Archive for June, 2011

Tell me more about government accounts please!

June 20, 2011

These are my notes from a talk I gave at the Open Government Data conference in Vienna last week. Then at the end I ask for help in understanding government accounts.

I’m going to talk about open government financial data, then about what is needed to get better stories on public accounts into the national press.

We don’t treat government financial information the way we do business financial info.

In business we ask lots of questions of the accounts.

There are hundreds of books that will show you how to answer these questions. These books will guide you through the few well chosen figures in the accounts and show you how to apply basic arithmetic so you can answer many questions about the business.

It’s neat that you can find out so much from so few figures.

In business accounts are there 3 main financial statement that relate to each other:

  • the profit and loss statement that shows the profit from sales of a companies products minus all the costs involved in getting those products sold
  • the balance sheet this shows a statement of what a company owes and is owed and what the company owes others
  • the cash flow this shows the transactions that took place over the financial period that led to the current state of the balance sheet

But combining values in the profit and loss statement and the balance sheet you can determine such things as:

  • how long it takes for a customer to pay when they buy on credit
  • how long goods are held on average by the company before they are sold
  • how much it costs on average to hold these items

And what’s more when these questions are answered we know what values are acceptable and what is something to be interested in. For example we know that gross margins more than 50% or less than 20% are unusual.

Unlike investors in a business, as tax payers we tend not to ask such specific questions about how well government runs our accounts.

We don’t often ask:

How well is our tax investment going?

There are a few reasons for this:

  1. public accounts are scattered all over the internet on different government websites – and so we don’t have easy assess for comparisons
  2. the return on investment for tax payers is public services not a big appealing pile of cash for personal gain as it is for business investors
  3. we don’t have 100s of books and lots of discussion about a set of questions to ask of public accounts

You might be wondering why business style accounts are even used for government.

In the UK we have GAAP standard accounts for pretty much every government body and we also have high level accounts that will be published for the first time this year when the Whole of Government Accounts project publishes the first consolidated public accounts.

Right now we have statistical accounts published by the Office for National Statistics, the accounts are all held in the Blue Book.

Internationally there is a movement to align different countries accounts.

Australia and New Zealand publish consolidated accounts.

And you might ask if we should be looking at accounts at all? If we want to make finances accessible to the public – maybe lists of what money is spent on is easier.

To get an idea of what accounts offer that lists of spending don’t I’m going to show an idea at the heart of all accounts – business and public. The idea is that an organisation requiring money to run can be considered in terms of three things:

  1. the amount the organisation owns and is owed to it
  2. what the organisation owes to others
  3. if you take what is owned and owed from others and use that to pay off all the debts, then the resulting figure is the return to the investors

This relationship can be shown in this equation:

amount owed to the company and amount owned by the company
– the company debts = return to investors

This equation can be rearranged to show:

amount owed to the company and amount owned by the company
= return to investors + the company debts

this shows what is owned in terms of the debts and profits that have been required to get it.

We can show this relationship should always be equal in that the assets of a company are equal to the claims over those assets.

We can show this in this chart:
asset-claim

This is a business just getting off the ground. The company owner has paid £10,000 of their own money into the company bank account.

In return for investing the owner gets 10,000 one pound shares in the company.

This business needs more money to get started, so they get a loan so there is more in the assets block, but it has also created a liability of equal size in the claims.

Now the business buys a car to visit customers, spending £9,000 on a car means the assets change to look like this:

We can see how these figures interact. This balancing of assets and claims is the principle of double-entry bookkeeping, where the two boxes are altered to show a transaction. The final state of the boxes is displayed on the balance sheet of the accounts somewhat like this:

So accounts are used to check money spent and debt accumulated and claims over the money making the business run. This seems like useful information in addition to the lists of spending item by item, as it gives a more manageable set of key figures to start with.

However we choose to look at government accounts with the aim of communicating to a wider audience, we need to consider if the information is:

valuable and interesting

This combination of often struck with business accounts.

This is a story that started by looking at the accounts of Innocent and noticing that they hadn’t donated to their self-created charity since 2008.

I couldn’t find a good story that originated from government accounts to show you.

I write about government financial stories all the time but they never make a big impact the way the Innocent story does.

The story I’ve written that has the best response is about groundhogs.

It involved testing the theory that groundhogs can predict the weather.

I wrote it at the right time for it be picked up by people interested in it in America. It shows that timing and the right keywords are very important for an online story to do well.

To get to a stage where we as journalists, as app makers can show something interesting about government spending we need building blocks.

I think these are important building blocks:

Spending with suppliers

This is the spending above a defined spending threshold for government bodies. So for local authorities it is spending over 500 pounds, for central government and health authorities it is spending over 25,000 pounds etc. On it’s own this data pretty much only tells us who the suppliers are. You can look for patterns in the data, like regular payments or very high amounts, both of which may help to ‘narrow down’ what payments worth investigating. But ultimately we do not know what the supplier’s role is or what they are doing with the money they get. My experience of investigating the more interesting transactions is that I get very small returns for the effort I put in. For example finding out more about Essex County Council’s contract with IBM gave this unhelpful reply. The value of this data is when it is combined with other sets, the best one I can think of is contracts…

Contracts

That is the contracts government is publishing plus others obtained through FOI. Potentially this could be used to make sense of what the suppliers should be doing. It will take years to get all this though, as contracts are only being published as they are signed off, and FOI can be tricky as good old commercial confidentially is often used and is difficult to deal with.

Accounts

There is a set of accounts for every government funded body in the UK. HM Treasury have a version of these accounts in digital form so they can use them for the whole of government accounts project. The other option for getting these accounts is to download the pdf of the financial statement or annual report from each public body’s website. I’ve been looking for useful ways of interpreting public sector accounts and knowing what values to expect for certain calculations – so we have some sense of when there is something wrong in the accounts. It is also worth mentioning that the whole of government accounts project will publish this year and this will be the consolidated accounts from every public body. It is not clear how the treasury plan to publish this work but worth finding out.

Budgets

The BBC have done an excellent job of collating local authority budgets for this financial year (full data in excel here). I think this is the first time the budgets have been published in the same year they apply to. Would be nice to see this data put to good use.

Summary reports e.g. PESA, CRA
It is good to have these as top level checks for public finances.

I’m sure that within all of these data sets there are good stories worth telling and a good resource for apps.

Starting more discussion about how to understand public accounts and what values are acceptable would, I think, be a good community project.

So far I’ve read :

  • Accounts De-mystified – The Astonishingly Simple Guide to Accounting by Anthony Rice (5th Edition). This explained double entry bookkeeping nicely and what the cash flow statement means relative to the balance sheet
  • How to read a financial report – for managers, Entrepreneurs, Lenders, Lawyers and Investors by John A Tracy. This shows how to calculate really useful values of company activity by combining values on the balance sheet the profit and loss and then focussing hard on the cash flow statement.
  • HM Treasury Analysing Resource Accounts: user’s guide. This is a guide from 2001, I’ve yet to find anything as good but up to date.

I would love suggestions for books to read on public accounts, ideally books that will show which parts of the balance sheet and cash flow statement to combine to give useful metrics on government performance, and will give expected ranges for these metrics – so it is clear when something requires further reading or investigation.

I was thinking of getting this book, does that look worth it?