the consequences and causes of resource accounting

Available online at http://www.idealibrary.com ondoi:10.1006/cpac.2001.0485Critical Perspectives on Accounting (2002) 13, 231–254

THE CONSEQUENCES AND CAUSES OFRESOURCE ACCOUNTING

HOWARD MELLETT∗

Cardiff Business School, Aberconway Building, Colum Drive, Cardiff,CF10 3EU, UK

This paper seeks both to entertain and to examine the issues surrounding thesubstantial project that is currently underway to introduce Resource Accountingand Budgeting (RAB) to the Central Government1 of the UK. It uses a discursiveapproach, based on that used by Hines (1988) and Pinch et al. (1989), andassembles a variety of evidence to examine the driving forces behind itsintroduction. The consequences are reviewed in a normative manner, using theUniversity environment to exemplify many of the issues raised. These includewhether RAB can, as suggested, reveal the “real costs” and “true costs” of activityand the limitations that accompany the use of private sector accounting practices.Using private sector practices has also created tension where these do not producethe accounting result considered appropriate in the public sector. The conclusionis that the claimed benefits on which the case for the introduction of RAB is basedhave not been convincingly presented, and may not exist.

c© 2002 Elsevier Science Ltd. All rights reserved.

The Consequences and Causes of Resource Accounting2

The time is the future after Resource Accounting and Budgeting (RAB) has suffusedthe public sector. The main conversations take place in two rooms in a UK university.In the first location an interview has just taken place to appoint a new member ofacademic staff; the second location is the room of a Professor of Accounting. Thedramatis personae comprise the interviewee, the interview panel, a Professor ofAccounting and a nurse.

Do come back in and take a seat.

I am sure you will be pleased to hear that the committee has decided to offer you thepost and, in view of your previous record, we intend to recommend that you shouldbe appointed on point 5 of the lecturer A scale3.

Obviously, you don’t have to decide whether to accept here and now, but are thereany further questions you would like to ask?

Well, I was wondering about the room that you showed me.

∗E-mail: [email protected]

Received 26 June 2000; revised 15 January 2001; accepted 21 February 2001

2311045–2354/02/$ - see front matter c© 2002 Elsevier Science Ltd. All rights reserved.

232 H. Mellett

Yes, splendid wasn’t it. We pride ourselves on giving our staff top rate accommoda-tion. The room you were shown will be allocated to you for your sole occupation.

I appreciate that; it was made very clear to me when I was shown round thedepartment, but I still don’t understand. I couldn’t help noticing that most of theProfessors and other senior staff have relatively small rooms. In fact, room sizeseems to be in inverse proportion to status. I mean, the Head of Department hasa room the size of a cupboard and the Professor of the room to be allocated to meseems delighted to be leaving it even though it occupies about half of the top floorand has wonderful views over the city on one side and the countryside on the other.I asked why the Professor didn’t want to keep the room, and did not get a directreply, just advice not to accept the first room I am offered.

Well, you have to appreciate that room allocation is as much an art as a science.Matching the right person to the right room, feng shui and all that.

Oh! I just wondered if there was some perverse incentive at work which madesmall rooms preferable to large ones, especially as I attended a paper on devolvedresource management given by one of your colleagues at a conference andwondered if the system described was not just theoretical but is actually operatedhere.

You must be referring to our system that pushes decisions down to those actuallyusing resources and then reports their results using resource accounting. I supposethis could have some impact on individuals and their resource usage decisions. So,if that’s answered your question.

Not really. Could you explain a bit more about who decides on resource usage?

Well. The system is really very simple. Every item of resource which is consumed isthe responsibility of an individual member of staff and so, conversely, every memberof staff is responsible for the resources they consume. This responsibility is matchedby the provision of a budget.

In that case, what resources would I be responsible for?

Let me see. There’s salary costs, consumables/research and accommodation. Youwill be given a budget and allowed to use it as you wish. The bulk is of course salarycost, which is set centrally and works on a sort of actual reimbursement basis—youcan’t go giving yourself pay rises!! However, apart from that you have flexibility.

The idea is that you should be aware of how much you are costing the university,including appropriate on-costs. You can then compare what you cost with youroutput and decide if you are giving value for money, as can your appraiser at yourbiennial review when discussing your contribution to teaching, administration andresearch.

So the system attempts to measure outputs as well as inputs and match them insome form of cost-benefit analysis?

Yes, I suppose you could put it like that.

The consequences and causes of resource accounting 233

Perhaps you could explain a bit more of the background and tell me what size mypersonal budget would be.

Well, it’s not quite straightforward enough to be able to give a quick response tothat, and this committee has got to get on with interviews to fill the vacant Chairin Ancient Runes. What I suggest is that I arrange for you to see the Professor ofAccounting who knows all about the system and should be able to fit you in, althoughthis is getting more difficult since Estates made everyone move their bookshelvesand filing cabinets out of the lifts and corridors and back into their rooms.

. . . . . . . . . . . .

Come in. Ah, you must be the person who wants to know all about this resourcebudgeting and accounting we operate. Just push that pile of boxes full of books intothe corridor and then you will find a folding chair against the wall. Open it up and sityourself down. That’s right. Now, what can I do for you?

I have been offered a lecturing post here, but am a bit hazy about all this talk ofdevolved budgets and outputs. Basically, I would be very grateful if you could tell mewhat it’s all about.

You’ve come to the right person. I have worked here for ages and so, if you havetime, I can tell you about how we have arrived at the present position and from thisyou should be able to see how it works. It is not possible to identify a single point intime, rather a general trend towards developing managerial systems. However, it ispossible to identify various strands that merged.

