Public Sector Accounting - the cruel world of neoliberalism
1. PUBLIC SECTOR ACCOUNTING
REFORM:
- the cruel world of Neoliberalism
Andy Wynne – andywyne@lineone.net
2. OUTLINE
public sector accounting reform is based
on New Public Management and
Neoliberalism
It is not based on proven good practice
It is an ideologically contest approach to
reform – not modernisation
Accrual accounting is costly & does not
provide the benefits claimed for it
2
5. Keynes to Washington consensus
q
Thatcher and Regan had to fight to introduce Neoliberalism
(miners strike & sacking of the air traffic controllers)
q
third world debt gave World Bank/IMF leverage to impose
structural adjustment policies (SAPs) across global south in
1980s
q
collapse of Berlin Wall (1989) undermined argument for state
led economic development
q
Anti-Capitalist movement – from Seattle 1999
q
Global recession – from 2008 and the Arab spring.
Slide 5
6. Post 1945 consensus
State was central to economic development - direct role
with state owned basic industries
economy should be actively managed to maintain full
employment
The state had the following responsibilities:
– provide affordable services to poor
– re-distribute wealth
– regulate economic activity to protect workers and the
environment
The World Bank vilified by Wall Street Journal for
‘promoting socialism’ in developing countries
7. Paradigm change
As Susan George said:
In 1945 or 1950, if you had seriously proposed any of the
ideas and policies in today's standard neo-liberal tool-kit
you would have been laughed off the stage or sent to the
insane asylum.
7
8. Requirements of Neoliberalism
• reduced government spending and
greater fiscal discipline
• removing import controls and restrictions
on foreign investment
• privatisation of state enterprises
• free market for the national currency
• abolition of food subsidies and
minimum wages.
10. New Public Management
Emphasises use of competitive markets & use of
private sector techniques:
• out-sourcing, public private partnerships
• government financing rather than directly
providing public services
• decentralisation, agencies and competition –
giving managers the right to manage
• performance management
• charging and ‘cost sharing’
11. World Bank view of PFM
Three main objectives of PFM – (Public Expenditure
Management Handbook, 1998):
aggregate fiscal discipline
resource allocation and use based on strategic
priorities
efficiency and effectiveness of programs and
service delivery.
MTEF, programme budgeting, IFMIS &
decentralisation
13. NPM approach to public sector financial
management
large state bureaucracies are inherently defective
and wasteful;
the free market is the most efficient method of
allocating scarce resources;
private sector management techniques are a
suitable model for the public sector; and
if the preferred approach of privatisation is not
considered to be appropriate then
commercialisation or pseudo-markets should be
introduced as the second best alternative.
(Minogue in Connolly, 2009, 26)
13
15. Cash or accrual accounting?
Cash basis is the traditional approach for the public
sector
Modified as record:
– debtors & creditors
– financial balance sheet – debt & bank balances etc
Accrual accounting = private sector style accounts
– physical assets valued in balance sheet
– depreciation included in P&L account
– tax recorded in year earned – so only estimate
15
16. Objectives of financial statements
Private sector – indicate level of dividend possible
without reducing capital base
Public sector – indicate whether money was spent
in line with parliamentary budget
16
17. Moving to accrual accounting ?
An interesting experiment by a few countries
significant costs involved
the benefits are yet unclear
17
18. Advantages of accrual accounting?
Financial reports prepared on an accrual basis
allow users to:
Assess the accountability for all resources the entity
controls and the deployment of those resources
Assess the performance, financial position and cash
flows of the entity
Make decisions about providing resources to, or doing
business with the entity
International Public Sector Accounting Standards Board (2002)
18
19. Recent Adoption of Accrual Accounting
Adopted by central
Country
government
Spain 1989
New Zealand 1993
Sweden 1993
Australia 1994
USA 1998
UK 2002
Canada 2003
Finland 2005
France 2006
19
20. Top twenty economies
Accrual Not Accrual
Australia Argentina, Brazil
China, Germany
Canada India, Indonesia
Italy, Japan
France Mexico, Russia, Saudi Arabia
South Africa
United Kingdom South Korea,
Turkey
United States
20
21. Slow train to accrual accounting ?
1850 - Birmingham City Council adopts accrual
accounting
1866 – HM Treasury retains cash accounting in
major reforms of public financial management
2001/02 – UK Government introduces accrual
accounting (RAB) for the first time
21
22. Lost in the post?
In Australia, the Postmaster-General’s department
introduced commercial accounts (including a full profit
and loss statement and balance sheet) in 1913
1996 –Australian central government adopted accrual
accounting
22
23. HM Treasury view in 1970s
“accruals accounting involving allocating costs
between years on the basis of resource use
rather than cash funding was incompatible with
parliamentary sovereignty and therefore
unacceptable. Parliament voted cash funding
year-on-year, so therefore the main control
accounts, reports and accountability must be on
an annual cash basis”
Perrin (1998,8)
23
24. Andrew Likierman changes his mind
In 1992 Andrew said:
Those who believe that private sector accounts are
superior need to bear two factors in mind. First, that
there are no immutable accounting or other financial
reporting rules which apply irrespective of the nature and
purposes of the organisation whose activities and results
are being displayed or the objectives of presentation.
