Making governments accountable

13 Mar 12
Ernst & Young has recently completed a survey of public sector accounting around the world. Despite clear benefits, Thomas Müller-Marqués Berger found that many governments remain reluctant to adopt International Public Sector Accounting Standards

By Thomas Müller-Marqués Berger | 1 March 2012

Ernst & Young has recently completed a survey of public sector accounting around the world. Despite clear benefits, Thomas Müller-Marqués Berger found that many governments remain reluctant to adopt International Public Sector Accounting Standards


Let’s face it; reform of government accounting standards is hardly the sort of subject likely to attract interest from the mass media or voters. Today’s 24:7 media cycle, and the intense and immediate economic challenges facing many countries around the world, could combine to push such an issue well down the priority list of an elected official. But this would be a significant mistake.

After all, you don’t need a degree in advanced accountancy to understand that governments should be able to account for what they own and owe. And as the shadow of recession once again threatens many countries in the Western world, it is clear that policy-makers need to be able to call on accurate data that gives a more complete picture of government finances as they seek to plot a course for recovery.

Unfortunately, it is increasingly accepted that such complex financial challenges have been made more difficult to resolve because of many governments’ continued reliance on antiquated, cash-basis accounting systems — the method in which income is recorded when cash is received, and expenses are recorded when cash is paid out. Such a system leaves questions, among others, over how much assets are worth and how much it costs to run public services.

Against this background, the International Federation of Accountants (IFAC) recently recommended that the governments and public sector institutions of the G20 nations should adopt accrual accounting, arguing that it is more capable of monitoring government debt and liabilities in a way that exposes their true economic implications. Furthermore, IFAC noted that many countries provide minimal disclosures relative to what the public, banks, investors and credit providers expect of the private sector.

Ernst & Young recently conducted a survey of 33 countries around the world to gain an understanding of the current state of public sector accounting from a global perspective. This new research sets out what governments are doing well, and where there is scope for improvement on the road to harmonization.

Toward transparency: A comparative study on the challenges of reporting for governments and public bodies found that national financial reporting standards are still mostly unique, making true financial comparisons between governments very difficult. The large majorityof countries in the survey each use their own accounting and financial reporting system, which means that most are unable to compare their level of efficiency with other governments.

The past few years have shown the fragility of the global financial system and have exposed the need for a variety of reforms. Solutions are not available yet for all problem areas — the issues are too complex and globally interweaved. However, the results of this survey are somehow reassuring, at least in respect of future accounting systems and financial reporting, because there seems to be a collective consensus on accrual accounting as the right way forward.

The majority of the entities surveyed had already converted to (modified) accrual accounting (52%) and identified clear benefits in doing so, including that it facilitates decision-making, improves asset and cash management, and improves cost awareness and efficiency. Under the accrual system, revenue is recorded when earned, and expenses are recognized when incurred. Totals of revenues and expenses are shown in the financial statements, irrespective of whether cash was received or paid out in that period.

However, the survey also found that most do not plan to reform their accounting system further. And in addition, essential stakeholders such as international financing institutions, rating agencies and the general public are not seen as key users of governmental financial statements in many countries. Compared to a significant majority (84%) listing governments and parliaments as key users, just under a third (33%) listed ratings agencies, over a third (39%) mention international financial institutions, and just over half (51%) see citizens being key users of financial statements issued by governments.

Such findings suggest that many governments are not disclosing their financial status effectively to external audiences. These are potential ramifications for the global economy if those audiences making critical investment, regulatory and political decisions do not have the most relevant and reliable information. Following the financial crisis, governments should be motivated to put the conditions for modern management in place and to reform their accounting methodologies — but more progress is still needed to address concerns about transparency, accountability and sustainability.

A large majority of the countries (75%) also identified “fair presentation” as the main focus of information presented in financial reports. The fact that countries using cash basis also gave that answer may be seen as contradictory, because cash basis accounting is, according to accounting experts, not in line with a fair presentation of a country’s financial situation. Therefore one can conclude, that from a global perspective, there is obviously no common understanding of fair presentation.

It is clear that the ultimate goal of IPSAS remains some way off. Most government financial administrations know about IPSAS — which are based on International Financial Reporting Standards issued by the International Accounting Standards Board — but only three countries in the study had actually implemented the standards.

So why have more countries not made the switch? After all, creating a common set of measures will make it much easier for governments to benchmark their performance against each other. It will also provide greater accountability and transparency for governments.

The relevant factors seem to be practicality and cost. In tough times, keeping doing what you’ve been doing is easier than trying something new. Additionally, half of the respondents stated that the link between cash accounting and budgetary accounting is one of the main hurdles to switching systems, with other reasons being the lack of resources to finance the shift and the limited access to sufficient expertise in managing the transition.

The financial crisis does not appear to have shaken anyone’s resolve. Almost all the government finance leaders we questioned agreed that the downturn has had no impact on their conversion plans. They remain convinced that accrual accounting will have the same advantages for government stakeholders that it has had for investors in private companies over the past few centuries — namely increased clarity about the government’s overall financial condition, as well as increased accountability and transparency of government leaders.

While an accounting method alone cannot guarantee that governments will always make the right decisions, transparent financial conditions and sound information should be key priorities for policy-makers around the world. Together with continued education about government accounting and reporting, these measures significantly reduce the risk of making uninformed decisions that can add to the burden for future generations. The private sector has had to incorporate measures that address transparency and usability of financial statements. The public sector urgently needs to do the same.

 

Read the full report here: www.ey.com/ GL/en/Industries/Government---Public-Sector

Thomas Müller-Marqués Berger is Global Head International Public Sector Accounting at Ernst & Young.

This article first appeared in the March edition of Citizen Today

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