In the middle to late 1980s there was increasing interest in space utilisation,accountability, and identifying the costs of activity. These ideas were contained ina number of reports, such as that of the CVCP4 in 1985 which stated: “It is in theplanning and use of resources that Universities have the greatest opportunity toimprove their efficiency and effectiveness” (p. 16) and space was clearly identifiedas a resource: “Space should be recognised as no less a resource than labour,materials and services” (p. 48). The same report recommended “Introducingarrangements for staff development, appraisal and accountability” (p. 36). On thesubject of costs, there was concern that full costs should be used when costingresearch projects “to reduce substantially the extent to which clients are subsidisedby the Universities themselves” (CVCP, 1988, p. 4) and a later conclusion wasthat performance indicators should “include unit costs” (UFC5, 1991, p. 18). By1992 there was a clear direction from the UFC that Universities should “considerthe introduction of space charging schemes” (UFC, 1992, p. 13) as “Space haspreviously been regarded as a free good, but this attitude must change” (p. 1). Thesedevelopments took place against the background of external financial reporting byUniversities based on the accruals concept and the production of an income andexpenditure account and balance sheet (CVCP, 1989; 2000).

Then there came the Green Paper6 on “Better Accounting for the Taxpayer’sMoney” (HM Treasury, 1994) and the decision that the approach adopted forGovernment Departments would suit this University. Also, there was great appealin the idea of emphasizing to their users that capital assets should not be regarded

234 H. Mellett

Cash 64,000Recycled 2,160

66,160

BudgetA B

SalaryResearch/consumables 2,000 2,000 4,000Cash spent 32,000 32,000 64,000Office 720 1,440Resources consumed 32,720 33,440

32,720

30,000

33,440

30,000

66,160

60,000

2,16066,160

CENTRAL ADMINISTRATION

TOTAL

Figure 1. Initial distribution.

as “free goods” with a consequential lack of concern about what they cost coupledwith a natural inclination to acquire as many of them as possible. When combinedwith the idea of relating resource consumption to outputs and making resourceconsumers responsible for the resources used at the point of use, the drive toimplement the system became unstoppable. It all seemed so sensible.

Yes it does, so what about the drawbacks?

It became obvious that the main cost, salaries, was not really controllable oncesomeone was appointed, and so attention moved to other costs. One of the majorones was accommodation. After all, this University possesses a number of primecity centre sites, and the interest foregone on their capital value is substantial.Also, some of the buildings were put up in the 1960s, and they can be seen tobe depreciating; the older buildings are of historical importance and have to be wellmaintained, at high cost to the University. It was felt that the people deriving benefitfrom occupying space in the buildings should be made aware of the value of thisbenefit by paying for depreciation and notional interest. So that they could “pay”,they were given a budget which included elements for their salary, research andconsumables and accommodation. The accommodation charge was only a bookentry and was recycled.

How can you recycle money?

It might be clearer if I give you an example with a few numbers in it. Just let mesqueeze through to the white board and I will show you. Take two lecturers withequivalence in everything, even their CVs7, apart from the size of office; as theresult of some historical process, B’s is twice the size of A’s. The cost of the officeis added to each one’s budget, and then the same amount is charged by internaltransfer, which results in something like this (Figure 1).


Cash 64,000Recycled 2,160

66,160

A B

2,360 1,640 4,00032,360 31,640 64,000

720 1,440 2,16033,080 33,080 66,160

Budget

SalaryResearch/consumablesCash spentOfficeResources consumed

33,080

30,000

33,080

30,000

66,160

60,000

CENTRAL ADMINISTRATION

TOTAL

Figure 2. Equalized resource distribution.

The total of £2 160 just goes round in a circle, but the occupants and managersare given a clear indication of the resources being used.

This system was implemented, but it wasn’t long before two complaints arose. Awanted to know why they should have less resources than B, given their equivalencein all other measures. B, on the other hand, complained that their reported costwas higher, and so, given equivalent outputs to A, their cost-benefit ratio appearedrelatively worse. Also, administration didn’t like it much as there was no realmanaging going on; if you moved to a bigger room, your “office” budget increasedaccordingly, so the system was not imposing any constraints or prompting resourcesaving activity.

Wouldn’t it be easier to ignore the recycled money?

Yes, but by this time administration had invested in a new management informationsystem and there was an underlying reluctance to change it. Also it continuedthe University’s style of management control with devolved budgets and localresponsibility, although this was pushed further down from departmental toindividual level.

Anyway, virtually every committee in the place had approved the new system. Ofcourse, not many of them actually understood what they were voting for. So, in timehonoured fashion, a “Resource Level Playing Field Committee” was set up to inves-tigate and advise. Its conclusion was that every academic of similar standing, likeA and B in the above example, should receive the same overall resource budget.

But, if the money is recycled, did this make any difference?

Right. Back to the white board. Taking my previous example, the new systemresulted in (Figure 2):

236 H. Mellett

You can see that A and B now have the same resource budget, but B has to “pay”twice as much for the room. But, to stay within overall budget, the extra amountcan only come from the real money for research and consumables, and, by facinga lower charge for accommodation, A’s research/consumables spending can rise.The net result is that A has 43% more to actually spend than B, but there is nodenying that they have been given, and consumed, equal resources.

People realised that, the lower their “office” charge, the more was left for research,conferences, etc. and so it wasn’t long before the move to smaller rooms started.Every time a small room became vacant, whoever was able to would grab it. Thiswas followed by a trend to sub-divide large rooms into smaller ones. After a while,significant parts of the building were unoccupied, but remained allocated to thedepartment. The total cost for the department’s accommodation remained the same,and so the cost per occupied square metre rose to ensure that the full amount wasrecovered. This means, of course, that if we acted together we could all move torooms twice the size of those we are in at the moment with no relative change, butno one is ready to make the first move, and moving offices itself costs money whichhas to come from someone’s budget.

Thus, large offices became white elephants and smaller rooms became prizedand occupied by senior staff. Newcomers were left with the larger rooms, and theiraccompanying high charges. This left them with less money for research, and theytended to vote with their feet.

Are there no positive outcomes?

There have been some if you look at the desire of the University to attract researchincome. When an individual receives a research grant, based on recovering theirfull cost, a proportion is included in their personal budget and they can spend thishow they wish. This could include a larger room. Similarly additional funding fromrecognition of teaching excellence can be used to supplement individual budgets.But, this is offset to some extent by the fact that such income is not permanent andso if it declines a person may be stuck with a large room and no means to pay for it.

Thanks for the explanation. Are there any plans to revise the system?

