The International Federation of Accountants has published a paper calling for enhanced financial management transparency and accountability in the public sector, especially in the midst of the sovereign debt crisis.

Ian Ball

The policy position paper, “Public Sector Financial Management Transparency and Accountability: The Use of International Public Sector Accounting Standards,” explains IFAC’s view that governments around the world need to provide clear and comprehensive information regarding the financial consequences of their economic, political, and social decisions, in order to protect the public as well as investors in government bonds.

IFAC, which includes 167 members and associates in 127 countries and jurisdictions, representing approximately 2.5 million accountants, is issuing the paper at a time when deficiencies in many governments’ financial management, transparency, and accountability have become more prominent, as a result of the worsening sovereign debt problems around the globe.

IFAC noted that transparency and accountability can only be provided through a high-quality, robust, and effective accrual-based financial reporting system. Such a system would allow for government assets and liabilities (including debt) to be appropriately recorded, reported, and disclosed—and hence effectively monitored.

“The sovereign debt crisis has highlighted the lack of transparency and accountability of governments, poor public finance management and public sector financial reporting, and the deficiency of institutions for fiscal management in many countries,” said IFAC CEO Ian Ball at the IFAC Sovereign Debt Seminar, which was held in Vienna earlier this week. “Governments around the world must collectively embrace high-quality and uniform accrual-based standards for financial reporting in order to protect the interests of both investors and citizens. While the problems highlighted by the sovereign debt crisis cannot be solved by better reporting alone, they cannot be solved in the long term without it.”

IFAC oversees the International Public Sector Accounting Standards Board, which promulgates International Public Sector Accounting Standards, an accrual-based financial reporting system.

During the sovereign debt seminar, IFAC found that the sovereign debt crisis has identified a compelling and urgent need for governments to address seriously the quality of their public financial management systems and institutions. The fiscal risks associated with the aging population in many countries amplify the risks associated with poor fiscal measurement and management that have been exposed by the sovereign debt crisis.

The current crisis has emphasized the deficiencies associated with cash-based accounting and budgeting, IFAC noted. Governments need to adopt accrual accounting and budgeting to better measure and manage fiscal position. The adoption of International Public Sector Accounting Standards, or IPSASs, is necessary to provide global consistency and comparability in public sector financial reporting. Accrual accounting and IPSAS are being successfully implemented in many countries, including Australia, Austria, New Zealand, Spain, Switzerland, and Sweden; these countries now have the tools for better resource allocation and fiscal decision-making.

The accountancy profession has a key role to play in this transformation, and should be leaders and catalysts for change, IFAC found. Politicians, governments, and ministers of finance need to recognize the political advantages of high-quality financial management systems in absorbing and managing economic shocks. Conversely, politicians, governments, and ministers of finance need to recognize that the cost of failure in financial management can be a loss of sovereignty.

Many stakeholders have a role to play, IFAC noted. International organizations, such as the Financial Stability Board, should consider the institutional changes necessary; citizens, investors, credit rating agencies, and auditors general need to be educated, communicated with, and engaged. The International Public Sector Accounting Standards Board must have strong governance and legitimacy, as well as financial and operational stability.