accounting and accountability

ACCOUNTING AND ACCOUNTABILITY

[What’s it all About?]by

DAVID C. JONESChartered Public Finance

AccountantChartered Certified Accountant (UK)

1

ANNUAL FINANCIAL STATEMENTS

Balance SheetStatement of Financial Position‘

-------------Income and Expenditure (Profit and Loss) Account – Income Statement

Statement of Comprehensive Income-------------

Statement of Cash Flows

2

CROWN WATER COMPANYFinancial Statements for 20_1 and 20_2

(Continued)

$ 708,000======

100,00050,00075,00035,00085,000

159,000----------204,000

76,000----------128,000======

6.4%71%

IncomeNet Water Revenues

ExpensesPersonnelChemicalsPowerMaterials AdministrationDepreciation

Net Operating IncomeInterest

Net Income

Rate of Return on Fixed AssetsOperating Ratio

$ 675,000======

100,00048,00071,00035,00085,000

150,000----------185,00072,000

----------113,000======

6.0%72%

20_1 20_2INCOME STATEMENT

3


(Continued)

$ 204,000159,000----------363,000

15,000----------348,000----------

50,00076,000

----------126,000----------222,000330,000----------108,000

Internal Sources of FundsNet Operating Income (Before Interest)Add Depreciation

Less Increases in Needs for Working Capital

Total Internal Sources of FundsDebt Service: Amortization Interest

Total Debt Service

Net Internally Generated Funds (After Debt Service)Capital Investment

Funds Required from External Sources

$ 185,000150,000---------- 335,000

- ----------335,000----------

45,00072,000

----------117,000----------218,000300,000----------

82,000

20_1 20_2CASH FLOW STATEMENT

4


(Continued)

$ 108,000100,000----------

-8,000=====

348,000126,000

2.76----------222,000330,00067.3%

----------

Funds Required from External SourcesNew Loans

Net Increase (Decrease) in Cash

Ratio Analysis:Total Internal Sources of FundsDebt ServiceDebt Service Coverage Ratio (Times Covered) Net Internally Generated Funds (After Debt Service)Capital InvestmentPercentage Contribution to Capital Investment

$ 82,000

100,000----------

18,000=====

335,000117,000

2.87----------218,000300,00072.8%

----------

20_1 20_2CASH FLOW STATEMENT (CONT.)

5

CROWN WATER COMPANYRevised Financial Forecasts for 20_1 and 20_2

(Continued)

$ 5,630,0002,309,000

----------3,321,000

----------

110,00065,00050,000

----------225,000----------

3,546,000-=======

Fixed AssetsFixed Assets (Revalued)Less Accumulated Depreciation

Net Current Value of Fixed Assets

Current AssetsInventoriesReceivablesCash

Value of Current Assets

Total Assets

$ 5,000,0002,000,000------------3,000,000------------

100,00060,00040,000

----------200,000

------------3,200,000=======

20_0 20_2BALANCE SHEET as at 31 December$

5,300,0002,150,000------------3,150,000------------

100,00060,00058,000

----------218,000

------------3,368,000=======

20_1

6


(Continued)

$ 700,000241,000----------941,000

1,500,000------------2,441,000------------1,005,000------------

100,000----------

3,546,000=======

29:712.3

EquityContributed CapitalAdd Accumulated Retained Earnings

Total Contributed Capital & Retained EarningsRevaluation Reserve

Total Equity

Long Term Debt

Current LiabilitiesPayables

Total Liabilities and EquityRatio Analysis:Long Term Debt : Equity RatioCurrent Ratio

$ 700,000

- ------------

700,0001,500,000------------2,200,000------------

900,000----------

100,000----------

3,200,000=======

29:712.0

20_0 20_2BALANCE SHEET as at 31 December (Continued)$

700,000113,000

------------813,000

1,500,000------------2,313,000------------

955,000----------

100,000----------

3,368,000=======

29:712.2

20_1

7


Fundamental Principles of Cost Accounting (FPCA)

ORCost Principles of Financial

Accounting (CPFA)By

David C. Jones, CPFAChartered Public Finance Accountant (UK)

8

ONE HUNDRED AND ONE WAYS OF LOOKING AT ACCOUNTING!

• The attached PowerPoint slide-show explains, in detail, using teaching documents, how to examine many ways of looking at accounting theories and practices, which lie behind statements and accounts.

• They include many ideas and concepts that emanate from my own thoughts, adaptations or inventions, to facilitate that those studying and demonstrating accounting will “get the point” beyond a mere learning of a series of book-keeping entries and accounting practices.

9


• When I studied accounting, about fifty years ago, I found that the principles used, to explain the accounting practices, to be very confusing and inhibiting. So, subsequently, I have tried to invest in my own ways of perceiving the principles. Thus, the resulting slide-show could easily be entitled as

• “One hundred and one ways of looking at accounting!”

• All of these were researched by me or prepared from my personal and professional knowledge. The slide-show was prepared, personally, by me, in my own home office.

10


11

• What is certain is that a computer output will always lack the illumination of traditional accounting. It will seem hollow, by comparison.

• A mathematical computation should not only answer the question. It should always give some understanding of why the answer is what it is.

• Merely sending an input into a black box and receiving an answer out of the other end adds to knowledge but NOT to understanding!

Simon Singh: Fermat’s Last Theorem

WORLD-WIDE FINANCIAL CRISIS

• World leaders have been meeting frequently, to try to develop new strategies for resolving various ongoing fiscal crises. • Many of their potential solutions seem to involve the creation of new “bail-out” funds to support casualties of the crisis – countries teetering on the brink of default and financial institutions facing large sovereign write offs.

12

WORLD-WIDE FINANCIAL CRISIS• But how robust can those solutions be? • Crucially we should ask the question:

“What impact will the creation of new – or much larger – bail-out funds have on the financial health of sponsoring (central, state or local, governments?”

13

WORLD-WIDE FINANCIAL CRISIS• The shocking answer to this question is that, in all but a handful of cases, we do not know! Why?

• Because most governments still account on a cash basis. They do not maintain balance sheets. They do not systematically record and value assets and liabilities including multi-billion dollar obligations to “bail-out” funds. • A solution built on such fragile foundations is bound to collapse. It is built on sand. The question is not “whether” but “when” it will fail.

14

WORLD-WIDE FINANCIAL CRISIS

• Governments account largely on a cash basis because governments choose to do so. They take decisions without proper regard to financial consequences because they choose to. They run up large debts and deficits because they choose to do so.

• They make lots of other poor choices.

15

WORLD-WIDE FINANCIAL CRISIS• But governments are susceptible to pressure and influence. If the profession really wants to create pressure for a step change in public financial management, reporting and auditing, it can make it happen. It will not be easy, but it is possible.• What it calls for is concerted, co-ordinated action. Every institute, and every firm, reinforcing the same compelling arguments for a step-change – nothing less – in all aspects of public financial management.

16

WHAT MAJOR ASSETS MAKE UP A BALANCE SHEET OF NATIONAL GOVERNMENTS?

• As far as the US Federal Government is concerned, the answer is "NONE". The US Federal Government does NOT produce credible balance sheets. Its financial statements are totally misleading and constantly manipulated by politicians and the media, for a variety of purposes.

• The accounts are produced and maintained on a cash basis only. Thus, the (so-called) "deficits" are merely (positive or negative) “cash” (monetery) balances.

17

WHAT IS MEANT BY THE “DEFICIT” OF NATIONAL OR FEDERAL GOVERNMENTS?

• The term “DEFICIT” is totally misleading, in accounting terms, because it incorporates (inter alia) expenditure on "fixed assets" and "monetary investments“.

• These would NOT be a part of any “deficit”, if the government followed what are known as "generally accepted accounting principles - GAAP" (in the USA) or International Financial Reporting Standards – IFRS (elsewhere)

18

Misleading Accounting Principles and Practices

19

Headline: “Governor McDonnell: Virginia is back in the Black –

Estimates show a surplus of $220m for fiscal 2010"

BUTResults derived only from Cash Flows

are inherently unreliable (and may easily be misleading,

fraudulent or politicized)


20

The Governor states: • The Commonwealth will also defer $620 million in payments toward the Virginia Retirement System (VRS), the state's $50 billion employee retirement fund, in fiscal 2011 and 2012, a deferment to be paid back over 10 years at a 7.5 percent interest rate. • The state deferred nearly $140 million in VRS payments in the fourth quarter of 2010.


21

Discussion with a former State Legislator: • The budget must always balance – every year!• It is HOW the budget is made to balance that is most important!

Reflection on the above statement:

• Does anyone…anywhere…understand what is going on? Does anyone “GET IT?”


22

• Long term borrowing to cover expenditure that is not capital expenditure is likely to be unconstitutional. Even if not, one can claim, with some authority, that it is imprudent and likely to be inconsistent with generally accepted accounting practices.

• It is, also, inappropriate (and often illegal!) for a municipal government to raise long term loans to re-finance short-term indebtedness caused by an accumulated general fund deficit (NEGATIVE RESULTS)

• In the notorious case of WorldCom, people have gone to prison, for a very long time, for accounting fraud that included the charging of operating expenditures as capital expenditure – so as to, unlawfully, increase stated profits! The comparison should be obvious! [RESULTS accounted for as RESOURCES]


23

• These principles are embodied in much local government legislation, world-wide. As a “golden rule,” they require long term borrowing to be only for capital expenditure, resulting in the creation, or acquisition, of community assets. Borrowing is typically subject to stringent external controls, such as central (or state) government approval or (as often, in the USA) a referendum procedure.

• The subsequent levying of taxes and charges, to cover the resulting debt service, is one way of ensuring that beneficiaries from the use of each asset (RESOURCES) will pay for this, during its useful life.

• These positions have been widely promulgated by the former US Comptroller General, Mr. David Walker, of the Peter G. Peterson Foundation.

http://www.iie.com/

http://www.iie.com/

• In addition, money borrowed would NOT add to the surplus (nor diminish the deficit) because it would, merely, add to the government's liabilities.

• For the same reason, money used to repay loans would NOT add to the deficit (nor diminish the surplus), because it would, merely, diminish the government's liabilities.

• (The INTEREST part of debt service WILL add to the deficit!).

24WHAT IS MEANT BY THE “DEFICIT” OF NATIONAL OR FEDERAL GOVERNMENTS?

• The U.S. government started its 2015 budget year with a deficit in October, although the imbalance was worsened, by a calendar quirk.

• The Treasury Department says the October deficit totaled $136.5 billion, up 12.2 percent from October 2014.

• In both years, Nov. 1 fell on a weekend, which required the government to mail out November benefit checks in October. That shifted $49 billion in payments into October, this year.

25

A CALENDAR ODDITY SWELLS THE DEFICIT (1)

• The “shifted” $49 billion in payments, into October, 2015, was up from last year’s $41 billion payment shift.

• The government’s budget year begins on Oct. 1.• For the 2015 budget year, which ended

Sept. 30, the annual deficit fell to $438.9 billion, its lowest level in eight years,

• This was spurred by gains in tax revenue that outpaced greater government spending.

26


• This kind of information, in terms of credible accounting, is useless and misleading.

• Reporting the information, in this manner, is quite silly and completely meaningless.

