The International Federation of Accountants(IFAC), their member bodies like CIPFA and the major auditing firms are leading the charge to accrual accounting in the public sector (a bit like the fabled lemmings running over a cliff). This is despite the fact that almost every single independent and objective study has found that the costs of introducing accrual accounting are far greater than any benefits can actually be achieved.
The one major ‘benefit’ that has been consistently achieved, in the few governments that have actually adopted the accrual basis of accounting, is that far more professionally qualified accountants are employed and the major in accounting firms are often used to facilitate this reform. So of course IFAC, the global trade union for the accounting profession, is in favour of these jobs for the boys (and a few girls).
But not only is IFAC inciting many governments to waste money on the adoption of accrual accounting, but they are also distorting the reform agendas of many governments, especially those of the Global South. Financial reporting is not a particularly important area in the public sector. Even in terms of public accountability, the annual report of the auditor general is far more important than the annual financial statements of a government.
Few governments across the world gain any publicity when they issue their annual accounts and almost nobody takes the effort to review the financial statements of their government. In contrast, the annual budget of almost every government is headline news on the day that it is announced in Parliament. The publication of the annual report of the auditor general is also often worthy of some coverage in the local media - it is through this report that the government is held to account by parliament, the media and its citizens.
So why is it that so much emphasis is put on the importance of government accounts? Why is it that so many conference papers are devoted to this topic and why is the change from the cash basis of accounting to accrual accounting seen as an important part of the reform agenda for many governments of the Global South. The editor of one international accounting journal even asked me what I did in Nigeria if I was not in favour of the move towards the adoption of accrual accounting!
Obviously, public financial management is far wider than annual financial reporting! Budgeting, cash management and planning, internal control & audit, payroll and contracting are all key areas which need to be improved, optimised and refined. The effort and reform agenda of many governments will be distorted if the importance of their financial statements is exaggerated.
At a recent conference, it was suggested to me that the following study by the French Cour des comptes (court of accounts) provided evidence of the benefits of the French government’s move to accrual accounting a decade ago:
However, this reports clearly states that the costs of this reform were significantly greater than any benefits that have actually been achieved:
"to date, the benefits of accrual accounting do not appear to be as much as the investments which were made by the administration in its establishment. Maintaining accounts requires significant resources, particularly within authorising departments. There are many recurring difficulties: the complexity of operations, perceived understaffing, sometimes insufficient training, lack of team support. Moreover, the related measures implemented by the professionals of the accounting function remain to be optimised. More broadly, attention to the modalities of accounting reform has sometimes taken precedence over that accorded to the expected results. In addition, several substantive reservations made by the auditor on the reliability of the financial statements and the possibility of auditing these statements still need to be addressed." (page 69).
Not only are the consultancy firms often gaining significant income from moves to accrual accounting by some governments, but the EU project to introduce accrual accounting across the EU is heavily reliant on PriceWaterhouseCoopers (PWC) for its research and they will probably be used for a proposed study of the costs and benefits of this reform. See, for example previous work commissioned by the EU from PWC on this topic: http://ec.europa.eu/eurostat/documents/1015035/4261806/EPSAS-study-final-PwC-report.pdf
IFAC and the global accountancy profession, led by the big four auditing firms, should be congratulated for the scam that they have pulled off. Even though only a small minority of governments have actually fallen for this prank, it has provided tens of thousands of lucrative jobs for professionally qualified accountants and millions of pounds worth of consultancy fees.
For the governments of the G20, the 20 largest economies in the world, the move to accrual accounting will only cost a small proportion of their budgets and so this reform can probably be introduced with little harm being done. Despite this only a minority of these governments have actually taken the bait and adopted this reform. However, across the Global South, this scam will probably cost the lives of many people and their children and so it is a far more serious matter. In Nigeria, for example, the National Primary Health Care Development Agency of Nigeria spent N15million ($75,000) valuing its assets as part of the process of adopting accrual accounting. Is this move really more productive or important than buying drugs, mosquito nets or training nurses?