Sheila Weinberg, Institute for Truth in Accounting (photo by Mel Ah Ching)
Sheila Weinberg, Institute for Truth in Accounting (photo by Mel Ah Ching)

BY PAUL HARLEMAN – Sheila Weinberg, founder of the Chicago-based Institute for Truth in Accounting, recent visit to Hawaii shows that Hawaii is in need of serious governance reform.

During a presentation organized by the Grassroot Institute of Hawaii, Weinberg, who is a certified public accountant, provided an independent assessment of the state’s financial position.

According to Weinberg’s audit of the state’s 2009 Comprehensive Annual Financial Report, the state’s reported budget surplus of $ 6.4 billion does not include the state’s $11.5 billion of deferred liabilities relating to the state’s employee retirement and post-employment benefit plans.

The difference between the state and Weinberg’s assessment is reflected by the state’s current use of antiquated accounting standards, which fail to recognize the future payments for the state’s retirement and post-employment benefit plans.

However, since the retirement and post-employment benefit plans are currently the largest expense that the state incurs on an annual basis, the reported liabilities on the state’s financial statements are significantly understated and create in an imbalance between short-term political decision-making and the long-term financial stability of Hawaii. In fact, Weinberg assessment shows that as of 2009 each taxpayer in Hawaii already owns the state $25,000 for previously incurred costs that have been pushed into the future.

It is the state’s responsibility to match today’s social services and benefits with current resources, as opposed to shifting the financial burden to future taxpayers. However, since the current balanced budget law has failed to provide sufficient protection for Hawaii’s future taxpayers, it is time to introduce meaningful reforms that will change the state’s current governance system.

A model that could lead to more accountability and transparency is the federally enacted Sarbanes-Oxley Act of 2002, also known as the “Public Company and Investor Protection Reform Act,” which includes enhanced standards for auditor independence and financial disclosure as well as individual responsibility for the accuracy and completeness of corporate financial reports.

In comparison to the current governance system in the private sector, the state’s framework clearly shows deficiencies in the areas of financial reporting and accountability standards.

Since both the private and public sector impact society by participating in our economic system, the question that strikes me is why we currently hold the private sector to higher governance standards than we demand from our government?

In today’s environment of declining public trust in government, this is an important question that we should be asking ourselves. In other words, if we want to restore our state’s financial position we need to take a step back and start addressing the current deficit in the state’s governance system before debating specific public policy decisions.

A first step into the right direction would be to modify the state’s statutes to require the publication of independently audited financial statements of all of state’s activities within a specific timeframe. Since publically traded corporations are obligated to disclose their annual financial statements within 60 days after the end of the fiscal year, we should demand that the state discloses its audited financial statements within the same timeframe.

There is no reason why the state should not be capable of disclosing audited financial statements within the 60 day timeframe. The fact that the World Bank, which asset level and operations by far exceed that of the State of Hawaii, is able to publish independently audited statements within the 60 day timeframe illustrates to me that there are either serious deficiencies in the state’s internal control system or an unwillingness among the state’s legislative and executive branches to disclose an objective presentation of the state’s financial position.

We as taxpayers must hold our state government to the same standards that we require from publicly traded corporations. From a conceptual perspective, we should be asking ourselves what the essential differences are between taxpayers and shareholders. Both taxpayers and shareholders require a return on their invested dollars, both hold a stake in respectively the government and corporations, and both are allowed to vote in state and board of director’s elections. So why do taxpayers do not receive the same level of protection that shareholders of publically traded corporations receive?

The recent downgrade of Hawaii’s bond rating by the credit agencies Fitch and Moody’s, shows that in contrast to the state’s reported financial position, the financial situation in Hawaii is rapidly deteriorating. If we want to prevent the financial condition from deteriorating any further, we should pressure legislators to pass legislation that would essentially narrow the gap between the financial reporting and accountability standards in the public and private sectors.

Paul Harleman is an intern with the Grassroot Institute of Hawaii and a student at the Hawaii Pacific University. Reach him at paul_harleman@grassrootinstitute.org

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