Darling’s £32bn ruse

The Britsh Government Accounting Fraud

Uses of Accounting Information

[An extract from a paper written for another purpose - but equally apposite for this situation, which I consider as disgraceful!]

Many public sector accounting systems have seemed to serve a single purpose. That is, to record whatever is required to be recorded, by a central authority ? often a ?ministry of finance? ? to satisfy bureaucratic concerns. This might have been, especially, the case under former ?soviet? systems, where local government units were more like branches of the entire governmental system.

However, in evolving systems of fully decentralized governance, much more is expected. Governments, even though supported by some central funding, are increasingly expecting (and expected) to become the primary systems of democratic management and service delivery for the local communities that they serve. This means that their accounting systems must become instruments of local accountability ? for stewardship of public funds; for performance of activities; and, for the control and safeguard of assets, liabilities cash and funds.

The financial statements of local government units are a major part of the public presentations of their ways of being and behaviour. Many entities are concerned to have these reports, either for their own purposes or to assist the local governments in their activities. However, financial reports cannot be on a ?one size fits all? basis.

Although published reports tend to follow a standard format, this may not always meet the requirements of all recipients or users. The following shows the major arrangements for the production and use of accounting information.

Although the users are primarily responsible for interpreting reports for their own use, it can also be helpful if the local government produces documents in varieties of formats and levels of detail. Indeed, for internal reports, it is essential that financial and operational specialists cooperate in the development of reports that are most useful for effective action.

Recipients of accounting information are both internal and external to the local government entity. Internal recipients include financial, operational and managerial staff, chief executives (however designated), finance and service committees, the councils or boards and internal auditors. External recipients include the central government departments for financial, economic and service management, especially where grant funding is involved. Also included are lenders, investors, debt-rating entities, suppliers, employees, pensioners, taxpayers, creditors, project implementation entities and the general public. External financial statements must be provided to ? and attested by ? external auditors. Auditors will include (staff) internal auditors, reporting to management and (independent) external auditors, reporting to the Council and to the general public. Finally, there may well be requests for information from international entities, such as the World Bank or the IMF.

The latter two, perhaps, need special mention. Both the International Monetary Fund and the World Bank conduct ?Public Expenditure Reviews.? It is, naturally, helpful if the expenditures from which these are derived bear a close relationship to ?costs of services.? To the extent they do not, they are less helpful than they might be, for analysis. This means, however, that they should be derived from accounting systems that are credible. In addition to expenditure reviews, both institutions expect, from their client countries and entities, financial and statistical information that will be much more comprehensive. For example, The World Bank requires audited financial statements from project entities and the IMF seeks comprehensive information for its Government Financial Statistics.

Each of these entities has gone to considerable effort to provide borrowing countries and entities with detailed explanations and guidance as to how they wish this information to be presented. It is an obligation ? and, at least, a matter of professional courtesy ? for the information to be presented as closely as possible to the formats requested. The World Bank guidance can be found in its publication: ?Financial Reporting and Auditing of Projects Financed by the World Bank: Guidelines.? The IMF has produced a detailed document called: ?Government Finance Statistics Manual 2001 ?

One feature of the GFS Manual is the amount of detail that it contains about the way in which the IMF perceives and uses accounting data and other financial information. Moreover, it is careful to point out that it intends to use, as far as possible, the accrual method of accounting. In Appendix 1: Changes from the 1986 A Manual on Government Finance Statistics, The IMF includes the following:

??The time at which transactions and other economic flows are recorded is determined by the principles of accrual accounting in the revised GFS Manual. That is, flows are recorded when economic value is created, transformed, exchanged, transferred, or extinguished. In the 1986 GFS Manual, transactions are recorded when cash is received or paid. In general, flows are recorded at an earlier time under the accrual basis than under the cash basis??

Those responsible for implementing (or researching) new accounting systems will find much of interest in a study of this important document ? the GFS Manual. Some important words of caution are, however, appropriate. The IMF?s requirement, for its international GFS system, is only one of many demands that can be made upon a comprehensive accounting system. Its manual bears out ? very distinctly ? what has been already discussed above; that no single set of financial reports will satisfy all potential users or recipients.

The GFS document itself makes the point that it is necessary for entities to follow standard accounting practices. An extract from the GFS manual on this topic reads as follows:

?C. Accounting rules

?3.35 Accounting rules for recording flows and stocks in the GFS system are designed to ensure that the data generated by the system conform with accepted standards for the compilation of economic statistics. With the exception of consolidation, as noted later in this chapter, the accounting rules of the GFS system are the same as those of the 1993 SNA .

?There are also many similarities between the rules used in the GFS system and those applied by businesses and governments in their financial statements. The following sections describe the type of accounting system used, the rules governing the time of recording and the valuation of flows and stocks, and miscellaneous other topics??

Two phrases are especially important in this extract. First: ?Accounting rules for recording flows and stocks in the GFS system ? conform with accepted standards for the compilation of economic statistics?? Second: There are also many similarities between the rules used in the GFS system and those applied by businesses and governments in their financial statements. This makes very clear that what is being compiled in the GFS system is to ?conform with? standards for ?economic statistics.? It also points out that there are ?many similarities? with accounting rules. This makes it abundantly clear that the IMF, in seeking to meet its own legitimate needs for information, does not ? indeed, cannot ? claim to be directly addressing accounting standards.

Whatever other important and useful things are done by the IMF, the setting of accounting standards is not one of these. As already explained, this is the responsibility of national legislation and government regulations, following interpretations of international accounting standards and principles. These emanate from accounting institutions, not the IMF or the World Bank.

Despite this stricture, by the IMF itself, some national governments seem to be seeking to use the IMF Government Finance Statistics Manual as a set of accounting standards. That is not what it is designed for. Consequently, such practices, for this purpose, should not be followed, as they are not, necessarily, consistent with accounting principles .

Indeed, important though it is, economic or social "accounting" is not really accounting at all ? as understood by accountants. Compilation of a ?System of National Accounts? (SNA) is an activity in statistical analysis. This is in stark contrast with governmental accounting, which is the book-keeping and subsequent reporting of all of a government?s own monetary transactions, as well as other money-valued adjustments of financial position. This follows ? albeit, often, crudely ? some acceptable form of ?public sector accounting principles.? Annex 3 gives some further explanation of these distinctions.

Posted by: David C. Jones, FCCA, CPFA , 18 Sep 2009 | 00:00