(FORTUNE Magazine) – The manner in which the federal government represents its financial condition is woefully misleading. For all the debate about the exact costs of items in the federal budget and the very precise deficit numbers reported each year, Congress and the voters do not know the real cost of government operations. Nor do they know how much the government owes its citizens in the form of pension obligations and other entitlements. And no one can have a clear idea of the economic impact of decisions by Congress or the Administration. But one thing is clear: the numbers in use today, the government's checkbook balances, grossly understate the cost of government. The underlying problem is that virtually all debate over the federal budget deficit focuses on the so-called cash deficit. By reporting its financial status only on a cash basis, the government ignores such things as accounts receivable and accounts payable, does not provide reserves for uncollectible debts, treats the sale of assets as income and long-term capital investments as current expenses, does not depreciate or amortize capital assets, and disregards the long-term costs of federal programs. A wise man once noted that ''we might hope to see the finances of the (federal government) as clear and intelligible as a merchant's books, so that every member of Congress and every man of any mind . . . should be able to comprehend them to investigate abuses, and consequently to control them.'' The man was Thomas Jefferson. Some may say that his comments on government finances are as obsolete today as knee-length britches and powdered wigs. I disagree. Like any large organization, the federal government cannot get a reliable picture of its financial condition unless it uses the accrual method of accounting. Accrual accounting recognizes financial events as they occur. It would enable federal officials to account for their activities in a manner that reflects the true economic impact of financial transactions, and it would give officials a sound basis for assessing national priorities. In 1975 my firm prepared prototype consolidated federal financial statements using accrual accounting to set a standard for sound financial reporting. This year we have prepared and are distributing comparative statements again to provide elected officials and citizens the information they need to properly address a decade of deficits, a lack of accountability, and inadequate federal financial management. The reported federal deficit in fiscal 1974 amounted to $6.1 billion on a cash basis. On an accrual basis the deficit that year was $95.1 billion. By 1984 the annual deficit had risen to $185.3 billion on a cash basis and $333.4 billion on an accrual basis. Along the way the accrual-basis deficit peaked as a percentage of GNP at 12% in 1980; by 1984 it had dropped to 9% of GNP. From 1974 to 1984 the accumulated deficit (the true national debt) measured on the accrual basis rose to $3.8 trillion. That was roughly double the total market value of all securities traded on the New York and American stock exchanges and over the counter at that time, and nearly three times the reported national debt of $1.3 trillion. The accumulated deficit at the end of fiscal 1984 amounted to approximately $44,500 per household. The principal reasons for the differences between our figures and the cash- basis figures in the federal budget are that accrual accounting includes the pensions promised to federal employees and the military and the future Social Security benefits that workers have already earned. These are the nation's largest liabilities, and yet they are not acknowledged as real obligations by the U.S. government. Because these programs are financed mostly on a pay-as- you-go basis, political leaders have been able to enhance benefits continually without reporting the cost of those obligations. THE PROPOSITION that the government ought to use accrual accounting is not radical. Indeed, Congress passed a law ordering the executive branch to adopt accrual accounting 30 years ago. As long as the Administration ignores that mandate, Congress will continue to adopt programs without fully recognizing the costs it is committing taxpayers to bear. This lack of accountability creates an incentive for elected officials to curry favor with today's voters at the expense of tomorrow's taxpayers -- a true generation gap. Until we remedy this, we cannot reasonably expect politicians to meet nonexistent standards of fiscal responsibility. The Reagan Administration often has asserted its philosophical commitment to sound government financial management. Here are some ways the Administration can replace rhetoric with clear action: Establish sound financial reporting as a priority. It should be possible to meet this goal by 1990 if not sooner. Publish and distribute annual financial statements. The federal government, which insists on full disclosure from public companies, should follow the rules it prescribes for others. For the past ten years the Treasury has prepared financial statements based on our prototype. But those statements generally have been prepared about a year late and have been issued with significantly less fanfare than that accompanying the appointment of a deputy under secretary. Submit federal financial statements to an independent audit. The logical choice would be Congress's General Accounting Office. Adopt accrual accounting for realistic budgeting. The federal government should finally comply with its own law requiring accrual accounting and use it not only for reporting, but for budgeting and management purposes as well. This accrual-basis budget would come in addition to the cash-flow budget. As accountants and consultants to business and government, my firm recognizes that fiscal crises often stem from a lack of accountability, inadequate or misleading financial information, and a failure to account properly for the full cost of long-term programs. We made this point when we presented the first prototype financial statement of the federal government in 1975. Soon thereafter, New York City and a number of other large municipal governments began foundering on the rocks of fiscal irresponsibility. Federal officials were quick to recognize the problem and quick to prescribe a cure. In return for the emergency assistance it provided to New York City, the Treasury ordered the city to convert to accrual accounting for financial reporting and budgeting, and to undergo annual audits. Subsequently Congress mandated annual audits for state and local governments receiving federal grants. Yet in the face of a fiscal crisis of its own, and in defiance of the 1956 law, the U.S. government has failed to implement the reforms it imposed on others. The need to restructure the nation's system of financial management is urgent. It is not simply an issue for debate among accountants or investment bankers; it is a critical question of governance. The representatives of a free society have an obligation to report accurately on the financial affairs of the federal government. Perhaps the American public would approve of all that Congress has committed it to pay. But whatever the case, the public has an inalienable right to know. At present the public does not know the true state of federal finances. Now is the time for Americans to insist that their government put its financial house in order. Above all, now is the time for an Administration committed to financial integrity to push for reforms that will create a practical basis for holding public officials accountable for their positive or negative contributions to the economic welfare of the nation. The gut issue is not accounting; it is accountability, an old idea whose time has come.