Special Reports - Public sector - The public sector revolution

A gargantuan project is underway to drag government accounting into the 21st century. Alice Haythornthwaite reports on progress.


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It's hard to miss the symbolism of the Treasury's recent appointment of Mary Keegan as managing director, financial management, reporting and audit. As chairman of the Accounting Standards Board, Keegan has been at the forefront of accounting standard-setting for the business world. Her recruitment to the public sector therefore exemplifies the government's determination to commercialise its financial framework and accounting processes and become more aligned to the rest of the economy.

A revolution in government accounting systems began in 1995, when the decision was taken to replace the traditional cash-based system with a more commercial-style resource accounting and budgeting (RAB) system.

Resource accounting is accruals-based and intended to provide parliament with more timely financial information, and with a much fuller picture of departments' financial activity than previously. This initiative was fully completed in April last year.

The government's next step is the gargantuan task of producing 'whole of government accounts' (WGA) from 2006-07 onwards, to improve the macro-economic framework. The process began in 1999, and this year, as a stepping stone, it will publish accounts for the whole of central government for the first time, following dry runs over the past two years. Two dry runs will also precede the first issue of WGA, which will bring in local authorities, NHS trusts, public corporations and trading funds.

Calling in the professionals

Part of the government's plan to improve its accounting systems has been to increase the professionalism of the senior finance function by recruiting more qualified accountants. It is arguably a long time coming. Government departments and their agencies currently spend around 421bn annually and are responsible for assets of some 334bn and liabilities of 112bn.

But until the resource accounting and budgeting system was brought in, there were just 600 qualified accountants in central government. It's hard to imagine any other business that size being run with so few finance professionals.

Since the public sector accounting revolution began, however, the number of qualified accountants has more than trebled to 2,200, and the government is still recruiting. The principal finance officers of each department were replaced by finance directors last year. These FDs, who also sit on their department's board, are usually qualified accountants, and if not, they are required to have a qualified accountant supporting them.

Mary Radford, a chartered accountant in the public sector and chairman of the ICAEW's Financial Reporting Committee's public sector sub-committee, says that although it might not immediately appear so, this change is pretty radical in the context of the civil service culture.

She explains: 'In the past the finance function has just been viewed as something for experienced, but nevertheless generalist, civil servants. So the decision last year is quite seminal in the sense that it's actually recognising - as it has done for a number of years on things like economics and science - that finance is a profession, and that in the modern civil service you have to have at senior levels somebody who is appropriately qualified.'

Sir Andrew Likierman, the outgoing head of government accounting services whom Keegan will replace, confirms: 'There will be the opportunity for more high calibre professional people in the civil service.

'And the changes offer the opportunity for people training in the public sector to get much further with their accountancy. I'd really like to stress that. It isn't just about bringing people in. There are a lot of very good people here already, and with any luck we'll retain them by giving them more challenging jobs.'

The drive for professionalism could gain more steam when an efficiency review of the civil service, now underway, is published. A leaked report revealing the plans for such a review back in February suggested that 80,000 civil service jobs could be cut as a result. A move away from the generalist civil servant towards skilled professionals would arguably boost efficiency and free up money for more high-level professional salaries.

As Likierman argues, public sector salaries aren't nearly so adrift of the private sector as they used to be, and serious senior finance roles receive very competitive salaries.

A gargantuan task

Modernisation is the aim, but has the government been rather late on the uptake as far as accruals accounting is concerned? CIPFA's assistant director of central government and health, Tom Lewis, says it depends how you look at it.

'If you think, accruals accounting has been around since the Middle Ages … But it isn't something that could happen overnight. It's an absolutely huge operation and it would be a mistake to try and do things too quickly because then it would just fall over. It makes sense to make sensible progress, making as rapid progress as can be while making sure the foundations are built properly.' So far, the government appears to have made good progress. Although the introduction of resource accounting and budgeting took eight years, this was in keeping with the timetable that had been set.

Likierman confirms that a long timescale was necessary because of the sheer scale of the project.

'It took so long because we wanted to keep the costs down in terms of the replacement cycle of systems, and also because we knew some of the systems in departments were not terribly good and needed quite a lot of attention before we made the switch,' he says.

'Our main difficulty was the sheer size of the project. We're talking about activities covering 40% of the country's gross national product - a flow of 500bn a year. And assets last valued at 274bn. The sheer scale was a challenge.

