enactment in 1975 of amendments to the Securities Exchange Act of 1934, municipal securities were exempt from all but the antifraud provisions of both the Securities Act of 1933 and the 1934 act. As a consequence, the SEC lacked the authority to impose disclosure requirements on issuers or to establish surveillance over the brokers and dealers who trade in municipal securities. The antifraud provisions to which municipalities and those who deal in their securities are subject are designed to protect investors from misleading statements or omissions of important facts in documents associated with new or outstanding issues of securities. They make it unlawful to make any untrue statement of a material fact or to omit to state a material fact that is necessary to make the statements issued in connection with an offering "not misleading." But unlike the sections of the 1933 and 1934 acts that cover nonexempt corporate securities, the antifraud provisions do not provide for direct regulation of the issuers or those involved with the sale or trade of municipal securities. Instead, they merely afford a judicial remedy, in the

amount of losses incurred, for parties victimized by a fraud.' The 1975 securities acts amendments extended the federal regulatory umbrella over the municipal securities activities of brokers, dealers and banks but not over the municipalities themselves. The key feature of the amendments was the establishment of the Municipal Securities Rulemaking Board.' The board, set up to be an independent, selfregulatory body charged with the responsibility of developing rules for the municipal securities industry, has 15 members representing municipal securities brokers, dealers, banks and the general public. Initially, its members were appointed by the SEC; subsequent members will be appointed in accordance with procedures established by the board itself. The board is empowered to finance its operations by levying fees on municipal seeurities brokers and dealers. At present the board charges a small one-time fee that is the same for all parties and ongoing fees that vary in relation to the dollar volume of new issues underwritten or distributed by each brokerdealer. The rules promulgated by the board are intended to prevent fraudulent and manipulative practices, to promote just and equitable principles of trade, to foster industry cooperation, to protect the investing public and the public interest and to develop a free and open market in municipal securities. The actions of the board are subject to approval by the SEC, and the board has no direct powers of enforcement. Authority to monitor compliance with the board's rules has been assigned both to the SEC and to appropriate federal bank regulatory agencies. The jurisdiction of the board does not extend to the issuers of municipal securities. In fact, special provisions in the act (the "Tower amendment") specifically prohibit the board
"For an analysis of municipal securities regulation, see John E. Petersen and Robert W. Doly, "Regulalion of the Municipal Securities Market and Tts Relationship fo the Governmental Issuer," Aiicdysis (Municipal Finance Officers Association), December 5, 1975. ' F o r a description of the board, see Roswell C. Dikeman, "Municipal Securities Rulemaking Board: A New Concept of Self-Regulation," Vanderbilt Law Review, May 1976, pp.903-33.

from prescribing municipal disclosure and reporting requirements. In an effort to help its members comply with the antifraud provisions of the 1933 and 1934 acts and to provide information to satisfy the needs of investors, and, no doubt, to head off additional federal regulations, the MFOA in 1976 promulgated disclosure guidelines for offerings of municipal securities.'° The guidelines recommend that an issuer of securities include in an offering statement not only financial statements (prepared in accordance with generally accepted accounting principles) but also information on tax limits, property base, methods of assessing and levying and collecting taxes as well as various debt ratios, the names of principal taxpayers and the amount of indebtedness of overlapping entities. Adherence to the MFOA guidelines is voluntary; the organization has no power to discipline its members. Proposed federal statutes, however, would establish mandatory standards of disclosure. The legislation that has received the most attention is the Municipal Secui-ities Full Disclosure Act of 1977 (S 2339), sponsored by Senators Harrison A.

I f present political and economic trends continue... the impact of the GAO auditing standards on municipal reporting may be substantial."
Williams (D-N.J.), Jacob K. Javits (RN.Y.) and William Proxmire (D-Wis.).'' Although hearings were not held on the bill during the last session of Congress, it is certain to be reintroduced during the 96th Congress. The bill would remove the exemption of municipal securities from the 1934 act and would compel "the preparation, on a uniform basis, of annual reports and distribution documents." In addition, it would delineate and clarify "the responsibilities of issuers, underwriters, and others involved in issuing or distributing municipal securities." The key feature of the bill for CPAs is its requirement that issuers with more than $50 million outstanding in securities prepare an'0 Disclosure Guidelines for Offerings of Securities by Stcrte and Local Governments (Chicago, 111,: Municipal Finance Officers Association, 1976). T For an analysis of Ihe provisions of this legislation, see Robert W. Doty, "The Municipal Securities Full Disclosure Act of 1977—Analysis of Provisions and Arguments," Analysis (Municipal Finance OfTicers Association), February 20, 1978.

