Is consolidation the key to effective public sector accounting?

This article was first published in the March 2016 international edition of Accounting and Business magazine.

Without the appropriate level of investment in educating politicians, government ministers and other key stakeholders, effort spent creating consolidated accounts for the public sector could be wasted in the future. This is one of the conclusions to be drawn from an in-depth study of the whole of government accounts (WGA) prepared by a number of countries around the world.

But if the accounts can be produced in a timely fashion, and presented in a format so that they are easily understood, then they will become an increasingly important tool for both public policy decision makers and those that scrutinise how public money is spent.

The study, Consolidated government accounts: how are they used?, investigates how different systems of financial reporting of the public sector are put to use, who looks at the accounts and what impact they are having on public policy. Most importantly, it aims to show whether the rhetoric matches the reality; for some countries, the move to an accruals-based financial reporting system had been heralded as a brave new world of financial accountability, but there is a strong belief that the accounts, when produced, gather dust on shelves around the political establishment until the next set arrive a year later.

And this might in part explain why there has not been a rush of countries wanting to adopt such a system. There are only a few countries that do produce consolidated accounts, including Australia, Canada, New Zealand, Sweden and the UK, and it is these five countries upon which the study focuses.

‘These countries went forward with such a system for different reasons,’ explains Gillian Fawcett, ACCA’s former head of public sector. ‘It could have been for economic or political reasons, or both, together with a need to be transparent and accountable. We had heard a good deal of rhetoric about how these accounts were being used, but we hadn’t seen any specific research that explored this further. And perhaps not unsurprisingly, when we carried out a literature review we found that the focus of previous studies had been on expected use rather than actual use.’

So what does this new study show, and how can it help inform the future direction and development of consolidated government accounts?

‘The focus on the use and usefulness of consolidated government accounts couldn’t be timelier as governments are striving to make best use of tight budgets to maintain quality public services as well as remain accountable and transparent,’ says Dr Danny Chow, a lecturer in accounting at Durham University Business School and lead author of the study. ‘But if government consolidated accounts are to go beyond being viewed by many commentators as mainly an accounting-centric function, more attention needs to be given to the potential users before governments embark on their journey of preparing consolidated accounts.’

Chow led a consortium of international universities in the study, finding that a combination of overly complex financial 
reporting and a lack of financial literacy among politicians is making it more difficult for policymakers to take advantage of the potential benefits available from the financial reports. However, the study reveals how the introduction of consolidated accounting systems in these countries could have a number of positive impacts if fully supported.

For instance, in all five cases, the study finds that the move has been an effective stimulus in transforming the quality standards of accounting practices and systems across governments, which in the past had been heavily cash-based. At the same time, reforms based on consolidated government accounting have highlighted limitations in existing systems of accounting and accountability, such as under-reported liabilities or inconsistent accounting practices. That is not to say, however, that such under-reporting has been removed – in the UK, the National Audit Office continues to qualify the UK’s whole of government accounts for, among other things, failing to report on the assets and liabilities of bodies that it considers to be in the public sector.

Also, variations in approach between the countries limit the extent of global comparisons. Each country draws its consolidation boundaries based on local specifics linked to its constitutional form rather than determined by adherence to a universal or accounting notion of consolidation. The UK delivers a single set of accounts that include central government, all local governments and public corporations, but excludes the part-nationalised banks. Australia provides separate accounts for federal, state and local governments, New Zealand produces separate central and local government accounts while Canada has individual accounts for federal government, each of the 10 provincial and three territorial governments, and all local governments. Sweden separates central and local government.

These varying ideas of what constitutes government, and therefore should be included in the accounts, provide the backdrop for understanding how consolidated government accounts are being used and, more importantly, in defining who are their users. For instance, as the study says, in the UK we see the political desire to use accounting to illuminate macroeconomic policy issues, such as the build-up of long-term liabilities like public sector pensions, while providing a more cohesive and comprehensive accounting-based information system underpinning all levels of government. But the use of the accounts for such macroeconomic management will remain limited until a time when the accounts are not qualified by the comptroller and auditor general. This situation is not helped by the fact that there are other competing accounting systems, especially the UK National Accounts.

It would also appear that the length of time for which the consolidated approach has been in operation can have an impact on how it is used. The UK system is comparatively young, with the first set of accounts for 2010 being published at the end of 2011, while New Zealand has been producing its version since the early 1990s. It is perhaps not surprising, then, that the study finds a more positive attitude in New Zealand than in the other countries. Interestingly, it also notes that the investment made by the major accountancy firms in supporting the development of government policy, and then making available their resources and knowledge base, has been another factor in the continuing support for such accounts in New Zealand.

Australia and Canada are similar to the UK in that their consolidated accounts are used primarily for compliance reporting and audit; also, these countries are similar in that the real political debate takes place at the budgetary level.

Sweden is unusual in that the consolidated accounts have become an integral element of public sector financial management. Accounts are released within four months of the year end (the fastest the UK has achieved is one year post-year end), while the ability to audit the accounts, make systems improvements and achieve better asset management seem to be the biggest wins in the move to consolidated, accruals-based accounts. But the budget and EU mandated statistical accounts continue to be the dominant set of accounts used by politicians. And this perhaps drives at the central issue surrounding the use of consolidated accruals-based accounts. Until the basic financial literacy of politicians and government officials improves dramatically, then these sets of accounts will not be thoroughly scrutinised, understood or acted upon.

‘The financial literacy of parliamentarians will need to step up in terms of effective scrutiny,’ says Fawcett. ‘We’ve recommended that new members of parliament receive the appropriate induction and development programmes.’ At the same time, Fawcett suggests the need for appropriate follow-up subsequent to any scrutiny process. ‘And if they are to have credibility, then they will have to be timely, with more forward-looking information,’ she adds.

Organisations such as ACCA will play a key role in the future development of these accounts, both in terms of advising the immediate users such as the parliamentarians to aid their understanding, and on the technical side to ensure consistency in standards and application. But ultimately the accounts need to be useful. As Fawcett says: ‘We want the information to be as clear as possible for the end user.’

Philip Smith, journalist