Most often people think of accounting as being synonymous with rands and cents, profit or loss, equity, and investor returns. In the private sector, that is certainly the case as the accounting and reporting in the financial statements allows investors to decide which entity they want to invest in and what returns they should expect. The reality is that some individuals will never have an interest in − or be able to – invest in the Stock Exchange. As a result, accounting in the private sector will never be of interest or relevance to them
As taxpayers, ratepayers, road users, electricity and water consumers, etc, we are all invested in ‘The South African Government Incorporated’ and all of its ‘subsidiaries’. The accounting and reporting of government and its entities affects each one of us and the decisions we make. Yet, many people do not know anything about government, the information that government produces, how it should be used, and what decisions it affects.
At a fundamental level, accounting in the public sector influences democracy and how it is exercised. Democracy for all – which the constitution promises – is not free. The founding provisions of the constitution explain that ‘all citizens are equally entitled to the rights, privileges and benefits of citizenship; and equally subject to the duties and responsibilities of citizenship’. In terms of the finances of government, as citizens we are entitled to transparent financial and other information that holds entities accountable to make financial, economic and other decisions. It is, however, our responsibility to make sure we execute our democratic rights and hold government accountable. We do so by voting in an informed way, based on credible information. The accounting principles in the public sector – when applied in an ethical way − are specifically designed to provide this information in the financial statements published by government and its entities every year.
Many would argue that the financial statements in the public sector, particularly the balance sheet, are meaningless because the assets cannot be sold or used to generate profit and government has the power to change legislation to alter its obligations. This is a narrow view of what the financial statements in the public sector mean.
Infrastructure and similar assets represent the investment you and I make in the country, and we should be interested in how much we invested, how assets are being consumed over time through depreciation, whether they are impaired, and how they are repaired and maintained. Receivables for taxes, rates, outstanding revenue for water, electricity and a range of other services reflect the credit provided by government for debts owed, and we should assess how effective government is in managing its credit policies and payment terms.
Liabilities represent government’s commitments to you and me to do certain things – pay lenders and creditors, pay employees, pay social benefits to those in need, rehabilitate landfill sites, and the list goes on. Expressing debt as a percentage of gross domestic product (GDP) is a universally accepted metric used around the world to assess the financial health of a country. This metric indicates the ratio of debt to the output of the economy. Did you know that ours is 75% (as at February 2022)?1
If we turn to the income statement, while the ‘net’ number does not mean the same as that in the private sector, it does not mean that there isn’t valuable information in the income statement. If you think about your own personal finances, if you spend more than you earn in a month (deficit), this is bad, and if you earn more than you spend, this is good. At present we have a budget deficit, and our projected deficit to GDP is 5,7% (as at March 2022).
While the financial statements present a snapshot of the financial position at a point in time, the value provided in this snapshot can be used to assess the government’s long-term fiscal sustainability. By extrapolating revenues, expenses and debt, government is able to assess its sustainability to meet its social commitments, to pay its debts, how it can raise revenue such as tax, and whether it is in position to borrow more. Of course, sustainability is measured in the private sector, but sustainability in the public sector means so much more as it represents the fate of you and me and our children. Simply put: the basic recording of debits and credits, assets, liabilities, revenue and expenses in the public sector is fundamental to our wellbeing as a society.
As citizens, we are often critical of government; we express dissatisfaction at the state of service delivery; we perceive all state officials as corrupt. While these thoughts and views may be justified, pause and ask – what am I willing to do about it? Take an interest in your municipality’s finances, participate in the budget process, read the audited financial statements, take a stand against corruption at grassroots level – be active, be heard, be courageous.
1 National Budget tabled in Parliament in February 2022.
Jeanine Poggiolini, Chief Executive Officer at the ASB. The views expressed in this article are those of the individual and not the board of the ASB