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Mr Peter Wong Hong-yuen, Senior Partner of Deloitte Touche Tohmatsu, was the Foundation’s guest speaker on 22 February 2001. This is the text of his speech.
Thank you for giving me a forum to expound on one aspect of accounting reform that our high-minded proponents of best practice are only just beginning to consider. By high-minded proponents, I refer to our Government - from the Chief Secretary all the way down to the Hong Kong Society of Accountants and its constituency of hundreds of professional accountants who work for the Government. Our Government is pressing for an up-grade of the financial accounting standards in the private sector. It wants our standards to be on a par with those of our peers around the world. But when it comes to the Government's own set of accounts, all the trappings of "Yes, Minister" emerge. A protective cocoon is weaved over their books. The fudge is maintained and they can continue to spin whatever they want. I have entitled my talk "Government Finances for Dummies". I might as well have called it "Government Surpluses for Dummies". Or how about "Surplices for Donalds" - meaning the surplices that the clergy wear over their cassocks when they perform in church. By all appearances, the surplices look white and clean. But history has revealed that they can hide all manners of habits beneath. Government Accounts If the Government was a publicly listed entity on the Hong Kong Stock Exchange, it would have had its knuckles firmly rapped. All listed companies must issue their audited accounts with their annual reports within 6 months of their year ends.
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If you are interested in those Government accounts, for $357 you can buy a set from the Government Printers. But I wonder how many of us do? Perhaps you are one of those lucky enough to get a fat package from the Government Printers now and then. What do you do with this package? Or should I ask, what does your secretary do with this package? File it? Throw it into the wastepaper basket? I dare to guess that many of us file them until we receive the next set.
If my guess is correct - this is a real pity. Within the pages of that fat package are contained the full process of accountability of government finances. Therein you will find how many of our tax dollars have been collected and how they have been spent. In all my years as a member of the Legislative Council, even as Chairman of the Public Accounts Committee, I have to confess that we never spent any time publicly scrutinizing those audited accounts. I have never heard our ever-vigilant press nor our academics taking any interest either.
What Accounts?
What are these Government accounts? Well, there is the General
Revenue Account and a total of 8 funds. The:
- Capital Works Reserve Fund
- Capital Investments Fund
- Civil Service Pension Reserve Fund
- Disaster Relief Fund
- Innovation and Technology Fund
- Land Fund
- Loan Fund and
- Lotteries Fund
But what about two of the major endeavours of the Hong Kong Government, affecting everyone: housing in the form of the Housing Authority and public hospital services through the Hospital Authority ? You won't find them on your tourist guide of Government Accounts. Separate legal entities and not accounted for in the system of Government Accounts. Same with the Airport Authority, the Kowloon Canton Railway Corporation, and the unsold parts of the Mass Transit Railway. In accounting parlance, they are all "off-balance sheet assets". They are "off the map".
Objectives of Those Accounts
To be fair, the main objective of those accounts is to meet the
needs of the Public Finance Ordinance and the Appropriation
Ordinance. The Financial Secretary can only go as far as
proposing to raise revenues and how to spend them. It is the
sole prerogative of the Legislative Council's Finance Committee,
to scrutinize and approve specific applications for use by the
designated entities, so the Director of Accounting Services can
disburse to them the requisite funds. The Finance Committee acts
as a check. It can vote less than asked for, but not a cent
more.
Scrutinise it does, and quite well. No problem there. I have no doubt that the elected Legco members take their scrutiny work far more seriously than the former Appointed Members. The problem is that since most of us are dummies. Especially when it comes to money. Add to this the fact that those accounts are not easy to see through and therefore can be easily manipulated to give the answers of the "Yes, Minister" variety; certainly - Out of Sight - Out of Mind.
Basis of Accounting
The first thing we were taught as accounting students is that if
the accounts are to mean anything, the bases must be consistent.
Ultimately, those accounts must present a true and fair view.
"True and fair view" - I'm sure that you've heard or
read this term many times before now.
