Public Sector Accounting - Case Study Example

Public Sector Accounting Table of Contents Table of Contents 2 Introduction 3 Accounting Needs & Objectives 4 Accounting Laws, Regulations & Guidelines 5 Public Sector Performance Assessment 7 Role of Auditor in Public/Private Organizations 8 Conclusion 9 References 11 Bibliography 12 Introduction This project includes a critical analysis of public sector accounting in UK as to how the public sector organizations demonstrate accountability. In the first section of the project the needs and objectives of the public sector accounting has been discussed along with a comparison with the objectives of non-public sector organizations. The second section of the project describes the laws and regulations governing public sector financial statements preparation and disclosures as well as the financial disclosures of a non-public entity. In order to demonstrate the differences an organization from each sector has been taken. The chosen public sector organization is The Royal Mail Holdings Plc and the publicly listed company is Aviva Plc. Royal Mail is a 100% UK Government owned organization involved with the postal services throughout UK, Ireland and Europe (Royal Mail Group Ltd, 2012). Aviva is a UK-based largest global insurance company and world’s sixth largest (Aviva, 2012). The third section demonstrates the effect of the objectives of public sector accounting and the rules and regulations governing public sector organizations in the form of differences and similarities in the format, style and accounting policies in the annual reports of Royal Mail and Aviva. The fourth section deals with the role of auditor in both the organizations. Overall the four sections in the project analyze if the differences between the two sectors’ accounting practices are prominent or if there is any reduction in their differing frameworks. Accounting Needs & Objectives The public sector encompasses all the organizations that are not owned or operated by private organizations. The organizations’ control lies in the hands of the Government, either national or local. Public sector in UK is diverse and includes nationalized industries, Government agencies and public service organizations. Nationalized industries are commercial organizations that sell goods to market but are mainly governed by government-appointed boards and ministers rather than markets or shareholders. The surplus generated from their operations is expected to enable replacement investment. The government agencies include welfare services and taxation body. These agencies are required to deliver satisfactory services to the claimants and taxpayers by using the resources at their disposal. The public service organization provides health, policing and defence services on behalf of central or local government. These services are financed from the tax revenues and therefore not charged from the public directly. Unlike the private sector with a clear objective of profit-making, the public sector has a complex mix of objectives and demands. It is primarily concerned with serving the general public. The importance of public sector accounting and disclosures, and their differences from the private sector accounting is due to the following reasons: Lack of making Profits: The ultimate objective of a private organization if profit making and/or creating wealth for its shareholders. However a public sector organization’s objective is not considered profit making. Sometimes this suggests the possibility of inefficient use of resources or absence of commitment to provide good service to the clients due to no profit-making. Lack of Competition: A private sector organization usually operates in an industry with direct competitors and subject to regulations by oversight regulatory bodies. Contrary to this the public sector organizations are not subject to disciplines of the markets and lack the comparability with other firms. Public Interest: There is a corporate governance framework and audit rules for private organizations as they are accountable to their shareholders and creditors. However the expectations from public sector organizations to be democratically accountable lead to the questions from press and general public. Absence of Shareholders’ Scrutiny: There are always risks that the interest of the shareholders and public will be swayed by the powerful stakeholders’ personal and political objectives (Botten, 2007, p.24). Accounting Laws, Regulations & Guidelines The Financial Reporting Advisory Board advises the relevant authorities such as HM Treasury, Scottish Government, Welsh Assembly Government etc regarding the financial reporting standards and principles. UK’s financial reporting framework is based on EU-adopted IFRS the guidance of which is set out in the following: 1. Financial Reporting Manual for departments of government and related bodies (IFRS-based) 2. NHS accounting manual for NHS 3. FT Financial Reporting Manual (Foundation Trusts) 4. Code of Practice for Local Authority Accounting in UK (IFRS-based). The members of FRAB Working Group comprise of Secretaries of FRAB and CIPFA/LASAAC who monitor the activities of IASB and IPSASB. IPSASB has had the authority of issuing the standards for public sector accounting in the form of IPSAS similar to IASB (HM Treasury, n.d.). For private sector, Accounting Standards Board in collaboration with IASB is responsible for issuing the accounting standards. ASB is an operating body of