Scrutiny in an uncertain world

8 Nov 16

Governments need to adopt international accounting standards so citizens know what they are getting for their tax payments. And auditors need to be able to tell it like it is and provide a longer-term perspective on key issues

Few things are certain in life, and indeed it seems clear that we are living in an increasingly uncertain and interconnected world. No nation, including the United States, can or should go it alone. This concept also applies to accounting and auditing/accountability principles. As a result, for a number of years, I have been an advocate for adopting international accounting and auditing standards and for sharing benchmarking, best practices and lessons learned information across the globe.  

Given this, it is critically important that governments move to a set of internationally accepted accounting and reporting standards in order to improve consistency and enhance their credibility. In doing so, three key topics need to be made a top priority.

First, ultimately governments need to adopt accrual-based accounting standards. Failure to adopt accrual-based accounting can result is a very misleading view regarding the current results of operations and the fiscal sustainability of current policies.

Second, while financial statement numbers matter a lot, performance results are also of critical importance. Citizens deserve to know what kind of results are being generated with the taxes they pay and the authority they give to their government. Linking resources to results is essential in order to assess “value for money” as well as to understanding what is working, what needs to be reformed, and what may need to be terminated.

Finally, government leaders have a fiduciary and stewardship responsibility to not just focus on today but also to help create a better future. As a result, government financial reporting needs to contain appropriate fiscal sustainability and intergenerational equity information. This should include the likely implications of the current fiscal (i.e. tax and spending) policy path, including on the debt to GDP ratio, tax increases and/or spending reductions. Doing so will provide a fuller and fairer perspective of the implications of current government policies for both today and tomorrow.

As president Ronald Reagan once said, “trust but verify”. This concept clearly applies to government financial and performance reporting. The independent audit work performed by government and other external auditors is a critical element to helping promote transparency, ensure accountability, and maintain the trust and confidence of the public.

From a government audit and accountability perspective, three key topics therefore need to be made a top priority. First, government auditors need to act in a professional, objective, fact-based, non-partisan and non-ideological fashion. They need to have an independent and yet constructive working relationship with their auditees. They need to not just focus on what is wrong but also acknowledge what is right, including sharing best practices and lessons learned. They should also lead by example and practice what they preach.

Second, financial statement audits have clear limitations. For example, they typically do not include an expression of opinion on the system of internal controls, nor do they address the economy, efficiency or effectiveness of applicable government programmes and activities. These are areas of critical importance for auditors to focus on in connection with their recurring activities.

Third, government auditors have an important role to play in providing contextual sophistication and a longer-term perspective on key issues. For example, reporting based solely on current results can be misleading. It is important to provide related trend, benchmarking and, as appropriate, projection information in order to truly assess performance and potential. Obviously the degree of assurance that an auditor can provide in connection with historical versus projected information is different. However, ignoring the long-term implications of current policy paths is both imprudent and inappropriate. That is one the primary reasons that I inserted an emphasis paragraph into the audit report on the U.S. government’s financial statements to draw attention to the unsustainability of the U.S. federal government’s current fiscal path. After all, if the independent government auditors won’t tell it like it is, then who will? 

Adopting generally accepted government accounting and reporting standards combined with independent and effective auditing can serve to improve performance, and enhance public trust and confidence in government. These are critically important objectives in these uncertain and rapidly changing times and given increased global inter-dependency and inter-connectivity. Government standard setters, financial management and audit/accountability professionals need to work together and with other government and professional leaders to help achieve these worthy objectives.

David M Walker is a speaker at the CIPFA International Seminar on 24-25 November at the European Court of Auditors in Luxembourg. Click here to watch the CIPFA international seminar live. A full recording of the seminar will also be available a few days after the event.

  • David M Walker
    David M Walker

    David M Walker is a former comptroller general of the United States and is now a senior strategic advisor to PWC

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