PRIVATIZATION, ACCOUNTING AND AUDITING CHALLENGES AND OPPORTUNITIES

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					               PRIVATIZATION, ACCOUNTING AND AUDITING
                   CHALLENGES AND OPPORTUNITIES
                                       by

                             David C. Jones
                  Chartered Public Finance Accountant
                  Chartered Certified Accountant (UK)




David C. Jones, CPFA, FCCA (UK)
Farsight
International Financial & Management
Consultant
4936 Andrea Avenue,
Annandale. Virginia. 22003. USA.
Tel: 703-978-8564
Fax: 703-978-8014
E-mail: dcjones2@cox.net




                                       1
                          PRIVATIZATION, ACCOUNTING AND AUDITING
                              CHALLENGES AND OPPORTUNITIES

                                                               by

                                                      David C. Jones1

Introduction

1. There are many modes of privatization, ranging from mere contracting-out, to the establishment
   or transformation of a public company. Moreover, in the former Soviet Union and Eastern
   Europe, the entire enterprise system, previously within the public domain, has now become,
   mainly, part of the new market economy. Each transformation creates new challenges and
   opportunities within accounting and auditing. Fundamental to every change of status from
   public to private operation is the need to examine whether the prevailing accounting and
   auditing practices will continue to serve as adequate monitors of financial accountability – for
   stewardship, performance and control.

2. Where contracting-out is the chosen privatization option, there could well be a significant
   relief from the burden of detailed accounting. This arises because the principal alternative to
   contracting-out is to use an internal work force. This requires, in principle, the use of a
   detailed system of cost accounting to keep track of the many activities performed.

3. In practice, costing systems may have been much more rudimentary, consistent with the crudity
   of many (if not most) public sector accounting systems. By contrast, when services are
   contracted-out, the public authority or entity must account only for the payment of the
   contractors' invoices, together with any directly chargeable administrative costs. Detailed cost
   accounting becomes the responsibility of the contractors – no longer of the public authority.

4. This is not necessarily true where public activities are contracted out in competition with public
   sector entities. These include direct works, direct service or direct labor units. In these cases, the
   direct interior departments must keep complete and accurate cost accounts of their activities,
   showing the extent to which their costs are higher or lower than the outside competition. It is
   especially important to know whether the inside departments have used credible figures of
   estimated costs to win a particular bid. Also, on completion of the work, only complete and
   accurate accounting will validate the earlier claims, as well as providing full accountability.
  1
     David C. Jones, a British national, has over forty years of experience as practitioner, educator and published author in
financial management. After seventeen years as a senior financial analyst and then financial advisor at the World Bank, he now
practices privately, providing consulting and training services in financial management and institutional development. A research
fellow at the Center for Urban Development Studies at the Harvard Design School (1987-2005), he has also carried out teaching
assignments for other universities and institutions, including George Mason University, Virginia and the International Law
Institute. David Jones is the sole author of "Municipal Accounting for Developing Countries", a joint publication of The
Chartered Institute of Public Finance and Accountancy (U.K.) and The World Bank. He is professionally qualified in the United
Kingdom, as a Chartered Public Finance Accountant and a Chartered Certified Accountant.




                                                               2
5. The greatest challenges and opportunities will occur, however, when privatization involves
   establishment of private sector corporations to replace state-owned enterprises. These
   challenges will arise because of the needs to meet the demands of the market place, particularly
   the capital markets. Also, whether there is competition or regulated monopoly, sound
   accounting will be necessary to facilitate appropriate pricing policies for the products of the
   private enterprises.

6. The opportunities will be those of shaking loose from the often crude and inadequate systems
   of accounting and auditing often endemic to the public sector. Sometimes, state-owned
   enterprises will already be using commercial accounting systems and be audited by independent
   firms of qualified accountants. Often, however, even revenue-earning operations, within the
   public sector: will be using simple cash-based accounting systems; will produce no separate
   meaningful financial statements; and, will be inadequately and incompetently audited by over-
   burdened and ill-qualified staff of a government audit service. Also, the government auditors
   may lack some degree of independence, an important characteristic of proper audit practice.

The Private Sector Corporation

7. When a private sector corporation is established, even if it replaces a state-owned enterprise,
   there will be a need for accounting procedures hitherto often not encountered or required. Most
   important will be the need to deal with the issue of publicly owned shares, reflecting the
   multiple interests of their private owners. This will usually replace the single "equity-interest"
   of a national, state or local government2.

