For facilitating and improving the regulatory activity, the international practice recommends the implementation of a Regulatory Accounting system, which differs from the traditional accounting. As stated by Groom, Schlirf Rapti and Rodriguez Pardina (2007), "traditional accounting information and some of the basic underlying principles of accounting make it useful for regulatory purposes. Nevertheless, regulatory purposes differentiate the regulator's needs from those met by traditional accounting information in several areas. These limitations make it necessary to complement these generally accepted accounting principles with specific rules and norms that make accounting information useful for regulation purposes."108
The regulatory accounting is a set of principles and rules to present the information aimed at regulatory firms. It includes certain account treatment and registration principles that differ from those used by the traditional accounting practice. It also involves greater information requirements and specifies presentation layouts for regulatory reports.
This tool allows the allocation of costs, revenue and assets to the different activities carried out by the firm and therefore, a direct view of the costs and revenues of the regulated activity, increasing transparency. Moreover, it uniforms the information submitted by regulated firms, harmonizes regulatory reports with traditional accounting reports and promotes transparency, all of which facilitates the supervision task of the regulatory agency and reduces information asymmetry.
However, even when the agencies do not specifically apply a real regulatory accounting system, the imposition of clear and minimum information requirements, homogenous for all regulated companies and supported by a rule and an enforcement mechanism, represents a concrete method for the regulator to reduce information asymmetry and to increase fairness. In this sense, a recent study shows how the application of international accounting standards reduces risks.109
A less demanding alternative which should be seen as the minimum requirement in terms of accounting is the "open book accounting" approach used in PPP projects in the UK (see BOX 15). This approach is defined as "a description of arrangements whereby part or all of a contractor's financial records for a project can be seen by the authority"110.
BOX 15 : Use of Open Book Accounting in PPPs - UK
| 55 per cent of the contracts we surveyed had provisions for open book accounting. As well as helping authorities to understand the contractor's financial position and determining the outcome of any profit sharing arrangements, open book accounting can also enable an authority to work in a collaborative manner with its contractor. For example, National Savings takes care, when planning a marketing campaign, to time it to run when there is a trough in Siemens' workload so as to even out Siemens' costs. Open book accounting could also help a contractor to draw to the attention of an authority any problems to which the contractor believes the authority has contributed. For example, one contractor told us that it had incurred additional costs because the authority had ordered a new service but did not deliver sufficient users of the service to generate the expected additional revenues for the contractor to offset the costs of developing the service. Another contractor said the authority sometimes asked for a new service to be developed but then changed its mind. |
Supervision during the operative phases will require the contractor to supply relevant financial information to the authority. The inclusion of open book accounting will help to ensure that value for money mechanisms are working as they should. It will also give the authority a greater understanding of the contractor's cost drivers and the impact on its profitability of authority actions or any changes made to the contract (NAO 20007). And importantly, the increase in accounting transparency will reinforce the trust between the PPP partners.
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108 For a following Groom, Schlirf Rapti and Rodriguez Pardina, "Accounting for Infrastructure Regulation: An Introduction" The World Bank, 2007.
109 Jeong-Box Kim and Haina Shi, "International Accounting Standards, Institutional Infrastructures, and Costs of Equity Capital around the World." April 2007.
110 NOA 2001