International PublicFinance
THE GLOBAL MAGAZINE FOR PUBLIC FINANCE PROFESSIONALS WINTER 2014 • €5
Mo Ibrahim sets out Africa's next big challenge Caroline Gardner on rooting out international fraud Rob Whiteman says don't avoid the truth on tax
CAN THIS MAN MAKE ACCOUNTANTS RAISE THEIR GAME?
publicfinanceinternational.co.uk
global experts in IPSAS Qualification and training for professionals Across the world public sector organisations are recognising the benefits that international standards such as International Public Sector Accounting Standards (IPSAS) bring and are making preparations to adopt them. CIPFA are the leading global accountancy body in implementation and training for International Public Sector Accounting Standards (IPSAS), with unrivalled experience across global public sector policy. Become an IPSAS expert today with our specialist IPSAS qualification and worldwide training.
CIPFA Certificate in International Public Sector Accounting Standards CIPFA is the first global accountancy body to have developed a dedicated IPSAS qualification. Being IPSAS qualified with CIPFA will demonstrate expertise and competence in applying the standards accurately and appropriately.
Find out more about the CIPFA Certificate in IPSAS qualification: www.cipfa.org/certipsas
Worldwide IPSAS training CIPFA, IASeminars and EY have joined forces to offer the most comprehensive and relevant IPSAS training courses available across many cities. IPSAS courses are scheduled for: November 2014 in London December 2014 in Cape Town March 2015 in London May 2015 in London June 2015 in Lagos June 2015 in Geneva
Find out more about our global IPSAS training: www.cipfa.org/iaseminars
p02_PFIntOCT14.indd 1
13/10/2014 14:47
14
PublicFinance
International
ISSUE
06 Editor Judy Hirst Contributing editor Vivienne Russell Reporters Richard Johnstone, Mark Smulian, Judith Ugwumadu, Contributors Anat Arkin, Peter Hetherington, Tony Travers Chief sub-editor Paul Nettleton Consultant creative director Mark Parry Picture editor Claire Echavarry Editorial assistant Tania Forrester Digital content manager Harriet Patience Sales manager James Condley Recruitment sales executive Emmanuel Nettey Senior production executive Aysha Miah Printing Stephens and George, Merthyr Tydfil Public Finance International is editorially autonomous and the opinions expressed are not those of CIPFA or of contributors’ employing organisations, unless expressly stated. Public Finance International reserves the copyright in all published articles, which may not be reproduced in whole or in part without permission. Public Finance International is published for CIPFA by Redactive Publishing Ltd.
01
04 Leading from the front CIPFA's Rob Whiteman on seeing the bigger public finance picture 06 News Fayezul Choudhury calls for global accountancy to step up 07 Opinion Keep pushing for transparency, says Ian Ball 08 Cover story Prince Charles has challenged accountants to accept a wider social role 12 Don't mention the debt Ian Ball says better accounting is an EU-wide issue 14 Gardner's world Scotland's auditor general on accountants living dangerously
18
08
ISSN 1352-9250
REDACTIVE PUBLISHING LTD 17-18 Britton Street London EC1M 5TP 020 7880 6200 publicfinanceinternational.org
The damage done to the Greek economy by poor accounting methods remains the EU's elephant in the room
12
18 Mo Ibrahim: out of Africa Africa is rising, just more slowly, says the billionaire who charts its progress 21 IPSAS: ready or not? Sylva Okolieaboh on reform to African financial reporting 22 Act globally EY's George Atalla is cautiously upbeat about the world economy 24 Do the right thing Rob Whiteman on profit shifting by multinationals 26 Retiring gracefully Josef Pilger of EY on the pensions deficit timebomb 28 Below the line How fiscal gimmicks helped EU members fudge their debts 31 Proudly public sector Gordon Ferrier on PFM training in developing countries 32 In the frame Ian Carruthers explains the framework for international governance 33 Fundamentals of good governance Commentary by the IIRC's Mervyn King
C OVER I MA GE: REX
Tel 020 7543 5600 Fax 020 7543 5700 Email corporate@cipfa.org Address CIPFA, 3 Robert Street, London, WC2N 6RL
p03_contents.indd 3
WINTER 2014 • PUBLICFINANCEINTERNATIONAL.ORG 3
17/10/2014 18:56
OPINION
ROB W HI TEMA N
Leading from the front on finance
reporting, fiscal transparency, or international standards – or the battle against corruption and fraud – a common theme emerges: how to make global accountancy fit for purpose? This is where a whole systems approach comes in. In CIPFA’s view, it is only by taking a holistic view of PFM – and firmly focusing on the public sphere – that we will improve service delivery in an increasingly globalised world. The underpinning principles for this are set out in CIPFA's guidance series Keystones for public finance. They focus on anaging public sector finances is about much the organisational architecture, analytical more than accountancy. It is integral to every framework and systems of governance that country’s financial health. Internationally, are a precondition for effective financial good public financial management can outcomes. change the lives of some of the world’s CIPFA and the International Federation poorest people and enable governments to of Accountants have also worked together raise finance and allocate resources. to develop an International framework Rarely have these issues been so important. for good public sector governance to As the World Congress of Accountants gathers help further these ends. This system of in Rome, debates over austerity, growth, checks and balances stresses the organic inequality and sustainability are intensifying across the globe. links between different elements of Whatever a country’s level of development or economic service delivery, whether to individuals, circumstances, its citizens will rightly keep raising the bar when it communities or the public at large. comes to public service delivery. Meanwhile, pressures on national In the international development budgets are huge – not least due to the fallout from the global context, a whole systems approach also financial crisis. This special edition of Public Finance International helps generate results that can meet explores many of these questions in some detail. demanding donor objectives. Above all, Whether discussing sustainable accountancy, integrated whole systems thinking means seeing the bigger, infinitely more complex picture. The Prince’s Accounting for Sustainability Project – featured in this issue – has repeatedly stressed how economic growth depends on healthy communities and environments. The Prince of Wales has personally called for new ways to define and measure economic success. Rob Whiteman is chief One way of answering that call is via the Integrated Reporting initiative. This brings together executive of CIPFA information about public sector organisations’ strategy, governance, performance and prospects in a way that genuinely reflects the context within which they operate. It confirms that we need to develop new standards, techniques and stewardship to help the profession raise its game. CIPFA is excited at the possibilities posed by this challenge. The Rome conference presents an ideal opportunity to engage with each other to turn this vision into reality. ●
In an ever more complex, globalised world, accountants need to join the public finance dots. A whole systems approach will help them rise to the challenge
M
ALAMY
4 PUBLICFINANCEINTERNATIONAL.ORG • WINTER 2014
p04_05_op-ed.indd 4
17/10/2014 15:31
‘Debates over austerity, growth, inequality and sustainability are intensifying across the globe’
—› p04_05_op-ed.indd 5
17/10/2014 15:32
NEWS DIGEST
Roman numerals
Meet the Pope
The World Congress of Accountants takes place in Rome from November 10-13, at the Auditorium Parco della Musica. Thousands of accountants, officials and policymakers will attend the event, which takes place every four years. WCOA is organised by the International Federation of Accountants.
Pope Francis is due to hold a special audience for WCOA delegates on November 14. The audience will take place at 12 noon in Paolo VI Hall in the Vatican and will last about 45 minutes. Places may be booked through the WCOA My Congress website, but there is no reserved seating available. GETTY
VISIT THE WEBSITE
IN NUMBERS
3.3
PER CENT IMF forecast for world economic growth this year, down 0.1% from July
32.6
$ BILLION World Bank prediction of economic cost to West Africa of the Ebola outbreak
www.publicfinanceinternational.org
20:20 vision for public finance International Federation of Accountants CEO Fayezul Choudhury tells PFI why good public financial management really matters Fayezul Choudhury believes accountants can seriously influence politics as well as economics, and decidedly for the better, he told Public Finance International ahead of the World Congress of Accountants. ‘Accounting methods have a direct impact on voters, because they can have an impact on the services that governments provide to taxpayers. If governments don’t know what they
can afford, they make poor decisions, which can ultimately compromise the services that taxpayers have come to expect,’ he said. At the heart of this is accrual accounting, said Choudhury. ‘By informing taxpayers of this issue as well as putting pressure on politicians and public servants, accountants play an important role in the adoption and implementation of accrual accounting.’ The International Federation of Accountants CEO hopes that public sector accountants will leave the World Congress of Accountants ‘with renewed vigour’ to project this message. ‘This year’s WCOA will offer sessions on best practices in accrual accounting and fiscal sustainability in the public sector to help educate participants on why this is so critical,’ he said. Many politicians may be opposed to government transparency and accountability, said Choudhury. ‘But if we’ve learned anything from the sovereign debt crisis, it’s that insufficient transparency and accountability, as well as poor public finance management and reporting, have dire consequences.’ ‘We know governments are not risk-free. The economic impact of fiscal mismanagement jeopardises both the interests of the public as well as investors,’ he said. ‘This stresses the need to take key steps towards meaningful reform of accounting standards.’ IFAC is pursuing this agenda on a number of fronts, including through its Accountability Now! initiative, which promotes awareness about enhanced public sector reporting and financial management. IFAC is also raising the centrality of improved public financial management for sustained growth at the G20 leaders’ summit in Brisbane, on November 15-16. ‘A strong, vibrant accountancy profession is essential across all parts of the globe,’ notes Choudhury, in IFAC’s submission to the summit. Along with member organisations, the World Bank and the donor community, they are looking to develop that capacity worldwide, particularly in developing and emerging nations.
WEBSITE
Public Finance International is a news, opinion and information service covering developments affecting government accountants, auditors, regulators and policymakers across the world. With essential news, informative features and provocative blogs, plus video interviews with thought leaders, it’s the essential destination on the web for global public finance professionals. www.publicfinanceinternational.org is brought to you by Public Finance and CIPFA
6 PUBLICFINANCEINTERNATIONAL.ORG • WINTER 2014
p06_07_news.indd 6
17/10/2014 18:45
Ebola economics
OPINION
The Ebola crisis could cost West Africa $32.6bn in lost economic output, according to the World Bank. The worst-hit economies – Guinea, Liberia and Sierra Leone – with their neighbours in the region, face ‘massive economic costs’. Bank president Jim Yong Kim has urged the international community to ‘find ways to get past logistical roadblocks’ to stopping Ebola. The UN estimates it will take $1bn to bring the Ebola outbreak under control over the next six months.