No, we have all got used to it now. However, there is one small, but growing,movement that could put an end to it. Some staff have managed to use theirresource budget to buy their own office space away from the University. They arguethat they have been given resources to use as they see fit and so should be able tolook to the private sector if this offers the same, or better, services at a lower cost.However, this interrupts the circular flow of recycled funds and converts a book entryinto real cash. Extending the example I have used so far, B may find that they canrent an equivalent office for £1 080 a year which is close to the University and withno detrimental impact on their ability to fulfill their contract of employment. The initialresult, as B spends cash of £1 080 on accommodation, is to free up an extra £360 tospend on their research. This gives a total for research of £1 640 plus £360 equals£2 000 and so puts B back to where they started from in Figure 1 but creates anoverdraft for the University (Figure 3).


A BSalary 30 000 Salary 30 000Research/consumables 2 360 Research/consumables 2 000Cash spent -A 32 360 32 000Office 720 Office 1 080Resources consumed 33 080 Cash spent -B 33 080

Spent by A 32 360Spent by B 33 080

65 420From HEFCE8 64 000Overdraft 1 420

Figure 3. Creating a central overdraft.

After that, every one else’s room charge would have to go up to cover the loss ofcontribution from B.

Didn’t the University respond to this? You can’t keep on running up overdrafts.

There were a couple of responses. One was to threaten to remove the “office”element from an individual’s allowance if they turn to the private sector in thisway, but this has been referred to the Resource Level Playing Field Committee.There have also been suggestions that spare capacity should be sold or let outcommercially. This looks attractive but ran into problems as the premises arescheduled for use only for educational purposes and the University does not wantto turn itself into a property company—even if this were allowed by its Charter andStatutes. And remember, all this is driven by a change in accounting that gavevisibility to a previously unreported cost and made individuals responsible for it.

It looks as though you can either have a system which has no teeth as everyonecarries on as they used to and is given a budget to cover their activity, or you reallygive people control over, and responsibility for, the resources they consume andtake the consequences.

It sounds to me as though this is not a place to come for a job if there are any otheroffers on the table. But, didn’t anyone foresee the problems and doesn’t anyonewant to do anything about it?

While all the subsequent discussion and implementation was going on, I was onsabbatical. Even if I had been around, I doubt if the outcome would have beendifferent, although I could have pointed them towards the literature on the subject,like Ashton who in 1976 looked at deviation-amplifying feedback, or Collins in 1982dealing with the use of accounting systems to prescribe behaviour, or Armstrong’s(1991) re-thinking of the use of accounting in the agency context, or Baiman andNoel (1985) when they considered responsibility accounting. I could go on, but it’sa bit too late now. Also, there is great intuitive attraction in being responsible foryour own resources, but no one grasped the distinction between fixed, variable

238 H. Mellett

and sunk costs and the difference between resources and cash, let alone thebehavioural consequences. Now we have the system, we may be stuck with it.After all, the government persists with its own version of resource budgeting andaccounting.

I’m sorry to go back to it, but didn’t anyone foresee the complications? Surely, ifit is to be used by the government, it must have been thoroughly investigated andassessed before it was implemented.

There were a few of us at the time who saw it all as “Alice in Wonderland’ accounting,but the whole process seemed to develop a life of its own, and anyway, as waspointed out to me later, it in fact had more to do with “Hunting the Snark” than“Alice”.

My train isn’t for a couple of hours, so please tell me what the Snark has to do withan accounting system.

OK. But first I will have to refresh my memory by looking at a few references Icollected at the time. Here we are.

In the late 1970’s a number of investigations took place under the generalheading of “Raynor scrutinies” (NAO9, 1986a). These looked at value for moneyin Central Government, and raised the question of cost identification. At the sametime, a revised management information system was being introduced to deal withdepartmental plans, performance and action (Coombs & Jenkins, 1994, p. 13).These two approaches merged in the Financial Management Initiative10 of 1982,which emphasised the role of costs in performance evaluation. By 1986 the NAOreported that, in the departments reviewed, considerable progress had been madein revising their systems to produce the required information but the plans had notyet been fully implemented (NAO, 1986b).

The attempt to introduce management procedures highlighted the size of thepublic sector and its dual roles of policy development and implementation. A 1988report (Efficiency Unit, 1988) recommended the creation of Agencies to carry outexecutive functions and by 1998 about 76% of the total number of civil servantswere working in Executive Agencies (Jones & Pendlebury, 2000, p. 32) and theseagencies used accounting methods based on those of the private sector. Therevolution for accounting in the remainder of central government was contained inthe November 1993 budget statement which announced that a system of resourceaccounting and budgeting—very soon known as RAB—was to be introduced forCentral Government. So, at this stage the position was:

He had bought a large map representing the sea,Without the least vestige of land:

And the crew were much pleased when they found it to beA map they could all understand

(Carroll, 1876, p. 55)

You see, agreement was possible because there was no substance, just astatement of intent. The next step was a Green Paper in 1994 which outlined how


the scheme to introduce RAB was to be put into operation (HM Treasury, 1994).This was followed by a White Paper11 which provided definitions (HM Treasury,1995, pp. 47–49):

• Resource accounting . A set of accruals accounting techniques for reportingon the expenditure of central government and a framework for analysingexpenditure by departmental aims and objectives, relating these to outputswhere possible.

• Resource budgeting . Planning and controlling public expenditure on a resourceaccounting basis.

• Accruals accounting . A method of accounting which records expenditure as itis incurred and income as it is earned during an accounting period.

• Cash accounting . A method of accounting which records cash payments andcash receipts as they occur within an accounting period.

Wasn’t this being done already?

Cash accounting already existed, and so the novelty lay in the use of accrualsaccounting as a basis on which to undertake RAB. As well as switching from cash toaccruals accounting, a cost of capital charge was suggested. It was also intendedto provide a much closer link between inputs and departmental aims, objectivesand outputs with the new basis applying not only to the way in which governmentdepartments report to Parliament12, but also to the conduct of government business.One way to highlight the changes is to look at the accounting reports that were tobe produced:

• Summary of resource outturn . This provides information for Parliamentarycontrol purposes and compares the estimate which was approved with actualexpenditure on both a resource and cash basis. An explanation of the causes ofvariation between the approved requirement and outturn is also included.

