NamaWineLake comments on the €3.6bn Irish government mis-accounting scandal. Basically, the national debt was miscounted and the boss of the Department of Finance (Kevin Cardiff) was called into the Public Accounts Committee.

NamaWineLake says that the error was (a) statistical and (b) not a cash item and suggests that the matter is therefore less serious. I think this is a mistake.

It is not true to call the error simply a ‘statistical error’ or to forgive it because it was not a figure that directly relates to cash or because it does not directly effect interest payments. It is an accounting error. (Arguably, accounting is a species of statistics, but that would require a tendentious argument.) Regardless of what type of error it is, it is a very significant error indeed. Three billion, six hundred million euros is an awful lot of wonga, whatever way you consider it.

Just because it is not a cash figure does not mean it can somehow be dismissed. Let me illustrate this by reference to the Irish banking crisis. The crisis the banks found themselves in was not a cash crisis. They still had money and most loans were still being repaid. The problem was a balance sheet crisis. The assets were turning out to be worth far less than the value the bank had previously said they were worth. The result was that the banks’ counterparties (their lenders and deposit holders)  lost confidence and would not advance further finance. The requirement for government recapitalization last year arose because the balance sheet position became untenable, not because there was any cash squeeze. Again, this was not an immediate cash issue. But it was still very real. Any entity with significant bank debt needs to manage its balance sheet almost as carefully as it manages its cash.

Government’s accounts in Ireland are a total mess. The government accounts for things basically the same way you would if you were running a school sweet shop. It is very informal and not done according to any particular rules. What’s more, there is clear ducking and diving, particularly in the Department of Finance. Issuing estimates and the like as rasterized PDFs in order to make it harder to analyze the figures (as DoF has frequently done) is the behavior of a Department which knows that it is in danger of being found out.

The good news is that there is a standard way to measure consolidated debt in an organization. It is described in International Accounting Standard 27 (IAS27) (Sections 24 onwards), and elsewhere. In fact, there are standards for all aspects of accounting that have been built up over hundreds of years of accounting practice.

The bad news is that the Department of Finance does not follow any of this best practice. Instead they basically take a back-of-envelope approach. They try to figure it out as best they can and hope it is OK. There is no meaningful way to audit the figures, because the assumptions and accounting rules are always left unstated. Screw-ups can easily be swept under the carpet.

Now, I am not saying for a minute that International Accounting Standards, as written, are perfect for governments. Governments are different from private organizations in many ways. However, the principals are there, and there are closely allied standards that could be followed. For example, Brazil is adopting the IPAS standards to solve exactly this issue.

It is also a general failing that there are almost no accountants working for any government department. By ‘accountant’ I mean a person who is qualified in that field, not just someone who adds numbers in a spreadsheet for a living. One government department, Communications and Energy, to its credit, has accountants on secondment from Big-4 accounting firms. These are mainly supposed to deal with the accounts of the big semi-states, however, rather than the government accounts.

The Department did screw up. This was not just a slip of the pen. It was the result of a deep systemic problem. The Secretary General was in charge and he is responsible for the system. The DoF personnel are supposed to be the best. That is why they (together with Department of An Taoiseach personnel) are paid a ten percent premium over employees of a similar grade elsewhere in the Service. But the taxpayers got second-best. Now someone has to step up and take responsibility.

More importantly, the systemic problem also needs to be dealt with. We need to follow the likes of Brazil and have a proper, consistent, well understood system of public accounts with an explicit balance sheet. We also need to bring accounting expertise into the Civil Service. This is what the Public Accounts Committee needs to press for if its role is to have any real, lasting impact beyond the short-term blame game.

(For the sake of clarity and full disclosure, I am not an accountant and do not play one on the ‘net, although I do hold a financial qualification from an accounting body. I do not know Kevin Cardiff or the other personalities and I have only very infrequent dealings with the Department of Finance.)