I AN BALL
ROUND-UP of recent stories from the PFI site that you might have missed
Fighting fraud CIPFA’s new Counter Fraud Centre (CCFC) is picking up the reins on counter-fraud work in the UK, and developing new specialist qualifications. But fraud and corruption are worldwide problems. Breach of contract procedures, local tax avoidance, bribery and misappropriation of public funds are just some examples of practices that make things tougher for everyone across the public sector. CCFC recommends simple measures, such as risk assessments, due diligence checks, staff training, internal and external audits and contract monitoring to help counter fraud internationally. www.cipfa.org/services/counter-fraud-centre
GE T T Y
‘Mediocre’ global growth, says IMF The International Monetary Fund expects global growth to reach 3.3% this year, 0.1% below its forecast in July, and has warned that the outlook is beset by risks. IMF chief Christine Lagarde said growth is still ‘brittle’ and ‘uneven’ and remains vulnerable to increased risks. She warned of ‘new mediocre’ levels of growth. Geopolitical tensions in the Ukraine, political developments in the Middle East and in some parts of Asia, and the Ebola outbreak in West Africa ‘cannot be ignored’, she said. Largarde has called for governments to adopt bolder fiscal policies, more efficient public spending and structural reforms of labour markets to raise productivity, competitiveness and employment. Increased infrastructure investment was also needed to avoid transport and energy supply bottlenecks hampering development.
p06_07_news.indd 7
Tackling accountability Auditors, policymakers and parliamentarians have begun discussions on how to improve the European Union’s fragile accountability system. A high-level conference held in Brussels recently considered how accountability throughout the EU could be strengthened. The European Court of Auditors described the system as ‘complex and enormous’ and said it was not surprised to hear of the risk of growing accountability gaps, overlaps and deficits. Aid funding is opaque Most international aid donors are not producing enough information on funding to ensure transparency, a report has found. The Aid transparency index, issued by the non-governmental organisation Publish What You Fund, found many donors still do not publish information about their activities in a meaningful way. China caps borrowing Fitch Ratings has welcomed plans by the Chinese administration to cap local government and regional borrowing, saying it would help the country manage its debt better. Beijing has decided to cap local and regional council debt, and ban additional borrowing through local government financing vehicles. China’s LRG debt is about 30% of GDP. 'Double Irish' loophole to close Ireland is to close the controversial ‘Double Irish’ tax loophole used by multinational corporations to limit their liability. Finance minister Michael Noonan said he would require all companies registered in Ireland also to be tax resident. Tax rules will change in January for new companies, while existing companies will have until the end of 2020 to comply.
Keep pushing on accounts transparency CIPFA International’s chair on his take-away message for delegates to the World Congress of Accountants The main message I want accountants and accounting bodies to take away from WCOA is to keep pushing for transparency in accounting information. They need to be confident that the move to accruals accounting is completely doable. Other countries have done it and they should be confident of the possibility of doing so. To be blunt, the main problem with adopting transparent accounting in developed countries is political will. Politicians and public servants may not want the whole picture seen. Even if voters are not directly engaged with accountancy issues, professional accountancy organisations can speak out on this. It is important to get across that it is not a technical issue, it is about transparency and better economic management. The effects of poor financial management on citizens can be dramatic, as we have seen in Greece. You see loss of democratic control over the budget and that then causes serious socio-economic issues. But the experience of other countries, for example New Zealand, shows that financial control can be dramatically improved. Accruals accounting is now accepted there, and you do not get anyone disputing it or calling for a return to cash accounting. The perception in New Zealand is that a government cannot run properly without it.
Ian Ball is chair of CIPFA International
17/10/2014 18:46
REGIME
CHANGE
PA
8 PUBLICFINANCEINTERNATIONAL.ORG • WINTER 2014
p08_11_HRH.indd 8
17/10/2014 15:56
A
ccountants and economists offer, in their different ways, opportunities for citizens and businesses to understand the flows of resources that surround them. Accountants provide rigorous methods for setting out how money is used in the creation and management of institutions, while economists make it possible to analyse the ways people interact within markets and also how incentives can be used to change behaviour. The development of international accounting bodies and standards has played a part in ensuring best practice can be spread across an increasingly complex world. Indeed, the proliferation of transnational governance, institutions and regulation has required a move towards global expertise and common standards. One of the most obvious advantages of such international professional development is that it deepens understanding and reduces the risks of conflict. There are a number of ways in which the evolution of accounting expertise can offer policymakers a better understanding of the world in which they operate. Reduced corruption, improved efficiency and public transparency are among the many benefits that accountancy can offer the world. Of course, the very ‘ordinariness’ of handling numbers to do with money can make accountancy appear rather less important than it is. In fact, much of the world’s $75 trillion economy is presented in accounts, generally several times over. National, company and personal accounts explore how resources are used. For companies and, increasingly, governments their accounts make it possible for outsiders to see how resources are being used, and what assets and liabilities exist. On the basis of these distant future. Academics, non-governmental organisations often legally enforced forms of presentation, judgments and businesses all play a part in understanding the impacts of are made about the resilience and credit-worthiness of investment decisions. Accountants, similarly, provide some of the institutions concerned. the tools with which to judge the ways in which resource use will The use of accountancy for measuring sustainability affect the future. has a similar purpose. Investors can develop an Against this background, The Prince’s Accounting for understanding of the changing landscape of commercial Sustainability Project is a unique exercise in highlighting the role risks arising from increasing environmental and social of accountants and finance teams in the delivery of sustainable pressures and the response of regulators and investors. development, in particular to enable the relationships between But to do this they need to have universally agreed ways environmental, social and economic outcomes to be made clear of presenting figures and of discounting for possible and incorporated into financial decision-making. The purpose future change. It is in this latter sphere that work of the project is ‘to catalyse action by the finance, accounting is required. and investor community to support a fundamental shift towards Big companies have big impacts as, for that matter, do resilient business models and a sustainable economy’. big governments. In their use of resources, specifically The Prince of Wales, speaking at an Accounting for natural resources, these large institutions impact Sustainability Forum last year, underlined the fundamental upon the lives of billions of people today and into the relationship between economic success and a sustainable world: ‘All too often the mainstream financial and accounting system focuses on short-term financial results. It does not adequately reflect the dependency of our economic success on the health and stability of our communities and of the natural environment. They are all too often a forgotten part of the equation.’ This observation must be correct. Both private and public organisations are under immense pressure to deliver results BY TO N Y T R AV E R S within the next quarter or, at best within a year. While balanced books are essential for companies and governments, they, in turn, must be balanced against the need for public buy-in – and a longer-term need to be able to live within our means. People need sufficient resources to secure a reasonable standard of living. But beyond a point, happiness is for most people a better objective than simply getting richer. Determining where to strike a balance between immediate gratification and the delayed enjoyment of benefit is one people face every day. For governments and companies, accountants can provide some of the techniques that allow rational judgments to be made about how they can balance short-term and long-term objectives in the use of resources. Prince Charles has touched on the kind of metrics he believes ↘
‘All too often the mainstream financial and accounting system focuses on short-term financial results’
The Prince of Wales has challenged accountants to play a wider social role and change the way they work. Are they ready to step up?
WINTER 2014 • PUBLICFINANCEINTERNATIONAL.ORG 9
p08_11_HRH.indd 9
17/10/2014 15:56
FA ST FACTS
$75 20 TRILLION The total GDP of all nations in 2013, according to the World Bank
INSTITUTES in the Accounting Bodies Network set up by A4S to promote accounting for sustainability
could be delivered by such techniques. ‘We need to understand the systemic relationships between the depletion of key resources – freshwater, soils and so on – and the volatility of prices in different markets like food and energy,’ he told a recent investor engagement event. He cited research which suggests ‘companies which have implemented sustainability policies have outperformed their counterparts. They have also enjoyed lower costs of capital and achieved better risk-adjusted returns. What is more, research … demonstrates that responsible businesses become more resistant to share price volatility, which I would have thought is an important consideration if you are a pension fund.’ In some ways, Prince Charles is describing elements of ‘due diligence’ of the kind undertaken by companies when they are considering the acquisition of another enterprise. Seen in this way, these factors amount to an understanding of environmental, and other factors, which are likely to affect a business or a state’s future. Accountancy can help businesses – or governments – articulate the value of sustainability in a way that enables investors to factor such considerations into their strategies. The capacity to measure costs and benefits in a consistent way is an essential part of improving the long-term viability of organisations. Prince Charles is on record as saying: ‘To that end, for what it is worth, I have felt for many years that the globally accepted ways of
‘We need new ways to define and measure success for businesses, governments and the global community’
Tony Travers is chair of the London Finance Commission and professor of government at the London School of Economics
PA
measuring success, whether in terms of profit or GDP, are not providing the correct information and signals for governments, businesses and other organisations to take the right decisions, given the immense and unprecedented challenges we face in the 21st century. It is clear to me that if we are to create the sustainable economy we so urgently need – one that provides a better life for all whilst also preserving the planet’s natural capital from which we can draw an income – we need new ways to define and measure success for businesses, governments and the global community. ’ It is true that policymakers in the public and private sector often use relatively narrow ways of measuring economic success and outcomes. But the very simplicity of measures such as Gross Domestic Product or GDP per head means it will inevitably be tempting for national leaders and economists to use them. Sustainability and wellbeing are valid objectives and of the utmost importance, but they are much harder to measure with precision than, say, GDP. International organisations, notably the OECD, produce oft-quoted league tables of countries showing GDP, tax payments and other ‘hard’ measures. The key issue for global accountancy is to help in delivering better measures, techniques and more integrated forms of presentation that would deliver the kind of wider understanding the Accounting for Sustainability project is seeking to promote. Accountants are often accused, perhaps unfairly, of publishing accounts in what is, for most people, a foreign language. While international standards in accountancy are beneficial when it comes to allowing people to make fair comparisons from country to country, they rarely assist public comprehension of the broader picture. In developing better options for public engagement, accountancy has an opportunity that goes beyond its traditional ‘back room’ role. The quality of financial reporting in many governments is slowly starting to improve, with the work of the International Public Sector Accounting Standards Board (IPSASB). But it should also be possible to influence debate about a wide range of issues. Perhaps some members of the profession would prefer to stay out of the limelight. But
10 PUBLICFINANCEINTERNATIONAL.ORG • WINTER 2014
p08_11_HRH.indd 10
17/10/2014 15:57
INTEGRATION, INTEGRATION Public sector organisations already publish a wide range of data on their impacts and performance. But one of the key challenges for the public sector is to use integrated reporting to understand and clarify how all this information is connected. Integrated reporting promotes a more cohesive approach to corporate reporting. An integrated report benefits all stakeholders interested in an organisation’s ability to create value over time. CIPFA has undertaken analysis of the issues involved in applying integrated reporting in the public sector. With the International Integrated Reporting Council, it has created a new diverse and inclusive international Public Sector Pioneer Network. This will address key sector-specific points, and facilitate the application of integrated reporting to public sector bodies. Commenting in advance of the network’s launch in November, Bertrand Badré, managing director of the IIRC and World Bank chief financial officer, said: ‘Integrated reporting does more for an organisation than just facilitate the creation of a holistic report of overall performance. It fosters and embeds integrated thinking – everyone has a common understanding and speaks the same language.’ www.cipfa.org/policy-and-guidance/articles/integratedreporting-public-sector-pioneer-network
this would risk having no voice in the development of policy. It would also open the profession to accusations that it was not playing a full role in civil society. Lawyers, doctors and other leading professions have long developed a public policy role. If accountancy accepted a wider role, there would be significant potential advantages for accountants and, indeed, for the quality of debate. Thus, taking up Prince Charles’s challenge in relation to the environment and sustainability, can the accountancy profession globally find new ways of connecting with a wider public? Are there ways of publishing robust data that can be ‘translated’ into forms which journalists, bloggers and students can more easily access? Science and history have made major steps in recent years in communicating complex ideas to a wider public. Academics are under ever-greater pressure to achieve public engagement and impact. The new Integrated Reporting Framework has a different, more rounded approach to reporting the broader impacts on organisations. But perhaps accountancy could also use the kind of encouragement provided by high-profile supporters such as Prince Charles to broaden the appeal of their profession. Everyone with an interest in the environment must worry about the production and presentation of credible statistics about changes in the climate and, in the longer term, about how business investment decisions may be effected. Few spheres of contemporary human activity generate such controversy and, frankly, disagreement. But the stakes are very high. Inappropriate decisions and investments will be made if society does not have the right information presented in a consistent and credible way. Accountancy across the world has a key role to play in delivering on these objectives. Encouragement from outside the profession can be a valuable catalyst for change. ●
WHAT IS A4S?