Financial Reporting Council. The standards developed by ASB are a part of Financial Reporting Standards. ASB can issue accounting standards without the approval of any other regulatory body although it consults widely on its set out proposals (FRC, 2012). It expects the public sector organizations to accord with principles underlying the ASB’s pronouncements except in those circumstances involving public sector bodies where Government finds such principles inappropriate. The accounts and annual reports prepared by public sector bodies may or may not refer to the accounting standards by ASB or with the need to provide a true and fair view (FRC-a, 2012, p.9). In 2007, UK government announced the preparation of financial statements of government bodies and departments would be prepared as per IFRS based FReMs replacing UK GAAP by 2008-09. However it was postponed until March 2010. FRAB recommended the government departments to prepare IFRS shadow resource accounts in addition to their accounts on UK GAAP basis for 2008-09. This was confirmed by the Treasury saying if the government bodies are in a position to do so they will prepare IFRS shadow resource accounts. This recommendation aimed to achieve successful IFRS compliance by 2010 (Wayment, 2009, p.5). The transition from IPSAS to IFRS kept the requirements as per IPSAS only because there are certain issues such as taxation to which IPSAS address and there is no equivalent in IFRS. Such exclusive public sector issues let the government bodies to consider IPSAS over IFRS. However they certainly admit that IFRS require more disclosures (CIPFA, 2010, p.8). The requirement to disclose the pension deficit which was earlier considered meaningless by public sector accounting and which has been introduced under IFRS. IFRS are practiced by more than 100 countries presently (Mirza, Holt & Knorr, 2011, p.3). Public Sector Performance Assessment It is well understood by the government that despite the lack of profit-making objective of public sector organizations, there is certainly a need for public accountability. This prompted it to adopt IFRS which entails enhanced financial disclosures. However in addition to the differences in the objectives the workings of a public sector organization are also different from those of the non-public entities. The financial statements of Royal Mail are prepared as per the guidelines under IFRS adopted by EU and produced in accordance with the Companies Act 2006 (Royal Mail Holdings Plc, 2011, p.57). Aviva’s consolidated financial statements have also been prepared as per IFRS issued by IASB and endorsed by EU. As Aviva is an insurance company therefore its financial statements preparation also comply with SORP on insurance business accounting provided by Association of British Insurers (Aviva Plc, 2011, p.74). The board of directors in both organizations consist of Chairman, executive directors and non-executive directors where the non-executive directors are also independent. Both the organizations’ financial statements preparation and disclosures are very much identical. The Directors of Royal Mail are required to prepare financial statements under Company law and approve the financial statements if they provided a true and fair view of the company’s state of affairs. They are required to select the suitable accounting policies and apply them consistently, make prudent and reasonable judgements and accounting estimates, oversee the application of UK Accounting Standards and disclose any significant departures, and prepare the financial statements on the basis of going concern unless they feel otherwise (Royal Mail Holdings Plc, 2011, p.101). Royal Mail has a number of board committees which are Chief Executive’s committee, audit and risk committee, remuneration committee, nomination committee, and pensions committee (Royal Mail Holdings Plc, 2011, p.42-44). Aviva’ Directors are responsible for approving business plans, group’s strategy, performance, financial reporting controls, dividend policy, capital structure, corporate governance, risk management policies etc (Aviva Plc, 2011, p.100). The various board committees are audit committee, nomination committee, remuneration committee, risk committee, and corporate responsibility committee (Aviva Plc, 2011, p.103). The difference lies in the accountability of the two kinds of organizations. The former is accountable to the UK Government whereas the latter is accountable to public shareholders. The possible explanation is because Royal Mail is non-listed company whereas Aviva is a listed company. Role of Auditor in Public/Private Organizations The role of external auditor is to provide an opinion on the objectivity and fairness of the company’s financial statements (Dunne & Morris, 2008, p.386). The opinions are generally of three types unqualified, qualified and adverse. An unqualified opinion is what most of the companies sought as evidence of a sound internal control system. The qualified opinion is also a satisfactory opinion with small exceptions or matters of concerns. An adverse opinion deems the failure of internal audit control. Other responsibilities of an external auditor are to evaluate the company’s internal control to determine if there is any discrepancy in the recording of the financial transactions. The external auditors work closely with the audit committee which consists of independent directors. The corporate governance framework establishes the requirement of audit