• Operating cost statement . This shows the administrative and programme costsof the department’s operation and is similar to a private sector profit and lossaccount, although the identification of income against which costs are offset isabsent.

• Balance sheet . Assets and liabilities are included and balanced against aGeneral Fund and Reserves. This is virtually the same as the private sectorbalance sheet, with differences in the sources of funding.

• Cash flow statement . Analyses net cash outflows by operating and investingactivities. Similar to that found in the private sector, but starting with an analysisof costs which are netted and offset by financing.

• Statement of resources . Analyses resource costs according to departmentalaims and objectives and matches them, where possible, with quantified outputmeasures. After a while this was linked in with Public Service Agreements andService Delivery Agreements13.

240 H. Mellett

Soon after this the printing presses started rolling and publications flowedfrom all parts of the financial regime to advance various aspects of the pro-gramme (HM Treasury, 1997a to h) together with responses from other govern-ment organisations such as the National Audit Office (1995, 1996, 1997), thePublic Accounts Committee14 (1995; 1997) and the Treasury Select Commit-tee15(1995a,b; 1996a,b; 1997). Also, a lot of practical work was completed, suchas compiling a physical list of government assets. You can see this at:

http://www.hm-treasury.gov.uk/pub/html/docs/nar/main.html

I see the way in which the whole project gathered momentum, but what was thestated underlying rationale?

Well, this depended on the rule of three:

Just the place for a Snark! I have said it twice:That alone should encourage the crew.

Just the place for a Snark! I have said it thrice:What I tell you three times is true.

(Carroll, 1876, p. 46)

If you say something often enough, it might become part of the received wisdom.So, Kenneth Clarke16, when outlining the main features of RAB, claimed that it “willcome to be seen as a milestone in modernising the state” (HM Treasury, 1995, p. i),but why? No doubt, this was based on the claims made for what the revised systemwill facilitate, which can be found throughout the Green and White Papers:

• From the foreword to the Green Paper (HM Treasury, 1994, pp. iii–iv)

� Enable managers to evaluate the cost of capital and current resources on anequivalent basis

� Strengthen cash management in departments

� Set departmental objectives and outputs in terms of resources used

� Enable taxpayers to see what they are receiving for their money and judgevalue for money

� Substantial benefits [unspecified] will follow its extension throughout govern-ment departments

� It will represent a significant improvement in public sector financial manage-ment techniques

� The adoption of a business-like approach will bear down on costs to thetaxpayer

• From the Executive Summary in the Green Paper (HM Treasury, 1994, pp. vii–viii)

� More accurate and relevant management information to cost resources usedand match them with outputs

http://www.hm-treasury.gov.uk/pub/html/docs/nar/main.html


� Better informed decisions on the balance between current and capitalexpenditure, taking into account the opportunity cost of capital and itsconsumption over time

� Improved public expenditure planning and control

� Development of cash control at a higher level than hitherto

� Contributing to the development of a strategic approach to managing the CivilService

� Enabling economic policy to be formulated with information about the valueand use of fixed assets and capital consumption in the public sector

� Promoting the better use of resources and so reducing the public sector’s callon funds

� It will be of great value to departments and their agencies in developing theirplans and managing their resources

• From the foreword to the White Paper (HM Treasury, 1995, p. i)

� Focusing on resources consumed and not just cash spent

� Treat capital and current expenditure in a way which better reflects theireconomic significance

� Encourage greater emphasis on outputs and the achievement of aims andobjectives

� Better informed decisions about overall public spending priorities

� More useful information to Parliament when it approves spending bydepartments

• From the Executive Summary in the White Paper (HM Treasury, 1995, pp. 2–3)

� Better treatment of capital, with charges for depreciation and the cost ofcapital to encourage its more efficient use

� The new control system will yield considerable microeconomic benefits

The Treasury’s17 view was that the benefits of resource accounting are that it“would provide departments with better management information on their costs andassets; help them to manage working capital; focus more on outputs and not just oninputs; and make managers more financially aware. It would also help governmentto allocate resources on a better basis and have very substantial benefits forParliament through new and better-focused information” (Select Committee onPublic Accounts, 1998, paragraph 9).

No wonder that RAB was hailed as such a great idea if it could do all of that!

So it seemed, and once introduced, the RAB project acquired the mantle of ageneral panacea. Take the Ministry of Defence18. It came in for a real pastingover its inability to bring in procurement projects on time and within budget. ThePublic Accounts Committee (1998) found that the “overall picture presented is

242 H. Mellett

one of cost overruns, averaging 9.1 per cent of approvals, and time overruns,averaging 37 months” (paragraph 3). Part of the Ministry’s response was that“resource accounting and budgeting would put a new degree of discipline intothe relationship between the Procurement Executive19 and front-line services, forexample, by bringing home to roost any increase to support costs as a result ofdelays or difficulties in the acquisition process” (paragraph 49). Exactly how thiswas to come about is not made clear, and, in any case, identifying costs does not ofitself remove delays or difficulties, it merely quantifies some of the results.

Outside bodies also gave support to RAB: “CIPFA20 fully supports the introductionof resource accounting and budgeting in government, as an initiative which itbelieves will bring benefits in terms of both improved published financial information,which will enhance the accountability of government, and improved financialmanagement within departments” (CIPFA, 1997, paragraph 1.1). On the other hand,the whole idea of depreciation accounting, in both the public and private sectors, canbe questioned on theoretical grounds and it is only really possible to describe it as“different” rather than “better” (Mellett, 1997).

The wish lists and other claims are not accompanied by explanations of why theadoption of RAB would deliver the claimed improvements. There was a hint thatthe new accounting is consistent with a more business like approach and the factthat RAB is based on UK Generally Accepted Accounting Practices, in particularthe reporting requirements of the Companies Acts and Accounting Standards,suggested that the private sector approach to accounting was necessarily viewedas better than the extant public sector methods.

