Endangered Disclaimers?

In the corporate world, the following statement would be a kiss of death for a borrower:

In our opinion ... the financial statements referred to above do not present fairly in conformity with generally accepted accounting principles, the financial position of the County ...

But in today's municipal market, it can be immediately offset by an assertion like this:

However, in our opinion, the statutory basis financial statements referred to above present fairly, in all material respects, the financial position of the County of Essex ... in accordance with accounting principles and practices prescribed by the Division of  Local Government Services, State of New Jersey.

In other words, in a showdown between the Governmental Accounting Standards Board and the State of New Jersey, the Garden State wins -- even when the auditor acknowledges that "the Governmental Accounting Standards Board is the recognized standard setting body for establishing governmental accounting and financial reporting principles."

It's not entirely fair to single out Essex County here -- most, if not all New Jersey issuers follow the same accounting procedures.  This is not a case of an issuer looking to re-write the accounting rules to void disclosing expensive future liabilities:  The POS includes three pages outlining the differences between GAAP accounting and the NJ Division of Local Government Services' rules.  They're technical.  Very technical.  [Interested bidders can find the entire POS via this site, and the county's summary notice of sale is available from The Bond Buyer here] 

But the fact that these disclaimers exist -- and that issuers appear to pay no price for them -- provide great illustrations both of why SEC Chairman Christopher Cox's proposal that municipal issuers be required to abide by GAAP accounting makes so much sense on the face of it ... and why it's going to be difficult to get that change adopted and implemented.

As well-intentioned as New Jersey's own guidelines may be, the catchphrase from the "Highlander" movies comes to mind:  When it comes to setting standards for governmental accounting, "there can be only one."  Why should investors be forced to wade through those three dense pages on accounting rules in order to make sense of the numbers?  And standardization would be only more crucial if a centralized municipal disclosure database is created -- another key Cox proposal.

On the flip side, re-writing the financial statements for issuers who have abided by local laws for years is going to be expensive, and in the absence of evidence that the differing standards are aiding and abetting fraud, it's not unreasonable for local officials to ask whether the cost is justified.

Who'll blink first?