Development dilemma

3 May 12
Adrian Pulham

The way that governments steward public money affects people’s lives and life chances, particularly in the developing world. Better global public financial management is vital if we are to avoid future crises and create an environment for economic development

Europe’s sovereign debt crisis has grown steadily over the past two or three years to its current climax. It has brought down governments and even threatened the survival of the European Monetary Union itself.

The origins of all this lie in the global financial crisis of 2007. As we know, that crisis caused many national economies to fall into recession. And, while in most cases recession is technically over, many nations are still struggling to return to strong levels of growth. Spain and the UK are currently experiencing a double-dip, with Germany only one negative quarter away from joining them.

But there is also another factor hitting government finances – the bail out of banks and financial institutions. These extraordinary transactions have made an already difficult situation seem untenable. No wonder that ratings agencies start to reflect more cautious views of government debt, and markets become jittery and volatile.

Of course, government financial crises do not respect national boundaries. And this is the environment within which development currently operates and which the accountancy profession must address.

And at its heart lies a major problem for capacity building initiatives. Most governments still account for their revenues and expenditure on a cash basis. They do not maintain balance sheets. They do not systematically record and value assets and liabilities (including those multi-billion dollar obligations to bail out funds).

So what should the profession do? 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, arguing that accountants and auditors did not create this crisis? Or should we be bolder  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 all 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, particularly in the developing world.

Governments account largely on a cash basis because they choose to do so. They take decisions without proper regard to financial consequences because they choose to do so. They run up large debts and deficits because they choose to do so. But governments are susceptible to pressure and influence.

If the accountancy profession really wants to create pressure for a step change in public financial management, reporting and auditing globally, we can make it happen. It will not be easy but it is possible. What it calls for is concerted, co-ordinated action.

Only a single system of government accounting standards will provide that firm foundation. Because the biggest challenge facing the profession right now is the quality of government reporting, auditing and financial management. This is a key issue in the current crisis and it is a massive issue in creating conditions for stability, the avoidance of future crises, and the environment for economic development.

In short, government 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.

CIPFA has a special interest in these matters. Governments and public sector finance is our exclusive focus. We are committed to try to bring about a step-change in financial management performance around the world, and we are convinced that now is the moment. There will never be a better opportunity.

We have some strong ideas and plans for effecting 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.

And that increased capacity will to deliver better reporting, better auditing, better controls, better management accounting and better forecasting. And, of course, capacity that will to deliver better decisions, greater transparency, stronger accountability and greater confidence.

And the importance of sound, comparable accounting standards to development is not without its own context. An understanding of the global public financial management infrastructure – a whole system approach – is vital to making effective interventions for development.

In 2012, the Department for International Development and CIPFA published what we believe is the first analysis of that infrastructure – showing global public financial management and in a worldwide context.

It is this world map of the global, regional and national public financial management institutions, their interaction with the donor community and the professional bodies underpinning this superstructure that provides for us the understanding of the international public financial management context vital to successful intervention, capacity building and better common standards.

And our real life experience shows that effective development interventions share a number of common characteristics:

  • Partnership – accounting bodies must work with and nurture the local profession, not impose their view from above
  • Sustainability – the capabilities developed by the project must be capable of self-replication, of sustaining themselves
  • Getting the level right – too often the providers of development solutions in accountancy fail to realise that what is needed are many more accounting technicians rather than professional accountants

So where the accounting profession works well with the local PFM community and the local in-country profession – balancing the principles of partnership, sustainability and level – the contribution of good accounting practice to development can be immeasurable.

Adrian Pulham is CIPFA’s education and training director. This is an edited version of his speech to the High-Level Meeting on Accounting for Development in Doha on 22 April 2012

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