We are told that the Government Accounts are prepared "mainly on a cash basis". In the case of the Capital Investment Fund and the Loan Fund, they are on a modified cash basis to include the values of their assets and liabilities. In addition, the Government publishes "accrual-based accounts" for services that are commercial in nature.
So does this mean that the Government keeps two sets of books? Yes and no. In reality, the answer is closer to yes. That is what they have to do. No-one can manage a business purely on a cash basis. However, the flip side is how can we tell the financial health of an entity or its financial viability and sustainability, if we do not get accounts which can compare one period to another consistently? I trust that I have you all thoroughly confused now.
Magic Away Cash Surpluses
Next stop on this magical, mystery tour of Government Accounts
is pure magic. Cast your mind back to 1992 when Hong Kong was
doing very nicely. In about January, the original budget surplus
of less than $10 billion was threatening to blow out at $30
billion. Huge land sales. Better than expected tax and stamp
duty collections. I was pushing for $7 billion to build the
first stage of the Strategic Sewage Disposal Scheme with the
controversial deep tunnels. That $7 billion was not to be
charged onto consumers. It was capital infrastructure cost. Most
of it is more or less permanent. It does not need replacement
and hence it would be unfair to recover the cost from the
public. Good sewerage is something basic that everyone should
enjoy.
My prayers were answered with a proposal in front of the Finance Committee a few days before the Government Financial Year End. A Sewage Services Trading Fund was to be set up to receive the full $7 billion in order to build and then run our sewage service.
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Big dilemma! I was the champion in Legco for Trading Funds. These take commercial enterprises such as Companies Registry, Land Registry and Post Office out of the cash accounting regime. Under normal Government financing regulations, any entrepreneurial initiative is removed from the cash accounting regime. Otherwise, all its income would have to be returned to central Treasury never to be returned. Trading funds are removed from the cash accounting regime by the same logic. But therein lay my dilemma. A trading fund was never meant to deal with the funding of a major infrastructure project. A trading fund, as its name implies, is for trading. It has to be profitable or at least, in balance, to remain viable. It has no capital to speak of in order to buffer shocks.
What could I do? In the very brief time then available, my concerns for the environment overcame my accounting ones even the latter were expressed. History tells me that that was a mistake. The Sewage Services Trading Fund had to be closed down when a later Legco refused to put up sewerage charges in line with cost, even though most of those Legco incumbents had voted positively for the original resolution which spelt out the principle of increasing charges as new treatment facilities come on stream.
But what drove that $7 billion largesse? By getting Legco to approve the $7 billion funding for SSDS Stage I, without spending a single cent, what would otherwise have been a $26 billion surplus was turned into a more explainable $19 billion! See? I told you! Magic!!!
Value for Money
The next part of our tour of Government Accounts may contain
land-mines, and is only for the brave. Some of my predecessors
in Legco were not blind. They saw money disappearing off those
cash accounts without anyone being the wiser as to what then
happened. Under Allen Lee, the Public Accounts Committee,
through the Director of Audit, was mandated to search high and
low to seek out instances of policy not being carried out
correctly and possible wastage of money. There was one
condition, mind you. The Director was not permitted to question
any policy, however mistaken it may be!
I was a member of the Public Accounts Committee all through my stint at the Legislative Council and chaired it after the death of Stephen Cheung for some 3½ years. It was clear to me that no civil servant liked appearing before us. I would have to say there were some committee members who used the Public Accounts Committee in their personal crusades to vindicate past injustices. Some had very sharp tongues and could be relied upon to make quotable quotes in the next day's press. The topic before you was sometimes just an excuse for a tongue-lashing.
I kept asking a succession of Directors of Audit to let us know of instances where they found persons who have done good things, over and above the call of duty. So that we can actually thank them in public. Those opportunities were all too rare. I suspect that good news does not sell and that blasting someone sells better.
One thing that I would now like to speak out on is the way the Public Accounts Committee became politicized after my term. In my time, we had a very strict rule as a Committee. Each member would restrict what we say in public to the formal meetings. What we discussed behind closed doors would remain confidential. If there was a time when we needed to go public to clarify matters or brief the press on decisions - that would only be done by the Chairman when as a Committee we had agreed upon the story line. We would only pronounce through the considered views of our written reports. We would not verbally or otherwise comment on or add to those reports. Rather like a judge with his judgement.
