Advertisement
Advertisement

Please don't make us laugh

Tony Latter

You may have read this before, but I make no apologies for launching another attempt to get the government to put its accounts in order. A letter from the press secretary of the financial secretary appeared in the South China Morning Post on Monday, addressing some of the points which I raised a fortnight ago about the government's fiscal accounting. (It also made a number of observations about the government's overall budget strategy which were not directly related to my article).

As to the specific accounting issues, the letter stated that the government's presentation of data on its debt complies with the International Monetary Fund's data dissemination standards. I agree. The standards cover such matters as the timeliness of data release, data quality, and its public accessibility. But the IMF does more than merely set dissemination standards. It also lays down detailed guidelines for statistical compilation, including for the compilation of government accounts. In that context, I have been studying its Government Financial Statistics Manual: it makes clear that securities issued by a government (and a bond is one kind of security) form part of the government's liabilities. It gives not the slightest hint that it would, in any circumstances, be proper to exclude these liabilities from the balance sheet. Most people would regard the balance sheet as the single most important accounting summary of a nation's or company's financial position. The Hong Kong government, in drawing up its consolidated balance sheet, has deliberately omitted the bonds from its liabilities. This defies not just IMF guidance, but also professional practice and common sense in accounting.

Meanwhile, the letter confirms the financial secretary's defence of the extraordinary habit of treating bond proceeds as revenue. This practice is, again, in clear contradiction of IMF guidance, which states that only non-repayable receipts can count as revenue. Part of the defence is that the treatment follows from the government's cash accounting convention; but, even within the realm of cash accounting, it is a highly idiosyncratic practice; anyway, cash accounting allows latitude in categorisation and does not, of itself, necessitate placing bonds under the 'revenue' heading. The other part of the defence is simply that the treatment follows Hong Kong precedent and reflects the structure in which the figures were presented to the legislature for approval. On that basis, misleading presentations look set to be with us indefinitely.

The letter points out, seemingly in mitigation, that the government has openly acknowledged that the proceeds from the two bond issues earlier this year have been included as revenue. This seems to imply that dodgy accounting is OK as long as it is owned up to. In fact, even that statement is somewhat disingenuous, since, only four days before the letter's publication, the government explicitly admitted in its monthly financial statement that it had, since May, been counting the proceeds of its toll-backed bond as revenue.

I raised last time the question of whether any of this really matters. Arguably, it is mainly an issue of presentation, and people who most need to understand what is going on will, anyway, read the footnotes and recalculate accordingly. But it is sloppy accounting, which sits awkwardly with Hong Kong's aspirations as a leading financial centre. Yet, whether for reasons of pride, precedent or obstinacy, the government seems determined to stick with it. When I raise the matter with bankers, economists or similar professionals, the reaction is generally one of amazement or perhaps, if they are familiar with Hong Kong, resignation. A senior executive from a leading ratings agency, visiting from New York, laughed out loud. Perhaps that sums it up: it may not be a matter of life or death, but do we really wish to be a laughing stock?

Tony Latter is a visiting professor at the University of Hong Kong

Post