The Prince of Wales established A4S to catalyse action by the finance and accounting community to support a fundamental shift to a sustainable economy A4S works to: ● Demonstrate the business case, increase engagement and build capacity to enable the financial and accounting community to play a leadership role. ● Develop the systems, tools and guidance to enable organisations to integrate environmental, social and economic performance into financial decision-making, accounting and reporting. ● Facilitate the creation of an enabling environment for change through a shift to sustainable capital markets, regulatory and reporting environments. A4S formed the Accounting Bodies Network – an international group of 20 accounting institutes, who have committed to five principles: ● Influence and inform: Promoting accounting for sustainability and 'integrated reporting'. ● Lead by example: Embedding accounting for sustainability within their organisations’ strategy and operations. ● Drive thought leadership: Increasing understanding on accounting for sustainability. ● Collaborate: Sharing learning and experience for better accounting for sustainability. ● Incorporate accounting for sustainability within training and professional education for employees, suppliers, students, members. The A4S CFO Leadership Network has five project groups: managing uncertainty in decision-making; integrating sustainability into capital expenditure decisions; valuing natural and social capital; investor engagement; and quick wins. www.accountingforsustainability.org/
WINTER 2014 • PUBLICFINANCEINTERNATIONAL.ORG 11
p08_11_HRH.indd 11
17/10/2014 15:57
T
he Greek economy has been in the spotlight, or is it the cross hairs, since the government’s misreporting of its financial performance triggered the sovereign debt crisis. The consequences have been extreme. They include huge losses (euphemistically ‘haircuts’) imposed on investors in Greek debt, drastic cuts in public services and social dislocation brought about by painful austerity. High unemployment rates, especially for young people, persist. Without sustained economic growth this situation will not be remedied. The media, ratings agencies and international organisations have failed to adequately address the accounting origins of the crisis. It has remained the ‘elephant in the room’ when the Greek economy and the need for reform is discussed. The recommendations of the European Parliament’s economic and financial affairs committee in 2011, that all member states should adopt the International Public Sector Accounting Standards within three years, was rejected for a process that, three years later, has not even resolved a path forward, let alone taken steps along this path. Yet better public sector accounting and financial management enables greater economic growth. The importance of economic growth lies not in the numbers, but in the impact on individuals and society as a whole. It determines a society’s ability to meet the needs of its citizens, whether safety and security, health or education. It is especially important for avoiding the adverse social consequences of high and persistent unemployment, especially youth unemployment, associated with a stagnant or declining economy. It might have been expected that an accounting failure by a sovereign government, with huge national, regional and global ramifications, would have generated a momentum for reform. But, even in Greece, there have been no serious steps to improve accounting. The troika imposed hundreds of reform requirements, but did not require the Greek government to move its accounting, budgeting and financial management to an internationally recognised accounting basis. Lack of accounting reform leaves the financial position of Greece as opaque as it was before the crisis. Damage to the economy and society was not confined to Greece – the consequences were felt throughout Europe and, through the highly interconnected international financial system, around the world. Better accounting in Greece would lead to economic growth, but in all countries better quality numbers enable better decisionmaking and enhanced accountability. Transparency acts to inform voters and constrain decisions that have unsustainable financial consequences. While the relationship between good numbers and good decisions is universal, Greece provides the most dramatic example of the damage that can be done by poor accounting and weak financial management. Greece is commonly cited as having a government debt: GDP ratio of 175%. The perception that this is an extraordinarily high debt burden impacts on the Greek economy in a number of ways. However, the 175% is based on the Maastricht Treaty, which uses the nominal or face value of debt. In other words, it does not reflect the time value of money or that restructuring pushed out the maturity of Greek debt significantly and also reduced the interest payable. Imagine the consequences if Greece was seen to have a debt level significantly less than Ian Ball is chair of 60%. That would be the result if IPSAS CIPFA International (or International Financial Reporting
Standards) were used to measure debt. A government with a debt: GDP level of less than 60% would attract more investment, achieve more favourable borrowing terms, and have both greater ability to borrow and greater scope to invest. There are a number of ways this would flow through into economic growth. First, Greece would become a more attractive country in which to invest. This would be reinforced if it were accompanied by a credible undertaking from the Greek government that it was implementing IPSAS in its own accounting. Greater investment means greater economic activity means more jobs. Second, because Greek government borrowing rates would decline, companies would pay less for loans. As they currently pay significantly more than rivals in other European countries, they would become more competitive. Small- and medium-sized enterprises would also be able to borrow more easily and at lower interest rates, improving profitability. Households would have lower debt costs and be able to borrow more. Both these effects would have positive economic effects and encourage job growth. There would be more finance for housing construction and development, increased activity in the building sector and, again, more jobs. Greece is unusual. The impact of its accounting failure was dramatic. Fixing this problem can have a dramatic result, if the Greek government accounts for its debt according to international accounting standards and signals the intent to be transparent. But my key point is not about Greece, which is simply an extreme example of a common threat to economic growth. That threat comes from governments not imposing on themselves the same
BY IAN BALL
DON'T MENTION
THE D
12 PUBLICFINANCEINTERNATIONAL.ORG • WINTER 2014
p12_13_greece.indd 12
17/10/2014 16:02
FA ST FACTS
GREEK DEBT BURDEN The perception:
175
PERCENT of GDP, based on Maastricht treaty
requirements for transparent financial statements, prepared in conformance with international accounting standards, that they impose on companies. Without that information, it is impossible for them to meet acceptable standards of financial management. Governments conduct a significant proportion of economic activity in most countries, and to have decisions in a major sector made without good financial information necessarily constrains economic growth. CIPFA, with the International Federation of Accountants, has long advocated the case for improved accounting and financial management by governments, and progress is being made. That progress is aided if professional accounting organisations around the world both press for reform and are equipped to assist their gov g overn ernme men men nts. C IPFA IPF FA s institute-to-institute insti in stitut st sti tute tut e to to inst inst nstitu itute itu tute te offer,, presented prese pr en nttted nte ed in in its itss governments. CIPFA’s Tak T akingg responsibility resp re sp spo ponsi n ibil bility ityy report, repor re por port, o t, offers support su suppo uppo pport rt to o all al professional professi pr profe ofe of f ssi ss on ona nal accounting acco ccount untting Taking org o rgani anisat sat attiion on ns that that wo would uld li like ke to dra aw on on its its res re ources our ces es an nd e xperti xpe r sse. rti e ● organisations draw resources and expertise.
