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Page 1: Using Accrual Accounting as an Enabler for better ...€¦ · A comprehensive accruals based accounting system is the final stage on the journey. The UK journey has had a number of

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Using Accrual Accounting as an Enabler forbetter 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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• The ‘destination’ - reasons foradopting accruals accounting

• The Journey

• Building a government financeprofession

• What we learned in the UK

• Next steps: Clear line of sight &Whole of Government Accounts

• How the accounting professioncan help

Accruals Accounting“The Public Sector Journey”

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The objective is well-managedpublic finances!• High quality public accounting is

necessary to deliver:

• Meeting the legitimate expectation ofcitizens

• Taxation that is fair

• Better value for money for publicexpenditure

• High quality public services

• Provide Confidence to investors

• Enable stability and growth

The destination

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Financial Management drivers behind adoption

There were a number of perceived problems with cashaccounting:• 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 ofgovernment policies on the public finances

• Poor visibility of the long term management consequences of assetscreated 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 accrualsaccounting 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 butnot settled at the accounting year end

• Improved asset management – through better understanding ofasset value and conditions

• Greater transparency and better public accountability

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A comprehensive accruals based accountingsystem is the final stage on the journey. TheUK 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

The Journey

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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 theproduction 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

1995-99Work begins – public consultation & drafting legislation

Recruitment, training & systems development

2000 Government Resources & Accounts Act (GRAA 2000)

2001First accruals accounts prepared on a UK GAAP basisand audited in parallel with cash accounts

2002Full implementation of accruals accounting for centralgovernment

2005-06 Government departments adopt IFRS

2007Clear 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 experiencedfinance 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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• Start Early! It took time to build up skillsand experience

• It was necessary to buy-in expertise forkey senior and specialist posts

• but there is also a need to establish anin-house pipe-line of talent

• Can use training & standards that arealready 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’

Building the governmentfinance profession

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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 alonger trip than envisaged at the start

• The real value comes from the experience of putting thetheory 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 experiencedfinance 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 thataccruals accounting provides

Area Benefit

Fixed assets Development of a complete asset register has led toa better understanding of the economic life of fixedassets and reduced capital spend (c. 10%-15%)

Payables &receivables

Commitments can be budgeted for more effectively

Unfunded pensionliabilities

Impact on policy making – greater recognition ofcommitments

Contingentliabilities

Transparency & improved understanding of the levelof risk borne by government and future calls on thepublic 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 fundswere voted

• Budgets & accounts prepared on same basis to align spendingcontrol with financial management

Implemented in 2011-12, CLoS has led to real improvements intransparency, though some departments are work through theconsequences!

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Whole of Government Accounts (WGA)

• The aim of the WGA is to present a comprehensive, accountingstandards based picture of public expenditure and the assetsand liabilities of the public sector as a whole

• In the UK over 5,000 government entities are consolidated intothe WGA, including regional & local government

• A significant benefit over the National Accounts is WGAcaptures comprehensive information on assets & liabilities – forexample state employee pensions & nuclear decommissioningliabilities

• It has had a significant impact on public policy decisions aroundstate control (e.g. Rail Infrastructure) and the provision of longterm social & welfare benefits.