Fainting in Coyles
An occasional letter from the Heart of Euroville
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Sunday, March 16, 2003  



Brussels, 21 May 2002
IAS/JM D(2002)

NOTE TO THE ATTENTION OF MR. J. LUCHNER
MEMBER OF KINNOCK CABINET



Subject: Proposal by accounting Officer for accounting reform


1. Professional-technical summary of observations

This is a prima facie professional-technical summary of observations on the accounting reform proposal by the Commission’s Accountant, dated 5th of April, 2002, addressed to Mr. Mingasson; as amended into an undated draft addressed to Ms Schreyer for Commission consideration. Note should be taken that the Commission’s Accountant tells us she has had no substantive co-operation/feedback from /within BUDG, including the Director-General, in preparing this note.

Her note is backed up by a draft BUDG internal study, dated June 2001, which underpins to different degrees the proposal of the Accountant. The two documents do not really conflict with one another, but note should be taken of the fact that The Accountant seems to put more emphasis on the need for powerful information systems (SAP/R3 based), in addition to strongly supporting a less cavalier language of accounting, or rather: to go for a paradigm shift in the Commission’s language of accounting towards full accrual accounting; as well as a pre-condition for introducing the controls features for any budget/accounting system, what ever the language of accounting adopted.

Hence it should be well understood that the proposals made are, inevitably, as much about controls and information strategy reform as addressing accounting reform.

To put it differently: even if the Commission were to decide to stick to the present language of budget accounting, vintage public sector in the 60’s, and not go for full accrual accounting, it would still have to address the lack of controls issues on its contingent assets and liabilities, i.e. relating to income and expenditures charged against/ credited to the budget under the prevailing traditional system, which probably have also already gone through the discharge procedures of past years, but having a contingent asset or liability nature till certain conditions have been met (audits, closure, payment of pensions etc); as well as address the ‘Sincom issue’.

Therefor, care should be taken that the issue of the need for Reform in the Commission’s Accounting System is not only seen as a need emanating from a more ambitious language of accounting; it is equally a due diligence/controls need in and of itself, predicated on the assumption that contingent assets and liabilities that go with a blunt budget accounting system as presently applied, require the same duty of care in identifying, audit trails and follow-up, even if the are off balance sheet! The reason they do not have that same duty of care at this juncture is because the (incentive system at the basis of the) current budget language, in combination with the current discharge system are not conducive to follow contingent assets and liabilities with the same rigor. Which is the controls dimension the Accountant, quite rightly in my view, seems to put so much emphasis on. In addition to the need for an data architecture/ strategic information management system that meets both the immediate information-technical controls needs as well as more ambitious accounting objectives.

If I compare both notes, i.e. the June 2001 document and Ms. Andreasen’s note on internal consistency, then I see no dramatic differences other than room for more clarity on the rationale/driving force of the Reform process, mentioned above; Ms Andreasen’s has a different audience an therefor is more condensed: and could have been structured a bit more clearly [ the price to be paid for isolation?]; I perceive more sense of urgency in Ms. Andreasen’s for getting the informational-technical platforms harmonized and up to snuff first; and a more realistic assessment of resource needs, but, intuitively, also her proposals too do not look realistic enough: her request for resources is probably a good start for a feasibility project, followed by a
strategic operationalized plan. But a project of this kind will be major multi-year effort, dramatically changing the data-architectural, information- strategic as well as accounting language of the Commission, enhance institutional transparency hence powerbases, requiring an institution wide mobilization of resources, have major governance and organisational behavioral consequences. Neither the June 2001 nor, to a lesser extent, the Accountant’s note is too clear about the depth of effort required.[I have been through it at the Worldbank]. It would also challenge the Iron Horse, called Sincom, on its versatility to cope with it all; and if we factor in its present reliability, I would speculate its functionality will fall far short of eventually identified needs.

Also, The Commission lacks the necessary skill base, both in accounting and controls, as well as, I speculate, in project management for a project of this complexity and scale. With the fragility of the present systems as they are, the need is to minimize the risks by the extant team [damage control focussed maintenance] and for a different team to work on the new design [innovation], with a probable need for parallel runs for some time.