Second, that cash accounts, despite their crudeness,
have a degree of transparency that accrual accounts
cannot give and that many private sector financial
reports do not seek to offer.
From 1993 to 2003 he was head of the Government Accounting Service and
drove the introduction of accrual accounting in the UK
24
26. Accrual accounting – the evidence? - 1
“In most cases it is too soon to identify any
discernible benefits from better resource
management”
UK National Audit Office, 2003
“there was little evidence that [accrual]
information was extensively used in decision
making… the costs were seen as substantial”
Connolly and Hyndman, 2005
26
27. Accrual accounting – the evidence? - 2
“there was no evidence that the perceived
benefits from the introduction of... accruals
accounting... were being realised”
Mellett, Macniven & Marriott, 2008
27
28. Accrual accounting – the evidence? - 3
“Departments have made significant progress in using
accruals-based accounting and budgeting systems since
our previous study. This has allowed departments to
better understand how they are using their financial
resources, for example by offering more detailed
information to manage their assets and liabilities.
Departments have used this information to help
identify under-utilised assets and to dispose of
those no longer required.”
UK National Audit Office, 2008
28
29. Clear Line of Sight Project
There are two main issues with current arrangements:
i. there is significant misalignment between the different bases on
which financial information is presented to Parliament; and
accordingly
ii. Government financial documents are published in different formats,
and on a number of different occasions during the year, making it
difficult to understand the links and inter-relationships between
them.
April 2008 said to be “potentially an historic development”.
July 5th 2010 this was debated in parliament (10 years after the
introduction of accrual accounting).
29
30. Edward Leigh – former Chair of Public Accounts
Committee (July 2010)
“both sides of the house are agreed that the
present system is broken and we should do
something about it”
“in terms of effective parliamentary scrutiny we
were at the bottom of the heap, together with
New Zealand, ranked lower than any other
democratic Parliament in the world, bar none”.
30
31. Public Administration Committee - Australia
“the Committee considers that the adoption of
accrual accounting & budgeting has the
potential for enhancing the management of the
Commonwealth’s funding and expenditure and
has done so to an extent.”
- 10 years after the introduction of accrual
accounting(2007)
31
32. State of Financial Accountability Reporting -
Cayman Islands (2008)
financial year from 1st July 2004 should have seen the
Cayman Islands being “at the very forefront of financial
accountability reporting among governments of the
world”.
But, 2008 Auditor General’s report described:
“a very grim assessment of the state of financial
accountability reporting throughout the Cayman Islands
Government”.
the first accrual based accounts were 2.5 years late and
the Auditor General found the “current situation
deplorable”. He also believed that “the legislative
assembly has lost control of the public purse”.
32
33. Cayman Islands – 2010 update
April 2010, the Auditor General concluded that,
“the state of financial accountability reporting has gotten
worse in the two years since I last reported on this
matter”.
“I believe this situation has become a national crisis that
could lead to tremendous consequences for the Cayman
Islands Government if not addressed immediately”.
33
34. Problems with US consolidated accrual accounting
the US Government Accountability Office has been
unable to provide an opinion on its accrual based
consolidated financial statements for the last 14 years
34
35. Annual report of Cour des Comptes - 2010
The review of management procedures produced three
major findings:
The different accounts of the state and their interaction
continue to have shortcomings
Management practices affect the concepts of budget and
fiscal balance.
The link between budget management and process
performance is rarely established.
35
37. OECD
OECD report on public sector reforms in Middle East and
North Africa made the following comments on the
introduction of accrual accounting:
Most countries, however, question whether the expected
benefits have materialised. Has this reform improved
the management of public resources and to what extent?
Has it usefully informed the political process? Has it
improved choices? These remain partly unanswered
questions. Meanwhile the costs of moving to accrual
accounting have been very substantial and generally
much higher than expected (page 98-99).
37
38. GASB (US) White Paper 2006
“Governments are fundamentally different from for-profit
business enterprises in several important ways. They
have different purposes, processes of generating
revenues, stakeholders, budgetary obligations, and
propensity for longevity. These differences require
separate accounting and financial reporting standards in
order to provide information to meet the needs of
stakeholders to assess government accountability and
to make political, social, and economic decisions.”
