Listener May 3, 1997.

Keywords: Governance

In 1978 the then Auditor General, Fred Shailes, publicly complained about the antiquated state of the nation’s public sector accounting. A younger man in the Audit Office, Jeff Chapman, seized the initiative by persuading the Society of Accountants to establish a committee to develop new standards for accounting in central and local government. …

… Chapman was the first chairman of the committee which in 1987 produced the pioneering “Statement of Public Sector Accounting Concepts” (SPSAC), although his views did not always dominate. Yet without him the new approach might never have got off the ground.

While accounting is a worthy rather than exciting subject, the framework that SPSAC created has had a very considerable impact on the practical functioning of our public service:
– It demanded accrual accounting in the public sector which, unlike the cash flow accounting of the old regime, recognizes revenue and expenses as they are occur, not when the cash is received or paid. No more could government departments pay at the end of one accounting year for work to be done in the next in order to hide cash surpluses, nor would the Ministry of Works have an incentive to buy shingle in March, to get its cash off the books, and resell the shingle in April to get the cash back again;
– It required a distinction between operational and investment expenditures, so that the New Zealand Forest Service would treat planting and tending trees as an investment rather than an expense;
– It made the accounts transparent. No longer could a local body be near bankrupt, and yet its books not show it. We can tell from today’s accounts of the Crown Health Enterprises (but not their predecessor Area Health Boards), that most are in severe financial stress. Even if they no debt to pay interest on, many would still be making a whopping loss. (Some 14 CHEs have “letters of comfort” from the government, which in effect says `this CHE is not financially viable, but the government will bail it out if necessary’.);
– It required comprehensive financial reporting of all dimensions of a public bodies activities including its service performance. The idea was that performance was not just a matter of a financial bottom line, but that reports should provide a more broadly based scorecard by comparing accomplishments with real objectives and activities. (Interestingly, the government has strayed from this standard, and a number of agencies – including TVNZ and the CHEs – are not required to provide service performance reports. Just think if TVNZ was required to report on the service it provides its viewers, and not only whether it made a profit).

The principles underlying the new SPSAC approach were incorporated into the 1989 Public Finance Act, although some of its spirit was lost as the new regime has confused the reporting and accountability functions of financial statements with the controlling functions of Treasury.

And Chapman, deservedly, went onto higher things: first the Chief Executive of the Accident Compensation Corporation ACC (although Ian Campbell in his Compensation for Personal Injury is critical of his performance there), and thence to Controller and Auditor General with, in 1989, presidency of the Society of Accountants, and leader of the nation’s accounting profession. Sadly however, he suffered from a serious character flaw, perhaps of avarice, abused his position of responsibility, and has been incarcerated.

It is not my intention to in any way diminish the disgrace of his fraudulent actions. But there is a context. First, while the appointment to the ACC was justifiable, we need to ask how a man already in financial difficulties was promoted to leadership of the Audit Office without anyone noticing. This suggests a serious failure in the senior state sector appointment procedures.

Second, it is most unlikely that Chapman is the only chief executive in the history of the recent public service to suffer from such a character flaw. What happened to the others? It is not my intention to suggest there are other chief executives rorting their departmental finances, although some may have other personality flaws, damaging their departments in other ways. My point is that the checks and balances, which restrained the character deficiencies of past departmental heads, were substantially reduced under the 1988 State Sector Act. Today’s chief executives have so much power that, apparently in one case, fraud could be practised for over five years without anyone finding out (and with the perpetrator getting promoted to another department). The 1988 State Sector Act seems based on the premise that the heads of our government departments are models of human perfection. Some are not. Is that a rational assumption? Should we not expect the odd character flaw in the occasional chief executive?

Flawed and yet talented, Chapman’s fraud is totally unacceptable. But without him the SPSAC, and those major improvements in government accounting, may not yet have happened. The story has elements of a Shakespearean tragedy in which a leader is destroyed by a fatal defect. One recalls Othello’s last words: “I have done the state some service, and they [should] know’t”.