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Financial reporting and its impact on decision making

Uresha Walpitagama

Dr. Anne Stafford

Dr. Danny Chow

Mario Abela

Prof. Ron Hodges

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Financial reporting and its impact on decision-making

Mario AbelaLeader – Research and Development

ACCA International Public Sector Conference, LondonDecember 4, 2014


A few antecedents to financial reporting today


Industrialisation and the need for capital


A new era of investor protection


Regulatory “failure” and market-led reporting


Financial reporting in the public sector


Conceptual basis of government accounting


Government accounting and the real world


Perhaps we have got it wrong…


Accountability. Now.


• 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

Why is this important to IFAC?


• 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

Accountability Now!


• 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

Creating momentum at a country level


• 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

Risks, Challenges and Opportunities

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)

UK: WGA

Central Govt

Local Govt Public Corporations

Australia: WGR

Commonwealth NSW

Local Gov

VIC

Local Gov

QLD

Local Gov

WA

Local Gov

NT

Local Gov

SA

Local Gov

TAS

Local Gov

New Zealand: WGA

Central Govt

Local Govt

Canada

Federal

States & TerritoriesLocal

Sweden

Central Govt

Local Govt

Defining use

• International variation• Dependent on constitution

• Global Labelling • Push for unifying “Conceptual Framework”• Local Solutions / Adaptations

Key reform drivers

• Rhetoric– Greater decision making / macro-econ links– Improved accountability

• Strength of accounting professions• Politics: Transparency deficit

Competition

• Systems– National Accounts/Statistics– GAAP/Accounting

• Global leadership• Professions/Commercial vs. Public Sector

The impact of accounting for Public Private Partnerships

ACCA International Public Sector Conference 4th December 2014

Dr Anne Stafford BA PhD FCCASenior Lecturer in Accounting and Finance

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 29

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 expertise30

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

31

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

32

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

33

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 34

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. …’

35

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 36

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 37

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’.

38

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

39

Financial Reporting and its

Impact on Decision Making

Uresha Walpitagama FCCA

Small and Medium Enterprise Development FacilityMinistry of Finance and Planning - Sri Lanka

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

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

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


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


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


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


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



Thank You

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