Time to make open-book accounting standard in public service contracts

6 Jul 15

A National Audit Office report on open-book accounting creates the opportunity to develop new measures for greater transparency and accountability for outsourced public services

Published last week, the National Audit Office’s Open-book Accounting and Supply-Chain Assurance report was a welcome contribution to both the enhancement of public sector procurement and public accountability.

When a public body is spending significant sums of public money to procure and secure the delivery of critical public services, it is incredible that any rational person would not expect transparency of payments, performance and profit. Surely then, we should expect the same transparency when services are outsourced as when public services are managed and delivered “in-house” by the public sector?

Transparency of operational and financial performance should be a fundamental condition of doing business with the public sector. Companies, social enterprises and charities – or indeed public sector organisations wishing to contract to deliver public services paid for through public expenditure – should accept this condition or simply not bid for such business.  Once a nationally-agreed contract size and value threshold is reached, or where the contract is politically sensitive, there should always be transparency of financial performance to agreed standards.

I mention contract size and a value threshold given that the application of such transparency needs to be proportionate to the level of payments, the risks and the political sensitivities involved. The burden and cost of transparency itself must neither be a barrier to small organisations bidding for public contracts, nor result in disproportionate costs for the public sector unless there is an overriding public interest for disclosure, whatever the costs.

This latest NAO report draws on several interesting and useful case studies to make the case for open-book accounting and effective supply-chain assurance. In respect of open-book accounting, I believe the key argument relates to transparency and accountability for the use and expenditure of public money.

There are other sound reasons for this practice, as the NAO points out. These include: as a means to support negotiations, especially when considering possible extensions to contracts; a means of challenging a supplier’s costs; to improve the relationship between clients suppliers; to benchmark costs and performance and º where there is some form of shared gain or profit share arrangement – an ability to calculate this. 

It must surely be a fundamental principle that the public is entitled to know how public money is being spent. And local government councillors and members of Parliament have an absolute duty to hold both the public sector client and the supplier to account for their stewardship of money that they have voted for specific purposes. 

The NAO report cites examples of good practice but makes the point that open-book accounting is far from being universal, even for large, complex and high profile public service contracts. 

In my experience, the lack of such arrangements can be due to a reluctance by public sector clients to want such expenditure and contractual arrangements to be commonly known, let alone understood by the public, or because they do not have the necessary skills or competencies. Of course, there are also many suppliers who have no wish to be transparent either (at least, to the extent required). 

The NAO has rightly drawn attention to the absence of a standard approach or common accountancy standards for open book accounting. CIPFA has done good work on this but there is much more to be done, and the recommendation for a joint industry, public sector and accountancy professional group to draw up some guidance is hugely welcome. I believe that such a group should include the wider public sector, not solely central government, and also charities and other social sector suppliers.

I noted earlier that in my view, the application of open book accounting should always be proportionate to the size and sensitivity of contracts, and should be applied in a practical and proportionate manner.  

However in the case of major (and we would need a consensus on thresholds that reflected both length of the contract and its financial value) and sensitive contracts, I believe that there is a need go beyond the NAO’s useful recommendations.

In particular I would like to see open book accounting to be a core contractual requirement for contracts, with standardised approaches and accountancy standards for specific services. This would allow for easier comparisons between contracts, and to minimise the need to reinvent models for each contract.

The accounts should show service performance, change control agreements and risk analysis in addition to financial performance, and all open book accounts should be subject to independent audit and the public sector client internal audit services and scrutiny by parliament and local authorities.

The expectation should be that these accounts will be published – allowing for some delays in the run up to a re-tendering – and any failure to publish being itself subject to public explanation.

This should include profit margins being made by key elements of the supplier’s supply chain, especially when there are internal transactions between different sections of the supplier’s company, or between subsidiaries.

Similar arrangements should also apply to significant constituent contributors to the prime contractor’s supply chain, with the movement of monies between the supply chain also to be included as well as a declaration of the financial and other incentives for key supplier personnel.

Public sector clients should also have to publish the business case for major outsourcing prior to procurement, with open book returns then audited against the original objectives and targets.

The NAO report is a welcome contribution to what should become an ever more sophisticated and urgent debate about the future of public service outsourcing; and to the general public’s very evident desire for greater transparency and accountability.

Let this debate commence and quickly result in bold yet practical new practices.

  • John Tizard

    John Tizard is an independent strategic adviser and commentator on public policy and public services. He works with a range of public, private, third, union and academic organisations. He now holds several non-executive, trustee and chair roles in the VCS and arts sectors. He was a senior executive both at Capita and Scope, and is a former joint council leader

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