All in this together

5 Mar 12

As the eurozone crisis continues and sovereign debt soars, governments need to urgently reform their accounting practices. CIPFA’s chief executive calls for a collective effort across the profession to transform public financial management globally

By Steve Freer | 1 January 2012

The sovereign debt crisis has grown steadily over the past two or three years to its current climax in Greece and Italy. Its origins lie in that other financial disaster – the global collapse of 2007/08. Indeed, sovereign debt is just the latest chapter in that crisis, which rolls on like a great financial hurricane or tsunami, threatening all in its path.

Crisis is not an exaggeration when G20 meetings end in embarrassing failure and prime ministers topple. George Papandreou and Silvio Berlusconi are the latest casualties but it is very unlikely that they will be the last. Even countries that have bitten the austerity bullet continue to be undermined by gloomy economic predictions and the ever-present fear of a double-dip recession.

In such a hostile climate, it is critical that public expenditure, income, assets and liabilities are controlled and stewarded skilfully, that government policies are soundly based and decisions are taken responsibly in the long-term public interest.

Without these secure moorings, sovereign debt is an accident waiting to happen.

Although the roots of the crisis lie elsewhere, the problems have been exacerbated by both regulatory and accounting failures. This has been vividly illustrated in Greece, where government statistics on deficit and debt data have regularly been revised. This led Ian Ball, chief executive of the International Federation of Accountants, to conclude that the Greek government has practised ‘financial reporting fraud’. President Sarkozy’s recent statement: ‘It was an error because Greece entered [the euro] with false figures… it was not ready’ was no less an indictment for the fact that many commentators had reached the same conclusion long before.

Very few governments in Europe and around the world have organised themselves to live up to the requirements of modern public financial management. Many, as we know, continue to budget and account on a receipts and payments – or cash – basis.

Markets hate uncertainty. But what could be more uncertain than the financial position of a government entering into complex transactions to bail out banks while maintaining its accounts on a cash abacus?

It is time for governments to wake up and confront the risks inherent in their accounting shortcomings. They need to begin to take their public financial management responsibilities much more seriously. That means budgeting as well as accounting on an accrual basis, reporting consistently and transparently in accordance with modern standards, and professional, independent auditing. It means slick, timely management accounting and forecasting and tight, effective financial controls.

Without these measures, transparency, accountability and, crucially, confidence will continue to be in very short supply.

The risks and consequences of widespread failings and weaknesses in public financial management are extremely serious. They affect a variety of important variables: economic performance, development and opportunity; living standards and quality of life; service delivery; accountability, trust and confidence in government; and much more. That is why people react so emotionally through protests and demonstrations when public spending cuts are announced, as we have seen in Greece. The message is clear: how public money is allocated and managed matters a great deal.

So if we fail to tackle the need for a real improvement in public financial management across the world we can expect to experience continuing difficulties in all these areas. The overall effect will, at best, be sub-optimal performance and, at worst, more fundamental system failure. This crisis will last longer and there is every prospect that it will be followed by further crises.

In contrast, if governments can achieve real progress in public financial management, we will be able to secure a range of positive outcomes that will make a real difference to both market and public confidence.

Part of the problem is the sheer scale of the challenge. Government is big business, managing complex and constantly rising demands. Political leaders are often heavily focused on the most immediate, short-term effects of the crisis and possible solutions to fix them.

Public financial management is complex and challenging too. But high standards are not achieved by waving a magic wand. They require continuous, carefully planned improvements and dedicated professional capacity to execute them. They are about fixing the foundations to provide a solid platform for long-term stability and confidence.

The November 16/17 annual meeting of the IFAC council in Berlin focused on sovereign debt and the global crisis. In my address to the meeting, the largest gathering of the accounting profession this year, I shared some of CIPFA’s experience and knowledge of how this leap in financial management could be achieved. But I also stressed that the institute alone could not make change happen on the required scale.

The problem screams out for a concerted global campaign involving the whole of the profession and a variety of other partners too. Dramatic improvements in government accounting, auditing and financial management practices could be achieved in under five years with determined and carefully co-ordinated action. This is one situation where that over-used word ‘transformation’ might literally apply.

Of course, this debate goes to the heart of what CIPFA is about. My presentation was therefore accompanied by the launch of CIPFA’s prospectus, Fixing the foundations, which calls for a range of prospective partners to work with us to achieve these changes.