The reality:
60
PERCENT or less of GDP, if measured using IPSAS
The damage done to the Greek economy by poor accounting methods remains the EU's elephant in the room
DEBT p12_13_greece.indd 13
17/10/2014 16:02
K
eeping an official, independent eye on the finances of governments and state enterprises can seriously damage your health. At worst, in parts of the world, rigorous scrutiny of officialdom for the public good can mean a knock on the door late at night, an overt threat to an accountant and their family – and, perhaps, the auditors paying the ultimate price for their probity. While in much of Europe, North America and Australasia the public auditor is a widely respected pillar of democracy, Caroline Gardner knows that in some countries the spending watchdog can be reduced to pariah status by fraudulent and corrupt regimes. As chair of an International Federation of Accountants task force examining how accountants cope with the challenge of corruption – she boils it down to how the profession should react to ‘basically illegal acts’ – Scotland’s auditor general is at the sharp end of a global campaign to clean up unsavoury governments and, thus, enhance democracy and financial accountability. ‘The starting point is serving the public interest ... how to pursue a suspected illegal act if they come across one and, at the end of the process, if they should override their normal duty of confidentiality because the public interest would be better served in doing that,’ Gardner says. This, she explains, is ‘a very sensitive issue because of the complexities of knowing when the public interest would be served in breaching confidentiality. More importantly, are safeguards in place to protect the interests (of accountants) professionally and personally when they do that?’ She answers that question in the negative, knowing that blowing the whistle can have life-threatening implications in parts of the world. ‘In developing economies they, and their families, might find themselves facing personal harm. What we know is that in some parts of Asia, and post-Soviet republics, where the rule of law doesn’t work very much, there are real concerns that placing a requirement on professional
accountants to speak up – entirely understandable in the public interest – may not be practical.’ So for someone doing the job in an unnamed ex-Soviet republic, Asia or elsewhere, could you say that being an accountant might not only damage your health but also prove life-threatening? ‘Absolutely,’ replies Gardner, without hesitation. ‘And we’ve heard some very strong evidence that this is the case from countries in that part of the world – Asia, for example – and we’ve had to take it seriously and say “what is reasonable for an ethics code for professional accountants and how does it fit in with the responsibilities of legislators, regulators, the OECD, which has done some great work on bribery and money-laundering? Can we play our part in that?” ’ At worst, then, could that mean an accountant being told to lay off a particular government or state agency – or, more alarmingly, face a knock on the
door and armed men threatening the auditor's personal safety? ‘Absolutely,’ replies Gardner. ‘Very much so.’ As part of the anti-corruption task force she’s leading, Gardner tells of round-tables held around the globe – in Washington, Brussels and Hong Kong, for instance – to hear on-the-ground experiences. The latter location was particularly revealing. ‘We heard from attendees from around that part of the world very strong concerns about the personal consequences for accountants of breaking confidentiality (in the wider public interest) ... where there isn’t a strong judicial system and there isn’t proper protection for individuals in place,’ she says. ‘Mainland China was one of the places where concerns have been raised – but not the only (East Asian) country.’ Gardner's day job is perhaps less dramatic, but nonetheless challenging. She has been in charge of Audit Scotland for over two years and, thus, scrutinises the Scottish Government’s block grant of
GARDNER WORLD BY PETER HETHERINGTON
IMAGES CHRIS WATT
Accountants live dangerously when they challenge official corruption around the globe. Caroline Gardner, Scotland’s auditor general, is leading a clean-up campaign
14 PUBLICFINANCEINTERNATIONAL.ORG • WINTER 2014
p14_16_gardner.indd 14
17/10/2014 16:32
about £33bn – and she has a long record of public service. Moving to Scotland in 1995 to set up new National Health Service responsibilities for the local spending body, the Accounts Commission, she took a 12-month secondment in 2010 to become chief financial officer of the Turks and Caicos Islands, a British Overseas Territory, after direct government was suspended in 2009 following a financial crisis compounded by corruption. ‘I was asked to go there because the public finances had broken down as ↘
‘When is it reasonable for accountants to break confidentiality in the public interest without putting themselves at risk?’
ER’S
p14_16_gardner.indd 15
17/10/2014 16:32
a result of serious corruption as well as the global financial crisis,’ she says. ‘I guess what I learned from it is how critical public confidence in the good management of money is for a decent society – that we had reached the stage where tax collection was crumbling, people didn’t feel they needed to pay their taxes, because other people weren’t – and that meant there wasn’t enough money to pay for vital public services like education, policing and so on. ‘There was a real risk of a spiral down into huge social problems and a longer-term economic collapse. The priority really was to put some of the basics back in place.’ So, a new tax collection system was introduced, debts were refinanced and accountability restored. Nearer to home, while much of mainland Europe is relatively free of fraud and corruption in local and national government, Caroline Gardner points to other concerns which have exercised both the European Union and the European Central Bank, which services the euro currency zone (of which the UK is not a member). As a member of the International Ethics Standards Board for Accountants, which has membership in about 160 countries, she thinks Scotland – and the rest of the UK – fares pretty well ‘partly because we’ve got good governance in place’. But she cautions: ‘That’s not to say things can’t go wrong, and audit plays an important part in making sure the frameworks are in place and responding when they come across something that’s not right.’ While Scotland has had a strong element of self-government since 1999 (when Audit Scotland was created) and a Scottish National Party government for seven years, the country is being given new tax-raising powers under legislation approved in 2012. By 2016, that will see the Scottish Government being allowed to raise or lower income tax by 10p in the pound. A new tax authority, Revenue Scotland, will be created next year to prepare for the change. Audit Scotland, Garner says, will have to be vigilant. ‘What I would say is that the changes we’re seeing in Scotland at the moment, both pressures on spending and the greater powers that will come, we can’t take for granted and that [means the] need for good financial management, good governance, good transparency in the public finances if we want to make proper use of the new financial powers.’ Further devolution of powers from the
FA ST FACTS
£33 $18.5 BILLION The size of Edinburgh's annual block grant from Westminster, which is scrutinised by Audit Scotland
UK government – promised by the three main UK parties before Scotland rejected independence on September 18 by a 10% margin – could place greater pressure on Audit Scotland; indeed the SNP government will, assuredly, press for full fiscal autonomy within the UK over the coming years. Gardner, a former CIPFA president, is nevertheless keen to put the international problems of financial mismanagement, fraud and corruption into context. What about, for instance, some Mediterranean countries, not to mention the odd city in the US? ‘We do see significant fraud in the developed world both in government and the corporate sector. In Spain and Greece there’s clearly an element of fraud – but there’s also an element of people just not being transparent,’ she says. There follows a cautionary tale of how devolution can go wrong – namely, in regionalised Spain. ‘The history of the financial crisis demonstrated first of all that places like Spain got into real trouble not because of the Spanish government mismanaging its finances, but because it didn’t have a clear picture of the commitments the regional governments had entered into,’ she warns. ‘There’s an important lesson there for countries like Scotland in making sure they have
BILLION The amount the city of Detroit owed creditors (£11.4bn) when it filed for Chapter 9 bankruptcy protection
got the whole picture of public finances as they take on new taxation and borrowing powers. We’ve also had pretty good evidence from Greece that the tax collection system wasn’t as robust as it needed to be.’ And, of course, across the Atlantic there’s bankrupt, partly-abandoned Detroit, the ultimate municipal basketcase which went bust in 2012 owing about $18.5bn (£11.4bn) to its creditors (the largest US city to file for Chapter 9 bankruptcy). ‘Some of that was mismanagement and some was clearly corruption,’ says Gardner as she rattles off the impact: local pensions cut dramatically, public services at breaking point, and law and order similarly at risk of breaking down. From parts of Europe to the US, she laments: ‘They’re all examples of countries within the developed world, where you might have expected the basis of good governance and financing to be in place, where things have gone badly wrong.’ At the WCOA conference in Rome, she hopes they will at least create a framework to guide professionals ‘on how best to serve the public when they encounter illegal acts. When is it reasonable for accountants to break confidentiality in the wider public interest without putting themselves at risk?’ Answers, please. ●
16 PUBLICFINANCEINTERNATIONAL.ORG • WINTER 2014
p14_16_gardner.indd 16
17/10/2014 16:33
global experts in counter fraud Protecting the public purse through the prevention, detection and recovery of fraud is a constant and ever growing challenge for organisations around the world. To help meet this challenge, the CIPFA Counter Fraud Centre has developed two new qualifications: The CIPFA Accredited Counter Fraud Specialist (CACFS) The CIPFA Accredited Counter Fraud Technician (CACFT) The CIPFA Counter Fraud qualifications are ideal for those wanting to strengthen skills, knowledge and expertise within Counter Fraud, and gain an accredited qualification from CIPFA. The qualifications are accredited by the University of Portsmouth and Counter Fraud Professional Accreditation Board, leading experts in fraud management.
Exclusive CIPFA Counter Fraud Centre CIPFA has taken the lead on global counter fraud and anti-corruption and launched the CIPFA Counter Fraud Centre in July 2014 – the UK’s first national centre of excellence for counter fraud. Working with the Department for Communities and Local Government (DCLG), the National Crime Agency (NCA), Cabinet Office and other agencies, we are dedicated to providing training, tools and ideas to shape the future of counter fraud and anti-corruption around the world.
