Public vs. Private Accounting

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Table of Contents

Introduction
Public and private similarities and differeneces
Peroformance measurement
Conclusion
References

Introduction

Certified Public Accountants are independent professionals are comparable to attorney or physicians, who offer accounting services to clients for a fee. CPA Firms vary in size from one-person practices to large, international organizations with several thousand professional accountants.

The CPA certificate is a licence to practice granted by the state granted on the basis of a rigorous examination and evidence of practical experience. All states require that candidates pass an examination prepared by the American Institute of Certified Public Accountants. For professional accountants, education doesn’t end at graduation time. CPAs are required to participate in continuing professional education programs throughout their careers. This commitment to staying proficient and to professional growth enables CPAs to advice their clients in a rapidly changing business environment. Public opinion polls indicate that most people have a high level of trust in Certified Public Accountants. This attitude of trust reflects widespread public confidence in the competence, skills, and ethical standards of the accounting profession.

The principal function of CPAs is auditing. How do people outside the business entity-owners, creditors, govt. officials and other interested parties-know that the financial statements prepared by the company’s management are reliable and complete? In large part, these outsiders rely upon audits performed by a CPA firm which is independent of company issuing the financial statements.

In contrast to the CPA in public practice who serves many clients, an accountant in private enterprise is employed by a single enterprise. The chief accountant officer of a medium size or large business is usually called the controller, in recognition of the accounting data to control business operations. The controller manages the work o the accounting staff. He or she is also a part of the top management team charged with the task of running the business, setting the objectives, and seeing that these objectives are met (Meigs n Meigs, p. 8).

Public and private similarities and differeneces

The public sector is as affected by managerial trends as the private sector. There is a consequent need for strategic accountability. As in a group of companies, strategy is not something which exists within one single business, but is also concerned with the relationship between the business and the canter. The language of strategy in general and financial management in particular is there fore necessary and is developing.

Consequently, the decisions support techniques used in the private sector are largely also applicable in the public sector. Given the trend towards generalisn and the reputation of the service at colleges for generalise it might see an opportunity to mount a course for private sector delegates. But what outlays would be involved, and would they be matched by income? The colleges are known to research and develop relevant management techniques: – again, cost and benefits need to be matched. Its report stresses that its greatest assets are ones- the knowledge and commitment of its staff-not shown on its balance sheet. It is important that such assets are recognised; cost effectively enhanced, employed to deliver good value for tax payers, money and suitably monitored. In corporate strategy terms, it is possible to quantify the cash flows from the rest of the public sector to the college, obtain its net present value, and then compare with the cost of the next best alternative example, using a private-sector provider(or, possibly to compare with the price which could be obtained on disposal).

So, subject only to a willingness by those in authority to quantify there judgement, financial management is, on the whole, equally applicable to the not for profit sector generally and the public sector in particular. It is worth stressing perhaps, that in common with the private sector it is never possible to say whether or not value has been maximized. We do not know what we do not know: specifically, we do not know what opportunity have been missed. This is not a problem for those familiar with devolved authority, as it is the only approach compatible with the improvement: you can not tell an explorer what to find, or identify what/ she has not found! Some bridge is usually required, from the unknown to the unknown example to relate the value of a unit to the cost of its tangible assets and to consider what ‘intangibles’ explain the difference. This will often act as a very good attention – directing tool, but recognise as holding up a mirror: in reality, value is not a function of cost.

Taking hospital as example, investments in medical equipment represent decision to trade in purchasing power now in the expectation of benefits later. These benefits may take the form of increased throughput (and hence reduced waiting list) or the meeting of the needs which would otherwise go unsatisfied. These benefits are not measurable, because it is not possible to measure something which has not yet happened; they are judgemental. But this does not mean that they are not quantifiable and hence capable of evaluation. The main obstacle is usually unwillingness on the part of those in authority (e.g. politicians) to express value judgements, perhaps because they fear such judgement being taken down and used in evidence against them.

For the avoidance of doubt, it is worth stressing that values are equally subjective in the private sector. No one trends that they can measure the effectiveness of a proposed investment in advertising; they forecast the improvement after assessing the likely reactions of competitors, direct customer and ultimate consumers. The management accountant fulfils a vital role in being able to synthesise these judgements together with others (e.g. the volume – cost relationship and the cost of capital) to identify the optimum level of investment they imply. The forecast outcome is logged, so as to provide a benchmark by which to measure progress.

Of course, there are differing degrees of difficulty – discomfort, even – in making value judgements in the public sector currently and forcibly. Thanks to results of research in pharmaceuticals, for example, previously incurable illnesses are being dealt with, and people are living longer. Demand for dugs, etc, is correlated with age so demand continues to increase with a progressively smaller proportion of a population in employment, the financial pressures are substantial. How does one make an informed choice as to the transfer of funds between the well and the unwell? What value does one put on curing an illness, or saving a life? These are societal matters, the discomfort being one of the reasons they are placed firmly in the public sector, rather than being left to the ‘survival of the fittest’ philosophy associated with the competitive struggle for existence that we call the market economy (Financial Strategy, p. 7).

The main feature is the separation of purchasers (representing a particular geographical area) from the providers (hospitals and other health care facilities) the providers are competing among themselves for the purchasers; funds, the idea being those offering the best value for money will gain an increasing of the available funds.