1998 saw the continued outpouring of government reports and, by then, theRAB project was being linked into macro economic policy. The golden rule hadbeen promulgated which states that, over an economic cycle, the Government willonly borrow to finance public investment and not to fund current expenditure. Thebalance sheet to be included in the “whole of government accounts”, penciled infor 2003–04 with full audited accounts from 2005–06 (Likierman, 1998a, p. 62), isexpected to help underpin this rule as it is based on a clear distinction betweencapital and revenue expenditure, although “there are, however, data and conceptualdifficulties that need to be addressed before the balance sheet can be given a moreformal role in the fiscal framework” (HM Treasury, 1998, paragraph 3.2.5).

Resource accounting was also an integral part of the New Public Management,which was described by Power (1997, p. 43) as “a cluster of ideas borrowed fromthe conceptual framework of private sector administrative practice”. In the UK thiswas expressed through the Financial Management Initiative with the accountingaspects being a later addition while in other countries accounting reforms had amore central role from the outset. Elsewhere, the claimed benefits were similarto those expected in the UK: better measurement of costs and revenues; greaterfocus on outputs; more efficient and effective use of resources; full cost identified;improved accountability; better financial management; and greater comparability ofmanagerial performance (OECD, 1993; Evans, 1995; Mellor, 1996). There werevoices raised which questioned the whole exercise (Conn, 1996) but these were not


heeded. Indeed, participants in other countries extolled its virtues, the Departmentof Public Enterprise in Ireland considered its benefits to be:

• Better and more detailed information upon which to review performance

• Identification of the true costs of running the Department

• The use of depreciation provides managers with the real cost of holding andusing assets

(McGeough, 1998, p. 60)

Note the idea that “true costs” and “real costs” exist, and can be measured byaccruals accounting!!!

There was also a perceived convergence between the objectives of private andpublic sector managements and this is reflected in the adoption of RAB (Guthrie,1998). However, accruals accounting developed in the private sector as a methodof reporting the results of profit seeking enterprises and identifying the surpluswhich was available for distribution, or, put another way, ensuring that capital wasmaintained and so passed on before any dividends are paid.

That sounds a good idea. Could it be used to measure the assets passed from onegeneration to another?

Yes, although this is an area which has not been fully appreciated as the benefitsclaimed to flow from the adoption of RAB have tended so far to concentrateon cost measurement, although the possibilities are recognised: “Over time, theGovernment intends to pay more attention to movements in the public sectorbalance sheet, which includes tangible assets as well as net financial liabilities”(HM Treasury, 1998, paragraph 3.2.5).

I think I get the idea of what happens in practice.

The accounting entity starts the year with a set of assets which were funded inthe past. During the year it adds to these and uses up some portion measured bydepreciation. This leaves a balance to pass on to the next year. If the depreciationcharge exceeds the additions, then there has been a net consumption during theyear enjoyed by those who have benefited from the output resulting from thisconsumption; where this continues for a number of years, the consequence is thatone generation has used up the resources it inherited and passed on a diminishedstock to its heirs. Funding additions to the capital stock by means of loans has asimilar effect, as the liability is passed on together with the assets.

You’ve got it. But don’t forget that revaluation muddies the water. It has the effectthat it is not possible simply to compare values of capital stock reported in publicsector balance sheets over a period of time. The opening balance generally growsas a result of revaluation and so offsets consumption if unadjusted comparisons aremade.

In the private sector, there is a general presumption that capital should bemaintained and that an enterprise which, over the years, is eroding its capital base is

244 H. Mellett

heading for eventual failure. This assumption may not always hold true in the publicsector. For example, military assets should be conserved, apart from in times of warwhen they all become expendable in pursuit of victory. Changes in policy may havea similar effect, especially where there is a switch from capital to revenue intensiveapproaches. This has arisen with the introduction of “care in the community” whichhas resulted in the disposal of capital assets as the large old mental hospitals havebeen shut and their sites sold off.

I suppose that whether capital has been maintained would have to be decided bycomparing additions with consumption. This would have to be done at an aggregatelevel as reductions in one area may be matched by growth in another; it would be apolitical decision as to whether the resultant trade-off is acceptable. The question ofwhether each generation should pass on at least as much net capital as it inheritedis also open to debate, which should be illuminated by the information provided byRAB.

That’s a good summary, but there remains the question of whether it is the valuewhich is to be maintained and passed on or the physical resources. It all dependson the extent to which a monetary value, arrived at using subjective measures, isan adequate proxy.

I’m getting really interested now. How did the managers respond to the new regime?

At first there was some confusion as to which parameter of performance should bepursued. As you know, what you measure is what you get, and activity was reportedin terms of inputs and outputs, so management had two dimensions to consider,just like the helmsman being instructed by the captain:

He was thoughtful and grave—but the orders he gaveWere enough to bewilder the crew.

When he cried, “Steer to starboard, but keep her head larboard!”What on earth was the helmsman to do?

(Carroll, 1876, p. 57)

But, wasn’t it a good idea to measure costs and then control them?

Agreed. The idea of making the public sector more business-like with the adoptionof efficiency-inducing management methods, which are perceived to exist in theprivate sector, included RAB which was predicated on the idea of identifying the fullcost of activities (Robinson, 1998). This is clear from the intention to cost separateactivities and match them with quantified outputs. The resources consumed aremeasured as revenue costs plus depreciation plus an interest charge to representthe opportunity cost of capital. This approach ignored the basic rule that decisionmaking should be based on those variables which it is possible to control; thus,the decision of whether to undertake a particular programme should be based oncontrollable incremental costs and should not include sunk costs. Training is takingplace that is intended to dispel ignorance on the part of those using the information(Likierman, 2000, p. 258) and so let’s hope it achieves this objective. There is alsothe question of how to deal with opportunity cost; should recognition be given to the


possibility of selling off assets and, as a consequence, lowering taxes or reducingborrowing but not delivering the output of a programme?

