Resolution Re Deed Of Gift Of Park Land: Fill & Download for Free

BRISBANE CITY COUNCILANNUAL FINANCIAL STATEMENTS 1992-93AUDIT REPORT - QUALIFICATIONComments by David C. Jones, CPFA, FCCA (UK).International Financial and Management ConsultantResearch Fellow, Center for Urban Development StudiesHarvard Design SchoolIntroductionBecause of the public interest generated by the report of the Queensland Audit Office on the Brisbane City Council Financial Statements for the year 1992-93, I have been requested to provide professional comments. As some of the public commentary in Brisbane appears to be contentious, I feel that I should presage my remarks by a disclaimer of interest.As a non-Australian international consultant, I have no personal or private interest in making professional comments. As a United Kingdom professional accountant, moreover, I am held to a high standard of independence and ethics. Although I have met the Lord Mayor briefly, in connection with my professional work, I do not know him personally and I have no private interest in his political fortunes. I am known to the Finance Manager and the Chief Executive only in connection with my professional work, although we are on good terms.The decisions and assertions under consideration are being made against a background of Australian (and Queensland) law, together with national and local administrative and accounting practices. Clearly, I have no competence to address these matters. Thus, my comments will be based on what I assess to be standard practices and principles of public sector administration and financial management, commonly practiced internationally.BackgroundIn May 1993, at the request of the Lord Mayor I made a brief presentation at a luncheon, given for the benefit of the financial media, to explain the introduction of new budgeting and financial reporting practices for the City Council. The session was entitled: "Financial Reform Preview - Highlights of the 1993/1994 Brisbane Budget.On that occasion, I was complimentary to the Lord Mayor, in respect of his leadership in setting the framework and facilitating the work of his professional staff, in moving towards what I regarded then, and still do, a fuller and more appropriate form of financial reporting.Brisbane City Council, as I then pointed out, was taking a lead – almost world-wide – in dealing with matters which have been (and still are) under consideration by the accountancy profession for many years. In the opinion of many, these actions are none too soon, for the public has been ill-served by crude reporting and thus crudely-based decisions.In making my comments about The Lord Mayor, I likened his political leadership the that of Mahatma Gandhi, when he sought independence for India:“They are my people. I am their leader. I must catch up ith them.”For this, I was good-naturedly taken to task by the media, as using an over-blown analogy.Probably, I deserved this. However, I am still of the opinion that my principal point is valid. Whether we live in a national, regional or local communities, we owe it to each other to be fully accountable for: stewardship of public funds; performance of public service; and, security of public assets. Indeed, to quote again – this time from the Christian Bible:“Forgetting all dishonesty, let us speak the truth to our neighbour, for we are allmembers of one another.”To the extent that we fail in this, community independence is compromised. Evidence of this, in many parts of the world, is overwhelming.The International ContextWorldwide, public sector financial reporting is increasingly being criticized as not conforming to private sector practices - often held to be of a higher standard. Often, private sector practices are of a higher standard, despite inherent differences not always fully appreciated by those without public sector experience. It is towards these higher standards which Brisbane - and Australia - has been moving. Yet, for doing so, the public sector now finds itself criticized.In terms of performance, also, there is a constantly growing demand for the public sector to be more aware of market forces. Unfortunately, it is the lot of the public sector to deal with the most extreme cases of market failure. Indeed, it could be argued that this is a large part of its justification - the delivery of "public goods" and "merit goods," as well as dealing with "natural monopolies” and other situations where the private market is – sometimes inherently - inefficent in service delivery.Unfortunately for the public sector, market forces usually operate more efficiently when there is competition. They operate less well in situations of monopoly. Furthermore, market forces operate least well of all in situations of coercion. This is an almost sole prerogative of governments.A limiting case is the eminent domain power to take property for public use, although usually, though not always, there must be just compensation. Yet, despite this power of intrusion into private lives, accountability for it has been - and commonly still is - little short of abysmal.One of the most serious shortcomings in public accountability has been the disregard, in public sector accounts, of the concept of the financial, economic, social and environmental rent. This is the actual or assessed charge for the use of fixed assets - the community plant.It is this plant which forms the most significant part of a community's equity, or its capability to deliver public services. It is, using my own terminology[1], the "results" of past operations, available as "resources" for future operations. In the language of Brisbane's reporting, it is described as "Increase in Operating Capability" virtually the same thing.Brisbane's Financial Statements - The Audit QualificationIt is with some concern that I noted the decision of the Auditor to issue