Thursday, October 26, 2006

The Federal Deficit Obfuscation Act

Voodoo economics, meet voodoo accounting.
Dick Cheney may think that "deficits don't matter," but Bush and the Republicans in Congress seem to be a little sensitive on this point. As CFO reports, an obscure provision in the so-called Deficit Reduction Act could more precisely be described as deficit obfuscation:
At the end of last month, the federal government played its own version of "pretend you're not home when bill collectors call." For nine days, from September 22 to 30, the government put a hold on Medicare payments to health-care providers. The payments resumed this month, with no interest or penalties added. Why? Because October is the start of the 2007 fiscal year.
Finance executives will recognize the blackout as a game of "shift the expenses." The payment holiday is a simple accounting gimmick to lower the federal deficit, or to at least appear to lower it. The hold shifted $5.2 billion in expenses into the 2007 fiscal year.
Who's behind the charade? Congress. It legislated the hold as part of the Deficit Reduction Act, signed into law in February by President Bush.
A little explanation may be in order. If a corporation (or state or local government) neglects to pay its bills at the end of the fiscal year, it can't claim to have improved its financial position. That's because they all report their results using accrual accounting, which means that if a corporation incurs an expense in September, it can't just ignore the bill and make it go away. The corporation has to report that expense whether or not it actually pay the bill before the end of the month.
I would hesitate to compare this to Enron or WorldCom, because their accounting trickery took some imagination. All this little gimmick required is the hope that no one would notice.


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