The International Federation of Accountants and the Chartered Institute of Public Finance and Accountancy have developed a new International Framework for Good Governance in the Public Sector to encourage more effective public sector governance.
The two groups noted that in the past few years, effective governance of public entities has become an urgent issue that has been getting more exposure in the wake of the financial and sovereign debt crises and a constant stream of governance failures from factors such as nepotism, inefficiency, corruption and poor financial management.
The new framework aims to encourage better governance and management of public sector entities by improving how they set and achieve their intended outcomes. Enhanced stakeholder engagement, robust scrutiny and oversight of those charged with primary responsibility for determining an entity’s strategic direction, operations, and accountability should lead to more effective interventions and better outcomes for the public at large, according to IFAC and CIPFA.
IFAC CEO Fayez Choudhury noted that in contrast to the private sector, public sector entities typically lack a mature model for management accountability. Civil servants and elected officials don’t need to worry about a CEO, board of directors, shareholders, securities laws and regulations, and other checks and balances, nor the clear outcome of generating profits and losses.
“The citizenry don’t really hold governments accountable for one particular aspect,” said Choudhury. “It’s multiple elements that determine the voters’ choice. The clear focus on good public sector governance and financial management and accountability point isn’t as clear as it is in the private sector. There is no single outcome that people are looking at. There’s no profit motive, etc. It can be service delivery and some other things as well.”
[IMGCAP(1)]Choudhury explained that the framework tries to address this lack of accountability by singling out some of the key principles that should govern public sector governance. “It gives people who are accountable the right sort of questions to ask themselves and to move towards, but it also gives people from the outside looking in at public sector accountability, from the viewpoint of being concerned citizens, a very useful framework or set of benchmarks on which to evaluate public sector performance,” he said.
The framework will provide a starting point for asking the right questions, according to Choudhury. “I think it gives someone from the outside looking in—or even people on the inside—a set of key questions, key issues and key principles that they should have in place,” he said. “That in and of itself can’t assure the right outcomes, but at least it’s a disciplined process, just trying to make sure that the right outcomes are achieved, and if they’re not, to at least know where things went wrong.”
Social Issues and the Environment
The framework also takes into account factors such as sustainability, the environment and social issues.
“Public sector governance must focus explicitly on sustainable economic, social and environmental outcomes, and this publication is unprecedented in highlighting the central role that outcomes and the public interest should play in the processes and structures of public sector governance,” said CIPFA International chair Ian Ball. “Our focus on sustainability is also especially important as public sector entities, from local councils to national governments, must consider the long term impact of their current decisions, especially in safeguarding the interests of future generations.”
Ball noted that the publication follows up on the work that both IFAC and CIPFA have done separately in the past.
“A few years ago we decided that both of those separate frameworks needed updating and we decided we would work together to produce a joint document,” he said. “There are so many examples of poor governance in the public sector around the world, and we see such significant consequences from them. If you take, for example, the sovereign debt crisis in Europe, that came out of governance failures in the Greek government and in the institutions that invested in Greek bonds and arguably in the regulators who oversaw the securities markets and didn’t alert investors to the issues around the risks to sovereign debt. On a daily basis, in the newspapers of virtually every major country, we see examples. Whether it’s corruption or misuse of resources or conflicts of interest, we see examples of poor governance and poor management in the public sector.”
[IMGCAP(2)]Ball pointed out that the public sector in most developed countries accounts for approximately 40 percent of the economy, making the economic costs of poor governance extremely high and worrisome.
“In the cases of countries like Greece, Ireland or Spain where the international institutions had to intervene, you see a loss of sovereignty, and you see damage to social cohesion with protests on the street,” he said. “The stakes in this area are fairly high and what we were concerned to do with this framework was to establish something that could apply to government organizations and governments themselves around the world.”
The framework lays out a set of key principles to provide guidance to governments on how they should structure their governance, such as what results they are seeking to achieve on a particular action.
“Once you decide what you want to achieve, you need to be very clear and transparent about what mechanisms or interventions you’re going to use to achieve those outcomes,” said Ball. “Are you going to do it through the provision of services directly, or are you going to do it through regulating? For example, in terms of outcomes associated with road accidents, are you going to do it by regulating blood alcohol levels, or are you going to do it through investment in infrastructure or the quality of roads? In other words, there’s a very important decision in a public sector context as to what intervention is the best way to achieve the outcome.”
The framework also emphasizes the management of capacity. “A government organization needs to have a clear picture of what its capacity is, whether it’s financial capacity—what’s the financial or fiscal strength of the organization—what’s its human capacity in terms of its staffing, capacity in terms of physical infrastructure, intellectual property, or whatever,” said Ball. “Identifying capacity is one of the key dimensions that a government needs to manage and measure. In many governments around the world, we see very poor management of assets. Some major governments still do not have a balance sheet. IFAC would see that as a major governance failure—the absence of a sensible balance sheet—given the complexity of the assets and liabilities that most governments now hold, whether in developed or developing countries.”
The framework is designed to reflect the particular circumstances of governments and adapt to them. “In many ways it covers the same territory that codes of corporate governance might in the private sector,” said Ball. “But it’s more developed to focus on those sorts of decisions that are perhaps more peculiar to governments.”
Fitting in with Accounting Standards
Choudhury sees the framework fitting in well with the kinds of accounting standards for state and local governments issued in the U.S. by the Governmental Accounting Standards Board. “I think they are part and parcel,” he said. “I think the principle for implementing good practices in transparency reporting and audit to deliver effective accountability plays very much into whether you are using the right accounting standards and internationally accepted reporting standards that are comprehensive and include all assets and liabilities. Those sets of issues fit very well into this framework. Stakeholders could ask, Are you doing this?’ If not, then those responsible for governance would need to be prepared to answer the question.”
Choudhury noted that adoption of IFAC’s International Public Sector Accounting Standards is a critical step, but improvement of other governance arrangements is essential if governments worldwide are to be successful in the sustainable development of our economies and societies.
Increased focus on the critical role that good governance plays in the public sector has grown in recent years, along with an awareness of the substantial role that poor public sector governance played in the sovereign debt crisis and other public sector failures, making the appropriate application of governance standards and arrangements more pressing than ever.
The framework for Good Governance in the Public Sector is intended to establish good practice principles for the fundamental aspects of public sector governance. The framework also facilitates the review and update of national governance codes for the public sector and, where specific principles and guidance do not already exist, stimulates improvement.
The ideas and insights outlined in the framework, which includes a foreword from Mervyn King, chairman of the International Integrated Reporting Council and author of the King Report on Governance for South Africa, were developed using a wide-ranging literature review and in consultation with an International Reference Group. The framework is intended to be useful for all those specifically involved with governance, including governing body members, senior managers, and internal and external auditors. In addition, the framework provides the public with a resource to challenge substandard governance practices in public sector entities.