For more information on the CIPFA Counter Fraud Centre: visit: www.cipfa.org/counterfraudcentre or email: counterfraudcentre@cipfa.org
p17_PFIntOCT14.indd 1
20/10/2014 16:59
Africa is still rising, just more slowly, says the billionaire behind an index that measures its annual progress. And now it's got Ebola to contend with too
M
o Ibrahim concedes that information is not ‘sexy’. But it is very important, he stresses. ‘You cannot fly a plane without information. How can you run a country without information?’ His observation serves as a neat summary of what the Mo Ibrahim Foundation’s annual governance index is trying to achieve: the provision of good quality, reliable information to help governments and policymakers do their jobs better – and to give citizens a tool to hold governments to account. According to the foundation’s definition, ‘governance is the provision of public goods and services that the citizen has the right to expect from his or her state and that the state has the responsibility to deliver to its citizens’. The Ibrahim Index of African Governance (IIAG) measures governance across 52 African countries and against four broad categories: safety and rule of law; participation and human rights; sustainable economic opportunity; and human development. Each of these categories is further divided into sub-categories covering areas such as national security, gender, public management, infrastructure, education and health. Underpinning these are 95 indicators on everything from digital connectivity to access to water. The public management sub-category, for example, is informed by outcomes against 10 indicators including budget management, fiscal policy, revenue
IBRAHIM: OUT OF AFRICA BY VIVIENNE RUSSELL
Nairobi by night. Kenya ranks 17th in the governance index, up 4.1 points over the past five years
18 PUBLICFINANCEINTERNATIONAL.ORG • WINTER 2014
p18_21_mo_nigeria.indd 18
17/10/2014 17:07
AL AMY/ C O R B I S
collection and statistical capacity. Progress against these categories is captured and distilled to give each African state an overall score out of 100. At the top of the table is Mauritius, with a governance score of 81.7; at the bottom is Somalia with just 8.6. Now in its 14th year, the IIAG has become a ‘very important reservoir of data’, Ibrahim says. The 2014 index shows that, overall, governance in Africa continues to improve, although the pace of improvement has slackened off slightly over the last five years when compared to the preceding five-year period. ‘We should do better,’ says Ibrahim. But the genial billionaire is keen to stress that there is good news out of Africa too. ‘The greatest improvement in governance has happened in some
p18_21_mo_nigeria.indd 19
‘There is good news too. The greatest improvement has happened in some very low-ranking countries’
very low-ranking countries, which is interesting. ‘Côte d’Ivoire [40 in the index] is improving hugely, followed by Guinea [42], Niger [29] and Zimbabwe [46]. This is improvement from a low base, so we need to understand that. ‘But what is interesting about this improvement is it comes after a period of negative trends. These countries were going down and then, somehow, they started to move up.’ Conversely, the continent’s strongest performers – Mauritius, Cabo Verde, Botswana, South Africa and Seychelles have dominated the top of the index since its inception – are beginning to show weaknesses in some areas, he notes, so the picture is mixed. Ibrahim, a Sudanese-born businessman who made his fortune with the African mobile phone company Celtel, started his foundation in 2006 to foster both governance and leadership across the continent. He has recruited an impressive and international board, which includes former Irish president Mary Robinson, social and political activist (and Nelson Mandela’s widow) Graça Machel and, the newest member, Pascal Lamy, the Frenchman who led the World Trade Organization for eight years. Ibrahim is clearly passionate about Africa and its problems but also its possibilities. He identifies strongly and personally with the continent, talking continually about what ‘we’ need to do, not what Africa should do. The 2014 index emerged in the early shadow of the Ebola epidemic, which has gripped the west African nations of Sierra Leone [25], Liberia [31] and Guinea [42]. The outbreak reflects the pressing need to build robust health systems and institutions, Ibrahim says. ‘It is not a coincidence that the three countries which are most affected are all really fragile countries coming out of conflicts, with severely limited ability to deliver an efficient health system. ‘In countries with more resilient systems, like Senegal [9] or Nigeria [37] they’ve managed to contain Ebola, so it is possible to deal with it if you have the capacity.’ He also displays some frustration with the way the Ebola outbreak has tarnished the reputation of the entire continent. ‘We need to be rational,’ he says. ‘I hear the tourist board of South Africa is concerned because so many people are
17/10/2014 17:08
• ALGERIA 54.4
81.7 76.6 76.2 73.3 73.2 70.3 68.2 66.0 64.3 62.3 60.4 59.7 59.4 58.8 58.2 57.6 57.4 56.7 56.1 54.4
1.3 1.3 1.3 0.5 2.7 1.1 1.6 2.2 4.6 3.8 4.6 4.4 3.1 2.9 -1.7 1.9 4.1 -3.5 1.0 1.4
►
Mauritius Cabo Verde Botswana South Africa Seychelles Namibia Ghana Tunisia Senegal Lesotho Rwanda São Tomé & Príncipe Zambia Morocco Tanzania Malawi Kenya Benin Uganda Algeria
► ►
• TUNISIA 66.0 CO 58.8 8 • MOROCCO
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
5yr CHANGE
►
‘The three countries most affected by Ebola are all coming out of conflicts, with severely limited ability to deliver an efficient health system’
The index each year measures governance in 52 African nations using 95 indicators under four categories: safety and rule of law; participation and human rights; sustainable economic opportunity; and human development
SCORE /100
► ►
RANK COUNTRY
2014 Ibrahim Index of African Governance
► ► ► ► ► ► ► ► ► ► ► ► ► ►
TOP 20
• CABO VERDE 76.6 • ERITREA 29.8
• SENEGAL 64.3 • CHAD 32.3 • GUINEA-BISSAU 33.2
• BENIN 56.7
• GHANA 68.2
• SOMALIA 8.6 • CAR 24.8 • UGANDA 56.1 • KENYA 57.4
• São Tomé & Príncipe 59.7
• RWANDA 60. 6 WAND ND ND ANDA AN DA A 60.4 • TANZANIA 58.2 • SEYCHELLES 73.2 • ZAMBIA 59.4 • MALAWI 57.6 • BOTSWANA NA 76.2 NA 76 2 • NAMIBIA 70.3
MAURITIUS • 87.1
• LESOTHO 62.3
-6.8 2.5 -2.8 -6.2 0.5
►
33.2 32.3 29.8 24.8 8.6
• SOUTH AFRICA73.3
►
5yr CHANGE
► ►
SCORE /100
►
cancelling holidays. Now, Paris is closer to Guinea than South Africa. Is anyone cancelling flights to Paris because of Ebola? Don’t be crazy. ‘Quarantining all of Africa because of Ebola is really a serious matter. And remember, every day, more people die of malaria than Ebola.’ BOTTOM 5 Critics of the index say it has its limitations. They note that of the RANK COUNTRY top five performers, only South Africa [4] has a significantly large 48 Guinea-Bissau 49 Chad population and economy and the 50 Eritrea index therefore fails to reflect the 51 CAR 52 Somalia per capita experience of ordinary Africans. Good governance is going to be easier to achieve in tiny island GE T T Y nations like Mauritius [1] and Cabo Verde [2] than in huge and complex economies like Nigeria. Ibrahim is receptive to these criticisms. He reveals that the foundation intends to start looking at the data in population terms, with a view to producing a separate report. For now, the index shows that the greatest driver of governance improvements in recent years is not the African economic miracle we all hear so much about, but improvements in citizen participation and human rights. ‘I think that’s interesting,’ says Ibrahim. ‘When we cause a fuss about Africa rising and economic opportunity, we look at the data and see something slightly different.’ So is the narrative of ‘Africa rising’ a misrepresentation of the
reality? Ibrahim shifts into philosophical mode. ‘Many years ago people said Africa is a basket case. We stood up and said, “No, Africa is not a basket case. Africa has some problems but it also has opportunities and resources”. ‘Nowadays, people say Africa is the best thing since sliced bread, and that if you want to make money, it’s the new wild west. Just go there. It’s a gold rush. ‘We say this is also a misrepresentation. The fact is Africa has always been a good place to do business. Africa is moving forward. Africa is rising and has always been rising, but,’ he pauses for effect… ‘rising slowly.’ ●
20 PUBLICFINANCEINTERNATIONAL.ORG • WINTER 2014
p18_21_mo_nigeria.indd 20
17/10/2014 17:08
The economic prospects of young Africans will be helped by better governance of public finances
BY SY LVA OKOLIEA B OH
IPSAS: ready or not?
are at the implementation stage. Compliance means that the financial statements of an entity meet the requirements of IPSAS in all material respects. It happens first in individual economic entities. Then it is rolled up to the next level of controlling entity in the form of consolidation in line with IPSAS 6: consolidated and separate financial statements. In most of Africa and the developing world, semi-autonomous and extrat the dawn of the millennium a bouquet of public budgetary units – called parastatals in financial management reforms were prescribed Nigeria – are ahead of central, state or to improve governance, strengthen institutions local government in accounting and and engender transparency and accountability in reporting compliance. They are usually countries in transition. smaller, more automated and attract These included budgeting, budget execution, more competent, better-paid staff. accounting and reporting and oversight. With the So it may be a good idea to create a assistance of the international donor community group within the IPSAS implementation led by the World Bank and International Monetary team to focus on parastatals and deliver Fund, International Public Sector Accounting them as quick wins; early adopters and Standards became the recommended default choice for public sector change agents to whom the rest of the financial reporting in many countries. public sector should look up. The perception and acceptance of IPSAS has varied from country Line ministries and other nonto country – ranging from indifference in the US to uncontrolled autonomous budgetary units are harder excitement in Africa. nuts to crack due to their size and There are contradictory statistics about which countries have slowness to adapt to change. adopted or complied with IPSAS. But when can a country be said The second level of IPSAS compliance is to have adopted IPSAS? Answering this question untangles a web consolidation at government level. This is, of misrepresentation and involves making a distinction between without doubt, the most challenging in adoption, implementation and compliance. every country. Adoption means that a country or public sector entity First, there is a disparity in accounting accepts IPSAS as its financial reporting framework, through the bases used by component entities. Second, pronouncement of a competent authority or by an act of parliament some will operate under constitutional or both. It is a legal or binding commitment. and legal provisions that are at variance Implementation starts from the moment a country or economic with IPSAS requirements. And, third, entity takes concrete steps to apply IPSAS methodology in recording there may be political and other interests and reporting financial data. that will resist bringing them into the This usually takes a considerable amount of time and resources. IPSAS net. According to a survey of 21 African countries published by KPMG, So, when is a country IPSAS compliant? Nigeria, South Africa, Kenya, Rwanda, Tanzania, Uganda and Kenya The best answer is one that is correct in all circumstances: ‘It depends.’ That a country is IPSAS-compliant may mean that: some economic entities are producing IPSAS-compliant financial statements; or, some economic entities are consolidating their statements in line with IPSAS; or, the country is producing consolidated whole-of-government IPSAS-compliant general purpose Sylva Okolieaboh is financial statements. deputy director in the A casual survey suggests that few countries will achieve the latter in the near future. Office of the Accountant So focusing on individual entities first – and letting consolidation come last – would seem to General of the make sense. IPSAS implementation should never be seen as an all-or-nothing project. ● Federation, Nigeria
African nations are enthusiastically trying to strengthen public financial reporting, but challenges remain to implementing international accounting standards
A
GET T Y
p18_21_mo_nigeria.indd 21
17/10/2014 17:09
W
ACT GLOBALLY, TH NK LOCALLY
ar and political upheaval on multiple fronts could yet push the world economy back into the recession from which it has just emerged. But George Atalla, recently appointed leader of government and public sector at consultants EY, takes a cautiously upbeat view of the global economy’s prospects. ‘I’m certainly optimistic about the long ••••••••• •••••••• ••••••••• term. I don’t think there is any other •••••••• ••••••••• •••••••• choice,’ he says. ‘But I think there are some ••••••••• •••••••• ••••••••• challenges that need to be tackled more •••••••• ••••••••• •••••••• ••••••••• aggressively perhaps than they have been •••••••• ••••••••• •••••••• in the past.’ ••••••••• •••••••• ••••••••• Top of the list of these challenges are •••••••• ••••••••• •••••••• ••••••••• the rising costs of healthcare, pensions •••••••• ••••••••• •••••••• and other entitlements. But Atalla sees ••••••••• •••••••• growing inequality as an equally serious problem. ‘Recessions have a way of affecting those who are disadvantaged perhaps even more than those who are not disadvantaged,’ he says, citing high rates of youth unemployment as one of the most persistent and damaging consequences of the financial crisis of 2007/08. Older people have also been badly hit by fallout from the crisis, he says. Low interest rates may have stimulated investment and helped to accelerate economic growth, but they have left many retirees struggling to survive on interest from their savings. Atalla believes that entrepreneurship could be a big part of the solution to the problems facing both young people and the over-60s. EY has worked with governments of G20 countries to identify BY ANAT ARKIN IMAGE AKIN FALOPE and remove obstacles to young people starting their own businesses, including red tape and lack of access to funding. A fluent English, Arabic and French speaker, Atalla is originally The firm has also looked at self-employment for people who are from Lebanon, where he studied civil engineering at the now retiring or have recently done so, seeing their contribution American University of Beirut. He did his graduate studies in as critical to increasing productivity and economic growth. the US and holds MScs in transportation from Northwestern EY’s proposals for unleashing the potential of this demographic University and industrial engineering from the Georgia Institute include offering appropriate training and support, improving of Technology and an MBA from George Washington University. access to credit and making self-employment more attractive – Although Atalla started as a transportation engineer, early in his for example, by including start-up support in phased retirement career he began working on the economic feasibility of engineering schemes. projects. ‘That led to my involvement with the organisational, These measures are needed most urgently in advanced transformational side of the business and was also my introduction economies with rapidly ageing populations. But Atalla’s interests to working more closely with governments,’ he says. and experience – like those of EY – are not confined to the G20 Before joining EY, Atalla worked for 17 years at Booz & Company, developed economies. In his career to date he has worked with most recently as a partner and vice president heading the firm’s governments in more than 30 countries on everything from government and public sector practice across the Middle East and economic policy to tax modernisation – and anything else that, Africa. Home for Atalla is Washington, but his new role is likely to as he puts it, ‘either makes money for government or draws see him spending much of his time away from the US capital. EY’s resources away from government’.
