|The current cash-accounting method used by the Hong
Kong Government has long been criticised by LegCo for
being outdated. Since the 1950s, LegCo members appointed
from the business sector for their supportive views of
the government have complained about the lack of transparency
in the government's accounts.
Even before the Handover, I consistently pushed the
government to account fully for public assets and liabilities.
I also pointed out the need to distinguish more clearly
the capital and revenue aspects of the government's
income and expenditure to establish a more rational
The need to consolidate the government's accounts has
become increasingly relevant as more statutory bodies
such as the Hospital Authority and the Housing Authority
are being decentralised and are functioning as financially
independent services with separate accounts. Further,
the growth of our foreign currency and fiscal reserves
should be integrated into one set of government accounts
to show the government's true financial position. These
examples represent a long list of issues driving the
need for change in public sector accounting.
One of the reasons for the past lack of support of
accrual accounts was that the government was never under
any real political pressure to adopt the model - few
politicians fully understood the implications. This
lack of understanding was evident when the government
released its consultation paper entitled 'Review of
Government Financial Reporting Policy', which resulted
in various fabricated conspiracy theories reported in
the press and released by political parties saying,
amongst other things, that accrual accounts justified
Another reason preventing change was the government's
successful argument that it is not run like a business
and hence, there was no need to adopt commercial accounting
principles, which aim to show a company's profits. More
importantly, most people except the accountants, saw
little need for change as the budget had been in surplus
for many years.
However, the situation has recently changed and reform
is moving ahead quickly. I have persistently pointed
out the shortcomings of the public sector accounting
system and have supported the adoption of accrual accounts,
which will help us gain a clearer idea of the structural
nature and the extent of our recurrent deficits. It
will also help us keep pace with international developments.
Further, one of the main benefits of accrual accounting
is that it provides better financial information on
the efficiency of the government's resource management.
This will inevitably make the civil service more aware
of the necessity of being accountable to the public.
Accrual accounts will also provide the government with
more accurate data regarding the increasing trend to
downsize, eg privatisation and outsourcing.
In addition to speeches made in response to this year's
budget (as well as to previous budgets), the Director
of Audit's recent report clearly supports the change
to accrual accounting, which has helped speed up the
pace of reform. The announcement by the former Financial
Secretary in March that the government would present
more information according to the accrual basis of accounting
signifies a big leap forward in government thinking
and marks a victory for the accountancy profession.
As the government begins to take stock of what is involved,
it will realise the substantial challenges that lie
ahead and the vast resources required. Being a pragmatic
government, it will choose a path of gradual change
that involves taking cautionary steps before it commits
to this new system of accounting. The government's consultation
document clearly reflects the government's political
compromise. However, it falls short of a complete commitment
to the accrual accounting system.
As yet, no timetable has been set for the change. However,
as time goes by, the two sets of accounts will invariably
show greater variances, potentially causing confusion
and undermining the value of the additional information
generated from the accrual accounts. Inevitably, in
the long term, there will be a single system unifying
cash and accrual accounts, but in the short run, it
is possible the two sets of accounts could produce different
surplus or deficit figures, which could potentially
cause a significant political dilemma.
Depending on the size of the difference, there may
be implications that will affect the government in how
it manages the budget and its fiscal policies. I think
we need to set a reasonably short timeframe, such as
five years, to resolve this problem before the variance
grows to unmanageable proportions.
In short, the government's proposal is at best a modified
cash-accounting method, rather than a full accrual-accounting
system. Nonetheless, it takes great courage to take
this 'small step' which accountants have long been waiting
for, as well as representing a big leap for the civil
Over time, the accrual system will make the government's
accounts more comprehensive bringing them more in line
with the public accounts most people are accustomed
to. In this regard, government accounts need to be readable
and straightforward to facilitable the analysis of and
comparisons with private sector accounts.
It will become easier to expose any inefficiencies
in the government's delivery of public services. But
as we incorporate these changes, better training (for
both the users and preparers of public sector accounts)
and patience are requisites for success in adopting
accrual accounts in the public sector.
Eric Li is the LegCo Accountancy Functional
Constituency Representative. His website can be found