a qualification to the Council's Financial Statements. This was with respect to the valuation placed on "land under roads" and on the related income item for the donation of such land during the fiscal year.In my opinion, so long as the City Council is the "highway authority[2]" the roads vested in it are clearly part of its operating capability. The land on which these are built is, by definition it would seem, part of the value of this capability.It must be noted, however, that the audit qualification is very clearly bounded. It refers only to valuations placed upon the land – not to the implicit ownership responsibility. Were this to be the only issue now in the public discourse, it might well be resolved by continuing the open conversations in which many earnest professionals have been engaged. These have been part of a concern to see proper resolution of contentious issues, in a brand-new domain of professional development.The Open Letter - General ObservationsUnfortunately, the relatively constrained nature of the Auditor's comments have triggered what seems to me an intemperate and unreasonable commentary, now in the public discourse, in the form of an " ‘Open letter’ to the Constituents of Brisbane and all Professional Accountants," issued by Ms. Pauline Pender. Since I number myself among the latter, I feel that I have a right and responsibility to respond to it.Before attempting a response, however, I recall that one of my compliments about the Lord Mayor was that his encouragement of the professionals in this endeavor involved some political risk. So it has proved. In my judgement, quite unfairly.Having read the "Open letter" carefully, I would divide it into three main themes.First, there is an unbecoming use of intemperate language. This conveys to the reader a degree of anger on the part of the writer, without justifying it. I shall leave this for the reflection of individual readers. However, it does represent the kind of ungrounded rhetoric which so often becomes part of the public discourse, with the potential to inflame opinion, to no specific purpose.Second, and more serious, is the strong implication that the presentation is a deliberate attempt by the City to misrepresent its financial position, either to improve its debt ratio or to offer an inappropriate enhancement of its equity value. Since this also relates to my claim of a third theme, I shall return to this later, and in detail.Preparation and Presentation of Financial StatementsWith respect to the broad assertion of misrepresentation, I offer the following observation. My considerable experience in the public sector, with particular emphasis on local government, offers little evidence of either opportunity or ability, on the part of policy-makers, to deliberately distort financial reports for their own selfish or political ends. This is because, almost universally, preparation of such reports is the responsibility of professional officials – not elected representatives.Within the Anglo-Saxon tradition, from which I emanate – and from which Australia (as well as the United States of America) takes many of its original precepts – a very strong concept is that of "the independence of the treasurer of public funds." This holds that the chief financial officer of a public body – by whatever name called – has an independent fiduciary responsibility to the taxpayers as a body and may not plead the instructions of his political masters for the carrying out of illegal or unethical conduct[3].It must, of course, be admitted that the permanent officials may prepare statements with a great range of professional skill, from the most competent to the least competent. Also, standards and practices vary widely. Most importantly, paid officials at all levels of government can and sometimes do engage in fraud or commit errors. These, of course, create false statements of figures, as well as damaging the public trust. Surely that is not what is intended as the implication in the "Open letter". It is certainly to be hoped not; otherwise action for defamation could arise.There are also, as is well-known, countless ways in which published numbers, once presented, can be used and abused for political purposes. But that is not what is here implied. Instead, there is a much clearer implication that the figures themselves have been mis-stated. This seems hardly worthy of a fellow professional. Indeed, taken with the intemperate language, it presents the image of a professional team within the Brisbane City Council which has been behaving in an arbitrary manner.From my, albeit limited, observation, it seems clear that the converse is true. In the preparation for these new and innovative practices, the Brisbane City Council accounting professionals appear to have gone out of their way to engage in a variety of conversations on contentious and difficult issues. Indeed, I understand that Ms. Pender was, herself, a participant in this.The Open Letter - Detailed ObservationsThe third and final theme of the "Open letter" should be dealt with in some detail. This is because it is a collection of erroneous assertions regarding the accounting treatment and valuation of the assets at issue. Because this is also the main concern of the Auditor's qualification, my comments can embrace this also.Land Ownership and TitleFirst, there is reference to the treatment of land claimed as "forfeited" by the developers as revenue. The argument is made that because the land has reverted to the Crown[4], "nobody" owns it. It would be more consistent with the common view of public administration to claim that "everybody" owns it – in the sense that it is administered in trust for the community as a whole. To use the concept of the Australian nation itself, it is part of the "common wealth[5]."The commonly-used terminology is that public property is "vested" in the authority with the statutory right to deliver the service. Thus, if the Brisbane City Council is designated as the "highway authority[6]" for the roads in question, it is appropriate to show all the property administered for this purpose as its assets.There is further justification. Even if there is not a titled legal ownership, the "highway authority" can be deemed to be the holder of a long term financial lease. It has, in other words, been required to accept financial responsibility for the use (and, therefore, the "rent") of the property, without which it could not deliver the service. The inclusion of a financial lease in a balance sheet, under these conditions, and to depreciate it annually[7], is wholly consistent with standard commercial accounting practice.Payment for Land by the Public AuthorityAnother contention put forward, with respect to imputed ownership, is that Brisbane City Council did not pay for the land. This is, of course, too narrow an assertion. Many assets change their legal ownership otherwise than by the actual payment of cash. To extend the example used by Ms. Pender in her text, if your friend deeds a house to you as a gift or legacy, or you recover it as part of a lawsuit, you become its legal owner. This is a very close analogy, on the one hand, to a donation and on the other, to a compulsory purchase[8].Furthermore, there is still the question of whether, at least implicitly, the public sector had, indeed, paid for the land. When property owners develop land for commercial purposes, this almost always leads, sooner or later, to a need for public sector expenditure on infrastructure, including roads. Depending on the location of a particular piece of property, this expenditure may enhance or (less commonly) detract[9]from its value.Overall, it must be asserted that the property values will, almost certainly, increase, as a result of the public expenditure. Furthermore, it must be assumed that a developer is aware, in advance, of this probability. He will also be aware that, consistent with standard practices, the portion of the land required for infrastructure - most usually, roads and drainage[10]- must be legally vested in the appropriate authority, to be subsequently operated and maintained by it - in perpetuity.For a road, this clearly represents a valuable right - access to his commercial property - for the developer. Indeed, it might even be claimed that it increases, implicitly, the capital value of the business. Yet, it has been paid for by the highway authority in exchange for the land donation. Is there always an exact trade-off? Clearly not. But neither is there in many commercial transactions, where the objective is to seek a competitive advantage at the expense of another party. Indeed, if transactions were not perceived of as seeking mutual advantage, there could be no commerce! What can usually be claimed is that the developer is not forced to make the transactions. He is aware of the involvement of the public sector interest, in advance. He will, thus, make investment decisions freely under these conditions.In the unusual case of a compulsory purchase – which governmental authorities will usually "bend over backwards" to avoid, just compensation[11] will, typically, be paid. Thus, the implication is that anything better than this, achieved by negotiation, would also be a fair deal (i.e. “just”) for the developer. This very standard practice contrasts with the implication in the "Open letter", that the Brisbane City Council must be assumed to be acting in an almost "predatory" manner.Conditionalities Restricting Assessment of Beneficial OwnershipBy an extension of my argument, the variety of conditionalities put forward in the third paragraph of the "Open letter" are not essential, in my opinion, to a designation of beneficial ownership of land, for the purpose of including it in the accounts. Indeed, in my experience, a standard practice for a public authority is that it does not – and would not normally be allowed to – mortgage public property, for fear of it losing control to a private lender in the event of default. This is usually considered contrary to public policy.There are several claims made as to legal limitations on the use of the land. These are, of course valid. However, should it become necessary to use the land in an alternative way, it is open to the public authority to invoke these legal procedures. It might also be noted that even the owners of private land do not normally have the right to use it in an unfettered manner. Under “town planning” or “property zoning” law, is standard practice, even in the most capitalistic of societies, for land use to be confined to that which is not in conflict with declared public purposes. Thus, a common practice is for loans to be raised by public institutions either by mortgage against future (general or specific) revenues, or else by the pledge of sovereign (or sub-sovereign) taxing power.A Northern Virginia ExampleThe comparison, between privately-owned and publicly-owned land offers another, defining, example. Close to my home, in Northern Virginia, there is an area known as Springfield. Its developmental centerpiece is an area which includes a main highway intersection, between two motorways. One is the Greater Washington Beltway (US – 495). The other is the main U.S. north-south route from the Canadian border to Florida (US – 95). Close by is a major covered shopping center, known as Springfield Mall. Connecting the arterial roads and the shopping center, as well as providing other local access, is a network of state roads[12].The shopping center, typical of many in the USA and Australia, comprises a central covered area, surrounded by a large parking lot and access roads. Thus, about two-thirds of the land area comprises "land under roads and parking