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Page 1: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local
Page 2: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

Financial reporting and its impact on decision making

Uresha Walpitagama

Dr. Anne Stafford

Dr. Danny Chow

Mario Abela

Prof. Ron Hodges

Page 3: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

Page 3 | Proprietary and Copyrighted Information

Financial reporting and its

impact on decision-making

Mario Abela

Leader – Research and Development

ACCA International Public Sector

Conference, London

December 4, 2014

Page 4: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

Page 4 | Proprietary and Copyrighted Information

A few antecedents to financial reporting today

Page 5: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

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Industrialisation and the need for capital

Page 6: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

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A new era of investor protection

Page 7: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

Page 7 | Proprietary and Copyrighted Information

Regulatory “failure” and market-led reporting

Page 8: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

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Financial reporting in the public sector

Page 9: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

Page 9 | Proprietary and Copyrighted Information

Conceptual basis of government accounting

Page 10: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

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Government accounting and the real world

Page 11: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

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Perhaps we have got it wrong…

Page 12: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

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Accountability. Now.

Page 13: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

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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

slow

• Need 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?

Page 14: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

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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 base

• Working closely with the Big Six and our member bodies to draw on their expertise

• A campaign, not a project or initiative, because a political problem requires a political solution – we need our voice heard and real action to follow

• Global, regional and local actions

Accountability Now!

Page 15: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

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• Raising awareness is not enough – need to move

governments along the adoption and implementation

path

• Country-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 address

• Closely linked with our PAO capacity building efforts

• Implementation left to the market to compete for –

coopetition model of working

Creating momentum at a country level

Page 16: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

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• This effort goes to the heart of IFAC’s public interest

agenda

• It demands we are creative in how we convince key

stakeholders and complements the sound work of

IPSASB

• Difficult to get quick wins – more an evolutionary

process

• It is not easy because we are not so good at talking to

non-accountants but we are learning fast

• Significant opportunity to strengthen the voice and

relevance of accountants globally

Risks, Challenges and Opportunities

Page 17: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local
Page 18: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

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)

Page 19: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

UK: WGA

Central Govt

Local Govt Public

Corporations

Page 20: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

Australia: WGR

Commonwealth NSW

Local Gov

VIC

Local Gov

QLD

Local Gov

WA

Local Gov

NT

Local Gov

SA

Local Gov

TAS

Local Gov

Page 21: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

New Zealand: WGA

Central Govt

Local Govt

Page 22: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

Canada

Federal

States & Territories

Local

Page 23: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

Sweden

Central Govt

Local Govt

Page 24: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

Defining use

• International variation

• Dependent on constitution

• Global Labelling

• Push for unifying “Conceptual Framework”

• Local Solutions / Adaptations

Page 25: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

Key reform drivers

• Rhetoric

– Greater decision making / macro-econ links

– Improved accountability

• Strength of accounting professions

• Politics: Transparency deficit

Page 26: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

Competition

• Systems

– National Accounts/Statistics

– GAAP/Accounting

• Global leadership

• Professions/Commercial vs. Public Sector

Page 27: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local
Page 28: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

The impact of accounting for Public Private

Partnerships

ACCA International Public Sector Conference

4th December 2014

Dr Anne Stafford BA PhD FCCA

Senior Lecturer in Accounting and Finance

Page 29: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

Economic context

• Public Private Partnerships (PPPs) can be loosely

defined as co-operative institutional arrangements

between public and private actors

– Most 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 1985

– Investment in low/middle income countries in energy, telecom,

transport and water of $2,200bn since 1990

– UK investment to 2012 £55bn, with whole life unitary charges

payable until 2050 of c. £300bn

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Page 30: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

Rationale for PPPs

• Rationale for western economies:

– Additionality plus private sector efficiencies

– In some economies, PPPs enable debt to be kept off the public

sector balance sheet

– But this rationale is contestable

• Rationale for developing economies:

– Need for improved infrastructure in order to bring about economic

development

– May be requirement in order to receive funding e.g. from WB/IMF

– May also be need for assistance with financial management

expertise

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Page 31: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