• It does, however, create opportunities for the media and politicians to make declarations (and to express opinions) which are, in effect, dishonest and even, possibly, fraudulent.

27


FISCAL BALANCE V. PHYSICAL DEFICIT

28

• As a result of these concerns, a phenomenon is created whereby “cash-based” or other financial budgets may be "balanced," perhaps by legal or administrative mandate (fiscal balance).

• However, there may be significant actual or potential deficits hidden away within under-maintained assets (e.g. property and/or infrastructure), or lower productivity of services (physical deficit).


• Thus, not only does the property suffer from delayed and inadequate care, renewal and expansion,

• It, also, steadily develops a permanent status of inefficient operation and physical shabbiness, from which it becomes impossible to recover, except at later – and much higher – cost.

29


• Thus, typically, immediate & operationally intensive expenditures are favored over those that are maintenance-intensive.

• For example, it is always more urgent to

pay teachers than to maintain schools, important though the latter may be.

• Roads are increasingly left with unrepaired potholes, instead of being fully maintained.

30


• Bridges maintenance is routinely ignored, until they collapse, with multiple injuries.

• Railway track maintenance is routinely ignored, until a train is derailed, at high speed, with multiple deaths and injuries.

• Funds are taken (i.e. misappropriated) from (or under-contributed to) pension, or other “trust” funds!

• Whilst politicians boast that:

“We have a balanced budget”

31

MINNESOTA BRIDGE COLLAPSE (AUGUST 2, 2007)

A Catastrophic FailureBy Eugene Robinson

(Washington PostFriday, August 3, 2007)

32


33


• As always, …we don't spend nearly what we should on maintenance and repair, [replacement and renewal]

• Bridges [are] actually deemed to be in better shape than dams, roads or the power grid.

• But the civil engineers estimated that it would cost $9.4 billion a year for 20 years “to eliminate all bridge deficiencies.”

• That's not a lot of money in the context of a $13 trillion economy. But does anyone think we're going to make infrastructure a national crusade?

• Of course not. Infrastructure is boring!

34

MD., VA. DIVERTED BRIDGE MONEYFUNDS WERE USED TO WIDEN ROADS, FIX STREETLIGHTS

35

• Virginia and Maryland officials used more than $30 million from the federal government's main bridge repair and replacement fund on projects that weren't bridges, according to interviews and government documents tracking spending over the past four years.

• The federal bridge money was transferred to general transportation accounts that funded such things as streetlights in suburban Maryland and the widening of Ox Road in Fairfax County and King Street in Leesburg.

MD., VA. DIVERTED BRIDGE MONEY[FUNDS WERE USED TO WIDEN ROADS, FIX

STREETLIGHTS]

36

Federal dollars might have been diverted to projects other than bridges …, but federal and state officials say “their accounting systems are not set up to track which projects eventually got the money.”

[This is Complete Nonsense!]

Accounting and Accountability (UK)

37

Public Accounts Committee chairperson,* Meg Hillier, has called on the government to “up its game” on transparency and produce more accessible information from across government to improve clarity on public spending.

[*The Chair of the committee is always drawn from the main opposition party and is usually a former senior Minister.]

https://en.wikipedia.org/wiki/Her_Majesty's_Most_Loyal_Opposition_(United_Kingdom)

Accounting and Accountability (UK)

38

• Hillier was speaking as the Institute for Government published its annual Whitehall Monitor report, which found that the Treasury (Finance Ministry!) was among the least transparent departments.

• Although technology was beginning to affect the way citizens accessed public services, government, as a whole, was bad at explaining key data, the report concluded.

Accounting and Accountability39

This kind of “half-baked” accounting and accountability has gone on for

so long, that the public and the media have become conditioned to

believing (and reporting) that:

“Bad is Good!”“Right is Wrong!”

“Down is Up!”“Upside Down is Right Way Up!”

UPSIDE DOWN IS RIGHT WAY UP40

TRUST• Confidence; a reliance or resting of the

mind on the integrity, veracity, justice, friendship or other sound principle, of another person, entity or fund.

• Honesty, reliability & certainty of outcome.

• He or that which is the ground of confidence.

41


We have erred and strayed from Thy ways like lost sheep. And there is no health in us!

[Anglican Book of Common Prayer – 1662]

42

WORLD-WIDE FINANCIAL CRISIS• Recently, the Financial Times published a letter from Ian Ball, then, the chief executive of the International Federation of Accountants. Ian has spent a career driving the argument for accrual-based accounting and modern international standards for public sector financial reporting. • His letter reminded politicians in the European Commission that the most serious accounting and auditing issue facing them is not the governance arrangements of the International Accounting Standards Board nor the market structure of the audit profession. • On the contrary, the elephant in the Commission room is the quality and reliability of the financial statements of its own member states.

43

44

Financial Reporting and Accountability

Disclosure of Public and Private Utilities: Mechanisms for Legal, Financial, and

Accounting Reporting

Understanding the purpose and methods of disclosure

Financial reporting and composition of disclosure

material under the International Accounting Standards Board (IASB)

David C. Jones CPFA, FCCA (UK)

IASB chairman discusses the future • If we move to principle-based standards, those students are going to have to come back and say,

‘Well, how do I do this?’ • When I was a young accountant, we didn’t have any

standards in the U.K., so you were on your own. And it was the old partner, with a lifetime of experience and judgment, who was the person who got you

through the challenges of practice.

45

David C. Jones CPFA, FCCA (UK)

IASB chairman discusses the future of IFRS, U.S. GAAP and the global accounting profession

• If we move to principle-based standards, those students are going to have to come back and say, ‘Well, how do I do this?’

• When I was a young accountant, we didn’t have any standards in the U.K., so you were on your own. And it was the old partner, with a lifetime of experience and judgment, who was the person who got you through the challenges of practice.

• As we start pressing on judgment, we’re going to bring the

professionalism back. I don’t think we’re “professional” enough in the accountancy profession, because we ask our colleagues to learn a huge amount of rules. And a lot of them don’t make sense.

• The question ‘Where does the profession go from here?’ is one that we need to confront now. I don’t think we can continue going in the direction we’ve been traveling for many years.

46

IASB chairman discusses the future of IFRS, U.S. GAAP and the global accounting profession

• As, then, chair of the London-based International Accounting Standards Board, Sir David Tweedie was championing an effort to develop a single set of global financial reporting standards that will be both, standard and enforceable.

• The scandals that we have seen in recent years are often attributed to accounting, although, in fact, I think the U.S. cases are corporate governance scandals involving fraud. If anything, however, the scandals have made accounting more exciting to people.

• Where I take issue with universities is in their teaching of accounting standards. They do that to help their students with their professional training. I think the universities should be teaching them to think. I see all these kids learning all the rules about leasing and I think, some day soon, we’re going to get rid of all those rules.

47

CASH MANAGEMENT – IS IT ENOUGH?

PRINTING MONEY

CASH RESERVESGOLD RESERVES

48

CASH MANAGEMENT – IS IT ENOUGH?

Reflect, discuss and report important reasons why you

consider that accounting ONLY for

CASH MANAGEMENT may not be enough!

[Is (Walker!) therapy required?!]

Let’s walk

before we run?

49

THE WALKER SLIDES

David Walker (abolitionist)David Walker (September 27, 1785 – June

28, 1830) was an outspoken American activist who demanded the immediate end of slavery:

[To an overwhelming and obsessivereliance upon cash-based accounting?!]

50

THE WALKER SLIDES

On, March 12, 2008, David M. Walker, resigned as Comptroller General of the United States (head of the GAO) and

accepted the position of President and Chief Executive Officer of the newly established “Peter G. Peterson Foundation.” He later founded the “Comeback America Initiative

(CAI)”

51

THE WALKER SLIDES

52

Failure to firmly grasp the walker – or the “Walker rules” - will inevitably cause

a slide! [In accounting standards & practices]

THE WALKER “SLIDE”

Ending with a faint whimper rather than a bang, the Comeback America Initiative (CAI), founded by former U.S. Comptroller General David Walker and dedicated to getting America's fiscal house in order, abruptly closed up shop. Mr. Walker said his organization was discontinuing operations so he could "spend some time with my family and consider future options."

53

THE WALKER “SLIDE”

“The voice of one crying in the wilderness… ...make his paths straight.”

BUTNobody is listening or paying attention! Short-

term, cash-based, politically expedient, fixes are the name of the game! What a mess!

THUS[I stick by my claims about the inadequacy of

the funding of pensions and the dishonest accounting, thereof.]

54

Accounting Principles and Practices

55

Accounting is NOT Rocket ScienceThere are Only

14 Types of Cash Flowsand

30 Types of Other Entries(TWICE as Many Types of Other Entries

as Cash Flows!)

Moral: Results derived only from Cash Flows are inherently unreliable

(and may easily be misleading, fraudulent or politicized)

THE COMPETITION FOR CASH

THE POOLOF CASH

CHARGES,FINES &

INTEREST

GRANTS &TRANSFERS

MAJOR POLICY ISSUES

ACTIVITY & SERVICES

INTERESTON DEBT

LONG-TERMLENDING

TEMPORARYBORROWING

(INTERMEDIATE)DEPLETIONS

(SAVINGS)WITHHOLDINGSUPPLIERSPAYMENTS

CAPITALINVESTMENT

LONG-TERMBORROWING

GRANTS &TRANSFERS

(INTERMEDIATE)ENHANCEMENTS

(DIS-SAVINGS)

(PRIMARY) SOURCES

"F.C.W.A.T!

INVENTORY

DEBTORS(GRANTINGOF CREDIT)

MONETARYINVESTMENT

(DEPOSIT)

MONETARYINVESTMENT

(WITHDRAWAL)

SALES OFASSETS (INCL.PRIVATIZATION)

MONEYCREATION(NATIONAL

GOVERNMENT)

TAXATION

(FINAL) USES & ABUSES

MAJOR POLICY OUTCOMES (OR LOSSES)

56

"F.C.W.A.T!" 57

STANDARD ACCOUNTING CHART AND

CODING STRUCTURE

KEY CONTROL & MANAGEMENT COMPONENTS

ACCOUNTING & BUDGETARY

CONTROL FRAMEWORK*

FINANCIAL REGULATIONS

& INTERNALCONTROLS

* = COMPUTERIZATION PRIORITY

FRAUD CORRUPTION WASTE ABUSE THEFT

} =

LOSSES OF CASH, CONFIDENCE,

CREDIT RATING, CONTROL AND CREDIBILITY

REPUTATION AS A MARKET FACTOR 58

Quality

P

E

A

0

C

• Interest rates.

• Search costs for capital funding.

• Regulation & loan conditions.

• Choice of Public and/or Private Financing or Implementation Entity Partners

B

D

Reputation >

(Poor reputation = High costs)

(Good reputation = Low costs)

COSTS

Selection of Ledger Accounts59

Accountability

60

“Fair Value Accounting is causing a large part of the problem at this

moment…”

Steve Bartlett, President and CEOFinancial Services Roundtable

Testimony to: U.S. House of RepresentativesFinancial Services Committee

18 November, 2008

David C. Jones, CPFA, FCCA (UK), had heard this statement, when listening to his car radio. He was so astonished that he nearly crashed into a tree!(Not believing his ears, he later needed to verify it from the C-SPAN web-site, which carried the hearing of the US House of Representatives Financial Services Committee!)