lots." These roads and parking lots are not in the public domain. Clearly, however, the land has substantial commercial value for the owner of the shopping center(s), as it provides necessary access to and by customers.For as long as I can remember, both the road system and the shopping center have been subject to continuous reconstruction, to allow for changes in the commercial and traffic patterns. This has involved the purchase, disposal and exchange of land, as well as alterations to its use. For example, a recent change to the shopping center has involved: the acquisition of additional land on its periphery; encroachment of buildings on the existing roads and parking lots; and, construction of a multi-storey car park, to compensate for the loss of parking space at ground level. More recently, an entire wider area has been substantially redeveloped, to allow for the construction and use of light rail (subway), commuter-rail and bus facilities. Quite clearly, the planning decisions were taken with considerable regard to the relative values of the land areas.Similarly, the national and state road systems have been reconstructed, involving the acquisition of additional land, thus depriving others of its use, for alternative purposes, including shopping center expansion. Indeed, currently, the entire intersection is being reconstructed, yet again, over an estimated twelve-year time period. This is to deal with ever-worsening road traffic congestion. Thus, this valuable land is now incorporated under, or adjacent to the road improvements or the right of way. By implication, therefore, the community - acting collectively - has decided that this use of land is more valuable, for the time being, than any other alternative.Comparison of Private and Public LandIt seems clear that, under circumstances of dynamic development, shifts of land use from a private to a public purpose do not nullify its value. Instead, the value, for public purposes, is implicitly increased. Otherwise it would be used for the alternative (non-public) purpose. This decision, incidentally, comes about by the free-market purchase and sale of land. Even where it is compulsorily “taken,” in the U.S.A., the Supreme Court has ruled that “just compensation” implies “market value.”The Use of "Deprival value"The "Open letter" brings up the matter of whether it is appropriate to value the public use of "land under roads" at what is described as a "deprival" value. The claim in the "Open letter" is that this terminology is not commonly used within the accounting profession. This does not, however, invalidate it, for it is introduced to clarify a concept not hitherto addressed. After all, new terminology is being introduced all the time, especially within the domain of management information, of which accounting is a part.The question to be addressed is, therefore, whether the term is useful for effective action. In my opinion, it is. Furthermore, it is an expression which is very well grounded in economic principles, which accounting is attempting (albeit imperfectly) to reflect. "Deprival" in its dictionary definition, means "to withhold or take away something desirable or necessary." Thus, the term has a very close analogy to the economic concepts of "demand" in the sense of a scarcity of wants and needs. If there is no scarcity, there can be, almost by definition, no significant "deprival." "Deprival, therefore, withholds a "supply" which would otherwise fulfill a demand for scarce resources. This is totally consistent with the economic concepts of "opportunity cost" and "alternative use" in the establishment of value.This concept is especially important when, as in today's discourse, there is growing concern about the environment. Many are now questioning whether the motor-car has become an economic tyrant, twisting the tail of urban economies without becoming fully accountable for the cost. Whether or not this is so, the accountability issue cannot begin to be addressed unless the cost is actually determined. This cost, in turn, will not be comprehensive unless it includes the “rent.” This, finally, cannot be determined without reference to the capital value of the asset, including all of its costs, adjusted for alternative use and inflation.Thus, deprival value, for land under roads, must recognize its potential alternative use for: agriculture; commerce; industry; other public purposes; health-care facilities; recreation; and, environmental protection.There is also another issue, almost Keynesian in its implications, relating to the concept of liquidity preference. Were the cash invested in the land not used for that purpose, it could have been invested (by the government or the taxpayers) to earn a rate of return that would – in a relatively “clean and open” market – equate to (or exceed) the real value of its opportunity cost, plus (anticipated) inflation. Thus, its compounded nominal value would equate to the value of the land under the road at any point in time.Since a large part of the management of public finance consists of making choices to spend money on scarce alternatives, this approach to accounting appears entirely appropriate.It is interesting to note that, in theSpringfieldcontext, the competition for land use covers almost all the normal urban development possibilities. Under separate ownership and control, for almost every separate purpose, are the following: mall shopping; neighborhood shopping; housing; schools; offices; hotels; a light-rail (metro) system; communter-rail; long-distance (inter-city) rail; commuter bus; inter-city bus; inter-neighborhood taxi-van; taxis; van-pooling; car-rental; vehicle dealers; and, freight rail. In addition, there are (interstate) trunk highways; intermediate roads, and, local roads, each carrying freight and passenger vehicles, both local and long-distance. There