Monday, 21 May 2012

Public sector accounting – what a waste of money

Now is the time of year when public sector accountants are busy finalising the statutory accounts of their public sector organisation for the financial year just ended. The current generation of financial accounts in the public sector are complex and difficult to understand but this was not always the case in years gone by when simpler statements were available. An important issue is whether all this effort and complexity is really worthwhile. We live in an era of financial austerity where the significant costs of financial reporting and audit must be balanced against the issue of large scale reductions in public sector expenditure. While it is obviously necessary for public sector bodies to produce some form of accounts, is it really necessary for them to be as complex, lengthy and incomprehensible as they are today? Given that the costs of preparing and disseminating statutory financial accounts are substantial surely this needs to be balanced by a consideration of who actually uses these accounts, do they understand the information provided and does it give them anything of value. The answers are probably no. The reality is that there is virtually zero research evidence (see below) to suggest that the current generation of public sector statutory financial accounts are widely used and that valuable information is gleaned from them. At the anecdotal level, I have held many seminars and discussion with public sector managers and public sector accountants. I often ask them if they have ever looked at the statutory financial accounts of their local authority or local NHS Trust in a personal role as a resident, service user or citizen (as opposed to a professional role as a manager or accountant). Their answer is universally in the negative. Many say that they just do not understand the accounts. Why, oh why, then are we producing these complex, sophisticated and expensive documents when a simpler, more relevant and more economic approach may suffice. There are a couple of thoughts: • Private sector practices - Over the last few decades accounting practices in the public sector have blindly followed practices in the private sector without any consideration of the differences between the two types of organisation and the relevance of the information provided. There seems to be an inbuilt assumption that if we follow private sector practices we can’t go wrong. The examples of Enron, and various banks suggest this is a fallacy. • Vested professional interests - It may be in the interests of the accounting profession and large accounting firms (who audit a large proportion of public sector accounts) to have more complex arrangements since this strengthens their position. As George Bernard Shaw once said “All professions are conspiracies against the laity”. Isn’t it time we started producing statutory financial accounts for public bodies that are relevant to and understandable by citizens and others rather than the accountants. “Statutory Financial Accounting in the UK Public Sector: Relevance and Cost?” By Malcolm Prowle, Don Harradine and Roger Latham published in the Journal of Finance and Management in Public Services

1 comment:

  1. Thanks for raising this issue. I work in local government and part of my role is to support local VCS groups that we have given funding to. First thing I do at every AGM they hold is turn to the accounts and examine them. It was an innovation for many of them to be asked questions about their accounts, and even stranger for my fellow officers when I explained how to analyse their very simple figures to draw conclusions about liquidity and cash flow!

    All our SLAs have terms and conditions that cover 'financial probity' but it's so rare that we look beyond achievement and successes in their outcomes.

    I'm currently studying for a Diploma in Management & Leadership whe my project is concerned with creating a framework that we can use to better assess the outcomes of our spending ('investment') in the VCS. Financial analysis will be part of that! Might be useful to talk with you sometime