The Hindu Business Line : Wiggle room in accounting to stage fiscal gimmicks

IN FEBRUARY, when the BJP-led NDA government was bullish about a return to power after the elections, and presented the Interim Budget, the Opposition was quick to decry it as `poll gimmicks'. Shivraj Patil had said that the Budget was for the election and not for the people, and Lalu spoke of ``doling out lollypops to woo voters''.

Why are incumbent parties desperate? Just that governments may be tempted to take advantage of accounting conventions when "fiscal rules (threaten to) bite," write Vincent Koen and Paul van den Noord of the Organisation for Economic Co-operation and Development (OECD), Economics Department, in their paper titled Fiscal Gimmickry in Europe: One-Off Measures and Creative Accounting, prepared for a workshop recently organised by the European Commission on "Fiscal surveillance in EMU: New issues and Challenges".

Gimmicks, as the dictionary defines, are tricks or devices intended to attract attention or publicity rather than fulfil a useful purpose. Accounting provides the ``degrees of freedom'', ``wriggle room'' or ``scope for judgment'' that come in handy as artifices "to put the best possible gloss" when governments are under pressure to perform.

The private sector has a variety of accounting devices, ranging from "the establishment of `cookie-jar reserves' in good times to premature revenue recognition in bad times." Thus, when the top management changes, and restructuring happens, there is "a cathartic `big bath accounting' operation that brings to the surface some of the gimmicks used by their predecessors" so that the new team starts with a clean slate. Similarly, governments like to boost their own performance while auditing their predecessors' accounts.

One-off measures and creative accounting

The authors define `one-off measures' as government decisions of a non-recurrent nature that affect general government net lending or borrowing for a short time. One example is "the privatisation of non-financial assets owned by the government, at a market price," where the proceeds may help balance the budget in the year of sale but impact in the subsequent years is only `indirect' and permanent gain typically much smaller. Another example, tax amnesties, "can lead to a permanent improvement in government revenue" despite being one-off provided tax base broadens in the process.

Creative accounting, according to the paper, refers to the more or less unorthodox treatment of operations involving the general government affecting the fiscal balance or public debt but not government net worth. This comes closer to `gimmicks', opine Koen and Noord, and may be `opportunistic' or `incorrect'. Creative accounting may at times be endorsed by law, such as the Eurostat ruling to account, above the line, one-time upfront payments (made to the government by firms undergoing privatisation to discharge their pension obligations onto the State).

Creative accounting may have advantages too, point out the authors, citing the success of public-private partnerships (PPPs) in reducing general government deficit for publicly-used infrastructure.

Gimmick catalogue

The authors provide `an incomplete inventory of fiscal gimmicks', because an exhaustive list would be impossible in the absence of public information. The selection ignores ruses that improved fiscal balance by less than 0.10 per cent of GDP, as in the case of France making "capital injections into chronically money-losing public enterprises", and Germany getting "lump-sum reimbursement in 1997 of subsidies paid to Airbus during the 1980s" adding to 0.04 per cent of GDP.

The authors are, however, benign to adjustments that temporarily worsen the recorded fiscal position, "but make for more favourable fiscal outcomes down the road," as in the case of Ireland that made a capital transfer of 1.8 per cent of GDP "to discharge future pension payments to the employees of the privatised telecommunication company."

An interesting analysis is presented country-wise, year-wise for the past decade, indicating the impact of the measure as a percentage of GDP.

Thus, Germany has resorted to one-offs such as reclassification of public hospitals into quasi-corporations, sale of casino licences, fines on illegal housing and so on. In the case of France, disputed treatment of the use of a revaluation of central bank reserves, accrued coupons on fungible Treasury bonds, and swaps appear in the list.

While Greece suffers from "chronic under-estimation of government expenditure for the procurement of military equipment," Luxembourg had revenue jiggle through "sale of satellite parking rights." It is not as if vices are only in the EU countries.

The paper notes that many US states too balance their budgets by "overestimating revenues, booking one-shot asset sales, delaying payments into the first days of the next fiscal year, shifting of paydays, delaying of tax refunds, accelerating the collection of fees and selling off buildings to lease them back."

The authors are of the view that the imposition of numerical fiscal rules encourage recourse to gimmicks.

They reason that governments could be myopic discounting time more heavily than society does and therefore tend to run down public assets (in the broadest possible sense, including the present value of future tax revenues) to finance the highest possible amount of present consumption. At the end of the ruling term, it is no surprise, therefore, that coffers are not merely empty but there is the legacy of heavy deficit.

Goodhart's curse

One-offs are not a curse; they may at times be appropriate. However, the paper reminds that these need not be the only response to fiscal stress, because such quick-fixes can defer any move to achieve structural adjustment, fiscal transparency and credibility. Again, "when inadequately documented, they do obscure the evolution of the underlying fiscal position." In short, "the temptation to temporarily embellish the accounts should diminish."

Take a re-look at the yardsticks that we employ to gauge country accounts, advise the duo. For, there is the Goodhart's curse: "the likelihood that any single indicator used as a benchmark, however smartly defined, will soon loose of its relevance." This good law is a cross between the Lucas critique and Murphy's Law, explain the authors. "Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes," said Goodhart, on measures that crumple.

This could be a curse that the auditing profession too may have to be wary of in the face of the looming threat of irrelevance, and so whip up a few new measures of control.

AccountSpeak@TheHindu.co.in

More Stories on : Accountancy | Account Speak

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Bias against the self-employed

Bittersweet saga

Wiggle room in accounting to stage fiscal gimmicks

The three legs of corporatedom

How to write annual reports

Banking consolidation must be synergy-driven

Corporate governance is essentially a state of mind

Calamity committee

Investing in warning systems