Accounting for PPPs

• IFRIC 12 Service Concession Arrangements 2006

• IPSASB issued IPSAS 32 Service Concession

Arrangements – Grantor 2011

• Existing accounting treatment only covers PFI-style long-

term service contracts

• Focus on which party has control

– The 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 5

• Many developing economies do not yet have accrual

accounting in place, so won’t adopt

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Page 32: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

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 impairment

• E.g. One new hospital costing £584m was immediately impaired by £290m

– It does not address the issue of contingent liabilities, which

remain a matter for judgement

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Page 33: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

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 guidelines

– It would be politically controversial to change Eurostat

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Page 34: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

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 sector

• Payment mechanisms do not deliver budget certainty nor

mitigate against costs to the public sector

• Difficult to determine penalties applied, most seem to be

small or non-existent

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Page 35: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

Issues arising from contracts (2)

• There are opportunities for further arbitrage around

contracts to avoid meeting the IFRIC 12 definition

• Furthermore, 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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Page 36: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

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 needs

• Empirical evidence shows that these organisational

structures create a complex working environment, where

the SPV interacts with multiple contractors and sub-

contractors

• Public sector management must be very strong to

mitigate against these sub-optimal activities 36

Page 37: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

Issues arising from reporting

• On the face of it both external and internal financial

reporting should disclose sufficient financial information

to assess financial performance

• However complex organisational structures and the

leeway provided for judgement and choice in

determining level of aggregation, presentation and public

disclosure mean monitoring is difficult

• The public sector is therefore dependent on self-

monitoring and performance data held by the private

sector, which can create vulnerability 37

Page 38: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

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 economies

• There 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 PPP

• However 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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Page 39: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

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 services

• Maintaining accountability of such concessions is

essential, but difficult, as public sectors move to ‘light

touch’ regimes 39

Page 40: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local
Page 41: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

Financial Reporting

and its

Impact on Decision Making

Uresha Walpitagama FCCA

Small and Medium Enterprise Development Facility

Ministry of Finance and Planning - Sri Lanka

Page 42: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

Financial Reporting and its Impact on Decision

Making

• How financial reporting can;

improve decision making

improve accountability and transparency for

public spending

• Financial Reporting - Challenges from developing

country perspective

Page 43: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

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

Page 44: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

Need of financial reporting for the government sector:

Why?

Deploy limited resources efficiently

Assess the deliverability of the government services

Avoid corruption/ fraud

Support the budget preparation process

Evaluate efficient sectors/ organisations

Adopt/ revise policy decisions

Financial Reporting and Impact on Decision Making

Page 45: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

Need of financial reporting for the government sector:

Why?

Report on expenditure of public money to its owners; i.e

general public

Initiate funding decisions

Plan ahead for the future requirements in asset

management and maintenance

Plan how to settle existing liabilities and forecasted

liabilities

Overall cash management

Financial Reporting and Impact on Decision Making

Page 46: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

How financial reporting can improve decision

making?

Set up systems and controls that provide, correct, accurate,

timely information

Provision of adequate information is mandatory

Adopt accrual based accounting i.e. provision of exact

revenue/expenditure, asset and liabilities of the government

Provide inputs to the budgetary process

Conduct timely audits

Address the issues in the audit reports and rectify them

before the next financial year

Financial Reporting and Impact on Decision Making

Page 47: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

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

department

Punish 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

Page 48: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

How to overcome developing countries' challenges

Differences in salary scales of chartered qualified accountants

in public and private sector must be reduced

Time to recognise the value of professionals and attract them

to public service in order to establish a healthy public sector

Employing 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 accountant

All government processes to be transparent

Financial reporting to be based on accrual accounting

Financial Reporting and Impact on Decision Making

Page 49: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

Financial Reporting and Impact on Decision Making

Thank You

Page 50: Financial reporting - Home | ACCA · PDF fileLocal Govt Public Corporations . Australia: WGR Commonwealth NSW Local Gov VIC Local Gov QLD Local Gov WA Local Gov NT Local Gov SA Local

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