Nowadays, I am saddened by the conduct of our successors. The Public Accounts Committee always has the last word. How can the hapless civil servant defend himself in the face of press reports, specially when the PAC has not yet given its decision? It is highly unfair. As I said, this whole process is ridden with land-mines.
Governance of Our Public Entities
The next leg of our tour takes us into uncharted territory. The
Hong Kong Society of Accountants, amongst others, is making much
of the need to improve the corporate governance of our listed
entities. But why has our Government been so extra-ordinarily
quiet about the corporate governance of our public entities?
I am a Board Member of the International Federation of Accountants. This is the transnational body charged with overseeing the conduct of accounting and auditing throughout the world. Its remit includes accounting in the Public Sector. Last year it published a paper on "Corporate Governance in the Public Sector: A Governing Body Perspective" asking for comments by 30 November 2000.
It would be a vast overstatement to say that there is enthusiasm by our Government to comment on this paper. I can only conjecture that it is because of the cans of worms that it would open up. Presumably it would upset the time honoured and abused rules or, indeed, lack of any rules followed by our top civil servants. Andy Lee of the Hospital Authority is now President of the Hong Kong Society of Accountants. He is the first "civil servant" to hold that position. I am hoping for braver things from him during his year of office.
A couple of years ago, the Public Sector Committee of the International Federation of Accountants held its meeting in Hong Kong and conducted a public seminar. I asked the Director of Audit who was also in the audience whether he thought that the present accounts presented by the Director of Accounting Services showed a true and fair view of Government Finances since they were on a cash basis. The Director of Accounting Services was the Chairman of the session and ruled my question out of order.
All credit was due to the Director of Audit who stood up and said that in spite of being ruled out of order, he wanted to answer my question and that he was going to raise the question of cash accounting within Government. Brave pioneer! I now await action resulting from those deliberations. I probably shouldn't hold my breath.
Controlling Costs Within Government
Mr. Chairman, in your original letter to me asking me to speak
at this luncheon, you suggested that I talk about
"Controlling Costs within Government and/or Reform of
Government Finances". You will see that I have not adopted
your suggested titles because I do not honestly think that the
Government can answer you honestly either as to what it really
costs to deliver a particular service.
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If you look at those audited accounts, there is a breakdown by departments. Within departments there are some general expenditure headings. But if you were to ask how much it actually costs to look after a particular patient who was in Queen Elizabeth Hospital Intensive Care Ward for 5 days after a heart operation, the best you will get is a guesstimate.
Reforms
What chance do you have of controlling costs unless you know
what the costs are and can measure them objectively? Ultimately
the only way is to really assess the process by breaking down
the operations into easily managed components and benchmarking
them against best practice.
My own firm is talking to the Trading Funds about Activity Based Costing so that the Fund Managers can get a better understanding of their costs and dynamics. Armed with this know-how, those managers can then start looking at the outside competition and truly assess their own performance. They know that all round the world, government services are being privatized. If they are going to survive in that jungle called private enterprise, they need to take action before they become what on the Mainland are now called SOEs "State Owned Enterprises" - no hopers.
Mr. Chairman, reform means change and all change causes some pain. As the saying goes, no pain, no gain. If change is to be successful, we need to convince everyone that the change is necessary. For many, if not most, of our civil servants, "if it ain't broke - don't change it" rules. On the face of it, Hong Kong has far, far more money than is good for it. Change, however desirable, will not happen unless our rulers are prepared to spend that political capital to drive it through. Our Chief Executive is pursuing almost everything that I feel is right to do. But all those who oppose change because it affects them are upset and regrettably Mr. Tung's political capital within Hong Kong, as exemplified by those elected to the Legislative Council, does not carry him that far.
My hope is that there will be changes before 2007 and our then new Chief Executive will be voted in with that mandate plus sufficient political capital to drive the necessary reforms through. My guided tour of Government Accounts ends at this point on this hope.
The above does not necessarily represent the views of the Foundation
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