The Journal of Accountancy, March 1979 59

nual reports and other such reports as the SEC might prescribe. The SEC would be given full authority to set forth the "detail and form" that the reports should take. Starting in 1980 the financial statements in an annual report would have to be audited by an independent CPA, a qualified independent licensed accountant or an "examiner from an independent state agency authorized by law to perform such functions." The bill enumerates several specific items that must be disclosed in the annual report. In general, however, the disclosures required are similar to those recommended in the MFOA guidelines. The bill sets forth the liabilities and defenses of the parties connected with the issuance of a security, which are modeled after the provisions for corporate securities. Experts such as accountants would be held to the same standards of "due diligence" that are applicable to corporate disclosures. The bill also calls for the establishment of a municipal securities advisory committee. The function of the committee, which would comprise representatives of issuers and the public, would be to make recommendations to the SEC on matters of municipal disclosure. Accounting. To date, the NCGA has been the only national organization concerned exclusively with governmental accounting practices, and as such it has assumed the leadership role in the promulgation of municipal accounting principles. The NCGA, which can trace its roots to 1934 when a predecessor committee was established by the MFOA to develop principles and standards of municipal accounting, is composed of 21 members. A majority of the members must be state or local finance officers, and at least 3 must be practicing members of the ATCPA. The initial members of the council, which was organized in its present form in 1974, were appointed by the MFOA; subsequent members are appointed by the NCGA itself. Although the NCGA seeks voluntary contributions from interested individuals and organizations, the MFOA has taken re.sponsibility for its financial support. In addition, the MFOA provides staff support and its executive director serves as NCGA executive secretary. The charge of the NCGA is to "develop, promulgate and interpret principles of accounting, financial reporting and related financial management activities" as well as "appropriate methods, practices and procedures for the effective implementation of such
60 The Journal of Accountancy, March 1979

principles."'' The most notable undertaking of the present NCGA has been the revision, still under way, of Governmental Accounting, Auditing, and Financial Reporting (GAAFR), the statement of principles issued in 1968 by its predecessor committee. Two sections of the revision have been completed. The section on principles, Governmental Accounting and Financial Reporting Principles. was published this month, and the section on grants has been approved for publication. They are significantly different in form from the original chapters and contain a number of substantive changes with respect to certain types of financial events. But as to the overall accounting model and particularly those concepts over which there has been the greatest controversy—-depreciation, consolidation of fund balances, revenue and expense recognition—the NCGA has, in general, opted for the status quo. Nonetheless, the NCGA does plan to sponsor research (it has no research staff of its own) designed to evaluate thoroughly the basic premises of governmental accounting and. as necessary, to undertake a more thorough revision of its standards. The influence of the AICPA on municipal accounting practices has been exerted primarily through its state and local government accounting committee, whose objective is to review current developments in municipal administration and accounting and to advise the AICPA membership on the auditing of municipal governments. This committee, as well as its predecessor committees, has cooperated with the NCGA and in general has given support to the pronouncements of the NCGA. In 1974, a predecessor committee issued the industry audit guide entitled Audits of State and Local Governmental Units, which remains the AICPA's most comprehensive statement on issues of municipal accounting and auditing. With regard to accounting principles, the guide is generally consistent with the revised version of GAAFR. The FASB has, until recently, been silent on issues of municipal accounting. However, citing deficiencies in current practice, a number of accountants have recommended that it promulgate accounting standards for local government. In response, the FASB has begun to assess its future role with regard not
' 2 National Council on Governmental Accounting, •Rules of Procedure," February 24, 1975, p.l.

only to local governments but also to all nonprofit organizations. It recently commissioned a study. Financial Accounting in Nonbusiness Organizations, by Robert N. Anthony, to identify the key conceptual issues with which it would have to grapple should it seek to involve itself in matters of nonbusiness reporting." The Anthony study identifies 16 issues that have special significance to nonprofit organizations but takes no position on any of them. The FASB then issued a discussion memorandum'* based on the Anthony study and held three public hearings on the issues involved. Auditing. Governmental audit standards have been promulgated by the AICPA, the NCGA and the GAO. The auditing standards of the AICPA, and particularly the general standards, the standards of field work and the standards of reporting, are as applicable to examinations of governmental units as they are to corporate enterprises. The AICPA industry audit guide on local governments is designed, therefore, to provide direction only for problems arising because of the unique characteristics of local governments. The NCGA, in GAAFR, also provides guidance for auditors of governmental units. Whereas the AICPA audit pronouncements are intended as authoritative standards for independent CPAs who are AICPA members, the NCGA pronouncements are directed to all independent auditors—those employed by governmental units as well as independent CPAs. They encompass the general standards, the standards of reporting and the standards of field work of the AICPA and provide explanations and checklists of specific audit procedures. In contrast to the AICPA standards, however, they are not considered authoritative by either independent CPAs or governmental auditors. The auditing standards of the GAO presently have no official standing for municipalities or their auditors. They were issued in large measure to encourage local governments to increase the scope and improve the quality of their evaluations. The GAO has cooperated with both the NCGA and AICPA and has demonstrated no inclination to usurp
13 Robert N. Anthony, Financial Accounting in Nonbusiness Organizations: An Exploratory Study of Conceptual tssues (Stamford, Conn.: Financial Accounting Standards Board. 1978). I'* Discussion Memorandum, An Analysis of Issues Related to Conceptual Framework for Financial Accountinf- and Reporting: Objectives of Financial Reporting by Nonbusiness Organizations (Slamford, Conn.: Financial Accounting Standards Board. 1978).