Also, I think, the rush to judgement that SAP is going to e the answer is, for all practical purposes probably right, but it will take more orderly process, an evaluation team, to arrive at that conclusion responsibly. The same, but in the other sense, can be said to the June 2001 paper when the author seems to bet for a further development of SI2 (Action 11 point – page 17) apparently without a clear oversight of the whole systems framework.

I appreciate Ms. Andreasen has made a best guess effort on resources needed, insofar foreseeable, but that much of the project will have the nature of a discovery process, hence contingency planning is imperative. I therefor fully support her suggestion to outsource the out-sourcable, but would like to add that it would seem wise to me, in view of the many entrenched intra en inter-service diverging views and interests, to have the project management as a whole equally outsourced. With a partnership/hybrid formula for an implementational team. That should be done on a results agreement basis.

One should be careful to avoid this project being seen as totally Accounting and Accountants driven; because it is not; there are major self-propelling controls/information management issues that makes a project of this nature imperative. Ideally a designated CIO could take responsibility for the whole or a project directorate, along the lines of the Reform Task Force. Most importantly, one of the actors missing in the June 2001 BUDG paper is the controls/ internal CFS unit (BUDG.D3). It is as if CFS has to do with all DG Controls except for the central ones….

For the rest I refer to our own observations on the essential flaws in the accounting system per our letter of 25/03/2002.

2. WORKING ENVIRONMENT

This briefing would not be complete without pointing out the circumstances under which the new Accountant is presently working, i.e. in a perceived intrinsically hostile work environment, where she has to get control over a department haunted by a profound lack of qualified staff, a host of vacancies/absentees in critical functions, an entrenched mindset and positions/ functions, a power ambience totally catered to the DG who himself has strongly opposed her appointment in the first place, an upset Commissioner who stopped being her main sponsor when she found out she has to work with an individual whose insistent questions are threatening the regular flow of funds and potentially causing embarrassment in the process to the appearance of a smooth functioning BUDG outfit; and an interested staff audience that looks back at the history of the Commission and put their money and support on the most likely winner of the arm twisting exercise; rather than asking themselves who is more right and what is in the better interest of the Commission.

No Commission(er) can let nature have its course without him/herself being seriously exposed, if the source of the controversy proves to be right in the type of questions she raises. We do not know Ms Andersen’s managerial capabilities, but we are sure she is raising the right questions and in a very short period of time, despite alleged across the board stonewalling of her colleagues. We do not think her procedural lack of communicational finesse to be an element in this, and see the fact they happen as a possible index of the lack of support she has inside DG BUDG: no-one protecting her avant la lettre. At this stage, her demise, if it were to come that far, would be a serious blow to Reform, sending a signal that the old ways of keeping things from happening still work; and put all professionals within the Commission on notice that ‘might makes right’, whatever one’s professional convictions/duties.

The substance of Ms Andreasen’s communications so far seem factually substantive and correct. They are benign in comparison with the assurance statement assertions we have seen from the DG’s in the recent assurance statement exercise; indeed of DG BUDG itself, which seem to have been shaken out its state of denial by default rather than self-design. She has grasped the key issues at hand, despite her uphill initiation and familiarization phase and relative to a heavy year-end closing workload, very fast indeed. Her intervention/ views/wishes to have up front acknowledgement of the inherent risk environment of the Treasury Management function, has triggered major emotions, but professionally, in particular with the hands on observations/experience she now has with the department, is fully understandable. So far the professional report card; we have no idea whether she is a good manager but would warn for any premature conclusions until she had a real chance to manage.

I this context, Eckart Guth, through his note of May 14, 2002, distributed the June 2001 Accounting Reform document to various actors involved in the debate on the Accountant’s functioning, suggests this work had given the new Accountant a flying start to implement her marching orders. This report, which basically borrows most of its ideas from a the so-called Montesinos report commissioned a year earlier, is a good base document addressing the WHAT question in transitioning from a mixed attribute/modified cash & accrual system to a mature accounting system. But it is also not a realistic analyses identifying the importance of the HOW, the organizational, procedural, systemic and information-technological issues, which are imperative, and crucial to the success of the implementation of any accounting system. Suffice to refer to the fact that even under the present, totally inadequate accounting language system, BUDG felt it necessary- under IAS prodding- to acknowledge the weaknesses in the underlying information systems to get the present budget accounting right. Needless to add what it would involve not only to fix the system, but also to make it adaptable to a much more demanding accounting language.

