The Role of Federal Agency Accounting Quality in Federal Budget Allocation

Abstract

This study examines the role of the accounting quality of U.S. federal agencies, measured with audit opinions, in federal budget allocations to agencies. We find that, when an agency receives a modified audit opinion, the president proposes and Congress enacts a lower budget for the agency, and the budgetary disagreement between them increases. These effects strengthen when the president and Congress have stronger incentives to demonstrate spending accountability to taxpayers. To enhance identification, we exploit the enactment of the Department of Homeland Security (DHS) Audit Requirement Target Act, which required DHS to end its longstanding modified audit opinions. Following the act’s implementation, the president proposed and Congress enacted higher budgets for the DHS, and their budgetary disagreement over the DHS diminished. These findings suggest that high-quality federal agency accounting influences budgetary decisions by reducing agencies’ information asymmetry with politicians (the president and Congress) and taxpayers, facilitating the evaluation of agencies’ spending accountability.

Keywords: Federal Agency Accounting, Government Transparency, Accounting Quality, Audit Opinion, Federal Budget, Political Incentives, Government Accounting