[T]he era of low
standards...is over.... [T]here will not be a different ethical
standard for corporate America than the standard that applies to
- George W. Bush,
on signing the
Sarbanes-Oxley Act of 2002
markets reeled last year from accounting scandals in the corporate
world, at firms ranging from Enron and WorldCom to Tyco
International and Global Crossing. America's politicians decried
the state of corporate accounting and demanded more transparency,
disclosure, honesty, and integrity in bookkeeping. Congress swiftly
passed the Sarbanes-Oxley Act to stiffen accounting regulations,
requiring--among other things--that each firm's chief executive
officer (CEO) personally vouch for the firm's financial
However, these new regulations, like most
pre-existing ones, apply only to private-sector, publicly traded
companies. Yet other firms can also be vulnerable to lax,
misleading, or fraudulent accounting--as recent revelations at
government-sponsored Freddie Mac have shown. Firms that are owned
directly by the government may be even more susceptible to
accounting woes, given the absence of stockholders to keep an eye
this regard, the United States Postal Service (USPS) deserves
particular attention. The Postal Service's budget for 2002 was
about $67 billion, which is almost 0.75 percent of the U.S. gross
domestic product (GDP). The USPS is the second largest civilian
employer with 854,000 employees and a significant part of the $900
billion mailing industry. Given the Postal Service's
role in the economy and the investment by U.S. taxpayers in the
Postal Service, it is critical that taxpayers have accurate and
sufficient information so that they can fully understand the Postal
Service's financial viability and assess its progress toward its
the USPS has had substantial difficulty in maintaining and
reporting full and accurate accounting information, as documented
in several recent reports by the U.S. General Accounting Office
(GAO). For instance, in recent years, its financial estimates have
fluctuated wildly. The USPS initially estimated its fiscal year
(FY) 2001 budget deficit at $480 million, and this figure was
approved by the USPS board in November 2000; then, just three
months later, it grew to an estimated $2 billion-$3 billion. The
next year, the Postal Service's estimated deficit of $1.35 billion
grew to $4.5 billion only six months later.
light of these problems, in July, the President's Commission on the
United States Postal Service--a nine-member commission created by
President George W. Bush to recommend Postal Service reforms--urged
steps to improve financial transparency. Specifically, the commission
urged that the USPS voluntarily comply with Securities and Exchange
Commission (SEC) reporting requirements.
is a step in the right direction, but it does not go far enough.
Compliance with SEC requirements should be mandated by law, rather
than be voluntary, and enforced by the SEC, with its full menu of
itself, this single step will not solve the problems of the Postal
Service. Ultimately, reform will require substantial structural
changes, including privatization and elimination of the Postal
Service's monopoly on letter mail. Such changes are critical
and would help reinforce accountability as well as provide other
benefits. Nevertheless, extending SEC reporting rules is a step in
the right direction, and one that could be achieved quickly while
the debate over broader structural reform continues.
comprehensive November 2002 report, the General Accounting Office
found significant problems in the Postal Service's financial
reporting. It concluded that the USPS
had failed to provide sufficient and timely information on its
financial condition and outlook.
sign of trouble at the USPS, noted by the GAO, has been its
changing financial estimates. Due to increasing use of e-mail and
other electronic alternatives, USPS mail volume has declined in
recent years, leading to financial difficulty for the USPS. The Postal
Service's consistent misestimates of expected returns have only
made the problem worse. For instance, the Postal Service's estimate
of its FY 2001 budget deficit was $480 million in November 2000 but
grew to an estimated $2 billion-$3 billion only three months later.