is privately owned and publicly-owned parking space – free, subsidised and market-rate. Finally, publicly-owned school buses run peak services to convey the school-children back and forth.If land cannot be said to have alternative uses – and therefore values – in these complex circumstances, how can choices possibly be made? Moreover, these circumstances demonstrate, beyond all reasonable doubt, that land cannot have values which are different merely because it is owned or controlled by the public sector, rather than the private sector.The Debt/Equity RatioThe "Open letter" has asserted that one purpose of claimedly overstating the asset value of the "land under roads" was to improve the debt/equity ratio. There are two points to consider here.The first point is that the ratio itself should not assume an overblown importance. It is only an accounting ratio, capable of useful assessment within the domain in which it is used. To claim, for example, that an alternative commercial entity, with a different activity, raising its capital by different methods and subject to different disciplines, would not view the ratio with favour is not really very useful.The second point addresses the ratio calculation itself. The claim that it is "spectacularly good" must, as already implied, be assessed against the concern: "relative to what?" However, what is also true is that the debt/equity ratio does improve dramatically under circumstance where fixed asset and debt values are both influenced by inflation. This, however, has nothing to do with the action of the Brisbane City Council, nor of any other individual entity. Instead, it is a result of the fact that "assets" and "debt" are treated in different ways by the commercial market-place.A fixed asset is, initially, brought into the books at its original cost. When and if its value changes, either because of alternative use or inflation, it will stay in the books at this cost, unless it is deliberately and periodically revalued. This, currently, would be done only under a regime of current cost (or current value) accounting. Such a regime is now being introduced and practiced by Brisbane City Council[13]. Therefore, it is appropriate for fixed asset values to be either indexed or individually revalued, as now done in the Brisbane City Council accounts. The use of a "deprival value", as already indicated, appears to be a reasonable way of achieving this.Long-term liabilities are typically treated by the financial market-place in quite a different manner. Here, the principal sum is retained in the books and never, normally, revalued, unless indexing is used, in situations of severe inflation. It is adjusted, of course, when paid off, whether in a lump sum or periodically. However, the interest rate includes not only the expected real return for the use of money and operational risk. It also includes an element for anticipated inflation. Thus, the interest really includes a component for "adjustment of principal."Whenever inflation occurs, debt repayment and interest payments represent continuously decreasing values, in real terms[14]. Thus, in these real terms, the public debt is being discharged at faster rates than asset values are being depreciated (used or destroyed). Land, of course, is not depreciated at all, so the effect is even more startling than for other fixed assets.The Single Reporting NumberFinally, the "Open letter" makes far too much of the concept of a single reporting number. One advantage of a more comprehensive set of financial reports is that the information can be conveyed to the reader in a variety of ways. The use to be made of this will depend on the purposes of the various observers.Modern financial statements almost always draw clear distinctions between "cash-flow" and "net income" concepts. This does not make one "right" and the other "wrong." Instead, it provides alternative presentations for a wider range of useful and effective actions. Instead of making a claim to re-state the financial position of Brisbane City Council in a revised form, it would be much more useful, in my opinion, merely to appeal to the intelligence of the normal observer.Thus, it could be said, by way of explanation or footnote, something like:"If the land under roads, valued at its assessed "deprival value" were to be excluded from these accounts, the net assets would be shown at only $3 billion, instead of $10.5 billion. Concurrently, this would require the omission of new land acquisitions for this purpose, amounting to $24 million, which would reduce the declared "increase in operating capacity." However, since the reduction relates to the non-monetary part of this operating capacity, it does not reduce the value of liquid assets currently available for this purpose. It merely omits certain of the fixed asset values from valuation and recognition."The Urban Transport ContextAs a final set observations, I would like to address, somewhat more broadly, the importance of valuing the resources which are appropriated to any particular purpose by public sector institutions. Because this issue deal with roads, a principal reference-point is a paper entitled: "Environmentally Sustainable Urban Transport – Defining a Global Policy." by Ismail Serageldin – (then) Vice President, Environmentally Sustainable Development, The World Bank. Ironically, it was delivered in Sydney, Australia, at the UITP 50th International Congress, on May 3, 1993. It opens with a statement of concern for sustainable development. This, it defines by a quote from the Brundtland Commission:"Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs."It is interesting how close this idea comes to the Brisbane concept of its equity as an "Operating capability." In effect, this is "the ability of a generation to meet its own needs."With particular reference to transport