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Home / 2006 / April 2006 / Insomnia - A cure from ASB!

by Patricia Barker

On the face of it, the ASB's beguiling invitation to us to comment on their ideas about a conceptual framework for public entity bodies, would seem to present more in the nature of a soporofic than a stimulant. The mention of a conceptual framework or statement of principles is pretty yawn-inducing for most accountants, but a 130 page draft conceptual framework for government and charity accounts sounds like something the wicked stepmother administered to Snow White.

Nevertheless, accounting for governments and for not for profit entities is increasingly important in today's global economy and, as with any professional activity, it is equally important that there is a clear underpinning set of principles for such accounting. So, even if you are too busy for abstract conceptual thinking, you should, at least be conscious of the undoubted business opportunities, given the multi-million budgets of many charities and increasing demand for qualified accountants in government, that accounting in this sector can and will provide for accountants. So this article provides you with a summary of the ASB's ideas and some observations that might prompt to engage in the debate and let the Institute's Accounting Committee hear your thoughts.

SUMMARY OF THE ASB'S IDEAS

Why is the ASB issuing this ED? The IASB and the FASB are currently developing a new and improved conceptual framework for financial reporting for the commercial sector and at some stage in the future (maybe up to ten years from now) they may incorporate the non commercial sector. The International Public Sector Accounting Standards Board issues standards for governmental bodies, but they do not have a conceptual framework for governmental accounting. There is no conceptual framework for other not-for-profit entities, such as charities. So the ASB, concerned at this lacuna, has issued its own exposure draft (ED) for the UK and Ireland for us to consider. The principle of this ED is that our current Statement of Principles (SoP) can be used for public entity bodies (PEB) with some helpful specific interpretation. It does not define a PEB. The rather inelegant conclusion the ED draws is that, since PEBs will be using basically the same SoP, there is no need to define them. Examples of the specific interpretation proposed by the ED are: Users: Our current SoP defines the providers of finance as the defining class of user for commercial entities. Satisfying their needs is deemed automatically to satisfy the needs of other users. For PEBs, the ED proposes that funders and financial supporters should be deemed to be the defining class of user. Their need to have information to help them to assess the stewardship of management is included.

Elements: Elements defined in the SoP are assets, liabilities, ownership interest, gains, losses contributions and distributions. The ED replaces ‘ownership interest’ with ‘residual interest’. There are some additional interpretations, such as for assets under stewardship but not control; and commitments to provide public benefits. Guidance is given where there are different classes of residual interest, especially where restricted funds exist and on voluntary gifts, capital contributions and capital grants.

NEED FOR A MORE BLANK-PAGE APPROACH?

While it is understandable that the ASB would seek to take an evolutionary rather than a revolutionary approach to providing a good workable conceptual framework for this significant sector, this writer has considerable misgivings about taking the existing framework and trying to tweak it and force it into a mould designed for a very different sector with different users, different objectives and different accounting demands.

