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What is the difference between Public and Private accounting?

What is the difference between public and private accounting?

JEREMY NICHOLLS, 28 FEBRUARY 2013

We need to rethink the way in which public bodies prepare financial accounts in order that we; the public, can better understand how and why money is being spent on our behalf. Going back to basic accounting principles suggests that we could combine financial accounting and social cost benefit analysis (SCBA) into a single more meaningful account.

Currently accounts for public bodies are prepared along very similar lines as accounts for private organisations; income and expenditure, debtors and creditors, accruals and prepayments – job done. But these are not the only relevant issues for a set of public accounts. What is currently being included provides information from a very limited perspective of government accountability – has tax payers money been spent on the purpose.  But nothing about what value has been created or destroyed for everyone for whom the government is accountable (not only taxpayers).

The real user of government accounts is the public, not that every member of the public will be spending Sunday afternoons poring over the accounts but the way in which they are prepared should be based on providing information to those with an interest. The public has two interests, one how was my money spent and secondly what happened as a result.

Separating the answer to these questions has led to a difference between public sector accounting: how was my money spent, and SCBA: what happened as a result of that expenditure. However there is an accounting principle is that accounts should include the issues that are of interest to the user. Whilst this user is defined as the investor in private sector accounting, the investor for an account of a public body is the public and their interest will be much wider.

I would argue that most of the costs and benefits arising from government expenditure should be included in government accounts. Most but not all for two reasons; firstly since SCBA does not generally consider materiality in deciding what should be included or excluded some things may be missed out and some may be included which are not material, secondly since a focus on what is of interest from the perspective of the public is likely to identify other issues that have not been included in cost benefit analyses. But SCBA, prepared as part of an assessment of government expenditure, is the type of information that should be included.

One reason why these costs and benefits have not been included is that public accounting developed from private accounting with its focus on identifying the profits that can be distributed. In private accounting this has been comparatively easy. Most issues that are included are transactions between people who are parties to a contract and the contract sets out the value. There are some issues that may need to be included to allow for breach of contract (bad debts) or where there was no contract but someone’s rights were affected by the business (contingent liability) but these have been a small proportion of the overall issues.

In the public sector, expenditure sets out to have effects on people with whom government does not have a contract. Consequently contract based issues are probably the minority of the issues that should be included.

There is another reason why these are not included. There are two requirements for an issue to get into the accounts. The second one is that it should be valued. Easy enough if there are contracts, easy enough to estimate breaches of contract. Much harder to do in situations where there is no contract. But this is what cost benefit analyses sets out to do; to value these costs and benefits even though too often the benefits are valued from the perspective of the government department and not from the perspective of the public, affected by the policy, where the value will be the change in their wellbeing.

But it is possible to value changes in wellbeing.  If public accounting had to start including values of costs and benefits experienced by the public as a result of government policy and had to this on an annual basis, it would be possible to improve how this is done very quickly.  In comparison to the amount spent by government, in the UK over £500 billion per annum and compared to what is being spend on SCBA and accounting at the moment, it need not be expensive.

It is not that public and private accounting are different, it is that the user and therefore the interests are different. Thinking about the public as those with an interest would mean that financial accounting and SCBA could merge and we would get the information we are interested in.

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