their infiuence or authority. If present political and economic trends continue, however, the impact of the GAO auditing standards on municipal reporting may be substantial. As the federal government increases its financial assistance to local governments by way of revenue-sharing or special purpose grants, it can be anticipated that the funding agencies will require the grantees to submit audited financial statements. Inasmuch as these agencies are likely to look to the GAO for audit leadership, the chances are that their audit guidelines will refiect some of the current changes being introduced by the GAO. Four Criteria a Standard-Setting Process Must Satisfy In evaluating the existing process by which standards of disclosure, accounting and auditing are established and the proposed changes, a number of criteria must be taken

"It is unlikely that any current arrangements for the establishment of reporting standards will meet fully all four criteria or satisfy all interested parties." into account. Of these, four have special significance. 1 The process by which standards are established as well as the standards themselves must have the support of everyone involved in the process of preparing, attesting to and u.mig the financial statements and this entire "constituency" must be actively involved in the standard-setting process. In April 1977, the structure committee of the Financial Accounting Foundation reported on the results of its assessment of the first years of the FASB. The conclusions and recommendations of the committee are directly relevant to the standard-setting process in the municipal area and are too important to be overlooked. The committee pointed out that "Accounting Standards are not immutable truths that can be proved scientifically. Rather they are conventions which are accepted and used by those who are involved in the preparation, attestation and use of financial statements because they are understood to be in the best interests of all." As a consequence, the committee avers, "standard setting requires good fundamental theory and acceptance of that
The Journal of Accountancy, March 1979 61

theory." A successful standard, it asserts "cannot be imposed by the standard setter, it must be assimilated by the constituency. . . ."'' The committee stressed the need for the board to maintain the support of its constituents and to solicit their active interest in its deliberations, 'Tn order for the process to work," it stated, "the constituents must be participants: The Board must do everything it can to involve the constituents in the process." Vital to the success of any process of standard setting for local governments is the support of municipal finance officers. This group corresponds directly to corporate financial executives in the private sector. In the corporate sector, the need for their direct involvement in the standard-setting process has only recently been acknowledged. Indeed, a critical element in the replacement of the Accounting Principles Board by the FASB was the need for increased participation of representatives from industry. As suggested previously, municipal finance officers have not traditionally identified with the AICPA or the FASB, the two organizations closely associated with the accounting profession. Whether they would ever be willing to recognize the preeminence in the process of standard setting of either of these two bodies—at least as they are presently constituted—is problematical. At their June 1978 annual convention, members of the MFOA went on record as opposing any intrusion of the FASB into the domain of the NCGA. In a resolution which politely thanked the FASB for exploring, in the Anthony study, "conceptual" issues of accounting for nonbusiness organizations, the MFOA reaffirmed its belief "that the responsibility for setting specific accounting and reporting standards for units of state and local government remains the responsibility of the NCGA. . . ."'* [Ed. note: The NCGA and the FASB have decided to work together to develop the objectives of reporting by nonbusiness organizations (see page 26).1 The MFOA is at least equally adamant in its opposition to federal involvement in the
15 Structure committee. The Structure of Establishing Financial Accounting Standards (Stamford, Conn.: Financial Accounting Foundation, April 1977), pp.18-20. The term "constituency" is used in this arliele, as suggested by Ihe structure committee, to refer to all of those who have an interest in municipal reporting—the public, the municipalities, the bondholders, the CPAs, etc. 1* Municipal Finance Officers Association Newsletter, June 1, 1978, p.49. 62 The Journal of Accountancy, March 1979

