Budget? Fudge it. The dirty little secret of government

You could almost write the script for them ahead of time. "We went over the books," says the leader of the new incoming government, shaking his head sadly. "And we were horrified to find that the financial circumstances of this great city, state, province, country (select one) were far worse than the people had been led to believe."
Don Pittis has reported on business for Radio Hong Kong, the BBC and the CBC.

You could almost write the script for them ahead of time.

"We went over the books," says the leader of the new incoming government, shaking his head sadly. "And we were horrified to find that the financial circumstances of this great city, state, province, country (select one) were far worse than the people had been led to believe."

In fact, I really didn't have to make that up. With a few Google searches, I was able to steal most of it verbatim from a 2003 speech by the newly elected finance minister in the province of Ontario.

Ontario is not a special case. In your Google search, change province to state or city and you can find variations on the same thing repeated many times.

But wait a minute. Did all those previous governments cook the books?

If so, why aren't they and their highly paid accountants in jail?

With governments across Canada lifting their robes and showing their budgets at this time of year, I think it is important for every Canadian to realize that government accounting has a little bit of Group of Seven or Atom Egoyan in it. In other words, it's creative.

This is the dirty little secret of accounting.

But don't believe me. Listen to an accountant:

"Some people think accounting is scientific and objective. In many ways, it is the exact opposite."

That is the considered opinion of David Cooper, CGA Professor of Accounting at the University of Alberta.

Cooper is lively and humorous, the exact opposite of the stereotypical accountant. (In fact of all the accountants I spoke to before writing this column, none fit the boring image.)

Interviewed for the deceptively-amusing ten-part BBC series A Brief History of Double Entry Book-keeping, Cooper wants to wake people up to the realization that even when everything is done completely legally, accounting is just a guide, not a set of hard facts.

He doesn't mince words.

"I tell my students that if anyone says they can tell you the true cost or real income of an enterprise, that person is either a fool or a villain."

There are two key words that separate accounting from a science like, say, nuclear physics. Judgment. And flexibility. Even the strictest set of rules such as the Generally Accepted Accounting Principles, or GAAP, include those two words.

And while companies are able to take advantage of those two slippery terms, governments have many more opportunities. Because, as Cooper says, in accounting terms, governments are "a real mess." This is not the kind of mess that can be fixed. It's just that governments have too many different bits doing too many different things.

Following the money

Andrew Graham wrote the book on public sector accounting. Literally.

The Queen's University management professor is the author of Canadian Public Sector Financial Management, billed as the only existing text book on the subject "for student and public sector professionals".

Graham agrees that unlike most businesses where there is a clear bottom line, government accounting has its challenges.         

"Following the money in the health sector will drive you crazy," he says.

"You can manipulate any accounting system if that is your intent," says Graham, but he insists that "the quality of public sector accounting in this country is excellent."

Unlike in the private sector, for example, he has never heard of a government accountant in a conflict of interest.

In or out?

However Graham admits there are many ways to be flexible.

"Like what's in and what's out," he says.

Government debt is one example. It's a source of much dispute south of the border.

How much does the U.S. government owe?

The official number leaves out many obligations for pensions and social benefits that the government has promised to pay. The so-called unfunded liabilities. The trillions of dollars owed to cover the failure of mortgage giants Freddy Mac and Fanny Mae are also excluded. That money is considered "off-balance-sheet," a term familiar from the Enron scandal.

Another example is closer to home.

Last week Toronto Hydro announced it was selling half a billion dollar in bonds and paying the money to its owner, the City of Toronto. Is that half billion dollars in, or is it out? Only your accountant knows for sure.           

In an office not far from Graham's, Steve Salterio studies auditing and governance at the Queen's School of Business.           

"There are always soft numbers in any business or government," says Salterio.

But he says that governments have so much room for judgment and flexibility that getting a firm number is like nailing jello.

Salterio says government accounts contain so many assumptions that today's financial statement can be quickly changed from wildly optimistic to wildly pessimistic or vice versa. Thus the "worse than we feared" statements mentioned at the top.

How to play it

In general, governments like to underestimate their liabilities when they are hanging on to power, but prefer to reset the clock just after they take office to cast as much blame as possible on the previous government.

Salterio remembers a case where one down east government had estimated that 10 per cent of fishermen's loans would be repaid. Another government estimated that 50 per cent would be repaid.

Sometimes a government wants its numbers to look good, and sometimes bad.

If you want to spend wildly on re-election promises, you want to look rich.

If your transit workers are looking for a raise, it is good to look poor. Same thing if you want transfer payments from another level of government.

In the current climate, governments might be wise to spend all the money they have and more. Extra fat will just make you a target of downloading by some other level of government.

And for a government that is trying to pay down a debt, Salterio says, it is impolitic to let taxpayers think you are too flush.           

"They are afraid of projecting a surplus because there will be political heat to spend that money," he says.

Despite his healthy reservations about the truth of accounting, Cooper is not completely cynical. Despite "enormous opportunities" to alter the books governments do not have carte blanche.

"Manipulation is not infinite," he says.

Which is reassuring. In a way.

But a one more good reason to change the government every few years. And get a second opinion.