8. This has both a micro and a macro aspect. The micro aspect deals with the need to have detailed
   registers to record individual stock-holdings3, often for different classes of shares (e.g. ordinary,
   preference, or hybrids of these) and to keep up with transfers of ownership as they occur
   through stock-exchange operations or by private transactions. The macro aspect deals with the
   need to establish the value, extent and type of the capitalization of the corporation so that, for
   example, its stock may be issued and subsequently traded in the capital markets. As a result,
   new capital can be raised, of appropriate types and on suitable terms.

9. Although the formal ownership is designated in shares of corporation stock, much of the
   capitalization may well be sought b
				
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PARTNER David C. Jones
David C. Jones, CPFA, FCCA. (UK) David Jones (UK Citizen) has over forty years of experience as practitioner, educator, consultant and published author in financial management. He is, currently, the Vice-president for Accountability at MIDEGO [Global Partnerships, Reaching Global Health Care Goals]. Specializing in accounting, budgeting, and financial management, he has provided advice and guidance to central, state and local governments, development institutions, non-profit organizations, utilities and companies in over 50 countries. Currently, he is the auditor of an NGO, associated with the World Bank. Affiliated with the Harvard University Graduate School of Design, from 1987 to 2005, Mr. Jones was a Research Fellow and Instructor at its Center for Urban Development Studies. In the early nineties, he taught Public Finance, for the Master in Public Administration degree, at George Mason University, Northern Virginia. He has lectured for the Master in Urban Planning Degree and the International Training and Education Programs at Harvard Graduate Design School. He also taught at the World Bank Institute and at many other institutions, world-wide, including Witwatersrand University in South Africa and the University of Malawi. For seventeen years at the World Bank (1970-87), he was a senior financial analyst and then the Bank’s financial advisor, in the public utilities, water supply and urban development sectors. Whilst at the World Bank, and subsequently as a consultant, Mr. Jones worked extensively on the preparation, appraisal, negotiation and supervision of a variety of (loan-funded and grant-funded) urban development and public utility projects. Working with leading accounting and financial management consultants, he also helped to develop improved budgeting and accounting systems of municipalities, utilities and other institutions. Mr. Jones has developed and participated in many international seminars on public sector accounting and financial management. He has been a keynote speaker at many of these, worldwide. He has also worked in countries of the former Soviet system and Eastern Europe: Russia, Ukraine, Georgia, Belarus, Latvia, Lithuania, Azerbaijan, Romania, Bosnia, Macedonia, the former (undivided) Yugoslavia, Poland and Albania. In addition, he has worked in China, Afghanistan, India, Pakistan, Indonesia, Thailand, Malaysia, Mongolia, Bangladesh, Sri Lanka, South Africa and many other countries, especially in Africa. David Jones is a Chartered Public Finance Accountant and a Chartered Certified Accountant of the United Kingdom. From his long experience in financial management, Mr. Jones is the sole author of the textbook: “Municipal Accounting for Developing Countries.” This is a 900-page manual, jointly published by the Chartered Institute of Public Finance and Accountancy and the World Bank. He has also authored many other publications and professional papers. In 2004-05, Mr. Jones was a member of the Harvard Graduate Design School team that prepared the Municipal Finance component of the UN-Habitat Global Report 2005: “Financing Shelter and Urban Development” Mr. Jones began his career in English local government. Based on his experience, he has wriiten “English Local Government and its Financing.” It explains the evolution of local government, from that provided by feudal lords and churches, to the present system of controlled autonomy of elected local governments. These now operate alongside many and varied governmental and non-governmental entities, appointed from among the “great and the good” of English society. Another recent activity, prepared for the Urban Economics Institute in Moscow, under a World Bank project, has been: “The Russian Federation – Expenditure and Public Sector Restructuring: Use of Performance Budgeting.” He has worked with Russians since the end of the Soviet Union, in 1991. In the nineties, Mr. Jones, then a visiting lecturer at George Mason University, testified before the District of Columbia Committee of the United States House of Representatives, about financial management of Washington D.C. He has also advised the Parliament of Georgia, in the former Soviet Union, on local government audit law. [In the eighties, in private conversation, at No.10, Downing Street, London, he warned (former World Bank colleague) Chief Economist to (then) Prime Minister Margaret Thatcher, not abolish property taxes, in favor of a poll tax! The rest is history!]