Do the right thing

16 Nov 11
Steve Freer

CIPFA’s chief executive calls for a concerted effort from accountancy institutes, firms and individual accountants to respond to the current global crisis by tackling poor public financial management

The global financial crisis has grown steadily over the past two or three years to reach its current sovereign debt climax in Greece and Italy.

Along the way, we have seen many national economies fall into recession. And whilst recession is technically over in most cases, nations are struggling to return to strong levels of growth. Many now face real fears of a dreaded ‘double dip’ – another period of perhaps significant contraction of economies.

In difficult periods of this type, government finances come under pressure for two related reasons. First, expenditure increases as more is spent to protect jobs; to support people who have lost livelihoods and sometimes their homes; and to create programmes to stimulate economic recovery.

Secondly, government income falls as tax revenues reduce. Fewer people are working so the proceeds of taxes on earnings are reduced. Citizens buy fewer goods meaning that sales tax revenues fall. Companies make smaller profits, or even losses, so that the proceeds of corporate taxes reduce as well.

Clearly, increasing expenditure and falling revenues is not a formula for success. On the contrary, if it endures for any length of time, it is a formula for exactly what we are currently experiencing – uncertainty, turmoil, and chaos.

Of course, in this crisis we have also had a third factor hitting government finances – the ‘bail out’ of banks and financial institutions. These extraordinary transactions – often combining astronomically large sums of money and bewildering complexity – have made an already difficult situation seem completely untenable. No wonder that rating agencies start to reflect more cautious views of government debt, and markets become jittery and volatile.

Over the months we have seen more and more countries drawn into or at least to the brink of this crisis. In many ways it is a crisis that threatens every single one of us. Government financial crises do not respect national boundaries. Many of the worried investors in an ailing government’s sovereign debt will be banks and financial institutions in other parts of the world.

This is where we find ourselves dealing with the risk of contagion – the problem rippling around the world like a pandemic, just as the sub-prime problems spread three or four years ago.

World leaders have been meeting recently to try to develop new strategies for resolving the crisis. Many of their potential solutions seem to involve the creation of new bail out funds to support casualties of the crisis – countries teetering on the brink of default and financial institutions facing large sovereign write offs.

But how robust can those solutions be? Crucially we should ask the question, what impact will the creation of new or much larger bail-out funds have on the financial health of sponsoring governments?

The shocking answer to this question is that, in all but a handful of cases, we do not know. Why? Because most governments still account on a cash basis. They do not maintain balance sheets. They do not systematically record and value assets and liabilities including multi-billion dollar obligations to bail out funds.

A solution built on such fragile foundations is bound to collapse. It is built on sand. The question is not whether but when it will fail.

Against this backcloth, the question of what the accountancy profession should do looms large. Should we be cautious and maintain a watching brief from the sidelines? Should we be defensive and concentrate our energies on protecting the profession’s reputation, marshalling our arguments that accountants and auditors did not create this crisis? Or should we be bolder – much more proactive – advocating responses that will serve the public interest in the long term.

I deliberately mention the public interest because it is so vividly at stake. The way in which governments steward public money affects the quality and availability of public services; economic prosperity, growth and jobs; accountability, trust and confidence in government, and the quality of people’s lives and life chances.

This is not a situation in which we should be asking ourselves what is best for the profession or for our members. The profession talks a great deal about serving the public interest and now really is the moment for us to show by our actions what that means.

Governments account largely on a cash basis because governments choose to do so. They take decisions without proper regard to financial consequences because they choose to do. They run up large debts and deficits because they choose to do so. They make lots of other poor choices too.

But governments are susceptible to pressure and influence. If the profession really wants to create pressure for a step change in public financial management, reporting and auditing, we can make it happen. It will not be easy, but it is possible. What it calls for is concerted, co-ordinated action. Every institute, and every firm reinforcing the same compelling arguments for a step-change – nothing less – in all aspects of public financial management.

A week ago the Financial Times published a letter from Ian Ball, the chief executive of the International Federation of Accountants. Ian has spent a career driving the argument for accrual-based accounting and modern international standards for public sector financial reporting. His letter reminded politicians in the European Commission that the most serious accounting and auditing issue facing them is not the governance arrangements of the International Accounting Standards Board nor the market structure of the audit profession. On the contrary, the elephant in the Commission room is the quality and reliability of the financial statements of its own member states.

But if the profession is to send that message to politicians in Europe and elsewhere, we also have to take that message to heart ourselves, and we have to reflect it in our priorities and our actions. The biggest challenges facing the profession right now concern the quality of government reporting, auditing and financial management. This is a key issue in the current crisis and it is a massive issue if we are to achieve stability and avoid future crises.

Government finances are not a separate, self-contained thing. We can see in the current crisis how they are wired into the financial sector, the wider economy and the lives of us all. They have profound implications for society and the communities in which we live and work. They affect the quality of the public services on which we all depend – schools, roads, healthcare, public transport. They impact on jobs, growth and development. They affect the quality of our lives and, in many cases, life chances. That is why ordinary people react so emotionally in demonstrations and, sometimes, even riots when major cuts in public services are announced.

In short, government or public financial management matters. And it is time for the profession to bring all of its influence to bear and to take its share of responsibility to make change happen.

But that doesn’t mean leaving it to IFAC. IFAC can and is addressing these issues as the global voice of the profession. But IFAC is not our only voice. To bring all of our influence and weight to bear we all have to shout up – every institute, every firm, and if we can achieve it, every accountant.

CIPFA has a special interest in these matters. Governments and public sector finance are our exclusive focus. We are committed to try to bring about a step-change in financial management performance.

We have some strong ideas and plans for affecting change: a global programme to make the change from cash to accruals and to implement modern standards; a global portal to join up government finance practitioners around the world, supporting both the sharing of good practice and continuous learning and development; a programme for making that step-change across the world and building the professional capacity to sustain it.

Capacity that will to deliver better reporting, better auditing, better controls, better management accounting and forecasting. And, of course, capacity which will to deliver better decisions, greater transparency, stronger accountability and, most valuable in the current crisis, greater confidence.

But CIPFA can’t change the world single-handed. We can’t even scratch the surface of the problem if we work alone. To succeed we must collaborate and work together.

I want the profession to show real leadership, to set our competitive instincts to one side and put the public interest first. We must stand together, act boldly and do the right thing. We must both demand and support the delivery of a global step change in public financial management.

Steve Freer is the chief executive of CIPFA. This is an edited version of his speech delivered today at the annual meeting of the council of the International Federation of Accountants. CIPFA’s Prospectus, Fixing the Foundations, is available

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