Accounting and Accountability

ACCOUNTING AND
ACCOUNTABILITY
[What’s it all About?]
by
DAVID C. JONES
Chartered Public Finance
Accountant
Chartered Certified Accountant (UK)
1

ANNUAL FINANCIAL STATEMENTS
Balance Sheet
Statement of Financial Position‘
-------------
Income and Expenditure (Profit and
Loss) Account – Income Statement
Statement of Comprehensive Income
-------------
Statement of Cash Flows
2

CROWN WATER COMPANY
Financial Statements for 20_1 and 20_2
(Continued)
$
708,000
======
100,000
50,000
75,000
35,000
85,000
159,000
----------
204,000
76,000
----------
128,000
======
6.4%
71%
Income
Net Water Revenues
Expenses
Personnel
Chemicals
Power
Materials
Administration
Depreciation
Net Operating Income
Interest
Net Income
Rate of Return on Fixed Assets
Operating Ratio
$
675,000
======
100,000
48,000
71,000
35,000
85,000
150,000
----------
185,000
72,000
----------
113,000
======
6.0%
72%
20_1 20_2INCOME STATEMENT
3

CROWN WATER COMPANY
(Continued)
$
204,000
159,000
----------
363,000
15,000
----------
348,000
----------
50,000
76,000
----------
126,000
----------
222,000
330,000
----------
108,000
Internal Sources of Funds
Net Operating Income (Before Interest)
Add Depreciation
Less Increases in Needs for Working Capital
Total Internal Sources of Funds
Debt Service:
Amortization
Interest
Total Debt Service
Net Internally Generated Funds (After Debt Service)
Capital Investment
Funds Required from External Sources
$
185,000
150,000
----------
335,000
-
----------
335,000
----------
45,000
72,000
----------
117,000
----------
218,000
300,000
----------
82,000
20_1 20_2CASH FLOW STATEMENT
4

CROWN WATER COMPANY
(Continued)
$
108,000
100,000
----------
-8,000
=====
348,000
126,000
2.76
----------
222,000
330,000
67.3%
----------
Funds Required from External Sources
New Loans
Net Increase (Decrease) in Cash
Ratio Analysis:
Total Internal Sources of Funds
Debt Service
Debt Service Coverage Ratio (Times Covered)
Net Internally Generated Funds (After Debt Service)
Capital Investment
Percentage Contribution to Capital Investment
$
82,000
100,000
----------
18,000
=====
335,000
117,000
2.87
----------
218,000
300,000
72.8%
----------
20_1 20_2CASH FLOW STATEMENT (CONT.)
5

CROWN WATER COMPANY
Revised Financial Forecasts for 20_1 and 20_2
(Continued)
$
5,630,000
2,309,000
----------
3,321,000
----------
110,000
65,000
50,000
----------
225,000
----------
3,546,000
-=======
Fixed Assets
Fixed Assets (Revalued)
Less Accumulated Depreciation
Net Current Value of Fixed Assets
Current Assets
Inventories
Receivables
Cash
Value of Current Assets
Total Assets
$
5,000,000
2,000,000
------------
3,000,000
------------
100,000
60,000
40,000
----------
200,000
------------
3,200,000
=======
20_0 20_2BALANCE SHEET as at 31 December
$
5,300,000
2,150,000
------------
3,150,000
------------
100,000
60,000
58,000
----------
218,000
------------
3,368,000
=======
20_1
6

CROWN WATER COMPANY
(Continued)
$
700,000
241,000
----------
941,000
1,500,000
------------
2,441,000
------------
1,005,000
------------
100,000
----------
3,546,000
=======
29:71
2.3
Equity
Contributed Capital
Add Accumulated Retained Earnings
Total Contributed Capital & Retained Earnings
Revaluation Reserve
Total Equity
Long Term Debt
Current Liabilities
Payables
Total Liabilities and Equity
Ratio Analysis:
Long Term Debt : Equity Ratio
Current Ratio
$
700,000
-
------------
700,000
1,500,000
------------
2,200,000
------------
900,000
----------
100,000
----------
3,200,000
=======
29:71
2.0
20_0 20_2BALANCE SHEET as at 31 December (Continued)
$
700,000
113,000
------------
813,000
1,500,000
------------
2,313,000
------------
955,000
----------
100,000
----------
3,368,000
=======
29:71
2.2
20_1
7

ACCOUNTING AND
ACCOUNTABILITY
Fundamental Principles of Cost
Accounting (FPCA)
OR
Cost Principles of Financial
Accounting (CPFA)
By
David C. Jones, CPFA
Chartered Public Finance Accountant (UK)
8

ONE HUNDRED AND ONE WAYS OF
LOOKING AT ACCOUNTING!
• The attached PowerPoint slide-show explains, in
detail, using teaching documents, how to examine
many ways of looking at accounting theories and
practices, which lie behind statements and
accounts.
• They include many ideas and concepts that
emanate from my own thoughts, adaptations or
inventions, to facilitate that those studying and
demonstrating accounting will “get the point”
beyond a mere learning of a series of book-keeping
entries and accounting practices.
9

• When I studied accounting, about fifty years ago, I
found that the principles used, to explain the
accounting practices, to be very confusing and
inhibiting. So, subsequently, I have tried to invest
in my own ways of perceiving the principles. Thus,
the resulting slide-show could easily be entitled as
• “One hundred and one ways of looking at
accounting!”
• All of these were researched by me or prepared
from my personal and professional knowledge. The
slide-show was prepared, personally, by me, in my
own home office.
10

11
• What is certain is that a computer output will
always lack the illumination of traditional
accounting. It will seem hollow, by comparison.
• A mathematical computation should not only
answer the question. It should always give some
understanding of why the answer is what it is.
• Merely sending an input into a black box and
receiving an answer out of the other end adds to
knowledge but NOT to understanding!
Simon Singh: Fermat’s Last Theorem

WORLD-WIDE FINANCIAL CRISIS
• World leaders have been meeting
frequently, to try to develop new strategies
for resolving various ongoing fiscal crises.
• Many of their potential solutions seem to
involve the creation of new “bail-out” funds
to support casualties of the crisis – countries
teetering on the brink of default and financial
institutions facing large sovereign write offs.
12

• But how robust can those solutions
be?
• Crucially we should ask the question:
“What impact will the creation of new – or
much larger – bail-out funds have on the
financial health of sponsoring (central,
state or local, governments?”
13

• The shocking answer to this question is that, in
all but a handful of cases, we do not know! Why?
• Because most governments still account on a
cash basis. They do not maintain balance sheets.
They do not systematically record and value
assets and liabilities including multi-billion dollar
obligations to “bail-out” funds.
• A solution built on such fragile foundations is
bound to collapse. It is built on sand. The
question is not “whether” but “when” it will fail.
14

• Governments account largely on a cash
basis because governments choose to do
so. They take decisions without proper
regard to financial consequences because
they choose to. They run up large debts
and deficits because they choose to do so.
• They make lots of other poor choices.
15

• But governments are susceptible to pressure
and influence. If the profession really wants to
create pressure for a step change in public
financial management, reporting and auditing,
it can make it happen. It will not be easy, but it
is possible.
• What it calls for is concerted, co-ordinated
action. Every institute, and every firm,
reinforcing the same compelling arguments for
a step-change – nothing less – in all aspects of
public financial management.
16

WHAT MAJOR ASSETS MAKE UP A BALANCE
SHEET OF NATIONAL GOVERNMENTS?
• As far as the US Federal Government is
concerned, the answer is "NONE". The US
Federal Government does NOT produce
credible balance sheets. Its financial
statements are totally misleading and
constantly manipulated by politicians and
the media, for a variety of purposes.
• The accounts are produced and
maintained on a cash basis only. Thus, the
(so-called) "deficits" are merely (positive
or negative) “cash” (monetery) balances.
17

WHAT IS MEANT BY THE “DEFICIT” OF
NATIONAL OR FEDERAL GOVERNMENTS?
• The term “DEFICIT” is totally misleading, in
accounting terms, because it incorporates
(inter alia) expenditure on "fixed assets" and
"monetary investments“.
• These would NOT be a part of any “deficit”, if
the government followed what are known as
"generally accepted accounting principles -
GAAP" (in the USA) or International Financial
Reporting Standards – IFRS (elsewhere)
18

Misleading Accounting
Principles and Practices
19
Headline: “Governor McDonnell:
Virginia is back in the Black –
Estimates show a surplus of $220m for
fiscal 2010"
BUT
Results derived only from Cash Flows
are inherently unreliable
(and may easily be misleading,
fraudulent or politicized)

20
The Governor states:
• The Commonwealth will also defer $620
million in payments toward the Virginia
Retirement System (VRS), the state's $50
billion employee retirement fund, in fiscal
2011 and 2012, a deferment to be paid back
over 10 years at a 7.5 percent interest rate.
• The state deferred nearly $140 million in
VRS payments in the fourth quarter of 2010.

21
Discussion with a former State Legislator:
• The budget must always balance – every
year!
• It is HOW the budget is made to balance
that is most important!
Reflection on the above statement:
• Does anyone…anywhere…understand
what is going on? Does anyone “GET IT?”

22
• Long term borrowing to cover expenditure that is not capital
expenditure is likely to be unconstitutional. Even if not, one can
claim, with some authority, that it is imprudent and likely to be
inconsistent with generally accepted accounting practices.
• It is, also, inappropriate (and often illegal!) for a municipal
government to raise long term loans to re-finance short-term
indebtedness caused by an accumulated general fund deficit
(NEGATIVE RESULTS)
• In the notorious case of WorldCom, people have gone to
prison, for a very long time, for accounting fraud that included
the charging of operating expenditures as capital expenditure –
so as to, unlawfully, increase stated profits! The comparison
should be obvious! [RESULTS accounted for as RESOURCES]

23
• These principles are embodied in much local government
legislation, world-wide. As a “golden rule,” they require long
term borrowing to be only for capital expenditure, resulting in
the creation, or acquisition, of community assets. Borrowing is
typically subject to stringent external controls, such as central
(or state) government approval or (as often, in the USA) a
referendum procedure.
• The subsequent levying of taxes and charges, to cover the
resulting debt service, is one way of ensuring that beneficiaries
from the use of each asset (RESOURCES) will pay for this,
during its useful life.
• These positions have been widely promulgated by the former
US Comptroller General, Mr. David Walker, of the Peter
G. Peterson Foundation.

• In addition, money borrowed would NOT
add to the surplus (nor diminish the deficit)
because it would, merely, add to the
government's liabilities.
• For the same reason, money used to repay
loans would NOT add to the deficit (nor
diminish the surplus), because it would,
merely, diminish the government's
liabilities.
• (The INTEREST part of debt service WILL
add to the deficit!).
24
WHAT IS MEANT BY THE “DEFICIT” OF
NATIONAL OR FEDERAL GOVERNMENTS?

• The U.S. government started its 2015 budget
year with a deficit in October, although the
imbalance was worsened, by a calendar quirk.
• The Treasury Department says the October
deficit totaled $136.5 billion, up 12.2 percent
from October 2014.
• In both years, Nov. 1 fell on a weekend, which
required the government to mail out November
benefit checks in October. That shifted
$49 billion in payments into October, this year.
25
A CALENDAR ODDITY SWELLS THE DEFICIT (1)

• The “shifted” $49 billion in payments, into
October, 2015, was up from last year’s
$41 billion payment shift.
• The government’s budget year begins on Oct. 1.
• For the 2015 budget year, which ended
Sept. 30, the annual deficit fell to
$438.9 billion, its lowest level in eight years,
• This was spurred by gains in tax revenue that
outpaced greater government spending.
26

• This kind of information, in terms of credible
accounting, is useless and misleading.
• Reporting the information, in this manner, is
quite silly and completely meaningless.
• It does, however, create opportunities for the
media and politicians to make declarations (and
to express opinions) which are, in effect,
dishonest and even, possibly, fraudulent.
27

FISCAL BALANCE V. PHYSICAL DEFICIT
28
• As a result of these concerns, a phenomenon
is created whereby “cash-based” or other
financial budgets may be "balanced," perhaps
by legal or administrative mandate (fiscal
balance).
• However, there may be significant actual or
potential deficits hidden away within under-
maintained assets (e.g. property and/or
infrastructure), or lower productivity of
services (physical deficit).