We do the things that allow governments to do things better, George Atalla, the new leader of EY’s government and public sector practice tells PFI
22 PUBLICFINANCEINTERNATIONAL.ORG • WINTER 2014
p22_23_atalla.indd 22
17/10/2014 17:29
‘Whether you are in a mature economy or an emerging economy, people want to know how their money is spent’
government and public sector practice is one the firm’s largest, employing about 7,000 people in more than 100 countries. Its activities include setting economic development agendas and helping government deliver more effective services. ‘So we do the things that government does but we also do the things that allow governments to do things better, which entails for, example, introducing new technologies or improving the quality of services,’ Atalla says. The practice is also heavily involved in public financial management. While the economies of the countries it works with vary in size, structure and maturity, Atalla argues that the PFM issues they face are essentially the same. He points to the budgetary pressures facing governments across the world as they are asked to deliver more services but without additional resources. ‘There is also increased demand for transparency all around the world,’ he says. ‘Whether you are in a mature economy or an emerging economy, people want to know how their money is spent.’ That said, he argues that different issues take priority in different parts of the world. So while governments in mature economies are preoccupied with the need to balance budgets and deliver the high-quality services their citizens increasingly expect, Atalla believes that transparency is the number one
issue in emerging markets. He sees a key role for International Public Sector Accounting Standards in addressing this issue, with standardised rules making it easier for external auditors to look at a government’s budget accounts and draw the right conclusions from them. Less obviously, introducing these standards can in itself lead to greater transparency. ‘Each time you roll out a new standard, you are putting in a disciplined process for how information is collected, compiled and disseminated,’ says Atalla, who argues that these processes are often as important as the data that come out of them. ‘If I publish data and you don’t know how I got it or how I collected it, then it will not have the same value.’ Transparency, in turn, can have a potentially positive and far-reaching impact on the economy as a whole. ‘Robust and transparent public finance systems will increase the public’s confidence in government, and contribute to the establishment of an effective investment climate, which eventually leads to higher economic growth,’ says Atalla. But he points out that as with any new way of doing business, the introduction of IPSAS carries costs – not only those associated with bringing in new technology but the additional costs of running two systems in parallel until the new one has bedded in and of training people to use it. Those costs and the difficulties that governments and public bodies have when it comes to implementing the new standards vary, a reflection of differences in their size, technological maturity and the capability of their people. So, as with much else that EY’s government and public sector practice does, helping clients implement IPSAS involves taking best practice from one country and deploying it elsewhere – while remaining sensitive to local conditions and local needs. Atalla’s role is to make sure that the practice has the capabilities to perform this balancing act. ‘The idea is for us to act very globally but at a very local level,’ he says. ‘That really is the main part of my role – to ensure that we have that ability to bring in global resources and expertise but apply them locally wherever there is a need for them.’ ●
WINTER 2014 • PUBLICFINANCEINTERNATIONAL.ORG 23
p22_23_atalla.indd 23
17/10/2014 17:29
BY ROB WHITEMAN
A
llan Ahlberg, with his illustrator wife Janet, has been one of the most successful writers of children’s books in the last 100 years. They created more than 80 books including The Jolly Postman, which sold over 6 million copies, and Burglar Bill, the tale of an artful kleptomaniac who ultimately returns all he’s stolen to the rightful owners. In July, Ahlberg was chosen for the inaugural Book Trust lifetime achievement award. He was delighted, but then discovered the award was sponsored by Amazon. Turning down the honour, he pointed to Amazon’s position as ‘the UK’s number one tax avoider’. Tax fairly applied, Ahlberg believes, is a good thing, paying for schools, hospitals and, close to his heart, public libraries. Is the situation sustainable, he asked, where a company can pay as little as 0.1% tax in a country where it turns over billions of pounds? Ahlberg isn’t alone in commenting on the corrosive effect of profit shifting. ‘Spillovers’, as they’re also known, are the subject of a recent International Monetary Fund study that complements a G20/OECD initiative on base erosion and profit shifting. The IMF report contains evidence that the tax-avoiding behaviour of many multinational enterprises is having the most significant impact on developing countries, which typically derive a greater proportion of their revenue from corporate tax. Limiting adverse spillovers will only be tackled effectively by addressing weaknesses in local legal frameworks and establishing robust international systems. The IMF report concludes that the international framework is weak. While governments call for concerted international action, they often seek advantage for their economies too. In October, the European Commission released a provisional finding that private tax approvals between Apple and the Republic of Ireland, where corporation tax is a low 12.5%, were tantamount to state aid. Nonetheless the pressure for action is growing when, for example, the US government – in the case of Apple – argues that billions of taxable profits ought to be repatriated. In the Observer last month, Carl Levin, chair of the US Senate's subcommittee on investigations, wrote: ‘If the public understands the full truth of how Apple and other companies skirt their obligations, pressure will grow on elected officials to close the loopholes that enable tax avoidance.’ Levin said the EU ruling exposed corporate giants essentially shifting their tax burden onto ordinary taxpayers and leaving governments less able to fund education, national security and other priorities. The accountancy profession has an essential role to play in addressing the quality of public financial management. We have considerable expertise in designing, implementing and operating financial information and management systems. It is in our power to lobby for the necessary reforms to deliver the global and national systems, transparency and good governance that are needed to limit spillovers, base erosion and profit shifting. We need to be seen to be doing the right thing in the public interest. The profession must further consider its ethical framework. In extreme cases of avoidance, even if technically the law is not broken, accountants must be seen to give balanced Rob Whiteman is chief advice. If a practice is highly questionable, executive of CIPFA or against their advice, as regulated
professionals acting in the public interest accountants arguably have a responsibility to notify relevant authorities. The profession also has a voice and a duty, not only to put pressure on governments to reform their financial management systems, but also to acknowledge that it has further to go with its own reforms so that it is trusted to act in the public interest. The prize is great because the global interconnectedness of government finance and the capital markets has never been more apparent. When poor financial reporting in the Greek government came to light, not only were banks and other lenders left with significant losses, the impact was felt globally. In the developing world, a wealth of natural resources, technological advances and exponential growth in productivity present a phenomenal opportunity, but also a profound risk from corruption. Without institutions able to deliver good financial management, reporting and transparency, the potential of these countries will be only partly realised, at huge cost to their citizens. Our profession can help countries shift from poverty to prosperity. Without good financial information and advice, policymakers and managers of public services will fail to make sound decisions, leading to poor use of public money, ineffective services and exposure to risk. Whatever the issue – transparency of government financial reporting, controlling fraud, limiting the corrosive effect of profit shifting – these are ethical questions for accountants that must not be ducked. We must work with others to bring about reforms that secure greater fairness and opportunity across all communities. Amazon’s position and defence, Ahlberg noted, is that it isn’t doing anything illegal. He felt this was less a question of law and more one of ethical behaviour and morality. So let’s hope, like Burglar Bill, with a little help from the accountancy profession, Amazon and others will see the error of their ways too. ●
There is growing evidence of the corrosive effects of profit shifting by multinational companies
DO THE RIGHT THING
24 PUBLICFINANCEINTERNATIONAL.ORG • WINTER 2014
p24_25_taxation.indd 24
17/10/2014 17:35
WINTER 2014 PUBLICFINANCEINTERNATIONAL 25 www.publicямБnance.co.uk
p24_25_taxation.indd 25
17/10/2014 17:35
Y
ou’d think the fact that people are living longer would be cause for celebration. It is on many levels: who doesn’t relish the vision of a longer life? A rapidly increasing number of us will have a retirement that lasts as long as our careers. At the same time, retirees are healthier and better educated than in previous generations. But it’s not all good news. For governments, the demographic earthquake holds serious implications for social, economic and pensions policies. With budgets stretched, and countries under threat of rating downgrades, how can they fund pension commitments and protect healthcare systems as citizens live longer? There are few easy answers. Much of the debate continues to be shaped by the legacy of the global financial crisis. While economies struggle to shake off recession and address spending deficits, policymakers have
BY JOSEF PILGER
been forced to confront the financial challenges of retirement. Governments are having to address the needs of baby boomers who expect their pensions to be paid. The time for kicking the can down the road is over. Although pension and retirement challenges have historically varied significantly within and between borders due to economic, social and political factors, there is general acceptance by industry experts, policymakers and governments of the need to rebalance pension and retirement systems in a fast-changing environment. EY recently interviewed 80 pension and retirement professionals from 18 countries across the Americas, Asia-Pacific and Europe. Our report, Building a better retirement world, found that greater transparency and learning from international pension systems are likely to challenge key industry assumptions and empower citizens in their retirement decisions. Our study highlighted five key components that will lead to more robust pensions and retirement provision: ➊ Financial adequacy. How much will beneficiaries need for their financial wellbeing in retirement? How much will governments and employers need to provide in retirement benefits to attract and retain employees? ➋ Financial sustainability. How much can governments, private sector plan sponsors, public sector entities and future beneficiaries afford to save over the long term to pay for pension and retirement benefits? ➌ Performance. How can we maximise outcomes and predictability of investments? ➍ Efficiency and effectiveness. How can we deliver promises efficiently and effectively to all stakeholders while meeting their service expectations? ➎ Political aspects. What is our pension and retirement vision? What trade-offs must be made to secure political backing? These five tenets apply to most countries, but their relevance varies around the
RETIRING GRACEFULLY Global pensions policies should be part of the solution, not part of the problem
26 PUBLICFINANCEINTERNATIONAL OCTOBER 2014 www.publicfinance.co.uk
p26_27_pensions.indd 26
17/10/2014 17:46
‘Given the political sensitivity of tinkering with benefit levels, initiatives require timely action and change in manageable steps’
