2. Financial reporting and its impact on decision making
Prof. Ron Hodges
Mario Abela
Dr. Danny Chow
Dr. Anne Stafford
Uresha Walpitagama

3. Financial reporting and its impact on decision-making
Mario Abela Leader – Research and Development
ACCA International Public Sector Conference, London
December 4, 2014

4. A few antecedents to financial reporting today

5. Industrialisation and the need for capital

6. A new era of investor protection

7. Regulatory “failure” and market-led reporting

8. Financial reporting in the public sector

9. Conceptual basis of government accounting

10. Government accounting and the real world

11. Perhaps we have got it wrong…

12. Accountability. Now.

13. Why is this important to IFAC?
Public interest issue and IFAC has invested in developing a robust set of global standards
Unlike other standards, the baseline in the public sector is much more uneven and progress has been particularly slow
Need to address the relevance and contribution of accountants – even global organizations are less than convinced about the role and importance of accounting as a foundation to improving financial management

14. Accountability Now!
Citizens should be demanding greater accountability of their governments Now!
Global coalition being established to ensure support from a broad stakeholder base
Working closely with the Big Six and our member bodies to draw on their expertise
A campaign, not a project or initiative, because a political problem requires a political solution – we need our voice heard and real action to follow
Global, regional and local actions

15. Creating momentum at a country level
Raising awareness is not enough – need to move governments along the adoption and implementation path
Country-level actions include using our convening power to bring together key decision-makers to develop roadmaps for implementation – recognizing each jurisdiction has specific issues and needs to address
Closely linked with our PAO capacity building efforts
Implementation left to the market to compete for – coopetition model of working

16. Risks, Challenges and Opportunities
This effort goes to the heart of IFAC’s public interest agenda
It demands we are creative in how we convince key stakeholders and complements the sound work of IPSASB
Difficult to get quick wins – more an evolutionary process
It is not easy because we are not so good at talking to non-accountants but we are learning fast
Significant opportunity to strengthen the voice and relevance of accountants globally

18. Comparing the use of consolidated public sector accounts
Danny Chow (Durham University, UK)
Ronald Day (University of Sydney, Australia)
Caroline Aggestam (Copenhagen Business School, Denmark)
Raili Pollanen (Carleton University, Canada)
Rachel Baskerville (Victoria University Wellington, New Zealand)

19. UK: WGA
Central Govt
Local Govt
Public Corporations

20. Australia: WGR
Commonwealth
NSW
Local Gov
VIC
QLD WA NT SA
TAS

21. New Zealand: WGA
Central Govt
Local Govt

22. Canada
Federal
States & Territories
Local

23. Sweden
Central Govt
Local Govt

24. Defining use International variation Dependent on constitution
Global Labelling
Push for unifying “Conceptual Framework”
Local Solutions / Adaptations

25. Key reform drivers Rhetoric Strength of accounting professions
Greater decision making / macro-econ links
Improved accountability
Strength of accounting professions
Politics: Transparency deficit

26. Competition Systems Global leadership
National Accounts/Statistics
GAAP/Accounting
Global leadership
Professions/Commercial vs. Public Sector

28. The impact of accounting for Public Private Partnerships
ACCA International Public Sector Conference 4th December 2014
Dr Anne Stafford BA PhD FCCA
Senior Lecturer in Accounting and Finance

29. Economic context
Public Private Partnerships (PPPs) can be loosely defined as co-operative institutional arrangements between public and private actors
Most common UK form is the PFI (Private Finance Initiative)
Global interest and involvement in PPPs continues to grow:
Worldwide investment in roads, rail, water & buildings of $820bn since 1985
Investment in low/middle income countries in energy, telecom, transport and water of $2,200bn since 1990
UK investment to 2012 £55bn, with whole life unitary charges payable until 2050 of c. £300bn

30. Rationale for PPPs Rationale for western economies:
Additionality plus private sector efficiencies
In some economies, PPPs enable debt to be kept off the public sector balance sheet
But this rationale is contestable
Rationale for developing economies:
Need for improved infrastructure in order to bring about economic development
May be requirement in order to receive funding e.g. from WB/IMF
May also be need for assistance with financial management expertise

31. Accounting for PPPs IFRIC 12 Service Concession Arrangements 2006
IPSASB issued IPSAS 32 Service Concession Arrangements – Grantor 2011
Existing accounting treatment only covers PFI-style long-term service contracts
Focus on which party has control
The UK as an early adopter of a mirror image of IFRIC 12 has brought many more schemes on balance sheet compared to previous accounting for substance under FRS 5
Many developing economies do not yet have accrual accounting in place, so won’t adopt

32. Issues arising from accounting treatment (1)
IFRIC 12 improves disclosure but creates a balance sheet measurement problem for assets and liabilities:
Asset valuation under a fair value approach is more subjective
For some UK PFI hospitals this has led to impairment
E.g. One new hospital costing £584m was immediately impaired by £290m
It does not address the issue of contingent liabilities, which remain a matter for judgement

33. Issues arising from accounting treatment (2)
Many European governments are in the process of adopting IPSAS, but the net debt problem still remains:
Whilst the UK uses mirror image IFRIC 12 to prepare government financial statements, the debt associated with PFI still remains off balance sheet and is still excluded from net debt calculations prepared according to Eurostat guidelines
It would be politically controversial to change Eurostat