61

“I’m as mad as Hell and I’m not going to take this any more”

(From The Film “Network” [1976] Howard Beale is ‘Mad as Hell’

62

ACCOUNTABILITY63

The determination of “Fair Value” can be done only through the full and correct application of basic

principles of accounting. These are explained, and are also much more

fully illustrated, in this detailed PowerPoint slide show.

[The slideshow is merely a snapshot of the standards that will require a significant amount

of work by entities, simply to understand the nature of the principles and concepts involved.]

• Stewardship of Public Funds

• Performance in Delivery of Public Services

• Control over Assets, Liabilities and Funds

• Debits always equal Credits [So what?]

• Resources always equal Results

ACCOUNTABILITY

64

International Accounting and Reporting Standards are fully consistent with these

theories?[They are the only ones that make sense!]

65

IN THE “PLAIN ENGLISH” OF ACCOUNTING• If you are a credit to your organization – you are

NOT an asset; you are a liability! [liabilities are shown as credits in the accounts!]

• If you credit money to your bank account, it is NOT a credit; it is a debit, in your accounts.

• BUT – if your bank sends you a statement, THEN it IS a credit; because to the bank, YOU are a liability!

Excuse Me? [At present - BANKS are NO CREDIT to anyone!]

RESOURCES & RESULTS66

RESULTS

RESOURCES

ADDITIONSCASH RECEIPTS

INVESTMENTSAVING

ACQUISITIONPURCHASES

CONSERVATIONLENDING

GRANTING CREDITADDING INVENTORY

DEPLETIONSCASH PAYMENTSCONSUMPTION

USAGEDISPOSAL

USE IN PRODUCTIONSALES

WASTE AND FRAUDBORROWING

INCURRING DEBT

ACTIVITYOPERATIONSWORK, SKILL

CRAFTINNOVATIONINVENTION

PUBLICATION

LOSSESEXPENSES

COSTS(OPERATIONAL)

CAPITAL DEPLETION(PHYSICAL)

BENEFITSGAINS

PROFITSSURPLUS

CAPITAL INCREASE(EXTERNAL)

DEBIT

DEBIT CREDIT

CREDIT

Comprehensive AccountabilityWhatever the accounting systems, virtually every public,

private or voluntary entity: • receives and pays cash;• holds cash and bank accounts;• owns fixed and current assets (property, plant and

equipment); • incurs long-term and/or short term indebtedness;• supplies or purchases goods and services on credit;• creates and manages separate funds for special purposes;• makes and/or liquidates monetary investments; • purchases, stores and uses inventories of:

– equipment, or – goods, – spare parts;

• accrues revenues (has cash owing to it); • incurs expenses, for goods and service delivery; and, • acquires, uses, consumes, damages and/or destroys

resources.

67

Comprehensive AccountabilityActivities, moreover, normally take place in

changing monetary values. The extent to which the resources, obligations, activities or values are not accounted for, is the extent to which the (private, public or voluntary) entity is not, completely or transparently, accountable to its: owners, benefactors, donors, taxpayers, electorate, beneficiaries, investors, customers, general public, employees, or other stakeholders.

68

Principles of Accountability for Stewardship

• Credibility• Compliance• Conduct• Comprehensiveness• Comprehension

• Competence• Certifiability• Coherence• Consistency• Confidence

69

Principles of Accountability for Quality Performance

70

• Economy• Efficiency• Effectiveness• Excellence• Equity• Ethics• Exposure

• Explanation• Enjoyment• Empathy• Energy• Enthusiasm• Ecology• Exchange

OMAR’S CAR RUNS WELL

71

OMAR’S CAR

OMAR’S CAR RUNS WELL 72

SERVICECHARGES

OPERATION

INTERESTDIVIDEND &RETAINEDEARNINGS POLITICAL

(POLICY)DECISIONS

INTERNALFINANCING

ADJUSTMENT OF VALUE

CONSUMPTION OF CAPITAL

RENT

ADMINISTRATION(INCLUDING TAXES)

MAINTENANCE

WELFAREENVIRONMENT

LATITUDELUXURY

TAX REVENUES(BAILOUTS?)

SURPLUS(SAVING)

RETURN ONINVESTMENT

SURPLUS(LOSS)

RISKUNCERTAINTYNEW ACTIVITY

STABILITY

FUNDAMENTAL ACCOUNTABILITY REQUIREMENTS

• Retain (real) net capital intact [including non-monetary capital!].• Maintain inter-generational equity (current users bear their fair

share of all costs, including capital financing costs)• Compute “Omar’s Car Runs” costs

• Operation• Maintenance (routine, preventive and remedial)• Administration & Taxes• Rent:

– Consumption of capital (depreciation)– Adjustment of value (fixed asset valuation)– Return on investment (interest, dividends, retained

earnings)• Surplus (to cover):

– Risk– Uncertainty– New activities– Stability

• Fully utilize “Churchill Chart” of accounts (see next page)– “Pray let me have, by this evening, on one page, the status

of our tank deployment…” [Winston Churchill, British Prime Minister – World War II]

73

} If you deal with the lowest bidder, it is well to add something for the risk that you run. And if you do that you will have enough to pay for the “something better” (See Slide 78)

Churchill Chart 74

TRADINGMANUFACTURE

OROPERATINGACCOUNT

PROFITAND LOSS

-------------------------INCOME AND

EXPENDITURE

NETEARNINGS

-------------------------GENERAL FUND

SURPLUS

EXPENSES

CASHAND

BANK

DEPRECIATION ORCAPITAL FINANCING

RESERVE--------------------------

FIXEDASSETS

STOCK OF

GOODS ANDMATERIALS

SALES

--------------------------REVENUEINCOME

SPECIALFUNDS

--------------------------PROVISION

FOR EXPENSES

LOANS

MONETARYINVESTMENT

DEBTORS(RECEIVABLES)

CREDITORS(PAYABLES)

SHAREHOLDERS(STOCK

HOLDERS)

CAPITAL &RESERVES (INCLUDING

FIXED ASSETREVALUATION)

1211

7

5

3

20

16

8

25

13

1026

14

9

24

19

1 2

21 4

8

4

9

5

6

23

23

1517

22

6

6

14

12

13

10

3

6

7

18

21

11

29

30

27 28

NOT ALL THERE

IS TO IT!

2728

Metro “Fair” Fare Chart

75

OPERATING [INCOME & EXPENDITURE]

ACCOUNT

PROFIT OR LOSSFROM

INCOME ANDEXPENDITURE

NETEARNINGS

-------------------------GENERAL FUND

SURPLUS

OPERATION ANDMAINTENANCE

EXPENSES

CASHAND

BANK


RESERVES--------------------------

FIXED ASSETS [TRACK, STATIONS, TRAINS, ETC.]

STOCKSOF SPARE PARTS AND MATERIALS

TICKET SALES--------------------------

OTHER REVENUE & SUBSIDY INCOME

SPECIALFUNDS

--------------------------PROVISION FOR

FUTURE EXPENSES

LOANS FROMGOVERNMENTS

& BOND-HOLDERS

MONETARYINVESTMENT FOR

FUTURE ACTIVITIES


CREDITORS(PAYABLES)

SHAREHOLDERSSTAKEHOLDERS

& TAXPAYERS



1211

7

5

3

20

16

8

25

13

1026

14

9

24

19

1 2

21 4

8

4

9

5

6

23

23

1517

22

6

6

14

12

13

10

3

6

7

18

21

11

27

28

27 28

NOT ALL THERE IS

TO IT! [WHAT’S BEHIND

THE TRAINS?]

75

WHAT’S BEHIND IT? 76

NOT ALL THERE IS TO IT! [WHAT’S BEHIND

THE RAINS?][CLIMATE,

FLOOD CONTROL, AGRICULTURE]


THE PAINS?][HEALTH

SERVICES]


THE DRAINS?] [SEWERAGE &

STORM DRAINAGE]


THE GRAINS?][AGRICULTURE &

BIOFUELS]


THE CRANES?][CONSTRUCTION]


THE BRAINS?][EDUCATION]


THE MAINS?] [WATER]

NOT ALL THERE IS TO IT! [WHAT’S BEHIND THE

TRAINS?] [RAIL, ROAD & OTHER

TRANSPORT]

($) CASH ($)AND

($) BANK ($)

NOT ALL THERE IS TO IT! [WHAT’S BEHIND THE STAINS?

[FRAUD & CORRUPTION]


THE LANES?][ROADS & PATHS]


THE PLANES?][AIRPORTS]

NOT ALL THERE IS TO IT! [WHAT’S BEHIND THE

GAINS?][UTILITY REVENUES]

Cost Cutting at Metro (and Elsewhere)

77

Assertion• This (proposed Congressional) bill would do little

more than reward poor performance with an unprecedented taxpayer bailout.

• Congress should force fundamental market-based reforms on Metro.

• By linking the continuation of the system's existing federal subsidies to: • reductions in operating costs;• improvements in service; and, • an aggressive program of competitive contracting,

similar to the successful reforms implemented elsewhere, in several of the major metropolitan areas of Europe.

Ronald D. Utt, Ph.D.The Heritage Foundation.

http://www.heritage.org/about/staff/ronaldutt.cfm





ECONOMICS• All have learned from economics studies

that: “The Consumer is King."

• There is also “Consumer is Queen" economics: "Quality Undermines Economic

Equilibrium Neutrality*.

78

**Equilibrium Neutrality = “Nash Equilibrium” [Promulgated by Nobel Laureate John Nash]

QUALITY UNDERMINES ECONOMIC EQUILIBRIUM NEUTRALITY

• Quality costs money – it may reduce profits.• Economic “winners” may be the producers of

lowest quality products at the highest profits or the leanest public budgets.

• Ability to achieve this depends on the degree of opportunism and the extent of influence over decisions [authority or lobbying].

• Opportunism is influenced by information asymmetry and bounded rationality of choice - (deciding on the basis of limited information, or the extent of concern or potential suffering).

• A limiting (& disturbing) case is competition based on lower “short run marginal cost prices” v. a necessity for higher “long run marginal costs.”

79

SUPPLY AND DEMAND80

PRICE&

COST

QUANTITY

P

Q0

D

D

SQ

SQ

SN

SN

QNQQ

PQ

PN

LESS OF A QUALITY PRODUCT AT A HIGHER

PRICE & COST

ECONOMIC EQUILIBRIUM [A NON-QUALITY

PRODUCT AT A “NORMAL” PRICE & COST]

• Quality is like buying oats. If you want nice, fresh, clean oats, you must pay a fair price.

• However, if you can be satisfied with oats that have already been through the horse .................that comes a little cheaper!

QUALITY OVERLY ASSERTIVE TRADING SLOGANS (OATS)

[e.g. “Magic of the Market-place!”]

81

• “It is unwise to pay too much, but it is worse to pay too little. When you pay too much, you lose a little money ..... that is all. When you pay too little you sometimes lose everything, because the thing that you bought was incapable of doing the things it was bought to do.

• The common law of business balance prohibits paying a little and getting a lot .... it cannot be done! If you deal with the lowest bidder, it is well to add something for the risk that you run. And if you do that you will have enough to pay for the something better”

[John Ruskin (1819 - 1900)]

LEAST-COST FEASIBLE SOLUTION82

CONFLICTING CONCERNS[Choose any Two of Three!]