It all has to be viewed in the context of the government wanting departmentsto deliver the required output at the lowest possible cost commensurate with anacceptable standard of service and within cash limits. There being no simple bottomline figure analogous to profit, other bases of comparison had to be used. Thesecould be derived from benchmarking and the analysis of trends, comparison withequivalent private sector entities, or competitive tendering with the private sector.But, based on the NHS experience of capital accounting, it was suggested that therewas little for the public sector to learn from the private in terms of cost managementor asset utilisation (Shaoul, 1998, p. 110).

Improved efficiency is derived from delivering the same output at a lower cost oran increased output from an unchanged cost. Under accruals accounting, the costincludes revenue costs and capital charges; while it may be possible to reduce theformer, the latter is less open to incremental reductions. The asset is owned andthe expense incurred, or it is not. Due to the adoption of depreciated replacementcost as a valuation base, the depreciation and interest charges increase over theyears as the underlying asset values rise. Should government wish to contain costs,including capital charges, within a fixed total, then revenue costs may have to bereduced to meet not only their own incremental increases from such factors as payincreases, but also increases in capital charges. This sort of squeeze appears in thisuniversity as the increased capital charges, when recycled, exacerbate the impactof the budget allocations I gave you in the earlier numerical examples. Likierman,the Head of the Government Accounting Service, identifies that it will “be essentialto ensure that users have the information to differentiate between appropriate andinappropriate signals” (2000, p. 259). However, to avoid perverse incentives youhave to identify them, and this means comparing the outcome of the prescribedsystem with the result that would obtain from an alternative, superior one. So whynot use the alternative in the first place?

But doesn’t accounting give a consistent insight into how an organisation isperforming?

It might do, but there are many limitations. Accounting has many areas that requiresubjective judgment, and where there is subjectivity there is room for possiblemanipulation and therefore lack of consistency.

Management could try to ameliorate the impact of capital charges by adopting,where possible, accounting and valuation policies which give lower outcomes. Theremay be limited scope for this, but subjective valuations are required for such itemsas buildings and land and there may not always be a directly comparable privatesector equivalent; what is the depreciated replacement cost of a good condition,hardly used, one careful driver, low mileage main battle tank? Or what about abrand new submarine? Four unused Upholder class examples were sold for a netamount of £100m—about one tenth of what they cost (Public Accounts Committee,1999, paragraph 39).

246 H. Mellett

The military also has accounting problems with munitions where apparentlysimilar items are treated differently for accounting purposes. These are countedas stock and written off when used unless they are guided missiles or bombs, inwhich case they are classed as fixed assets, revalued to current replacement costand depreciated; the depreciated value is written off when they go “bang”. In realitya weapon has been purchased, stored and exploded but its accounting impactdepends on how long it has been owned. It appears cheaper to delay action thatinvolves the use of guided weapons so that operational costs consist of the write-offof more completely depreciated assets.

On a more mundane level, where possible, extended asset lives may be optedfor to give a lower annual charge. In Figure 3, the University could increase assetlives so as to give a lower charge, and hence budget, and so those who usethe private sector route may find themselves having to dip into their research orconsumable funds to pay their outside rent. When an asset with an extended life isdisposed of, any loss caused by under-depreciation can be blamed on a defectiveaccounting policy. In any case, it is an exceptional item and the fault of previousmanagement. The external imposition of what management views as excessivevalues can provide a plausible excuse for not achieving targets. Alternatively, it maybe decided to split costs into those that are controllable in the short to mediumterm and those that are not, with managers obviously keen to include as many aspossible in the “uncontrollable” category.

Also, unless an element of capital charge can be directly attributed to a particularactivity, the problems of joint costs arise. For example, in the University the costof accommodation for an academic member of staff services teaching, researchand administration. To decide how much to attribute to each would require thedevelopment of a basis, such as time spent on each, and this would lead toacademics having to complete time sheets. Where costs have to be apportionedbetween activities, arbitrary bases have to be established. It is possible thatapportionments are based on what the activity will bear, with a subsequentrationalisation to explain the particular approach adopted. Thus, an academic maybias costs away from research by taking a very broad definition of what time shouldbe recorded for administration and teaching; a lot of time could be spent discussinghow to record time spent administering research.

Another feature of joint costs emphasises the linkages between activities. Where asingle cost contributes to two existing activities, the decision on whether to continueeither of them has to include consideration of what will happen to fixed costs if oneof them is discontinued. If there is no other use, then they either remain in limbo asa cost incurred with no related output, or they are charged to the remaining activity,with a consequent increase in its stated cost which may make it appear unviable.The person responsible for the activity carrying all the costs can rightly complainthat they are being penalised for costs over which they have no control, just ashappened with our rooms. A full costing of research or teaching might make eitherof them appear uneconomic, but to stop doing one of them means the other bearsall the costs that do not stop with it.


As students bring fees with them, attempts have been made to cost individualcourses to identify any that do not pay their way. This involves aggregating the jointcosts of many activities, such as those for teaching staff and premises. The troubleis that discontinuing courses does not result in their related costs disappearing asstaff still have to be paid, unless numbers are cut, and premises provided.

I had not realised that accounting involved such subjective considerations, Iassumed that the fact that accounts balanced indicated some type of precision.

I’m afraid not. Accounting depends on deciding what items to include in theaccounts—and by extension, what is left out of the accounts—and how to valuethem.

How can things be left out of the accounts?

Quite easily. This whole question is addressed by Hines (1988) in the form ofa dialogue, but, looking at specific public sector cases, RAB uses conventionalaccounting definitions and so an asset is something that has a value because itsownership will bring future economic benefits (Accounting Standards Board, 1999,paragraph 4.6). However, even with this approach, many things that might appearto be assets are excluded, such as the human capital built up through training andfamiliarity with the work to be undertaken. It is even possible to argue that somethings that look like assets are in fact liabilities.

Now you are trying to take things too far. Not even a creative accountant couldconvert an asset into a liability.

OK. Let’s try. Do you agree that an asset has a present value because it will producea series of positive inflows of resources in the future?

Yes.

Good. Now, can you think of something the ownership of which will result in onlyoutflows of resources in the future?

Well, how about a nuclear submarine or a park in the middle of a city?

