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Public sect or accrual account ing: inst it ut ionalising neo-liberal principles? Sheila Ellwood Susan NewberryArticle information:
To cite this document:Sheila Ellwood Susan Newberry, (2007),"Public sector accrual accounting: institutionalising neo-liberal principles?", Accounting, Auditing & Accountability Journal, Vol. 20 Iss 4 pp. 549 - 573
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Public sector accrual accounting:
institutionalising neo-liberal
principles?
Sheila Ellwood
University of Bristol, Bristol, UK, and
Susan Newberry
University of Sydney, Sydney, New South Wales, Australia
Abstract
Purpose– The purpose of this paper is to examine the role of public sector accounting in implementing neoliberal reforms.
Design/methodology/approach– The proposition that the adoption and development of accrual accounting in the public sector is a technical development intended to improve transparency and accountability is investigated. The paper compares the development and use of accrual accounting in public sector financial management reforms in the UK and New Zealand.
Findings– The findings in this paper suggest that in both countries, accrual accounting, as developed, also provides a means to reduce the government’s role to that of procurer of services and enforcer of rules set by others, thus advancing a controversial privatisation and trade liberalisation agenda which is consistent with neo-liberal principles.
Research limitations/implications– The paper shows that in contrast to more usual claims about the need for accrual accounting to provide a “read across between the sectors” or that public interest motives assure the neutrality of accounting, seemingly technical accrual accounting developments seem to function as a political tool to aid a controversial political agenda. There is a need to look at the overall effect of public sector financial management reforms and the role of, and implications for, accounting standard-setters.
Originality/value– The information in the paper applies to accounting the new political economics literature on agenda control and information based structures where control is achieved through information asymmetries.
KeywordsPublic sector accounting, New Zealand, United Kingdom Paper typeResearch paper
In a newspaper article, Stiglitz (2003) argued that the reforms advocated by experts, often backed by the International Monetary Fund (IMF), are “more often based on ideology than economic science”. Stiglitz warned that although proposed reforms may seem technical, economic policies require choices which favour some groups over others and, therefore, involve political choices which should not be left to technocrats. The economic policy underlying the structural adjustment and reform programmes advocated by such key supra-national agencies as the OECD, the International Monetary Fund (IMF), the World Bank and its allied agencies, and credit rating agencies is distinctively neo-liberal The current issue and full text archive of this journal is available at
www.emeraldinsight.com/0951-3574.htm
The authors thank the anonymous reviewers for their thorough and helpful comments, which greatly improve the article, and acknowledge with thanks the support of the Pacioli Society at the University of Sydney for facilitating this joint research.
Public sector
(Kelsey, 1995, p. 17). Economic policies are relatively powerless in the absence of detailed intermediating processes, such as rules and regulations, to bring them into effect (Deakin and Wilkinson, 1998). Arguably, accounting and requirements to observe accounting rules provide another form of intermediating process, and this article considers the role of accounting in such reforms.
The three key features of neo-liberal reforms consist of independently-administered anti-inflationary monetary policy; macro-level fiscal disciplines imposed on governments to achieve balanced budgets; and micro-economic reforms to liberalise trade and to expand the business sector (McKinnon, 2003, p. 316). This neo-liberal “iron tripod” is intended to constrain and reduce the size and power of governments, while at the same time supporting and encouraging the expansion of business activity. These changes in relative size of government and business sectors are brought about in part through privatisation, defined broadly as a process of “reducing the role of government or increasing the role of the other institutions of society in producing goods and services and in owning property” (Savas, 2000, p. 3). To the extent that tax-funded services remain, the government’s role is re-cast as merely a procurer, rather than a provider of services, purchasing in a competitive, or at least, contestable, market. The commercialisation of government activities and introduction of competition is, therefore an integral part of such reforms.
Differing views about the appropriate size and role of governments are a feature of political debate in many countries, and government-provided services may include education, health, welfare, energy and water. Decisions about such services might seem to be matters for political debate and decision in each country, but recent world trade developments show the potential effect of intermediating processes through the establishment of trade rules which now provide scope to challenge as barriers to competition any state controls imposed on services for social purposes. All of these services are targeted for trade liberalisation (Drake and Nicolaidis, 1992). The privatisation and trade liberalisation of energy and water is well advanced, while education and health are a particular focus of current efforts through the Doha trade round.
This article focuses on the introduction and development of accrual accounting in the public sectors of the UK and New Zealand, and considers the role of accounting. A feature of the accounting development in both countries is that the form of accounting introduced is that known as generally accepted accounting practices (GAAP) as developed for the business sector, albeit with some modifications for the public sector. Accounting standard-setters in the business sector have tended to represent accounting as a neutral technology intended to provide “even-handed financial and other information that, together with information from other sources...assists in promoting efficient allocation of scarce resources in the economy” (Leisenring, 1987, p. ii). If such a description of accounting’s nature and role has ever been appropriate for the business sector, it is certainly not appropriate for governmental accounting. According to Jones (1992, pp. 155-156), governmental accounting “has always been used primarily to control people’s behaviour: to encourage them to do what they otherwise would not do or to prevent them from doing what they otherwise would”. Arguably, the development of governmental accounting should pursue the fundamental purpose of governmental accounting, constitutional control by the parliament over the executive government
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(Pallot, 1992). Hopwood (1984, p. 171) has summed up the misgivings of many about this development in the public sector, commenting that “in a whole series of ways the practices of accounting are increasingly being used to infiltrate and change, rather than merely record, the activities of the State”.
The controversy surrounding the implementation of accrual accounting in the public sector is not about the use of accrual accounting per se, but about the implementation of accrual accounting as originally devised for business purposes, accompanied by claims that this provides a “read across” between sectors. Even at the conceptual level, marked differences are apparent (Ellwood, 2003; Newberry, 2001). Further detailed requirements have been added, many also similarly derived from the business sector but these too are applied differently (for example, full cost accounting). Numerous concerns have been raised about this development. Some have observed that many of the techniques adopted had already been discredited in the business sector, and that the developments do not really remove differences between the public and private sector as claimed (see, for example, Barton, 1999a, b; Carnegie and Wolnizer, 1995, 1997, 1999; Ellwood, 2003; Gray and Jenkins, 1993; Guthrie, 1998; Guthrie and Carlin, 1999; Mayston, 1993; Micallef and Peirson, 1997). Of special concern has been that the fundamental purpose of governmental accounting is protection of public money, and that business sector accounting practices were not devised for that purpose (Pallot, 1992, pp. 39-40; Chan, 2003). Gradually, some pattern is emerging, as experience over time reveals the running down of public sector activities through financial resource constraints and biases which load public sector costs (Carlin, 2003, 2005; Newberry 2002a, 2003; Newberry and Pallot, 2004).
