Thinking like an accountant- is that all bad ?

We all know the jokes about accounting and accountants. This line of humour was in evidence when a New Zealand politician, introducing a public finance bill that would require the government to account according to essentially the same rules as companies, said, “We all know accounting is boring, but public sector accounting is boring to the power of two”. However, in a Bloomberg commentary on the FTX collapse, Michelle Hanlon and Nemit Shroff gave us a reminder that under the heading "boring but important", basic bookkeeping “tops the list”.

The past three decades have seen many governments worldwide move to produce financial statements that are not dissimilar to those they require companies to produce. While this is a step in the right direction, it does not go far enough – the information needs to be used for financial decision-making, including budgeting, rather than purely as an exercise in accountability and transparency, desirable though this is.

To start with the big picture. Fiscal policy has been conducted with a focus almost exclusively on annual cash surplus or deficit and debt levels. Yet the surplus or deficit tells us nothing about whether spending has been used for investment or consumption. A focus on debt levels ignores non-debt liabilities like public employee pensions, which often exceed outstanding debt. It also says nothing about the assets that are available to provide public services, or to underpin public finances in the future.

In short, conventional fiscal rules might instil a degree of financial discipline for the short term. But they tell us nothing about a government’s overall financial health, its ability to withstand future challenges, whether known or unknown. A richer set of financial information is needed for this. Reporting the size and structure of asset holdings, for example, is important for understanding balance sheet strength and fiscal resilience. And IMF research^[1] supports the value of better accounting as an enabler of more effective fiscal management, especially when it leads to better management of the government’s real commercial assets.

There is also a more subtle issue. When governments make choices about spending on the current provision of services versus investment, or on financing their activities through taxation or borrowing, they are, in part, deciding whether to favour the interests of current or future citizens. Making the right judgment on these matters of “intergenerational fairness” can be tough, especially for democratically elected governments - future generations do not vote. Accounting cannot tell governments what they should do. But it can track the consequences of their decisions and allow informed debate about an issue that is at the heart of our responsibilities as citizens.

However, the case for good accounting by governments is focused on more than what it tells us about overall financial health, or about who will pay for the services that we receive from government. It rests on the management tasks that confront all large organisations daily. Achieving their goals requires organisations to make well-informed decisions about the production and distribution of the goods and services they produce. These decisions are complex in their own right, requiring up-to-date information about the resources required to deliver them. But, as anyone who has managed a large organisation knows well, a myriad of such decisions needs to be made, ranging from long-term strategic issues to routine matters relating to employment, purchasing, budget control, and many more. These decisions all require good financial information.

Governments aren’t just large. They are immense. In modern developed economies, a significant proportion of the total production in a country comes from the government – at least 40% and in some cases up to 60%. So poor financial management has an enormous cost.

Governments provide a vast range of services that have an impact on the lives of every citizen; in national defence, security, health, education, transport, and many others. They also engage in significant transfers, for example, old-age pensions, and regulate many aspects of our lives. Delivering all this requires competent management of both operations and finance. In this respect, the government can be seen as a huge conglomerate with a complex organisational structure, employing many people and utilising a wide range of different assets to produce its services. For this, the accounting information needed is substantially the same as that required by a large conglomerate company. This need to manage the activities of a large, complex service delivery organisation is the fundamental rationale for governments producing and using high-quality financial information.

So why do most governments still not produce and use accounting information that is sufficiently relevant, timely and reliable? Because accounting is boring? Perhaps the reason is the relationship between “accounting” and “accountability”. But whatever the cause, the joke is on taxpayers and citizens – those alive today and the yet-unborn.

Ian Ball, Willem Buiter, John Crompton, Dag Detter and Jacob Soll are the authors of the forthcoming book “Public Net Worth – Accounting, Government and Democracy” (Springer/ Palgrave Macmillan).