83

COST & PRICE OF PRODUCT

QUALITYOF PRODUCT

QUANTITYOF SALES

Transport Privatization in Europe• British Rail, once a wholly owned public railway, has been

sacrificed to “gods of privatization”. Instead of one publicly-owned railway, privatization gave Britons 25 new railways. These, Britons were assured, would provide improved service, healthy competition, lower fares and further delights.

• The result has been chaos. Apart from much plastic speech, there was an awesome decline in the quality of passenger service, frequent delays and cancellations, not to mention the increased danger to life and limb now provided by a public service driven by the lust for private profit.

• And profits there are; privatized railroading has proved a gravy train for the investor. As for the public, its rewards have been few and, of course, the government is still shelling out millions of pounds in subsidy for maintenance and other infrastructure costs.

• British experience speaks eloquently to the high public cost of free market capitalism. The rail system has, NOW, effectively, been re-nationalized.

[Sunday, January 14, 2001 in the Toronto Star]

84

84

http://www.thestar.com/

Transport Privatization in Europe

Metronet's bankruptcy highlights the flaws in the [London] Tube contracts

• IT WAS like watching a train crash in slow motion. Metronet, one of the two firms charged with upgrading London's rickety old underground network under a multi-billion-pound public-private partnership (PPP) deal, had been in trouble for months. A dispute with Transport for London (TfL), the city's transport authority, over who was to blame for £1 billion of projected cost overruns on three of the lines it was renovating, went to arbitration last month.

• The decision was expected to take a year; in the meantime, with its shareholders and banks refusing to release any more cash, Metronet had asked for an extra £551m of taxpayers' money. On July 16th Chris Bolt, the PPP arbiter — the referee for such disputes — awarded it just £121m.

• Two days later, it admitted that it was bankrupt.Jul 19th 2007: from The Economist print edition

85

85

PUBLIC TRANSPORTATION SERVICES 86

• In the same way as for other utilities, transport services are related to fixed asset use and maintenance.

• Thus, it is necessary to examine the systems from the perspective of full-cost recovery, in accordance with standard practices for cost accounting and financial analysis for utilities.

• This must conform to Fundamental Principles of Cost Accounting. [Principles of “OMAR’S CAR RUNS WELL”.]

• These principles are necessary, to provide a useful starting point for getting urban transport operating costs under control, by: • setting hard budget constraints; and,• providing for the revenues to achieve this.

• By themselves, these principles are not sufficient to deal with fares.

• Computation of fares requires:• financial and economic analysis; and,• forecasts of future passenger loads, and of annual costs and

revenues, together with economic externalities.

87

• Tesco overstated it profits by £250m after revenue recognition irregularities were spotted in its half year results, knocking its share price back 10%.

• Tesco said it discovered the overstatement of its figures, as part of a 29 August profit warning, during preparations for its forthcoming interim results.

• It predicted, at the time, that its half-year trading profit would be around £1.1bn, but this figure has now been cut back by £250m.

• The figures, which were overseen by the board, revealed that accruals were carried back into the current financial period and liabilities deferred later, to dress up the interims, by £250m.

TESCO ACCOUNTING GAFFE EXPOSED

http://www.investegate.co.uk/tesco-plc--tsco-/rns/trading-update/201409220700142186S/



88

Crawford Spence, a professor of Accounting at the Warwick Business School, commented:• This revelation should be interpreted as a

sign of distress. Tesco has essentially tried to recognize revenue too early and delay the recording of costs until a later date.

• Accounting is not a hard science and some of this behavior is acceptable, within limits. What Tesco appears to have done is push the boat out a bit too far, ending up with revenue that hadn't really been earned yet and costs that probably should have been booked earlier.

Tesco accounting gaffe exposed

89

• It is a classic 'earnings management' issue. Firms quite legitimately play around with their revenue and expenses all the time.

• However, when they do so aggressively, as Tesco appears to have done, this is usually because the firm is under pressure.

• In Tesco's case, it has been losing market share to its competitors steadily in recent years and losing value quite dramatically in its share price in recent months.


90

• To Tesco’s credit, however, it has flagged this up internally and is doing something about it. This suggests that there are probably no other big accounting shocks, hidden away.

• Given that this has been flagged up and dealt with internally, it is unlikely any court proceedings will occur. Tesco could be fined by the authorities, but they will most likely wait to hear what the auditors, Deloitte, uncover, first.”


COOKING THE BOOKS!91

EXPENDITURE

INCOME

PROFIT!

?

KICK THE CAN DOWN THE ROAD

92

93

• Tesco has named Deloitte as its new auditor, ending its relationship with PricewaterhouseCoopers (PwC) after an accounting scandal.

• The scandal led to the suspension, then exit, of several senior executives, and sparked investigations by the Serious Fraud Office (SFO), accounting watchdog, the Financial Reporting Council (FRC) and a grocery industry watchdog. It could also prompt investor lawsuits both in Britain and the US.

• PwC has been Tesco’s auditor for 32 years, since 1983. Its auditing of the supermarket’s 2014-15 accounts was its final act for the company.

TESCO NAMES DELOITTE AS NEW AUDITOR AFTER ACCOUNTING SCANDAL

http://www.theguardian.com/business/pricewaterhousecoopers

“COST” CUTTING – BY WOLFGANG AMADEUS MOZART (“W.A.M.” PRINCIPLES)

94

Conversation

Emperor of Austria to Mozart: Methinks your symphony is a trifle too long, young sir! There are too many notes!

Mozart: Indeed your Majesty, and precisely which notes would you have me remove?

[“Amadeus”-Movie]Conclusion

It really is not about numbers, or size or length, or appearance, is it?

It is, I think, about depth. Depth of perception, depth of appreciation, depth of acknowledgement of the sheer

vastness of what we do not 'know” - yet - but would 'love or like' to know.

“Cost” Cutting by

Wolfgang Amadeus Mozart (“W.A.M.” Principles)

95

• WIZE• ACCOUNTABLE• MANAGEMENT

RESULTS OF ACTIVITY – A SYMPHONY OF OUTCOMES

COMMERCIAL,SOCIAL &

ECOLOGICAL

RETURN &REINVESTMENT

WASTE, DAMAGE& DESTRUCTION

INNOVATION - CONSUMER SATISFACTION ,REINVESTMENT & PRODUCT DEVELOPMENT

COMMERCIAL,SOCIAL &

ECOLOGICAL

CONSUMPTION(SATISFACTION)

COMMERCIAL,SOCIAL &

ECOLOGICAL

(“W.A.M.” PRINCIPLES): IMPORTANT NOTES - SUCCESS CRITERIA AND PRINCIPAL FOCUS OF ATTENTIONTO CUT “COSTS”: WHICH OF THESE NOTES WOULD YOU LIKE US TO REMOVE, OR DIMINISH – MR. MAYOR

(PRESIDENT, GOVERNOR, MANAGER)?

PERFORMING USEFUL & HIGH-QUALITY ACTIVITIES AT APPROPRIATE PLACES AND TIMES

LONG-TERM OPTIMIZATION OF RESOURCE USE(PRODUCTIVITY & WASTE CONTROL) DEBT SERVICE

QUALITY OF ENVIRONMENT

PAYMENTOF TAXES

BALANCED (FLAT) CURRENT BUDGET

QUALITY OFSOCIAL LIFE

(SHARP) OPERATIONALRELIABILITY

WASTE DISPOSAL

PRODUCT &SERVICE QUALITY

QUALITY OFLABOR LIFE

DAMAGERECTIFICATION

Cost v Quality of Service♯ ♫♪♫

♯♫ ♫

♯

♭

♫

♫

♫

♫

♫ ♫

♫

♫

♫

♫

♫

♫♫

♫♫

♫

♫

♫

♫

♫ ♫♫

♫♫ ♫♫ ♫ ♫♫

♫

♫

♯ ♫♪♫96

Churchill Chart 97

TRADINGMANUFACTURE

OROPERATINGACCOUNT

PROFITAND LOSS

-------------------------INCOME AND

EXPENDITURE

NETEARNINGS

-------------------------GENERAL FUND

SURPLUS

EXPENSES

CASHAND

BANK


RESERVE--------------------------

FIXEDASSETS

STOCK OF

GOODS ANDMATERIALS

SALES

--------------------------REVENUEINCOME

SPECIALFUNDS

--------------------------PROVISION

FOR EXPENSES

LOANS

MONETARYINVESTMENT


CREDITORS(PAYABLES)

SHAREHOLDERS(STOCK

HOLDERS)



1211

7

5

3

20

16

8

25

13

1026

14

9

24

19

1 2

21 48

4

9

5

6

23

23

1517

22

6

6

14

12

13

10

3

6

7

18

21

11

29

30

27 28

NOT ALL THERE

IS TO IT!

2728

The Balance of Accounting

98

RESOURCES

RESULTS

DEBIT

DEBIT

CREDIT

CREDIT

Resources [Symbols with straight lines]always equal

[Symbols with curved lines]

Results

Accounting Chart 1. The attached chart illustrates the working of the entire accounting system of any

financially autonomous entity, keeping its accounts on an accrual basis. It can be applied to private sector, public utility, enterprise or municipal accounting systems.

2. It is probable that well over ninety-five percent of accounting entries, for any kind of business, are represented by the fourteen cash-flows and twenty-eight other book entries represented on the chart. Thus, forty-two entries cover virtually all transaction types.

3. Each class of account has been given a separate symbol. In the “Keys to Symbols” box, those on the left represent “personal” accounts (debtors and creditors). Those on the right represent “real” accounts (cash, stocks of goods / materials and fixed assets) and “nominal” accounts (gains and losses - income and expenditures). Furthermore, the symbols with straight sides (squares and triangles) represent resources (assets and liabilities), whilst the circles represent the analysis of results (gains and losses).

4. Each line represents a class of business transaction or a generally recognized accounting adjustment. Where a line touches the left-hand side of an accounting symbol, it represents a debit entry to that class of account. Conversely, a line touching the right-hand side represents a credit. Solid lines represent cash flows and broken lines represent accounting entries not directly related to cash transactions.

99

Accounting Chart

5. The arrows on the lines are somewhat arbitrary. However, they attempt to show the direction in which each transaction is normally understood to flow. The entries are conceptual, not legal. For example, the transfer of extra-ordinary losses (and fixed asset revaluations) direct to “Capital and Reserves” is regarded as bad accounting practice in many systems but is acceptable in others. In this chart, they have been shown as direct transfers to “Capital and Reserves,” merely for simplicity.

6. The chart indicates that an accounting system, whilst complex, is bounded and closed. For accountants, it may assist in systems and computer work. For non-accountants, it may be useful in understanding what accountants are doing (or supposed to be doing) and may also help to develop an appreciation of what can and should be expected from an accounting system. For students of accounting, the chart may represent a useful learning tool, to be used in conjunction with other teaching materials.