This article proposes that the form of accrual accounting under development in the public sector supports and advances the neo-liberal agenda of shrinking the government through privatisation and trade liberalisation by providing misleading data. It begins by reviewing the new political economics literature associated with public sector reforms, noting some potential roles and uses of accounting before comparing key features of the accounting aspects of public sector reforms in the UK and New Zealand. The UK is seen as the initiator of public service reform whereas New Zealand began as a late-starter but became the renowned leader, especially in the adoption and development of accrual accounting. The discussion and conclusion reconsiders the nature of accounting in light of new political economics and the cross-country comparisons.
Public sector reforms, new political economics, and the potential role of accounting
Internationally, efforts to reform the public sector have waxed and waned in popularity. During the 1970s and 1980s, and after a long post-war period of government expansion, the relatively large size of the public sector in member countries of the Organization for Economic Co-operation and Development (OECD) was viewed as one cause of the reduced economic growth experienced by those countries. Public attitudes increasingly reflected antipathy to government involvement in essentially business activities; market resource allocation mechanisms were preferred over government intervention, and individual and corporate freedom were regarded as crucial to economic and social progress (Mascarenhas, 1991). Privatisation
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was pursued openly as public policy for a while, but soon became controversial, attracting increasing opposition (Savas, 2000).
New political economics (NPE), a body of relatively recently developed, and still developing, theories became popular, those associated academically with the Chicago School in the USA being most relevant to the analysis in this article. These theories apply economics to politics, and include public choice theory, constitutional economics, transaction cost economics, and agency theory, which, in combination, focus on government and the management of government (Jones, 1992, p. 149; Buchanan, 1997). The ideas underlying these theories range from ideas about people’s voting behaviour, about how a government operates and ideal constitutional rules, to ideal structures for organising and coordinating activities, and arrangements for controlling relationships within those structures. Much of the analysis focuses on “bureaucracy,...regulation,
... corruption, rent-seeking by interest groups, and constitutional provisions ... ” (Rubin, 1992, pp. 131-132). All of these NPE theories rely on the same underlying assumptions, that individuals are self-interested, opportunistic and boundedly rational, and that they will seek “to maximize their individual utility by whatever means available” including, according to Rubin (1992, p. 131), “the possible use of governmental accounting”. These individualistic assumptions reject, or at least ignore the possibility of, any concept of public interest or altruistic behaviour.
These NPE adherents believe that institutions (rules) are crucially important (Meckling, 1978, p. 106). An early wave of NPE theories developed from the late 1940s in opposition to Keynesian economics then dominant in Western countries (Jones, 1992). Keynesian economics proposes that governments should try to counterbalance economic cycles and allocate resources to maximise welfare. The NPE theorists, however, argued that Keynesian economics and, in particular, the rules of functional finance theory associated with Lerner, contained an inbuilt bias towards government expansion and caused increased public sector debt and inflation (Buchanan and Wagner, 1978). They proposed a set of rules (meaningful constitutional norms) intended to reverse the rules of functional finance theory and, therefore, the effects of Keynesian economics by tightly constraining a government’s access to resources. Those norms included the iron tripod previously mentioned,viz, independently administered anti-inflationary monetary policy; macro-level fiscal disciplines imposed on governments to achieve balanced budgets without incurring debt; and micro-economic reforms to provide incentives for private sector investment (see, for example, Buchanan and Wagner, 1978, p. 176; Buchanan, 1989, p. 56; Jones, 1992, p. 153).
Niskanen (1975, p. 617) focused on the micro-level reforms required seeking the pursuit of efficiency through market processes. He believed that government provision of services would always be inefficient when it is the “only game in town” and that the cause of this inefficiency was self-interested, budget-maximising bureaucrats. NPE theorists subsequently opposed the “bureaucratic supply of services”...and favoured “two fundamental dimensions of reform: privatization and competition” (Miller and Moe, 1983, p. 297).
Extensions of Niskanen’s work focussed on agenda-control, using either authority-based structures where responsibility lies with individuals or groups, or information-based structures where control is achieved through information asymmetries (Rubin, 1992). From the early 1990s, interest developed in the use of
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information-based control structures. The theory was that the amount and type of information generated by bureaucrats and made available to policy-makers influences perceptions of the efficiency and effectiveness of a policy proposal, and this, in turn, influences the decisions about the policy. The self interest assumptions suggest ministers and parliamentarians should beware of delegating the power to set rules that determine the information they will receive. The information asymmetry between bureaucrats and politicians can give the bureaucrats enormous power, and the use of information-based control structures carries with it the potential for ministers and parliamentarians to lose control (Bendoret al., 1985).
NPE is founded on views that economics and politics are two sides of the same coin (Jones, 1992). Several NPE theorists acknowledge their philosophical stance as key to their economic policy proposals (see, for example, Buchanan, 1989; Breit, 1978; Parkin, 1987, p. 331), but admit those views encounter public resistance (see, for example, Buchanan, 1997). They acknowledge that proposals for reform require symbolic rhetoric (such as economy and efficiency) intended to appeal in the particular government circumstances and political climate (March and Olsen, 1989, p. 76; see also Henisz, 1999). Whereas the policies are intended to increase the likelihood of privatisation and reduce the size of the public sector (see, for example, Buchanan, 1997, p. 42; Buchanan, 1993, p. 57) the objectives are stated using such symbolic terms as economic efficiency and fiscal responsibility. Occasionally, these symbolic terms are acknowledged as minor issues (see, for example, Buchanan et al., 1987, p. 69). Arguably, the rhetorical claims accompanying complicated and seemingly technical reforms represent a form of information asymmetry.
In summary, through NPE, the policy directions sought are privatisation and reductions in public sector size and power largely through the use of seemingly technical economic policies. Evidently, monitoring of policy requires the use of accounting both as a means of ensuring compliance with balanced budget constraints and for restoring efficiency through the use of market processes. There is, therefore, as Jones (1992) suggests a potentially normative aspect to governmental accounting developments. Accounting standard-setters claim that accounting provides information specifically not intended to influence decisions one way or another (Leisenring, 1987; IASB (International Accounting Standards Board), 2006, p. 52). However, the information asymmetry assumptions applied in the context of information-based agenda control raise the potential for the construction and use of accounting data to influence policy processes and outcomes in a particular direction.
