The Effect of Voluntary GAAP Compliance and Financial Disclosure on Governmental Borrowing Costs
Posted: 23 Jul 2014
Date Written: Summer 1991
State and local governments are not subject to Securities and Exchange Commission (SEC) regulations requiring compliance with generally accepted accounting principles (GAAP). It was only in 1980 that Standard & Poor's issued a policy statement indicating a failure to conform with GAAP would be considered a negative factor in establishing municipal bond ratings. Until May 1986, governmental GAAP was not even enforceable under Rule 203 of the A/CPA code of ethics. While some state governments regulate the accounting practices of their local governments, the states them selves are exempt from all accounting regulations. In this unregulated environment, differential levels of financial disclosure by the states are observed. Differential disclosure is presumably the outcome of an economic decision based on the conventional equal ization of the marginal costs and benefits of GAAP compliance. In this paper. we try to estimate the magnitude of one potential benefit accruing from differential GAAP compliance-the interest cost sav ings on general obligation bonds. Our study suggests the bond markets are ''informationally efficient'' in the sense that bond prices incorporate the effects of differentia! GAAP compliance.
Keywords: Governmental borrowing costs, Voluntary gaap compliance, financial disclosure
JEL Classification: M41
Suggested Citation: Suggested Citation