Revolution in Whitehall.

In July 1995, the white paper Better Accounting for the Taxpayer’s Money: Resource Accounting and Budgeting in Government set out the framework for a fundamental revolution in the way the 33 Departments of State will account and budget for public money.

It specifies that, from 1 April 1998, all central government departments must shift from their traditional cash accounting basis to a full accruals-based system. By this date, they must also have in place IT systems able to handle the next phase of the transition, the move to resource budgeting.

This isn’t merely a technical exercise – the change is fundamental. Chancellor Kenneth Clarke has remarked that ‘people will find other ways of celebrating the millennium but few (events) will be more important’. He wasn’t exaggerating.

The Government aims to impose upon departments the normal financial disciplines of business while simultaneously preparing for a wholly new way of calculating each year’s public sector expenditure requirements. Coming onto a proper accruals basis, departments will also be in a position to carry out the sort of budgeting exercise that is routine for corporations the world over.

For the Government (or Treasury) one of the beauties of this transformation when fully implemented is that at a stroke it will knock on the head the age-old last minute dash by departments to spend unused funds simply to protect next year’s slice of the state pie. (The concept of ‘matching’ – one of the key accounting principles being introduced by the white paper – make it harder to justify this sort of splurge).

Managing affairs

Another key benefit is that more meaningful comparisons will be possible between the public and private sectors in such matters as market testing, since both will account in approximately the same fashion. However, undoubtedly the most important benefit is the anticipated improvement in civil servants’ ability to manage their department’s affairs.

While resource accounting will be in full swing from 1 April 1998, resource budgeting is the Treasury’s goal. It expects to achieve it by the end of 1999 and for it to form the basis of the Public Expenditure Survey by 2000.

In terms of the white paper, resource budgeting means departments will have to define and cost all activities that, when aggregated, constitute their departmental output or outputs. (An output is the department’s objective, stated at a reasonable level of abstraction).

Departments must then be able to demonstrate just how their outputs have been costed via a ‘drill down’ procedure. In theory, this will reveal layer after layer of detailed costings – figures not plucked from the wind but based on facts and sound accounting principles.

But before then, departments must define and cost activities in a manner that accurately reflects the realities of the work they carry out.

For the most part, it won’t be a simple exercise. Most corporates would regard this kind of task re-definition as part of a fairly hefty business re-engineering process.

But Government departments are not businesses – and in some ways this makes it harder for them to carry through.

Much of the imposition of accruals-based accounting is by analogy what happens in a trading company. It is not an exact parallel and many of the accounting issues to do with just how Generally Accepted Accounting Principles (GAAP) will be ported across to the public sector have yet to be resolved.

Shrewd guesswork

Companies know what they make, or what their services are, and they know what their cost basis is. Government departments, of course, are run by intelligent people who can be expected, when pressed, to make shrewd guesses about the cost of their activities. But guessing is (usually) not the same as accounting. While departments have long been good at tracking funds flowing through them, whole areas of activity that in reality incur costs have not required the kind of attention they would in the private sector.

Without the need to prepare a balance sheet, for example, assets can be cost-free once acquired. And there has been no obligation until now for departments to distinguish between spending on capital and revenue items. The list goes on and on.

So implementing the IT systems to meet the requirements of the white paper is a massive task.

Fortunately, the sophistication of commercial accounting software is on the side of the departments.

Had the Conservatives latched onto the idea of converting the whole ship of state to an accruals basis after defeating Labour in 1979, the rigidity of the systems then available would probably have killed the idea stone dead.

Today, the systems are so much more flexible that course corrections in mid-stream are both possible and, within reason, affordable.

A survey of departments carried in January highlighted the importance of this flexibility. Sponsored by Hewlett-Packard and accounting software provider QSP, it was carried out by the independent research firm Kable based on 70 interviews with central government (three quarters of the respondents being finance directors, principal finance officers or chief accountants).