The good news is that we are not starting from zero. Poor public financial management is not being completely ignored. Many conscientious, committed organisations and individuals already recognise it is a critically important specialism and are working hard to improve it.

For example, IFAC has established the International Public Sector Accounting Standards Board. As well as developing a suite of international accounting standards tailored for the needs and circumstances of public sector entities, the board is also tackling critical challenges such as measuring and reporting long-term fiscal sustainability.

Similarly, a consortium including the World Bank, the European Commission, the UK’s Department for International Development and the International Monetary Fund has established the Public Expenditure and Financial Accountability initiative. This in turn has developed the Public Financial Management Performance Measurement Framework, a rigorous methodology that monitors countries’ performance and helps to identify good practice in public financial management.

The International Organisation of Supreme Audit Institutions has developed a further series of international auditing standards for public sector entities. And in terms of aid effectiveness, the Organisation for Economic Co-operation and Development has sponsored a team working exclusively on the improvement of public financial management.

This powerful group – the PFM Taskforce – will be at the OECD Aid Effectiveness Forum in Busan, South Korea in a few weeks’ time. It will call on governments to ‘demonstrate their political commitment to strengthening PFM through a credible reform programme, to ensure independent and well-resourced oversight institutions, and to increase transparency for better accountability to the public, including through civil society organisations, for all public resources.’

CIPFA itself has contributed significantly to developments in this area. For example, our ‘Whole System Approach to Public Financial Management’ provides comprehensive mapping of the elements and component parts that make up public financial management. In effect, these are the levers that can help to secure significant progress and improvement.

These important and complementary achievements provide a solid platform for further developments. But we should not allow their existence to obscure the big picture. Notwithstanding these successes, overall progress is slow and diffuse. Too many efforts and resources are largely uncoordinated, meaning weak public financial management is being tackled in an inefficient, fragmented and wholly underpowered way.

We need to draw attention to this problem and create widespread recognition that improving public financial management is critically important for all governments, requiring concerted and co-ordinated international action.We need to bring collective resources to bear and ensure that governments, public sector organisations and public financial management practitioners collaborate and learn from each other.

A vital starting point is to have a common understanding of what public financial management is and what it involves. We need to promote recognition of it as a distinct and significant specialism, one that includes a range of disciplines that are typically practised by the finance function and a number of activities that are carried out elsewhere.

This understanding is vital to creating both supply and demand side pressures for improved standards. We also need recognition that public financial management is multi-tiered, and that action is needed at global, regional, national and local levels.

To ensure any improvements last, governments must build a consensus that will maintain a high level of commitment and energy over a long period. So too must leaders of public service organisations and influential individuals, such as accountants general, auditors general and chief financial officers in public bodies.

However, ‘top-down’ exhortations or commands alone will not secure the results required. A prerequisite for success is the need to nurture and develop professional public financial management capacity and capability. A community of skilled and empowered exponents working in public sector organisations will be able to drive systematic, step-by-step improvement of standards of practice. CIPFA can bring a lot to this party. We can roll out existing tools, such as the Financial Management Model and training programmes, to a wider audience. We also have a range of further ideas, including:

> A public financial management web portal. This would provide opportunities for the global community of practitioners and others to access relevant research, products and services; address their own learning and development needs; share insights; benchmark performance and exchange best practice with peers

> An international public sector accounting standards implementation programme. This would offer support and guidance for governments and organisations making the challenging transition from cash to full accrual accounting and implementing modern standards

> The development of a systematic approach to the professionalisation of public financial management. This would include the wide-scale rollout of qualifications at technical and professional levels, specially tailored to provide the skills and competencies required by public financial managers.

CIPFA already works with a range of partners: accountancy and other professional bodies in the UK and around the world, education providers, donor bodies, and financial services and other companies providing services to governments at all levels. However, responding to this greater need, we aim to deepen existing relationships and liaise with other organisations that share our passion to transform public financial management globally, regionally, nationally and locally.

There is no doubt that these are historic times. In 20, 30 or 40 years’ time people will talk about the global crisis at the beginning of the twenty-first century. And when we say that we were there, in leadership roles in the public sector and in the profession, they will ask: ‘What did you do?’

We are determined to be able to say that the institute showed real leadership, that we stepped up to the plate and acted boldly to make high standards in public financial management the global norm rather than the rare exception.

Steve Freer is the chief executive of CIPFA. The institute’s prospectus, Fixing the foundations, is available at cipfa.org.uk/prospectus