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ABSTRACT. While the passage of Statement No. 34 by the Governmental Accounting Standards Board (GASB, 1999) created a more robust financial reporting model, local officials continue to struggle with defining financial condition, interpreting it from annual financial statements, and communicating it in a systematic way. This review presents a framework for analyzing, interpreting, and communicating financial condition within the fund and government-wide reporting structure. It specifically responds to the void in the public administration literature for a manageable, yet comprehensive, approach to financial condition analysis. The goal is to help local officials conceptualize financial condition from the interpretation of resource flow and stock as presented in annual financial statements.
INTRODUCTION
Determining the financial position of a local government is relatively straight forward. Management prepares external financial statements at fiscal year end, which are subjected to an independent audit. An unqualified audit opinion informs the reader that the statements were prepared in conformity with generally accepted accounting principles (GAAP) and that they present, in all material respects, the financial position of the organization. While receiving an unqualified audit opinion is extremely important, how does a local official respond when a stakeholder moves beyond financial position and inquires about financial condition?
The local official is faced with two fundamental problems. First, unlike private firms with one income statement and one balance sheet, a local government's annual financial report contains multiple operating statements and balance sheets. Second, while there is universal agreement on the importance of fiscal health, there is little agreement on what financial dimensions and indicators actually represent financial condition (Wang, Dennis, & Tu, 2007).
The Governmental Accounting Standards Board (GASB) responded to the first problem in 1999 with the passage of GASB Statement No. 34, Basic Financial Statements-and Management's Discussion and Analysis-for State and Local Governments, expanding the financial reporting model to include financial statements at the fund level and financial statements at the government-wide level (GASB, 1999). The government-wide financial statements, similar to those of private firms, include one operating statement (statement of activities) and one balance sheet (statement of net assets) for the entire organization, opening the door for a more comprehensive methodology for analyzing, interpreting, and communicating financial condition.
Frank and Gianakis (2008) found, however, that local officials are not using...