Comparison of accrual accounting developments in the UK and New Zealand
This section examines and compares the implementation and use of accrual accounting in the UK and New Zealand. Both the UK and New Zealand have implemented neoliberal reforms that include macro-level fiscal controls and micro-level reforms intended to encourage private sector investment and liberalise trade. The adoption of accrual accounting has been a feature of both countries’ reforms, and a variety of potential benefits from the use of accrual accounting has been claimed. Evans (1995) identifies a representative set of benefits which include: better measurement of costs and revenues including comparisons between years; greater focus on outputs rather
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than inputs; more efficient and effective use of resources, for example through charges for fixed assets; full cost of providing a service can be compared with outside suppliers; a better indication of the sustainability of government policy; improved accountability; better financial management; and greater comparability of management performance results. While not denying those benefits, this section identifies inconsistencies that raise questions about further motives. It begins with macro-level fiscal controls before moving on to the micro-level to examine the implementation of business-style accounting in the public sector, the flow-through to competition policies and efforts to use accounting for comparison of public sector full costs with private sector prices, and efforts to link the macro-level controls with those at the micro-level.
The UK
From the early nineteenth to the mid twentieth century there was considerable growth in the extent of UK state enterprise. By 1951, many infrastructure services, including water and drainage, roads, gas, electricity, telephone services, rail transport, and international air services, as well as the BBC, coal mines, the steel industry and the road haulage industry were in state hands. Between 1892 and 1950 central and local government expenditure grew from 11 to 39 percent of GNP, most of the growth arising between 1910 and 1950 (Greenleaf, 1983). Public expenditure as a percentage of GNP continued to rise until the Conservative Party returned to power in 1979 and Prime Minister Mrs Thatcher commenced her world-leading efforts to privatise government activities and reduce public expenditure.
Efforts to privatise government activities involved an attempt to differentiate across government between activities that are at the core of the public sector and must remain so, and the remaining functions that can be undertaken either within or outside the public sector. The privatisation of nationalised monopoly utilities, such as British Telecom, British Gas, the UK electricity industry and the English water industry, took place as part of a general transfer of ownership from the public to the private sector (Marsh, 1991).
Macro-level fiscal controls were adopted to achieve absolute reductions in public expenditure; reductions in real terms, and reductions as a proportion of GDP. The adoption of fiscal controls seemed to prompt a competition among countries to reduce public expenditure below that of others (Buchanan and Musgrave, 1999). In 1996, for example, William Waldegrave, Chief Secretary to the Treasury, stated that, “The countries that are going to make it...have brought their spend well under 40 per cent. We have to join the leading group or we will be in trouble”. Prime Minister of the time, John Major, reinforced that view stating that he wanted to reduce expenditure to 35 per cent of GDP.
The early fiscal controls were subsequently modified after New Labour was elected to government in 1997 and pressed ahead with its version of reforms. As Chancellor of the Exchequer, Gordon Brown (2002, pp. x-xi), subsequently explained:
The reforms are built on three pillars: first, a monetary policy framework with an independent Monetary Policy Committee responsible for setting interest rates to meet the Government’s inflation target; second, a fiscal policy framework which is delivering sound public finances through a Code for Fiscal Stability, firm fiscal rules and better planned public spending which focuses on the quality of public service provision; and third, new institutions
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such as the Financial Services Authority to ensure financial stability through transparency, responsibility and clear lines of accountability.
In 1998, the New Labour government had introduced a public expenditure management system, which imposed controls ranging from the macro-level to the micro-level. The details of this system are set out in HM Treasury (1998). At the macro level, the EFSR specifies two criteria for judging governmental expenditure. For current spending, the Golden Rule applies. This rule states that over the economic cycle, current spending (including depreciation) will be met from revenue, and the Government will borrow only to invest. For capital expenditure (EFSR 4.2.2.) the macro-economic criterion is the sustainable investment rule directed at a prudent debt-to-GDP ratio. The Government continues to monitor spending across the public sector but there is no longer a target for public spending as a share of national income (EFSR 4.2.1).
New Zealand
New Zealand has been independent from Britain since 1906 but, as a member of the British Commonwealth, it retains the British Monarch who is represented as titular Head of State by the Governor-General. New Zealand’s unitary central government was modelled on the British system but the Upper House was abolished in 1951, leaving a unicameral legislature. Throughout the second half of the twentieth century until 1996, the first-past-the-post electoral system was dominated by two main political parties, National and Labour, with the result that the party in power could function almost as an elected dictatorship. However, in 1996, following the outcome of a binding referendum conducted in conjunction with the 1993 general election, the country’s first-past-the-post electoral system was replaced by a mixed-member proportional (MMP) representation system. The outcome of the four general elections conducted under the MMP system (1996, 1999, 2002 and 2005) suggests that coalition governments are now the norm, although the dominant coalition party’s powers seem scarcely diminished. In comparison to the relatively strong central government, local government has tended to be weak (Scott, 1979; Bush, 1980). A set of reforms similar to those described below for central government has been imposed on local government where much of the country’s infrastructure is located[1].
From 1935, New Zealand developed a comprehensive social welfare system, which lasted until the public sector reforms of the 1980s and 1990s. Between 1975 and 1984, under the leadership of the Prime Minister and Minister of Finance, Robert Muldoon, the National government resisted the neo-liberal economic reforms being implemented in other OECD countries and advocated by the Treasury. However, increasing pressure on the Prime Minister from within his party meant that some changes were made. In May 1984, just two months before the snap election which ended the National party’s nine year term in government, the Prime Minister approved the establishment within the Treasury of a financial management support unit to develop a reformed accruals-based financial management and accounting system (McKinnon, 2003).
New Zealand’s reforms are recognised as Treasury-led (see for example, Boston
et al., 1991). In the midst of the constitutional and foreign exchange crisis that immediately followed the snap election, The Treasury (1984) convinced the incoming Labour government of the need for urgent economic reform. Within days of the
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election, the newly-elected Labour government began the rapid implementation of radical neo-liberal economic policies which became known as Rogernomics after the Minister of Finance, Roger Douglas. Once embarked on this reforming path, continuation of the reforms seemed unstoppable, and New Zealand soon became known as an extreme and rapid mover (Ferlieet al., 1996, p. 16; James, 1992).
In New Zealand, as in the UK, the reforms involved efforts to reduce government size and expenditure through macro-level fiscal controls and privatisation, which was unpopular with the wider voting public and within the Labour party. The efforts to privatise were preceded by reforms, the stated intention of which was to improve efficiency by identifying the more commercial activities of government and then establishing them as State Owned Enterprises (SOEs). Shortly after this step, a massive programme of privatisation was announced in late 1987. The need to privatise was defended by presenting the level of government debt as a particular worry and the sale of assets, including SOEs, as essential for its reduction. The assets subsequently sold included electricity generation and supply, forests, telecommunications services, the national airline, the rail system, and a bank. The privatisation programme soon became controversial and the subject of considerable public opposition. Roger Douglas, Minister of Finance at the time of this initiative, subsequently admitted the weakness of the argument that SOEs needed to be sold to reduce debt but acknowledged its political convenience (Birchfield and Grant, 1994, p. 163).
