Download Using Accrual Accounting as an Enabler for better Management of

Using Accrual Accounting as an Enabler for
better Management of the Public Finances
Ross Campbell
Director Public Sector, ICAEW
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“千里之行，始於足下”
“A journey of a thousand miles starts with a
single step”
Lao Tzu
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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
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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
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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
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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
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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
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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
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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
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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
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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’
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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’
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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
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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!
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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.
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Whole of Government Accounts (WGA)
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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
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Questions?
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