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Folder Title: Enthoven, Adolf J. H. - Articles and Speeches (1965 - 1969)

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Reprinted from

Filance ani DevelipmeiVolume 6 Number 3 September 1969

\;,?D / 04

WBG

Finance and Development is pub-lished quarterly in English, French,and Spanish by the InternationalMonetary Fund and the InternationalBank for Reconstruction and Develop-ment, Washington, D.C., 20431, U.S.A.

A selection of its contents is pub-lished annually in Rio de Janeiro,Brazil, in cooperation with the UnitedNations Information Center.

Opinions expressed in articles andother material are those of the writeror writers; they are not statements ofFund or Bank policy.

The contents of Finance and De-velopment may be quoted or repro-duced without further permission. Dueacknowledgment is requested.

Accountancy for

Economic

DevelopmentIn an article in the last issue of Finance and Development Adolf

J.H. Enthoven showed how accountancy has through its history continu-ously responded to new needs. In this article he indicates how he believesit should now respond to the requirements of the developing countries.

Adolf J.H. Enthoven

T HE dynamic process of developing the less devel- objectives of development. The standards on whichoped countries poses a new demand for an effective the information is evolved must be part of an eco-

and comprehensive methodology and practice of ac- accountancy "philosophy" or theory. Such a theory,countancy for both microeconomic and macroeconomic to be economically oriented, would constitute a co-purposes. An improved form of accountancy that will herent set of standards and guidelines, forming a refer-serve the economic development process in the most ence framework. The purpose of the framework is toeffective and useful manner must be sought. If, then, judge the applicability of the accountancy methodology,we are to create, as I believe we should, an "economic and it should accordingly encompass more than thedevelopment accountancy" the important questions that accepted practices and conventions. Second, the infor-we shall have to answer are what type and form of in- mation and evaluations should reflect not only theformation do we need for this new kind of accountancy "hard" information that we have about past events butand what methodology is required to attain it? also the information (clearly less hard) that estimates

provide about the future. Accountants have historicallyLet me offer some indications of what is involved. been obsessed with the question: is this information

In the first place the information to be generated needs accurate and verifiable? In economic development ac-to be economically meaningful and useful, reflecting countancy they must accept that even information thatsocioeconomic relationships, and geared toward the only approximates to accuracy may be useful.

24

Finally, the information should be valued and por- and auditing; more reliable social accounts; a moretrayed in such a form that it benefits the principal users; unified development of accountancy theory; and im-it will have to serve both the microeconomic and macro- provement in economic planning and policies. Interna-economic sphere. Adherence to a standardized system tional acceptance of such a "uniform accountancyor plan of accountancy would be of the greatest value system" would be desirable, as it would facilitate meas-in this connection. urement and comparison by countries and expedite

Accountancy-in its widest context-may be con- capital formation and investment flows.sidered as consisting of four kinds of activity, pertaining A great deal of valuable work in standardizing socialto the eco-financial information to be provided: (I) accounting systems has been carried out by the Unitedidentifying, analyzing, processing, classifying, allocating, Nations, the Organization for Economic Cooperationand reporting; (2) measurement, evaluation, communi- and Development, and the International Monetarycation, and the assessment of efficiency; (3) decision Fund, and the development of a uniform accountancymaking about human and material resources; (4) ac- system will have to be closely coordinated and inte-countability and the facilitating of controls. These ac- grated with these preparations.tivities have applicability to the four branches of For information to be effective for decision making,accountancy, i.e., financial accountancy and auditing; future cost and benefits have to be measured, incor-cost and management accountancy; government ac- porating, where possible, economic and technologicalcountancy and budgeting; and social (national) ac- trends. Comparisons between industries equally requirecounting. that the information is assessed and allocated on a basis

that is economically justifiable. Too often we find that

Collecting Information the accountancy rules set forth ways of, for example, al-

In order to shape such a new form of accountancy, locating expenses, costs, and revenues that are directed

certain technical aspects have to be considered. I have exclusively to the requirement of "accounting and stew-

already stressed that the information should be classi- ardship" in a narrow sense.fied, portrayed, and reported in a more universally Long-term development planning and investment re-standardized manner. We often find, for example, that quires calculations about future direct and indirect bene-stmidardizeptannr. eatn find (or exapeae fits and costs, to determine the most beneficial socialsimilar capital or operating items (or expenses) aretreated differently in different projects or different or private-financial course of action to follow. Such