• Thus, not only does the property suffer
from delayed and inadequate care, renewal
and expansion,
• It, also, steadily develops a permanent
status of inefficient operation and physical
shabbiness, from which it becomes
impossible to recover, except at later – and
much higher – cost.
29

FISCAL BALANCE V. PHYSICAL
DEFICIT
• Thus, typically, immediate & operationally
intensive expenditures are favored over
those that are maintenance-intensive.
• For example, it is always more urgent to
pay teachers than to maintain schools,
important though the latter may be.
• Roads are increasingly left with unrepaired
potholes, instead of being fully maintained.
30

FISCAL BALANCE V. PHYSICAL
DEFICIT
• Bridges maintenance is routinely ignored,
until they collapse, with multiple injuries.
• Railway track maintenance is routinely
ignored, until a train is derailed, at high
speed, with multiple deaths and injuries.
• Funds are taken (i.e. misappropriated)
from (or under-contributed to) pension, or
other “trust” funds!
• Whilst politicians boast that:
“We have a balanced budget”
31

MINNESOTA BRIDGE COLLAPSE
(AUGUST 2, 2007)
A Catastrophic Failure
By Eugene Robinson
(Washington Post
Friday, August 3, 2007)
32

(AUGUST 2, 2007)
33

(AUGUST 2, 2007)
• As always, …we don't spend nearly what we should
on maintenance and repair, [replacement and
renewal]
• Bridges [are] actually deemed to be in better shape
than dams, roads or the power grid.
• But the civil engineers estimated that it would cost
$9.4 billion a year for 20 years “to eliminate all
bridge deficiencies.”
• That's not a lot of money in the context of a $13
trillion economy. But does anyone think we're
going to make infrastructure a national crusade?
• Of course not. Infrastructure is boring!
34

MD., VA. DIVERTED BRIDGE MONEY
FUNDS WERE USED TO WIDEN ROADS, FIX STREETLIGHTS
35
• Virginia and Maryland officials used more than
$30 million from the federal government's
main bridge repair and replacement fund on
projects that weren't bridges, according to
interviews and government documents
tracking spending over the past four years.
• The federal bridge money was transferred to
general transportation accounts that funded
such things as streetlights in suburban
Maryland and the widening of Ox Road in
Fairfax County and King Street in Leesburg.

MD., VA. DIVERTED BRIDGE MONEY
[FUNDS WERE USED TO WIDEN ROADS, FIX
STREETLIGHTS]
36
Federal dollars might have been diverted to
projects other than bridges …, but federal and
state officials say “their accounting systems
are not set up to track which projects
eventually got the money.”
[This is Complete Nonsense!]

Accounting and Accountability (UK)
37
Public Accounts Committee chairperson,*
Meg Hillier, has called on the government to
“up its game” on transparency and produce
more accessible information from across
government to improve clarity on public
spending.
[*The Chair of the committee is always
drawn from the main opposition party and is
usually a former senior Minister.]

Accounting and Accountability (UK)
38
• Hillier was speaking as the Institute for
Government published its annual Whitehall
Monitor report, which found that the Treasury
(Finance Ministry!) was among the least
transparent departments.
• Although technology was beginning to affect
the way citizens accessed public services,
government, as a whole, was bad at
explaining key data, the report concluded.

Accounting and Accountability
39
This kind of “half-baked” accounting
and accountability has gone on for
so long, that the public and the media
have become conditioned to
believing (and reporting) that:
“Bad is Good!”
“Right is Wrong!”
“Down is Up!”
“Upside Down is Right Way Up!”

UPSIDE DOWN IS RIGHT WAY UP
40

TRUST
• Confidence; a reliance or resting of the
mind on the integrity, veracity, justice,
friendship or other sound principle, of
another person, entity or fund.
• Honesty, reliability & certainty of outcome.
• He or that which is the ground of
confidence.
41

ACCOUNTING AND
ACCOUNTABILITY
We have erred and strayed
from Thy ways like lost sheep.
And there is no health in us!
[Anglican Book of Common Prayer – 1662]
42

• Recently, the Financial Times published a letter from Ian
Ball, then, the chief executive of the International Federation
of Accountants. Ian has spent a career driving the argument
for accrual-based accounting and modern international
standards for public sector financial reporting.
• His letter reminded politicians in the European Commission
that the most serious accounting and auditing issue facing
them is not the governance arrangements of the International
Accounting Standards Board nor the market structure of the
audit profession.
• On the contrary, the elephant in the Commission room is
the quality and reliability of the financial statements of its
own member states.
43

44
Financial Reporting
and Accountability
Disclosure of Public and Private Utilities:
Mechanisms for Legal, Financial, and
Accounting Reporting
Understanding the purpose and
methods of disclosure
Financial reporting and composition of
disclosure material under the
International Accounting Standards
Board (IASB)
David C. Jones CPFA, FCCA (UK)

IASB chairman discusses the future
• If we move to principle-based standards, those
students are going to have to come back and say,
‘Well, how do I do this?’
• When I was a young accountant, we didn’t have any
standards in the U.K., so you were on your own. And it
was the old partner, with a lifetime of experience and
judgment, who was the person who got you through
the challenges of practice.
45
David C. Jones CPFA, FCCA (UK)

IASB chairman discusses the future of IFRS,
U.S. GAAP and the global accounting profession
• If we move to principle-based standards, those students are
going to have to come back and say, ‘Well, how do I do this?’
• When I was a young accountant, we didn’t have any standards
in the U.K., so you were on your own. And it was the old partner,
with a lifetime of experience and judgment, who was the person
who got you through the challenges of practice.
• As we start pressing on judgment, we’re going to bring the
professionalism back. I don’t think we’re “professional” enough in
the accountancy profession, because we ask our colleagues to
learn a huge amount of rules. And a lot of them don’t make sense.
• The question ‘Where does the profession go from here?’ is one
that we need to confront now. I don’t think we can continue going
in the direction we’ve been traveling for many years.
46

IASB chairman discusses the future of IFRS,
U.S. GAAP and the global accounting profession
• As, then, chair of the London-based International Accounting
Standards Board, Sir David Tweedie was championing an effort to
develop a single set of global financial reporting standards that will
be both, standard and enforceable.
• The scandals that we have seen in recent years are often
attributed to accounting, although, in fact, I think the U.S. cases are
corporate governance scandals involving fraud. If anything,
however, the scandals have made accounting more exciting to
people.
• Where I take issue with universities is in their teaching of
accounting standards. They do that to help their students with their
professional training. I think the universities should be teaching
them to think. I see all these kids learning all the rules about
leasing and I think, some day soon, we’re going to get rid of all
those rules.
47

CASH MANAGEMENT – IS IT ENOUGH?
PRINTING MONEY
CASH RESERVES
48

CASH MANAGEMENT – IS IT ENOUGH?
Reflect, discuss and report
important reasons why you
consider that accounting
ONLY for
CASH MANAGEMENT may
not be enough!
[Is (Walker!) therapy
required?!]
Let’s
walk
before
we run?
49

THE WALKER SLIDES
David Walker (abolitionist)
David Walker (September 27, 1785 – June
28, 1830) was an outspoken American activist
who demanded the immediate end of slavery:
[To an overwhelming and obsessive
reliance upon cash-based accounting?!]
50

THE WALKER SLIDES
On, March 12, 2008, David M. Walker,
resigned as Comptroller General of the
United States (head of the GAO) and
accepted the position of President and
Chief Executive Officer of the newly
established “Peter G. Peterson
Foundation.” He later founded the
“Comeback America Initiative (CAI)”
51

THE WALKER SLIDES
52
Failure to firmly
grasp the walker – or
the “Walker rules” -
will inevitably cause
a slide!
[In accounting
standards &
practices]

THE WALKER “SLIDE”
Ending with a faint whimper rather than a
bang, the Comeback America Initiative (CAI),
founded by former U.S. Comptroller General
David Walker and dedicated to getting
America's fiscal house in order, abruptly
closed up shop. Mr. Walker said his
organization was discontinuing operations
so he could "spend some time with my
family and consider future options."
53

THE WALKER “SLIDE”
“The voice of one crying in the wilderness…
...make his paths straight.”
BUT
Nobody is listening or paying attention!
Short-term, cash-based, politically expedient,
fixes are the name of the game! What a
mess!
THUS
[I stick by my claims about the inadequacy of
the funding of pensions and the dishonest
accounting, thereof.]
54

Accounting Principles
and Practices
55
Accounting is NOT Rocket Science
There are Only
14 Types of Cash Flows
and
30 Types of Other Entries
(TWICE as Many Types of Other Entries
as Cash Flows!)
Moral: Results derived only from Cash Flows
are inherently unreliable
(and may easily be misleading, fraudulent
or politicized)

THE COMPETITION FOR CASH
THE POOL
OF CASH
CHARGES,
FINES &
INTEREST
GRANTS &
TRANSFERS
MAJOR POLICY ISSUES
ACTIVITY &
SERVICES
INTEREST
ON DEBT
LONG-TERM
LENDING
TEMPORARY
BORROWING
(INTERMEDIATE)
DEPLETIONS
(SAVINGS)
WITHHOLDING
SUPPLIERS
PAYMENTS
CAPITAL
INVESTMENT
LONG-TERM
BORROWING
GRANTS &
TRANSFERS
(INTERMEDIATE)
ENHANCEMENTS
(DIS-SAVINGS)
(PRIMARY) SOURCES
"F.C.W.A.T!
INVENTORY
DEBTORS
(GRANTING
OF CREDIT)
MONETARY
INVESTMENT
(DEPOSIT)
MONETARY
INVESTMENT
(WITHDRAWAL)
SALES OF
ASSETS (INCL.
PRIVATIZATION)
MONEY
CREATION
(NATIONAL
GOVERNMENT)
TAXATION
(FINAL) USES & ABUSES
MAJOR POLICY OUTCOMES (OR LOSSES)
56

"F.C.W.A.T!"
57
STANDARD
ACCOUNTING
CHART AND
CODING
STRUCTURE
KEY CONTROL &
MANAGEMENT
COMPONENTS
ACCOUNTING &
BUDGETARY
CONTROL
FRAMEWORK*
FINANCIAL
REGULATIONS
& INTERNAL
CONTROLS
* = COMPUTERIZATION PRIORITY
 FRAUD
 CORRUPTION
 WASTE
 ABUSE
 THEFT
=
LOSSES OF CASH,
CONFIDENCE,
CREDIT RATING,
CONTROL AND
CREDIBILITY

REPUTATION AS A MARKET FACTOR 58
Quality
P
E
A
0
C
• Interest rates.
• Search costs for
capital funding.
• Regulation &
loan conditions.
• Choice of Public
and/or Private
Financing or
Implementation
Entity Partners
B
D
Reputation >
(Poor reputation = High costs)
(Good reputation
= Low costs)
COSTS

Selection of Ledger Accounts
59

Accountability
60
“Fair Value Accounting is causing a
large part of the problem at this
moment…”
Steve Bartlett, President and CEO
Financial Services Roundtable
Testimony to:
U.S. House of Representatives
Financial Services Committee
18 November, 2008

David C. Jones, CPFA, FCCA (UK), had
heard this statement, when listening to
his car radio. He was so astonished that
he nearly crashed into a tree!
(Not believing his ears, he later needed to
verify it from the C-SPAN web-site, which
carried the hearing of the US House of
Representatives Financial Services
Committee!)
61

“I’m as mad as Hell and I’m not going to
take this any more”
(From The Film “Network” [1976]
Howard Beale is ‘Mad as Hell’
62

ACCOUNTABILITY
63
The determination of “Fair Value”
can be done only through the full
and correct application of basic
principles of accounting. These are
explained, and are also much more
fully illustrated, in this detailed
PowerPoint slide show.
[The slideshow is merely a snapshot of the
standards that will require a significant amount
of work by entities, simply to understand the
nature of the principles and concepts involved.]