The final deficit was $1.7 billion. The next year, the estimated
$1.35 billion deficit for FY 2002 grew to $4.5 billion only six
months later. The final 2002 deficit was
GAO report concluded that whatever the reason for these and other
misestimates, USPS financial reporting provided no way either to
anticipate the changes or to judge the reliability of the original
estimates. In making its case, the GAO focused on the USPS's
quarterly financial reports. The Securities and Exchange Commission
requires that publicly traded companies issue such reports and
include in them a discussion of the firm's financial condition and
results of operations. Although not subject to SEC rules, the USPS
also issues such reports, but the GAO found these reports
determining this, the GAO compared USPS quarterly reports to those
filed by UPS and FedEx, two major private firms in the delivery
business. It found that the private-sector reports were
consistently more detailed and provided better information on the
firm's financial standing and prospects. While many of the
differences appeared cosmetic, technical details of reporting--such
as the lack of explanatory footnotes in the USPS reports--can
determine whether a report conveys an accurate picture of a firm's
GAO also found that USPS reports have not been "consistent in
format and content, or as readily available to the public" as those
of other firms. Again, while at first glance
this may appear to be nit-picking detail, conventional uniformity
can be critical to a correct understanding of the financial
picture. As the GAO put it, "Sufficient, consistent, and accessible
financial information helps provide the necessary transparency and
accountability that are fundamental principles in ensuring public
confidence in an organization and proper oversight."
was not the only major flaw in the Postal Service's information
releases. The GAO also criticized the Postal Service for not
providing information on future or contingent liabilities. UPS and
FedEx, it pointed out, discuss such liabilities in considerable
detail, while the USPS did not. For example, in the wake of the
2001 anthrax attacks, the USPS did not disclose or discuss the
estimated $4 billion needed over the next several years to address
the threat, leaving readers uninformed of an expenditure that would
materially affect future results.
The "Postal Year"
addition to inadequate reporting of information, the Postal Service
uses methods of compiling information that raise artificial
barriers to analysis of postal activities. For example, the USPS
maintains budget data in a unique 52-week "postal year format" that
defies understanding, comparisons, and interpretation. Each "postal
year" has the same number of days each year (364). The 364 days are
divided into 13 "months" of four seven-day weeks. For this reason,
the postal year starts and ends on a different calendar day each
year and rotates counterclockwise around the regular calendar year.
The first, second, and third quarters contain three "months" each,
while the fourth quarter contains four "months."
if the Postal Service wanted to make comparisons by "years,"
"quarters," or "months," this time format would frustrate the
attempt. The strong seasonal component of postal activities is
buried in the iconoclastic "postal year" because holidays do not
occur at the same time in each postal year. Furthermore, this
postal year defies comparability with non-postal data. One might
think that this data system was designed to prevent measurement,
analysis, and comparisons of postal operations over time or with
other economic data. The USPS recently committed to a more
traditional fiscal year accounting, but the longtime use of the
postal year system underscores the overall lack of transparency in
Disclosure and Accountability in the
lack of transparency and accuracy in USPS finances stands in marked
contrast to the recent drive for better reporting in the private
sector. There has been wide agreement among the public and
policymakers over the past year on the need to strengthen and
enforce accounting standards. In response to accounting problems in
the private sector, legislative efforts have sought to strengthen
disclosure, accountability, and the usefulness of financial
information in both the public and private sectors.
key legislation resulting from these efforts has been the
Sarbanes-Oxley Act of 2002, which required greater accuracy and
reliability of corporate disclosures and imposed sanctions. Among
other changes, CEOs now incur personal liability in signing
financial statements for their corporations. Specifically, CEOs and
chief financial officers must personally vouch that their company's
financial statements are accurate, to the best of their knowledge.
They must also certify that they understand their firm's
statements, have discussed the information with the firm's audit
committee, and have made every effort to ensure the statement's
accuracy before release.
These new requirements are in addition to
pre-existing SEC financial disclosure and accounting requirements
for private, publicly traded firms. Among these are:
- An annual 10-K report detailing
information on--among other things--the firm's financial situation,
assets, management structure, pending legal proceedings, and
- Quarterly 10-Q reports providing
information to supplement the annual 10-K forms. These provide
interim financial statements, discussions of the firm's financial
condition, and comparisons to prior quarters. The GAO study of the
Postal Service was based on these forms.
- Form 8-K reports on current conditions.
The disclosures on this form are required within a few days of an
extraordinary event, such as a merger or bankruptcy.
of these disclosure forms are available to the public, not just
shareholders. In addition to SEC requirements, firms are subject to
state rules and regulations on corporations regarding such things
as independent boards of directors and requirements that
independent firms conduct audits.
