All that glisters is not gold: new public management and corruption

Richard I C Tambulasi (2009) All that glisters is not gold: new public

management and corruption in Malawi's local governance, Development Southern Africa, 26:2, 173-188, https://doi.org/10.1080/03768350902899447

New Public Management (NPM) has been the dominant approach to public sector reform for the last few decades.  However, this approach and the wider Neoliberal economic reforms have been associated with increased corruption and inequality.  This article provides clear evidence from the Southern African country of Malawi that NPM reforms provide greater opportunities for corruption.  This is primarily based on the views of local government officials and councillors, but is also supported by the wider academic literature.

NPM was implemented in Malawi in the hope that it would improve “accountability, transparency and good governance” (page 174).  But, as in many other countries, it has “created a breeding ground for corruption” (page 174).  Despite this donors, consultants and experts are usually so confident of the benefits of NPM that its effects have not been checked and evaluated (for example, there is not a single independent study that has shown that the presumed benefits of adopting accrual accounting have actually been achieved in practice anywhere in the world).

The NPM paradigm has been summarised as ‘disaggregation + competition + incentivisation’ (Dunleavy and Margetts, 2000).  Managers are given greater powers and are incentivised with output-based performance management.  However, these increased powers and less detailed oversight mean that there are greater opportunities for personal enrichment and corruption. This is coupled with use of private sector tools of management and greater competition with the private sector (outsourcing) and within the public sector.  Governments move from being providers of services to procuring these services.  As a result, we have the contract culture and increased charging for public services. 

The link between NPM and corruption has been under researched with the common argument that it does not cause corruption directly, but it does provide greater opportunities.  Hood makes the plainest statement, claiming that the “three commonest failings” of NPM are “bribery, misappropriation and extortion; front-line abandonment; and the use of public organisations for personal ego-trips” (1998:29).

Richard interviewed 30 local councillors and 20 local government officials.  “The large majority… felt that NPM leads to increased corruption” (page 179). “All of the interviewees asserted that contracting out presents motivations, opportunities and possibilities for corruption.” (page 179).  As a result, 84% of respondents “thought contracting out led to corruption”; 78% “attributed corruption to decentralisation;  68% saw managerial autonomy as a cause of corruption”;  90% “thought user fees led to corruption; and another 90% “thought public–private partnerships led to corruption.” (page 179).

Thus this study provides over-whelming evidence that New Public Management reforms generally, and in particular contracting out and user fees, have led to greater corruption.  It would be interesting to see if these views are replicated in Nigeria.  What do state and local government officials believe has been the effect of introducing NPM style reforms in Nigeria – especially contracting out (including public–private partnerships) and user fees?  I would be interested to work with other researchers in this area.

Are European Auditors General Moving Against Accrual Accounting?

Public sector auditors across Europe may be moving against the introduction of accrual accounting as the evidence mounts.  In recent years, reports from Britain, France and especially Germany have become increasingly critical, saying any benefits are not worth the significant costs involved.  

The National Audit Office in Britain undertook three studies in this area since the introduction of business style accrual accounting by the Government in 2001.

The report of the first of these studies concluded that:

In most cases it is too soon to identify any discernible benefits from better resource management in terms of contributing to improved public services from for example, enhanced efficiency (NAO, 2003, page 31).

Its second study reported that:

Departments have made significant progress in using accruals-based accounting and budgeting systems since our previous study. This has allowed departments to better understand how they are using their financial resources, for example by offering more detailed information to manage their assets and liabilities. Departments have used this information to help identify under-utilised assets and to dispose of those no longer required. (NAO, 2008, paragraph 9, page 7)

So the only specific benefit was that ministries (called departments in the UK) were able to identify and sell assets (mainly buildings) which were no longer used! However, almost all of the information for such an exercise was already available from asset registers before the introduction of accrual accounting.

The third National Audit Office study, reporting in March 2011, recognised that business style accrual accounting was now well developed, but clearly indicates that senior managers do not appear to be using the information provided.

Thus the view of the British National Audit Office was that, after a decade of business style accrual accounting, the additional information available is not being used by senior managers. In fact, the accrual financial statements are only really produced at the end of the year as a legal obligation.

In 2016, the French state auditor, reported in a major study undertaken 10 years after the adoption of accrual accounting by the French central government, that:

The benefits of accrual accounting, to date, do not appear to justify the level of resources devoted to its introduction by the administration (page 69). 

The benefits of accrual accounting to the transparency of the State’s financial situation and the modernization of its management have not proved to be equal to the efforts made by the administration to introduce this style of accounting and, above all, the expectations placed on it by the legislators during its introduction (page 99).

A decade after the introduction of accrual accounting by the French Government, its auditors are clear.  The efforts and costs involved are, at this stage at least, greater than any benefits that have been achieved.

Perhaps learning from their colleagues in Britain and France, the Public Audit Board in Germany issued a report in 2017 arguing that the Federal Government should not be required to implement accrual accounting based on the proposed European Public Sector Accounting Standards (EPSAS).

They said that such a move would involve “high implementation costs for Germany not matched by any real benefits” (page 2).  They state that the costs could considerably exceed the European Commission’s estimate of €3.1 billion or 0.1% of GDP. The Auditors argued that the Commission monitors compliance with its fiscal rules through statistical reports and so lack of high-quality financial data is not a problem.

The German Audit Board was also worried by the undue influence of audit firms.  They were being used to advice on the introduction of accrual accounting and would then benefit from the resulting multi-million consultancy market.  This would involve significant conflicts of interest.

The views of the German Audit Board on moves to accrual accounting are fully supported by the German Federal Ministry of Finance and by parliament.

This range of reports by public auditors from several major European countries indicates that the arguments often provided in favour of moving from the cash to the accrual basis of accounting do not appear to stand up to independent scrutiny.  All these reports indicate that the significant costs of a government moving to accrual accounting are not likely to be justified by the meagre benefits that may be achieved.  Significant benefits were not being achieved even a decade after the introduction of these reforms.

Governments of the Global South should take note of these reports.  They are currently being lobbied by donors, consultancy firms and accountancy bodies to adopt accrual accounting, but these independent studies indicate that many of the supposed benefits are illusory.  In addition, many of those arguing for accrual accounting may expect to have significant financial gains from such a move, in terms of consultancy assignments as well as highly paid government posts.

Links to the Audit Reports:

Reports of the British National Audit Office:

www.nao.org.uk/report/managing-resources-to-deliver-better-public-services/

(2003)

www.nao.org.uk/report/managing-financial-resources-to-deliver-better-public-services/ (2008)

www.nao.org.uk/report/progress-in-improving-financial-management-in-government/ (2011)

Report of the French Audit Office (2016):

www.ccomptes.fr/fr/publications/la-comptabilite-generale-de-letat-dix-ans-apres-une-nouvelle-etape-engager

Report of the German Audit Office:

www.bundesrechnungshof.de/en/veroeffentlichungen/sonderberichte/epsas?set_language=en

Is the Move to Accrual Accounting Just a Major Scam by the Accounting Profession?

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:

www.ccomptes.fr/Publications/Publications/La-comptabilite-generale-de-l-Etat-dix-ans-apres-une-nouvelle-etape-a-engager

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?