Complexity with bells on

Andy Wynne reports on new research published by ACCA

ACCA launched its latest research report, on the impact of introducing resource accounting, at a packed meeting in Belfast recently. Professor Noel Hyndman of Queen’s University, Belfast, who undertook the research with Ciaran Connolly of the University of Ulster, said that the report told two stories. One was on the extent to which this reform was implemented successfully in Northern Ireland; the other, of more general interest, was the extent to which the Resource Accounting and Budgeting (RAB) reforms were actually delivering on their promise.

Despite the additional challenges of the Northern Ireland context leading to a shorter lead time, the reforms appear to have been implemented as quickly and as successfully as in the rest of the UK. The challenges included the change from six to 11 departments to accommodate devolution. As a result, the Department of Finance and Personnel was, for example, having to get its management information from five different financial systems for a time!

The other story is more complex, at least partly because it is still developing and the reforms, as in the rest of the UK, remain work-in-progress. Thus, in December 2003, when reviewing recent accounting reforms across the UK, the National Audit Office said that: “In most cases it is too soon to identify any discernible benefits from better resource management in terms of contributing to improved public services from, for example, enhanced efficiency.”

One of the main conclusions of the ACCA research project is that the additional information being provided as a result of the introduction of RAB is not being widely used, certainly at an operational level. In addition, the costs of implementing this reform are unclear, although they are perceived to be substantial.

This is disappointing - RAB was heralded with great enthusiasm, and this type of reform continues to be highly recommended as the approach to modernisation of public sector accounting across the world. Kenneth Clarke, then Chancellor of the Exchequer, even went so far as to claim, when launching the Green Paper on RAB in 1994, that: “People will find other ways of celebrating the millennium, but few will be more important. This is one of those highly significant events.”

Similarly, in 2002, when announcing the European Commission’s plans to move to accrual accounting, the Budget Commissioner Michaele Schreyer said: “Today’s action plan… maps the Commission’s progress towards the wholesale implementation of the most up to date public sector accounting standards… the Commission will once again be far ahead of most national administrations in the world.”

In practice, Hyndman said that most of the operational accountants they had interviewed as part of the research “saw few benefits from the reforms at present, and some said there aren’t any”. The report includes a range of comments from accountants working across government departments in Northern Ireland, including: “To me, the exercise had been more or less a waste of time”, and that RAB “is a necessary evil”.

Clearly, some benefits have arisen and more are expected in the future, as a member of the audience at the launch said: “We are moving towards producing quarterly management accounts and, hopefully, we will see some benefits when managers are provided with the additional information which is now available.”

Decisions on whether to allow early retirement is one specific area where information produced by the RAB reforms is being used. There is widespread agreement that such decisions were, in the past, taken only on the basis of short-term cost considerations. Now the longer-term costs appear in the RAB balance sheet and they will later hit the department’s operating cost statement. Thus, these implications have to be taken seriously.

Another example of the effect of RAB, in the Northern Ireland context, is over the question of the financing of the local water industry. However, in this case, the effects may in fact be distorting rather than being beneficial. Unlike the case in England and Wales, the Northern Ireland water industry has not been privatised although it suffered similar problems of under investment in the 1980s. The necessary capital investment in water could be financed, but the longer-term costs of depreciation and capital charges will be very difficult to afford within future budgetary constraints and the approach used to calculate budgets for Northern Ireland. As a result, some kind of public-private partnership is being considered, although the direct charges for water services which may result are already subject to significant opposition.

Both HM Treasury and the Northern Ireland Department of Finance and Personnel had claimed that RAB would have a limited cost impact and so, perhaps because of this view, no budget was prepared for the project, and no official estimates are available of the costs which have been incurred so far. A somewhat ironic situation for a reform which aimed to increase openness and accountability! Thus, one of the accountants interviewed as part of the research stated that: “No-one produced a budget for RAB in this department, and I have no idea what it cost. In fact you are the first to ask the question. But it has cost a terrible amount of money.”

There does appear to be a developing consensus that the RAB style financial statements are more complex than may be necessary. This is particularly true for schedule 1, a summary of resource outturn, which compares the actual resources which have been used by a government department to those which were authorised by parliament in the budget. This comparison is done on both a resource (accrual) and a cash basis and it may not be clear which figure should take precedence. This is one reason why many people are questioning whether it was helpful to extend resource accounting principles to the budgeting process.

One of the senior accountants interviewed said: “It is extremely confusing to me and I’m meant to be an expert”, and one of the members of the Public Accounts Committee at Westminster is said to have asked recently whether there was anyone who understood a set of resource accounts. This is the committee with direct responsibility for reviewing departmental accounts on behalf of parliament and, so, holding civil servants to account for the way they have used public resources.

Professor Hyndman said at his presentation: “RAB consists largely of private sector accounting techniques with bells on; not only does the public sector now have to account for capital with depreciation calculated on a current cost basis, but there is also an additional capital charge. We also have the awful schedule 1 which has no equivalence in the private sector.”

Clearly the jury is still out on the full impact of resource accounting, and further research will be necessary in this area to inform this decision. For those who are interested the research report contains a wealth of information and analysis on this important reform. The full report is available from ACCA’s website at www.accaglobal.com/pdfs/research/rr-087-001.pdf.

Andy Wynne is ACCA’s head of public sector technical issues. ACCA regularly responds to public consultation documents on current issues in public sector financial management. If you would like to assist with the development of ACCA’s responses please contact Andy at publicsector@accaglobal.com.