From the beginning of New Zealand’s reforms, when the public sector accounting systems were still cash-based, The Treasury (1984) advocated the adoption of published macro-level fiscal targets, including a general rule of fiscal balance. Such targets were adopted unofficially as part of the budgeting process, and these targets involved efforts first to reduce government deficits, then to reduce government expenditure as a percentage of GDP; and to reduce government debt as a percentage of GDP. The publication of fiscal targets became official under S4A of the Fiscal Responsibility Act 1994 (FRA) which in late 2004 was absorbed into the Public Finance Act 1989. The legislation specifies principles of fiscal responsibility and requires demonstration of consistency between the principles and the actual fiscal policies adopted.
The principles of fiscal responsibility specify the application of any operating surplus to repay debt until debt is reduced to an unspecified “prudent” level; and the need for balanced budgets after that. Had they been legislated in a cash-based accounting environment, these principles might seem reasonable. However, the Fiscal Responsibility Act 1994 came five years after accrual accounting had been adopted throughout the public sector in compliance with the requirements of the Public Finance Act 1989. In an accrual accounting environment a reported operating surplus is not necessarily cash and cannot, therefore, be expected to automatically reduce debt. Two brief examples may help to illustrate this point. Unrealised gains from the revaluation of commercial forests are reported in the operating statement and therefore included in the reported operating surplus (available at: www.treasury.govt.nz/financialstatements/year/jun06/27.asp). More worryingly, the modified equity method of consolidation used to prepare whole of government financial reports from 1992 to 2002, meant that some increases in debt were reported as revenue and included in the reported operating surplus, and reported as operating cash inflows in the statement of cash flow[2]. It follows that a budget balanced
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for accruals-based revenues and expenses also does not necessarily have any connection with the level of debt.
The fiscal targets actually adopted, which are consistent with, but not the same as, those specified in the FRA, are net debt as a percentage of GDP and expenses as a percentage of GDP. Those targets have been lowered over time, the net debt target being 35 percent at the time of its introduction when net debt was 43 percent, then gradually reduced to 15 percent, while the current coalition Labour government has claimed an intention to reduce it to zero by 2010[3]. The expense target began at 40 percent, then reduced to 30 percent but currently is 35 percent of GDP under the Labour coalition government.
Comparison
In both the UK and New Zealand, the privatisation of some activities occurred quite quickly, although it was not universally accepted by the wider electorate.
In both countries the macro-level rules seem intended to control total public sector expenditure by limiting current year expenses to current year revenue, and imposing limitations on capital expenditure, while suggesting that the controls imposed will facilitate maintenance of a prudent debt level. In both countries, closer scrutiny of those rules reveals misconceptions. One misconception, which is more applicable to New Zealand than to the UK, is that there is an essential and controllable link between the result reported in an accruals-based operating statement and the level of reported debt such that a result balanced for revenues and expenses will automatically mean no increase in debt. Accountants typically provide a statement of cash flow in addition to an operating statement and balance sheet to show the adjustments necessary to explain the links between the operating result and debt but, as shown in the modified equity accounting example above, that too can be misleading[4]. The other misconception overlooks valid reasons for borrowing money besides investment. In the UK, where investment is over the economic cycle rather than the annual cycle, this second misconception is less rigid and it has since been eased in New Zealand.
Micro-level accrual accounting
Much of the international discussion of accrual accounting in the reformed public sector gives the impression that New Zealand led the world in all aspects. This is not strictly true because an earlier accrual accounting development in both countries achieved greater acceptance in the UK than it did in New Zealand. Nationalised industries in the UK retained accrual accounting when nationalised and then took up and retained current cost accounting (CCA) from the late 1970s even though the private sector abandoned it. However, the adoption of accrual accounting more extensively in the UK public sector following the public sector reforms was selective and might be characterised as the non-application of UK GAAP rather than its claimed application (Ellwood, 2003). Superficially at least, New Zealand’s accrual accounting developments might be characterised as the application of NZ GAAP.
As noted above, the later move to adopt accrual accounting was accompanied by efforts to commercialise the public sector. Although accrual accounting was advocated as a means of improving management in the public sector, there was also an intention to compare the full cost of services with outside suppliers as part of an effort to achieve efficiencies. Other discussion at the time referred to the creation of a level playing field
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and the ability to achieve a “read across” between sectors. Possibly, these objectives helped to motivate the introduction of private sector-style accrual accounting rather than the development of accrual accounting practices specifically designed for use in the public sector.
UK: the non application of GAAP
The UK has six professional accounting bodies, including one involved largely in the public sector, the Chartered Institute of Public Finance and Accountancy (CIPFA, 1999). This has meant some professional separation between public sector and private sector accounting and accountants. It has also meant that new accounting ideas developed and disseminated might be accepted in one sector and rejected in another. This was the case with CCA, which was accepted in parts of the public sector despite rejection in the private sector. The private sector accounting standard-setter, today the Accounting Standards Board (ASB) has, at least until recently, tended to confine its attention largely to the private sector. During the late 1990s, the ASB adopted a Statement of Principles for Financial Reporting (SOP), a derivation of the conceptual frameworks adopted in other countries, all of which are based on the Financial Accounting Standards Board’s conceptual framework. A feature of these conceptual frameworks is rejection of the matching approach to accounting, which is fundamental to CCA. The ASB’s adoption of that conceptual framework, therefore, reinforced the differences in accrual accounting ideas between the public and private sectors in the UK.
A marked feature of accrual developments in the UK public sector is variety in approach, as discussed in Ellwood (2003). The Local Government Planning and Land Act 1982 which applied to local authority Direct Service Organisations (DSOs) required the use of accrual accounting, largely on a current cost basis, with current cost depreciation and a return on assets required. A number of DSOs were set up as separate reporting entities within local authorities so that competitive tendering could be applied. These included, for example, highway maintenance, and refuse disposal. CIPFA, together with the Local Authority Accounts (Scotland) Advisory Committee (LASAAC) determines a code of practice for local authority accounting, and this is formally received by the ASB as a Statement of Recommended Practice (SORP).
Some of the service areas remaining in the public sector after the early public sector reforms were subject to New Public Management (NPM). This required movement to a more commercial basis under purchaser-provider splits adopted in the National Health Service (NHS) or compulsory competitive tendering/ best value arrangements adopted at local government level. These commercialising NPM reforms were accompanied by the selective introduction of accruals accounting. Those areas of the core public sector that were not commercialised were not required to adopt accruals accounting either.