7. The chart covers most accounting procedures likely to be encountered. It includes, moreover, the two main entries concerned with the conversion of historical cost accounts to current values. This is still a matter of uncertainty and contention among accountants and is not practiced in all systems. However, unless recognized, especially where high rates of inflation exist, fixed asset (and other non-monetary asset) values, based only on historical costs, become increasingly meaningless. Furthermore, depreciation (and other capital charges) based of these historic values will cause the under-statement of costs and a corresponding over-statement of profits.

100

Cash and Accrual AccountingCash Flows

1. Cash Purchases - Stock (Inventories)

2. Cash Sales or Revenue Income

3. Cash Settlement - Creditors (Payables)

4. Cash Settlement - Debtors (Receivables)

5. Dividends or Share (Stock) Repayment

6. New Share Capital7. Payment from Funds8. Investment Withdrawal9. Cash Expenses10. Investment of Cash in

Monetary Instruments11. Loan Repayments12.Loans Raised13.Capital Expenditure14.Sales - Fixed Assets

101

Cash and Accrual AccountingAccounting Flows

1. Use of Stocks (Inventories)2. Sales Income3. Expenses (Trading, Operations,

Manufacturing)4. Revenue (Recurrent) Income5. Credit Purchases6. Cash Discount Received7. Gross Profit (Trading, Operations,

Manufacturing)8. (Sales & Operational) Income

Recoverable9. Taxes Now Payable10. Expenses (Profit and Loss or Income

and Expenditure)11. Net Loss or Net Expenditure12. Net Earnings or Net Income13. Allocated or Declared Dividends14. Transfers to Reserves15. Capital Repayable

16. Surplus on Investments (Credited as Income)

17. Future Income or Corporation Tax (Provision)

18. Extra-ordinary Losses19. Expenses Paid in Advance20. Surplus on Investments (Credited as

Capital)21. Bad Debts or Discounts Allowed22. Transfer of Expenses23. Accrued Expenses24. Transfers to Special Funds/Provision for

Expenses25. Investment Losses26. Depreciation (Commercial or Enterprise

Accounts) & Capital Financing Reserve - by Loans Repaid, Revenue Contributions to Capital or Special Funds Applied (Municipal - Public Sector - Accounts)

27. Interest Receivable [e.g. from Investments]28. Interest Payable [e.g. on Loans]29. Revaluation of Fixed Assets30. Revaluation of Accumulated Depreciation

102

Churchill Chart – Production v. FinancingTRADING

MANUFACTURE OROPERATING

CASHAND

BANK

FIXEDASSETS

--------------------------DEPRECIATION

STOCK OF GOODS ANDMATERIALS

SALES--------------------------

REVENUEINCOME

103

LOANS & CREDIT

EQUITY CAPITAL

FINANCIAL MANAGEMENT(& MISMANAGEMENT)

PRODUCTION SELLING &

MARKETING

EARN

ING

S

INTEREST RECEIVABLE

INTEREST PAYABLEEXPENSES

PROFITS & LOSSES

RECEIVEABLES & INVESTMENTS

Resources and ResultsThe concepts of “Resources” and “Results,” when applied to accounting principles, were originally devised, for teaching and illustrative purposes, by David C. Jones.. In his definitive textbook “Municipal Accounting for Developing Countries,” the following appears (page 2):

“An accountant records and interprets variations in financial position. He records, in money values, the results of variations during any period of time, at the end of which he can always balance Net Results (of past operations) against Net Resources (available for future operations)”.

Net Results are the “way of being” of the world, after the performance of Activity to earlier Net Resources.

104

Municipal Accounting for Developing Countriesby

David C. Jones, CPFA, FCCA (UK)

105

[900 pages; © Chartered Institute of Public Finance and Accountancy and The World Bank]

Resources and ResultsThese principles, developed by the author, are grounded in theories enunciated by (inter alia) eminent British writer and (government) district auditor, Carson Roberts and from a US book, 'Accounting Principles and Practice', by Hatfield, Sanders and Burton. They have also been interpreted by a former president of the Chartered Institute of Public Finance and Accountancy, Mr. J.B.Woodham, Borough Treasurer, and later Chief Executive, of Middlesborough and of Cleveland County, England.

106

Resources and ResultsMr. J.B.Woodham, Borough Treasurer, (and later Chief Executive), of Middlesborough and of Cleveland County, England, refers to “Resources” as “What” accounts (what one owns and what one owes) and “Results” as “How” accounts (how the changes in resources came about). The concepts fit very neatly with those relating to (on the one hand) balance sheets and (on the other hand) income and expenditure accounts.

International Accounting Standards, International Public Sector Accounting Standards and International Financial Reporting Standards are all fully consistent with these principles.

107

BASIC RULES FOR ACCOUNTING[From “Municipal Accounting for Developing

Countries” by David C. Jones, CPFA, FCCA (UK)]

108

"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 they can balance net results (of past operations) against net resources (available for future operations)".

BASIC RULES FOR ACCOUNTING

109

Rule 1 The ledger system as a whole must always be in balance, otherwise it is not correct. The total of all debit entries (or debit balances) must always agree with the total of all credit entries (or credit balances).


110

Rule 2 To ensure that the ledger is always in balance, every change in the financial position must be recorded in the form of debit and credit entries of equal value. For all debit(s) there must be equal credit(s).


111

Rule 3 There are two main classes of ledger accounts, with related, but quite different, purposes:

(a) accounts dealing with assets and liabilities (resources); and(b) accounts dealing with gains and losses (results). The net balance of assets over liabilities (resources) will always equal the net balance of gains over losses (results):


112

Rule 4 In accounts dealing with assets and liabilities, all assets are recorded as debits, and liabilities as credits. It follows from this that:

(a) increases in assets (positive resources) are DEBITS;(b) decreases in assets (positive resources) are CREDITS;(c) increases in liabilities (negative resources) are CREDITS; and(d) decreases in liabilities (negative resources) are DEBITS.


113

Rule 5 In accounts dealing with gains and losses, all gains are recorded as credits and all losses as debits. It therefore follows that:

(a) increases in gains or surpluses (positive results) are CREDITS;(b) decreases in gains or surpluses (positive results) are DEBITS;(c) increases in losses or deficiencies (negative results) are DEBITS; and(d) decreases in losses or deficiencies (negative results) are CREDITS.

Accounting Flow Chart (Cash)

KEY TO SYMBOLS ___________ Cash Flows ------------- Accounting Flows

Legal Claims by the Entity

Debit Amounts Claimed Tangible

Assets

Debit Increases in Assets

Credit Amounts Settled Credit Decreases in

Assets

Legal Claims against the

Entity

Debit Amounts Settled

Gains and Losses Debit Losses or

Expenses Credit Amounts

Claimed (Income and

Expenditures) Credit Gains or Income

114

THE BALANCE OF ACCOUNTING

EINSTEIN’S THEORY OF RELATIVITY

115

E = MC2

Energy [E] = Mass [M] Times the Square of the Speed of Light [C2]

OMAR’S THEORY OF RELIABILITY

√E3 = (MC)3

The Root of Economy, Efficiency and Effectiveness [E3] = Maintenance of

Capital: Promptly, Properly and Periodically [(MC)3]

116

OMAR’S CAR RUNS WELL[IT IS WELL-MAINTAINED]

117

OMAR’S CAR

OMAR’S CAR RUNS WELL[Direction, Policy, Activity,

Outcome, Driver Practices]

118

OMAR’S CAR

IT IS WELL-MAINTAINEDCredibility, Compliance,

Competence, Consistency, Standard Practices

FINANCIAL MANAGEMENT [Direction, Policy, Activity, Outcome,

& Company Practices]

119

OMAR’S CAR COMPANY

ACCOUNTING & ACCOUNTABILITY[Credibility, Compliance, Competence,

Consistency, & Standard Practices]

THE COMPETITION FOR CASH

THE POOLOF CASH

CHARGES,FINES &

INTEREST

GRANTS &TRANSFERS

MAJOR POLICY ISSUES

ACTIVITY & SERVICES

INTERESTON DEBT

LONG-TERMLENDING

TEMPORARYBORROWING

(INTERMEDIATE)DEPLETIONS

(SAVINGS)WITHHOLDINGSUPPLIERSPAYMENTS

CAPITALINVESTMENT

LONG-TERMBORROWING

GRANTS &TRANSFERS

(INTERMEDIATE)ENHANCEMENTS

(DIS-SAVINGS)

(PRIMARY) SOURCES

MAINTENANCE OF FIXED ASSETS

INVENTORY

DEBTORS(GRANTINGOF CREDIT)

MONETARYINVESTMENT

(DEPOSIT)

MONETARYINVESTMENT

(WITHDRAWAL)

SALES OFASSETS (INCL.PRIVATIZATION)

MONEYCREATION(NATIONAL

GOVERNMENT)

TAXATION

(FINAL) USES & ABUSES

MAJOR POLICY OUTCOMES (OR LOSSES)

120

BUSINESS ACTIVITY (OMAR’S CAR RUNS) 121

SERVICECHARGES

OPERATION


DECISIONS

INTERNALFINANCING

ADJUSTMENT OF VALUE


RENT


MAINTENANCE

LOSS(SUBSIDY)

SURPLUS(SAVING)

RETURN ONINVESTMENT

SURPLUS(LOSS)


STABILITY


BUSINESS ACTIVITY (OMAR’S CAR RUNS WELL) 122

SERVICECHARGES

OPERATION


DECISIONS

INTERNALFINANCING

ADJUSTMENT OF VALUE


RENT


MAINTENANCE

WELFAREENVIRONMENT

LATITUDELUXURY


SURPLUS(SAVING)

RETURN ONINVESTMENT

SURPLUS(LOSS)


STABILITY

GENEROSITY ENCOURAGED123

• Remember this: Whoever sows sparingly will also reap sparingly, and whoever sows generously will also reap generously.

• Each of you should give what you have decided in your heart to give, not reluctantly or under compulsion, for God loves a cheerful giver.

• And God is able to bless you abundantly, so that in all things at all times, having all that you need, you will abound in every good work.

• As it is written: “They have freely scattered their gifts to the poor and their righteousness endures forever.”

[2 Corinthians 9: 6-9]

BUSINESS ACTIVITY (OMAR’S CAR RUINS) 124

SERVICECHARGES

OPERATION


DECISIONS

INTERNALFINANCING

ADJUSTMENT OF VALUE


RENT


MAINTENANCE

LOSS(SUBSIDY)

TAXREVENUES

SURPLUS(SAVING)

RETURN ONINVESTMENT

SURPLUS(LOSS)

RISKUNCERTAINTY

INTERNALIZATIONNEW ACTIVITY

STABILITYPotential Financial Trade-off

BUSINESS ACTIVITY (OMAR’S CAR LEASED)[OPERATING LEASE]

125

OPERATIONS*

RENT*

SURPLUS ORLOSS)**

CASH**

LEAVE EXPENDITURE AS STATED – EQUAL TO DISBURSEMENT

** BALANCE SHEET [BUT ONLY INDIRECTLY – IN TOTAL ONLY]* ON THE PROFIT AND LOSS STATEMENT

IS THIS ALL THERE IS

TO IT?

Dr. Cr.

BUSINESS ACTIVITY (OMAR’S CAR LEASED)[OPERATING LEASE]

126

OPERATIONS*

RENT*

SURPLUS ORLOSS)**

CASH**

LEAVE EXPENDITURE AS STATED – EQUAL TO DISBURSEMENT

** BALANCE SHEET [INDIRECTLY – IN TOTAL ONLY]* ON THE PROFIT AND LOSS STATEMENT

NOT (QUITE) ALL THERE IS

TO IT!

