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Central government’s plans to introduce Whole of Government Accounts could have fundamental implications for accounting procedures across the public sector, writes David Walker.

Britain’s government has not been turned on its head, at least since Charles I lost his on a scaffold in Whitehall. We do not have revolutions, however much journalists fancy the word. We certainly do not have accountancy revolutions.

But the changes in accounting practice now being road tested under the ‘whole of government’ banner have the potential to set the Thames alight. They could even call into question some Whitehall assumptions and municipal commonplaces. It all depends on whether these are just going to be alterations to accountancy practice or an exercise in political visibility.

The former, says the Treasury, is just a technical exercise. And, it must be admitted, so far the wider world (including most mainstream officials in central and local government) has not woken up to its significance. But the Treasury also says the point of the change is to make tax and spend decisions more open and honest, and down that road political trouble might lie.

Commercial Balance Sheet Equivalent
Change is possible in at least three ways. Whole of Government Accounts (WGA) are supposed, ultimately, to provide the equivalent of a commercial balance sheet for the public sector, including local authorities, the National Health Service and a great array of other public bodies (half the energy of the WGA project so far seems to have gone in definition and discussions around Whitehall).

WGA might then start painting a picture of something that for centuries has eluded constitutional theorists as well as officials and politicians, the British ‘state’. Aberdeen University professor David Heald says “the modern state is such a difficult concept to analyse”. That’s an understatement.

Together with the mystical notion of ‘the crown’, obfuscation around just where our government structure and spending begins and ends has proved very useful for generations of civil servants and ministers and people in local government too, though they would never admit it. If WGA works, all will become clearer. Formal accounts and budgets will be aligned. What taxation pays for ought to be easier to see. Liabilities, assets and revenues will be set down in black and white.

Too black and too white, perhaps. WGA could conceivably persuade some – critical newspapers and Opposition MPs among them – that the British Government is bankrupt, its liabilities far exceeding its income, and that severe retrenchment is needed.

Pressure on Local Government
Another effect of WGA will be on local authorities. It is already increasing pressures inside local government to adopt the same kind of techniques and accounting styles as the centre of government, adding fuel to the fires of ‘centralisation’ that have been burning brightly in recent years. A lot of what local government finance directors now do – with reserves and the handling of long term liabilities for example – could suddenly become a lot more transparent, uncomfortably so.

WGA is a step child of the movement that got going within government during the 1980s and 1990s better to align public and private sector accounting conventions – a victory for the private sector, some might say. Resource accounting was proposed in a July 1994 Green Paper but the preparation of commercial balance sheets for government ruled out. Work on resource accounting proceeded - it is now rolling out across Whitehall.

MPs were interested in WGA, however, and in 1995 the Treasury agreed to commission work jointly with the National Audit Office. The pace quickened under Labour with the publication in 1998 of a big scoping study; the intellectual battle was won. New statute law, the Government Resources and Accounts Act 2000, laid the basis for what the Government (meaning for most practical purposes HM Treasury) hopes will give a sounder basis to taxing and spending, make reporting more consistent across government, help investment planning and provide MPs with ‘an audited overall view of government performance and finances’.

WGA Timetable
A memo to the Commons’ public accounts committee in December 2000 set out the timetable that is now in operation. An audited Whole of Government Account, covering the entire public sector and consistent with Generally Accepted Accounting Practice, is to be published for 2005-2006.

‘Whole’ covers 1700 bodies, councils, NHS trusts, public corporations and trading funds – but the edges of the exercise are still fuzzy. The Treasury says it is applying the Accounting Standards Board’s FRS 2 on accounting for subsidiary undertakings to determine which quangos should be included. But the fuss surrounding Network Rail may be an indicator of storms ahead.

Final go ahead, expected this summer, depends on the success of the preparation of a (whole) account for central government, that is to say Whitehall departments, central funds and most non-departmental public bodies. ‘Dry run’ audited accounts for the centre for 2001-02 are nearing completion, with the National Audit Office closely involved. In parallel the Treasury is working on how WGA is to be aligned with the figures published by the Office of National Statistics as national accounts; there are possible impacts on the way gross domestic product is calculated.

Holding Fire
Local authorities are mostly holding fire, waiting for the Treasury to decide to push ahead. Technical discussions have been going on for the past 18 months with the Office of the Deputy Prime Minister, the Audit Commission, the Accounting Standards Board and the accountancy professional bodies. But the message has yet to get through to many local authority finance staff.

They are aware of related changes, such as earlier closure of annual accounts, and the need to align asset accounting with WGA. But the exercise, so far, has seemed rather marginal. Even after WGA comes in, councils will go on using existing accounting conventions before consolidating the figures for the wider exercise.

Paul Dransfield, director of finance at Derby City probably speaks for many in saying WGA “will not change decision making, or the resources at the council’s disposal”. That may be open to argument because the Treasury is saying WGA “will result in greater comparability of performance data, increasing the ability of individual bodies to benchmark their own performance against that of others”.

Pensions
Yet the eventual effects of WGA will depend not just on the publication of new data sets but whether the public – and Opposition MPs – pick them out of the morass of existing official figures and make a fuss. Take pension liabilities. It’s not yet clear whether WGA will feature state pension liabilities – the Treasury is pushing the line that “there is no clear case under UK General Accepted Accounting Practice for making a provision”. But pensions owed to government and quasi-government employees will show through.

Unfunded defined benefit or final salary schemes are already being made more transparent as resource accounting spreads. The National Audit Office thinks a number of public bodies may still be accounting for pension schemes on a cash basis: WGA will force a change.

Skeletons in the Closet?
The resulting figures could provoke controversy, if they expose higher than expected liabilities. Another area which might swelter under the spotlight is joint ventures and public-private partnerships. WGA is meant, literally, to end “off the books”.

So far the Treasury has been confident that WGA will not tumble skeletons out of the closet. But since the point of the exercise is to make public accounts more intelligible, there are bound to be some unwelcome discoveries made further down the line.

David Walker writes for The Guardian

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