countries; and different allocations, amortizations cost-benefit analysis applies to tactical decisions con-

of and valuations (historical vs. rcerning an enterprise, a project and its components, the

and expense items may give a distorted account of comparison between projects, and to development pro-

income, surplus, and aggregate result. These distortions g st ps an id fote imptementif a dee-in turn may lead to different planning coefficients, msuch as shadow prices, input-output relations, and ably optimize-the difference between revenues and

capital output ratios. For purposes of reporting, meas- costs. Such cost-benefit measurements have to be more

urement, and microeconomic and macroeconomic de- extensive than an extrapolation of past financial trends,

cision making, such diversity of presentation and re- which could lead to the wrong decision-makinglated evaluation is undesirable and detrimental, model"; it requires a certain economic insight into fu-

The adoption of a uniform or standardized system ture behaviors of cost and prices. These factors are in-The dopion f aunifrm r stndadize sytem fluenced by socioeconomic conditions and technological

of accountancy could alleviate many basic accountancy chnged by ineon al onitional infragrcaproblems in developing economies, where generally we changes and by istitutional, organizational, infrastruc-are in any event faced with a lack of information and ture, and manpower variations.adequate accountancy skills. Such a uniform account- Both capital and operating costs and benefits tend

ancy system or plan would be widely useful; it would to change over time, and this time-value factor is ofy m . great importance in the accountancy cost-benefit (and

serve the business unit, the industry, the social accounts, cost-effectiveness) calculations. Time has an economicthe development plan and its related economic policies, value, and it is necessary in cost-benefit analysis to com-the government budget, and the fiscal system. The uni- pare the benefits and costs, taking into account the inter-formity would above all apply to concepts and terms, est rate, or discount factor, on future revenues and costs.the procedures of valuation (inputs and outputs), the The costs are generally easier to calculate than the fu-method of registration, and the classification of ac- ture (discounted) benefits. The interest (discount) ratecounts for business, sectoral, and even national pur- used-or return obtained-in cost-benefit analysis is aposes. The advantages of such a standardized eco- measure of the (marginal) productivity of capital in theaccountancy system would be easier analysis, evaluation, economy, and helps to determine whether a project isand comparability; better studies of feasibility and costs; worthwhile. Such analyses assist in eliminating uneco-facilitation of fiscal administration, budgeting, control, nomic projects and in channeling investments in the

25

most beneficial direction. The projected benefits of a with acquisition expenses, which apply to the past, andproject or program are generally realized over a long are of a monetary character.period of time, while most of the costs are incurred in Such an economic approach to accountancy bridges,the beginning. Relative financial weights have to be in my opinion, the big gap between value and cost andplaced on revenues and costs, and the weighted sum would bring greater unanimity to the concepts of valuemaximized. Such discounting of benefits and costs, over added, income, capital, and surplus. It will also lead totime, is referred to as the discounted value or discounted the needed closer integration between enterprise, gov-cash flow method.' The rate of interest-or return ernment, and social accountancy and will also requirerequired-is a determinant in the feasibility and opti- a more deeply considered coordination between econo-mization of a project or program. mics and accountancy.

It cannot be stressed too strongly that what is really Accountancy that is concerned with current (i.e., re-vital to accountancy for economic development is that placement) values does not claim to portray financial

the accountant, in preparing feasibility studies and other certainty, but aims to convey more realistic information

forecasts, has to measure and communicate information about the whole economic, technical, and financial field

about the future. This calls for a greater eco-technical of interest. This wider information is what is needed for

insight and coordination with other disciplines than is the making of effective decisions in economic develop-found at present. From an auditing point of view it also ment.

involves the concept of verification and accountabilityin a different context; auditing should give an accountof the structure in which the entity or project operates.Such operational auditing has to be considered againstthe economic development environment and trends. Ac-countancy and auditing have been too much concernedwith the registration, allocation, and verification of itemsconsidered as monetary entities for the business unit,while too little attention has been paid to the processing,registration, valuation, and evaluation of information IL qfrom both the microeconomic and macroeconomic pointof view. For purposes of administration and control,adherence to traditional historical accountancy/auditing

practices might be required in many countries for sometime to come, but it should not constitute the entirescope and aims of accountancy.

