Financial reporting
and its impact on decision making
Prof. Ron Hodges
Mario Abela
Dr. Danny Chow
Dr. Anne Stafford
Uresha Walpitagama
Financial reporting and its
impact on decision-making
Mario Abela
Leader – Research and Development
ACCA International Public Sector
Conference, London
December 4, 2014
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A few antecedents to financial reporting today
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Industrialisation and the need for capital
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A new era of investor protection
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Regulatory “failure” and market-led reporting
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Financial reporting in the public sector
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Conceptual basis of government accounting
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Government accounting and the real world
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Perhaps we have got it wrong…
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Accountability. Now.
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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
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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
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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
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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
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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
VIC
QLD
WA
NT
SA
TAS
Local Gov
Local Gov
Local Gov
Local Gov
Local Gov
Local Gov
Local Gov
New Zealand: WGA
Central Govt
Local Govt
Canada
Federal
States & Territories
Local
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 FCCA
Senior 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
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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
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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 longterm 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
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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
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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
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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
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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. …’
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Issues arising from structure
• The use of an SPV as the key legal form in both PFIstyle 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 subcontractors
• Public sector management must be very strong to
mitigate against these sub-optimal activities
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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 selfmonitoring and performance data held by the private
sector, which can create vulnerability
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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’.
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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
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Financial Reporting
and its
Impact on Decision Making
Uresha Walpitagama FCCA
Small and Medium Enterprise Development Facility
Ministry 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
opposition), institutions and the general public
or
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
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
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
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
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
Thank You
Financial Reporting and Impact on Decision Making