Excellent. The idea of heritage assets in fact representing liabilities because allthey will bring to their owner is costs was analysed by Mautz (1988) who used theWashington Monument as an example. A similar line could be taken for universitybuildings, although they could become assets if the organisation owning thembecame one that depended on generating income, as happened in the case ofNational Health Service Hospital Trusts (Mellett, 1992). Using this approach, someof the University’s older buildings are definitely liabilities with the amount of upkeepthey require, and they have limited selling value as planning law allows them onlyto be used for educational purposes. But, things may change with the increasingemphasis on using facilities to generate income from sources such as researchcontracts or running conferences.

I never knew accounting could be such magic. Are there any other things you canmake appear or disappear?

248 H. Mellett

Oh yes. There is the question of whether liabilities and assets relating the PrivateFinance Initiative (PFI) should be included in the balance sheet. Under this schemea public sector need which is underpinned by the provision of a capital asset isdefined in terms of a desired set of outputs, such as places in prison or hospitalbeds; consideration is then given to how these outputs are to be provided. The PFIsolution is that a private sector entity builds and runs the required asset and thepublic sector purchases its output in exchange for a stream of revenue payments.

The government’s view on the assets associated with this delivery is that “Theassets will belong to the private sector. The accounts of the public sector purchaserwill not recognise these assets, and will record only the service payments” (HMTreasury, 1997g, p. 94). An alternative view is that, because of the non-cancellable,long-term nature of the agreement, the value of the assets and the related long-termliability should be included in the accounts of public sector user. So, they can appearor disappear according to your preferred means of accounting representation.

Isn’t it confusing to have PFI assets and liabilities in some organisation’s accountsbut not in others?

It would be, but the government broadly aims to observe standard accountingpractice as set by the Accounting Standards Board for the private sector and sowould find it difficult not to comply with its decisions. One of the key justifications ofPFI was the transfer of risk to the private sector; if the assets appear on the publicsector balance sheet, it would suggest that in fact risk has not been transferred.This discussion is centered around the idea of reporting substance over form. If anorganisation is tied to a long term commitment to pay for an asset and carries itsassociated risks, as in the case of a lease, the substance of the transaction is thatthe lessee has a long-term liability and an asset even though, in terms of the strictlylegal form, it does not own it. In other words, if it looks like a duck and quacks,then . . .

. . . it probably is a duck . . .

. . . and will be reported as such.

The Treasury used the argument that the stream of payments was for both theasset and associated services and, as these could not be identified separately, anasset was not established. This position prevailed and was reflected in the Treasuryrules for accounting for PFI (HM Treasury, 1999), although these did requiredisclosure by way of a note, of the commitments existing under PFI contracts.There was no single presenter of the alternative view that carried the weight ofthe Treasury, although there was certainly academic questioning of the rational(Mayston, 1999; Hodges and Mellett, 1999; Broadbent & Laughlin, 1999).

Going back to recycling, it is possible for things to go round in circles and sotheir effect disappears. The White Paper (HM Treasury, 1995) contains a specimenset of accounts. These show how notional charges, including interest on capitalemployed, are charged as a cost and then recredited so that their net impact is zero.This internal balancing means that, whatever the value of the notional charges, theyhave no effect on the resources of the entity, and so we arrive at:


Taking three as the subject to reason about—A convenient number to state—

We add Seven, and Ten, and then multiply outBy One Thousand diminished by Eight

The result we proceed to divide, as you see,By Nine Hundred and Ninety Two:

Then subtract Seventeen, and the answer must beExactly and perfectly true

(Carroll, 1876, p. 79–80)

Just a minute, can I borrow a calculator? So that’s 3 plus 7 plus 10, gives 20,

times 1 000 minus 8 totals 19 840

divide by 992 and take away 17

I see, we ’re back to 3, so it goes round in circles and ends up back where it startedfrom. Anyway, with all this going on, what was happening in Parliament?

Well, instead of marching through the lobbies to support or oppose cash basedestimates, MPs had to do exactly the same but now for a cash and resource basedversion. They then waited and after some time got back comparisons of actual cashspent and resources consumed compared with budget. One of the main problemswith the resources was that the fixed assets were revalued using indices to approx-imate to current value, but these were not known at the time of setting the budget.As a result, variances could be caused by the fact that the volume of resourcesconsumed was different from that expected, or the revaluation indices were different.

And remember, this was at a time when “Cabinet ministers [were] to be sent backto the classsroom to learn basic economics, accountancy and statistics [because]civil servants [were] so concerned about the lack of numeracy at the top ofgovernment” (Denny, 2000, p. 11). If that was the state at the top, imagine whatit was like on the back benches.

So, what’s your overall impression of all this Resource Accounting and Budgeting?Was it inevitable that we have ended up where we are?

When surveying any social system, there is no single or easy answer to thequestion “How did we get here?” The present position represents the resolutionof many forces, some acting together while others act in opposite directions. Inthe context of RAB in the UK, a number of factors can be seen to encourage itsadoption. The political climate at its inception was conducive to the idea of “privatesector good, public sector bad” and any system transplanted from the privatesector was held to be an improvement. Vested interests can also be identified;the list of supportive respondents to the Green Paper (HM Treasury, 1995, p. 24)included professional bodies, accountancy firms, consultancies, interest groups andgovernment departments whose members could see the possibility of personaladvantage or potential lucrative contracts. The need felt by outside groups to carrytheir techniques into the public sector may be consistent with the proposition thatprivate sector accounting is itself facing problems and:

250 H. Mellett

that the homeland is on fire, or at least becoming significantly less fertile territory to occupythan in the past, with a consequent need to seek out new lands to take over and absorb.Nomadic behaviour and the search for new territory to occupy may then be the result ofshort-sighted predatory policies in the homelands rather than of a superior culture.

