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Using Accrual Accounting as an Enabler for better Management of the Public Finances Ross Campbell Director Public Sector, ICAEW BUSINESS WITH CONFIDENCE © ICAEW 2015 icaew.com “千里之行,始於足下” “A journey of a thousand miles starts with a single step” Lao Tzu BUSINESS WITH CONFIDENCE © ICAEW 2015 icaew.com Accruals Accounting “The Public Sector Journey” • The ‘destination’ - reasons for adopting accruals accounting • The Journey • Building a government finance profession • What we learned in the UK • Next steps: Clear line of sight & Whole of Government Accounts • How the accounting profession can help BUSINESS WITH CONFIDENCE © ICAEW 2015 icaew.com The destination The objective is well-managed public finances! • High quality public accounting is necessary to deliver: • Meeting the legitimate expectation of citizens • Taxation that is fair • Better value for money for public expenditure • High quality public services • Provide Confidence to investors • Enable stability and growth BUSINESS WITH CONFIDENCE © ICAEW 2015 icaew.com Financial Management drivers behind adoption There were a number of perceived problems with cash accounting: • Insufficient transparency - especially with respect to cost of ownership considerations • Unhelpful incentives around the timing of transactions • There was only a short-term perspective on the impact of government policies on the public finances • Poor visibility of the long term management consequences of assets created by cash expenditure were BUSINESS WITH CONFIDENCE © ICAEW 2015 icaew.com What the UK set out to get In the UK the expectations for HM Treasury in adopting accruals accounting were: • Resources used as intended • Full costs of delivering government policies captured • Future liabilities transparent – to policy makers • Improved budgeting – taking account of commitments incurred but not settled at the accounting year end • Improved asset management – through better understanding of asset value and conditions • Greater transparency and better public accountability BUSINESS WITH CONFIDENCE © ICAEW 2015 icaew.com The Journey A comprehensive accruals based accounting system is the final stage on the journey. The UK journey has had a number of stages: • Cash accounting to modified cash • Accruals budgeting • Basic accruals accounting • GAAP based accounts • IFRS • Clear line of Sight • Whole of Government Accounts BUSINESS WITH CONFIDENCE © ICAEW 2015 icaew.com The Journey A lot of “up-front” work needs to be done to begin the process • Building political consensus • Enabling legislation • Recruitment or training of finance staff (16,000 plus in UK) • Procurement and set-up of accounting systems • Processes – including consolidation and audit • Valuation of assets and liabilities • Trial runs – i.e. ‘shadow accounts’ The UK took 7 years from the decision to adopt accruals to the production of its first set of government accruals-based accounts BUSINESS WITH CONFIDENCE © ICAEW 2015 icaew.com The United Kingdom experience Timeline Event 1994 Political decision to implement accruals accounting 1995-99 Work begins – public consultation & drafting legislation Recruitment, training & systems development 2000 Government Resources & Accounts Act (GRAA 2000) 2001 First accruals accounts prepared on a UK GAAP basis and audited in parallel with cash accounts 2002 Full implementation of accruals accounting for central government 2005-06 Government departments adopt IFRS 2007 Clear Line of Sight project begins – alignment of budgets, parliamentary estimates and accounts 2010 First Whole of Government Accounts published 2011-12 Clear Line of Sight adopted BUSINESS WITH CONFIDENCE © ICAEW 2015 icaew.com The United Kingdom experience • It took time to build up to the current 16,000 experienced finance staff (4,000 qualified chartered accountants) • A government finance profession had to be created • It took time to build experience of the accruals approach • It also took some time to get quality to acceptable levels! Year No. of qualified audit opinions 1999 30 2000 12 2001 9 2002 6 2003 3 2004 2 BUSINESS WITH CONFIDENCE © ICAEW 2015 icaew.com Building the government finance profession • Start Early! It took time to build up skills and experience • It was necessary to buy-in expertise for key senior and specialist posts • but there is also a need to establish an in-house pipe-line of talent • Can use training & standards that are already commercial best practice – no need to ‘re-invent the wheel’ • Build confidence through ‘dry-runs’ or ‘pilots’ before going full implementation • Concentrate then disseminate • Now setting up a ‘finance academy’ BUSINESS WITH CONFIDENCE © ICAEW 2015 icaew.com What we learned in the UK • This is a journey! • In the end we got where (& what) we expected – but it was a longer trip than envisaged at the start • The real value comes from the experience of putting the theory into practice & the associated learning – Process of implementation develops insight – Decision makers start to think differently with new information • There is real value in investing in high quality people – Strategic Finance (planning) vs. Operational Finance (running) – Recognise it takes time to build up a cohort of experienced finance professionals – Need to consider succession plans and ‘pipe-line’ BUSINESS WITH CONFIDENCE © ICAEW 2015 icaew.com What we learned in the UK There is enormous value in the balance sheet perspective that accruals accounting provides Area Benefit Fixed assets Development of a complete asset register has led to a better understanding of the economic life of fixed assets and reduced capital spend (c. 10%-15%) Payables & receivables Commitments can be budgeted for more effectively Unfunded pension liabilities Impact on policy making – greater recognition of commitments Contingent liabilities Transparency & improved understanding of the level of risk borne by government and future calls on the public finances BUSINESS WITH CONFIDENCE © ICAEW 2015 icaew.com Clear Line of Sight Having brought in accruals it was clear that to get the benefit, budgets and parliamentary approvals also had to be aligned • Clear Line of Sight (CLoS) was established in July 2007 • Object was to align budgets, parliamentary supply (funding) & accounting • All entities funded by government now captured in accounts • All entities report back to Parliament on the same basis as funds were voted • Budgets & accounts prepared on same basis to align spending control with financial management Implemented in 2011-12, CLoS has led to real improvements in transparency, though some departments are work through the consequences! BUSINESS WITH CONFIDENCE © ICAEW 2015 icaew.com Whole of Government Accounts (WGA) • The aim of the WGA is to present a comprehensive, accounting standards based picture of public expenditure and the assets and liabilities of the public sector as a whole • In the UK over 5,000 government entities are consolidated into the WGA, including regional & local government • A significant benefit over the National Accounts is WGA captures comprehensive information on assets & liabilities – for example state employee pensions & nuclear decommissioning liabilities • It has had a significant impact on public policy decisions around state control (e.g. Rail Infrastructure) and the provision of long term social & welfare benefits. BUSINESS WITH CONFIDENCE © ICAEW 2015 icaew.com Whole of Government Accounts (WGA) BUSINESS WITH CONFIDENCE © ICAEW 2015 icaew.com How can the Accounting Profession add value? • Strategic perspective on government financial management • Understanding the end to end process – How to plan – what is needed & when – Expert advice & training resources – Understanding the skills required to implement and operate – Knowing the ‘art of the possible’ • Helping policy makers understand the numbers – Interpretive analysis – “cause & effect” – More efficient use of resources BUSINESS WITH CONFIDENCE © ICAEW 2015 icaew.com Questions? BUSINESS WITH CONFIDENCE © ICAEW 2015 icaew.com A world leader of the accountancy and finance profession BUSINESS WITH CONFIDENCE © ICAEW 2015 icaew.com