John Watson (Tasmania, Liberal Party) Share this | Hansard source

This afternoon I wish to speak about a matter of public importance—that is, public sector specific accounting standards. Last year, the Australian Accounting Standards Board proposed to abolish public sector specific standards—namely, AAS27, financial reporting by local governments; AAS29, financial reporting by government departments; and AAS31, financial reporting by governments. The Financial Reporting Council has commissioned a review of the proposed public sector standards in relation to accounting standards in Australia. I believe that review is very important.

I do not support the removal of those standards, having worked behind the scenes for their establishment. While the move towards sector-neutral standards is a good one, I believe the public sector has significant differences from the private sector and does need to be treated as such. Over the next few minutes, I intend to outline the benefits of what I call sector-neutral accounting standards, the areas in which the public sector differs from the for-profit sector and, finally, the problems that would arise if the Australian accounting standards relating to the public sector were removed.

My first point is that the move towards sector-neutral standards is, on the whole, a good one; I do not deny it. Sector-neutral standards reduce compliance costs, are required to bring Australia into line with international financial reporting standards and increase investor confidence. The international accounting standards are produced by the International Accounting Standards Board and are used by many countries all over the world, including the European Union, Japan and the United States. Having sector-neutral standards increases interoperability between different government and private entities and allows clearer and more transparent financial reporting. There is very little argument that, in an ideal world—which we do not have—sector-neutral standards would be universal. As we will see, though, the reality of the situation is not quite so simple.

My second point is that the public sector is fundamentally different from the for-profit sector. But the question is: do we need in Australia two different accounting standards—one for the public sector and one for the private sector? Therefore, the accountancy profession in the public area is very much at the crossroads. The public sector does not generate revenue and does not have as its primary objective the generation of a return on shareholders’ funds. Professor Allan Barton of the Australian National University has written:

The environment of government and the nature of its operations are fundamentally different to those of the business sector, and accounting information systems must be designed to suit these characteristics if they are to provide useful information to the government and its managers ... Parliament and citizens.

CPA Australia, the largest accounting body in this country, has outlined several key areas where the public sector differs from the for-profit sector, and they are as follows. Revenue: the government sector does not generate revenue in the commercial sense. Fair value: the nature of public sector assets means that it is not possible to obtain a fair value without a significant investment of resources and with a marginal outcome. As funding is not determined by the value of the asset, on what basis should fair value apply to public sector assets? That is a fair criticism. With respect to heritage and cultural assets, the public sector is the major custodian of the community’s heritage and cultural assets. There is a need for specific standards to address this unique government issue.

Just taking these few areas alone, we can see that significant problems arise when we hold the public sector to the same standards as the private sector. How exactly does one value a national park? How does one value the land under our roads? Is it worth billions of dollars or is it worth nothing? How can we determine a market value for an asset that cannot be sold, such as the Great Barrier Reef?

Also, consider the costs of making such evaluations. How exactly would spending millions of dollars and man-hours estimating the worth of cultural and natural assets improve the provision of services to the public? In short, it would not. We would simply be forcing government departments to waste scarce resources to meet an unnecessary standard.

I will take a moment to acknowledge that I am a fellow of CPA Australia, which has over 14,000 members in both the public and not-for-profit sectors. I note that CPA Australia does not support the Australian Accounting Standards Board proposal to abolish public sector specific accounting standards, unless significant issues are addressed, and I endorse that. CPA Australia recently held a series of think-tanks in Sydney, Canberra, Melbourne and Brisbane to canvass the views of over 300 top public sector finance and accounting professionals on this fundamental public sector accounting issue. As CPA Australia Public Sector Director Justin Naylor said:

The overwhelming response from our membership is that the public and private sectors are significantly different and therefore public sector-specific accounting issues must be addressed before the specific standards are removed.

He went on to say:

CPA Australia is concerned that the withdrawal of public sector-specific standards will undermine the many advances made in government financial reporting achieved since the introduction of accrual accounting.

Furthermore, the Australian Auditor-General, Mr Ian McPhee, who is an FCPA—a fellow of the accounting body—said recently:

It is appropriate, in my view, to have a presumption in favour of sector-neutral standards, but where a case can be made, departures from this approach should be allowed. On this basis, in light of the marked differences between the for-profit and public sectors, and the scale of public sector activities, I am strongly in favour of the AASB continuing to develop public sector standards.

I believe this matter is so fundamentally important that this issue really should be examined by an appropriate parliamentary committee. We in Australia have made such great advances, particularly since the introduction of accrual accounting, in terms of developing our own public sector standards. In conclusion, I see that the sector-neutral standards may be beneficial on the whole, but the public sector is so significant and fundamentally different, as I have outlined, that it does need to be treated as such. I thank the Senate for the opportunity to express these concerns.