The man making Whitehall assets count

Paul Gosling on a revolution which will bring new opportunities for accountants

The first major change in 130 years to the government's accounting system is under way. Cash accounting - which treated each financial year in isolation, failed to account for the use of fixed assets, and treated all assets as if they had no cost - is being phased out, to be replaced by a system of accruals accounting that will be broadly recognisable to accountants in the private sector.

Although resource accounting, as the government terms it, was unveiled two years ago by the Conservative administration, it has been welcomed by the Labour Party in opposition and now in government. Resource accounting is being introduced by some departments in this financial year, parallel to their traditional accounting systems, and all other departments will follow next year.

Government accounts in 1998/9 will be prepared using resource accounting, and the accounts the following year will be audited. Related changes will include the adoption of resource budgeting, which will incorporate the accruals concept into the financial planning process and, subject to approval by Parliament, the use of resource budgets when Parliament votes through spending estimates. By 2002 the public sector accounting revolution should be complete.

Although industry would regard cash accounting as an outdated concept, Britain is actually one of the most advanced nations in commercial accounting systems for government. New Zealand, a much smaller nation, introduced resource accounting principles in the mid-Eighties, after a public spending crisis prompted a widespread public spending management review. The British programme is attracting widespread international attention, with France and Australia particularly interested as they are making comparable changes and want to exchange experiences.

The man in charge of introducing the changes in Britain is Andrew Likierman, the Treasury's chief accountancy adviser and principal finance officer, who is also a respected academic at London Business School. Professor Likierman is pleased with the progress made in adopting the new accounting systems, while readily admitting that it has not been universally easy.

"Some departments have got much greater problems than others, because they have such an enormous asset base," Professor Likierman says. "The sheer mechanics of delivering this is very, very complicated, in particular for the Ministry of Defence. Social Security has a budget approaching pounds 100bn, but little capital, so many accounting issues are relatively straightforward, whereas Defence has an enormous asset base and accounting is a much more difficult proposition."

A key element of the changes has been a major training programme across all government departments raising accountancy skill levels, with special courses for managers who are introducing resource accounting and budgeting. In the past many senior financial managers in the public sector have not been accountants. Increasingly accountants are being employed in those positions, while financial managers are learning more about accountancy to help them make better use of assets and capital employed in departments.

That has been aided by creating, for the first time, a charge on capital employed, at the rate of 6 per cent in real terms. Customs and Excise has declared that taking the reforms together, including the introduction of resource budgeting, will transform departmental management. "Managers will move to a more integrated approach to managing inputs, activities and outputs," one C&E executive declared. "Managers will consider the links between the full costs of people and things, what we do and what we produce."

A full guide to accounting principles and policies will be published in the next few weeks. It will determine the asset valuation systems to be used in each department - which may vary. The policies have been drawn up in consultation with the Financial Reporting Advisory Board, a body set up at Parliament's request to provide an independent element in the Treasury's accounting policy making.

The Government's new accounting system is based on Gaap, Generally Accepted Accounting Practice, which will enable accountants with private sector experience to move much easily into government departments, and improve cross-fertilisation between sectors - previously almost impossible.

"All the moves to put each part of the public sector on the same basis must increase the possibilities there will be movement across," Professor Likierman says. "One doesn't have to look back very far to see that these tended to be pretty watertight compartments. People did not move, generally speaking, between sectors, or even between parts of a sector. You were a specialist local authority person, or a specialist health service person, or a specialist central government person ... But this will help to accelerate that process."

The government's accounting reforms are good news for accountants, giving them employment opportunities that were previously denied to them. But they should also be good news for taxpayers, as financial management is likely to be transformed, with greater disposal of redundant assets and more emphasis on partnership with the private sector. Which goes to show just how integral accountancy isn