Mayston, 1993, p. 89

Or, although written in the context of PFI, a more general proposition is that:“There is indeed a danger that . . . change within the public sector, proves to serveparticular interest groups, such as management consultants, accountants, andcurrent managers and politicians seeking short-term fiscal palliatives, rather thanlonger-term efficiency goals” (Mayston, 1999, p. 272). Where there is not a financialincentive, private sector firms have withdrawn, as occurred in the case of auditingwhere a couple of private sector auditor firms have left the Audit Commission’s21

approved list because they considered the returns to be insufficient (Clatworthy etal., 2000, p. 68). However, all the accounting firms will be ready to sell the newestprivate sector innovations to the public sector, the latest one being risk managementas set out by Turnbull (1999).

Even when there was a change in the political party in government in 1997, theRAB project continued and soon after the general election was reckoned to beabout half way towards implementation (Likierman, 1998b). The benefits, both thoseexplicitly promised and those alluded to, could not be guaranteed and were unlikely,given the deficiencies of accruals accounting in the private sector. What we sawwas a private sector problem posing as a public sector solution (Hopper, 1986).

In any case, it didn’t really matter to those who created the system, they move on:

In the midst of the word he was trying to say,In the midst of his laughter and glee,

He had softly and suddenly vanished away—For the Snark was a Boojum, you see

(Carroll, 1876, p. 96)

wakeup. . . Wake Up. . . wake up. . . Wake Up wake up. . . wake up Wake Up

WAKE UPCome on Professor. You were muttering away, was it a nightmare? It’s time to stopdreaming about the ivory towers where you worked before you retired, it alwaysgets you agitated. Time to take your medication and then it’s your turn to use thebedroom. After all, the NHS can’t have valuable resources like rooms lying unusedwhen the ward manager is charged such a lot every year for their use, can we?

EpilogueThe introduction of RAB continues. Whether it will be a success can only be judgedwhen the results of its implementation are visible. As Likierman puts it (2000, p. 253)“A full analysis will only be possible once the new systems have been working fora number of years”. Some look forward with dreams of better things while others, ifnot actually having nightmares about it, have their doubts.


Acknowledgements

The author would like to thank those who attended a seminar at the NottinghamUniversity Business School, the BAA Conference in Exeter, his colleagues at CardiffBusiness School, Professor Chris Humphries and two anonymous referees for theirhelpful comments on earlier drafts of this paper.

Notes

1. Central Government is the national government of the UK.2. Resource Accounting comprises a set of accruals accounting techniques for reporting the

expenditure of central government and Resource Budgeting uses resource accounting to plan andcontrol public sector expenditure. It represents one aspect of New Public Management whereby thepublic sector borrows ideas from the conceptual framework of private sector administrative practice.

3. The pay scale for UK academics comprises a number of points on a spine. Staff are appointed to aparticular point within a band determined by the category to which they belong. The lecturer A gradecovers the lowest section of the scale, from point 4 to point 11 (the rates of pay associated with thesepoints, effective from 1 April 2000, were £UK16 775 to £UK23 256).

4. The CVCP, now known as Universities UK, is a Committee of Vice-Chancellors and Principals of allthe UK Universities which was established for purposes of mutual consultation. Its mission is to bethe essential voice of UK universities by promoting and supporting their work.

5. University Funding Council: the forerunner of HEFCE (see endnote 8).6. Green papers are consultation documents produced by the Government. They are often used when

a Government Department is considering the introduction of a new law. Its purpose is to encouragedebate and feedback on the proposals from both inside and outside parliament.

7. Curriculum Vitae (CV) is an account of a person’s previous career.8. The Higher Education Funding Council for England (HEFCE) distributes public money for teaching

and research to universities and colleges. It aims to promote and fund high-quality, cost-effectiveteaching and research.

9. The National Audit Office is independent of government and scrutinises public spending on behalfof Parliament. It audits the accounts of all government departments and agencies, as well as a widerange of other public bodies, and reports to Parliament on the economy, efficiency and effectivenesswith which Government bodies have used public money.

10. The Financial Management Initiative promoted systems throughout government that give a clearview of objectives, define responsibility and provide appropriate information.

11. White Papers are produced by the Government and set out details of future policy on a particularsubject. The White Paper allows the Government an opportunity to gather feedback before it formallytakes steps to enact the related legislation.

12. The British Parliament is the institution by which government is carried out. It is made up of threeparts—the Crown, the House of Lords and the House of Commons. One of its responsibilities isscrutinise the Government, a function in which RAB will have a central role as the means by whichthe financial aspects of government are reported.

13. Every department, since 1998, within Central Government has a Public Service Agreement (PSA)to specify the targets and outputs which it is committed to delivering; each department’s PSA is ineffect its contract with the Treasury and shows what will be delivered in return for funding. ServiceDelivery Agreements focus more on the operational side of the department and set out productivitytargets.

14. The Public Accounts Committee is appointed by the House of Commons to examine the accountsthat show how the sums of money granted by Parliament to meet the public expenditure have beenused. Its reports are diverse and cover such aspects as the management and control of hospitalacquired infections, compensation for victims of crime and the acquisition of specific items of defenceequipment.

15. The Treasury Select Committee is appointed to examine on behalf of the House of Commons theexpenditure, administration and policy of the Treasury, the Board of Inland Revenue and the Boardof Customs and Excise.

252 H. Mellett

16. Kenneth Clarke is a Conservative Member of Parliament who was Chancellor of the Exchequer, andhence in charge of the Treasury, from May 1993 until April 1997.

17. The Treasury is the Government Department that is responsible for overall Government spending onpublic services and for raising taxes; it also does the Government’s accounting.

18. The Ministry of Defence is the Government Department with responsibility for the armed forces of theUK. Its mission is to: “defend the United Kingdom, and Overseas Territories, our people and interests[and] act as a force for good by strengthening international peace and security”.

19. The Procurement Executive is an integral part of the Ministry of Defence with responsibility forprocuring new major equipment once its acquisition has been approved.

20. The Chartered Institute of Public Finance and Accounting (CIPFA) is the professional body in theUK of accountants involved in the public sector. Its objects include the advancement of the scienceof public finance and of accountancy and cognate subjects as applied to all or any of the dutiesimposed upon and functions undertaken by public service bodies and the to promotion of publiceducation therein.

21. The Audit Commission is a Government body that appoints auditors to all local authorities and NHSbodies.

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the consequences and causes of resource accounting

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