The use of accrual accounting on a current cost basis was extended to National Health Service (NHS) Trusts in 1991, local authorities as a whole in 1995, and departments of the central government from the 1999/2000 financial year. Departments of the central government were required first to produce accruals-based shadow accounts, and then to shift solely to the accruals regime from the 2002/2003 financial years. Exceptions to current cost valuation requirements have been allowed for some assets, local authorities retaining historic cost for reporting infrastructure assets, and a
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notional amount for community assets, but the valuation methods required in central government are largely current replacement cost.
The Government Resources and Accounts Act 2000 now requires accrual accounting (known as resource accounting) throughout the public sector. Resource accounts are required to present a true and fair view, and to conform to GAAP “subject to such adaptations as are necessary in the context of the departmental accounts”. HM Treasury has the responsibility to determine those adaptations for central government accounting requirements.
Evidently, the move to apply GAAP was regarded as practical, a key advantage being that, rather than having to devise a new framework, public sector financial reports based on business sector GAAP would provide a “read-across” to the financial reports of other organisations outside the public sector, assist the understanding of those outside government who are already familiar with business-style accrual-based financial reports, and require merely adapting an already established framework, rather than creating a new one (Likierman, 1998, p. 19). However, whereas the public sector has retained current cost accounting ideas, which rely on matching, the conceptual framework, which is now supposed to guide standard setting, rejects matching.
There are other differences besides those brought about by inconsistencies arising from the continuation with current cost ideas. The application of private sector GAAP has been selective, and involves deferrals of application of standards, modifications to standards and generally accepted accounting practices, and efforts to influence or reinterpret private sector accounting standards. After suggestions the international financial reporting standards (IFRS) would be adopted in the public sector from 2005, that move was deferred by a year. Ellwood (2002) provides examples of how the Treasury in 1998 deferred the application of several standards in the NHS “to allow patient care, financial discipline, funding and practical implications to be properly considered within the context of these Financial Reporting Standards.” Modifications to the application of standards mean that some standards are only partially applied or modified. For example, the Resource Accounting Manual (RAM) lists several accounting standards that are stated to apply only “partially” (for example, FRS2: Accounting for Subsidiary Undertakings, and FRS3: Reporting Financial Performance), or “as adapted” (for example, FRS5: Reporting the Substance of Transactions, FRS10: Goodwill and Intangible Assets, FRS11 Impairment of Fixed Assets and Goodwill, and SSAP 9). To take one example, FRS10 Goodwill and Intangible Assets does not permit the revaluation of development expenditure but the RAM states that development expenditure is subject to annual revaluation using indexation.
The most well-known instance of the Treasury becoming involved in accounting standard-setting issues is in relation to FRS5: Reporting the Substance of Transactions. The Treasury and the ASB clearly disagreed over accounting for the Private Finance Initiative (PFI), and the Treasury seemed determined to ensure such financing initiatives were off-balance sheet. Amidst considerable controversy (Hodges and Mellett, 1999), the difference in stance between the Treasury and the ASB was resolved following the development of a Technical Note (TN99) which allowed public sector
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continuation of off-balance sheet arrangements under some circumstances, hence the public sector application of FRS5 “as adapted”.
Although modifications such as these are claimed to be necessary for the specific public sector context, the effect is to modify the business-style accounting practices beyond recognition (Jones, 2000) while also projecting an appearance that public sector and private sector reports may validly be compared.
Until recently, the ASB’s announced position has been that “the setting of accounting standards for the public sector in the UK is a matter for the legislation governing the bodies concerned, and the Accounting Standards Board has no direct locus” (Accounting Standards Board, 2003a, p. 7). However, the ASB has issued discussion documents and an exposure draft reinterpreting the Statement of Principles for public benefit entities, arguing that, with these reinterpretations, the principles are equally applicable to public and private sector entities (Accounting Standards Board, 2003b, 2005). Those reinterpretations are similar to those applied in New Zealand and Australia, the effect being significant but disguised differences between sectors (see next section). This change in stance evidently reflects changed relationships, the chair of the ASB having become head of the Government Accountancy Services, and diminishing differences between the ASB and the Treasury over the application of standards.
Application of NZ GAAP
New Zealand has only one professional accountancy body which, at least until the early 1980s confined its attention to the private sector. Until 1996, this body was known as the New Zealand Society of Accountants (NZSA), when its name changed to the Institute of Chartered Accountants of New Zealand (ICANZ) and subsequently the New Zealand Institute of Chartered Accountants (NZICA). Accountants in the public sector tended not to hold NZSA membership, and the NZSA’s effort to introduce CCA in the late 1970s related to the private sector which rejected it. In the early 1980s, the NZSA established a public sector interest group, which developed a conceptual framework especially for the public sector (see Pallot, 1992, 1997 for a description). This framework was subsequently rejected following a consultant’s advice to the Treasury that a business-like (and therefore commercial) approach should be applied to all government activities. The consultant observed that future public sector performance assessments would rely on financial reports, and that financial reports are a function of the accounting policies adopted. He advised the Treasury to restrict allowable accounting policies (The Treasury, 1987, pp. 184, 188, 199-202)[5].
The corporatisation of SOEs as limited liability companies meant they were required to adopt business sector-derived accounting standards. The Public Finance Act 1989 applies to the remainder of government activities, and requires financial reporting practices in accordance with generally accepted accounting practices (GAAP) recognised in New Zealand as appropriate for the public sector. Although this suggests the public sector might apply practices quite different from private sector GAAP, events following friction over the appropriate accounting treatment for infrastructure and heritage assets give the impression that GAAP is now the same in both sectors. Treasury staff became closely involved in accounting standard-setting by the NZSA which then adopted a purportedly “sector-neutral” approach to accounting.
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The Treasury withdrew its earlier opposition to proposed legislation (the Financial Reporting Act 1993) requiring companies to comply with accounting standards, and shortly before enactment a requirement was added that the public sector be required to comply with them as well (Treasury, July 1993; see Pallot, 1997 for comment about the differing views over renewal accounting).
The Financial Reporting Act 1993 created a regulatory body, the Accounting Standards Review Board. This board holds the delegated power to approve and thus make legally enforceable accounting standards applicable to the private and the public sectors. By this time, the NZSA had adopted a much abbreviated form of the conceptual framework derived from that originally devised by the Financial Accounting Standards Board, and subsequently modified and taken up in Australia. Although claimed sector neutral, the conceptual framework uses one set of terms to refer to the various elements of financial reports, but two sets of interpretations are applied. The result is that the same terms have significantly different meanings depending on whether they are interpreted for application to the public sector or the business sector (Newberry, 2001; Barton, 2002; Carnegie and Wolnizer, 2002; Newberry, 2002b). The effect is deceptive because the claim is made that accounting standards are neutral between sectors and, therefore, facilitate cross-sector comparability of financial reports (Newberry, 2001, 2002b). In addition, some financial reporting standards contain modifying paragraphs that either add requirements for the public sector or release the public sector from some requirements. More recently, with the move to IFRS, New Zealand’s accounting standard-setters are claiming their application to both the public and private sectors but the standards are modified for application to the public sector. The standards are not sector-neutral.
