How Important is Accounting for Governments?

When individuals, corporations and nonprofits intentionally or accidentally make accounting errors, they have to answer to government entities like the Internal Revenue Service (IRS) and state tax commissions and departments of revenue. However, governments, too, have a responsibility to spend their funds appropriately and account for their assets and liabilities accurately. What happens when governments fail at accounting?

The Causes and Effects of Government Accounting Problems

In any accounting equation, spending shouldn’t exceed funds. Yet that’s what happens when governments spend more money than they bring in through tax revenue. Social services, infrastructure maintenance, and other costs can be massively expensive – too expensive, at times, for existing tax revenue to cover the cost. If they don’t want to raise taxes to increase revenue, then these countries have to go into debt, taking loans from other countries, to meet those costs. When a country continues to spend more money than it brings in and keeps taking on more debt instead of paying back those loans, the practice will eventually become unsustainable.

What happens then? Too often, a financial crisis is the result of poor governmental accounting. That means a poor economy and increased poverty for citizens throughout the nation. Sometimes, the economic fallout will even affect trade partners in other nations, especially as the economy becomes increasingly global.

Greece: A Modern Example of Government Accounting Failure

Governments throughout history have made accidental errors or intentional deceits when it comes to accounting. A prominent example of accounting errors in today’s global economy is Greece. The small Mediterranean nation “relied on cheap international credit” to fund expenses its tax revenue didn’t cover and used “flawed and misleading statistics” to hide the extent of its debt, In the Black reported. Eventually, the true picture of the country’s debt emerged.

The resulting financial crash, still ongoing, has the nation’s promising young and educated people – the very workers who would add value to a faltering economy – looking to leave for brighter opportunities elsewhere. Greece has to rely on other nations to bail it out of debt. Citizens who remain will see the government tightening its budget, The New York Times reported, which could mean a decrease in government spending on things like education, healthcare, infrastructure and social services. Citizens might be forced to pick up the financial slack personally, and education and other programs could suffer.

Understanding how accounting failures contributed to Greece’s financial instability – and the economic and social effects of this crisis – is just one example of how accounting can help us understand the impact of global issues. Other examples include calculating the financial cost of allowing violent conflicts in the Middle East to continue and watching how international accounting scandals unfold. As technology makes the world increasingly connected on a global level, an accounting perspective can help us understand these issues and the costs and financial repercussions. Governments have a responsibility to use accurate accounting practices and to weigh the financial costs and repercussions of their decisions.