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Small Step, Great Leap
The current cash-accounting method used by the Hong Kong Government has long been criticised by LegCo for being outdated.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 fiscal policy.

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 new taxes.

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 service.

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 at http://www.ericli.org.

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