• Stewardship of Public Funds
• Performance in Delivery of Public Services
• Control over Assets, Liabilities and Funds
• Debits always equal Credits [So what?]
• Resources always equal Results
ACCOUNTABILITY
64

International Accounting and Reporting
Standards are fully consistent with these
theories?
[They are the only ones that make sense!]
65
IN THE “PLAIN ENGLISH” OF
ACCOUNTING
• If you are a credit to your organization – you are
NOT an asset; you are a liability! [liabilities are
shown as credits in the accounts!]
• If you credit money to your bank account, it is NOT
a credit; it is a debit, in your accounts.
• BUT – if your bank sends you a statement, THEN it
IS a credit; because to the bank, YOU are a liability!
Excuse Me?
[At present - BANKS are NO CREDIT to anyone!]

RESOURCES & RESULTS
66
RESULTS
RESOURCES
ADDITIONS
CASH RECEIPTS
INVESTMENT
SAVING
ACQUISITION
PURCHASES
CONSERVATION
LENDING
GRANTING CREDIT
ADDING INVENTORY
DEPLETIONS
CASH PAYMENTS
CONSUMPTION
USAGE
DISPOSAL
USE IN PRODUCTION
SALES
WASTE AND FRAUD
BORROWING
INCURRING DEBT
ACTIVITY
OPERATIONS
WORK, SKILL
CRAFT
INNOVATION
INVENTION
PUBLICATION
LOSSES
EXPENSES
COSTS
(OPERATIONAL)
CAPITAL DEPLETION
(PHYSICAL)
BENEFITS
GAINS
PROFITS
SURPLUS
CAPITAL INCREASE
(EXTERNAL)
DEBIT
DEBIT CREDIT
CREDIT

Comprehensive Accountability
Whatever the accounting systems, virtually every public,
private or voluntary entity:
• receives and pays cash;
• holds cash and bank accounts;
• owns fixed and current assets (property, plant and
equipment);
• incurs long-term and/or short term indebtedness;
• supplies or purchases goods and services on credit;
• creates and manages separate funds for special purposes;
• makes and/or liquidates monetary investments;
• purchases, stores and uses inventories of:
– equipment, or
– goods,
– spare parts;
• accrues revenues (has cash owing to it);
• incurs expenses, for goods and service delivery; and,
• acquires, uses, consumes, damages and/or destroys
resources.
67

Comprehensive Accountability
Activities, moreover, normally take place in
changing monetary values. The extent to
which the resources, obligations,
activities or values are not accounted for,
is the extent to which the (private, public
or voluntary) entity is not, completely or
transparently, accountable to its: owners,
benefactors, donors, taxpayers,
electorate, beneficiaries, investors,
customers, general public, employees, or
other stakeholders.
68

Principles of
Accountability for Stewardship
• Credibility
• Compliance
• Conduct
• Comprehensiveness
• Comprehension
• Competence
• Certifiability
• Coherence
• Consistency
• Confidence
69

Principles of Accountability
for Quality Performance
70
• Economy
• Efficiency
• Effectiveness
• Excellence
• Equity
• Ethics
• Exposure
• Explanation
• Enjoyment
• Empathy
• Energy
• Enthusiasm
• Ecology
• Exchange

OMAR’S CAR RUNS WELL
71
OMAR’S CAR

OMAR’S CAR RUNS WELL 72
SERVICE
CHARGES
OPERATION
INTEREST
DIVIDEND &
RETAINED
EARNINGS POLITICAL
(POLICY)
DECISIONS
INTERNAL
FINANCING
ADJUSTMENT
OF VALUE
CONSUMPTION
OF CAPITAL
RENT
ADMINISTRATION
(INCLUDING TAXES)
MAINTENANCE
WELFARE
ENVIRONMENT
LATITUDE
LUXURY
TAX REVENUES
(BAILOUTS?)
SURPLUS
(SAVING)
RETURN ON
INVESTMENT
SURPLUS
(LOSS)
RISK
UNCERTAINTY
NEW ACTIVITY
STABILITY

FUNDAMENTAL ACCOUNTABILITY
REQUIREMENTS
• Retain (real) net capital intact [including non-monetary capital!].
• Maintain inter-generational equity (current users bear their fair
share of all costs, including capital financing costs)
• Compute “Omar’s Car Runs” costs
• Operation
• Maintenance (routine, preventive and remedial)
• Administration & Taxes
• Rent:
– Consumption of capital (depreciation)
– Adjustment of value (fixed asset valuation)
– Return on investment (interest, dividends, retained
earnings)
• Surplus (to cover):
– Risk
– Uncertainty
– New activities
– Stability
• Fully utilize “Churchill Chart” of accounts (see next page)
– “Pray let me have, by this evening, on one page, the status
of our tank deployment…”
[Winston Churchill, British Prime Minister – World War II]
73
}
If you deal with the lowest bidder, it
is well to add something for the risk
that you run. And if you do that you
will have enough to pay for the
“something better” (See Slide 78)

Churchill Chart 74
TRADING
MANUFACTURE
OR
OPERATING
ACCOUNT
PROFIT
AND LOSS
-------------------------
INCOME AND
EXPENDITURE
NET
EARNINGS
-------------------------
GENERAL FUND
SURPLUS
EXPENSES
CASH
AND
BANK
DEPRECIATION OR
CAPITAL FINANCING
RESERVE
--------------------------
FIXED
ASSETS
STOCK
OF
GOODS AND
MATERIALS
SALES
--------------------------
REVENUE
INCOME
SPECIAL
FUNDS
--------------------------
PROVISION
FOR EXPENSES
LOANS
MONETARY
INVESTMENT
DEBTORS
(RECEIVABLES)
CREDITORS
(PAYABLES)
SHAREHOLDERS
(STOCK
HOLDERS)
CAPITAL &
RESERVES (INCLUDING
FIXED ASSET
REVALUATION)
12
11
7
5
3
20
16
8
25
13
10
26
14
9
24
19
1 2
2
1 4
8
4
9
5
6
23
23
15
17
22
6
6
14
12
13
10
3
6
7
18
21
11
29
30
27 28
NOT ALL
THERE
IS TO IT!
27
28

Metro “Fair” Fare Chart
75
OPERATING [INCOME &
EXPENDITURE]
ACCOUNT
PROFIT OR LOSS
FROM
INCOME AND
EXPENDITURE
NET
EARNINGS
-------------------------
GENERAL FUND
SURPLUS
OPERATION AND
MAINTENANCE
EXPENSES
CASH
AND
BANK
DEPRECIATION OR
CAPITAL FINANCING
RESERVES
--------------------------
FIXED ASSETS [TRACK,
STATIONS, TRAINS, ETC.]
STOCKS
OF SPARE PARTS
AND MATERIALS
TICKET SALES
--------------------------
OTHER REVENUE &
SUBSIDY INCOME
SPECIAL
FUNDS
--------------------------
PROVISION FOR
FUTURE EXPENSES
LOANS FROM
GOVERNMENTS
& BOND-
HOLDERS
MONETARY
INVESTMENT FOR
FUTURE ACTIVITIES
DEBTORS
(RECEIVABLES)
CREDITORS
(PAYABLES)
SHAREHOLDERS
STAKEHOLDERS
& TAXPAYERS
CAPITAL &
RESERVES (INCLUDING
FIXED ASSET
REVALUATION)
12
11
7
5
3
20
16
8
25
13
10
26
14
9
24
19
1 2
2
1 4
8
4
9
5
6
23
23
15
17
22
6
6
14
12
13
10
3
6
7
18
21
11
27
28
27 28
NOT ALL
THERE IS
TO IT!
[WHAT’S
BEHIND
THE
TRAINS?]
75

WHAT’S BEHIND IT? 76
NOT ALL THERE IS TO
IT! [WHAT’S BEHIND
THE RAINS?]
[CLIMATE,
FLOOD CONTROL,
AGRICULTURE]
NOT ALL THERE IS TO
THE PAINS?]
[HEALTH
SERVICES]
NOT ALL THERE IS TO
THE DRAINS?]
[SEWERAGE &
STORM
DRAINAGE]
NOT ALL THERE IS TO
THE GRAINS?]
[AGRICULTURE &
BIOFUELS]
NOT ALL THERE IS TO
THE CRANES?]
[CONSTRUCTION]
NOT ALL THERE IS TO
THE BRAINS?]
[EDUCATION]
NOT ALL THERE IS TO
THE MAINS?]
[WATER]
NOT ALL THERE IS TO IT!
[WHAT’S BEHIND THE
TRAINS?]
[RAIL, ROAD & OTHER
TRANSPORT]
($) CASH ($)
AND
($) BANK ($)
[WHAT’S BEHIND THE STAINS?
[FRAUD & CORRUPTION]
NOT ALL THERE IS TO
THE LANES?]
[ROADS & PATHS]
NOT ALL THERE IS TO
THE PLANES?]
[AIRPORTS]
[WHAT’S BEHIND THE
GAINS?]
[UTILITY REVENUES]

Cost Cutting
at Metro (and Elsewhere)
77
Assertion
• This (proposed Congressional) bill would do little more
than reward poor performance with an unprecedented
taxpayer bailout.
• Congress should force fundamental market-based
reforms on Metro.
• By linking the continuation of the system's existing
federal subsidies to:
• reductions in operating costs;
• improvements in service; and,
• an aggressive program of competitive contracting,
similar to the successful reforms implemented
elsewhere, in several of the major metropolitan areas
of Europe.
Ronald D. Utt, Ph.D.The Heritage Foundation.

ECONOMICS
• All have learned from economics studies
that: “The Consumer is King."
• There is also “Consumer is Queen"
economics: "Quality Undermines Economic
Equilibrium Neutrality*.
78
**Equilibrium Neutrality = “Nash Equilibrium”
[Promulgated by Nobel Laureate John Nash]

QUALITY UNDERMINES ECONOMIC
EQUILIBRIUM NEUTRALITY
• Quality costs money – it may reduce profits.
• Economic “winners” may be the producers of
lowest quality products at the highest profits
or the leanest public budgets.
• Ability to achieve this depends on the degree
of opportunism and the extent of influence
over decisions [authority or lobbying].
• Opportunism is influenced by information
asymmetry and bounded rationality of choice
- (deciding on the basis of limited information,
or the extent of concern or potential
suffering).
• A limiting (& disturbing) case is competition
based on lower “short run marginal cost
prices” v. a necessity for higher “long run
marginal costs.”
79

SUPPLY AND DEMAND
80
PRICE
&
COST
QUANTITY
P
Q
0
D
D
SQ
SQ
SN
SN
QNQQ
PQ
PN
LESS OF A QUALITY
PRODUCT AT A HIGHER
PRICE & COST
ECONOMIC EQUILIBRIUM [A
NON-QUALITY PRODUCT AT
A “NORMAL” PRICE &
COST]

• Quality is like buying oats. If you
want nice, fresh, clean oats, you
must pay a fair price.
• However, if you can be satisfied
with oats that have already been
through the horse .................that
comes a little cheaper!
QUALITY
OVERLY ASSERTIVE TRADING SLOGANS (OATS)
[e.g. “Magic of the Market-place!”]
81