Dr. Cr.

THE BALANCE OF [LEASE] ACCOUNTING

127

RENTCASH

OMAR’S (LEASED)CAR(OFF THE BALANCESHEET!)

?

The Balance of [LEASE] Accounting128

OMAR’S (LEASED)

CAR(OFF THE BALANCE

SHEET!)

?WHERE IS ITACCOUNTED

FOR?

ANSWER = IN THE ACCOUNTS OF THE LESSOR!!( FOLLOWING PRINCIPLES OF OMAR’S CAR RUNS!)

LEGALLY CORRECT BUT

PERCEPTIVELY INCONSISTENT

BUSINESS ACTIVITY (OMAR’S CAR LEASED)[CAPITAL (OR FINANCE) LEASE]

129

OPERATIONS*

RENT*

SURPLUS ORLOSS)**

CASH**

LEAVE EXPENDITURE AS STATED – EQUAL TO DISBURSEMENT?


ALL THERE IS

TO IT?

Dr. Cr.

BUSINESS ACTIVITY (OMAR’S CAR LEASED)[CAPITAL (OR FINANCE) LEASE]

130

OPERATIONS*

RENT*

SURPLUS ORLOSS)**

CASH**

LEAVE EXPENDITURE AS STATED – EQUAL TO DISBURSEMENT?


NO!NOT ALL THERE IS TO IT!

Dr. Cr.

BUSINESS ACTIVITY (OMAR’S AIRPLANE LEASE)[CAPITAL (OR FINANCE) LEASE

131

AIRPLANE

ACCOUNTING forINTERNATIONALREPORTING

POSTULATE*LIABILITY &ASSET – NOT asEXPENSING* “PRETEND”

The Balance of [LEASE] Accounting132

DEBITCREDIT

ALL OBLIGATIONS OF THELEASE

CONDITIONALRIGHTS OF USE& OPERATION

UNDER THE LEASEAGREEMENT

“RESOURCES”

“PHANTOM”LIABILITY

“PHANTOM”ASSET

NOT LEGAL OWNERSHIP NOR LIABILITY

“OMAR’S AIRWAYS”133

DEBITCREDIT

“RESOURCES”

Dr Property, plant & equipment

Cr Finance lease obligations

BUSINESS ACTIVITY (OMAR’S CAR LEASE) [CAPITAL LEASE – “ON BALANCE-SHEET”]

134

EQUATING to

ADJUSTMENT OF VALUE*

CONSUMPTION OF CAPITAL*

ASSETS*

LIABILITIES*

RETURN ONINVESTMENT*

STEADILY

ELIMINATED*

* ON THE BALANCE – SHEET * ON THE PROFIT & LOSS STATEMENT

BUSINESS ACTIVITY (OMAR’S CAR LEASE) [IFRS “EXPOSURE DRAFT]

135

EVERY

ADJUSTMENT OF VALUE*

CONSUMPTION OF CAPITAL*

ASSET

LET

RETURN ONINVESTMENT*

STAND

EXPOSED*

* ON THE BALANCE - SHEET * ON THE PROFIT & LOSS STATEMENT

BUSINESS ACTIVITY (OMAR’S CAR RUINS) 136

SERVICECHARGES

OPERATION


DECISIONS

INTERNALFINANCING

ADJUSTMENT OF VALUE


RENT


MAINTENANCE

LOSS(SUBSIDY)

TAXREVENUES

SURPLUS(SAVING)

RETURN ONINVESTMENT

SURPLUS(LOSS)

RISKUNCERTAINTY


STABILITYPotential Financial Trade-off }

OR

BUSINESS ACTIVITY (OMAR’S CAR RUINS)

[EXPLOITS THE ENVIRONMENT]

137

RISKUNCERTAINTY


STABILITY

ENVIRONMENTALEXPLOITATION

ANDECONOMIC

EXTERNALITY

BUSINESS ACTIVITY (OMAR’S CAR RUINS)

[EXPLOITS THE PHYSICALCAPITAL]

138

RISKUNCERTAINTY


STABILITY

ENVIRONMENTALEXPLOITATION

ANDECONOMIC

EXTERNALITY

WHAT IS CAPITAL?

139

Banks must maintain a pool of money that they own free and clear as a reserve against losses. The ratio of a bank's capital to its loans and other commitments is regarded as a basic measure of the bank's health.

Binyamin Appelbaum (Washington Post: April 25, 2009).

COMPLETE AND UTTER NONSENSE!!

A quote, from Ken Wagstaffe, a British professional colleague, and fellow accountant, who wrote a paper, about this kind of thing:

"......it is based on some completely and fundamentally wrong notions about what accounting is. The level of ignorance about accounting is breathtaking."

140

ACCOUNTING – WHAT IS IT?

WHAT IS CAPITAL?[Accountancy 101]

141

Banks, and all other forms of business organization – partnerships, corporations or non-profit entities – hold Capital as the RESULTS of the net value of the difference between its POSITIVE RESOURCES & its NEGATIVE RESOURCES (a.k.a. Assets minus Liabilities). It may or may not be held wholly or partially as cash. The remainder is held as: • property, plant and equipment; • monetary investments; and, • legal receivables; MINUS: • amounts owed to bankers and all other legal

payables.There may, indeed, be NO cash (or other liquid

assets).[David C. Jones, Chartered Certified Accountant (UK)]

Wrong notions of what accounting is?

The level of ignorance about accounting is breathtaking!

142

ACCOUNTING – WHAT IS IT?

Cassius:"The fault, dear Brutus, is not in our stars, But in ourselves, that we are underlings.”

William Shakespeare – Julius Caesar

DETAILED PERCEPTION

143

BROADER PERSPECTIVE

144

BALANCE OF ACCOUNTING

Detailed Perception

Broader Perspective

145

What do I know about it?I am just an old book-keeper!

146

Bank Balance Sheet as at 31 December, 2008

Assets

[On the Left, There is Nothing Left!]

Liabilities and Capital

[On the Right, There is Nothing Right!]

“Impact of the credit crunch on the 2008 financial statements: 18 November 2008”

By Willeke Ong en Jens Osinga [©PricewaterhouseCoopers]

TRANSCENDENT TRANSPARENCY[BARE STERNS!!]

147

Bank Balance Sheet as at 31 December, 2008

Assets[Toxic Assets]

Derivatives[MBSs, CDOs, CDSs]

Liabilities and Capital[Precarious Credit]

Overnight loans (repos.)[Renewable daily]

“Be sober, be vigilant; because your adversary the devil, as a roaring lion, walketh about, seeking whom he may devour: Whom resist steadfast in the faith!” [1 Peter 5: 8-10]

[William Cohen: “House of Cards”]

BALFOUR BEATTY ISSUES £75M BLACK HOLE WARNING

148

Beleaguered infrastructure group Balfour Beatty has issued a fifth profit warning after discovering a new

£75m black hole in its UK profits.The news has added to growing concern about the UK

builder, resulting in a sharp fall in the company's shares by more than 20%.

In a statement to the market, Balfour Beatty said it had experienced “further program slippage” and “poor

operational delivery”.The group - which is involved in motorway

construction, power stations and PPP projects around the world - said there would be a further shortfall of £75m this year in its UK construction arm after two

earlier profits warnings this year.

http://www.investegate.co.uk/balfour-beatty-plc--bby-/rns/trading-update/201409290700188233S/

BALFOUR BEATTY ISSUES £75M BLACK HOLE WARNING

149

No doubt the valuations they accrue each period were not being earnestly reviewed and built up, with no one really understanding the accounting or too frightened of the consequences.

Management accountants should have a personality test, to find out that:

a) they are not charlatans that just want to skate on the surface, in meetings; and,

b) they have got the “balls” to lay the law down, no doubt in this case, to aggressive contract and quantity surveying managers.

NEVER MIND!

150

Never mind...there may be 75m missing, but I'm sure their carbon footprint is OK, and the sustainability of their operations

will stand up to ethical scrutiny.

(Wonderful things, these buzzwords.)

PRESENT COMPANY NOT EXCLUDED

[Badly Designed Interim Certificate]

151

COUNT, BADLY AND CHEAT[CHARTERED QUANTITY SURVEYORS]

CERTIFICATE OF COMPLETIONCONTRACT: Petworth Sewerage Project

Value of Prior Work Certified: £3,000Value of Work NOW Certified: £2,000Total of Work Certified to Date: £5,000

FIRST UNIVERSAL BANKALWAYS & EVERYWHERE

PETWORTH RURAL DISTRICT COUNCIL

5,000.00A and B Contractors Ltd.

A.BundanceChief Financial Officer

Five Thousand Pounds

23 April 20_5

ERRONROUS OUTCOME – OVERPAYMENT OF A CONTRACTOR!

£

152

A “Goof” by the Author of These Slides!

BEAN-COUNTERS!(HOW MANY BEANS MAKE FIVE?)

153

= 5[RESOURCES] = [RESULTS]

Dr Cr


154

= 5[CONCRETE] = [CONCEPT]

Dr Cr


155

= 5[NET ASSETS] = [CAPITAL]

Dr CrMINUS

LIABILITIES[NEGATIVE

ASSETS]

ACCOUNTANTS!(HOW MANY RESOURCES

EQUAL RESULTS?)

156

[RESOURCES] = [RESULTS]

EQUITYSHAREHOLDERS

(STOCKHOLDERS)

ACCOUNTANTS!(HOW MANY RESOURCES

EQUAL RESULTS?)

157

[RESOURCES] = [RESULTS]

NET ASSETS[RESOURCES]

EQUALCAPITAL

[RESULTS]

ACCOUNTANTS!(HOW MANY RESOURCES EQUAL RESULTS?)

158

EQUITY(RESULTS)

(OWED TO & OWNED BY)SHAREHOLDERS

(STOCKHOLDERS)

CASH & BANKFIXED ASSETS& STOCKS OFMATERIALS

CAPITAL &RESERVES (INCLUDING FIXED ASSET

REVALUATION)

NETEARNINGS

-------------------------GENERAL FUND

SURPLUSEXPENSES LOSSES,

(FRAUD, CORRUPTION,

WASTE & ABUSE)

NOT ALL THERE IS

TO IT!

RESOURCES

LEVELS OF FINANCIAL CONCERN 159

NEW DEBT OREQUITY FINANCE

CAPITAL COST& DEBT SERVICE

ESSENTIALCONCERNS

CAPITALSTRUCTURE

EXPANSION &DEVELOPMENT

SURVIVAL

NEW OPERATING COST & INTEREST

PROFITABILITY- USING“OMAR’S CAR RUNS” COST

SUSTAINABILITY

POTENTIALSFOR DISRUPTION

INSTITUTION

GOING CONCERN(STEADY STATE)

PROJECTS(DISRUPTIVE)

OVERALLACHIEVEMENT

FINANCIALREQUIREMENTS

CASH FLOW

FINANCIAL ANALYSIS LINKS 160

ACCOUNTINGSYSTEM

MANAGEMENTDECISIONS

INSTITUTIONALANALYSISPRICE & SUBSIDY

POLICY(C.R.I.M.O.G.)*

RISK ANALYSIS

REVENUE &BEHAVIOREXTERNALITIES

PROJECTFINANCIAL

ANALYSIS (D.C.F.)

