19 Aug 2013
The majority of governments still use cash-based accounting practices, which fail to capture information on public sector assets and liabilities, and present a very short-term view of public finances.
The global financial meltdown and the subsequent sovereign debt crisis have brought government public finance management practices under scrutiny from the accountancy profession, the international donor community, the capital markets and the general public. This additional pressure to control spending and improve public finances can lead to the use of accounting devices, such as hidden borrowing and deferred spending, by politicians and governments. Tactics like these can give an illusion of improved fiscal measures in the short-term by reducing current deficits, but they do so by increasing future deficits and debt levels.
The demand has never been stronger for governments to adopt sound and transparent accounting rules as part of their wider public finance management. It’s vital for governments and their stakeholders to understand the full economic impact of today’s decisions that affect financial performance, financial position, and cash flows. We need to know what all the liabilities are in the government balance sheet, including long-term debts and pension obligations.
Will we create or consume a legacy for the next generation? We can only answer that question if we have sound and transparent government accounting and reporting that doesn’t hide the real picture.
This demand for clearer information has prompted a trend towards accrual accounting frameworks, such as International Public Sector Accounting Standards (IPSAS), especially in non- OECD countries in Africa, Asia and Latin America. In these countries, the transition to accrual-based accounting frameworks is often included as part of wider public finance reforms and combined with investments in better financial information systems.
In Europe, the European Commission has completed its assessment of IPSAS’ suitability for EU countries. The EC’s report concludes that, even if IPSAS cannot be implemented in the EU as it stands, they are a good reference for the potential development of European Public Sector Accounting Standards.
Transitioning to an internationally- recognised, accruals-based accounting framework is a challenge. It demands a clear vision and strong political commitment to strengthen public institutions, develop high quality standards and practices, enhance skills, and build capacity. Converting to accrual accounting standards based on IPSAS usually involves a transformation project that extends well beyond the finance function and takes several years.
While accrual accounting is the basic foundation for a modern finance function, to really deliver value within government the finance team will need to move beyond its ‘score keeper’ role and the year-end, historical financial statements. It must play a proactive role to provide key information that informs strategic and operational decisions. Only then will it earn its place at the decision-making table and be recognised as an important business partner within the government as a whole.
Sound and transparent public accounting does not in itself guarantee good public financial management. But it is a necessary step towards that goal. Better accounting leads to improved reporting, which provides the information necessary for better decisions. And this in turn should lead to better use of public resources.
If we want to create a positive legacy for the next generation, a pre-requisite is that we use clear, consistent and relevant information to plan ahead.