• “It is unwise to pay too much, but it is worse to
pay too little. When you pay too much, you lose a
little money ..... that is all. When you pay too little
you sometimes lose everything, because the thing
that you bought was incapable of doing the things
it was bought to do.
• The common law of business balance prohibits
paying a little and getting a lot .... it cannot be
done! If you deal with the lowest bidder, it is well to
add something for the risk that you run. And if you
do that you will have enough to pay for the
something better”
[John Ruskin (1819 - 1900)]
LEAST-COST FEASIBLE SOLUTION
82

CONFLICTING CONCERNS
[Choose any Two of Three!]
83
COST &
PRICE OF
PRODUCT
QUALITY
OF PRODUCT
QUANTITY
OF SALES

Transport Privatization in Europe
• British Rail, once a wholly owned public railway, has been
sacrificed to “gods of privatization”. Instead of one publicly-
owned railway, privatization gave Britons 25 new railways.
These, Britons were assured, would provide improved service,
healthy competition, lower fares and further delights.
• The result has been chaos. Apart from much plastic speech,
there was an awesome decline in the quality of passenger
service, frequent delays and cancellations, not to mention the
increased danger to life and limb now provided by a public
service driven by the lust for private profit.
• And profits there are; privatized railroading has proved a
gravy train for the investor. As for the public, its rewards have
been few and, of course, the government is still shelling out
millions of pounds in subsidy for maintenance and other
infrastructure costs.
• British experience speaks eloquently to the high public cost
of free market capitalism. The rail system has, NOW,
effectively, been re-nationalized.
[Sunday, January 14, 2001 in the Toronto Star]
84
84

Transport Privatization in Europe
Metronet's bankruptcy highlights the flaws in the
[London] Tube contracts
• IT WAS like watching a train crash in slow motion. Metronet,
one of the two firms charged with upgrading London's rickety
old underground network under a multi-billion-pound public-
private partnership (PPP) deal, had been in trouble for months.
A dispute with Transport for London (TfL), the city's transport
authority, over who was to blame for £1 billion of projected
cost overruns on three of the lines it was renovating, went to
arbitration last month.
• The decision was expected to take a year; in the meantime,
with its shareholders and banks refusing to release any more
cash, Metronet had asked for an extra £551m of taxpayers'
money. On July 16th Chris Bolt, the PPP arbiter — the referee
for such disputes — awarded it just £121m.
• Two days later, it admitted that it was bankrupt.
Jul 19th 2007: from The Economist print edition
85
85

PUBLIC TRANSPORTATION SERVICES
86
• In the same way as for other utilities, transport services are
related to fixed asset use and maintenance.
• Thus, it is necessary to examine the systems from the
perspective of full-cost recovery, in accordance with standard
practices for cost accounting and financial analysis for utilities.
• This must conform to Fundamental Principles of Cost
Accounting. [Principles of “OMAR’S CAR RUNS WELL”.]
• These principles are necessary, to provide a useful starting point
for getting urban transport operating costs under control, by:
• setting hard budget constraints; and,
• providing for the revenues to achieve this.
• By themselves, these principles are not sufficient to deal with
fares.
• Computation of fares requires:
• financial and economic analysis; and,
• forecasts of future passenger loads, and of annual costs and
revenues, together with economic externalities.

87
• Tesco overstated it profits by £250m after revenue
recognition irregularities were spotted in its half
year results, knocking its share price back 10%.
• Tesco said it discovered the overstatement of its
figures, as part of a 29 August profit warning, during
preparations for its forthcoming interim results.
• It predicted, at the time, that its half-year trading
profit would be around £1.1bn, but this figure has
now been cut back by £250m.
• The figures, which were overseen by the board,
revealed that accruals were carried back into the
current financial period and liabilities deferred later,
to dress up the interims, by £250m.
TESCO ACCOUNTING GAFFE EXPOSED

88
Crawford Spence, a professor of Accounting
at the Warwick Business School, commented:
• This revelation should be interpreted as a
sign of distress. Tesco has essentially tried to
recognize revenue too early and delay the
recording of costs until a later date.
• Accounting is not a hard science and some
of this behavior is acceptable, within limits.
What Tesco appears to have done is push the
boat out a bit too far, ending up with revenue
that hadn't really been earned yet and costs
that probably should have been booked
earlier.
Tesco accounting gaffe exposed

89
• It is a classic 'earnings management'
issue. Firms quite legitimately play around
with their revenue and expenses all the
time.
• However, when they do so aggressively,
as Tesco appears to have done, this is
usually because the firm is under pressure.
• In Tesco's case, it has been losing
market share to its competitors steadily in
recent years and losing value quite
dramatically in its share price in recent
months.

90
• To Tesco’s credit, however, it has
flagged this up internally and is doing
something about it. This suggests that
there are probably no other big
accounting shocks, hidden away.
• Given that this has been flagged up and
dealt with internally, it is unlikely any
court proceedings will occur. Tesco could
be fined by the authorities, but they will
most likely wait to hear what the auditors,
Deloitte, uncover, first.”

COOKING THE BOOKS!
91
EXPENDITURE
INCOME
PROFIT!
?

93
• Tesco has named Deloitte as its new auditor, ending its
relationship with PricewaterhouseCoopers (PwC) after
an accounting scandal.
• The scandal led to the suspension, then exit, of several
senior executives, and sparked investigations by the
Serious Fraud Office (SFO), accounting watchdog, the
Financial Reporting Council (FRC) and a grocery
industry watchdog. It could also prompt investor
lawsuits both in Britain and the US.
• PwC has been Tesco’s auditor for 32 years, since 1983.
Its auditing of the supermarket’s 2014-15 accounts was
its final act for the company.
TESCO NAMES DELOITTE AS NEW AUDITOR
AFTER ACCOUNTING SCANDAL

“COST” CUTTING – BY WOLFGANG
AMADEUS MOZART (“W.A.M.” PRINCIPLES)
94
Conversation
Emperor of Austria to Mozart: Methinks your symphony is
a trifle too long, young sir! There are too many notes!
Mozart: Indeed your Majesty, and precisely which notes
would you have me remove?
[“Amadeus”-Movie]
Conclusion
It really is not about numbers, or size or length, or
appearance, is it?
It is, I think, about depth. Depth of perception, depth of
appreciation, depth of acknowledgement of the sheer
vastness of what we do not 'know” - yet - but would 'love
or like' to know.

“Cost” Cutting
by
Wolfgang Amadeus Mozart
(“W.A.M.” Principles)
95
• WIZE
• ACCOUNTABLE
• MANAGEMENT

RESULTS OF ACTIVITY – A SYMPHONY OF OUTCOMES
COMMERCIAL,
SOCIAL &
ECOLOGICAL
RETURN &
REINVESTMENT
WASTE, DAMAGE
& DESTRUCTION
INNOVATION - CONSUMER SATISFACTION ,
REINVESTMENT & PRODUCT DEVELOPMENT
COMMERCIAL,
SOCIAL &
ECOLOGICAL
CONSUMPTION
(SATISFACTION)
COMMERCIAL,
SOCIAL &
ECOLOGICAL
(“W.A.M.” PRINCIPLES): IMPORTANT NOTES - SUCCESS CRITERIA AND PRINCIPAL FOCUS OF ATTENTION
TO CUT “COSTS”: WHICH OF THESE NOTES WOULD YOU LIKE US TO REMOVE, OR DIMINISH – MR. MAYOR
(PRESIDENT, GOVERNOR, MANAGER)?
PERFORMING USEFUL & HIGH-QUALITY
ACTIVITIES AT APPROPRIATE PLACES AND TIMES
LONG-TERM OPTIMIZATION OF RESOURCE USE
(PRODUCTIVITY & WASTE CONTROL)
DEBT SERVICE
QUALITY OF ENVIRONMENT
PAYMENT
OF TAXES
BALANCED (FLAT)
CURRENT BUDGET
QUALITY OF
SOCIAL LIFE
(SHARP) OPERATIONAL
RELIABILITY
WASTE
DISPOSAL
PRODUCT &
SERVICE QUALITY
QUALITY OF
LABOR LIFE
DAMAGE
RECTIFICATION
Cost v Quality of Service
♯ ♫♪♫
♯♫ ♫
♯
♭
♫
♫
♫
♫
♫ ♫
♫
♫
♫
♫
♫
♫♫
♫♫
♫
♫
♫
♫
♫ ♫♫
♫♫ ♫♫ ♫ ♫♫
♫
♫
♯ ♫♪♫
96

Churchill Chart 97
TRADING
MANUFACTURE
OR
OPERATING
ACCOUNT
PROFIT
AND LOSS
-------------------------
INCOME AND
EXPENDITURE
NET
EARNINGS
-------------------------
GENERAL FUND
SURPLUS
EXPENSES
CASH
AND
BANK
DEPRECIATION OR
CAPITAL FINANCING
RESERVE
--------------------------
FIXED
ASSETS
STOCK
OF
GOODS AND
MATERIALS
SALES
--------------------------
REVENUE
INCOME
SPECIAL
FUNDS
--------------------------
PROVISION
FOR EXPENSES
LOANS
MONETARY
INVESTMENT
DEBTORS
(RECEIVABLES)
CREDITORS
(PAYABLES)
SHAREHOLDERS
(STOCK
HOLDERS)
CAPITAL &
RESERVES (INCLUDING
FIXED ASSET
REVALUATION)
12
11
7
5
3
20
16
8
25
13
10
26
14
9
24
19
1 2
2
1 4
8
4
9
5
6
23
23
15
17
22
6
6
14
12
13
10
3
6
7
18
21
11
29
30
27 28
NOT ALL
THERE
IS TO IT!
27
28

The Balance of Accounting
98
RESOURCES
RESULTS
DEBIT
DEBIT
CREDIT
CREDIT
Resources
[Symbols with
straight lines]
always equal
[Symbols with
curved lines]
Results

Accounting Chart
1. The attached chart illustrates the working of the entire accounting system of any
financially autonomous entity, keeping its accounts on an accrual basis. It can be
applied to private sector, public utility, enterprise or municipal accounting systems.
2. It is probable that well over ninety-five percent of accounting entries, for any kind of
business, are represented by the fourteen cash-flows and twenty-eight other book
entries represented on the chart. Thus, forty-two entries cover virtually all transaction
types.
3. Each class of account has been given a separate symbol. In the “Keys to Symbols”
box, those on the left represent “personal” accounts (debtors and creditors). Those on
the right represent “real” accounts (cash, stocks of goods / materials and fixed assets)
and “nominal” accounts (gains and losses - income and expenditures). Furthermore,
the symbols with straight sides (squares and triangles) represent resources (assets and
liabilities), whilst the circles represent the analysis of results (gains and losses).
4. Each line represents a class of business transaction or a generally recognized
accounting adjustment. Where a line touches the left-hand side of an accounting
symbol, it represents a debit entry to that class of account. Conversely, a line touching
the right-hand side represents a credit. Solid lines represent cash flows and broken
lines represent accounting entries not directly related to cash transactions.
99

Accounting Chart
5. The arrows on the lines are somewhat arbitrary. However, they attempt to
show the direction in which each transaction is normally understood to
flow. The entries are conceptual, not legal. For example, the transfer of
extra-ordinary losses (and fixed asset revaluations) direct to “Capital and
Reserves” is regarded as bad accounting practice in many systems but is
acceptable in others. In this chart, they have been shown as direct
transfers to “Capital and Reserves,” merely for simplicity.
6. The chart indicates that an accounting system, whilst complex, is
bounded and closed. For accountants, it may assist in systems and
computer work. For non-accountants, it may be useful in understanding
what accountants are doing (or supposed to be doing) and may also help
to develop an appreciation of what can and should be expected from an
accounting system. For students of accounting, the chart may represent a
useful learning tool, to be used in conjunction with other teaching
materials.
7. The chart covers most accounting procedures likely to be encountered. It
includes, moreover, the two main entries concerned with the conversion
of historical cost accounts to current values. This is still a matter of
uncertainty and contention among accountants and is not practiced in all
systems. However, unless recognized, especially where high rates of
inflation exist, fixed asset (and other non-monetary asset) values, based
only on historical costs, become increasingly meaningless. Furthermore,
depreciation (and other capital charges) based of these historic values will
cause the under-statement of costs and a corresponding over-statement of
profits.
100