Although any processing of information involves cer- The new Computer Center operated jointly by the World Bank Group andtain qualitative judgments, its evaluation for economic the Fund: the Bank has taken considerable initiative in applying sophisticateddevelopment accountancy needs much more in the way forms ofcest-beneft ana lysis, for example, where we tryof such judgment. Accountancy as it is now practiced to compare current and discounted projected costs withessentially conveys quantifiable and verifiable data of discounted forecasted benefits, the need for uniformlya conservative, retrospective nature. Such conventional valued costs and benefits is extremely important. Whataccounting does not answer to the necessities of calcu- are benefits and what are costs is largely a question oflation and communication in dynamic times. For ac- value determination. Capital-output ratios, which reflectcountancy to be more effective for microeconomic and the relationship between the capital investments and themacroeconomic purposes, it has to reflect current eco- annual resulting income from these investments, equallyfinancial values. The underlyig idea is that all goods, need information about current value to make themservices, and value added have an input-output com- effective for policy making. Again, "current value" ac-ponent, which should be assessed according to their countancy is necessary for input-output analysis; ancurrent or replacement value. input-output table, which shows how goods and services

Accountancy is essentially a processing and registra- interact among industries, is being widely used as antion of values, and such values have to be economically analytical tool and guide to decisions about economicuseful. Production is the consumption of existing values policy.to create new values; for example, the current value of Current or replacement value does not necessarilya piece of equipment might be stated as the discounted mean the actual technical replacement, but rather thevalue of its future incorporated working units. Costs economic replacement. The actual replacement price,are values sacrificed, but they should not be confused and the actual decision to replace, might well deviate

1 An article on Discounted Cash Flow appears in this issue. from the current or replacement value, i.e., the best eco-

accountancy value existing at the present moment. In dominant in many developing countries, could be onethe business economic (micro) sphere such current of its greatest users and promoters. Underlying thevalues pertain particularly to the fixed assets (plant and adoption and execution of a current value accountancyequipment) and inventories, which were acquired in approach, which has an impact on the whole economicthe past and are "written off" or consumed over a period sphere, are the accountancy postulates, standards, andof years, according to tax laws, the dogma of conven- rules. Each standard or rule will have to be looked attional accountancy, or other arbitrary criteria. Such from the point of view of its economic merit, and thewrite-offs (depreciation) of fixed assets generally con- methodological frame of reference in accountancystitute an allocation of the historical expenditures, which should be more than the sum total of conventional ac-are unrelated to the current valuation of the services cepted practices. The development of a sound account-being used, or the value of the remaining services still ancy theory, methodology, and practice requires a clearto be incorporated in the asset. Inventories and other understanding of the foundation and scope of account-assets are generally-under the principles of conven- ancy.tional accountancy-absorbed or amortized on the basisof their historical expense, and reflected in the financial Accountancy in the Development Process

statements at the lower of cost (expense) or market If we want to consider more fully the kind of account-price. ancy needed in planning economic development, we

Financial depreciation, amortization, and inventory must consider it in three specific fields: developmentconsumption often form a large part of the cost of pro- planning, capital formation, and government administra-duction in industry; such cost estimates are being used, tion.among other purposes, for setting selling prices, income Development planning involves the application of ra-determination, the valuation of inventories of goods pro- tional choices among various patterns of investment.

duced, efficiency and managerial controls, and planning One of the most difficult tasks in development planningand policy making. Yet such valuation of assets at his- is the outlining, screening, selection, and implementation

torical cost has a distorting effect, since it has a tend- of projects and programs. Import statistics, social ac-

ency to overstate true profitability or surplus. counts data, input-output tables, commodity flows, mar-At the project or business level, current value income ket studies, and rough cost-benefit calculations might

determination conveys that only that portion is income give us an indication of potentialities. However, to pre--or surplus-which can be consumed without impair- pare, measure, and evaluate projects in accordance with

