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Regulatory Accounting is a fundamental tool for a
regulator to perform his/her functions effectively. Generally,
regulatory authorities, under the protection granted by franchising
contracts or service provisioning licenses, do not have the same
quality information as those who have the responsibility of effecting
the provisioning of such services. Particularly, this problem takes
place as regards outlays, costs, and expenditures related to the
service provisioning. This situation becomes critical when, as in the
telecommunication sector, there are recurrent conversations on the
efficiency of service provisioning, so as to evaluate or determine
tariff structure and level.
From the economical point of view, the concept of
efficiency can be studied by focusing on three different levels that
must be inter-related, such as:
(i)
Allocation: rates should reflect
the shortage of a good or a service’s provisioning.
(ii)
Production: the operator should
minimize costs for a given production level (or service coverage) or
increase to a greater degree the production level (or service
coverage), for a given supply mix.
(iii)
Distribution: the rate structure
should be consistent with the user’s possibility to make payments and
the service’s access level.
(iv)
Dynamic level: relying on a rate
level that allows repaying service provisioning and also investment
costs, the operator should invest adequately.
The various typologies describing efficiency from
the economical standpoint are indeed particular objectives within the
existing multiplicity related to the regulation and service
provisioning and their inter-relation with fundamental instruments.
Tariff‘s level structure and system, are of primary interest to the
regulators, and they define the regulator’s need to count on a
Regulatory Accounting system as a tool.
Taking into account the perspective given by the
Principal-Agent approach, Regulatory Accounting constitutes a tool.
Its usage aims to bridge the already mentioned breach or lack of
symmetry concerning both the quality and the quantity of the available
information among the parties involved in the matter being regulated.
Some of the consequences of asymmetry in information can be:
(i)
Inefficiency in service provisioning.
(ii)
Distortion in costs structures.
(iii)
Inefficient Investment Valuation.
(iv)
Unreasonable Tariff Levels.
(v)
Lack of Monitoring or Control.
(vi)
Inefficient Allocation of Resources.
(vii)
Inadequate or Insufficient
quality in service provisioning.
(viii)
Excessive Profitability to the
provider.
(ix)
Negative impact on Income
Distribution.
It can be said then, that Regulatory Accounting is
characterized as a unique
system of data capture, register and
arrangement. It is aimed to meet information requirements strictly
oriented to regulatory ends such as the satisfaction of needs related
to consistent and objective information access, goal monitoring,
economical and financial control, and the protection of the
efficiency level and service quality compromised by the provider.
Studies made by the Inter- American Development
Bank indicate that: “...Regulatory Accounting constitutes a system of
data capture and handling, that unifies the methodology and the
formats to be used by a service provider at the moment of presenting
the required information by the regulator. Its main aim is the
reduction of the information asymmetry”.
On the other hand, as regards the mentioned item,
the World Bank adds that: “...on the basis of the accounting
separation principle, ...the regulatory accounting is a particular
form of Cost Accounting in which the Separation of Accounts and the
imputation criteria are established according to the regulatory
objectives”.
Unlike the traditional accounting, that presents
the accounting facts and establishes the results that took place in a
specific period of time, focusing in the inherited management, the
regulatory accounting has a perspective oriented to the future
reflected towards the performance control of the provider, including
not only the technical aspect but also the financial economic aspect.
It is true that the information produced by an
Accounting system may not be enough for the exercise of regulatory
tasks, especially, from the economic point of view. Furthermore, the
regulatory interest is to focus basically on the regulatory activity.
However, a Regulatory Accounting system must initially protect its
consistency with the basic postulations, the Generally Accepted
Accounting Principles (GAAP), the current caution criteria in the
country where the service provisioning takes place, and the accounting
register of the provider under regulation.
In general, from the regulator point of view,
counting with a Regulatory Accounting system has as an objective to
have a reliable, easy-to-handle and structured under common criteria
cost base, which contributes to determine efficient costs for service
provision, anti-competitive behaviour or the existence of
cross-subsidies. This way, one of the basic objectives related to a
Regulatory Accounting System is the visible separation of incomes and
expenditure, costs and outlays, between the regulated and
non-regulated activities carried out by the service provider.