Cash and Accrual Accounting
Cash Flows
1. Cash Purchases - Stock
(Inventories)
2. Cash Sales or Revenue
Income
3. Cash Settlement -
Creditors (Payables)
4. Cash Settlement -
Debtors (Receivables)
5. Dividends or Share
(Stock) Repayment
6. New Share Capital
7. Payment from Funds
8. Investment Withdrawal
9. Cash Expenses
10.Investment of Cash in
Monetary Instruments
11.Loan Repayments
12.Loans Raised
13.Capital Expenditure
14.Sales - Fixed Assets
101

Cash and Accrual Accounting
Accounting Flows
1. Use of Stocks (Inventories)
2. Sales Income
3. Expenses (Trading, Operations,
Manufacturing)
4. Revenue (Recurrent) Income
5. Credit Purchases
6. Cash Discount Received
7. Gross Profit (Trading, Operations,
Manufacturing)
8. (Sales & Operational) Income
Recoverable
9. Taxes Now Payable
10. Expenses (Profit and Loss or Income
and Expenditure)
11. Net Loss or Net Expenditure
12. Net Earnings or Net Income
13. Allocated or Declared Dividends
14. Transfers to Reserves
15. Capital Repayable
16. Surplus on Investments (Credited as
Income)
17. Future Income or Corporation Tax
(Provision)
18. Extra-ordinary Losses
19. Expenses Paid in Advance
20. Surplus on Investments (Credited as
Capital)
21. Bad Debts or Discounts Allowed
22. Transfer of Expenses
23. Accrued Expenses
24. Transfers to Special Funds/Provision for
Expenses
25. Investment Losses
26. Depreciation (Commercial or Enterprise
Accounts) & Capital Financing Reserve - by
Loans Repaid, Revenue Contributions to
Capital or Special Funds Applied (Municipal
- Public Sector - Accounts)
27. Interest Receivable [e.g. from Investments]
28. Interest Payable [e.g. on Loans]
29. Revaluation of Fixed Assets
30. Revaluation of Accumulated Depreciation
102

Churchill Chart – Production v. Financing
TRADING
MANUFACTURE OR
OPERATING
CASH
AND
BANK
FIXED
ASSETS
--------------------------
DEPRECIATION
STOCK OF
GOODS AND
MATERIALS
SALES
--------------------------
REVENUE
INCOME
103
EQUITY
CAPITAL
FINANCIAL MANAGEMENT
(& MISMANAGEMENT)
PRODUCTION SELLING &
MARKETING
EXPENSES
PROFITS & LOSSES
RECEIVEABLES
& INVESTMENTS

Resources and Results
The concepts of “Resources” and “Results,” when
applied to accounting principles, were originally
devised, for teaching and illustrative purposes, by
David C. Jones.. In his definitive textbook “Municipal
Accounting for Developing Countries,” the following
appears (page 2):
“An accountant records and interprets variations in
financial position. He records, in money values, the
results of variations during any period of time, at the
end of which he can always balance Net Results (of
past operations) against Net Resources (available for
future operations)”.
Net Results are the “way of being” of the world, after
the performance of Activity to earlier Net Resources.
104

Municipal Accounting for Developing Countries
by
David C. Jones, CPFA, FCCA (UK)
105
[900 pages; © Chartered Institute of Public Finance and Accountancy
and The World Bank]

These principles, developed by the author, are
grounded in theories enunciated by (inter alia)
eminent British writer and (government) district
auditor, Carson Roberts and from a US book,
'Accounting Principles and Practice', by Hatfield,
Sanders and Burton.
They have also been interpreted by a former
president of the Chartered Institute of Public
Finance and Accountancy, Mr. J.B.Woodham,
Borough Treasurer, and later Chief Executive, of
Middlesborough and of Cleveland County, England.
106

Mr. J.B.Woodham, Borough Treasurer, (and later Chief
Executive), of Middlesborough and of Cleveland County,
England, refers to “Resources” as “What” accounts (what
one owns and what one owes) and “Results” as “How”
accounts (how the changes in resources came about). The
concepts fit very neatly with those relating to (on the
one hand) balance sheets and (on the other hand)
income and expenditure accounts.
International Accounting Standards, International Public
Sector Accounting Standards and International Financial
Reporting Standards are all fully consistent with these
principles.
107

BASIC RULES FOR ACCOUNTING
[From “Municipal Accounting for Developing
Countries” by David C. Jones, CPFA, FCCA (UK)]
108
"An accountant records and interprets
variations in financial position. He or she
records, in money values, the results of
variations, during any period of time, at
the end of which they can balance net
results (of past operations) against net
resources (available for future
operations)".

BASIC RULES FOR
ACCOUNTING
109
Rule 1
The ledger system as a whole must
always be in balance, otherwise it is not
correct. The total of all debit entries (or
debit balances) must always agree with
the total of all credit entries (or credit
balances).

BASIC RULES FOR
ACCOUNTING
110
Rule 2
To ensure that the ledger is always in
balance, every change in the financial
position must be recorded in the form of
debit and credit entries of equal value.
For all debit(s) there must be equal
credit(s).

BASIC RULES FOR
ACCOUNTING
111
Rule 3
There are two main classes of ledger accounts, with
related, but quite different, purposes:
(a) accounts dealing with assets and liabilities
(resources); and
(b) accounts dealing with gains and losses
(results).
The net balance of assets over liabilities (resources)
will always equal the net balance of gains over
losses (results):

BASIC RULES FOR
ACCOUNTING
112
Rule 4
In accounts dealing with assets and liabilities, all
assets are recorded as debits, and liabilities as
credits. It follows from this that:
(a) increases in assets (positive resources)
are DEBITS;
(b) decreases in assets (positive resources)
are CREDITS;
(c) increases in liabilities (negative resources)
are CREDITS; and
(d) decreases in liabilities (negative resources)
are DEBITS.

BASIC RULES FOR
ACCOUNTING
113
Rule 5
In accounts dealing with gains and losses, all gains
are recorded as credits and all losses as debits. It
therefore follows that:
(a) increases in gains or surpluses (positive
results) are CREDITS;
(b) decreases in gains or surpluses (positive
results) are DEBITS;
(c) increases in losses or deficiencies (negative
results) are DEBITS; and
(d) decreases in losses or deficiencies (negative
results) are CREDITS.

Accounting Flow Chart (Cash)
KEY TO SYMBOLS
___________ Cash Flows ------------- Accounting Flows
 Legal Claims
by the Entity
Debit
Amounts
Claimed  Tangible
Assets
Debit Increases in
Assets
Credit
Amounts
Settled
Credit Decreases in
Assets
 Legal Claims
against the
Entity
Debit
Amounts
Settled 
Gains and
Losses
Debit Losses or
Expenses
Credit
Amounts
Claimed
(Income and
Expenditures)
Credit
Gains or
Income
114
THE BALANCE OF ACCOUNTING

EINSTEIN’S THEORY OF
RELATIVITY
115
E = MC2
Energy [E] = Mass [M] Times the
Square of the Speed of Light [C2]

OMAR’S THEORY OF RELIABILITY
√E3 = (MC)3
The Root of Economy, Efficiency and
Effectiveness [E3] = Maintenance of
Capital: Promptly, Properly and
Periodically [(MC)3]
116

[IT IS WELL-MAINTAINED]
117
OMAR’S CAR

[Direction, Policy, Activity,
Outcome, Driver Practices]
118
OMAR’S CAR
IT IS WELL-MAINTAINED
Credibility, Compliance,
Competence, Consistency,
Standard Practices

FINANCIAL MANAGEMENT
[Direction, Policy, Activity, Outcome,
& Company Practices]
119
OMAR’S CAR COMPANY
ACCOUNTING & ACCOUNTABILITY
[Credibility, Compliance, Competence,
Consistency, & Standard Practices]

THE COMPETITION FOR CASH
THE POOL
OF CASH
CHARGES,
FINES &
INTEREST
GRANTS &
TRANSFERS
MAJOR POLICY ISSUES
ACTIVITY &
SERVICES
INTEREST
ON DEBT
LONG-TERM
LENDING
TEMPORARY
BORROWING
(INTERMEDIATE)
DEPLETIONS
(SAVINGS)
WITHHOLDING
SUPPLIERS
PAYMENTS
CAPITAL
INVESTMENT
LONG-TERM
BORROWING
GRANTS &
TRANSFERS
(INTERMEDIATE)
ENHANCEMENTS
(DIS-SAVINGS)
(PRIMARY) SOURCES
MAINTENANCE
OF FIXED ASSETS
INVENTORY
DEBTORS
(GRANTING
OF CREDIT)
MONETARY
INVESTMENT
(DEPOSIT)
MONETARY
INVESTMENT
(WITHDRAWAL)
SALES OF
ASSETS (INCL.
PRIVATIZATION)
MONEY
CREATION
(NATIONAL
GOVERNMENT)
TAXATION
(FINAL) USES & ABUSES
MAJOR POLICY OUTCOMES (OR LOSSES)
120

BUSINESS ACTIVITY (OMAR’S CAR RUNS) 121
SERVICE
CHARGES
OPERATION
INTEREST
DIVIDEND &
RETAINED
EARNINGS POLITICAL
DECISIONS
INTERNAL
FINANCING
ADJUSTMENT
OF VALUE
CONSUMPTION
OF CAPITAL
RENT
ADMINISTRATION
(INCLUDING TAXES)
MAINTENANCE
LOSS
(SUBSIDY)
SURPLUS
(SAVING)
RETURN ON
INVESTMENT
SURPLUS
(LOSS)
RISK
UNCERTAINTY
NEW ACTIVITY
STABILITY
TAX REVENUES
(BAILOUTS?)

BUSINESS ACTIVITY (OMAR’S CAR RUNS WELL) 122
SERVICE
CHARGES
OPERATION
INTEREST
DIVIDEND &
RETAINED
EARNINGS POLITICAL
DECISIONS
INTERNAL
FINANCING
ADJUSTMENT
OF VALUE
CONSUMPTION
OF CAPITAL
RENT
ADMINISTRATION
(INCLUDING TAXES)
MAINTENANCE
WELFARE
ENVIRONMENT
LATITUDE
LUXURY
TAX REVENUES
(BAILOUTS?)
SURPLUS
(SAVING)
RETURN ON
INVESTMENT
SURPLUS
(LOSS)
RISK
UNCERTAINTY
NEW ACTIVITY
STABILITY

GENEROSITY ENCOURAGED
123
• Remember this: Whoever sows sparingly will
also reap sparingly, and whoever sows
generously will also reap generously.
• Each of you should give what you have
decided in your heart to give, not reluctantly
or under compulsion, for God loves a cheerful
giver.
• And God is able to bless you abundantly, so
that in all things at all times, having all that
you need, you will abound in every good
work.
• As it is written:
“They have freely scattered their gifts to the
poor and their righteousness endures forever.”
[2 Corinthians 9: 6-9]

BUSINESS ACTIVITY (OMAR’S CAR RUINS) 124
SERVICE
CHARGES
OPERATION
INTEREST
DIVIDEND &
RETAINED
EARNINGS POLITICAL
DECISIONS
INTERNAL
FINANCING
ADJUSTMENT
OF VALUE
CONSUMPTION
OF CAPITAL
RENT
ADMINISTRATION
(INCLUDING TAXES)
MAINTENANCE
LOSS
(SUBSIDY)
TAX
REVENUES
SURPLUS
(SAVING)
RETURN ON
INVESTMENT
SURPLUS
(LOSS)
RISK
UNCERTAINTY
INTERNALIZATION
NEW ACTIVITY
STABILITYPotential Financial
Trade-off

BUSINESS ACTIVITY (OMAR’S CAR LEASED)
[OPERATING LEASE]
125
OPERATIONS*
RENT*
SURPLUS OR
LOSS)**
CASH**
LEAVE EXPENDITURE AS STATED – EQUAL TO DISBURSEMENT
**BALANCE SHEET [BUT ONLY INDIRECTLY – IN TOTAL ONLY]
* ON THE PROFIT AND LOSS STATEMENT
IS THIS ALL
THERE IS
TO IT?
Dr. Cr.