ing the net capital structure. It is not a mere subtraction established economic policies and alternatives is a te-between revenues and allocated expenses. Current value dious task, and requires the measurement of social andaccountancy measurements also reflect the setting aside individual benefits and costs. This is an accountancyof adequate reserves for the economic replacement of function.the assets of the business or project, which simultan- Cost-benefit analysis, or cost-effectiveness in govern-eously convey the anticipated replacement financing re- ment, resembles profit maximization for the businessquirements. In many developing economies there is a firm. It is important that all the benefits and all thetendency to distribute the maximum amount of income, cost of a program or project be taken into account.and where income is historically computed there is a The cost, benefit, and investment return data are alsodanger that in addition to "true income" part of the used for the social accounts and other feasibility studies,actual capital of the enterprise may be distributed as and these micro data assist in portraying alternativebeing profit. Especially during periods of inflation and development models. Erroneous or unrealistic cost andrapid technological change-often encountered in de- benefit information may cause unwise investments andveloping countries-adherence to historical cost assess- investment fund allocation.ments tends to distort true income, surplus, the decision- The World Bank has taken considerable initiative inmaking factors, the macro (social) accounts and the applying sophisticated forms of cost-benefit analysis inplanning-policy framework. its project studies over the past years.

The economic implications of current value account- Effective economic planning needs a comprehensiveancy are that net income during periods of recession and analytical framework of social (or national) ac-and price decline tends to be higher than when based counts data, and preferably input-output tables derivedupon historical accountancy, and the reverse during therefrom. If such social accounts and interindustry dataperiods of boom. Current value accountancy would have are to be effective, the underlying accountancy informa-a beneficial or curbing influence on capital formation tion that is available in the private and public sectorand investment decisions when it is required, and would must be both truthful and economically useful. The tech-tend to work anticyclically. The technique of current niques of business accountancy are also used in socialvalue accountancy is then an integral part of "economic accounting; they reflect the same equations, they usedevelopment accountancy." The government sector, the double entry debit and credit system, and they both

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consolidate; however, they diverge in their require- Although the techniques involved in input-outputments as regards the classification, valuation, and ac- tables, capital-output ratios, and cost-benefit analysiscumulation of information. are well known, the informational and methodological

An input-output system gives a more dynamic idea accountancy requirements have not been adequatelyof the economy, and although these tables are hard evaluated and set forth.to prepare-above all in developing countries-they Project evaluation requires a measurement of pro-play a vital role in development planning. The account- ductivity, and while labor or capital intensity might being information derived from business activities is at the desirable from the point of view of those responsiblecore of such a matrix, and especially with the applica- for individual projects it might not be so socially. Thetion of input-output coefficients current or prospective degree of labor or capital intensity often depends oneco-accountancy values have to be reflected. These co- the policy objectives of the government, but generallyefficients help determine the requirements of prospec- it will be guided by the national income or surplus cre-tive projects. ation, preferably with the aid of shadow or "account-

Capital-output ratios, reflecting the quantity of out- ing" prices. Such shadow or accounting prices are aput resulting from a unit of capital input, are used as sort of replacement value under equilibrium conditionsa measuring tool or policy guide in macro and micro relying upon current accountancy information, and theyplanning. In computing the gross, net, or marginal are needed when prices do not reflect real scarcities or

surpluses. Such shadow prices may apply to the cost ofcapital, the cost of labor and foreign exchange and in-ternational commodities, and, by their use in economicdevelopment, projects could be justified or rejected ona sounder basis of economic reasoning.

The effective implementation and follow-up of aA project or program also places a strong demand upon

accountancy and auditing as financial and cost state-ments need to be prepared, cost-benefit assessment andrevisions have to be made, and capital and operatingfinancial means and methods to be outlined and secured.

Capital Formation and Development Finance

The existence of sound eco-accountancy will tend toresult in the generation of increased individual or socialsurplus (profit). This in itself can be one of the majorsources of capital formation within a country. Theavailability and execution of sound projects and pro-grams might also stimulate the potential internal andexternal flow of capital in and to a country. By contrast,the absence of sound projects might cause capital flight.It is an essential aspect of development accountancy,by means of cost-benefit calculations and related meas-urements, to help identify and implement projects, whichshould have priority from the point of view of nationalincome, savings, or investment return. Consequently,sound accountancy is able to assist in a more efficientallocation and use of capital and finance funds. Thegovernment budget and its fiscal policy can be anothermajor internal source of capital formation, requiring anequally sound accountancy approach.

