ANY CHANGES IN THE WAY GOVERNMENTAL AND MUNICIPAL REPORTING STANDARDS ARE ESTABLISHED SHOULD BE EFFECTED SO AS TO CONSIDER THE SPECIAL NATURE OF THE TAX-EXEMPT BOND MARKET AND ITS GENERALLY SOPHISTICATED INVESTORS AND WELL-ESTABLISHED PRACTICES OF TRADING AND ANALYSIS. THE CHANGES MUST ALSO BE CONSISTENT WITH CERTAIN LEGAL REQUIREMENTS AND THE CONSTITUTIONAL PROTECTION AFFORDED LOCAL GOVERNMENTS AGAINST CERTAIN TYPES OF FEDERAL ENCROACHMENT. THEY MUST ALSO CONSIDER THE SPECIAL DIFFICULTIES OF SEPARATING ISSUES OF ACCOUNTING, AUDITING, AND DISCLOSURE, THE ORGANIZATIONAL LOYALTIES OF MUNICIPAL FINANCE OFFICERS AND OTHER INTERESTED PARTIES, THE TRADITION OF FREEDOM FROM OUTSIDE REGULATION ENJOYED BY MUNICIPALITIES, AND THE ABSENCE OF A WELL-DEVELOPED THEORY OF ACCOUNTING FOR GOVERNMENTS. THE CURRENT STATUS OF REGULATIONS REGARDING DISCLOSURE, ACCOUNTING, AND AUDITING ARE DESCRIBED AND CURRENT PROPOSALS FOR CHANGE ARE REVIEWED, FOLLOWED BY A DISCUSSION OF THE CRITERIA THAT SHOULD BE MET IN A STANDARD-SETTING PROCESS. THESE CRITERIA ARE AS FOLLOWS: (1) THE PROCESS BY WHICH STANDARDS ARE ESTABLISHED AS WELL AS THE STANDARDS THEMSELVES MUST HAVE THE SUPPORT OF EVERYONE INVOLVED IN THE PROCESS OF PREPARING, ATTESTING TO, AND USING THE FINANCIAL STATEMENTS, AND THIS CONSTITUENCY MUST BE INVOLVED IN THE STANDARD-SETTING PROCESS; (2) A SINGLE ORGANIZATION SHOULD HAVE RESPONSIBILITY FOR ESTABLISHING STANDARDS AND PRINCIPLES OF DISCLOSURE, ACCOUNTING, AND AUDITING; (3) THE ORGANIZATION MUST BE CAPABLE OF SUPPORTING AND CONDUCTING AN EXTENSIVE PROGRAM OF EMPIRICAL RESEARCH AND THEORY DEVELOPMENT; AND (4) THE ORGANIZATION MUST BE ADEQUATELY FINANCED. THE PRESENT PROCESS OF STANDARD-SETTING FAILS TO SATISFY ANY OF THE AFOREMENTIONED CRITERIA. FOOTNOTES AND A TABLE ARE INCLUDED. (RCB)