Comparison
In the UK and New Zealand, the projected appearance is that the form of accrual accounting adopted is GAAP as developed initially for the private sector, and this in turn gives the impression that public sector and private sector financial reports may validly be compared. In each country the idea has been developed from a different base but convergence is clear. A key difference seems to have been the level of cooperation between the Treasury and the relevant accounting standard-setting body. In the UK, until recently there was a clear difference of opinion between the two, whereas in New Zealand, the relationship became closer and cooperative from about 1992. In both the UK and New Zealand, however, the impression that sector neutrality or the ability to “read across” sectors exists appears to be misleading. Of further concern is the manner in which developments at an even more detailed level, intended to support competition, potentially impact on performance assessments and comparisons across sectors.
Competition: the UK
With accrual accounting in place, one stated objective has been to allow the comparison of the full costs of public sector services with the prices charged by other providers (for example, Evans, 1995). Following the 1982 introduction of accrual accounting using current cost valuation for local government DSOs, the DSOs were required to measure and report the capital consumption involved in their activities. In some aspects of their activities, they were also required to generate improved efficiencies through compulsory competitive tendering (CCT).
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Similarly, the adoption of accrual accounting in the NHS in 1991 was accompanied by the introduction of a purchaser-provider split and the creation of an internal health market whereby hospitals were required to price their services to recover full costs. Having adopted a current cost base for accrual accounting, the NHS trusts had to include in their costs depreciation at current cost and a capital charge imposed at 6 percent of the reported value of their assets. This 6 percent rate equates to the then test discount rate applied on public sector investments. It was lowered to 3.5 percent in 2003/2004, and 2.2 percent from 2005/2006. Similar requirements were subsequently imposed on local authorities, and, more recently, departments of Government, which adopted the accruals accounting regime from the 1999/2000 financial year. Given that potential providers in the private sector quote prices, not full costs, and in any event are not required to apply a current cost base for asset valuations, the requirements imposed on the public sector bodies automatically have the potential for comparatively high costs to result. The system as applied in NHS Trusts depletes operating capacity as dividends at the set interest rate must be paid quarterly to the government even when no surplus before interest arises.
Initially, compulsory competitive tendering (CCT) in which public sector full costs were compared with prices quoted by non-public sector providers was conducted openly, but it was controversial and unpopular. Later, although CCT seemed to cease, various review processes were devised to allow officials to conduct comparisons. These were known variously as Prior Options Reviews, Best Value Reviews, and Comprehensive Performance Assessments. Osborne and Plaistrik (1997, p. 93) who note the unpopularity of CCT describe such reviews in the UK as a “clear the decks” procedure intended “gradually and continuously” to reduce the government’s role. Although later versions (for example, EFSR(98) suggest that other considerations besides the direct financial comparisons also matter, the review processes rely heavily on the numerical accounting information (Shaoul, 2005). As noted above, the validity of the numerical comparisons is dubious because of the differences in accounting requirements. In the absence of understanding of the differences between the two sectors, the effect seems likely to result in judgements that public sector full costs are unnecessarily high and therefore the public sector is inefficient.
Competition: New Zealand
The Public Finance Act 1989 required the adoption of accrual accounting throughout New Zealand’s public sector. It included a purchaser-provider split by conceptualising virtually all activities as the production of outputs. It requires that outputs be fully costed (Public Finance Act 1989, s. 2, 4). That legislation also delegated to the Treasury the power to develop more detailed rules (s. 79-81).
More detailed output specification and costing requirements were developed and refined over a four-year period (1991-1994), the Treasury taking a dominant, and controversial, role. Expectations were that public sector delivery of outputs would reduce, and in developing the specifications, departments were encouraged to “imagine that their department did not exist, and they were assigned a budget to acquire the same services through contracts” (Scott, 2001, p. 179). This was consistent with the machinery of government principles on which the reforms were based, which intended,
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inter alia,that the emergence of competition would result in the cessation of public sector functions (Treasury, August, 1988).
Ministers were advised that their role was to choose exactly what to purchase and in what quantity; and to “ensure that the individual outputs are value for money by comparing the outputs offered by a department with those from other sources” (Treasury, March 1993). Their ability to perform this task was always doubtful, and the Treasury offered to assist by performing an advisory function for ministers. The Treasury proposed that it would advise ministers on both purchasing and how to achieve cost reductions. In addition, the Treasury would perform efficiency assessments and find alternative sources of supply (Treasury, February and December 1993).
Stated expectations were that the creation of a competitively neutral environment (or level playing field) and opening markets to external suppliers would prompt efficiency improvements. However, as described in Newberry and Pallot (2004, pp. 252-253), the terminology underwent subtle changes over time and rules were introduced which had the effect of loading output costs. Important among these was the requirement to revalue assets, which resulted in increased depreciation expense and increased capital charges. Further, the rate of the capital charge was biased high intentionally (see Newberry and Pallot, 2004, for explanation). Other documentary evidence suggests that in light of the known public opposition to CCT in the UK, the operation of New Zealand’s public sector financial management system was intended to bring about privatisation without publicly visible pressure (Treasury, September 1992).
From 1993 when the Treasury lamented the lack of competition, it began to develop rules that are more detailed and review processes. These seemed to increase departmental costs. From these came exhortations and efforts to value and report internally developed intangible assets (statistical databases, for example). These would have increased output costs further because the increased amounts reported would increase capital charges and amortisation, and because of the valuation and compliance costs involved. This drive to impose increasingly detailed rules prompted within-Treasury controversy about this growing “information and accountability leviathan” (Gorringe, 1995, p. 21).
From 1996, forms of review by officials were introduced, beginning with the output price review. These reviews are similar to the “clear the decks” reviews Osborne and Plaistrik (1997, p. 93) mention but the Treasury had no mandate to conduct such reviews, and had to work jointly with the State Services Commission (SSC) (1998). By 1998, after several such reviews, the SSC (December 1998) objected that the options presented to ministers should not be limited to reductions and divestments of public sector activities. Subsequently, similar review processes were designed into the budgeting system, which the Treasury claimed as its sole responsibility. Although these review processes, such as the Value for Money review, claim to take wider issues into consideration the Treasury has acknowledged the logic is similar to the output price review which focused on output cost comparisons (Treasury, December 1999; November 2001). The imposition of various review processes clearly provides an important means of protection of public money but, to the extent that the numerical aspects of the reviews rely on the biased cost calculations required within the public sector, the application of seemingly reasonable processes of review seems likely to result in unfair judgements.