issues, the paper goes on to say:"Environmental issues in the urban transport sector stem mainly from the proliferation and use of private motor vehicles and the failure of Governments to address the real costs that these vehicles place on our society.""The private automobile, which makes up the largest proportion of the world vehicle fleet, is a major consumer of resources. It consumes 60 percent of all natural rubber, 20 percent of steel production, 10 percent of aluminium products, and requires between 5 and 10 meters of road for every vehicle in the major cities."Clearly, there is a need for costs to be addressed by public sector accounting systems, in ways which have – hitherto – been largely ignored or significantly distorted. This is one of the things which Brisbane's new accounting system is attempting to remedy. In particular, Mr. Serageldin emphasizes how much road-space is needed for each vehicle in major cities. This is a direct function of land-use and – by extension – land availability and cost.Mr. Serageldin goes on to say:"Infrastructure Needs: The studies of Newman and Kenworthy[15], mentioned previously, examined 31 cities around the world and divided them into five categories. At one end of the spectrum were the heavily auto dependent cities (Los Angeles, Houston, Detroit, Perth and Brisbane) and at the other were the transit orientated cities (Munich, Singapore, Paris, Hong Kong and Tokyo). In the "auto" cities, the provision of road space was eight times greater than in the "transit" cities and the provision of parking was three times greater...."Reference to the case ofBrisbane, as one of the "auto" cities, should not go unnoticed. Clearly, a substantial proportion of the city's land is being appropriated for the use of the motor vehicle. This is depriving the land of other, alternative, uses. If this is the wish of the city's residents, well and good. However, they can only make sound judgements, through the ballot-box and by other public and collective processes, if they are as well-informed as possible. One important component of this information ought to be how much, in current dollars, has already been invested in road construction, including the use of land for this. Clearly, one major source of this information is that of financial reporting.The Lord Mayor, again at some political risk, has given his authorization to the city officials to make the publication of this information as transparent as possible. Stockholders of public companies must receive comprehensive financial information on which to base their financial investments. In making the choice of where to place their funds, they are making assessments about whom to trust - and to what extent.In the same way, stockholders in the public sector – the electorate – must make similar judgements about whom to trust, for the next several years, with the stewardship of their funds and the delivery of the services which those funds help to provide. The provision of this information is the mandate of the City's Finance Manager. It is my belief that he is taking this responsibility seriously and discharging it with integrity.Municipal Accountability for Costs (Results) and ResourcesMost large or medium-sized private businesses are legally required to keep their financial accounts in compliance with national or international accounting standards. Thus, although neither financial nor economic costs of activities can be directly derived from these, they usually provide sound bases for the development of cost accounting computations and of the cost accounting systems necessary to generate these.As discussed in many places elsewhere, financial accounting systems used in the public sector, and particularly in local government units, may be of two main forms. Firstly, for activities that are revenue-seeking and possibly intended to earn profits, the financial accounting systems are often quite similar to those used in private sector enterprises. This is especially so if the public sector revenue-seeking activities are performed by an entity with some degree of legal separation from core local government activities, funded mainly from taxes and other general revenues.Secondly, financial accounting systems for activities to be funded from general revenues have often been much simpler in form from those used in the private commercial sector. However, although the form may be relatively simple, the substance of the accounts may be very complex, covering a huge variety of activities, possibly ranging from “archive management” to “zoos”! Some of these services, moreover, are very large. Many are very capital-intensive. For example, outside of national defense services, education is one of the world’s largest public sector or private sector activities, with “teachers’ salaries” probably by far the largest single cost element.Unfortunately, however, even more than within the private sector, public financial accounting systems typically fall short of what is necessary to achieve cost measurement, either for pricing or for other policy decisions. Moreover, the huge quantities of capital resources, held as “fixed assest” are often treated, for accounting purposes, with disdain. Yet, in the public sector, the concepts of “costs” and “resources” are almost constantly used in the policy discourse. They are also frequently misunderstood and misused concepts. Decisions that should be based on costs or resources are based on almost anything but these.In all sectors of business and public activity, therefore, cost accounting systems are needed, in addition to financial accounting systems. Ideally, cost accounting systems should be capable of providing accurate information about the consumption of economic resources for specified activities. These should either be the economic resources actually consumed or at least those