CURRENT ISSUES IN PUBLIC SECTOR CONSOLIDATEDFINANCIAL REPORTING

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This special issue of Abacus comprises papers presented at the Abacus Whole ofGovernment Accounting Forum held at the University of Sydney on 3 December2009. The collection of articles explores a range of developments, controversies andissues surrounding consolidated financial reporting practices in the public sectorboth in Australia and internationally. The article by Barton explores Australia’stransition from accrual-based financial reporting to the Government Finance Sta-tistics (GFS) system. The GFS system is an International Monetary Fund (IMF)approach widely used for national income measurement and for fiscal policy pur-poses. In December 2008, the Australian government made the decision to replaceprofessional accounting standards (AASs) for external financial reporting with theGFS system. Australia is now the first nation in the world to use the GFS cash andaccrual accounting system for both its budgeting and external financial reporting.Barton notes that the longstanding concern with the application of AAS standardsin the public sector is that they fail to capture or recognize essential differences inthe nature, purpose and functions of government vis-à-vis the private sector. Bartonconcludes that the GFS system (which provides both cash and accrual information)is conceptually superior to the alternative accounting systems, such as accrualaccounting. He concludes that the GFS system is designed specifically for govern-ment use and specifically considers special features of governments which distin-guish them from the private sector, and hence the information provided is relevantto the needs of government and parliament.

The article by Heald and Georgiou presents a U.K. perspective on consolidatedfinancial reporting. The authors observe that the purpose and intended use ofaccrual-based whole of government (WGA) financial reports has been the subjectof some debate internationally. The authors observe that there are different con-ceptions of the role that WGA can perform in different jurisdictions. For instance,in Australia WGAs are traditionally viewed as consolidated financial statements ofparticular political jurisdictions (i.e., Commonwealth and each state/territory),applying, inter alia, the principle of control. The overriding concern in Australia ispolitical accountability, with transparency and economic efficiency being key con-siderations. In contrast, the authors note that U.K. WGA was conceived in mac-roeconomic terms (consider the close alignment of WGA with national accountsdefinitions). In this context, the authors examine the potential uses of the U.K.WGA to discuss its policy relevance to the United Kingdom’s future response toserious fiscal problems that, in part, originate in the near-meltdown of the globaleconomy. The methodology of the research underpinning their paper has twofacets. First, an examination of relevant published information, and making con-nections between government accounting reform and long-term fiscal projections.

ABACUS, Vol. 47, No. 4, 2011 doi: 10.1111/j.1467-6281.2011.00354.x

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Second, the authors have been participant observers throughout the WGA devel-opmental process in the U.K., which has included evaluation of U.K. plans andproposals for more extensive public sector consolidation. Among other sugges-tions, the authors anticipate that WGA would help to reveal asset portfoliochanges resulting from privatizations, and the deterioration of public sector assetsshowing up via impairments owing to ongoing asset maintenance. In relation tothe U.K. WGA, the authors highlight a number of reasons for a degree of opti-mism about the potential usefulness of WGA. First, WGA can promote disciplinein terms of entity financial reporting (challenging the attitude that ‘no-one readsaccounts’, which had contributed to past neglect of timeliness) and of addressinginconsistent accounting practices across the public sector. Second, WGA providesa context in which regulatory arbitrage can be addressed. Third, WGA can provideincrementally useful information in relation to the public finances. Here, theauthors conclude that there is potential to correct the narrow focus on the netdebt measure, which ignores all assets other than liquid financial assets. WGAshould also be useful in policy debates about fiscal sustainability and intergenera-tional equity. Fourth, there are policy questions about the design of fiscal institu-tions, including which body is responsible for particular tasks, including long-termfiscal projections. Fifth, the authors acknowledge there is the possibility of arbi-trage between financial reporting (IFRS) and national accounts. Finally, theauthors note implications for the research agendas of academic accountants, espe-cially those with public sector interests.

In a prior paper Walker (2009) analysed the arguments for the preparation ofpublic sector consolidated statements encompassing whole of government and tiersof government.The main focus of this article was on the judgments potentially madeby participants in (or observers of) the public sector, on the basis of aggregatedfinancial information. Walker drew distinctions between judgments that are maderoutinely, or only in certain or exceptional circumstances, by different classes ofusers. This established a basis for clarifying the objectives of public sector consoli-dated statements, and for deriving appropriate rules for their preparation. In thisarticle, Walker identifies a number of issues that have arisen in Australian practiceover two decades since 1988, and suggests how those issues might be resolved, againby reference to judgments that may be routinely made by users of these reports.Some of the issues addressed include audit qualifications, assets and liabilities notrecognized, ‘on-line’ consolidations. Walker concludes that overall, the compilationof public sector consolidated statements does provide a convenient summary of thefinancial performance of governments. However, users should remain scepticalabout the claims of some politicians who claim that an increase in net worth (or ‘netassets’) is a tribute to their financial stewardship. Moreover, governments mayproduce surplus budgets within the GGS and a surplus on operating activities acrossthe whole of government, but still allow legacy assets to deteriorate. While backlogsin infrastructure maintenance should not be regarded as a liability for accountingpurposes, Walker concludes there is a case for supplementary reporting on thecondition of physical infrastructure combined with estimates of the cost to upgradeto a satisfactory condition or to meet current requirements.

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The article by Newberry addresses several issues raised by Heald and Georgiou.Newberry notes that their paper is based on limited U.K. data, and responds to theircall for more empirical data from other countries, such as New Zealand. In 1992,New Zealand became the first sovereign government to publish comprehensiveaccrual-based financial reports for whole of government. Newberry provides anoverview of N.Z. WGA reports from 1993 to 2010, and focuses attention on theprinciples of fiscal responsibility legislated in New Zealand in 1994, the particularfiscal targets adopted, and the extent to which WGA reveal asset portfolio changesresulting from privatizations. Newberry concludes that in light of the financial dif-ficulties facing governments internationally following their attempts to restore con-fidence in financial institutions, the dangers of governments themselves coming toresemble financial institutions ‘should prompt thought about current directions ingovernmental fiscal and financial management’.

Grossi and Soverchia believe that accrual accounting in the EU is expected toprovide more useful information for long-term assessment of public policy both forinternal use (i.e., for cost and price calculation, make-or-buy choices, outsourcing)and for external decision making, which could ultimately improve government’stransparency, accountability and performance evaluation. According to the authors,cash accounting would be fundamentally inconsistent with the precepts of publicresources management control because this system of accounting cannot highlightexplanatory linkages between resources consumption and achieved outcomes.However, the authors accept that the jury is still out on this debate. For instance, theyacknowledge that various theoretical and empirical studies have identified imple-mentation issues with accrual accounting in the public sector. In terms of publicsector consolidation issues, the authors conclude that the solution adopted by theEU for defining the area of consolidation represents a ‘fair’ compromise betweenthe traditional public and budgetary approach and the private sector approachfocused on the concept of control. According to the authors, the new area of con-solidation, defined as beginning in the 2005 financial year, is based on two criteria: abudgetary one (for the European institutions and agencies financed through the EUgeneral budget) and a control one (for all other European agencies, accordingIPSASs 6, 7 and 8). The authors believe the broader area of consolidation is posi-tively valued and constructive, largely attributable to growing introduction of theaccrual-based accounting system being adopted by the European Commission, byother institutions and by an ever growing number of agencies. The authors believethat such a process will ultimately strengthen the European Commission’s role ascoordinator and manager of financial resources.

Stewart JonesThe University of Sydney

November 2011

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