As the general election approaches, citizens will have the opportunity to judge the performance of the incumbent government and, based on the current economic and fiscal position alongside a whole range of other factors, select the party they consider will best lead the country.
One of the features of an effective democracy is that voting decisions are exercised by a well-informed electorate. In many ways this is analogous to the requirement that in public company annual meetings shareholders have good information to evaluate the performance of the board and to appoint directors. Recognising this, governments around the world impose on companies the obligation to report fully to their shareholders, and to reinforce the need for good reporting, companies must follow independently determined accounting standards. But because the boards may have an incentive to varnish the truth, audits are required. And to further emphasize the importance of these reports, governments require the auditors to comply with independently determined standards.
They also impose regulatory oversight on the conduct of the audits to ensure they do meet those required standards. Given the importance of board members receiving reliable financial information, governments generally impose significant sanctions where the financial statements do not receive an unqualified audit opinion. And finally, because information needs to be timely as well as relevant and reliable, companies are required to report soon after year end.
These multiple levels of regulatory requirement speak to the importance governments (and others) place on financial reports for the proper conduct of companies and the effective operation of capital markets. Without these reports, shareholders cannot hold boards to account and elect directors, and investors cannot make informed decisions. If one accepts that the democratic process is as important as the functioning of the capital markets (some might think it more important), then citizens should, like shareholders, be well informed. Indeed I would argue that in the upcoming election citizens cannot effectively hold the government to account, and exercise their voting decision, without a recent set of audited financial statements.
The election will be held on Thursday 7 May. At the time of writing, the latest set of audited financial statements for the government of the United Kingdom (the Whole of Government Accounts, commonly referred to as WGA) were released in June 2014. They relate to the year ended 31 March 2013 - close to two years ago. Much has happened since, and voters deserve to know how those events have affected the financial performance and position of the government. For comparison, listed companies in the UK are required (under the EU’s transparency directive) to report within four months of year-end, while the New Zealand, Australian and Canadian governments report in approximately three, five and six months respectively.
But not only are the WGA delayed, the latest set was subject to some significant audit qualifications. These qualifications relate to such non-trivial matters as:
- disagreements on the definition and application of the Account boundary
- disagreement relating to inconsistent application of accounting policies
- disagreement in the accounting for 3G and 4G licences
- limitation of audit scope due to lack of evidence supporting the completeness and valuation of schools’ assets included in the Accounts
- limitation of audit scope due to lack of evidence supporting the completeness of the elimination of intra-government transactions and balances.
Also important is the fact that, unlike companies, the government does not face a requirement to prepare its financial statements according to an independently determined set of standards. Rather, it uses independently determined standards as a starting point in the development of its accounting policies, but retains, and exercises, the right to deviate from those standards.
All this would not matter much, in an electoral context, if the WGA did not have information value. But they do. First, they are audited, and in that important sense more reliable than the statistical information more commonly used as a basis for fiscal decisions, so voters can be much more confident in the numbers. Second, they are more comprehensive in the picture they paint of the government’s fiscal performance and position.
Two examples. If you look at the latest set of WGA you see that while the reported UK debt is £996bn, the total liabilities, which include public service (though not old-age) pensions, are almost three times this amount, at over £2.8 trillion. Yet the public and electoral debate is about debt, when this is only a fraction of the government’s liabilities. Another example – the WGA shows that in the 2012-2013 financial year the negative net worth of the UK government further increased by £283bn, an amount equal to approximately 45% of its total revenues for the year. By any standards that is a concerning deterioration of fiscal position. Currently voters have no way of knowing with reliability whether these positions have improved or worsened for the 2013-2014 year.
In the circumstances described, the central message of this blog is no doubt obvious. In order to cast their votes in a fully informed way, electors require, at the very least, an audited set of financial statements for the year ended 31 March 2014. It is very much to be hoped these will be released well ahead of the election and ideally those statements would have an unqualified audit opinion.
In the understandable absence of financial statements for the 2014-2015 year, a promise (from all political parties) to institute a legal requirement for the government to produce its financial statements within six months of year end would be a welcome acknowledgement that the information needs of voters are as important as those of shareholders. Given that information is more valuable if it is more current, interim financial statements published at least every three months would also be highly desirable.
Another valuable step forward would be to produce detailed forecast financial statements as part of the Budget documentation, so that the WGA can at the end of the year compare the actual result with the planned result; and at the time of the Budget, voters can see the impact the government expects from announced policies on its financial position. Finally, future elections would be well served by the government releasing an update of the economic and fiscal position approximately two months before the poll. This would force the campaign to be fought against the backdrop of the current, real, situation.
If this message is unpalatable, perhaps some consolation can be taken from the fact that the UK government is still amongst the leaders internationally in terms of fiscal transparency. But this should not diminish the importance of addressing this egregious absence of current, reliable, independently assured financial information. To go into the voting booth on 7 May without knowing how the government performed for a financial year that ended 13 months earlier would leave a voter sadly disenfranchised. Hopefully, the Treasury will come to the rescue.
