A consideration of the costs and benefits of adopting the accrual basis of accounting in the context 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

3. Background of
Neoliberalism

4. The ideology of reform
4

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.

9. New Public
Management

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

12. Is government debt so bad?
12

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

14. Accrual
accounting

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

25. What is the
objective
evidence?

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

36. Other opinions

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

42. Other PFM
reforms

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

44. So where do
we go from
here?

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

47. Thank you!
Questions?
Comments?
andywynne@lineone.net