Soup-Kitchen Accounting

By JAMES DEITRICK and MICHAEL GRANOF

Austin, Tex.

TIMOTHY GEITHNER, the Treasury secretary, has pledged that the second bank bailout will be characterized by far greater transparency than the first on the part of the financial institutions. If he is sincere in his goal, then there is a simple accounting procedure that should be a part of the plan: the beneficiaries of taxpayer financing should have to keep track of their money in the same way nonprofits must.

Nonprofit accounting is designed to ensure that the recipients of grants from the federal government and other benefactors are held accountable for the funds they receive. Regrettably, the big banks that have been granted billions from the Troubled Asset Relief Program are less transparent in their financial reporting than the local soup kitchen that gets federal support.

Nonprofits use what is known as “fund accounting.” Fund accounting requires that a separate set of books be maintained for all grants that are designated for a specific activity. The aim is to ensure that the resources are spent for their intended purpose.

Executives of banks that have received TARP cash have said that it is too hard to account separately for how they spend their federal dollars. Money is fungible, they argue, and therefore they cannot readily distinguish between outlays of their own resources and those provided by the government. But that’s the type of doublespeak that would get the head of a town’s homeless shelter thrown in jail. If bankers are unable to segregate cash by source and specifically account for expenditures, why are they in charge of banks in the first place?

Were a bank or other bailout beneficiary required to maintain separate accounts for its federal receipts, then independent auditors could track all direct outlays of those funds. All they would have to do is follow the checks drawn on the accounts used for government money.

It’s true that there would still be opportunities for mischief. For example, a bank executive who has received TARP money could use the bank’s regular resources to purchase a $50 million jet or pay himself a bonus while reserving the TARP funds for routine loans.

However, this is where additional practices common to federal financial assistance come into play. Before a charity can receive a federal grant, it must prepare a proposal outlining precisely what it will do with the funds. Bailout recipients should do the same, or at least sign contracts agreeing to spend the money in accordance with terms set forth by the Treasury and to refrain from certain types of expenditures during these troubled times.

Similarly, charities are asked to provide detailed financial reports at least once a year to the federal agencies overseeing their grants. In the case of banks, the Treasury (or some other regulatory agency), could require quarterly “accountability reports” that include schedules detailing new loans, renegotiated loans, entity operating expenses, dividend payments, purchases of Treasury shares, debt retirement, maintenance of reserve or capital requirements and purchases of derivatives.

In addition, TARP recipients should be compelled to produce schedules that quantify the riskiness of their portfolios. These could be based on models that they now use for internal risk assessment, or that bank examiners have developed. This type of information, when compared with similar data from prior years, would go a long way toward determining whether the TARP funds were used for what Congress and the Treasury intended.

Thanks to the Single Audit Act of 1984 and supporting regulations from the Office of Management and Budget, governmental entities and not-for-profit organizations receiving federal assistance must submit to independent audits. TARP recipients should do the same. The auditors would not only attest to the integrity of the recipients’ financial data but also report on the extent to which they complied with the terms of the grant. If violations were found, the auditors would be charged with reporting them to the appropriate oversight agency.

Charity is accountable. TARP recipients should be, too.

James Deitrick and Michael Granof are professors of accounting at the University of Texas at Austin