ENTITYFINANCIAL ANALYSIS

(ACCOUNTS)

ECONOMICANALYSIS

COMPARISONS& CONTRASTS

FINANCIALACCOUNTING

(ENTITY)

COSTACCOUNTING(ACTIVITIES)

AUDITEDFINANCIAL STATEMENTS

PLANNING& BUDGET

ENGINEERINGECONOMY

FINANCIALINFORMATION

RISK ANALYSISMARKET-PLACE

(SUPPLY & DEMAND)

* CHANGING the RULES IN the MIDDLE OF the GAME

USE OF ECONOMIC RESOURCES

RESULTS

RESOURCE MOBILIZATION

CAPITAL CONTRIBUTIONS ASSET SALES LONG-TERM DEBT TEMPORARY DEBT SUPPLIERS (CREDIT)

RESOURCE ACTIVATION

INFORMATIONRAW MATERIALSSERVICESENERGYLABORCUSTOMERS & CLIENTS

THE COMMON WEALTH

NATURAL RESOURCES

MONETARY INVESTMENT

INVENTORIESWORK IN PROGRESSCUSTOMERS (CREDIT)CASH

RESOURCE ALLOCATION (& RESOURCE CONSERVATION)

LANDPERMANENT WORKSBUILDINGSEQUIPMENT & MACHINERY

RESOURCE UTILIZATION

PRODUCTIONDISTRIBUTIONOPERATIONMAINTENANCEADMINISTRATIONTAXESDEPRECIATIONINTERESTDIVIDENDRETAINED EARNINGSPROPERTY DISPOSAL

HUMAN CAPITAL*MANAGEMENT (ENTERPRISE)*

* CREATIVE, INNOVATIVE(RIGHT-BRAIN) TALENT

COMMERCIAL,SOCIAL &

ECOLOGICAL



COMMERCIAL,SOCIAL &

ECOLOGICAL

CONSUMPTION(SATISFACTION)COMMERCIAL,

SOCIAL &ECOLOGICAL

STIMULATION

161

RESULTS OF ACTIVITY (USE OF RESOURCES)

COMMERCIAL,SOCIAL &

ECOLOGICAL



INNOVATION - CONSUMER SATISFACTION ,REINVESTMENT & PRODUCT DEVELOPMENT

COMMERCIAL,SOCIAL &

ECOLOGICAL

CONSUMPTION(SATISFACTION)

COMMERCIAL,SOCIAL &

ECOLOGICAL

IMPORTANT SUCCESS CRITERIA AND PRINCIPAL FOCUS OF ATTENTION

PERFORMING USEFUL & HIGH-QUALITY ACTIVITIES AT APPROPRIATE PLACES AND TIMES

LONG-TERM OPTIMIZATION OF RESOURCE USE(PRODUCTIVITY & WASTE CONTROL) DEBT SERVICE

QUALITY OF ENVIRONMENT

PAYMENTOF TAXES

PROFIT (OR BALANCED CURRENT BUDGET)

QUALITY OFSOCIAL LIFE

OPERATIONALRELIABILITY

WASTE DISPOSAL

PRODUCT &SERVICE QUALITY

QUALITY OFLABOR LIFE

DAMAGERECTIFICATION

RESOURCE CONSUMPTION V. RESULTS

TRADE-OFFS

TRADE-OFFS

162

RESPONSIBILITY ACCOUNTING 163

PROFITABILITY*

OPERATIONALRELIABILITY

Typically, operationally intensive expenditures are favored over those that are maintenance-intensive. For example, it is always more urgent to pay schoolteachers than to maintain schools, important though the latter may be. Thus financial budgets may be "balanced," perhaps by legal mandate (fiscal balance), whereas there may be significant actual or potential “deficits” hidden within under-maintained assets or lower productivity of services (physical/social deficit).

* Operating Surplus

FISCAL BALANCE V. PHYSICAL DEFICIT164

FISCAL BALANCE*

PHYSICAL DEFICIT(RELIABILITY)

Financial budgets may be "balanced," perhaps by legal mandate (fiscal balance), whereas there may be significant actual or potential “deficits” hidden within under-maintained assets, physical breakdowns or lower productivity of services (physical – or operational) – deficit .

UNDER-MAINTAINEDASSETS: MANAGEMENT

INCOMPETENCE!

Financial Statements of Resources & Results TRAMBUS TRANSPORT COMPANY BALANCE SHEET AS AT .... $m $m $m $m

Fixed Assets Property, Plant and Equipment Current Assets Inventories Receivables Cash

15 9

222 -----

1,250

246 ----- 1,496 =====

Equity Contributed Capital Retained Earnings Long Term Debt Loans Outstanding

400 216

-----

616

880

----- 1,496 =====

TRAMBUS TRANSPORT COMPANY INCOME AND EXPENDITURE STATEMENT For the Period Until .... $m $m $m $m

Expenditures Operating Expenses Interest on Debt Balance C/fwd. Retained Earnings Balance C/fwd.

243 97 216

----- 556

=====

216

Income Operating Revenues Retained Earnings Balance B/fwd.

556

----- 556 =====

216

165

RESOURCES

RESULTS

ASSET AND LIABILITY MANAGEMENT INFRASTRUCTURE, PROPERTY, PLANT AND EQUIPMENT MONETARY INVESTMENTS

LONG-TERM LOANS OUTSTANDING

:

RENT OF PROPERTY

ADMINISTRATION

MAINTENANCE

OPERATIONS

ADJUSTMENT OF VALUE

RETURN ON INVESTMENT

(DEPRECIATION)

INVENTORIES

CAPITAL - SURPLUS

RECEIVABLES ANDCASH

PAYABLES ANDTEMPORARY LOANS

CAPITAL CONS.

166

MAIN CASHIERFOR COLLECTIONS(CHIEF CASHIER)

GOVERNMENTUNIT’S BANK

MAIN CASHIERFOR PAYMENTS

(CHIEF PAYMASTER)

PAYERSOF TAXES, FEES

& CHARGES

BRANCH CASHIERS (DISTRICT OFFICES) BORROWERS

& INVESTMENT RECIPIENTS

LENDERS(BANKS &

BONDHOLDERS)

BRANCH CASHIERS (IMPREST HOLDERS)

CENTRAL GOVERNMENT PUBLIC AUTHORITIES THE GENERAL PUBLIC& CAPITAL MARKETS

SUPPLIERS CONTRACTORS& EMPLOYEES

MAIL & ELECRONIC TRANSFERS

MAIL & ELECRONIC TRANSFERS

INFORMATION & INSTRUCTIONS

BRANCHBANKS

BRANCHBANKS

“SWEEPS”

CASH FLOWS

167

ECONOMY, EFFICIENCY & EFFECTIVENESS

ACTUALOUTPUT

PLANNEDOUTPUT

TECHNICALEFFECTIVENESS

ACTUALEFFICIENCY

ACTUALINPUT

EFFICIENCYIMPROVEMENT

ECONOMYPLANNEDINPUT

PLANNEDEFFICIENCY

ACTUALOUTCOME

POLICYEFFECTIVENESS

PLANNEDOUTCOME

ASSESSMENT

168

FINANCIAL CONTROL 169

EXTERNALFINANCIAL CONTROL

VOTING INELECTIONS

EXAMINATION OFPUBLIC DOCUMENTS

EXTERNAL AUDIT AND REPORTING

ATTENDANCE ATPUBLIC HEARINGS

INTERNALFINANCIAL CONTROL

GOVERNMENTALREGULATION

LEGISLATIVEREQUIREMENTS

COMPETENT CHIEFFINANCIAL OFFICER

COMPETENTFINANCIAL STAFF

INTERNAL CHECKS &INTERNAL AUDIT

CONCERNED TOPMANAGEMENT

DESIGN OF SYSTEMS & PROCEDURES

BUDGETARY ANDCOST CONTROLS

170INTERNAL & EXTERNAL CONTROLS

Price ofInputs

Purpose

Quantityof Inputs

Questioning Capacity

Pay

Inputs Expenditure(Production)

Permission

Prestige

Quality of inputs

Productivity

Probity PublicityProcedures

Questing Intensity

Power

Production

Category – Characteristics of Activity

P

PQ

P2Q

P3Q

P4Q

Transparency of activities is reflected in (but is not limited to) information disclosed in financial statements. This information must, moreover, address a great variety of inputs.

One structured methodology for this can be in the form of the following (polynomial) “pseudo-equation.”

171

S = f (P4Q + P3Q + P2Q + PQ + P)Where: “S” represents a degree of total satisfaction and symbols “P” and “Q” designate inputs, necessary to achieve this satisfaction

INTERNAL & EXTERNAL CONTROLS

THE "EIGHT Ls" PRINCIPLES OF BORROWING172

AS

LICENSE LUCK* LIFE-MATCH

AS POSSIBLE(OR

NECESSARY)

SUBJECT TO

LIQUIDITY

LATE LONG LOW-COSTLITTLE

* LUCK = LIKELIHOOD OF OUTCOME

EIGHT PRINCIPLES OF INVESTING*173

AS

LICENSE LUCK** LIFE-MATCH

AS POSSIBLE(OR

NECESSARY)

SUBJECT TO

LIQUIDITY

EARLY SHORTTERM

HIGHRETURNMUCH

** LUCK = LIKELIHOOD OF OUTCOME [INCLUDING SAFETY]

*“CASH”: Capital Appreciation v. Safe Haven!

CASH FLOWS - LOCAL GOVERNMENTS & ENTERPRISES

HOUSEHOLDS , BUSINESSES AND DEVELOPERS(INCLUDING FOREIGN LENDERS)

CENTRAL/STATE GOVERNMENT LOANSRAISED

CAPITALFUNDING

BUDGETARY CONTRIBUTIONOPERATING(RECURRENT)

FINANCEFOREIGN

CURRENCYRESERVES

BUDGETARYSUPPORT

TAXESFEES

CHARGES &PRICES

CAPITALCONTRI-BUTIONS

CAPITALGRANTS& LOANS

DEBT SERVICE

LOCAL GOVERNMENT

& PUBLICUTILITIES

SPECIAL FUNDS(INCLUDING

CONSOLIDATEDLOANS FUNDS)

CAPITAL INVESTMENT & USAGEEXPENDITURE

ON (COSTS OF) SERVICES

NETFOREIGN

EARNINGS(COMMERCE

ANDINDUSTRY)

WORKING CAPITAL

CONTRIBUTIONS (**)

SINKINGFUNDS (***)

LOANSREPAID

CAPITALMARKETS

DEFICIT FINANCING (*)

(**) = INCL. DEPRECIATION (RETENTION) OR RENEWALS FUNDS(*) = UNSATISFACTORY PRACTICE

174

FINANCIAL RAPE!(Deficits Don’t Matter!)

175

CAPITALFUNDING

BUDGETARY CONTRIBUTIONOPERATING(RECURRENT)

FINANCE

WORKING CAPITAL

DEFICIT FINANCING*

* “No!” means “No!”

