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Rubbery Figures

Rubbery Figures

Over recent years Australian and New Zealand governments have led the Western world in the switch from undeniably problematic cash-based accounting systems to the sorts of accrual accounting systems used by business.

Australia and New Zealand governments have led the world in switching from cash-based accounting systems to the accrual accounting methods used by business - and now we're all paying for their decision.

Business loves to remonstrate with government for failing to emulate all those principles and practices that make business efficient and effective.

Unfortunately for civil society, business typically does not have a clue about the real functions and responsibilities of government. Now, thanks to the unbridled enthusiasm of various Western governments, the whole world can see what happens when government departments are encouraged to operate as pseudo businesses - and it ain't pretty.

Over recent years the Australia and New Zealand governments have led the Western world in the switch from undeniably problematic cash-based accounting systems to the sorts of accrual accounting systems used by business - initiatives kicked off by former NSW Premier Nick Greiner at state government level, and then quickly mirrored by the federal government.

This switch - prompted in part by a commendable urge to make government more efficient and in part to satisfy an ideological urge to shrink the role of government in society - seemed absolutely reasonable and founded on impeccable logic.

It was not. The switch reflected shifts in thinking (led by The Chicago Group, a US professional management consulting firm) as Western governments, influenced by consultancies and big business, have striven to minimise the role of government in directing and influencing the nation's affairs. The influence of The Chicago Group is one reason why Western governments have shifted so much to outsourcing and privatisations over recent years. The only trouble is, according to Emeritus Professor Allan Barton of the Australian National University's School of Business and Information Management, The Chicago Group's conceptualisation leaves out all sorts of important roles of government, like macro-economic management and the provision of social welfare and public goods.

In fact, he says, the chartered accounting firms and major IT consultancies that so zealously drove and promoted the move to accrual accounting had little understanding of the true role of government or how it differed from business. Their proposals ignored externalities and overlooked many of the vital functions of government.

The result has been a massive loss of transparency, much unnecessary cost for taxpayers and a perversion of the public service culture. The changes have also served to conceal the true costs of privatisations and outsourcings, and the "many very poor outcomes from outsourcing contracts" - even to the government itself.

And by placing agencies at a severe competitive disadvantage, they have allowed the private sector to exploit its position to unfairly win outsourcing contracts then lock itself in to big slices of government business.

Barton says there are other serious problems with the position as it stands: problems that go to the very heart of the loss of transparency. All of these problems are going to have to be fixed - and the burden on government CFOs and CIOs is certain to be considerable.

Troubled Reform

There's no doubt that in anybody's book the reforms were desperately needed. Under the cash accounting and budgeting system (CABS), which operated in the Commonwealth before the Coombs Royal Commission sought to rein in the ever-expanding size and cost of government, there was no measurement of the costs of programs or departments, or the vast array of non-cash assets - including environmental and cultural assets - and non-cash liabilities held by the government. The failure to measure and manage some $250-odd billion of Commonwealth assets helped fuel budget deficits and played its part in the ballooning of government debt, while the failure to measure liabilities helped create the looming unfunded public sector superannuation disaster.

For all these reasons Coombs recognised accrual accounting was essential for cost control purposes, and Barton entirely agrees.

"The introduction of accrual accounting was long overdue in my opinion," Barton says. "So we needed changes. They should have had it throughout history, with hindsight."

And Barton is full of praise for the work done by the Department of Finance and Administration, which had carriage of the reforms, and the Auditor-General, in pursuing those reforms. He says both should be lauded for their "tremendous effort and accomplishment" in achieving the changeover in record time.

But he says by rushing in before the Public Sector Accounting Standards Board defined the standards in late 1996, and in accepting the Australian Accounting Research Foundation policy that argued the government should adopt business accounting standards, the government has created a raft of problems for itself.

The changes have not only malformed the public service culture but helped to explain the poor outcomes from outsourcing contracts. Moreover, the total abandonment of cash accounting measures in favour of accrual accounting methods much more suited to business have made it difficult for the government to fulfil its role of accountability to the electors who keep it in power.

Barton says the adoption of a business accrual accounting model and related "marketisation" reforms designed to fit into this model were inappropriate to the public sector environment and were done in pursuit of ideology, not the public interest - a situation even the Department of Finance and Administration has now woken up to and taken steps to address.

Problems Abound

There are many manifestations of the problem. For one thing, by dumping CABS a few years ago, without prior announcement or public discussion, federal Treasurer Peter Costello has made it all but impossible to draw meaningful conclusions from the budget figures.

For another, there are now eight separate measures of the budget balance in the budget papers, since the Commonwealth currently uses two systems of accrual accounting: AAS31, developed by the Accounting Research Foundation, and GFS (Government Financial Statistics) drawn up by the International Monetary Fund as an international standard.

And the changes have led to distorted accountings too, such as the ridiculous notion - fully supported by the budget papers - that the Defence Department is the single most profitable enterprise in Australia. There in black and white it is irrefutably demonstrated that in 2000-01 the Defence Department received revenues of $19 billion, had a surplus of $6.5 billion and paid a dividend to the government of $5 billion. Better still, the books show the department is largely a self-funded entity, since the government directly contributed only $735 million towards its net assets of $44 billion, which were largely funded from accumulated surpluses. And without any significant debt, Defence would seem to be both a highly profitable and financially strong entity, without par in the Australian corporate world. It would be a rare public servant who would fail to see this for the nonsense it is.