In the early days, at least various ‘rules of the game’ have been laid down, most notably (from a strategic financial management point of view) in the area of pricing. The rules are very simple; price must equal cost, and the cost must equal total cost, including a target return on capital employed. Those who framed the rules seem to have been thinking in terms of their being one objectively verifiable cost of an activity (which is valid only when looking backwards) but prices have to be established in advance. The demand for sophisticated yet pragmatic costing systems will, consequently, be hive for some considerable time to come, as providers see cost which signal good value for money for the business they seek to attract and pour value for those they wish to repel (Financial Strategy, p. 8).

Peroformance measurement

Measuring performance is required to know which area you heading to and what are the gap that are faced by the organization. Traditionally, managers have focused on financial measures of performance and progress. Increasingly, organizations in both the private and public sectors are using non – financial indicators to asses’ success across a range of criteria, which need to be chosen to help an organization meet its objectives. Some common financial and non – financial indicators are below.

Financial Performance Indicators

Poor Liquidity is a greater threat to the survival to the survival of an enterprise than is poor profitability. Unless the organization is prepared to fund growth with high levels of debt, cash generation is vital to ensure cash generation in future profitable opportunities. In private sector the alterative to cash via retained earnings is debt. In the public sector this choice has not been made available in the past, and all growth has generally been funded by the government. However in the face of government imposed cash limits, local authorities and other public sector institutions are beginning to raise debt on the capital markets, and are therefore beginning to be faced with the same choice as private companies.

Value Added This is primarily a measure of performance. It is usually defined as sales value less the cost of purchased materials and services. It represents the value added to a company’s products by its own effort. A problem here is compatibility with other industries – or even with other companies in the same industries. It is less common in the public sector, although the situation is changing and many public sector organizations are now publishing value on their own value added.

Profitability May be defined as the rate at which profit is generated. It is often expressed as profit per unit of input. However, profitability limits an organizations focus to one output measure – profit. It overlooks quality, and this limitation must be kept in mind while using profitability as a measure of success. Although the concept of profit in its true sense is absent from most of the public sector, profitability may be used to relate inputs to outputs if a different measure is to be used (Financial Strategy, p. 9).

Non – Financial Performance Indicators

Market Share A performance indicator that could conceivably be included in the list of financial measures, market share is often seen as an objective for a company in its own right. However, it must be judged in the context of other measures, can take quality into account – it must be assumed that if customers do not get the quality they want or expect then the company will lose market share. It is a measure that is becoming increasingly relevant to the public sector.

Customers Satisfaction this can be linked to the market share. If customers are not satisfied they will take their business elsewhere and the company will loose market share and go into liquidation. Measuring customer satisfaction is difficult to do formally, as the inputs and outputs are not readily defined or measurable.

Competitive Position The performance of a business must be compared with that of its competitors to establish a strategic perspective. A number of models and framework have been suggested by organizational theorists as to how competitive position may be determined and improved. An array of measure is needed to establish competitive position. The most difficult problem to overcome in using competitive position as a success factor is in collecting and acquiring data from competitors. The public sector is increasingly in competition with other providers of similar services both in private and public sectors. Advantage is that it is easier to gain access to data from such competitor than it is in private sector.

Risk Exposure Risk can be measured according to finance theory. Some risk for example, exchange rate risk and interest rate risk can be managed by the use of hedging mechanisms. Shareholders and the companies can therefore choose how much risk they wish to be exposed to for a given level of return. However risk can take many forms and the theory does not deal with risk exposure to matters such as recruitment of senior personnel or competitor activity. Public sector organization tend to be risk averse because of the political repercussion of failure and the fact of tax payers, unlike shareholders, do not have the option to invest their money in less or more risky ventures (Financial Strategy, p. 10).

Conclusion

Financial strategy is applicable to, and equally important in, organization which does not seek distributable profits, emphasizing that the key factor is the assessment of the value of the output of an entity and especially the excess of that value over the cost of inputs, whether or it be in the private sector or the public sector.

Dividend payments have been shown to be irrelevant to shareholders wealth in perfect capital markets. When market imperfections – such as taxes, transaction costs and imperfect information – are considered, the situation is less clear. Companies tend to adopt stable and consistent dividend policies, in order to attract a clientele of investors whose personal taxation position suits that particular policy. Unexpected fluctuations in the dividend payment tend to be avoided because of the informational content of the dividend which is being signalled to the market.

References

Bernistein, P.l. Against the goals: The remarkable story of Risk, Wiley, 1996
C Parkinson and J Ogilvie. Management Accounting Financial Strategy, 2003 Edition Elsevier, pages 7-10
Edvinsson, L., ‘Developing intellectual capital’ Long range planning, pg 366-377 vol 20, 1997.
Knight, J.A., Value Based Management, McGraw Hill, 1998
Meigs and Meigs Accounting; the basis for business decisions Eighth Edition 1990 Mc –Graw Hill, pg 8
Mills, R.w., The dynamics of Shareholders value, mars Business Associate 1998.
Roger Mills, Sean Rowbotham and John Robertson, Management Accounting, 1998
Tony Jackson, Financial Times, 1999

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