CAPITALGRANTS& LOANS

FUNDAMENTAL ACCOUNTABILITY REQUIREMENTS

• Retain (real) net capital intact [including non-monetary capital!].

• Maintain inter-generational equity (current users bear their fair share of all costs, including capital financing costs).

176

STRUCTURE OF INTERNATIONAL FINANCIAL REPORTING

STANDARDS (IFRS)International Financial Reporting Standards (IFRS)

are:

"principles based“

in that they establish broad rules

as well as dictating

specific treatments.

177

STRUCTURE OF IFRSInternational Financial Reporting Standards comprise:

• International Financial Reporting Standards (IFRS) - standards issued after 2001

•International Accounting Standards (IAS) - standards issued before 2001

•Interpretations originated from the :

• International Financial Reporting Interpretations Committee (IFRIC) - issued after 2001

• Standing Interpretations Committee (SIC) - issued before 2001

178

UNDERLYING ASSUMPTIONS

The underlying assumptions used in IFRS are:

Accrual basis - the effect of transactions and other events are recognized when they occur,

not as cash is gained or paid.

Going concern - an entity will continue in operation for the foreseeable future.

179

http://en.wikipedia.org/wiki/Accrual_basis

http://en.wikipedia.org/wiki/Going_concern

QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS

• Understandability• Reliability• Comparability• Relevance• Materiality• Prudence• Substance over

form• Completeness

180

ELEMENTS OF FINANCIAL STATEMENTS

The financial position of an enterprise is primarily provided in the Statement of Financial Position.

The elements include:

1. Asset: An asset is a resource controlled by the enterprise as a result of past events, and from which future economic benefits are expected to flow to the enterprise.

2. Liability: A liability is a present obligation of the enterprise arising from the past events, the settlement of which is expected to result in an outflow from the enterprise' resources, i.e., assets.

181


The financial position of an enterprise is provided in the Statement of Financial Position. In addition to Assets and

Liabilities – Resources – the elements include accumulated Results.

3. Equity: Equity is the residual interest in the accumulated results of the assets of the enterprise after deducting all the liabilities. Equity is also known as “owner's equity”.

[The financial performance of an enterprise is primarily provided in an income statement or profit and loss account. The net total of the elements of an income statement – or the elements that measure the financial performance – results – are added to (or subtracted from) that part of the equity described as “retained earnings” – or a similar expression].

182


The financial performance - results - of an enterprise is primarily provided in an income statement or profit and

loss account. The elements of an income statement or the elements that measure the financial performance are as

follows:

4. Revenues: increases in economic benefit - positive results - during an accounting period in the form of inflows or enhancements of assets, or decrease of liabilities that result in increases in equity. However, it does not include the contributions made by the equity participants, i.e., proprietor, partners and shareholders.

5. Expenses: decreases in economic benefits - negative results - during an accounting period in the form of outflows, or depletions of assets or incurrences of liabilities that result in decreases in equity.

183

ELEMENTS OF COST STATEMENTSThe financial performance – the cost – of an activity is

primarily provided by a detailed analysis of the expenses in an income statement or profit and loss account. The cost elements of an income statement are the elements

that measure the financial performance of an activity as to the following:

A. Expenses: are decreases in economic benefits – negative results – during an accounting period in the form of outflows, or depletions of assets or incurrences of liabilities that result in decreases in equity. WHEREAS:

B. Revenues: are increases in economic benefit – positive results – during an accounting period in the form of inflows or enhancements of assets, or decrease of liabilities that MAY OR MAY NOT result from the expenses incurred at “A” (above.) They DO NOT form part of the analysis of the expenses .

184

REQUIREMENTS OF IFRSIFRS financial statements consist of (IAS1.8):

• Statement of Financial Position

• Comprehensive Income Statement

• Either a Statement of Changes in Equity (SOCE) or a Statement of Recognized Income or Expense (SORIE)

• Cash Flow Statement or Statement of Cash Flows

• Notes, including a Summary of the Significant Accounting Policies

Comparative information is provided for the previous reporting period (IAS 1.36).

185

REQUIREMENTS OF IFRS [On 6 September 2007, the IASB issued a revised IAS 1]

These require that an entity must:

• Present all non-owner changes in equity (that is, 'comprehensive income') either in one statement of comprehensive income or in two statements (a separate income statement and a statement of comprehensive income). [Components of comprehensive income may not be presented in the statement of changes in equity].

• Present a statement of financial position (balance sheet) as at the beginning of the earliest comparative period in a complete set of financial statements when the entity applies an accounting of its activities.

186

REQUIREMENTS OF IFRS [On 6 September 2007, the IASB issued a revised IAS 1]

These require that:

• ‘balance sheet' will become 'statement of financial position'

• ‘income statement' will become 'statement of comprehensive income'

• 'cash flow statement' will become 'statement of cash flows'.

The revised IAS 1 is effective for annual periods beginning on or after 1 January 2009. Early adoption is permitted.

187

“P.O.P.” APPROACHES TO MONITORING OF QUALITY

• Profit over People• Profit over Prevention• Predatory Oil Production• Pricing on Pumps• Poor Operational Preservation

188

WITH EYES ON GULF, BP ALASKA PIPES REMAIN AT RISK

189

The extensive pipeline system that moves oil, gas and waste throughout BP's operations in Alaska is plagued by severe corrosion, according to an internal maintenance report generated four weeks ago.

The document, obtained by the journalism group ProPublica, shows that as of Oct. 1, at least 148 BP pipelines on Alaska's North Slope received an "F-rank'' from the company.


190

According to BP oil workers, that means inspections have determined that more than 80 percent of the pipe wall is corroded and could rupture. Most of those lines carry toxic or flammable substances. Many of the metal walls of the F-ranked pipes are worn to within a few thousandths of an inch of bursting, according to the document, risking an explosion or spills.


191

BP oil workers also say that the company's fire and gas warning systems are unreliable, that the giant turbines that pump oil and gas through the system are aging and that some oil and waste holding tanks are verging on collapse.

MINE SAFETY IN AMERICASAFETY SYSTEM DYSFUNCTIONAL BEFORE MINE BLAST

192

NPR NEWS INVESTIGATION: Legally required water systems at Massey Energy's Upper Big Branch coal mine in West Virginia were not functioning properly before the April 5 explosion that killed 29 mine workers. Some experts say these systems might have helped prevent the disaster if they had been working properly.

http://n.npr.org/NPRI/jN167805757_756663_756653_Z.htm

http://n.npr.org/NPRI/jN167805757_756663_756653_Z.htm

STANDARD MACRO-ECONOMICS[GLOBALIZATION]

193

GNP - NFER = GDP

GROSSNATIONALPRODUCT

NET FOREIGNEARNINGS andREMITTANCES

(From Labor & FromCapital Investment)

GROSSDOMESTICPRODUCT

ENVIRONMENTAL ECONOMICS

194

GNP - NFER = GDP!

GROSSNOW!

PRODUCT

GROSSDEPLETED!PRODUCT

NET FUTUREENVIRONMENTAL

REQUISITIONS

ENVIRONMENTAL ECONOMICS

GNP + NFER = GDP!

GREED,NEED &

POPULATION GROWTH

NO FARSIGHTEDENVIRONMENTALRESPONSIBILITY

GRAB,DESTROY

& POLLUTE

195

RISING VALUES DUE TO SCARCITY

SUPPLIES - FOR PARTICULAR PLACES

AND TIMES:OF EARTH (LAND), AIR

FIRE (ENERGY) AND WATER

LIMITS OF SUPPLY

COSTS OF SUPPLY

AND DEMAND

ENVIRONMENTAL RENT(Adjustment of Value)

196

Air & Water

RenewableNatural ResourcesBasic Land Use

UnusedLand + Mineable & Other

Energy Resources

ENVIRONMENTAL RENT(Return on Investment)

197

Basic Land Use

POLLUTION

ENCROACHMENT and EXTRACTION

DESTRUCTION

POLLUTIONENCROACHMENT} ENVIRONMENTAL

DISINVESTMENT

RenewableNatural Resources

Air & Water

Unused Land + Mineable & OtherEnergy Resources

ENVIRONMENTAL RENT(Return on Investment)

198

=

DESTRUCTION

GLOBAL SUPPORT FOR CARBON PRICING

199

As government and business leaders gathered in Paris, in December 2015, they sent a clear message to the world that climate change is a risk that cannot be ignored, and that they are ready to work together, to bring down emissions.

http://click.icptrack.com/icp/relay.php?r=35773509&msgid=507806&act=U1HJ&c=276942&destination=http://www.worldbank.org/en/news/feature/2014/09/22/governments-businesses-support-carbon-pricing?cid=ISG_E_WBWeeklyUpdate_NL

http://click.icptrack.com/icp/relay.php?r=35773509&msgid=507806&act=U1HJ&c=276942&destination=http://www.worldbank.org/en/news/feature/2014/09/22/governments-businesses-support-carbon-pricing?cid=ISG_E_WBWeeklyUpdate_NL

ENVIRONMENTAL RENT THE ACCOUNTANT'S RESPONSIBILITY

200

• Accounting training is, hopefully, more than just an education, merely to do a job or to earn a living. There must be a duty, a civic trust.

• This responsibility must extend to the obligation for

accounting for the environment. Never were the combined qualities of competence and humility more important.

• These are not intended as moralizing or religious precepts but as necessary contributions to continuance of meaningful and harmonious living on our planet.


201

• To quote the Dalai Lama: "Taking care of our planet is nothing special, nothing sacred or nothing holy. It is just something like taking care of our house. We have no other planet - no other house - except this."

• In this house, therefore, let us take care of our family, using wise budgeting and sharing of resources.

• Let us support and sustain our Mother, the Earth, so that Universal Intelligence, will not, in exasperation, devastate, ruin or destroy us.


202

More professionally, as accountants, let us live in constant fear and respect of the ruthless discipline which can be imposed upon us by our Universal External Auditor.

ENVIRONMENTAL RENT

203

• So far as is known, very few people, indeed, have lived otherwise than upon our Earth. They are the astronauts and cosmonauts!

• From the very beginning of space travel, these privileged people have been able to view our Earth, from afar, in ways not shared by those billions of others of we and our neighbors, who live upon it.

• Virtually all of them have regarded the Earth with awe! We are responsible – and privileged – to follow their example. If we do not, we are all lost – for ever!

"Keep it simple" is often the distracting and disarming slogan.

Yet, those who urge this precept upon (say) accountants and economists, would almost certainly renounce it for (say):

• surgeons operating on them or their loved

ones,• architects designing or building their houses.

The contrast between the scalpel and the meat-axe is perhaps an appropriate analogy, applying equally to financial information!

204

Fifty years ago, at a banquet in the Mansion House, London, UK, celebrating the centennial of

Britain's “Chartered Institute of Public Finance and Accountancy,” the Chaplain to the Lord

Mayor of London prayed the following grace:

"Oh Lord, bless this meal and all those who are engaged in the profession of

public finance, remembering that, in the end, we are all accountable to Thee!"

ULTIMATE ACCOUNTABILITY205

ULTIMATE ACCOUNTABILITY

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While putting away lying, speak every man truth with his neighbor:

for we are all members one of another.

[Ephesians 4:25]

accounting and accountability

Economy & Finance