"The parliament is hopelessly confused by all this, because they don't get the cash figures, and it's the cash figures they have to actually approve in the appropriation bills, so they're lost," Barton says. "And so the Treasurer and [Opposition Leader] Mr Crean can quote whatever figure they like. This is why the Public Accounts Committee gets so upset and why they are reviewing the whole structure of their accrual budgets."

The move has also created serious management problems for agency heads. Commonwealth Auditor-General Pat Barrett says confusion has arisen because of differences in interpretation of accounting standards and the use of the two sets of standards for reporting.

"The Commonwealth does put out a reconciliation table for the main aggregates under both sets of standards," Barrett says. "However, this does not seemed to have helped many in the parliament to understand the relationship between the budget and the financial statements."

Barrett says with many agencies not delivering such information in a usable form to managers' desktops, there is still some way to go before managers in the public sector actually manage on an accrual basis. Under those circumstances it is hardly surprising that little attention is given to financial statements as a management tool.

"CPA Australia, through its Public Sector Centre of Excellence, has recently put out a very useful document explaining how public sector managers can use their balance sheet data," Barrett says.

"Many public servants have accepted the usefulness of full costing of their outputs using accrual information, particularly for comparative and benchmarking purposes, for example in relation to outsourcing and their performance. The same cannot be generally said for their use of aggregate information in their financial reports and certainly not for any comparisons of budget and financial data."

However, Barrett warns against any temptation to "throw the baby out with the bathwater", pointing out most Western democracies now agree it is better to have accrual-based information for accountability purposes.

"We are now seeing efforts to harmonise in the standards arena, both nationally and internationally. What we need is one set of consistent, well-understood figures which can easily be compared, whether in the budget or the financial statements," he says.

Addressing the Problems

Certainly that is a goal the Department of Finance and Administration has identified. Assistant secretary of Accounting Policy, Brett Kaufmann, says the goal is worthwhile and must be pursued.

"If a government or the parliament or a central agency or indeed the chief economist in the banks is trying to make sense of the budget, they ask: 'Which number? Which number? Which number?'" Kaufmann says. "And the users are very confused about having two different sets of accounts. So to put it simply, our moves to create far greater transparency and openness about government operations have in fact led to some confusing results."

Now there are people within both the Finance and Treasury departments working assiduously on the issues - but they are not going to be solved overnight. Information teams in departments and agencies are facing some significant changes that will take place over the next few years.

Kaufmann says the next iteration for the Department of Finance and Administration on its journey to accrual is to bring together the GFS accounting framework and the traditional accrual accounting framework in what it calls a "harmonisation".

"Australia is leading this, and the reason we are leading is because in the past we've been at the forefront, and consequently we're the ones who have picked up the problems that our ministers and other users have in trying to interpret the useful information in two different sets of financial reports, whether budget or end of year budget outcome," Kaufmann says.

"From a chief information officer point of view, and indeed a CFO point of view, you've got two rafts of changes coming - one is the harmonisation between accounting standards and GFS, which then begs the question - which series of accounting standards do we harmonise to? And then there are the international standards. So there's that raft of changes coming, from the accounting standards and the harmonisation process."

What those changes might look like is as yet uncertain, but Barton insists any well-designed total information system should provide both cash accounting and accrual accounting systems, and integrate them.

"If you take the point of view that accounting should be a financial management information and reporting system, then you always must design the information system to suit the needs of the management and the other major external users of information," he says. "In the case of the government, one of the key features of any democratic government is full transparency and accountability."

Happily, he has designed just such a system - for the Australian National University. In 1984 Barton was invited by the university chancellery to help move the university's information systems to accrual accounting, on instructions from the Auditor-General.

"This was before the government's own standards, which was fortunate, because I could do it my own way then," Barton says. "So we retained cash accounting and we built a full accrual accounting system on top of the cash. And we have an integrated database financial management system, everything online, and everything had to be reconciled as it went. So we built in all the internal controls into the systems. And instead of the Auditor-General taking 19 months to audit our accounts, he can now do it in a couple of weeks."

Barton believes that in time the Commonwealth may adopt this approach as its own. In the meantime, the Department of Finance and Administration is working around the clock to define the best next stage. If a new system is developed, all agencies will face massive costs and a huge amount of effort to re-jig their financial accounts to record in the new reporting framework.

Barton predicts the changes will impose a "huge burden" on information management teams in departments and agencies, with the changes certain to involve a tremendous amount of work. That in turn will involve massive staff training program.

"One of the things I found in the university for example is that we had to institute a staff training program for the business managers and their staff in each faculty and research school, and that we had to keep training them in these systems and how to use them."

Kaufmann promises the Department of Finance and Administration will be there to assist the two key change agents - CFOs and CIOs - throughout the exercise. He acknowledges both will face a heavy workload as they simultaneously move towards the adoption of the new International Accounting Standards by January 1, 2005. He insists it was good for the Commonwealth government to be out in front on the accounting changes, but concedes the standard setters at the time should have taken more time to understand the differences between the private and public sector business models.

Barton takes a somewhat different view. He says the whole thing could have been avoided, had ideology been left out of the equation in the first place. Editor's note: For more on this topic, see the story "Weapons of Mass Distortion" in the October issue of CIO

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