Standard-setting process. In 1976 it resolved that "Federal legislation which would impose . . . additional control or would mandate compulsory federal guidelines and supervision by the Securities and Exchange Commission is opposed . . . because it is unnecessary, premature, violative of the constitutional principle of separation of power."'' It is not sufficient, however, for the constituency to support only the process by which the standards are established. It must support the standards themselves. The standard-setting body, therefore, must have the authority to make certain that its pronouncements are followed. This power of enforcement mav be derived not only from legal sanction but also from recognition by professional organizations which discipline members who fail to live up to their professional standards and from the organizations' own abilities of persuasion. The enforcement authority of the SEC need not be questioned; its releases have the status of law. To date, it appears as if the pronouncements of the FASB have also met with complete acceptance by the corporations and CPAs within its sphere of influence. The extent to which the hegemony of the FASB can be attributed to its support by the SEC as opposed to its own credibility cannot, of course, be determined. On the other hand, as indicated, support for the pronouncements of the NCGA as well as those of the state and local government accounting committee of the AICPA has been, at best, selective. 2 A single organization should have responsibility for establishing standards and principles of disclosure, accounting and auditing. Because questions of municipal disclosure, accounting and auditing are not readily separable from one another, a single organization should have responsibility for the three areas. A single body would assure that issues relating to the three areas are resolved consistently. It would avoid duplication of work and jurisdictional conflict and would be able to present a solid, rather than a fragmented, front to outsiders. While a tripartite system of responsibility has worked in the private sector with varying degrees of success, it was not designed as such—it developed into that form over the years. There is no reason to believe that if the standard-setting process
"Municipal Finance Officers Association Newsletter, May 16, 1976, p.46.

were to be redesigned today, it would be constructed with the same three divisions; in fact, in recent years the jurisdictional boundaries have become increasingly obscured. 3 The organization must be capable of supporting and conducting an extensive program oj empirical research and theory development. Research, no matter how thorough, is not going to be a panacea for all the alleged deficiencies of municipal reporting. But there are a number of fundamental questions that must be investigated if meaningful standards are to be promulgated as the need for them

arises.
The experience of the FASB indicates that research must be an integral element in the proeess of establishing standards. The organization assigned the task of municipal rulemaking cannot simply rely on the research being conducted within universities or large CPA firms. Nor can it merely sponsor an occasional project. In its evaluation of the FASB, the structure committee stated, "The Board's research activity must be the most important of all its operations and so the Research Director should be a primary person within the Board's structure, with a great deal of visibility and credibility."'^ 4 The organization must be adeqtiately fitmnced. A sound process for establishing standards cannot be acquired inexpensively. The 1978 budget of the FASB is approximately $5 million. The organization responsible for establishing standards must be provided with the necessary funds to support its research, to pay the salaries of full-time board members and their staffs, to pay the travel and miscellaneous expenses of advisers, to meet the costs of keeping its constituents continuously informed of its activities and to maintain office facilities. Obtaining adequate financial resources is certain to be the most formidable challenge for any municipal rule-making group which is not directly associated with the federal government. The means by which existing rule-making organizations finance their operations suggest several possibilities for funding the standard setting in the municipal sector. None, however, is without severe limitations. The FASB is financed from voluntary contributions on the part of CPAs and their corporate clients. CPAs might well be willing to support an independent organization devoted to establishing standards of municipal
'"Structure committee, p.31.

reporting, but municipalities faced with recurring pressures to reduce expenditures eannot, based on the experience of the NCGA, be counted on to contribute voluntarily an amount comparable to what the FASB receives from corporations. Hence, voluntary financing from CPAs and municipalities is likely to be inadequate. The AICPA and the MFOA are supported primarily by membership dues. Even if either or both organizations together could satisfactorily finance a program of standard setting, the program might never be viewed as being sufficiently independent of the organizations to be acceptable to the investment community or to congressional overseers. The Municipal Securities Rulemaking Board imposes fees on municipal securities brokers and dealers. An organization empowered to establish accounting standards might also be given sanction to levy charges on one or more of its constituent groups. But insofar as Congress is constitutionally limited in its powers to tax municipalities, such an approach might be fraught with legal and political pitfalls. The federal government eould supply such funds. Constituent groups, however, have consistently opposed federal involvement in the process of standard setting. In the eyes of many members of these groups, federal funding would be viewed as an inevitable step toward federal control.

Conclusion
The present process of standard setting fails to satisfy any of the four criteria. Tt lacks constituent support, as evidenced by the large percentage of municipal reports that violate current requirements. It is fragmented, with no clear distinctions being made as to the areas of authority of the various standardsetting organizations. No organization maintains a permanent research staff directed exclusively to issues of municipal reporting. No organization has the necessary resources to finance a full-time board and necessary research and administrative staffs. It is unlikely that any current arrangements for the establishment of reporting standards will meet fully all four criteria or satisfy all interested parties. Concessions will be required, creative relationships will have to be forged and significantly more resources, particularly in terms of research, will have to be developed if any progress is to be made in this important area. •

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63