[OPERATING LEASE]
126
OPERATIONS*
RENT*
SURPLUS OR
LOSS)**
CASH**
LEAVE EXPENDITURE AS STATED – EQUAL TO DISBURSEMENT
**BALANCE SHEET [INDIRECTLY – IN TOTAL ONLY]
NOT (QUITE)
ALL THERE IS
TO IT!
Dr. Cr.

THE BALANCE OF [LEASE] ACCOUNTING
127
RENT
CASH
OMAR’S
(LEASED)
CAR
(OFF THE
BALANCE
SHEET!)
?

The Balance of [LEASE] Accounting
128
OMAR’S
(LEASED)
CAR
(OFF THE
BALANCE
SHEET!)
?WHERE IS IT
ACCOUNTED
FOR?
ANSWER = IN THE ACCOUNTS OF THE LESSOR!!
( FOLLOWING PRINCIPLES OF OMAR’S CAR RUNS!)
LEGALLY CORRECT
BUT
PERCEPTIVELY INCONSISTENT

[CAPITAL (OR FINANCE) LEASE]
129
OPERATIONS*
RENT*
SURPLUS OR
LOSS)**
CASH**
LEAVE EXPENDITURE AS STATED – EQUAL TO DISBURSEMENT?
ALL
THERE IS
TO IT?
Dr. Cr.

[CAPITAL (OR FINANCE) LEASE]
130
OPERATIONS*
RENT*
SURPLUS OR
LOSS)**
CASH**
LEAVE EXPENDITURE AS STATED – EQUAL TO DISBURSEMENT?
NO!
Dr. Cr.

BUSINESS ACTIVITY (OMAR’S AIRPLANE LEASE)
[CAPITAL (OR FINANCE) LEASE
131
AIRPLANE
ACCOUNTING for
INTERNATIONAL
REPORTING
POSTULATE*
LIABILITY &
ASSET –
NOT as
EXPENSING* “PRETEND”

The Balance of [LEASE] Accounting
132
DEBIT
CREDIT
ALL OBLIGATIONS
OF THE
LEASE
CONDITIONAL
RIGHTS OF USE
& OPERATION
UNDER THE LEASE
AGREEMENT
“RESOURCES”
“PHANTOM”
LIABILITY
“PHANTOM”
ASSET
NOT LEGAL
OWNERSHIP
NOR LIABILITY

“OMAR’S AIRWAYS”
133
DEBIT
CREDIT
“RESOURCES”
Dr Property, plant &
equipment
Cr Finance lease
obligations

BUSINESS ACTIVITY (OMAR’S CAR LEASE)
[CAPITAL LEASE – “ON BALANCE-SHEET”]
134
EQUATING to
ADJUSTMENT
OF VALUE*
CONSUMPTION
OF CAPITAL*
ASSETS*
LIABILITIES*
RETURN ON
INVESTMENT*
STEADILY
ELIMINATED*
* ON THE BALANCE – SHEET
* ON THE PROFIT & LOSS STATEMENT

BUSINESS ACTIVITY (OMAR’S CAR LEASE)
[IFRS “EXPOSURE DRAFT]
135
EVERY
ADJUSTMENT
OF VALUE*
CONSUMPTION
OF CAPITAL*
ASSET
LET
RETURN ON
INVESTMENT*
STAND
EXPOSED*
* ON THE BALANCE - SHEET
* ON THE PROFIT & LOSS STATEMENT

BUSINESS ACTIVITY (OMAR’S CAR RUINS) 136
SERVICE
CHARGES
OPERATION
INTEREST
DIVIDEND &
RETAINED
EARNINGS POLITICAL
DECISIONS
INTERNAL
FINANCING
ADJUSTMENT
OF VALUE
CONSUMPTION
OF CAPITAL
RENT
ADMINISTRATION
(INCLUDING TAXES)
MAINTENANCE
LOSS
(SUBSIDY)
TAX
REVENUES
SURPLUS
(SAVING)
RETURN ON
INVESTMENT
SURPLUS
(LOSS)
RISK
UNCERTAINTY
INTERNALIZATION
NEW ACTIVITY
STABILITYPotential Financial
Trade-off
}
OR

BUSINESS ACTIVITY
(OMAR’S CAR RUINS)
[EXPLOITS THE ENVIRONMENT]
137
RISK
UNCERTAINTY
INTERNALIZATION
NEW ACTIVITY
STABILITY
ENVIRONMENTAL
EXPLOITATION
AND
ECONOMIC
EXTERNALITY

BUSINESS ACTIVITY
(OMAR’S CAR RUINS)
[EXPLOITS THE PHYSICAL
CAPITAL]
138
RISK
UNCERTAINTY
INTERNALIZATION
NEW ACTIVITY
STABILITY
ENVIRONMENTAL
EXPLOITATION
AND
ECONOMIC
EXTERNALITY

WHAT IS CAPITAL?
139
Banks must maintain a pool of money that they
own free and clear as a reserve against losses.
The ratio of a bank's capital to its loans and
other commitments is regarded as a basic
measure of the bank's health.
Binyamin Appelbaum (Washington Post: April 25, 2009).
COMPLETE AND UTTER NONSENSE!!

A quote, from Ken Wagstaffe, a British
professional colleague, and fellow
accountant, who wrote a paper, about this
kind of thing:
"......it is based on some completely and
fundamentally wrong notions about what
accounting is. The level of ignorance about
accounting is breathtaking."
140
ACCOUNTING – WHAT IS IT?

WHAT IS CAPITAL?
[Accountancy 101]
141
Banks, and all other forms of business organization –
partnerships, corporations or non-profit entities –
hold Capital as the RESULTS of the net value of the
difference between its POSITIVE RESOURCES & its
NEGATIVE RESOURCES (a.k.a. Assets minus
Liabilities). It may or may not be held wholly or
partially as cash. The remainder is held as:
• property, plant and equipment;
• monetary investments; and,
• legal receivables; MINUS:
• amounts owed to bankers and all other legal
payables.
There may, indeed, be NO cash (or other liquid
assets).
[David C. Jones, Chartered Certified Accountant (UK)]

Wrong notions of what accounting is?
The level of ignorance about accounting is
breathtaking!
142
ACCOUNTING – WHAT IS IT?
Cassius:
"The fault, dear Brutus, is not in our stars,
But in ourselves, that we are underlings.”
William Shakespeare – Julius Caesar

BALANCE OF ACCOUNTING
Detailed
Perception
Broader
Perspective
145

What do I know about it?
I am just an old book-keeper!
146
Bank Balance Sheet as at 31 December, 2008
Assets
[On the Left,
There is Nothing Left!]
Liabilities and Capital
[On the Right,
There is Nothing Right!]
“Impact of the credit crunch on the 2008
financial statements: 18 November 2008”
By Willeke Ong en Jens Osinga
[©PricewaterhouseCoopers]

TRANSCENDENT TRANSPARENCY
[BARE STERNS!!]
147
Bank Balance Sheet as at 31 December, 2008
Assets
[Toxic Assets]
Derivatives
[MBSs, CDOs, CDSs]
Liabilities and Capital
[Precarious Credit]
Overnight loans (repos.)
[Renewable daily]
“Be sober, be vigilant; because your adversary
the devil, as a roaring lion, walketh about,
seeking whom he may devour: Whom resist
steadfast in the faith!” [1 Peter 5: 8-10]
[William Cohen: “House of Cards”]

BALFOUR BEATTY ISSUES £75M
BLACK HOLE WARNING
148
Beleaguered infrastructure group Balfour Beatty has
issued a fifth profit warning after discovering a new
£75m black hole in its UK profits.
The news has added to growing concern about the UK
builder, resulting in a sharp fall in the company's
shares by more than 20%.
In a statement to the market, Balfour Beatty said it
had experienced “further program slippage” and “poor
operational delivery”.
The group - which is involved in motorway
construction, power stations and PPP projects around
the world - said there would be a further shortfall of
£75m this year in its UK construction arm after two
earlier profits warnings this year.

BALFOUR BEATTY ISSUES £75M
BLACK HOLE WARNING
149
No doubt the valuations they accrue each period were not
being earnestly reviewed and built up, with no one really
understanding the accounting or too frightened of the
consequences.
Management accountants should have a personality test,
to find out that:
a) they are not charlatans that just want to skate on the
surface, in meetings; and,
b) they have got the “balls” to lay the law down, no doubt
in this case, to aggressive contract and quantity
surveying managers.

NEVER MIND!
150
Never mind...there may be 75m missing,
but I'm sure their carbon footprint is OK,
and the sustainability of their operations
will stand up to ethical scrutiny.
(Wonderful things, these buzzwords.)

PRESENT COMPANY NOT
EXCLUDED
[Badly Designed Interim Certificate]
151
COUNT, BADLY AND CHEAT
[CHARTERED QUANTITY SURVEYORS]
CERTIFICATE OF COMPLETION
CONTRACT: Petworth Sewerage Project
Value of Prior Work Certified: £3,000
Value of Work NOW Certified: £2,000
Total of Work Certified to Date: £5,000

FIRST UNIVERSAL BANK
ALWAYS & EVERYWHERE
PETWORTHRURALDISTRICTCOUNCIL
5,000.00A and B Contractors Ltd.
A.Bundance
Chief Financial Officer
Five Thousand Pounds
23 April 20_5
ERRONROUS OUTCOME –
OVERPAYMENT OF A CONTRACTOR!
£
152
A “Goof” by the Author of These
Slides!