VARIED USERS OF FINANCIAL INFORMATION

What users need from commercial financial statements is a complex area. Studies have shown that different users have very different needs from accounting data due to their various future needs. Providers have different views on the amount of information that should be disclosed to those user groups. The variation in information need arising from differing future needs of individuals is added to by varying abilities to construe financial accounting data. However, it is probably possible to say that most of their needs can be met by providing information on the financial performance and position of the entity. The needs of users of financial statements of PEBs are very different from the user needs of stakeholders in commercial entities. This is increased by the internal complexity of user needs. In a public hospital, for example, the finance director will have an alternative set of interpretations and needs to those of the Board members and they will have a very different set from a patient, Minister of Health or ward sister. They will variously be interested in efficiency, utilisation of resources, value for money, costs against budgets, cost per procedure, capital provision, income generation from various sources, administration v. clinical costs, reserves, staff:bed ratios, clinical success performance ratios, medical training outcomes, litigation costs and research costs and outcomes. Most of them will be less interested in the profitability and financial performance of the hospital than will shareholders in a commercial organisation. The matter of balance, therefore, has to be considered. In the case of publicly quoted commercial entities, there is a range of users with differing user needs. However, the balance of significance of the users gives weight to the needs of the investor group, and in particular, the informed investor group, with concomitant useful information flows for the other users. In the case of the public entity bodies the balance of users is not so clear and catering for one specific group will not, automatically, provide for the needs of the majority of users. Additionally, the focus of user needs is more likely to be on future oriented decisions than on stewardship (or past focus) which is assumed to be the main focus for the financial statements of commercial entities. A conceptual framework must first identify the users and their information needs and must assess the balance of needs. The framework should then be predicated on those needs and that balance. This writer is not convinced that sufficient justification had been provided for assuming that the Statement of Principles designed for the reasonably sophisticated financial user to satisfy his/her information needs on the financial performance and position of the entity in which s/he has invested simply needs interpretation for public entity bodies. Public entity bodies have significantly different objectives from commercial organisations. For some, the significant stakeholders are as likely to be the customers as they are the investors of finance. For example, the people of Pakistan are probably more interested in the financial disbursements and decisions of Concern than the donor who throws a couple of euro into a bucket outside the pub, or even the concerned liberal who makes a €5,000 donation having seen the television images of earthquake. However, for others, the significant stakeholder may be the funder, but his/her primary interest may not be in profitability, but in value for money. For example, the taxpayer who makes contributions to pay the unemployment benefit of a single parent is as likely to be interested in that disbursement as is the recipient, but is more interested in whether that disbursement was the most effective use of his/her contribution than in whether it represents a financial gain for him/her. In both the case of the charity funder and the government funder, however, there is no tangible financial return for the investors and, in the main, there is little residual interest. Giving increasingly complex and detailed information appears to be satisfying the user needs of large commercial organisations and the interpretation of the Framework for commercial organisations seems to assume this to be the case, but in the case of public entity bodies giving complicated and detailed information and calculations and data that is past oriented and focused on profit, may well not be appropriate for the information needs and balance of the users of public entity bodies' financial reports. It is suggested that this project did not start in the right place, i.e. it should start with an understanding of the user needs and of the internal balance of needs within the sector, rather that starting with an assumption that the SoP for commercial enterprises simply needs to be adapted for the public sector. Additionally, it is assumed in the Statement of Principles and Framework that the balance sheet driven approach is most appropriate for the needs of the primary users (and, therefore, for all other users). However, it seems to this writer that the income statement approach may be more appropriate for public entity bodies. There are two major types of entity for which a specific interpretation of the framework or statement of principles is imperative in developing accounting standards, Government and NGOs (including all charitable entities).

GOVERNMENT FRAMEWORK

The area of government includes national, local and European government and is an area of current development. Government has been moving towards the introduction of New Public Management (NPM) principles. This incorporates the translation of private sector managerial ideas about quality into the context of public management, borrowing a cluster of ideas from the conceptual framework of private sector administrative practice, emphasising: cost control, -financial transparency, -the autonomisation of organisational sub-units, -the decentralisation of management authority, -the creation of markets and quasi-market mechanisms, -separating purchasing and providing functions and their linkage via contracts and the enhancement of accountability to customers for the quality of service via the creation of performance indicators.

To the background of corporate governance codes and external codes such as Sarbanes-Oxley in the private sector, Government is influenced in the setting of objectives and execution of its business (and therefore in its ideas of accountability) by a corporate governance model Additionally, the demand for quality assurance of government programmes is giving rise to more public demand for clear accountability. This adoption of private sector management techniques should not, however, be confused with the adoption of a private sector business objective.

VALUE FOR MONEY

The new techniques bring with them a demand for the services of a professional accountant and auditor not just to perform the preparation, attest and assurance of compliance with regulation and legislation of financial statements, but also to perform what has become known as 'value for money' responsibility accounting and audit. The role of the Comptroller and Auditor General encompasses a VFM function requiring that the areas of economy, efficiency and effectiveness are dealt with as well as fiscal regularity. As a profession, we should be moving towards designing a concomitant VFM accounting model as well as fiscal regularity accounting stewardship model in this NPM environment. Such a focus of accountability requires a root and branch review of a SoP for government bodies rather than an interpretation of the SoP for commercial organisations. So, for example, although the accountant would not be required to assess the objectives of government, which would involve the expression of a political preference, s/he should incorporate elements of the OFR and budgeted figures into the financial statements in order to give full and complete information to allow the justifiable user to make decisions and to judge the performance of the entity in achieving its objectives - including the delivery of value for money.

NON GOVERNMENTAL ORGANISATIONSs

The other major group is the NGO sector. This is a sector in which the turnover of individual NGOs can exceed many of the large listed companies. Although most of the large NGOs are structured as companies limited by guarantee and therefore required to comply with the Companies' Acts, their objectives are significantly different from for profit limited companies and the materiality of their operations demands a consideration of the underlying conceptual framework of their objectives, users and key financial indicators.

SUMMARY

So, in conclusion, although the ASB may be described as brave and innovative in stepping into territory that others will (or dare) not, it is suggested that they need to don tougher armour, arm themselves with much sharper swords and gallop bravely into the forest of the Principles, cutting down all the existing growth and setting new growth in order to wake up this sleeping princess!

Clear and concise accounting and reporting guidance required for NGOs Value for money assessment processes need to be clearly articulated as this is the area that need to be emphasised when it comes to NGOs in Africa.