Leading from the front on finance?

29 Jan 13
Steve Freer

Better financial management and reporting by governments across the world are vital to stop further economic crises. But is this message getting through?

Are the lessons of the global financial crisis being learned? More importantly, given the weaknesses they highlight in underlying financial and regulatory systems and processes, are practical steps being taken to design and implement solutions that will mitigate the risk of déjà vu crises in the future?

CIPFA is particularly interested in the answers to these questions as they relate to the sovereign debt and public finance strands of the larger crisis. Our 2011 report, , pointed to the need for governments across the world to prioritise improving their own financial management to secure the financial health and sustainability of their public sectors as a whole.

We argued that without concerted action to drive up standards in public financial management, a series of negative outcomes would continue to undermine and restrict progress. Investor confidence would remain fragile, business development and growth would be poor, economic performance would disappoint, and confidence and trust in governments would remain weak.

So what has happened in the intervening 12–18 months? Inevitably, the picture is mixed. Looking around the world, some administrations have enthusiastically embraced greater transparency, accountability and self-discipline. There have also been disappointments. For example, despite constant urging by organisations such as the International Federation of Accountants, public financial management has barely featured in the pronouncements from the Group of Twenty and other summits of world leaders.

On balance, however, the big picture is increasingly positive, reflecting a range of encouraging developments and the tantalising prospect of a soon-to-be-published Eurostat report that just might mark a dramatic tipping point.

Important initiatives under way include the finance ministries of African nations developing a draft declaration on Public Financial Governance. If all goes to plan, it will provide a common template for the continent’s efforts to drive forward significant reforms and improved standards.

Another key development is the International Monetary Fund’s report, Fiscal transparency, accountability and risk. It points to increasing evidence of correlation between the degree of fiscal transparency practised by governments and their fiscal credibility and performance. The implication is that in future it will be possible for governments to construct a more compelling return-on-investment business case for financial management reforms.

A variety of accountancy institutes around the world are also showing increasing awareness of the importance of public financial management for the profession. IFAC’s Global leadership survey, published in February 2012, recorded an increase in recognition of public sector issues. Additionally, the importance of the International Public Sector Accounting Standards Board, hosted by IFAC, was more highly rated.

CIPFA’s own discussions confirm that more institutes around the world are asking what they can do to improve public financial management in the jurisdictions in which they are influential.

The International Public Sector Accounting Standards Board itself looms large in all these discussions and initiatives. Its suite of international financial reporting standards for public sector entities, spanning both cash- and accrual-based accounting, stands out as a way forward with the potential to transform the landscape of government financial reporting over the next decade.

Encouragingly, far from resting on its laurels, the board itself is striving to strengthen the quality of its outputs. In particular, it is developing a conceptual framework to articulate the definitions and principles that underpin its work. Four fascinating initial chapters of the framework have just been published.

Both the board and IFAC are also pressing for the creation of a public oversight mechanism to inspire greater confidence in the systems and processes deployed when developing IPSAS, and to assure a demonstrable commitment to serve the public interest. This would bring the IPSASB into line with other standard setters.

The truth is that, while the minutiae of standards provide endless opportunities for professional debate and disagreement, there are few substantive doubts about the quality and independence of the IPSASB’s outputs. However, there is a pressing need to incorporate high-quality public oversight over its current practices to give greater assurance and inspire maximum confidence.
But what of the eagerly awaited Eurostat review? It will address the case for the adoption and implementation of accrual accounting under a framework of consistent standards throughout the governments of the European Union’s member states. It also has the potential to influence future global developments.

This is a tremendous opportunity for Europe to show strong leadership, ideally by requiring all member states to adopt and implement accrual-based accounting under IPSAS. Were Europe 
to give that strong lead, there would be real cause for optimism that other major economies would follow in due course, potentially providing the ingredients for a paradigm shift.

In such circumstances, it would be difficult not to conclude that lessons from the crisis really were being learned and acted on with vigour and purpose.

Steve Freer is chief executive of CIPFA

This article first appeared in the January/February edition of Cooking Recipes

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