More than just counting numbers: Following the publication of its Green Paper, the Government plans to introduce resource accounting into the public sector. Paul Gosling reports
Wednesday 26 October 1994
For the first time since the Green Paper was published in July, a government minister - Paymaster General, David Heathcoat-Amory - together with the main author of the Green Paper, Richard Allen, under-secretary at the Treasury, will be speaking about the new accounting regime when they address today's Chartered Institute of Public Finance and Accountancy conference.
Resource accounting - or accruals accounting as it is called in the private sector - will replace cash accounting in all government departments by the 1999/2000 year, and will be introduced into all departments by 1 April 1998.
It has already been adopted in executive agencies, the NHS and local government.
It may amaze private sector accountants, but traditionally public bodies have not recorded depreciation in their accounts, and capital spending has been treated almost identically to revenue expenditure. The real cost of retaining fixed assets, such as buildings and land, has never been shown in accounts, and the end of each financial year can see a massive binge to avoid a year-end surplus and thus a reduction in the next year's budget.
While management has been generally positive about the introduction of accruals, there has been some resistance. While resource accounting does show a truer picture, its accuracy depends on the assumptions made, such as the rate of depreciation used or the valuation of fixed assets, and can, accordingly, be more easily manipulated.
Public borrowing policy could be changed, believes Martin Evans, the head of Cipfa's technical and research division. Gearing - the ratio of borrowing to the value of assets - could become clear for the first time in the public sector, he says.
'Borrowing to fund the deficit on the revenue account is a quite different proposition from borrowing to finance investment in assets that will benefit generations to come,' Mr Evans argues. 'The proposed new system of accounting will for the first time provide public policy makers with information which can better inform the debate and choices about public expenditure and its financing.'
Mr Evans believes that the potential benefits will only be realised if management understands that resource accounting is a tool which needs to be properly understood and applied. 'It is fairly straightforward in accountancy terms, but it is the management questions that really need addressing,' he says. 'It's about producing information - and what managers do with that information is the important thing. As you change management styles you need to change accounting practices. It's not about counting numbers. It will highlight subsidies.'
For both politicians and managers, resource accounting will mean concentrating on outputs, not inputs. In New Zealand, which first introduced accruals into public services, parliament now approves budgets related to the services provided, not to the departments which provide them. This creates an internal market, where departments may compete to produce the most cost-effective result.
Resource accounting could also lead to a boost in the Government's drive to dispose of surplus assets. As Mr Evans explains: 'The benefit of accrual accounting is that it confronts service managers with the real cost of holding and using assets. Once managers have to pay for the assets they use, they may begin to question whether they need them, or whether they can use them in a more efficient way. So long as assets are free, managers have no incentive to ask these questions.'
Francis Plowden, the partner responsible for government work at Coopers & Lybrand, sponsor of the conference, is to say today that the introduction of accruals accounting is a significant step towards completing the public services revolution.
Core departments are still weak in strategic management, performance targets and indicators are inadequate, and the new management approach has yet to transform core government departments and non-departmental public bodies, argues Mr Plowden. The introduction of accruals should help address all these issues.
For resource accounting and budgeting to work, Government and core departments will need to be less prescriptive, suggests Mr Plowden. 'This will raise some difficult questions at the boundary between officials and ministers.
'Ministers are the ultimate decision makers, and they will be in a position to thwart the change of management culture, which they want to see, if the output-based approach does not inform their thinking on resource allocation as well,' says Mr Plowden.
Martin Pfleger, assistant auditor general at the National Audit Office (NAO), is among the other speakers, and he is expected to concentrate on the need to sell the advantages of resource accounting to Parliament, rather than allow benefits only to be felt by management and Government.
While the NAO supports the move to accruals, it is worried that the Green Paper fails to explain how resource budgeting will affect Parliament. Some MPs are nervous that while it could lead to their playing an increased role, it could just as easily be used to sideline them, allowing greater power to lie in the hands of the executive. This will be determined by the detail to be put forward by the Treasury, which was absent in the Green Paper.
'There is a job to be done by the Treasury to persuade Parliament that there is something in it for them,' says Joe Cavanagh, director of the NAO. 'It is rather taken for granted. We will be advising the Public Accounts Committee (of the House of Commons) towards the end of the year. The Treasury will need to persuade the PAC. The Green Paper says nothing about resource budgeting and how it would affect Parliament.'
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