Reprinted from The National Business Review (NZ) 25 August 2000 by arrangement.
Financial reporting:  Accrual-basis won’t put a stop to abuse, plunder.
By Alan J Robb
Senior lecturer in accountancy at the University of Canterbury.

The publicity about the International Federation of Accountants recent standards (NBR 21 July, reprinted below) contains some amazing claims for the benefits of forcing governments to produce annual financial statements on an accrual basis comparable with the private sector.

It is asserted that accrual accounting will:

These are very disputable claims which seem at variance with many observable facts where accrual accounting is the norm.

Many businesses have been plundered despite, or perhaps because of, the existence of, accrual accounting.  Robert Maxwell stole over 526 million pounds from his employees’ pension fund.  Bond Corporation plundered the A$1.2 billion cash box that was Bell Resources.  Millions of dollars in secret commissions have been paid, for example in the Tricontinental collapse.  Insider trading allowed financial operators such as Michael Milken, Ivan Boesky, Martin Seigel and Dennis Levine to strip billions of dollars from shareholders.  Many other examples could be cited.

Such pillaging of another’s resources is not prevented either by accruing debtors and creditors or listing assets and liabilities.  False data can easily be recorded and can pass undetected.  Audited financial statements based on accrual accounting cannot be assumed to be free of error or fraud.  The fraudsters behind the insurance company Equity Funding created 64,000 fictitious life policies with a face value in excess of US$2 billion and then sold them to other insurance companies for cash.  They also faked assets of more than US$100 million and had counterfeited bonds and forged death certificates.  Accrual accounting did not cramp their style in any way.

So far as “forcing governments to identify what assets they hold” it is not necessary to adopt accrual accounting to achieve this.  An asset register can be kept quite independently of any accounting system.  Indeed it should be kept independently of the accounting records so that they are not lost if the accounting records are corrupted.

What has happened with the public sector reporting requirements in New Zealand might more accurately be described as forcing governments to value community assets in questionable ways.  The recent Bertram & Terry report has challenged the relevance of the emotively titled “Optimised Deprival Value”.  Yet to be questioned is the purpose of valuing culturally or historically important heritage assets as if they were tins of baked beans.  Some would point out that the only parties who have benefited from the fixation with valuing assets have been the professional consultants.  Have any decisions been made based on the knowledge that the National Archives collection had a net current value of $716 million at 30 June 1997?  I suspect that knowledge of what is in the archives is of far greater importance than this accounting number.

It is very difficult to see how accrual accounting can of itself lead to “greater transparency and accountability.”  The evidence is that financial statements in the private sector often obscure and hide information especially as a result of the consolidated accounting process. In their landmark study of Australian company collapses Professors Graeme Dean and Frank Clarke cite the comment that inter-company shareholdings and transactions have given cover to fraudulent dealing and to legally less serious but financially no less deceptive mis-statements of results and position.  It has effectively shielded them from public gaze and scrutiny, they said.

Far from the private sector having a trend towards greater transparency and accountability it can be argued that the use of partnerships, joint ventures, trusts and international operations routed through tax havens is leading to less transparency and accountability.
Experience in the private sector with accrual accounting gives little hope that any of these claimed benefits will materialise.
Reprinted from ‘The National Business Review’ July 21, 2000 by arrangement.
Accrual-based accounting rules rule, OK
By Mike Ross
Initiatives developed in New Zealand to improve public sector accounting have been followed up with international accounting standards now released which force governments worldwide to produce annual financial statements comparable with the private sector.
Public sector adoption of accrual-based accounting rules will cramp the style of those robbers and thieves who like to plunder national treasuries.

The use of accrual-based rules overturns traditional public sector practices of just reporting cash in and cash out.

These moves are predicted to benefit not only governments but also voters, rating agencies, capital markets and international financial institutions.

New Zealand led the way, with the previous Labour government adopting accrual accounting.  This forces governments to identify what assets it holds and the extent of long-term liabilities.

Accrual accounting makes more transparent the economic effect of government decisions.
The first set of accrual-based public sector accounting standards, just issued by the International Federation of Accountants (IFAC), cover the presentation of financial statements, borrowing costs, cash flow statements and the effect of changes in foreign exchange rates.

lan Ball, formerly professor of accounting at Victoria University [Wellington], headed the IFAC public sector committee that developed and approved the new standards.
Dr Ball said the new standards supported trends toward greater transparency and accountability of governments.

Political considerations often govern the content and form of annual financial statements.  Defence spending may be excluded or fudged.  Not all revenue might be accounted for, with wads of cash disappearing into the pockets of government ministers and their cronies.
Some countries have no tradition of honest reporting, even under a cash accounting format.
To assist these governments, IFAC has developed a primer titled Financial Reporting Under the Cash Basis of Accounting.  This is intended to give governments a starting point, before taking the big step to accrual-based accounting.