Some progress has been made in the campaign to improve government accounting. But the G20, now chaired by Russia, must do more to demonstrate the need for clear, complete and transparent financial information

I first touched on the economic situation confronting the United States, the issue of fiscal responsibility, and the role of the politician in accountability and transparency, in my September blog, Debt, deficits, and democracy.

In the five months since, President Barack Obama has won a second term and a fiscal deal was once again reached at the eleventh hour. The immediate drama of avoiding going over the ‘fiscal cliff’ did much to eclipse what is really nothing new – poorly functioning fiscal institutions. The US has not delivered a balanced budget for more than a decade and Congress has not passed a budget at all for at least the past three years.

David M Walker, the former comptroller general of the US, has worked for years to alert Americans to the seriousness of the fiscal situation. More recently the American Institute of Certified Public Accountants (AICPA) published a survey revealing that 54% of CPAs regarded this situation as a key priority – more than twice as many as those citing job creation (23%), tax reform (18%) or the stability of Social Security and Medicare (5%).

But the US is not alone in experiencing problems with the management of its finances. Since the onset of the financial crisis, many governments in the developed world have seen their fiscal positions worsen dramatically. And, in a similar vein to the US, we have seen the profession highlight the need for corrective action.

CPA Australia recently published an op-ed by Chief Executive Officer Alex Malley entitled We Must Push G20 on Nations’ Accountability, the Institute of Chartered Accountants in England and Wales (ICAEW) released Sustainable Public Finances: Global Views, and the Association of Chartered Certified Accountants (ACCA) just released a policy paper titled Setting High Professional Standards for Public Services Around the World.

And, of course, CIPFA's Steve Freer has been a leading voice in the call for greater transparency, not least through the institute's ‘Fixing the Foundations’ campaign plus a number of pieces written for Public Finance.

What we have not yet seen is sufficient action at the international level to identify the nature of the institutional changes that will put the sharpest possible tools in the hands of governments as they attempt to work their way back to more healthy and sustainable fiscal positions. The International Federation of Accountants (IFAC) has pressed for G20 governments to give this task to the Financial Stability Board (FSB).

However, at least in relation to standards of fiscal reporting and responsibility, the domain of the International Monetary Fund (IMF), there has been some progress. In November 2012, the IMF published a paper that draws attention to some of the key components of a functional and effective fiscal toolbox.

One example is the importance of governments using the same accrual basis in both budgeting and accounting. While this may seem obvious, it is not the case in many governments. But, it is only one element, and there are many others, such as:

•    Information on fiscal performance and position made publicly available by governments on at least a quarterly, and preferably a monthly, basis;
•    Full transparency – preparation and publication of fiscal and economic conditions – ahead of elections, so that voters can cast informed votes;
•    Established, well-defined, and publicly available principles for fiscal management and control, with full transparency (publication in a timely manner) to demonstrate that those principles are being followed; and
•    The publication, in a timely manner – no longer than within six months from the end of the reporting period – of independently audited financial statements for the government.

But what we are still not seeing is recognition and acknowledgement within the G20 that the poor design of fiscal institutions is a significant part of what led to the sovereign debt crisis, and that effective fiscal institutions will be important to an orderly exit strategy from the fiscal predicaments that many governments currently face.

The good news is that even without further study by the FSB, we do have some idea of what works and what does not. A number of governments have taken serious and effective action to improve their fiscal institutions – Australia, Canada, New Zealand, and the Nordic countries are cases in point – and in all of those cases the financial crisis has been managed in a way that is sustainable in the long term without acutely disruptive policy shifts.

One of the common features of what has been done in these countries is a high-level of commitment to actually being transparent. While many governments are prepared to talk about transparency, this is a case where actions speak very much louder than words.

There is increasing concern that in their efforts to further promote economic growth, many governments are running out of room to move for both fiscal and monetary policy. If this is the case, they are likely to turn to structural change, such as reform of the labour market and tax system and other areas where either absent or inappropriate regulation is constraining economic growth and development. In most developed countries, the public sector is a very significant part of the economy in its own right.

One place to look for structural change – reform – is, therefore, the public sector itself. Public financial management reform should be a central part of that change process. And while that is not a straightforward task, it is an important one, given the size of the public sector in developed economies.

Eurostat recently published a suitability assessment of International Public Sector Accounting Standards (IPSAS) for adoption by European Union member states, which supported the implementation of uniform and comparable accrual-based accounting practices for all sectors of government to ensure high-quality statistics. The final report, due shortly, is expected to emphasise the fact that IPSAS are an indisputable reference framework for potential EU harmonised accrual-based public sector accounts.

This will unquestionably be a step in the right direction, and will lead to improved transparency by EU member states. But the problem is global. As the Russian government assumes the chairmanship of the G20 this issue requires an effort by all member countries. Governments have a responsibility to provide clear, complete, and transparent financial information – without that there is no way they can claim to be acting in the public interest.

It is encouraging to see there is increasing recognition of that need, but without strong institutional arrangements in place to support such change, governments are likely to find themselves facing more and more dramatic consequences of fiscal mismanagement.

Ian Ball is the former chief executive of the International Federation of Accountants