PFM: the good, the bad and the ugly

23 May 16

There is improved awareness of the contribution public financial management makes to good governance and facing down corruption. However, accrual-based information must be deployed

At the Financial Reform for Economic Development in Asia – Public Sector Forum 2016 (FRED) event in Kuala Lumpur last week I had the opportunity to participate in a session that dealt with public financial management (PFM) reform, looking at what future outcomes are possible, given past experience. And at a public sector financial management conference – jointly hosted by CIPFA and the Malaysian Institute of Accountants (MIA) – later in the week there was further discussion of both PFM reform and of the relationship between various elements of governance (such as adherence to the rule of law, levels of corruption, and ease of doing business) and outcomes such as economic development, financial stability and social progress.

One of the really good things to emerge from FRED was the steadily deepening awareness of the importance of PFM as a component of governance. FRED focused on Asia, not surprisingly given it was hosted by the Confederation of Asian and Pacific Accountants (CAPA), and within Asia many countries are working actively to improve the quality of their PFM.  Better PFM is essential from many angles, not least the declining strength of many countries’ balance sheets, as levels of debt increase and levels of net worth decline. Given the risks associated with exposed sovereign balance sheets, improved PFM will enable a more realistic assessment of actual current position and provide better tools to progressively correct the position.

A less desirable feature, bad in my opinion, is the failure to employ accrual-based information in fiscal and budgetary decision-making. This problem is not confined to Asian countries. It is a huge waste to go to the effort of introducing accrual reporting systems, but then not to employ that information in one of its highest value uses. In fact many governments use it for neither of its two most valuable applications – performance management and fiscal management. The failure to use accrual information in fiscal and budgetary decision-making can be seen in the absence of any consideration of accrual-based numbers in budget discussions, and in the absence of forecast financial statements as part of budget reporting. The consequences are poor decisions, misallocation of scarce resources and enhanced fiscal risk.

The “ugly” reference in the title of this blog refers to the level of corruption that hinders progress in many countries in Asia and other regions. This issue was addressed at both FRED and the CIPFA MIA conference. It was also the subject of a high-level, anti-corruption summit in London, hosted by the UK government, on May 12, which resulted in a declaration in which world leaders stated:

We commit to expose corruption wherever it is found, to pursue and punish those who perpetrate, facilitate or are complicit in it, to support the communities who have suffered from it, and to ensure it does not fester in our government institutions, businesses and communities.  

In the context of corruption it was very disturbing to hear, informally, in the margins of the events in Kuala Lumpur this week, the prevalence and tolerance of corruption at senior levels within government organisations in Asia. There is much that can be done to combat corruption. Improved PFM, including especially improved accounting and audit, contribute significantly to this vital task.

To end on a “good” note: internationally, a number of forces are combining that are likely to reduce the incentives and increase the risks associated with corrupt activities. The reduced tolerance within political systems towards corruption (actions against the president of Brazil and the former president of Argentina, for example) combined with the willingness of individuals to disclose evidence of potentially corrupt activity (the Panama papers) increase the probability of detection, exposure and prosecution. And the capabilities available through “big data” and data analytics will make the identification of corrupt behaviour much more likely. Together these forces have the potential to make corruption both more discoverable and less likely to be tolerated. That would be a very good thing, both for its own sake and as a means of restoring trust in political institutions.

  • Ian Ball
    Ian Ball

    Professor of Public Financial Management at Victoria University of Wellington

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