Accounting
The state of GAAP: Government financial reporting and the road ahead under the FDTA
A landmark research study by the Governmental Accounting Standards Board has provided one of the most detailed examinations to date of how state and local governments in the United States use GAAP.
The findings, published in the March 2025 staff working paper “
The study confirms that all
One of the key contributions of the study is its categorization of state-level financial reporting requirements. Each state has the authority to determine whether and how GAAP is mandated. The researchers placed states into five categories: those that require GAAP with no exceptions; those that require it with exceptions; those that prescribe a non-GAAP framework with or without exceptions; and those that do not specify a framework at all. While GAAP is universally required at the state level, the requirements for counties, municipalities and special districts are far more variable. The lack of a uniform mandate at the local level has created a fragmented reporting environment, especially for smaller jurisdictions.
To better understand why some governments adopt GAAP even when it’s not required, the study analyzed a sample of 1,372 counties, municipalities and special districts in seven states that offer flexibility in choosing their reporting framework. Several statistically significant factors were found to influence GAAP adoption. Larger governments, measured by total revenue, are more likely to utilize GAAP. The same is true for governments carrying higher levels of outstanding debt, particularly those that issue public debt requiring continuing disclosures to the Municipal Securities Rulemaking Board. Additionally, governments subject to a federal Single Audit — triggered by the receipt of $750,000 or more in federal funding — were more inclined to adopt GAAP, likely because of the audit standards and federal oversight such funding entails.
The most striking finding of the study was the impact of state-supported alternative financial reporting frameworks. In states like Indiana, Kansas and Washington, which offer comprehensive non-GAAP frameworks complete with manuals, templates and technical support, governments were up to 12 times less likely to use GAAP. Among governments subject to a Single Audit, those without a state-supported alternative were 36 times more likely to follow GAAP. This dramatic disparity illustrates the powerful role that institutional support — and not just regulation — can play in shaping accounting practices.
The researchers also contextualize these patterns using institutional theory, which posits that governments adopt certain practices not merely for technical reasons, but to signal legitimacy to stakeholders. Engagement in professional associations and the need to demonstrate transparency to voters, creditors and oversight agencies all serve as pressures toward GAAP adoption. In some cases, political scrutiny or financial mismanagement has led to legislative reforms mandating GAAP compliance, underscoring the symbolic as well as practical importance of standardized reporting.
These findings are especially relevant as governments prepare for the implementation of the Financial Data Transparency Act, passed in 2022. The FDTA requires municipal securities issuers to submit their financial disclosures in machine-readable, standardized formats using open data standards. Although the act does not mandate GAAP, it requires structured financial reporting that may more easily align with GAAP-based formats.
For governments already reporting under GAAP, this transition to digital reporting is expected to be seamless. Their financial statements follow a consistent structure that can be more readily mapped to the taxonomies being developed for FDTA compliance. On the other hand, governments using non-GAAP frameworks may face significant challenges. These governments will need to map their existing reports to new standardized formats, which could require updated accounting systems, training for staff or outside technical assistance. The availability of well-supported alternative frameworks — an asset in the past — may now become a hurdle to compliance if those frameworks do not translate cleanly into the new data requirements.
As a result, FDTA could become a catalyst for broader GAAP adoption. Governments may conclude that aligning their reporting with GAAP will make FDTA compliance easier and reduce the cost and complexity of converting financial data into the required digital formats. Midsized governments and those on the margins of GAAP adoption may be especially susceptible to this shift. At the same time, the pressure to comply with FDTA may expose the limitations of existing alternative frameworks, potentially prompting states to revisit their support structures or consider standardization strategies that better align with federal expectations.
GASB’s working paper serves as a valuable foundation for monitoring how these dynamics play out. It not only provides updated estimates of GAAP usage but also introduces a replicable model for assessing changes over time. This is particularly critical in the coming years, as the federal push for data transparency, technological modernization and fiscal accountability converges with longstanding debates over accounting standards in the public sector.
In summary, the GASB study reveals a nuanced picture of financial reporting across U.S. governments, shaped by institutional pressures, state mandates, organizational capacity and market incentives. As the FDTA begins to take effect, it is poised to influence these patterns — potentially accelerating the shift toward GAAP or, alternatively, driving efforts to modernize and standardize non-GAAP reporting systems. Either path will require careful coordination among governments, regulators and professional organizations to ensure the goal of the FDTA — clear, comparable, and accessible financial information — is achieved.
The Public Company Accounting Oversight Board today sanctioned Heaton & Co. and one of its partners, Kristofer Heaton, for failing to properly document five audits.
The firm violated AS 1215, Audit Documentation, by failing to assemble the proper documentation for five issuer audits. Two of those audits resulted in the firm making significant modifications and additions to the workpapers just before a PCAOB inspection. Although the firms generally disclosed in the workpapers that they had created and modified them after the respective completion dates, those additions and modifications were not adequately documented.
For the other three issuer audits, one contained numerous incomplete workpapers, another contained workpapers related to a different client, and for the third, the firm created over 90% of the workpapers after the completion date upon PCOAB enforcement staff requesting them.
“Failing, not once, but multiple times to properly document audit work, calls the integrity of the entire audit into question, and the PCAOB will take action to protect investors,” PCAOB Chair Erica Williams said in a statement.
