NEW YORK CITY COULD HAVE AVOIDED ITS CRISIS IF IT HAD BEEN ACCURATELY REPORTING FINANCIAL OPERATIONS IN ACCORDANCE WITH ESTABLISHED ACCOUNTING PRINCIPLES. BECAUSE NEW YORK'S REVENUES DID NOT COVER EXPENSES, THE CITY BORROWED MONEY TO FINANCE CERTAIN OPERATING EXPENSES REDEFINED AS CAPITAL IMPROVEMENTS. THE COLLAPSE OF THIS FINANCIAL HOUSE OF CARDS WAS TRIGGERED BY ADVERSE ECONOMIC CONDITIONS IN 1975. NO SINGLE GROUP CAN BE BLAMED FOR FAILING TO DEMAND STRICT ACCOUNTABILITY FROM THE MUNICIPAL GOVERNMENT, BUT THE ROLES OF TAXPAYERS, GOVERNMENTS, AND THE ACCOUNTING PROFESSION SHOULD BE EXAMINED TO PREVENT A SIMILAR DISASTER. THE NATIONAL COUNCIL OF GOVERNMENTAL ACCOUNTING HAS ISSUED STANDARDS FOR MUNICIPAL GOVERNMENTS, GOVERNMENTAL ACCOUNTING, AUDITING, AND FINANCIAL REPORTS (GAAP), BUT THEY ARE NOT GENERALLY ACCEPTED. FEDERAL INVOLVEMENT IN LOCAL GOVERNMENTAL AFFAIRS IS A CONTROVERSIAL ISSUE, BUT WITH THE INCREASING AMOUNTS OF FEDERAL FUNDS CHANNELED TO STATE AND LOCAL PROGRAMS TAXPAYERS NEED ASSURANCES THAT MONIES ARE PROPERLY MANAGED. LOCAL GOVERNMENTS MUST THEN ACCEPT THE GAAP STANDARDS VOLUNTARILY OR BE COMPELLED TO DO SO BY TAXPAYERS, INVESTORS, OR THE FEDERAL GOVERNMENT. GAO COULD ASSUME VARIOUS ROLES TO PROMOTE GAAP, INCLUDING PARTICIPATION IN CONCERNED PROFESSIONAL ASSOCIATIONS, SUPPORT FOR LEGISLATION MANDATING OR ENCOURAGING FISCAL IMPROVEMENTS, AND ENCOURAGEMENT FOR THE CREATION OF AN INDEPENDENT BOARD TO ESTABLISH ACCOUNTING STANDARDS. (MJM)