ACCRUAL ACCOUNTING ESTIMATE ROOT CAUSE OF $600M MISCALCULATION
2 April 2008
New Zealand Press AssociationWellington, April 2 NZPA – An error in the Government’s accounts remained undetected for seven months, and Treasury could have considered delaying publishing the accounts when confronted with a large unexplained variance in the numbers, a report has found.
The $600 million mistake revealed last month meant the operating balance appeared to have slipped into deficit by nearly $400 million, when the reality was a surplus of about $200 million.
A report into the error by Paul Carpinter, an adviser to Treasury, and Alan Pinder, an adviser to Inland Revenue, released today found Inland Revenue used incorrect accrual numbers in the monthly results for company tax and other persons’ tax.
Accrual accounts attempt to reflect activity that occurs in a period rather than just cash, so tax is recognised when the activity take place not when the tax is actually received. It is a private sector form of accounting used when the Government adopted private sector accounting methods.
So IRD counted the cash it had received, money to be collected in assessments not yet actually paid and estimated an accrual forecast to reflect the full tax revenue likely to be received for the period. “The root cause of the error was that Inland Revenue did not use the accrual calculation agreed by Treasury,” the report said. “Inland Revenue varied the calculation procedure and used out-of-date data.”
Treasury had noticed a variance and went to some lengths to explain it but was “looking in the wrong place”.
Secretary to the Treasury John Whitehead and Commissioner of Inland Revenue Bob Russell said the error was taken very seriously and recommendations in the report would be implemented.
A number of staff would be disciplined but no one would be sacked. Mr Russell reiterated that he expected the error to be taken into account in his performance review.
He said he had discussed resigning with States Services Commissioner Mark Prebble but did not actually tender his resignation. Mr Prebble indicated his confidence in Mr Russell continuing.
The report recommends improving communications between the two departments, and the production of tax revenue data earlier.
It recommends better documentation and that Treasury state that Inland Revenue is responsible for financial calculations, explanations and data it produces. It also recommends guidance be prepared on how to deal with variances and that there be an independent review of the changes implemented.
Inland Revenue was under-staffed and also had the KiwiSaver project on but Mr Russell wouldn’t say that Inland Revenue had taken its eye off the ball because of KiwiSaver.
The report said Treasury should have considered delaying the publication or providing additional information rather than publishing the accounts with unexplained variances between actual and forecast numbers.
Mr Whitehead rejected the suggestion that the Government should drop private sector accounting methods and just stick to cash accounting.