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.
Norway, which has adopted NPM ideas in stages, has been described as a ‘slow learner’ and a ‘successful tortoise’ (Olsen and Peters,1996).
Public Sector Accounting - the cruel world of neoliberalism
PUBLIC SECTOR ACCOUNTING REFORM:- the cruel world of Neoliberalism Andy Wynne – firstname.lastname@example.org
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
Keynes to Washington consensusq 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 1980sq collapse of Berlin Wall (1989) undermined argument for state led economic developmentq Anti-Capitalist movement – from Seattle 1999q 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 changeAs Susan George said: In 1945 or 1950, if you had seriously proposed any of the ideas and policies in todays standard neo-liberal tool-kit you would have been laughed off the stage or sent to the insane asylum. 7
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 ManagementEmphasises 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 PFMThree 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
NPM approach to public sector financial managementlarge state bureaucracies are inherently defectiveand wasteful;the free market is the most efficient method ofallocating scarce resources;private sector management techniques are asuitable model for the public sector; andif the preferred approach of privatisation is notconsidered to be appropriate thencommercialisation or pseudo-markets should beintroduced as the second best alternative. (Minogue in Connolly, 2009, 26) 13
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
Objectives of financial statementsPrivate sector – indicate level of dividend possible without reducing capital basePublic sector – indicate whether money was spent in line with parliamentary budget 16
Moving to accrual accounting ? An interesting experiment by a few countries significant costs involved the benefits are yet unclear 17
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
Recent Adoption of Accrual Accounting Adopted by central Country governmentSpain 1989New Zealand 1993Sweden 1993Australia 1994USA 1998UK 2002Canada 2003Finland 2005France 2006 19
Top twenty economies Accrual Not AccrualAustralia Argentina, Brazil China, GermanyCanada India, Indonesia Italy, JapanFrance Mexico, Russia, Saudi Arabia South AfricaUnited Kingdom South Korea, TurkeyUnited States 20
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
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
HM Treasury view in 1970s“accruals accounting involving allocating costsbetween years on the basis of resource userather than cash funding was incompatible withparliamentary sovereignty and thereforeunacceptable. Parliament voted cash fundingyear-on-year, so therefore the main controlaccounts, reports and accountability must be onan annual cash basis” Perrin (1998,8) 23
Andrew Likierman changes his mindIn 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
Accrual accounting – the evidence? - 1“In most cases it is too soon to identify anydiscernible benefits from better resourcemanagement” UK National Audit Office, 2003“there was little evidence that [accrual]information was extensively used in decisionmaking… the costs were seen as substantial” Connolly and Hyndman, 2005 26
Accrual accounting – the evidence? - 2“there was no evidence that the perceivedbenefits from the introduction of... accrualsaccounting... were being realised” Mellett, Macniven & Marriott, 2008 27
Accrual accounting – the evidence? - 3“Departments have made significant progress in usingaccruals-based accounting and budgeting systems sinceour previous study. This has allowed departments tobetter understand how they are using their financialresources, for example by offering more detailedinformation to manage their assets and liabilities.Departments have used this information to helpidentify under-utilised assets and to dispose ofthose no longer required.” UK National Audit Office, 2008 28
Clear Line of Sight ProjectThere 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 accordinglyii. 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
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
Public Administration Committee - Australia“the Committee considers that the adoption ofaccrual accounting & budgeting has thepotential for enhancing the management of theCommonwealth’s funding and expenditure andhas done so to an extent.” - 10 years after the introduction of accrual accounting(2007) 31
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
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
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
Annual report of Cour des Comptes - 2010The 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
OECDOECD 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
GASB (US) White Paper 2006“Governments are fundamentally different from for-profitbusiness enterprises in several important ways. Theyhave different purposes, processes of generatingrevenues, stakeholders, budgetary obligations, andpropensity for longevity. These differences requireseparate accounting and financial reporting standards inorder to provide information to meet the needs ofstakeholders to assess government accountability andto make political, social, and economic decisions.” 38
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
View from Malaysia“Keep the accounts simple, but yet be able toshow how the government has utilised theresources under its control. That should be thepurpose of public sector accounts”Teh Ben Chu, former Deputy Accountant GeneralMalaysia 2008 40
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
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
Concluding thoughtsAccrual accounting may assist with:• efficiency (reducing costs/wages) and comparison withthe private sector• the importance of a balanced budgetDirect benefits appear limited and may not justify thecostsEfficient 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