34. Issues arising from contracts (1)
Poor transparency/restricted access to contract detail
Lack of skills/public resources devoted to monitoring and using performance data, in contrast to private sector
Payment mechanisms do not deliver budget certainty nor mitigate against costs to the public sector
Difficult to determine penalties applied, most seem to be small or non-existent

35. Issues arising from contracts (2)
There are opportunities for further arbitrage around contracts to avoid meeting the IFRIC 12 definition
Furthermore, contract negotiation is not a neutral activity:
Many contracts are subject to political will
Financial and legal advisors have a vested interest in maintaining the market: ‘Why go to this level of bureaucracy? It’s almost as though there was a PFI industry with consultants out there… how can we make it even more complicated?’
Conflicts of interest abound: ‘I'm one of the X private sector partner group directors sitting on the board of the LEP and also of the PFI company. I suppose obviously the shareholders will sit there with almost two hats on. …’

36. Issues arising from structure
The use of an SPV as the key legal form in both PFI-style and JV PPP structures means that project governance is heavily dominated by the private sector directors, who may privilege profit over service delivery and user needs
Empirical evidence shows that these organisational structures create a complex working environment, where the SPV interacts with multiple contractors and sub-contractors
Public sector management must be very strong to mitigate against these sub-optimal activities

37. Issues arising from reporting
On the face of it both external and internal financial reporting should disclose sufficient financial information to assess financial performance
However complex organisational structures and the leeway provided for judgement and choice in determining level of aggregation, presentation and public disclosure mean monitoring is difficult
The public sector is therefore dependent on self-monitoring and performance data held by the private sector, which can create vulnerability

38. Issues for developing economies
PPPs are often regarded as instruments for more ambitious radical structural change, and the scope of contracts is often more expensive than is the norm in the advanced economies
There may be limited state capacity to detect strategic behaviour by the private partners, and this can lead to issues of affordability, such as those experienced by the Lesotho Hospital PPP
However a counter argument is that the implementation of PPPs can improve financial management practices:
In the case of the Nigerian Ports Authority PPP, a government official stated that: ‘I think PPP is suitable, it has worked in our port operations and private financing and also increased our efficiency’.

39. A conclusion: PPPs are evolving, so must the decision-making and accountability
Better transparency in terms of understanding majority of contract costs, but are we starting to see a global shift in the nature of some classes of PPPs?
There are a growing number of social concessions (education and healthcare) where the public sector acts as a commissioner and the private sector delivers both infrastructure and full services
Maintaining accountability of such concessions is essential, but difficult, as public sectors move to ‘light touch’ regimes

41. Financial Reporting and its Impact on Decision Making
Uresha Walpitagama FCCA
Small and Medium Enterprise Development Facility
Ministry of Finance and Planning - Sri Lanka

42. Financial Reporting and its Impact on Decision Making
How financial reporting can;
improve decision making
improve accountability and transparency for public spending
Financial Reporting - Challenges from developing country perspective

43. Financial Reporting and Impact on Decision Making
Financial statements need to be transparent;
Data produced and reported must be complete, free from errors and must present in a timely manner.
Decision makers:
Government officers, politicians (government or opposition), institutions and the general public

44. Need of financial reporting for the government sector: Why?
Deploy limited resources efficiently
Assess the deliverability of the government services
Avoid corruption/ fraud
Support the budget preparation process
Evaluate efficient sectors/ organisations
Adopt/ revise policy decisions
Financial Reporting and Impact on Decision Making

45. Need of financial reporting for the government sector: Why?
Report on expenditure of public money to its owners; i.e general public
Initiate funding decisions
Plan ahead for the future requirements in asset management and maintenance
Plan how to settle existing liabilities and forecasted liabilities
Overall cash management
Financial Reporting and Impact on Decision Making

46. How financial reporting can improve decision making?
Set up systems and controls that provide, correct, accurate, timely information
Provision of adequate information is mandatory
Adopt accrual based accounting i.e. provision of exact revenue/expenditure, asset and liabilities of the government
Provide inputs to the budgetary process
Conduct timely audits
Address the issues in the audit reports and rectify them before the next financial year
Financial Reporting and Impact on Decision Making

47. Financial Reporting and Impact on Decision Making
How financial reporting can improve accountability and transparency for public spending;
Set up a well established system and deploy capital
Assign Finance professionals to key accounting, managerial positions and juniors must be trained under them
Recognise auditor’s service & independent auditing department
Punish those who misconduct
Utilise financial information in the budgetary process for decision making.
Review the reporting by the parliament
Financial Reporting and Impact on Decision Making

48. How to overcome developing countries' challenges
Differences in salary scales of chartered qualified accountants in public and private sector must be reduced
Time to recognise the value of professionals and attract them to public service in order to establish a healthy public sector
Employing professionals to Auditor General’s Department and changing the attitudes of the existing auditing staff “to think out of box”
Establishing an internal audit department in each ministry headed by a qualified accountant
All government processes to be transparent
Financial reporting to be based on accrual accounting
Financial Reporting and Impact on Decision Making

49. Financial Reporting and Impact on Decision Making
Thank You
Financial Reporting and Impact on Decision Making