We speculate this may in part be due to lack of professional- technical awareness of the importance of such interface; and/or the chronic state of denial, witness the strong opposition from BUDG through the APC chair in auditing Sincom at the beginning as well as the end of 2001.

Also, Guth refers to the importance of the addressees being ‘informed about the work already undertaken for the modernisation of accounts’ but does not mention that the work has been at a virtual standstill since the drafting of this report; and hence, that none of the suggested deadlines have been met. In fact the impression is that BUDG having drafted this June report lost total interest subsequently, did not share it with the IAS team that was looking into accounting systems summer 2001; and despite promises to the contrary choose to totally ignore informal- but strong – recommandations by the IAS in 2001 to take any suggestion in the Commission’s standards- in particular prudence- out of its public statements. Which would have been a very easy, effective fix, avoiding external embarrassment, or worse, of the Commissions gross overstatement of its present state of accounting.

The core problem is BUDG had no champion promoting the cause of improving accounting, to the contrary. I find it hard to accept we can blame the new Accountant not having been able to wrap her arms around this complex issue, with a homebase in a deep state of denial on the quality of the existing systems, embedded in a very top down managerial mono-culture, with a DG who only recently told the Audit Court he did not see the need for any accounting system at all. We should also not blame the Audit Court for not responding to this June note; if there is no serious audience.


3. CONCLUSIONS

My suggestions would be for Neil to:

(1) Ask for a revised proposal segmenting more clearly the work to be done with- and without - changing the accounting framework, i.e. for controls/information management purposes on the one hand[this will make more clear the deficiencies in the system as it is; as an absolute minimum to fix]; and for purposes of a modernized language of accounting on the other. This proposal should come from the DG BUDG!

(2) Ask for a revised proposal that includes the role and contribution required by the Commission services as a whole, i.e. with participation of the RUF community; and the governance system of this Reform project. And that clearly answers the governance question.

(3) Ask for a clear, realistic timeline, properly contingency planned, clarifying the involvement/ resource commitment of the different actors; and the deliverables that go with it.

(4) Before decisions are being taken, ask to have a special controls (self) assessment done by the Sincom community, users and producers, on the present functionality of Sincom and its resourcefulness to deal with the old as well as new challenges inherent to a more ambitious accounting system; and solutions to the problems {the burning platform phase}. So that the opinion of the information Community is known (but not necessarily followed. Have this self-assessment independently reviewed by outside consultants; or let outside consultants run the self assessment exercise.

(5) Suggest that, given the fragility of the present systems the Accountant not be distracted too much, but to make sure the extant fragile systems works as good as possible; and come up with a special interim plan to that effect.

(6) Instruct the accountant, moving forward, to take the most dangerous sting out of our financial statements, i.e. that they approximate compliance with international standards, and have been prepared conform the prudence principle. That will take at least the false pretence out of Commission statements of its financial accountability. The IAS proposed this a year ago.

(7) And for the Accountant to be supported by external consultants in this blueprint phase on all matters referred to above; and to express a preference to have implementational project management as a whole, outsourced, on a partnership bases.

(8) The idea that the IAS should become the auditors of the opening balances, will simply not be doable and turn us into de facto compliance controllers. This is the job of the RUF Community and CFS…..

(9) Finally, the Commission should realize if it entails on a project like this, it engages in a multi-annual program, going to the heart of institutional transparency by introducing one language of business/ data/strategic informational architecture, probably ‘busting’ the home grown, each for himself, DG driven information management culture. It should only do so, if it has a Commissioner who is willing to own such change program; who has the stamina and spine to take a lot of shit; and see it through consistently. Therefor it is so important to first let the RUF Community itself come to its own conclusions a) that the present free for all language is untenable {the assurance statement exercise has already done the groundwork); that SAP is probably the only sound option (but go through a due diligence procedure)
Copies: IAS management team Jules Muis

posted by Eliab | 11:18 pm
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