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D19371 1 (1981-01-02)

handle is hein.gao/gaobaduzr0001 and id is 1 raw text is: A Role for GAO in the Development of Standards for Social Research Joseph F. Guy Dr. Guy is an associate professor in the School of Accountancy at Georgia State University In 1974-75, he was a Sears/ American Assembly of Collegiate Schools of Business Federal Faculty Fellow and was a supervisory auditor in the Field Opera- tions Division In 1977-78, he was a consul- tant to the Atlanta regional office in a proj- ect on which this article is based He is a CPA, Is active in professional accounting organizations, and regularly teaches auditing and financial accounting subjects The Problem In recent years there has been an Increasing use of social research and social program evaluations In making decisions regarding public sector programs. This research and evaluation, frequently referred to as social accounting, may play a decisive role in determining the di- rection of such programs and, ac- cordingly, should be audited. How- ever, auditors, both within GAO and without, have experienced difficul- ties In this relatively new area of au- diting. Many of these difficulties are similar to those problems audi- tors have already faced and dealt with in financial accounting and auditing. The American experience in developing financial accounting standards may well be a useful tool in arriving at standards for evaluat- ing social programs. This article examines that experience in Its broad outlines, suggests its rele- vance to evaluation of social pro- grams, and discusses GAO's role in the formulation of standards for social research. Financial Accounting Before the Great Depression For the most part, the develop- ment of authoritative accounting standards began during the 1930's. To be sure, the need existed before then, but only after the stock market crash of 1929 did work begin in earnest. As might be expected, financial accounting reports pre- pared before authoritative stan- dards had been established often contained serious flaws that led to unwise business decisions. One such flaw was a tendency to give incomplete information. After re- viewing a number of offering cir- culars, a 1920 committee of the In- vestment Bankers Association noted: GAO Review/Winter 1981 It is exceptional to have a balance sheet included in the prospec- tus. ** * It is frequently the practice to give average earnings over a period of years without showing the fluctuations which make up this average. *** Information on the distribution of dividends and depre- ciation policy were usually absent.' Other examples of this tendency to withhold inportant information can readily be found. In a 1926 speech to the annual meeting of the American Institute of Accountants (AIA), one prominent accountant discussed what was then the com- mon practice of not disclosing aross sales In financial reports.2 The reason for such policies is not clear. Was it to safeguard confiden- tial Information which might be useful to competitors? Was it to avoid criticism? Worst of all, was it to hide unfavorable facts about company operations? Regardless of the reason, creditors and investors were not given the valuable finan- cial information they routinely re- ceive today. When complete financial state- ments were published, they often contained false and misleading In- formation. The literature of the period shows that deception took many forms: assets were given ar- bitrary values, profit equalization reserves were used to artificially in- crease or decrease earnings, depre- ciation was arbitrarily recorded or even passed over when profits were deemed insufficient, and consoli- dated statements excluded the operations of unprofitable subsidi- aries. These abuses reached their peak during the 1920's and were well documented in a series in the Atlantic Monthly, later published as a best-selling book. ' Efforts in the Private Sector Given that the development of financial statements (i.e., sum- 87

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