Can governments apply the accounting and financial reporting standards that business entities use?
The simple answer is no. Governments and for-profit entities are different in a variety of ways. One of the biggest differences is the stakeholders, and how separate accounting and financial reporting standards are in place to provide the appropriate information to meet the needs of these users. Governments and for-profits also have different purposes, budgetary obligations, and processes of generating revenues. In addition, Governments typically have a longer life.
The operating environment of governments is set up in a way that requires them to be accountable for the use of resources that have been received mainly through the involuntary payment of taxes. This differs from the for-profit world as their revenues stem from the voluntary exchange of willing buyers and sellers. Since there is usually no direct relationship of services received through the payment of taxes, taxpayers relay on the government to assess the value received from their resources. This is where governmental accounting and reporting comes into play. It helps to show taxpayers how public resources are being acquired and used. It also allows them to see what types of services are being provided, their associated costs, and how the government is managing those costs.
The Governmental Accounting Standards Board (GASB) has developed a conceptual framework that places emphasis on addressing the needs of citizens and elected officials, in addition to investors and creditors, which explains why public accountability is the backbone on which the financial reporting objectives were built.