BEAN-COUNTERS!
(HOW MANY BEANS MAKE FIVE?)
153
= 5
[RESOURCES] = [RESULTS]
Dr Cr

BEAN-COUNTERS!
154
= 5
[CONCRETE] = [CONCEPT]
Dr Cr

BEAN-COUNTERS!
155
= 5
[NET ASSETS] = [CAPITAL]
Dr Cr
MINUS
LIABILITIES
[NEGATIVE
ASSETS]

ACCOUNTANTS!
(HOW MANY RESOURCES
EQUAL RESULTS?)
156
EQUITY
SHAREHOLDERS
(STOCK
HOLDERS)

ACCOUNTANTS!
(HOW MANY RESOURCES
EQUAL RESULTS?)
157
NET ASSETS
[RESOURCES]
EQUAL
CAPITAL
[RESULTS]

ACCOUNTANTS!
(HOW MANY RESOURCES EQUAL RESULTS?)
158
EQUITY
(RESULTS)
(OWED TO & OWNED BY)
SHAREHOLDERS
(STOCK
HOLDERS)
CASH & BANK
FIXED ASSETS
& STOCKS OF
MATERIALS
CAPITAL &
RESERVES
(INCLUDING
FIXED ASSET
REVALUATION)
NET
EARNINGS
-------------------------
GENERAL FUND
SURPLUSEXPENSES
LOSSES,
(FRAUD,
CORRUPTION,
WASTE &
ABUSE)
NOT ALL
THERE IS
TO IT!
RESOURCES

LEVELS OF FINANCIAL CONCERN 159
NEW DEBT OR
EQUITY FINANCE
CAPITAL COST
& DEBT SERVICE
ESSENTIAL
CONCERNS
CAPITAL
STRUCTURE
EXPANSION &
DEVELOPMENT
SURVIVAL
NEW OPERATING
COST & INTEREST
PROFITABILITY- USING
“OMAR’S CAR RUNS” COST
SUSTAINABILITY
POTENTIALS
FOR DISRUPTION
INSTITUTION
GOING CONCERN
(STEADY STATE)
PROJECTS
(DISRUPTIVE)
OVERALL
ACHIEVEMENT
FINANCIAL
REQUIREMENTS
CASH FLOW

FINANCIAL ANALYSIS LINKS 160
ACCOUNTING
SYSTEM
MANAGEMENT
DECISIONS
INSTITUTIONAL
ANALYSIS
PRICE & SUBSIDY
POLICY
(C.R.I.M.O.G.)*
RISK ANALYSIS
REVENUE &
BEHAVIOR
EXTERNALITIES
PROJECT
FINANCIAL
ANALYSIS (D.C.F.)
ENTITY
FINANCIAL ANALYSIS
(ACCOUNTS)
ECONOMIC
ANALYSIS
COMPARISONS
& CONTRASTS
FINANCIAL
ACCOUNTING
(ENTITY)
COST
ACCOUNTING
(ACTIVITIES)
AUDITED
FINANCIAL STATEMENTS
PLANNING
& BUDGET
ENGINEERING
ECONOMY
FINANCIAL
INFORMATION
RISK ANALYSIS
MARKET-PLACE
(SUPPLY & DEMAND)
* CHANGING the RULES IN
the MIDDLE OF the GAME

USE OF ECONOMIC RESOURCES
RESULTS
RESOURCE MOBILIZATION
CAPITAL CONTRIBUTIONS
ASSET SALES
LONG-TERM DEBT
TEMPORARY DEBT
SUPPLIERS (CREDIT)
RESOURCE ACTIVATION
INFORMATION
RAW MATERIALS
SERVICES
ENERGY
LABOR
CUSTOMERS & CLIENTS
THE COMMON WEALTH
NATURAL RESOURCES
MONETARY INVESTMENT
INVENTORIES
WORK IN PROGRESS
CUSTOMERS (CREDIT)
CASH
RESOURCE ALLOCATION
(& RESOURCE CONSERVATION)
LAND
PERMANENT WORKS
BUILDINGS
EQUIPMENT & MACHINERY
RESOURCE UTILIZATION
PRODUCTION
DISTRIBUTION
OPERATION
MAINTENANCE
ADMINISTRATION
TAXES
DEPRECIATION
INTEREST
DIVIDEND
RETAINED EARNINGS
PROPERTY DISPOSAL
HUMAN CAPITAL*
MANAGEMENT
(ENTERPRISE)*
* CREATIVE, INNOVATIVE
(RIGHT-BRAIN) TALENT
COMMERCIAL,
SOCIAL &
ECOLOGICAL
RETURN &
REINVESTMENT
WASTE, DAMAGE
& DESTRUCTION
COMMERCIAL,
SOCIAL &
ECOLOGICAL
CONSUMPTION
(SATISFACTION)
COMMERCIAL,
SOCIAL &
ECOLOGICAL
STIMULATION
161

RESULTS OF ACTIVITY (USE OF RESOURCES)
COMMERCIAL,
SOCIAL &
ECOLOGICAL
RETURN &
REINVESTMENT
WASTE, DAMAGE
& DESTRUCTION
INNOVATION - CONSUMER SATISFACTION ,
REINVESTMENT & PRODUCT DEVELOPMENT
COMMERCIAL,
SOCIAL &
ECOLOGICAL
CONSUMPTION
(SATISFACTION)
COMMERCIAL,
SOCIAL &
ECOLOGICAL
IMPORTANT SUCCESS CRITERIA AND PRINCIPAL FOCUS OF ATTENTION
PERFORMING USEFUL & HIGH-QUALITY
ACTIVITIES AT APPROPRIATE PLACES AND TIMES
LONG-TERM OPTIMIZATION OF RESOURCE USE
(PRODUCTIVITY & WASTE CONTROL)
DEBT SERVICE
QUALITY OF ENVIRONMENT
PAYMENT
OF TAXES
PROFIT (OR BALANCED
CURRENT BUDGET)
QUALITY OF
SOCIAL LIFE
OPERATIONAL
RELIABILITY
WASTE
DISPOSAL
PRODUCT &
SERVICE QUALITY
QUALITY OF
LABOR LIFE
DAMAGE
RECTIFICATION
RESOURCE CONSUMPTION V. RESULTS 162

RESPONSIBILITY ACCOUNTING
163
PROFITABILITY*
OPERATIONAL
RELIABILITY
Typically, operationally intensive expenditures are
favored over those that are maintenance-intensive.
For example, it is always more urgent to pay
schoolteachers than to maintain schools, important
though the latter may be. Thus financial budgets may
be "balanced," perhaps by legal mandate (fiscal
balance), whereas there may be significant actual or
potential “deficits” hidden within under-maintained
assets or lower productivity of services
(physical/social deficit).
* Operating Surplus

164
FISCAL BALANCE*
PHYSICAL DEFICIT
(RELIABILITY)
Financial budgets may be "balanced,"
perhaps by legal mandate (fiscal balance),
whereas there may be significant actual or
potential “deficits” hidden within under-
maintained assets, physical breakdowns or
lower productivity of services (physical – or
operational) – deficit .
UNDER-MAINTAINED
ASSETS: MANAGEMENT
INCOMPETENCE!

Financial Statements of Resources & Results
TRAMBUS TRANSPORT COMPANY
BALANCE SHEET AS AT ....
$m $m $m $m
Fixed Assets
Property, Plant and
Equipment
Current Assets
Inventories
Receivables
Cash
15
9
222
-----
1,250
246
-----
1,496
=====
Equity
Contributed Capital
Retained Earnings
Long Term Debt
Loans Outstanding
400
216
-----
616
880
-----
1,496
=====
TRAMBUS TRANSPORT COMPANY
INCOME AND EXPENDITURE STATEMENT
For the Period Until ....
$m $m $m $m
Expenditures
Operating Expenses
Interest on Debt
Balance C/fwd.
Retained Earnings
Balance C/fwd.
243
97
216
-----
556
=====
216
Income
Operating Revenues
Retained Earnings
Balance B/fwd.
556
-----
556
=====
216
165
R
E
S
O
U
R
C
E
S
R
E
S
U
L
T
S

ASSET AND LIABILITY MANAGEMENT
INFRASTRUCTURE,
PROPERTY, PLANT
AND EQUIPMENT
MONETARY
INVESTMENTS
LONG-TERM LOANS
OUTSTANDING
:
RENT OF PROPERTY
ADMINISTRATION
MAINTENANCE
OPERATIONS
ADJUSTMENT
OF VALUE
RETURN ON
INVESTMENT
(DEPRECIATION)
INVENTORIES
CAPITAL - SURPLUS
RECEIVABLES AND
CASH
PAYABLES AND
TEMPORARY LOANS
CAPITAL CONS.
166

MAIN CASHIER
FOR COLLECTIONS
(CHIEF CASHIER)
GOVERNMENT
UNIT’S
BANK
MAIN CASHIER
FOR PAYMENTS
(CHIEF PAYMASTER)
PAYERS
OF TAXES, FEES
& CHARGES
BRANCH
CASHIERS
(DISTRICT
OFFICES) BORROWERS
& INVESTMENT
RECIPIENTS
LENDERS
(BANKS &
BONDHOLDERS)
BRANCH
CASHIERS
(IMPREST
HOLDERS)
CENTRAL GOVERNMENT
PUBLIC AUTHORITIES
THE GENERAL PUBLIC
& CAPITAL MARKETS
SUPPLIERS
CONTRACTORS
& EMPLOYEES
MAIL &
ELECRONIC
TRANSFERS
MAIL &
ELECRONIC
TRANSFERS
INFORMATION & INSTRUCTIONS
BRANCH
BANKS
BRANCH
BANKS
“SWEEPS”
CASH FLOWS
167

ECONOMY, EFFICIENCY
& EFFECTIVENESS
ACTUAL
OUTPUT
PLANNED
OUTPUT
TECHNICAL
EFFECTIVENESS
ACTUAL
EFFICIENCY
ACTUAL
INPUT
EFFICIENCY
IMPROVEMENT
ECONOMY
PLANNED
INPUT
PLANNED
EFFICIENCY
ACTUAL
OUTCOME
POLICY
EFFECTIVENESS
PLANNED
OUTCOME
ASSESSMENT
168

FINANCIAL CONTROL 169
EXTERNAL
FINANCIAL CONTROL
VOTING IN
ELECTIONS
EXAMINATION OF
PUBLIC DOCUMENTS
EXTERNAL AUDIT
AND REPORTING
ATTENDANCE AT
PUBLIC HEARINGS
INTERNAL
FINANCIAL CONTROL
GOVERNMENTAL
REGULATION
LEGISLATIVE
REQUIREMENTS
COMPETENT CHIEF
FINANCIAL OFFICER
COMPETENT
FINANCIAL STAFF
INTERNAL CHECKS &
INTERNAL AUDIT
CONCERNED TOP
MANAGEMENT
DESIGN OF SYSTEMS
& PROCEDURES
BUDGETARY AND
COST CONTROLS

170INTERNAL & EXTERNAL CONTROLS
Price of
Inputs
Purpose
Quantity
of Inputs
Questioning Capacity
Pay
Inputs Expenditure
(Production)
Permission
Prestige
Quality of inputs
Productivity
Probity PublicityProcedures
Questing Intensity
Power
Production
Category – Characteristics of Activity
P
PQ
P2Q
P3Q
P4Q

Transparency of activities is reflected in (but is
not limited to) information disclosed in financial
statements. This information must, moreover,
address a great variety of inputs.
One structured methodology for this can be in
the form of the following (polynomial) “pseudo-
equation.”
171
S = f (P4Q + P3Q + P2Q + PQ + P)
Where: “S” represents a degree of total
satisfaction and symbols “P” and “Q” designate
inputs, necessary to achieve this satisfaction
INTERNAL & EXTERNAL CONTROLS

THE "EIGHT Ls" PRINCIPLES OF BORROWING
172
AS
LICENSE LUCK* LIFE-MATCH
AS POSSIBLE
(OR NECESSARY)
SUBJECT TO
LIQUIDITY
LATE LONG LOW-COSTLITTLE
* LUCK = LIKELIHOOD OF OUTCOME

EIGHT PRINCIPLES OF INVESTING*
173
AS
LICENSE LUCK** LIFE-MATCH
AS POSSIBLE
(OR NECESSARY)
SUBJECT TO
LIQUIDITY
EARLY
SHORT
TERM
HIGH
RETURNMUCH
** LUCK = LIKELIHOOD OF OUTCOME [INCLUDING SAFETY]
*“CASH”: Capital
Appreciation
v. Safe Haven!