attributed, allocated or ascertained, in some mathematically acceptable way. Cost accounts, almost always, produce financial and other information about more activities, in much more detail and sometimes in different ways, than financial accounts. Thus, although soundly-based financial accounts are necessary, they are usually not sufficient for the purposes of costing.Comprehensive cost accounting systems can be perceived of as being firmly “bolted on” to the related financial accounting systems. They should derive much of their necessary information from the financial accounting and be capable of being wholly reconcilable with them. Accounting systems, complete or incomplete, are expected (system-wise) to balance debits against credits and (more conceptually)to match resources against results. This is as true of cost accounting systems as of financial accounting systems.There are at least two approaches to the need to set up cost accounting systems. The first is to derive from the financial accounting system whatever information is available in it, in whatever form it exists. Then, an attempt is made to arrange the information in forms that will be useful in calculating costs. This may well require the addition of supplementary information that is not currently available in the financial accounting system, at least in usable form. Indeed, where financial accounting systems are crude or incomplete, the balancing of cost accounting systems against these may prove to be difficult, sometimes impossible, and often futile to attempt. In other words, the costs of deriving costs may exceed the benefits of having them available.With many accounting systems currently in use in local governments, in many different countries, this is typically the case. Therefore, costs derived from these accounts will only be partial. They may, indeed, be relatively useless as a basis for many policy decisions. However, “the perfect is the enemy of the good,” it is sometimes said[16]. Therefore, as a second alternative, one does what one reasonably can with the information and systems available, producing figures that, while not closely approximating costs, are at least more useful than mere cash payments or expenditures. They are, however, likely to be more useful if taken from the accounting system than if derived, more or less informally, from a variety of other documents, of varying and dubious credibility.In recent years, the “magic of the market-place” has been held out to all as an unbridled paragon of virtue in financial and economic management. Thus, deregulation, privatization, contracting out, public-private partnerships and (as in UK) the “Private Finance Initiative,” have all been used as adjuncts to more traditional methods. These largely relied on the financing of fixed assets by long-term public debt and operating them by public employees.The newer approaches have often been a mixed blessing. Without doubt, they have provided useful alternatives in financing and operating public services. They have also opened the public sector more widely to many innovations and efficiencies, hitherto seeming to be largely exclusive to the private sector. One particular domain where this has been so, is to increase the pressure for more accurate accounting, within the public sector, to facilitate more rational comparisons of cost and resource use with those offered by the private sector. However, the world is now littered with disasters relating to privatization and deregulation. The “California Energy Crisis,” the “British Rail” debacle and the financial failure of the “Channel Tunnel” are just a few of the most obvious that come to mind. Moreover, many major frauds and financial failures have been in sectors highlighted as good candidates for privatization: electricity[17], telecommunications, water and solid waste management. So far as accounting is concerned, after Enron, Worldcom and Waste Management Inc. to mention just a few, is it necessary to say any more?Greater accountability has also been demanded by the voting and taxpaying public. As the private sector’s superiority has been emphasized, less financial resources have been available to the public sector. Clearly, in improving public sector accounting, we are at early stages in most countries. Relatively few are currently setting the pace, such as New Zealand, Australia and the United Kingdom. There is still much to be done and this work is continuing. The International Federation of Accountants is also involved. Unfortunately, the private sector has hardly covered itself with glory, either in the private delivery of public services or in credible and effective accounting.It used to be thought that the private sector was clever and innovative, in contrast to a dull and cumbersome public sector. Indeed, the relatively perceived “rough and ready” attitude of the public sector engendered the expression: "Close enough for government work!" Unfortunately, this is, now, not nearly close enough! The Economist, some time ago, stated as follows:"The government has gone wrong, however, on the first point -- the mix of its spending between investment and consumption. To see this, the idea of a public-sector balance-sheet is helpful. It would be a short-sighted company that minimized its liabilities and ignored its assets. So, too, for governments. Like companies, they should aim, at least, to maintain their net worth -- the value of assets less liabilities. This highlights the distinction between borrowing to finance spending on (say) salaries (which reduces net worth), and borrowing for investment (which generates future income, so should leave net worth unchanged)…The balance-sheet approach also exposes tricks such as selling public assets, which most governments wrongly treat as cutting their deficits".The issue of greater accountability – within both