Financial reporting and - PowerPoint Presentation

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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 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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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 slowNeed 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?

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

Accountability Now!

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Raising awareness is not enough – need to move governments along the adoption and implementation pathCountry-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 addressClosely linked with our PAO capacity building effortsImplementation left to the market to compete for – coopetition model of working

Creating momentum at a country level

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This effort goes to the heart of IFAC’s public interest agendaIt demands we are creative in how we convince key stakeholders and complements the sound work of IPSASBDifficult to get quick wins – more an evolutionary processIt is not easy because we are not so good at talking to non-accountants but we are learning fastSignificant opportunity to strengthen the voice and relevance of accountants globally

Risks, Challenges and Opportunities

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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)

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UK: WGA

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Australia: WGR

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New Zealand: WGA

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Canada

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Sweden

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Defining use

International variation

Dependent on constitution

Global Labelling

Push for unifying “Conceptual Framework”

Local Solutions / Adaptations

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Key reform drivers

Rhetoric

Greater decision making / macro-econ links

Improved accountability

Strength of accounting professions

Politics: Transparency deficit

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Competition

Systems

National Accounts/Statistics

GAAP/Accounting

Global leadership

Professions/Commercial vs. Public Sector

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The impact of accounting for Public Private Partnerships

ACCA International Public Sector Conference 4th December 2014Dr Anne Stafford BA PhD FCCASenior Lecturer in Accounting and Finance

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Economic context

Public Private Partnerships (PPPs) can be loosely defined as co-operative institutional arrangements between public and private actorsMost 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 1985Investment in low/middle income countries in energy, telecom, transport and water of $2,200bn since 1990UK 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 efficienciesIn some economies, PPPs enable debt to be kept off the public sector balance sheetBut this rationale is contestableRationale for developing economies:Need for improved infrastructure in order to bring about economic developmentMay be requirement in order to receive funding e.g. from WB/IMFMay also be need for assistance with financial management expertise

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Accounting for PPPs

IFRIC 12 Service Concession Arrangements 2006IPSASB issued IPSAS 32 Service Concession Arrangements – Grantor 2011Existing accounting treatment only covers PFI-style long-term service contractsFocus on which party has controlThe 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 5Many 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 impairmentE.g. One new hospital costing £584m was immediately impaired by £290mIt 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 guidelinesIt 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 sectorPayment mechanisms do not deliver budget certainty nor mitigate against costs to the public sectorDifficult 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 definitionFurthermore, 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 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 needsEmpirical evidence shows that these organisational structures create a complex working environment, where the SPV interacts with multiple contractors and sub-contractorsPublic 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 performanceHowever complex organisational structures and the leeway provided for judgement and choice in determining level of aggregation, presentation and public disclosure mean monitoring is difficultThe public sector is therefore dependent on self-monitoring 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 economiesThere 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 PPPHowever 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 servicesMaintaining accountability of such concessions is essential, but difficult, as public sectors move to ‘light touch’ regimes

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Financial Reporting and itsImpact on Decision Making

Uresha Walpitagama

FCCA

Small and Medium Enterprise Development Facility

Ministry of Finance and Planning - Sri Lanka

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Financial Reporting and its Impact on Decision Making

How

financial reporting

can;

i

mprove

decision making

i

mprove

accountability and transparency for

public spending

Financial

R

eporting - Challenges from

developing country perspective

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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

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Need of financial reporting for the government sector: Why?

Deploy limited resources efficientlyAssess the deliverability of the government servicesAvoid corruption/ fraudSupport the budget preparation processEvaluate efficient sectors/ organisations Adopt/ revise policy decisions

Financial Reporting and Impact on Decision Making

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Need of financial reporting for the government sector:Why?

Report on expenditure of public money to its owners; i.e general publicInitiate funding decisions Plan ahead for the future requirements in asset management and maintenancePlan how to settle existing liabilities and forecasted liabilitiesOverall cash management

Financial Reporting and Impact on Decision Making

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How financial reporting can improve decision making?

Set up systems and controls that provide, correct, accurate, timely informationProvision of adequate information is mandatoryAdopt accrual based accounting i.e. provision of exact revenue/expenditure, asset and liabilities of the governmentProvide inputs to the budgetary processConduct timely audits Address the issues in the audit reports and rectify them before the next financial year

Financial Reporting and Impact on Decision Making

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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 departmentPunish 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

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How to overcome developing countries' challenges

Differences in salary scales of chartered qualified accountants in public and private sector must be reducedTime to recognise the value of professionals and attract them to public service in order to establish a healthy public sectorEmploying 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 accountantAll government processes to be transparentFinancial reporting to be based on accrual accounting

Financial Reporting and Impact on Decision Making

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Financial Reporting and Impact on Decision Making

Thank You

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