'We tried to ensure things don't go horribly wrong by taking a pace which was right for the nature of the task being undertaken.'

And likewise a long time frame is needed to implement WGA which is, in Likierman's words, 'a huge aggregation process that's very complicated'.

He explains: 'There's a lot of work to be done, bringing together on a single basis bodies that have been treated differently in accounting terms. The technical issues are very significant in terms of how one completes a (financial) statement of this kind. We are on track but this is a very long project too.'

Question of culture

However, while the mechanics of resource accounting and budgeting may now be in place, Lewis says there's still a big job to do in actually integrating it into the financial culture of the civil service.

'I think some departments are very much treating RAB as an end-of-year exercise rather than working it into the day-to-day management of their affairs. It's a matter of getting hearts and minds to really grasp what this concept actually is.'

Indeed the general report of the comptroller and auditor general, Sir John Bourn, for 2002-03, concluded that 'although nearly all departments are producing unqualified accounts, there are nevertheless indications … that some underlying systems and management controls are still, in essence, cash-based. Such systems and management will need to be further developed if the Treasury's proposals to accelerate the production of accounts are to be achieved.'

Assuming that the government is on track, which it does seem to be, what are the real benefits of the changes? Lewis says the use of accruals is 'fundamental' to accounting in a sensible way.

'It's so basic really that it's quite difficult to know why you would want to explain it,' he says. 'It's got to be the way to manage the finances properly on a through-the-year basis rather than just using it for your end-of-year accounts.'

He believes that WGA too will be a massive achievement. 'It's the most ambitious consolidation that I know of, not just in the public sector, but anywhere. Other countries such as New Zealand have done similar things but not included local government. So the UK's consolidation is the biggest and best so far, and it will be quite a feather in the cap when it's pulled off - which I have no doubt it will be.'

Radford agrees that the basis of RAB is much more appropriate to a complex, modern public service. WGA should be beneficial because it will give a whole government view, but, she says, the government doesn't yet seem to have resolved in its own mind what it's going to do with the accounts when they are published.

'There are a number of things it could do with it. To some extent I think it will inform macro-economic considerations, because particularly in areas like assets and liabilities it will probably provide better quality information for fiscal planners than is currently available from statistics-based information. But the government hasn't quite decided yet.'

Arguments against

The ACCA's head of public sector technical issues, Andy Wynne, argues, however, that WGA is a misnomer.

'It's actually most of the public sector, not all of it as is implied. Big chunks are being left out such as all further and higher education institutions, housing associations and smaller local authorities, such as parish and town councils.

'The government says WGA will provide more accurate information for macro-economic management, and more accurate information on the level of government debt - but if you exclude these chunks, some of which will have debt, then it's questionable whether you will actually get a more accurate picture.

'And given that government debt is way below the Maastricht limit, and significantly below the lower limit of 40% that chancellor Gordon Brown's set himself, then why do we need to know the level of government debt more accurately?'

Wynne also questions the general thrust of RAB that whatever the private sector does is appropriate to the public sector, particularly the assumption that private sector style financial statements are appropriate.

'Conceptually accrual accounting is designed to measure profits by matching income with associated costs - and profit doesn't really have any meaning in the public sector.

'And you can't have matching at a transactional level because you really have two independent streams: the costs of providing public sector goods and services, and then independently a tax stream of revenue. There's no relation between the two, except for the time period in which they occur.'

Wynne also argues that RAB accounts could be more difficult for MPs to understand. The old cash accounting system involved a budget being agreed by parliament, and then departments would report back at the end of the year how much of this limit they had actually spent.

'It was relatively easy to understand,' he says. 'If you start producing accruals-based accounts with a balance sheet and rather complex ways of measuring the value of all your assets, depreciation and capital charging etc, then I think it's more difficult to understand what you've been given.'

Wynne admits his is a minority view, but points out that the UK is something of a guinea pig with these public sector accounting changes. 'We've got very, very limited experience of what the actual benefits are,' he says.


The UK is one of the first countries to introduce private sector style financial statements. New Zealand and Australia were the first, followed by the US and Canada. France is planning to follow suit over the next few years. However, Italy and Germany have no plans to at all, and last year, the Netherlands decided not to go ahead with plans for moving to accrual accounting for its central government ministries.

The Organisation for Economic Cooperation and Development and the International Federation of Accountants are vigorously campaigning for accruals accounting in the public sector.

Source: Andy Wynne, head of public sector technical issues at ACCA.

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