Heaton, the engagement quality review partner on the five audits, violated AS 1220, Engagement Quality Review, by failing to evaluate whether the documentation reviewed indicated the engagement team responded appropriately to risks and supported the reached conclusions. At the time Heaton provided his concurring approval for the issuance of each audit, certain documentation either did not exist or was insufficient to indicate the engagement team had responded appropriately.
“The respondents failed to comply with multiple PCAOB rules and standards,” Robert Rice, director of the PCAOB’s division of enforcement and investigations, said in a statement. “We will continue to bring enforcement actions to address these violations and ensure that accountability is upheld at every level of the profession.”
The firm also violated PCOAB quality control standards by failing to establish, implement and monitor policies and procedures to provide reasonable assurance that firm personnel would comply with professional standards and the firm’s standards of quality. During that period, Heaton substantially contributed to those violations, in violation of PCAOB Rule 3502, Responsibility Not to Knowingly or Recklessly Contribute to Violations.
Without admitting or denying the findings, the firm and Heaton consented to the PCAOB’s order, which:
- Censures each respondent;
- Revokes the firm’s registration with the right to apply to re-register after two years, if the firm undertakes remedial measures;
- Bars Heaton from being an associated person of a registered firm with the right to petition the Board to associate with a firm after two years, given he has completed 40 hours of continuing professional education, in addition to CPE requirements related to any professional license he holds; and,
- Imposes civil money penalties of $35,000 on the firm and $25,000 on Heaton.
Accounting
Technology as the cornerstone: Success strategies for small and medium-sized accounting firms
The accounting profession is more complex than ever before. Small and medium-sized accounting firms face increasing competition, shifting client expectations and rapid technological innovation. While many firms seek to adapt through trial and error, our recent study provides evidence-based insights into what truly drives perceptions of success in this challenging landscape.
Through a survey of 192 firms collected by the Center for Accounting Transformation, we found that the most significant factor consistently associated with success is technological leadership. Firms that consistently stay ahead of their peers with advanced technologies outperform their peers. Beyond technology, other contributors to success include exceeding client expectations and fostering a culture of continuous learning and improvement.
For practitioners, these findings offer actionable guidance. Success in today’s accounting world is not about doing everything, but about prioritizing the right strategies. Below, we outline the suggestions that can help small and medium-sized firms thrive based on our empirical results.
Key factors driving firm success
Leadership in technology adoption: The clear standout factor in our research is technological leadership. Firms that position themselves ahead of their peers in adopting advanced tools—such as AI, automation and cloud platforms—are consistently perceived as more successful.
- Why it matters: Technology enhances efficiency, allowing firms to automate parts of routine tasks like tax preparation and reviewing workpapers. It also enables firms to remain resilient during periods of rapid change, adapt to shifting client needs, and compete effectively with larger firms. By leveraging technology, firms can streamline operations, reduce costs, and free up resources to focus on higher-value services.
- Survey insight: Respondents noted that tools like AI not only streamline operations but also solve staffing challenges. For instance, respondents to our study noted, “AI allows me to produce more today by myself than when I had a staff of 20.” Additionally, remote work technologies were highlighted as game-changers: “The ability to work anywhere with our paperless environment is a tremendous advantage.”
Exceeding client expectations: Technology is not the only factor that incrementally enhances perceptions of success; firms must also focus on delivering exceptional client experiences. Firms that go beyond meeting expectations to actively contribute to client success see stronger client loyalty and reputational benefits.
- Why it matters: Clients increasingly demand tailored, strategic solutions, not just compliance work. Exceeding expectations strengthens trust and fosters long-term relationships.
- How to implement: Use client feedback to identify service gaps and opportunities for improvement. Train staff to adopt a client service approach, focusing on clients’ broader business goals.
A culture of continuous learning and improvement: Organizational culture is another important driver of success. Firms that emphasize learning, innovation, and improvement outperform those focused solely on team dynamics or routine processes.
- Why it matters: A forward-thinking culture helps firms adapt to industry changes, attract top talent, and retain staff in a competitive labor market.
- How to implement: Implement professional development programs that prioritize tech skills and leadership training. Regularly evaluate firm processes and encourage team input for improvements.
Surprising findings, what didn’t matter as much: Our empirical research also debunks some common assumptions. For example:
- Service specialization: While many practitioners emphasize the need for industry or service specialization, our findings show these factors have limited incremental impact on success.
- Advisory work vs. compliance work: Contrary to popular belief, the balance between advisory and compliance work does not significantly drive success. Instead, success stems from how services are delivered, not the type of services offered.
Practical steps for practitioners
To capitalize on these findings, firms should focus on:
- Investing strategically in technology
- Assess your firm’s current tech stack and tech abilities and compare it to industry leaders.
- Prioritize investing in the technology skills of your people and in investments in AI, automation and cloud-based solutions that directly enhance client service and operational efficiency.
- Reframing client relationships
- Position your firm as a strategic partner, not just a service provider.
- Create metrics to measure and track client satisfaction and loyalty.
- Fostering a culture of innovation
- Encourage staff to explore new technologies and processes.
- Recognize and reward innovative ideas that enhance client or firm outcomes.
Looking to the future
The accounting profession is evolving at a breakneck pace, with new technologies like generative AI, predictive analytics and remote work technology reshaping the landscape. For small and medium-sized firms, success depends on being proactive: adopting transformative technologies, exceeding client expectations, and fostering a forward-thinking culture. By prioritizing these strategies, your firm can navigate the challenges ahead and emerge as a leader in the industry.
For more detailed insights or guidance on implementing these strategies, feel free to reach out to the authors.
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