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In summary, although a competitively neutral environment (level playing field) seemed to be a key objective accompanying the introduction of accrual accounting in New Zealand, the increasingly detailed financial management and accountability rules and review processes are biased. This disadvantages continued governmental service provision in any efficiency assessment if the assessment is based on full costs because the public sector option is automatically comparatively high.
Comparison
In both the UK and New Zealand, accrual accounting provides a base for full costing processes and the introduction of competitive processes ostensibly intended to create a level playing field. In both countries, however, that level playing field appears to have been tilted, and the public sector bodies are playing uphill. This is consistent with some findings reported in Australia (see, for example, Robinson, 1998; Guthrie, 1998; Guthrie and Carlin, 1999). Developments over time suggest that the unpopularity of processes applied more openly, for example, the UK’s CCT, led to the use of less obvious means – the application of detailed review processes by officials, who focus on financial numbers produced as if comparison is fair and valid. These misleading numbers, in turn, are likely to be used as evidence in reports and proposals to ministers and the wider public.
Linking the macro to the micro
In both the UK and New Zealand efforts have been made to link the macro-economic fiscal controls with the micro-economic budgeting processes. However, the thinking behind such macro-level controls as balanced budget constraints is derived from efforts to control aggregate expenditure in a cash-based environment, whereas both countries have moved to accrual accounting. The imposition of such controls over accruals-based expenses does not necessarily achieve the same effect.
The UK
The Treasury undertakes a comprehensive spending review biennially, which looks ahead three years, although separate budgets and different criteria apply for current and capital expenditure. The features of this review system are noticeably similar to the PPBS strategic planning and budgeting system adopted in the mid-1960s. It includes medium term programming for resources and short-term operational budgeting.
This comprehensive review begins at the macro-level with the macro-level fiscal discipline targets[6]. It is claimed to achieve a combination of fiscal prudence and good public services by ensuring that, within their spending limits, each department has clear objectives, measurable targets and measures of efficiency. Some spending cannot reasonably be subjected to firm annual spending limits because it is determined by prior policy commitments. This includes social security, and Common Agricultural Policy. For the remaining expenditure, which excludes the Local Authority Self Financed Expenditure (LASFE), multi-year spending limits based in real terms are set for a three-year period and rolled forward. However, the application of spending limits to departments of government is not increased if inflation substantially varies from forecast.
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New Zealand
Shortly after implementation of the principles of fiscal responsibility, some means of linking the “information systems for budgeting with those of reporting the government’s finances” was recommended (Scott, 1995, pp. 10-12). A separate “counting framework” intended to provide this link was devised and introduced in 1997. From 2003, the counting framework has been incorporated in the budgeting guidelines (Newberry and Pallot, 2003).
The counting framework is described in more detail in Newberry and Pallot (2003). The rules are supposed to maintain expenditure control by converting the fiscal targets for debt and expenses into dollar amounts, and then using those figures in conjunction with a three-yearly rolling budget baselines regime, which maintains departmental maximums in nominal dollar terms[7]. In the conversion process, the debt fiscal target is converted to a capital expenditure figure by applying the erroneous assumption that capital expenditure (but nothing else) increases debt. The counting framework muddles debits and credits, as exemplified by converting the debt target into an amount for capital expenditure. It also muddles accrual and cash-based accounting ideas. For example, departments receiving accrual-based appropriations were expected to retain cash over the longer term and replace their assets from their own resources, with criticism resulting from failure to do so. At the same time, counting framework adjustments meant no increase in resources when departments were required to recognise pre-existing liabilities, such as superannuation liabilities, or non-output expenses, such as restructuring costs. Instead they were required to use pre-existing financial resources, which was the depreciation component of appropriations. In some cases, as exemplified by the Department of Statistics, they have been required to fund major projects into the future with the depreciation component of future appropriations while also facing criticism for failure to save the depreciation component for asset replacement[8]. The combined effect of the rules in the counting framework is to incorporate a series of biases, which discourage the purchase or retention of assets in favour of longer-term off-balance sheet arrangements such as operating leases. Although the manner in which the fiscal targets are determined involves calculations based on GDP and they are, therefore, adjusted in real terms, the budget baselines regime imposes controls in nominal dollar terms, thus preventing any increase in cash to departments.
The effect of the budget baselines regime on departments is to impose continued downward pressure on the amounts of cash provided to departments by allowing inflation to erode spending power (Barnes and Leith, 2001). Eventually, this forces a “bid” for additional money. Initially, a precondition for such a bid was extreme financial distress, and the prior application of an output price review, to which the SSC eventually objected and alternative forms of review are now conducted as part of the budgeting process (see above).
Comparison
New Zealand Treasury officials interviewed for Newberry and Pallot (2003) stated that New Zealand’s rules linking the macro-level fiscal controls to the micro-level budgets are similar to those in the UK. Worthy of note, therefore, is the function of the nominal dollar spending levels, and the muddling of debits and credits and accrual and cash accounting as outlined above.
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The link between the macro and the micro is deceptive. Superficially, the link functions as a means of tracing the macro-level fiscal controls through to lower levels but the macro-level limit is adjusted in real terms while the micro-level is tied to a nominal dollar. This has the effect of tightly constraining the provision of cash, while encouraging engagement in off-balance sheet arrangements such as operating leases, and, notoriously, public private partnership arrangements. For example, in the UK the “Code for Fiscal Stability” does not take into account the impact of finance leases on public sector net debt “as the impact cannot be accurately estimated” FSBR 2006: C.34. This further encourages private finance.
Discussion and conclusion
Stiglitz (2003) warned that seemingly technical economic policies advocated by such supra-national agencies as the OECD, IMF and World Bank are “more often based on ideology than economic science”. A detailed consideration of literature on accounting and ideology is outside the scope of this article, but readers might refer, for example, to Tinkeret al.(1982). In both the UK and New Zealand, the three legs of the neo-liberal iron tripod are apparent, namely, independently-administered anti-inflationary monetary policy; macro-level fiscal disciplines imposed to achieve balanced budgets; and micro-economic reforms to liberalise trade and to expand the business sector (McKinnon, 2003, p. 316). A strong belief in markets underpins neo-liberalism. Efforts to reduce the size of government would be consistent with the desire to foster and encourage business activities. Accompanying the early neo-liberal reforms were openly-pursued efforts to do this by privatising previously-governmental activities. In both the UK and New Zealand, the early stages of these privatisation efforts mostly involved the outright privatisation of some infrastructure-based industries, and were defended at least partly as a means of reducing government debt. These privatisation efforts were tolerated initially, but they soon became controversial and the subject of considerable public opposition. More gradual, less visible processes seemed to follow, some of which, as suggested above, are buried in seemingly technical details.