Postal Service is not required either to prepare any of these forms
or, more important, to disclose the information that would be
contained in them to the public. As discussed above, the USPS
voluntarily prepares some reports similar to those required by the
SEC--such as quarterly financial statements--but the information
falls far short of the standards for private-sector firms.
What Needs To Be Done
American taxpayers, as owners of the
Postal Service, deserve the same protections and access to
information as shareholders in private, publicly traded firms. To
this end, the recent report of the President's Commission on the
United States Postal Service recommends that the USPS "voluntarily
comply with applicable Securities and Exchange Commission reporting
is a positive step, but it falls short of the mark. Voluntary
acceptance of reporting requirements would arguably leave the USPS
with final discretion as to what and how to disclose, and it would
leave penalties and other sanctions for inadequate performance
unclear. Potentially, the Postal Regulatory Commission (PRC), a new
body that the commission recommends be created, could exercise such
powers as part of a general regulatory authority over the USPS.
Even this, however, is less than satisfactory. The new PRC would
doubtless be expert in postal, not financial accounting, matters
and would therefore be poorly positioned to enforce rules that are
essentially SEC rules.
Instead, the USPS should explicitly be
treated as private-sector firms are treated. Congress should
specifically require that the USPS fully comply with Securities and
Exchange Commission reporting requirements, including the
requirements of the new Sarbanes-Oxley Act. To ensure compliance,
the SEC should be granted the same enforcement authority over the
USPS that it has over private companies, including the ability to
impose financial penalties and seek injunctions in court to forbid
or mandate actions.
steps could be undertaken as a stand-alone reform, without other
changes in USPS structure and management. Fannie Mae, for instance,
subjected itself voluntarily to SEC reporting and disclosure
requirements last year.
course, this step--whether voluntary or mandated by Congress--would
still leave the USPS under less pressure to provide full
information than other firms, primarily because the USPS lacks
stockholders. For publicly traded firms, stockholders contribute
substantially to creating accountability because they have a vested
interest in demanding information from management and spurring
outside analysis of the firm's performance. Perhaps most important,
shareholders provide continuous signals concerning a firm's
performance through changes in share prices.
However, for a stock to trade and achieve
these positive benefits, investors must have some prospect of a
positive return. Yet, at the moment, there is little consensus that
the USPS should even have profit-making as a goal, and the payment
of dividends would be extremely difficult as a practical matter in
the current environment. Policymakers should work on resolving
these and other impediments to private stock ownership of some or
all of the USPS. In the meantime, imposition of SEC disclosure
rules would still provide significant benefits.
reporting rules, it should be noted, are not the only reporting
rules to which the USPS should be subject. Because of its monopoly
on letter mail and the consequent possibility that the USPS could
"cross-subsidize" competitive services with income from its
monopoly services, it is important that the Postal Service be
subject to extensive cost and revenue reporting beyond SEC
requirements. The proposed new Postal Regulatory Commission would
have substantial powers to collect such information, unlike the
Postal Rate Commission--the current regulator--whose authority is
limited. This information would be for PRC purposes and not
necessarily available to the public. The purpose of such reporting
is, of course, very different from the purpose of SEC reporting and
very specific to the Postal Service, but it is also important.
U.S. Postal Service needs reform. In order to have the incentive
and ability to compete in today's marketplace, the Postal Service
should be subject to the same pressures, incentives, and
requirements as private firms. Ultimately, this should involve the
abolition of the Postal Service's legal monopoly on letter mail and
the privatization of the organization.
the meantime, however, some modest steps could be taken
immediately. Among these is improving the Service's financial
integrity and accountability by placing it under the same SEC
requirements as those that apply to private-sector firms. Such
action would help protect both the U.S. taxpayer and postal
consumers. They deserve no less.
Douglas K. Adie, Ph.D., is Professor of
Economics at Ohio University, and James L.
Gattuso is Research Fellow in Regulatory Policy in the
Thomas A. Roe Institute for Economic Policy Studies at The Heritage
Freddie Mac reported in June 2003 that it
had underreported profits by some $4.5 billion.