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PUBLIC SECTOR ACCOUNTING REFORM: - the cruel world of Neoliberalism

Andy Wynne –

 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

Background of Neoliberalism

The ideology of reform

New Public Management Public sector accounting reform

Keynes to Washington consensus

Thatcher and Regan had to fight to introduce Neoliberalism (miners strike & sacking of the air traffic controllers) third world debt gave World Bank/IMF leverage to impose structural adjustment policies (SAPs) across global south in 1980s collapse of Berlin Wall (1989) undermined argument for state led economic development Anti-Capitalist movement – from Seattle 1999

Global recession – from 2008 and the Arab spring.
Slide 5

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

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.


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.

New Public Management

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‟

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

Is government debt so bad?


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

Accrual accounting

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

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


Moving to accrual accounting ?

 An interesting experiment by a few countries
 significant costs involved  the benefits are yet unclear


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)


Recent Adoption of Accrual Accounting

Country Spain New Zealand Sweden Australia USA UK Canada Finland France

Adopted by central government 1989 1993 1993 1994 1998 2002 2003 2005 2006

Top twenty economies


Not Accrual
Argentina, Brazil China, Germany India, Indonesia Italy, Japan Mexico, Russia, Saudi Arabia South Africa South Korea, Turkey


United Kingdom
United States


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


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


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)


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

What is the objective evidence?

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


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


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


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).

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”.


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)


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”.

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”.


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


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.


Other opinions


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).

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.”


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

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


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

Other PFM reforms

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

So where do we go from here?

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?

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

Thank you!

Questions? Comments?