world and over time. Note, though, that global similarities in underlying pension and retirement issues are increasing. Given the long lead time required to see the results of reform and the political sensitivity of tinkering with benefit levels, initiatives require timely action and change in manageable steps. Much can be learned through global collaboration. It will take diverse experience and capabilities in the assessment, decision and implementation phases of pension and retirement reforms to deliver truly sustainable retirement outcomes. Many executives are combining domestic experience and market context with international insights to rebalance and refine retirement solutions. Stakeholders face challenges in emulating innovative solutions, identifying what has worked and why, and benchmarking data. Private and public sector pension providers are learning how to protect, improve or innovate their existing business, products and services or to reduce costs. Private sector providers want to know how to grow new business or enter new markets. We identified opportunities for pension and retirement providers to help deliver social policy: ⦁ Rebalance benefit expectations with financial resources. Demographic transformation and existing pension promises are creating a financial gap for consumers and opportunities and challenges for providers and governments. The global financial crisis made concerns about funding long-term liabilities a public policy issue that will only increase in the years ahead. ⦁ Accept a new level of regulation, supervision, governance and transparency. The pension and retirement industry in many countries is as large as the banking sector or annual GDP. This growing market and the risk to social and economic stability demands a new level of political, regulatory and public attention. ⦁ Increase focus on operational excellence. Lacklustre capital market returns have forced the pensions industry to step up efforts to cut costs, improve customer delivery and service, and enhance risk management. Operational initiatives come at a substantial cost and require significant change in behaviour, infrastructure and delivery systems. They will lead to long overdue 'industrialisation'. ⦁ Find simplicity in complex systems. Low voluntary savings rates, participation of young savers and take-up or switching of voluntary solutions are indicative of a lack of engagement and understanding by beneficiaries. Improving buy-in, understanding and informed decision-making among members is vital. ⦁ Become customer-centric. Through better customer engagement, governments and providers can influence persistency, reputation, understanding and action. Providers are seeing the value of pension and retirement systems as more than a balance of payments, assets, price and product features; instead, they are focusing on delivering to customers what they want and improving the experience. In a globalised world, there is no single response as systems operate in different contexts and levels of maturity. While pension and retirement challenges vary considerably, their increasing importance demands higher quality regulation, supervision, governance and transparency. Policymakers need to ask the right questions and take stock as failure to act now may lead to the closure of essential services for some and severely limited options for most to avoid harsh adjustments. Discipline, reasoning and hard decisions Josef Pilger is EY’s will be necessary to make the retirement government & public world better, fairer and sustainable over sector pensions leader the long term. ●
WINTER 2014 • PUBLICFINANCEINTERNATIONAL.ORG 27
p26_27_pensions.indd 27
17/10/2014 17:47
T
he euro’s problems have absorbed most of the European Union’s energies in recent years. Many economists had cautioned that a common currency would not function without strong coordination and the centralisation of national fiscal policies. Yet in the early stages of economic co-operation, member countries were reluctant to give up fiscal sovereignty. The EU instead devised an elaborate system of budget surveillance and fiscal rules in the 1992 Maastricht Treaty and 1997 Stability and Growth Pact, limiting government deficits to 3% and debt to 60% of GDP in member states. Governments soon found ways to
fudge their fiscal data when struggling he deficit limit. In 2002 to comply with the tistical agency (Eurostat) the European statistical gal, which refused to challenged Portugal, ion on some €7.4bn of provide information n public enterprises, subsidies to seven including Metro Lisboa. By classifying d regularly to cover subsidies granted es as equity purchases, accumulated losses the government moved them ‘below the line’, outside the deficit, which was the key ed by the stability pact. indicator governed owing earlier revisions of Then Greece, following 004, achieved notoriety its fiscal data in 2004, sing its deficit more than in 2010 after revising e budget projection to five-fold from the ing the eurozone into an 15% of GDP, plunging existential crisis. The factors thatt led EU governments to fudge budget figures figures and how this
B Y J A M E S A LT, D AV I D D R E Y E R L A S S E N A N D J O A C H I M W E H N E R
THE LINE 28 PUBLICFINANCEINTERNATIONAL.ORG • WINTER 2014
p28_31_essay_training.indd 28
17/10/2014 18:09
‘There is no straightforwar g straightforward wayy to measure measur fiscal gimmick g gimmicks. Theyy are designed g to be unobservable’
EU members used fiscal gimmicks to fudge their deficits and mask public subsidies for years before the eurozone plunged into crisis
misrepresentation was achieved in public accounts are revealed by data for 14 EU countries from 1990–2007. This shows that: ⦁ Despite reporting rules and elaborate monitoring, two accounting components – the net acquisition of ‘shares and other equity’ and the ‘net incurrence of other liabilities’ that captures mainly ‘other accounts payable’ – were used to systematically manipulate deficit figures and evade stability pact fiscal rules. ⦁ Political incentives resulting from the electoral cycle and the state of the economy systematically undermined compliance with stability pact limits. ⦁ The scale of fiscal ‘gimmickry’ depends on the degree of transparency in the domestic budget process. ⦁ Electoral incentives to evade supervision by tampering with accounting figures reached about 1% of GDP. ⦁ Non-compliance with the stability pact was not ‘all about Greece’. Greece was an extreme case, the least transparent of the countries, but the patterns appear whether or not Greece is included in the data. In the Portuguese case, 2002 was an
election year and an example of the pattern in low-transparency countries, where fiscal gimmickry is used to increase political support. Countries with higher fiscal transparency generally observed stability pact requirements for fiscal reporting, but occasionally violated deficit limits. When larger deficits loomed in an economic downturn, low-transparency countries also systematically circumvented reporting rules using creative accounting. Despite common supranational rules and monitoring, domestic institutions, politics and economic cycles explain much of the variation in the use of such fudging exercises. Originally, according to Webster’s dictionary, ‘gimmick’ was a slang term for something that a con artist or magician had his assistant manipulate to make appearances different from reality. It retains that meaning in the fiscal context. There is no straightforward way to measure fiscal gimmicks. As deliberate attempts to mislead, they are designed to be unobservable. However, detailed work on the gap between a change in ↘
WINTER 2014 • PUBLICFINANCEINTERNATIONAL.ORG 29
p28_31_essay_training.indd 29
17/10/2014 18:09
GIMMICK JUNKIES
Portugal:
Greece:
€7.4 1 BILLION to seven public enterprises including Metro Lisboa, 2002
PERCENT of GDP average under-recording of military expenditure, 1997-2003
Gimmickry Noun, pejorative: the use of any clever device, gadget, or stratagem, esp. one used to deceive Collins Dictionaries Online
a government’s debt and its budget deficit, the so-called stock-flow adjustment, can provide telling clues. This is defined for a year t as SFAt = Dt - Dt-1 + Bt, where the first two terms are the annual change in gross debt (D) and B is the budget balance, in which a deficit is expressed as a negative number. Since an increasing deficit would increase debt, a positive SFA indicates that the change in gross debt exceeds the magnitude of the budget deficit (or decreases by less than a surplus). If countries maintain a positive adjustment over time, this may suggest that deficit data are being manipulated. Two SFA components are plausible sources of gimmicks. ‘Shares and other equity’ transactions become one source when, for instance, payments to cover recurring losses by a state-owned company are treated as equity purchases instead of current transfers. 'Other accounts payable' is another, encompassing goods and services that have been delivered but not yet paid for. With cash accounting, the accumulation of such arrears can make the deficit look
better. With the EU’s system of accrual accounting, this can be achieved through under-recording at the time of delivery, which reduces the reported deficit without causing a corresponding reduction in debt (if the bills are actually paid). That shows up as an irregularity in the annual change of other accounts payable: the SFA increases with a negative net change. For example, a 2004 audit by Eurostat uncovered such under-recording of military expenditures in Greece, averaging 1% of GDP annually between 1997 and 2003. Gimmicks are constrained by budget transparency: more transparent institutions make it easier for auditors, markets and the public to see through government decisions to misrepresent fiscal quantities. Combining data on fiscal disclosure practices from the Organisation for Economic Development and Co-operation, the International Monetary Fund and the International Budget Partnership shows that fiscal transparency is crucial in determining whether EU governments resort to data manipulation in response
to upcoming elections, deteriorating economic conditions and the imposition of fiscal rules. The data reveals a strong electoral cycle in gimmicks, diminished or eliminated by higher transparency. Each additional year left in the electoral term reduces the SFA by about 0.5% of GDP for Portugal and Italy. By contrast, if in 2002 there had been two additional years left in Portugal's electoral term, the SFA would have been about 1% of GDP lower. What produced this pattern? Abuse by accounting for subsidies as equity purchases and, to a lesser extent, the under-recording of deliveries stand out. These two components account for over half of the changes estimated in the SFA. The misuse of equity injections to disguise subsidies (and thus deficits) via the SFA became more significant after the introduction of the stability pact. Once again, this effect, like that of economic slumps and election pressures, is absent where fiscal transparency is greater. Greece was not a special case; rather, it was the extreme case of a general, and comprehensible, pattern. It seems inescapable that attempts at fiscal policy co-ordination in economic unions will struggle – or even fail – in non-transparent environments. The 2012 Fiscal Compact adopted by most EU countries emphasises complex ‘secondgeneration’ fiscal rules based on structural indicators, which are notoriously subject to differing interpretations and different methods of calculation. This approach is especially worrying, given the tremendous difficulties the EU encountered in monitoring and attempting to enforce a seemingly simple 3% deficit limit, and makes fiscal transparency even more essential. The compact places more emphasis on the deficit than the stock of debt: it requires countries to incorporate the structural balance rule, but not the limits on debt, into national law. Without major improvements in fiscal transparency, this approach may not bring about the budgetary discipline sought by the designers of the compact. Indeed, the structural balance rule could instead turn out to be counter-productive. ●
This is an abbreviated version of an essay published in the British Journal of Political Science, Cambridge University Press (October 2014). DOI: 10.1017/S0007123414000064
30 PUBLICFINANCEINTERNATIONAL.ORG • WINTER 2014
p28_31_essay_training.indd 30
17/10/2014 18:10
In Bangladesh, 170 students have so far enrolled on courses leading to CIPFA exams.