committee to ensure the independence of external auditor (Bragg, 2011, pp.4). Royal Mail follows the Combined Code on Corporate Governance published in 2003 and revised in 2008 and 2010 with the appropriate provisions for public company with single shareholder. Aviva follows the Combined Code on Corporate Governance issued by FRC in 2010. The UK corporate governance code deals with the role of audit committees. The effectiveness of internal control within Royal Mail is reviewed regularly by the Internal Audit and Risk Management that reports to audit and risk committee. The IA&RM provides assurance to the board and executive management for the internal control systems (Royal Mail Holdings Plc, 2011, p.37). The external auditor of Royal Mail has stated to be responsible to the Company and its members as a body for the audit and opinions (Royal Mail Holdings Plc, 2011, p.50). The audit committee of Aviva works in association with the risk committee to review the effectiveness of the internal control including operational, financial, compliance controls, and risk management systems. The company’s internal control system complies with the revised Combined Code on the Turnbull guidelines (Aviva Plc, 2011, p.104). The external auditor in its statement of opinion has reported similarly as in case of Royal Mail. Conclusion In this project the analysis of two organizations from public sector and non-public sector i.e. The Royal Mail Holdings Plc and Aviva Plc shows the differences and similarities in their accounting practices. The major difference between the two organizations is that Royal Mail is not publicly listed company whereas Aviva is a publicly listed company. The shareholder of Royal Mail is the UK Government whereas the Aviva is owned by retail as well as institutional shareholders. Both the firms presently prepare their accounting statements in accordance with the IFRS issued by IASB. FRAB governs the public sector accounting whereas FRC governs the publicly listed companies. IPSASB used to issue the accounting standards IPSAS for public sector entities whereas ASB has been the accounting standard issuer for publicly listed firms. The main motive for adopting the IFRS for the government owned enterprises was that IFRS entails enhanced disclosures as compared to IPSAS and also uniformly exercised by more than 100 countries around the world. The analysis of the accounting policies of both the organizations shows that there are no significant differences in the accounting practices including the corporate governance systems and internal control systems. References Aviva Plc. (2011). Aviva Plc: Annual Report and Accounts 2010. [Pdf]. Available at: http://www.aviva.com/library/reports/2010ar/downloads/aviva-2010.pdf. [Accessed on January 17, 2012]. Aviva. (2012). About Us – Aviva. [Online]. Available at: http://www.aviva.co.uk/about-us/. [Accessed on January 17, 2012]. Botten, N. (2007). CIMA Official Learning System Management Accounting Business Strategy 4th ed. Butterworth-Heinemann. Bragg, S.M. (2011). The New CFO Financial Leadership Manual 2nd ed. John Wiley and Sons. CIPFA. (2010). IFRS: How to tell story. [Pdf]. Available at: www.cipfa.org.uk/ifrs/download/IFRS_how_to_tell_the_story.pdf. [Accessed on January 17, 2012]. Dunne, P. & Morris, G.D. (2008). Non-Executive Directors Handbook 2nd ed. Butterworth-Heinemann. FRC. (2012). Accounting Standards Board - About the ASB. [Online]. Available at: http://www.frc.org.uk/asb/about/. [Accessed on January 16, 2012]. FRC-a. (2012). Foreword to Accounting Standards. [Pdf]. Available at: http://www.frc.org.uk/documents/pdf/176.pdf. [Accessed on January 16, 2012]. HM Treasury. (No Date). Developing financial reporting guidance for the public sector: Memorandum of Understanding between the relevant authorities - HM Treasury. [Online]. Available at: http://www.hm-treasury.gov.uk/frab_memorandum_of_understanding.htm. [Accessed on January 16, 2012]. Mirza, A.A. Holt, G. & Knorr, L. (2011). Wiley IFRS: Practical Implementation Guide and Workbook 3rd ed. John Wiley & Sons. Royal Mail Group Ltd. (2012). Who we are - Royal Mail Group. [Online]. Available at: http://www.royalmailgroup.com/who-we-are. [Accessed on January 17, 2012]. Royal Mail Holdings Plc. (2011). Royal Mail Holdings Plc: Annual Report and Financial Statements 2010-11. [Pdf]. Available at: http://www.royalmailgroup.com/sites/default/files/ROY0001_fullproof_41.pdf. [Accessed on January 17, 2012]. Wayment, S. (2009). CIMA: IFRS and the Public Sector, Topic Gateway Series No. 58. [Pdf]. Available at: http://www1.cimaglobal.com/Documents/ImportedDocuments/cid_tg_IFRS_and_the_public_sector_jul09.pdf.pdf. [Accessed on January 17, 2012]. Bibliography Bourn, J. (2007). Public sector auditing: is it value for money? John Wiley and Sons. Bragg, S.M. (2010). IFRS Made Easy. John Wiley and Sons. Dick, W. & Missonier-Piera, F. (2010). Financial Reporting Under IFRS: A Topic Based Approach 2nd ed. John Wiley and Sons. Financial Reporting Advisory Board. (2009). Financial Reporting Advisory Board report for the period April 2008 to March 2009. The Stationery Office. Great Britain: National Audit office. (2007). General report of the Comptroller and Auditor General 2005-06: financial auditing and reporting. The Stationery Office. Jorge, S. (2008). Implementing reforms in public sector accounting. Imprensa da Univ. de Coimbra. Prowle, M. (2000). The changing public sector: a practical management guide. Gower Publishing, Ltd. Read More