The use of identical information sources and the
homogeneity in the identification of accounts and the entry imputation
and valuation are the requirements that characterize a Regulatory
Accounting system. They must also serve as a basis for comparing the
company’s performance under regulation, including its financial
status. This uniform comparing basis will not only have positive
effects, as indicated in the previous section in the reduction of
information asymmetries and regulatory risk, but it will also result
in a decrease of the so-called transaction costs.
A Regulatory Accounting system should be supported
by some of the basic principles listed in the following chart:
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Consistency |
Once defined, the Regulatory Accounting
system criteria and principles must result stable and with
continuance through time. |
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Objectivity |
All allocations and assignments of income and
expenditure must be specified on an objective base.
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Causality |
Incomes as well as expenditures must be
assigned or allocated according to the activity that generates
them. |
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Transparency |
Clarity in assignment methods selected income
and expenditure entries and the perfectly distinguishable
entries. |
Besides the
objectives already explained, a Regulatory Accounting system can
contribute to reveal anti-competitive behaviour or the presence and
performing of subsidies, or to assist in the monitoring of the
financial condition of the service provider. It should always be
oriented to the improvement of transparency in the regulatory process.
Besides the series of mutual benefits already
indicated, to which other advantages could be added, such as a
reduction of the discretionary nature, the minimization of uncertainty
about incomes and expenditure, or the improvement in the presentation
of the information regarding to the regulated matter, the definition
and the beginning of operations of a Regulatory Accounting system sets
a series of challenges both from the regulator and the service
provider perspectives.
The main challenge set to both parties at the
beginning of a Regulatory Accounting system is to increase the
regulatory transparency and the institutional quality of the control
and monitoring of the service provider.
It is of crucial importance that, from the
homogeneity and uniformity characteristics previously stated, both
parties, regulator and regulated build up a language and a common
understanding basis, in order that both parties can understand the
same when it comes to entry components, outcome structures, assignment
processes or income and outcome allocation.
Both regulator and regulated must make an effort,
so that each of them, in their own area generates not only the
appropriate information for the performance of the regulatory
accounting system, but also the adaptation of their databases and
computer systems to those effects.
From the regulator’s point of view specifically,
regarding the implementation of a Regulatory Accounting system, the
challenge is focussed on the definition of simple and transparent, but
forceful principles. It should rely on human resources and adequate
systems as well, in order to collect information, and also to
interpret and use it as support of decisive regulatory processes such
as the Revision of Tariffs. The regulator should structure management
and efficiency indicators from the Regulatory Accounting system, which
allow making consistent comparisons between companies or benchmarking.
This way, a Regulatory Accounting system must contribute to define a
clear methodology of tariff estimation, and support the financial
economic analysis of the service provider. The regulator must also
design appropriate processes to strengthen advertising and the
presentation of conclusions and principal data that can be extracted
from the implementation of the Regulatory Accounting system.
From the service provider point of view, the main
challenge is to contribute to the satisfaction of the existent needs
regarding provision of objective and transparent information, this way
reducing certain discretions that may exist originating the already
mentioned asymmetry in information. Also, the provider must have the
necessary resources in order to submit to the regulator the
information required for the performance of the Regulatory Accounting
system in the specific format, detail and periodicity. Likewise, it
should adapt or change the architecture of internal accounting
processes, plans and account manuals already working in their area.
According to the way in which the coverage of the
Regulatory Accounting system may be defined, there is a possibility
that the provider must adapt to new types of audits, with the
resultant processes and resources adaptation that are considered
necessary. Finally, it is foreseen that the regulator must be
extremely careful when having at his disposal additional resources to
increase the reliability level in the production, protection and
provision of the information related to the Regulatory Accounting
system.
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Additional Information: This is an excerpt of the
Technical Notebook of CITEL on PRACTICAL CASES OF
APPLICATION AND USE OF REGULATORY ACCOUNTING..
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