public and private sectors – was also addressed by a well-known economist, Kenneth Boulding, as follows:"Although I...with all modern economists, owe an enormous debt to Keynes' brilliance of insight and imaginative sweep, his system shows a number of weaknesses that have not been corrected by his followers. One of these weaknesses is a general failure to distinguish between two very different processes in economic life, the exchange or payments process, on the one hand, by which existing assets, including money, are circulated among various owners, and the processes of production, consumption, income and outgo on the other, by which assets are created, destroyed and accumulated”[18].Elsewhere, Professor Boulding writes:"The usual marginal analysis treats the firm as if it had nothing but an income account; it has no balance sheet, no capital problems and no dynamics;...Consequently, the economist has been able to give only fragmentary accounts of inventory changes, investment structures, liquidity positions and like problems[19]."Over a century ago, a judicial ruling in the United Kingdom stated the following:‘A full and fair balance sheet must be such a balance sheet as to convey a truthful statement as to the company’s position. It must not conceal any known cause of weakness in the financial position, or suggest anything which cannot be supported as fairly correct....[20]’Finally, in my own writing[21], I emphasize the points made by the Economist and Professor Boulding, by the following:“An accountant records and interprets variations in financial position. He or she records, in money values, the results of variations during any period of time, at the end of which he or she can balance net results (of past operations) against net resources (available for future operations)”.The results of past operations – the use, consumption, transformation, degradation and destruction of economic resources – are costs. The resources available for future operations are the assets and liabilities that remain, after the costs incurred during the preceding accounting period have been fully accounted for. Integrating these, for useful and effective purposes, is “A full and fair balance sheet [that] must be such a balance sheet as to convey a truthful st[1] Municipal Accounting for Developing Countries, by David C. Jones, a joint publication of The Chartered Institute of Public Finance and Accountancy and The World Bank – 1984 (Now being republished) [© David C. Jones and The World Bank][2] Since the ownership of assets has not been questioned by the auditor, only their valuation, I choose not to treat this as a contentious issue. In any case, as it is a legal matter, I am not competent to comment on this.[3] The leading case on this is from the U.K: “Attorney General v. De Winton,” otherwise known as the “Tenby Case.”[4] For British Commonwealth countries, in Her Majesty’s Dominions, “Crown” is a legal term for “Government.”[5] Interestingly, the term “Commonwealth” is still used, also, for four states of the U.S.A., including Virginia.[6] As indicated in the text, no claim is made as to the legal status of the Brisbane City Council in this regard.[7] The "land" element, of course, would normally not be depreciated.[8] In the U.S.A., this is referred to, from the Constitution, as the “taking of private property for public use.”[9] This could happen, for example, if a road split a commercial property, with consequent restriction of easy access.[10] Many other infrastructure assets, such as undergroung pipes, will not require the perpetual appropriation of land, merely an easement.[11] In the U.S.A., this is specifically required, under the Federal Constitution.[12] Interestingly, the local government for the area – Fairfax County – is not – in general – the highway authority, despite being (arguably) one of the most affluent – and better run – local government units in the USA (AAA Bonds!). The highway authority (notably for this particular improvement) is the Commonwealth (State) of Virginia. This does not affect the basic premise.[13] “Accrual at current value” accounting is now legally required, for example, in U.K. local Government.[14] For example, assume Brisbane City Council to borrow $1,000 for 20 years at (say) 15.5%. Further assume that this nominal interest rate includes (by compounding) a 5% real rate and 10% for inflation. Using the “annuity” or “level-payment” method, the nominal annual payment, usually dictated by the lender, would be $164. At the end of year 1, the price index would be 110, so the level payment would be equal to only $149 in real terms. Moreover, at the end of year 20, with a price index of about 673, the real value of the annual payment would be only about $24, only about one-seventh of the real value in the first year.[15] Transport and Urban Form in Thirty-two of the World's Principal Cities, Peter W.G. Newman and Jeffrey J. Kenworthy, Transport Reviews, 1991, Vol 11, No. 3, pp. 249-272.[16] In cost accounting, this may be a necessary postulate only because of the inadequate quality of input data. However, for cost outputs, the emphasis should be the converse. Thus, the “merely good” is the enemy of “as near perfect as one can get.”[17] A former senior trader at the Enron Corporation pleaded guilty yesterday to engaging in a conspiracy that illegally manipulated theCaliforniapower market during the state's energy crisis, driving up prices and generating millions of dollars in excess profits for his employer. [New York Times,18 October, 2002][18] A (1950) text "A Reconstruction of Economics," by Kenneth Boulding (1910-1993)][19] Boulding (Op. Cit.)[20] Re London and General Bank (No2) [1895] 2 Ch 673, 692[21] Municipal Accounting for Developing Countries, by David C. Jones [© The Chartered Institute of Public Finance and Accountancy and the World Bank (1984)]