38
39. Is the accrual balance sheet complete?
Does not include:
– natural resources - nationalised banks (UK)
– the right to tax
Imbalance:
– cost of education, but not value of workforce
– pension costs, but not related future tax
Result suggests the need to reduce expenditure
39
40. View from Malaysia
“Keep the accounts simple, but yet be able to
show how the government has utilised the
resources under its control. That should be the
purpose of public sector accounts”
Teh Ben Chu, former Deputy Accountant General
Malaysia 2008
40
41. What standards for the public sector?
The accrual IPSASs have not been adopted, even by the
key players:
US and France have their own accounting standards
UK is adopting IFRS (with changes for the public sector)
Australia – IFRS (with amendments), sector neutral
New Zealand – IFRS with with 'public benefit entity'
amendments
Cash Basis IPSAS issued in January 2003, but core
aspects yet to be implemented by a single country
41
43. Other NPM accounting reforms
consolidated financial statements - Whole of
Government Accounts
move from incremental line item budgeting to
programme budgeting
medium term expenditure frameworks
integrated financial management information
systems
value for money auditing
43
45. Concluding thoughts
Accrual accounting may assist with:
• efficiency (reducing costs/wages) and comparison with
the private sector
• the importance of a balanced budget
Direct benefits appear limited and may not justify the
costs
Efficient approach:
• What additional information is needed?
• How can it be provided cheaply?
46. How do we fight Neoliberalism?
We need to fight for an alternative to cuts in public sector
spending and unemployment
We need to fight against the fascist reaction of Anders
Behring Breivik and the English Defence League
We also need to argue that NPM reforms like accrual
accounting do not work, even on their own terms
The successes of the Arab Spring remind us that
another world is possible
18/05/12 13:15 Andy Wynne Notes Page Reagan had to sack all the US air traffic controllers in 1981 and only managed to defeat their strike because other air industry workers crossed picket lines. After a year long coal miners strike in 1984/85 Thatcher only just won and had to close down the coal mining industry which had been one of the main industries in Britain employing over 1 million miners.
In UK from 1997 the Blair Government continued and extended the Neoliberalism of the Thatcher era and retained some of the most vicious anti-union legislation. Two main reasons: to retain credibility with capital to attacked foreign investment. Brown's prudent rules, Bank of England independent and given the responsibility to set interest rates with the sole objective of managing inflation. The other is the defeat of the Labour left and so no credible alternative was available to fiscal and monetary prudence and business-approved supply-side measures.
UK government debt peaked at 250% of GDP – this proved to be sustainable. For Greece only 120% is considered so. Lagos State Government launched a ₦75billion ($500million) bond in December 2008 which was over subscribed by 20% and had a real rate of interest of around minus 2%.
Usual efficiency claims and better management of capital assets
Birmingham was one of the top 6 economic entities in 19th century Britain – less 1.5 hours from London by train Accrual accounting was not mandatory in the private sector until the 1948 Companies Act. But it is seen as MODERNISATION. Thus the European Commission when announcing its move to accrual accounting used this term many times and claimed it would result in the EC having one on the most modern accounting systems.
Mainland China, Malaysia – looked at but no plans. Italy, Germany – no plans for central government Netherlands new government in 2003 scrapped plans as too bureaucratic Accountants General against in Mauritius and Namibia Not introduced in the Republic of Ireland
page 23, ‘Financial Reporting in the Public Sector’ in Public Sector Accounting and Financial Control , Edited by Sir Douglas Henley and Clive Holtman, Chapman & Hall
This was in the National Health Service in England and Wales which had adopted accrual accounting over 15 years previously.
Certainly more NAO accounts went from 6 pages in 2000-01 to 26 pages in 2001-002 Professionally qualified accountants increased from less than 600 in 1989 to 2,200 in 2003. Audit fees for NAO increased by 67% to 2001/02
Connolly page 21
Ten years after the Cayman Islands agreed to adopt accrual accounting,
The financial statements for 2004/05 (the first year of accrual accounting) had still not been issued, despite the Government having spent an additional $1 million in the current fiscal year to address the problem. The Auditor General assessed the efforts as being “too limited and therefore insufficient to address the situation”. He estimated that at the current rate it would be “several years before the accounting activities of the Government are up to date” and considered that this was “unacceptable”. The Cayman Islands is not a poor country: the per capita income is one of the highest in the world and, as it is a tax haven and financial services centre, there are many qualified accountants available locally. If the introduction of accrual accounting can go so horribly wrong in the Cayman Islands, imagine what could happen in the many developing countries where accrual accounting is still actively being promoted for the public sector.
“ While significant progress has been made in improving federal financial management since the federal government began preparing consolidated financial statements 14 years ago, three major impediments continued to prevent us from rendering an opinion on the federal government’s accrual-based consolidated financial statements over this period: (1) serious financial management problems at the Department of Defense (DOD) that have prevented DOD’s financial statements from being auditable, (2) the federal government’s inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and (3) the federal government’s ineffective process for preparing the consolidated financial statements.”
On point three on performance budgeting: 3. Analysis of the results should not only focus on the budgetary balance and the result heritage but also the concrete results achieved by program managers that need to be mentioned in the annual performance reports. If the technical tools to measure the performance continued to be improved, fiscal reality has remained insufficiently connected to this approach. The implementation of cost accounting that can act as management tools and decision support remains essential.