‘A consistent thread is the need to offer distinctively public sector solutions to PFM capacity development efforts’
Proudly public sector
day-to day pressures of task- and projectspecific training and to take a more holistic view of the competencies required in the Philippines. The competency model covered the five main disciplines: budgeting, procurement, accounting, auditing and cash management. It concentrated on key competencies, recognising the available time and budgetary constraints. ducation and training for public sector finance Within each discipline the necessary staff is an essential component of public financial competencies were identified at five management. levels, reflecting increasing amounts While short courses and other training initiatives of discretion about how the job is done have an undoubted part to play, there can be no and the complexity of the operating substitute for programmes designed according to the environment. requirements of International Accounting Education Since 2010 CIPFA has also been supporting Standards, delivered by qualified and experienced staff. the modernisation of the Federal Treasury Given the specialist nature of PFM education and Academy at Orozo in Nigeria. The finance training it is not appropriate to rely entirely on staff training arm of the federal government with experience and expertise in training for the private sector, had previously offered its own qualification although such staff can represent a valuable resource on which to as the main way to provide government build when designing and implementing training schemes. finance staff with the necessary knowledge In Bangladesh, CIPFA is working as part of a team supporting the and skills to operate effectively. Strengthening public expenditure management programme of the World The basis of CIPFA’s support was its Bank. The primary aim is to strengthen the capacity of the Financial suite of International Public Financial Management Academy of the Office of the Comptroller and Auditor Management qualifications and early General of Bangladesh, to train students enrolled on courses leading stages of the support programme have to examination and certification by CIPFA. To date, some 170 concentrated on equipping staff at students have enrolled. An alliance with the Dhaka training college the academy with the technical and LCBS will help to ensure the sustainability of the programme, by other skills needed to provide tuition to creating a resource to support training. students enrolled on the programme. In a novel initiative to identify the competencies required of The IPFM suite has a very distinct public PFM staff working in the Philippines government, CIPFA with sector orientation, making it particularly the support of WYG International and national consultants has attractive to the accountant general, developed a competency model for finance staff as part of the whose staff form the majority of those PFM reform roadmap. Making these reforms sustainable requires being trained. strengthening the capacity of government, a critical challenge. A consistent thread running through Like many other governments around the world, the Philippines all these examples is the need to offer and its ministries, departments and agencies have historically distinctively public sector solutions to engaged in piecemeal and largely uncoordinated training initiatives. long-term PFM capacity development Implementing the roadmap demonstrated a need to rise above the efforts. Alternatives, such as encouraging staff to take courses that develop solely commercial skills or providing courses focused on task specific technical skills, have been tried and found wanting. While it is important that government be business-like in its operations and financial management, government is not business. Providing services often involves transactions that do not result in inflows Gordon Ferrier is of economic resources to the government. Accountancy training based on bilateral flows of resources assistant director lack the capacity to deal with that particular aspect of public financial management. (international) at CIPFA There are significant commonalities, of course, between financial management in the public and private sectors. But for those elements of the business of government that are ‘proudly public sector’ there is no substitute for PFM education and training that recognises these essential differences. ●
Gordon Ferrier charts CIPFA’s support for training in developing countries
E
p28_31_essay_training.indd 31
17/10/2014 18:10
Is your organisation efficient, economic, effective and equitable? There is one code to help perfect them all
BY IAN CARRUTHERS
T
here has been significant work done on the role of good governance in successful private sector organisations. But this is less true of the public sector and some of what does exist has become dated. Yet the impact of poor governance in the public sector – particularly weak financial management – on the sovereign debt crisis is widely recognised. The International Federation of Accountants and CIPFA have jointly developed an international framework for good governance, taking account of features specific to the public sector. To fulfill its wide range of functions, the public sector must satisfy complex political, economic, social, and environmental objectives. This subjects it to different constraints and incentives from the private sector, all of which affect its governance arrangements. Public sector stakeholders are interested in issues such as whether planned outputs have been delivered and outcomes achieved and whether this has been done in an efficient, economic, effective and equitable manner. Although most public sector codes focus on delivering good practice at organisational level, the fundamentals of Ian Carruthers is governance remain CIPFA's policy and the same for an technical director individual entity
IN THE FRAME
32 PUBLICFINANCEINTERNATIONAL WINTER 2014 www.publicfinance.co.uk
p32_33_framework.indd 32
20/10/2014 10:37
MERVYN KING
Fundamentals of good governance
and the funding/service delivery system of which it is a part. The International framework: good governance in the public sector [2014] aims to be relevant not only for an individual entity, but also for the whole system – subnational, national or international. This is consistent with the philosophy described in CIPFA’s report Public financial management: a whole system approach [2010], which outlines how constituent parts, such as external assurance and scrutiny, financial reporting and audit standards, contribute to the integrity of the whole system. The framework places sustainable economic, societal and environmental outcomes as a key focus of governance processes and structures. It emphasises the importance of considering the longer term and links between governance and public financial management. The framework also highlights the need for integration in both reporting and thinking about performance, reflecting the International integrated reporting framework (International Integrated Reporting Council, 2013). Governance comprises the arrangements put in place to ensure that intended outcomes for stakeholders are defined and achieved. To deliver good governance in the public sector, governing bodies and workers must try to achieve these objectives while acting in the public interest. It requires: ⦁ Behaving with integrity, demonstrating strong commitment to ethical values, and respecting the rule of law. ⦁ Ensuring openness and comprehensive stakeholder engagement. In addition to the overarching requirements above, achieving good governance in the public sector also requires effective arrangements for: ⦁ Defining outcomes in terms of sustainable economic, social and environmental benefits. ⦁ Determining the interventions necessary to optimise the achievement of intended outcomes. ⦁ Developing the entity’s capacity, including the capability of its leadership and individuals within it.
The International framework is novel in positioning the attainment of sustainable economic, societal and environmental outcomes as a key focus of governance. Outcomes are what give the public sector its meaning and importance, and it is fitting that they have this central role in public sector governance. The focus on sustainability and the links between governance and public financial management are also very welcome – governments more than anybody must recognise the need to focus on the long term. They have responsibilities to more than their current electors; they must take account of the impact of current decisions and actions on future generations. Good governance requires a qualitative approach, not a mindless quantitative one. It requires integrity, objectivity, transparency and accountability, built on a foundation of intellectual honesty. These principles are already embedded throughout the framework, but it should be read with these fundamentals firmly in mind. The International framework will address an important and urgent need. Good governance in the public sector is essential if governments around the world are to play their proper role in the long-term development of our economies and societies, and in the protection of our natural environment.
Mervyn King is chair of the International Integrated Reporting Council and of the King Report on Governance for South Africa
⦁ Managing risks and performance through robust internal control and strong public financial management. ⦁ Implementing good practice in transparency, reporting and audit to deliver effective accountability. The framework recognises that many different governance structures exist and does not seek to replace national or sector codes. Instead, it is intended to be a reference for those who develop and set national codes for the public sector. Where codes and guidance do not exist, it will provide a shared understanding of what constitutes good governance and a powerful stimulus for positive action. The real challenge for the public sector is in implementing codes and guidance, as it is often the application that fails in practice. The supplement to the International framework underpins each principle with examples, evaluation questions and references to other sources of information. For example, it highlights
Transparency International’s work in developing international principles for whistleblower legislation. Effective governance encourages better and long-term decision making, as well as the efficient use of resources. It strengthens accountability for the stewardship of those resources. Good governance is characterised by robust scrutiny, which places important pressures on improving public sector performance and tackling corruption. The purpose of the International framework is to provide a benchmark for everyone concerned with the public sector not only to understand and apply the principles of good governance, but also to assess the strengths and weaknesses of current governance and seek to improve practice. ●
www.cipfa.org/policy-and-guidance/standards/ international-framework-good-governance-in-thepublic-sector
WINTER 2014 • PUBLICFINANCEINTERNATIONAL.ORG 33
p32_33_framework.indd 33
17/10/2014 18:55
PublicFinance
International DAILY GLOBAL NEWS
ONLINE AND STRAIGHT TO YOUR
INBOX
SIGN-UP TODAY
Public Finance International is a news, opin opinion, nion informat information and jobs service covering developments affecting government accountants, auditors, regulators and policy makers across the world.
publicfinanceinternational.org p34_PFIntOCT14.indd 1
20/10/2014 14:50
creating experts The only global professional accountancy qualification for public services The Chartered Institute of Public Finance and Accountancy (CIPFA) is the only global professional accountancy body to focus exclusively on the public sector, offering unrivalled opportunities for career progression and development. Around the world the CIPFA qualification is highly respected by governments, donors and public finance professionals seeking to advance public financial management and deliver better outcomes for public services.
CIPFA’s suite of professional qualifications provides the right skills to deliver high performance in public services wherever you are and includes: CIPFA Certificate in International Public Sector Accounting Standards CIPFA International Counter Fraud qualifications CIPFA International Public Financial Management qualifications
Successful completion of the CIPFA International Public Financial Management qualification leads to full membership of CIPFA and use of the designatory letters CPFA – Chartered Public Finance Accountant.
Find out how the CIPFA global qualifications can enhance your career: www.cipfa.org/global
p35_PFIntOCT14.indd 1
13/10/2014 14:48
© 2014 EYGM Limited. All Rights Reserved. ED 0115.
2013
EY is committed to doing its part in building a better working world. So, we’re delighted that nearly 94,000 business students have voted us #2 in Universum’s ranking of the “World’s Most Attractive Employers.” Together, we can build a better working world for our people, clients and communities. That’s our purpose. Let’s see where it takes us next. better begins here: ey.com/betterworkingworld ey.com/careers
p36_PFIntOCT14.indd 1
13/10/2014 14:47