CASH FLOWS - LOCAL GOVERNMENTS & ENTERPRISES
HOUSEHOLDS , BUSINESSES AND DEVELOPERS
(INCLUDING FOREIGN LENDERS)
CENTRAL/STATE GOVERNMENT
LOANS
RAISED
CAPITAL
FUNDING
BUDGETARY CONTRIBUTIONOPERATING
(RECURRENT)
FINANCE
FOREIGN
CURRENCY
RESERVES
BUDGETARY
SUPPORT
TAXES
FEES
CHARGES &
PRICES
CAPITAL
CONTRI-
BUTIONS
CAPITAL
GRANTS
& LOANS
DEBT SERVICE
LOCAL
GOVERNMENT
& PUBLIC
UTILITIES
SPECIAL FUNDS
(INCLUDING
CONSOLIDATED
LOANS FUNDS)
CAPITAL INVESTMENT & USAGE
EXPENDITURE
ON
(COSTS OF)
SERVICES
NET
FOREIGN
EARNINGS
(COMMERCE
AND
INDUSTRY)
WORKING CAPITAL
CONTRIBUTIONS (**)
SINKING
FUNDS (***)
LOANS
REPAID
CAPITAL
MARKETS
DEFICIT FINANCING (*)
(**) = INCL. DEPRECIATION (RETENTION) OR RENEWALS FUNDS(*) = UNSATISFACTORY PRACTICE
174

FINANCIAL RAPE!
(Deficits Don’t Matter!)
175
CAPITAL
FUNDING
BUDGETARY CONTRIBUTIONOPERATING
(RECURRENT)
FINANCE
WORKING CAPITAL
DEFICIT FINANCING*
* “No!” means “No!”
CAPITAL
GRANTS
& LOANS

FUNDAMENTAL ACCOUNTABILITY
REQUIREMENTS
• Retain (real) net capital intact
[including non-monetary
capital!].
• Maintain inter-generational
equity (current users bear
their fair share of all costs,
including capital financing
costs).
176

STRUCTURE OF INTERNATIONAL
FINANCIAL REPORTING
STANDARDS (IFRS)
International Financial Reporting Standards (IFRS)
are:
"principles based“
in that they establish broad rules
as well as dictating
specific treatments.
177

STRUCTURE OF IFRS
International Financial Reporting Standards comprise:
• International Financial Reporting Standards (IFRS) -
standards issued after 2001
• International Accounting Standards (IAS) - standards
issued before 2001
• Interpretations originated from the :
• International Financial Reporting Interpretations
Committee (IFRIC) - issued after 2001
• Standing Interpretations Committee (SIC) - issued
before 2001
178

UNDERLYING ASSUMPTIONS
The underlying assumptions used in IFRS are:
Accrual basis - the effect of transactions and
other events are recognized when they occur,
not as cash is gained or paid.
Going concern - an entity will continue in
operation for the foreseeable future.
179

QUALITATIVE CHARACTERISTICS
OF FINANCIAL STATEMENTS
• Understandability
• Reliability
• Comparability
• Relevance
• Materiality
• Prudence
• Substance over form
• Completeness
180

ELEMENTS OF FINANCIAL
STATEMENTS
The financial position of an enterprise is primarily
provided in the Statement of Financial Position.
The elements include:
1. Asset: An asset is a resource controlled by the
enterprise as a result of past events, and from which
future economic benefits are expected to flow to the
enterprise.
2. Liability: A liability is a present obligation of the
enterprise arising from the past events, the
settlement of which is expected to result in an
outflow from the enterprise' resources, i.e., assets.
181

STATEMENTS
The financial position of an enterprise is provided in the
Statement of Financial Position. In addition to Assets and
Liabilities – Resources – the elements include accumulated
Results.
3. Equity: Equity is the residual interest in the accumulated
results of the assets of the enterprise after deducting all the
liabilities. Equity is also known as “owner's equity”.
[The financial performance of an enterprise is primarily provided
in an income statement or profit and loss account. The net total
of the elements of an income statement – or the elements that
measure the financial performance – results – are added to (or
subtracted from) that part of the equity described as “retained
earnings” – or a similar expression].
182

STATEMENTS
The financial performance - results - of an enterprise is
primarily provided in an income statement or profit and
loss account. The elements of an income statement or the
elements that measure the financial performance are as
follows:
4. Revenues: increases in economic benefit - positive results
- during an accounting period in the form of inflows or
enhancements of assets, or decrease of liabilities that result in
increases in equity. However, it does not include the
contributions made by the equity participants, i.e.,
proprietor, partners and shareholders.
5. Expenses: decreases in economic benefits - negative
results - during an accounting period in the form of outflows, or
depletions of assets or incurrences of liabilities that result in
decreases in equity.
183

ELEMENTS OF COST
STATEMENTS
The financial performance – the cost – of an activity is
primarily provided by a detailed analysis of the expenses
in an income statement or profit and loss account. The
cost elements of an income statement are the elements
that measure the financial performance of an activity as to
the following:
A. Expenses: are decreases in economic benefits – negative
results – during an accounting period in the form of outflows,
or depletions of assets or incurrences of liabilities that result in
decreases in equity. WHEREAS:
B. Revenues: are increases in economic benefit – positive
results – during an accounting period in the form of inflows or
enhancements of assets, or decrease of liabilities that MAY OR
MAY NOT result from the expenses incurred at “A” (above.)
They DO NOT form part of the analysis of the expenses .
184

REQUIREMENTS OF IFRS
IFRS financial statements consist of (IAS1.8):
• Statement of Financial Position
• Comprehensive Income Statement
• Either a Statement of Changes in Equity (SOCE) or a
Statement of Recognized Income or Expense (SORIE)
• Cash Flow Statement or Statement of Cash Flows
• Notes, including a Summary of the Significant Accounting
Policies
Comparative information is provided for the previous
reporting period (IAS 1.36).
185

[On 6 September 2007, the IASB issued a revised IAS 1]
These require that an entity must:
• Present all non-owner changes in equity (that is,
'comprehensive income') either in one statement of
comprehensive income or in two statements (a separate
income statement and a statement of comprehensive
income). [Components of comprehensive income may
not be presented in the statement of changes in equity].
• Present a statement of financial position (balance
sheet) as at the beginning of the earliest comparative
period in a complete set of financial statements when
the entity applies an accounting of its activities.
186

[On 6 September 2007, the IASB issued a revised IAS 1]
These require that:
• ‘balance sheet' will become 'statement of financial
position'
• ‘income statement' will become 'statement of
comprehensive income'
• 'cash flow statement' will become 'statement of
cash flows'.
The revised IAS 1 is effective for annual periods
beginning on or after 1 January 2009. Early adoption
is permitted.
187

“P.O.P.” APPROACHES
TO MONITORING OF QUALITY
• Profit over People
• Profit over Prevention
• Predatory Oil Production
• Pricing on Pumps
• Poor Operational Preservation
188

WITH EYES ON GULF, BP ALASKA
PIPES REMAIN AT RISK
189
The extensive pipeline system that moves oil,
gas and waste throughout BP's operations in
Alaska is plagued by severe corrosion,
according to an internal maintenance report
generated four weeks ago.
The document, obtained by the journalism
group ProPublica, shows that as of Oct. 1, at
least 148 BP pipelines on Alaska's North
Slope received an "F-rank'' from the company.

WITH EYES ON GULF, BP ALASKA
PIPES REMAIN AT RISK
190
According to BP oil workers, that means
inspections have determined that more
than 80 percent of the pipe wall is corroded
and could rupture. Most of those lines
carry toxic or flammable substances. Many
of the metal walls of the F-ranked pipes are
worn to within a few thousandths of an
inch of bursting, according to the
document, risking an explosion or spills.

WITH EYES ON GULF, BP ALASKA PIPES
REMAIN AT RISK
191
BP oil workers also say that the company's
fire and gas warning systems are
unreliable, that the giant turbines that
pump oil and gas through the system are
aging and that some oil and waste holding
tanks are verging on collapse.

MINE SAFETY IN AMERICA
SAFETY SYSTEM DYSFUNCTIONAL
BEFORE MINE BLAST
192
NPR NEWS INVESTIGATION: Legally required
water systems at Massey Energy's Upper Big
Branch coal mine in West Virginia were not
functioning properly before the April 5 explosion
that killed 29 mine workers. Some experts say
these systems might have helped prevent the
disaster if they had been working properly.

STANDARD MACRO-ECONOMICS
[GLOBALIZATION]
193
GNP - NFER = GDP
GROSS
NATIONAL
PRODUCT
NET FOREIGN
EARNINGS and
REMITTANCES
(From Labor & From
Capital Investment)
GROSS
DOMESTIC
PRODUCT

ENVIRONMENTAL ECONOMICS
194
GNP - NFER = GDP!
GROSS
NOW!
PRODUCT
GROSS
DEPLETED!
PRODUCT
NET FUTURE
ENVIRONMENTAL
REQUISITIONS

ENVIRONMENTAL ECONOMICS
GNP + NFER = GDP!
GREED,
NEED &
POPULATION
GROWTH
NO FARSIGHTED
ENVIRONMENTAL
RESPONSIBILITY
GRAB,
DESTROY
& POLLUTE
195

RISINGVALUES DUE TO
SCARCITY
SUPPLIES - FOR
PARTICULAR PLACES
AND TIMES:
OF EARTH (LAND), AIR
FIRE (ENERGY) AND
WATER
LIMITS OF
SUPPLY
COSTS OF
SUPPLY
AND
DEMAND
ENVIRONMENTAL RENT
(Adjustment of Value)
196

Air & Water
Renewable
Natural ResourcesBasic Land Use
Unused
Land + Mineable & Other
Energy Resources
ENVIRONMENTAL RENT
(Return on Investment)
197

Basic Land Use
POLLUTION
ENCROACHMENT
and EXTRACTION
DESTRUCTION
POLLUTION
ENCROACHMENT} ENVIRONMENTAL
DISINVESTMENT
Renewable
Natural Resources
Air & Water
Unused Land
+ Mineable & Other
Energy Resources
ENVIRONMENTAL RENT
(Return on Investment)
198
=
DESTRUCTION

GLOBAL SUPPORT FOR CARBON
PRICING
199
As government and business leaders
gathered in Paris, in December 2015, they
sent a clear message to the world that
climate change is a risk that cannot be
ignored, and that they are ready to work
together, to bring down emissions.

ENVIRONMENTAL RENT
THE ACCOUNTANT'S RESPONSIBILITY
200
• Accounting training is, hopefully, more than just an
education, merely to do a job or to earn a living. There
must be a duty, a civic trust.
• This responsibility must extend to the obligation for
accounting for the environment. Never were the
combined qualities of competence and humility more
important.
• These are not intended as moralizing or religious
precepts but as necessary contributions to continuance
of meaningful and harmonious living on our planet.

ENVIRONMENTAL RENT
201
• To quote the Dalai Lama: "Taking care of our planet
is nothing special, nothing sacred or nothing holy. It is
just something like taking care of our house. We have
no other planet - no other house - except this."
• In this house, therefore, let us take care of our
family, using wise budgeting and sharing of resources.
• Let us support and sustain our Mother, the Earth, so
that Universal Intelligence, will not, in exasperation,
devastate, ruin or destroy us.

ENVIRONMENTAL RENT
202
More professionally, as accountants, let
us live in constant fear and respect of
the ruthless discipline which can be
imposed upon us by our Universal
External Auditor.

ENVIRONMENTAL RENT
203
• So far as is known, very few people, indeed, have
lived otherwise than upon our Earth. They are the
astronauts and cosmonauts!
• From the very beginning of space travel, these
privileged people have been able to view our Earth,
from afar, in ways not shared by those billions of
others of we and our neighbors, who live upon it.
• Virtually all of them have regarded the Earth with
awe! We are responsible – and privileged – to follow
their example. If we do not, we are all lost – for ever!

"Keep it simple" is often the
distracting and disarming slogan.
Yet, those who urge this precept upon (say)
accountants and economists, would almost
certainly renounce it for (say):
• surgeons operating on them or their loved
ones,
• architects designing or building their houses.
The contrast between the scalpel and the
meat-axe is perhaps an appropriate analogy,
applying equally to financial information!
204

Fifty years ago, at a banquet in the Mansion
House, London, UK, celebrating the centennial of
Britain's “Chartered Institute of Public Finance
and Accountancy,” the Chaplain to the Lord
Mayor of London prayed the following grace:
"Oh Lord, bless this meal and all those
who are engaged in the profession of
public finance, remembering that, in the
end, we are all accountable to Thee!"
ULTIMATE ACCOUNTABILITY
205

ULTIMATE
ACCOUNTABILITY
206
While putting away lying, speak
every man truth with his neighbor:
for we are all members one of
another.
[Ephesians 4:25]

Accounting and Accountability

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