The first, slightly worrying point revealed is that only half the sample identified better control of costs and budgets as the key benefit of implementing Resource Accounting and Budgeting (RAB) as a technical exercise. One would obviously expect the number taking an interest in the management potential of RAB systems to increase significantly as departments move closer to the 1 April start. On the contrary, figures indicate the inertia that will need to be overcome along the way. This inertia isn’t all on the side of the departments. Many see the Treasury too as doing less than it could to promote the idea. According to the Kable survey: ‘The consensus (among departments) is that the Treasury has not been as helpful as it could have been on the introduction of resource accounting.’ Some 67% said the Treasury had not done enough to explain the pitfalls of the move to RAB.

Andy Knott, marketing director of CSL, the outsourcing arm of Deloitte & Touche, says departments have differed markedly in the urgency with which they have reacted to the need to identify resource accounting software.

‘Some have gone a long way down the road and have already identified their preferred supplier. Others are quite well into the thinking process. And some have just begun to invite tenders.’

One of the problems, he points out, is that there is no shortage of software suppliers claiming to have the ideal resource accounting package.

In practice, all departments seem to be concentrating on a handful of preferred suppliers. Oracle Financials is doing well. Systems Union has secured a number of orders. And the traditional suppliers to central and local government, such as Ross Systems and Cedar Data, are also picking up orders, as is SAS Institute and Tetra Business Systems.

One thing everyone in central government agrees on, it seems, is that with the wealth and range of private sector accountancy software now available, there is no point in a department trying to write its own bespoke system.

One of the biggest IT implementations on the go at the moment is the u134m project being managed for the MoD by Coopers & Lybrand. Coopers partner Richard Jones is under no illusions about the scale of the task.

One of the basic problems is that, having operated for so long without the discipline of a balance sheet, the MoD has a huge job just valuing its assets and agreeing a depreciation charge, never mind defining and costing the activities that go to make up its outputs.

‘We can put the book-keeping methodologies in within two years or so.

But determining outputs is a long and complex task, especially when you remember that one person’s output can be another’s input as, for example, in the case of a training agency delivering fully-qualified front line troops to a battalion,’ he says.

Many conversations

Jones points out that nailing down what constitutes an activity will involve an enormous number of conversations throughout each government department.

Both Systems Union and Oracle have been selected by Coopers for various parts of the MoD project. Laurie Mascott, sales manager (government division) at Systems Union, reckons that traditional accounting software systems have structural weaknesses that make them unsuitable for this kind of output costing. ‘With the traditional three-ledger style of programming for accounting software you have very little flexibility on the ledger structure, with very unwieldy ledger codes, and you also have a major problem reconciling information between the ledgers.

‘Our approach is to take a single combined ledger structure where everything is updated immediately and there are no batch totals to be reconciled.’

The benefits of this kind of approach is that an agency such as the Land Registry, which implements Systems Union software to do pure cash accounting, was able to move to a cash plus accruals basis when it became an executive agency and to move on again and switch off the cash side of its accounting when it became a trading company. ‘It did all this with no problems and with no need for an upgrade,’ he says.

Both Oracle and Systems Union take a ‘data warehousing’ approach which makes all data in the system available to be sliced, diced and delivered up in any reporting format required by management. This flexibility in modern software will be invaluable to departments still to discover the kinds of questions they will want their RAB IT systems to answer.

Price Waterhouse partner Mike Newcome, whose firm has been involved as a sub-contractor in the Coopers/MoD project and in a project for the Foreign Office, says that many departments really are looking to get more out of accrual accounting than simply conformance with the white paper’s requirements.

‘They want to be able to use their new IT systems as a way of improving management and of getting better value for money,’ he says. ‘Having to produce a balance sheet makes people focus on things like depreciation charges and the costs associated with the use of their asset base, so it helps them to avoid sitting on redundant assets.

This is standard fiscal discipline for business and it will help departments speed up the move to outsourcing and market testing. It will also make them more interested in getting large empty buildings off their books.’

However Newcome adds a note of warning: ‘Right now, you have to realise that this is a totally new way of accounting and managing for Government departments.

‘They simply do not have sufficient accountants who understand accrual accounting instead of cash accounting – so training and recruitment are going to be just as important as implementing the right IT systems.’

Anthony Harrington is a freelance journalist.