The accountability, control, and communicating roleThe Center's four magnetic tape drive units. of accountancy in the enhancement of capital formation

capital-output ratio, the value of the inputs and outputs is also significant. The availability of comprehensivehas to be consistent, incorporating realistic accountancy and reliable financial reporting and appraisals for out-information and classifications. The basis of deprecia- siders, according to certain prescribed standards andtion greatly influences the ratio. Comparing historical rules, will have an effect in building confidence, whichinputs with current outputs can result in the wrong in turn tends to stimulate domestic and foreign capitalevaluations and decisions. investment.

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Government Administration and Budgeting Implementing "Economic Development Ac-

In many developing countries, the public sector is countancy"dominant and the increasing range and complexity of Economic development accountancy, in addition to agovernmental activities requires comprehensive govern- revision of existing accountancy thoughts and concepts,mental accountancy for social accounting, economic a new kind of systematization, and an educational effortpolicies, planning, management, controls, and accounta- to make this widely known and understood, requiresbility. institutional effort. Institutes of accountancy, other pro-

The government budget-preferably on the account- fessional associations, and academic circles should beancy accrual basis-states the government's financial called in to assist in evaluating and outlining the con-program for one or more years-and this budget can cepts, standards, and directives. The initiative and/orserve as a valuable tool in the formalization of develop- support for a needed change in accountancy method-ment plans and programs. The budget is to be seen as ology and practices might come also from internationalan essential instrument for defining national aims and organizations such as the World Bank, the Internationalplans and goals (benefits) which have to be achieved Monetary Fund, and the United Nations and its affili-at the least cost. Tied in to the governmental budgeting ated agencies, as these organizations are so deeply in-system are the account classifications (economic or volved in the direct and indirect generation and applica-functional), which are part of the government account- tion of economic development accountancy information.ing system. They might be able to take part in devising and/or

A fairly recent development in the budgetary field is making known more effective accountancy norms and"performance budgeting," and its further extension, practices. Many of the required modifications in the"planning-programming-budgeting" (p.p.b.). While tra- teaching and practice of accountancy-and accredita-ditional budgeting is aligned to the role of financial tion of certificates-preferably also could be imple-stewardship and stresses the financial aspects of expen- mented with the support of international organizations.ditures, performance budgeting is oriented to manage- An attempt should be made to harmonize the account-ment and cost accounting and tries to measure the bene- ancy and auditing concepts, standards, rules, and prac-fits and costs of programs, projects, and activities. It tices gearing these toward demands of economictries to build a link between the'projects, the plan, and development. Revisions of the laws and rules coveringthe budget. The adoption and adherence to a "uniform eco-financial measurements, reporting, and communica-accountancy system" would greatly facilitate integration tion will be needed.between planning and budgeting, and could simultane- Moving accountancy out of its present narrow dog-ously serve other microeconomic and macroeconomic matic sphere of operation toward a more effective socio-needs. economic development function will be a slow and per-

The recording and classification of government re- haps a rather tedious task, but if this objective is notceipts and expenditures also covers the area of fiscal pursued, other disciplines may start filling the eco-administration. Taxation, which can be a potential form accountancy needs, and accountancy may become tooof capital formation, is at the core of government oper- important to be left to the accountants. In an earlierations. Dogmatic accountancy rules and regulations may article I showed that, in the past, accountancy hashamper the growth of an effective tax structure, and adapted itself to the changing requirements of society;meaningful reporting procedures have to be installed now it must respond effectively to the challenge of eco-based upon sound accountancy standards and rules. nomic growth and development.

Adolf J.H. Enthoven, a native of the Netherlands, received hisdoctorate from the Netherlands School of Economics, and did sub-sequent work at the Institute of Social Studies in advanced economicplanning and national accounting. Previous to joining the InvestmentDepartment of the International Finance Corporation in 1964, hewas Director, Europe, for Lybrand, Ross Bros., and Montgomery(International Certified Public Accountants), and lecturer at theUniversity of Toronto in corporation finance. He left the InternationalFinance Corporation in 1967 to become Visiting Professor of Ac-countancy and Economics at the University of Illinois.

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