On the radio yesterday there was an item about how NHS Trusts are trying to deal with government funding targets and ever increasing demand. The interviewee was knowledgeable and senior and explained the sorts of accounting tricks which are being used to meet performance targets by mortgaging the future.
This will all sound familiar to anyone involved in running a business that is underperforming. I can only imagine the sort of pressure that Health Trusts are put under to meet the share of central government budget allocated to them, but the techniques used to flex the numbers and pressurise management into agreeing to unrealistic outcomes will be similar. One favourite, which the speaker referred to, is to play with what does and does not constitute capital expenditure. It’s a simple process, capital gains are treated as revenue and conversely running costs are capitalised, things look much better for one period, while all that has really happened is that costs have been shuffled off into the future (next year’s results can seem a long way off in tough times). The trickier part is getting the auditors to agree to the convoluted rationale needed to support the treatment- this is where FDs can get really creative! The government is an old hand at this, PFI was once described to me as ‘off balance sheet finance for governments’ where the future of, for example schools and hospitals is burdened by extortionate payments to the providers of finance, but the capital receipts from financing largely go straight to the government’s revenue account!
Pressure to stretch the balance sheet occurs across large and small companies and always represents a challenge to board independence. In smaller companies, where founders and venture capitalists often dominate the board, their interest is in the short term share price and they can easily persuade themselves that any problems are passing and the projected business performance they have invested in is sustainable despite any current difficulties. This can be for valid reasons such as wanting to avoid a difficult conversation with debt providers that might cause greater harm to the company, but it can also be to avoid having to explain the underperformance to their own boards. Whatever the rationale we have entered into the opaque area where senior board members start to use phrases like ‘balance of judgement’. Having decided on the kind of result needed, the next step is to get any dissenters on the board to fall in line and ‘support the company’. What all this adds up to is often a very optimistic view of the company’s future as it now has faces the twin challenges next year of beating the inflated results and restoring a strained balance sheet. If the anticipated upturn does not then occur the consequences are often expensive for shareholders as targets are missed and financing lines come under strain.
While not a mirror image the position with Health Trusts is similar. It is hard to imagine that they do not genuinely need to spend more than they have been allocated by an austerity led government as they deal with increased costs of treatment and an ageing population. The speaker finished by saying that he thought it unlikely that the auditors would pass the accounts of many Health Trusts. Presumably tomorrow’s problem and having kicked it down the road government departments will have no difficulty then in laying any responsibility with management.