Advocates of privatisation (for example, Savas, 1982, p. 123) propose various ways to proceed with privatisation gradually which run less risk of “bruising” ideological battles than methods pursued openly. These include running down public services and encouraging “natural forces” to develop markets in those formerly public services. Arguably, the pursuit of such policies is assisted by the manner in which accrual accounting has been and is being developed in the public sector in both the UK and New Zealand. The fiscal controls and budgeting processes facilitate the withholding and withdrawal of financial resources from public sector operations, thus forcing service reductions and the running down of services. The more detailed accrual accounting requirements, especially revaluation requirements and the imposition of charges based on the revalued assets (depreciation and capital charge) which load the full-costs required for comparison with potential alternative suppliers and are used in the various review processes are biased against continued public sector provision, and thus support and encourage business activity by suggesting public sector services are inefficient. The manner in which accrual accounting has been developed in the public sector has the effect of privileging decisions, which advance the privatisation aspect of the neo-liberal agenda. That an underlying privatisation agenda continues becomes apparent only occasionally. For example, in the UK, the NHS improvement plan states as an objective
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that by 2008 the independent sector will provide 15 percent of procedures on behalf of the NHS. Occasional policy documents released in New Zealand reveal similar aims but, for the most part, the moves to privatisation seem to depend for their legitimacy on demonstrations of public sector ineptness or inefficiency. The detailed rules designed into the public sector financial management systems in both countries seem likely to cause both, the withholding and erosion of financial resources reducing the capacity of public sector services to function, and the accrual accounting requirements loading reported full costs.
This research relates only to the UK and New Zealand, but the Chancellor of the Exchequer, Gordon Brown’s introduction to HM Treasury (Brown, 2002) raises questions about the extent to which similar developments are being pursued internationally.
Just as in the mid 1940s a new British economic policy was matched by the high ideas that brought the creation of the World Bank and the IMF, so too at the turn of the century the same high ideals are driving change from debt relief to major reforms in the international financial architecture. We must, at an international level, build a new consensus ...
ensuring countries have in place the macro-economic, financial, structural and social policies for long-term success in the global economy. For this reason we have been active in international institutions such as the G8, the IMF and World Bank ... And while much
remains to be done before a new international financial architecture is in place, I believe we are making progress.
Given Stiglitz’s warning, and the findings reported here, issues for continued and future research include scrutiny of the public sector accounting developments advocated and imposed by supra-national organisations, and of the detailed nature of their efforts through the International Federation of Accountants (IFAC) to standardise public sector accounting world-wide. Even more important for future research is the need to ensure the fundamental purpose of governmental accounting, protection of public money, receives due attention and is strengthened rather than weakened as seems to be the case, at least in New Zealand (Newberry and Pallot, 2005).
Jones (1992) commented that the function of governmental accounting is to control people’s behaviour by encouraging or discouraging particular actions. This makes clear that accounting in the public sector should not be represented or regarded as a neutral technology. It is accepted that there is value in the use of accrual accounting in the public sector, but the manner and form in which accrual accounting has been introduced and developed results in the presentation of accounting data as if it may validly be compared with business sector accounting information. Arguably, this supports advancement of neo-liberal policies of privatisation and trade liberalisation by providing biased and misleading data. If this effect has been brought about knowingly, it might be regarded as exemplifying information-based agenda control through which the amount and type of information produced and made available is intended to influence decisions and policy outcomes (Rubin, 1992; Bendoret al., 1985). The suggestion that this accrual accounting development in the public sector is merely the application of business sector practices intended to provide a “read across” or be “sector neutral” misleads. Areas for future research include closer scrutiny of the overall effect of public sector financial management reforms, as well as the role of, and implications for, accounting standard-setters.
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Files obtained under the Official Information Act (predominantly Treasury files and archives of former Ministers of Finance, Ruth Richardson, and David Caygill)
Notes
1. For example, water, sewage, local roads.
2. The government’s financial statements for 1997 demonstrate how increases in SOEs’ debt could be reported as revenue to the government. These are available at: www.treasury.govt.nz/ pubs/fmb/CFS97/contents.htm. Note 9 explains the modified equity method of consolidation under which dividends received from SOEs are reported as revenue, and then the total net surplus/deficit of SOEs, net of the dividends already reported as revenue is shown before achieving the reported operating balance. A change in company law in 1993 removed the earlier earned income limitations on dividend payments, and this meant dividends paid could exceed reported profits, and in the case of some SOEs did exceed reported profits (see Note 9). One SOE, Contact Energy Ltd, an electricity generator, was split off from another SOE in November 1995, with the government holding 100 percent of its shares. It was required to borrow to help finance the assets with which it was established. For its financial year ended on 30 September 1996, it reported a deficit of NZ$32 million. Following a decision in 1996 to increase the Contact Energy Ltd’s gearing, the SOE paid to the government a dividend of $150 million. The state of the Contact Energy Ltd’s balance sheet at the time makes clear that it would have been forced to borrow to pay the $150 million dividend (see, www.contactenergy. co.nz/web/pdf/financial/1996_annualreport_financials.pdf) The modified equity method adopted to incorporate SOEs into the whole of government financial reports meant that the SOE borrowings, effectively, forced to provide the dividend, were reported in the whole of government financial report for the 1997 financial year as investment revenue, and in the statement of cash flows as operating cash inflows (available at: www.treasury.govt.nz/pubs/ fmb/CFS97/contents.htm pp. 40, 43, and Note 3). Although there is a further relatively small adjustment to the government’s operating statement to pick up the difference between the total of dividends received and the reported results of the equity accounted entities, the presentation conceals the fact that the dividends came from only a few SOEs, some of which had to borrow. Some of the reported investment revenue is, in fact, borrowings.
Date
File number
(if any) Title Source/archive
August 1988 CM88/32/8 Corporate planning resource allocation process Caygill U537 November 1989 Treasury/SSC Report on departmental incentives Treasury August 1991 T91/3516 Financial disclosure Richardson 721 September 1992 T92/2652 Reply to contracting out proposal from Mr
Michael Cox
Richardson 794
February 1993 T93/233 Enhancing vote analysis as part of Treasury’s core business
Richardson 1093
March 1993 T93/434 Purchase agreements Richardson 817 July 1993 T93/1792 Financial Reporting Bill: Applying GAAP to the
public sector
Richardson 909
December 1993 T93/2951 Purchase agreements Richardson FM/2/13 March 1997 Statistics New Zealand Output Price Review Treasury December 1998 Future application of output pricing reviews:
incentives, options and strategies
Treasury
December 1999 T99/61 Value for Money in the Public Sector Treasury
November 2001 E-mails to S. Newberry Treasury
