The International Federation of Accountants has written an open letter to the G-20 nations in advance of this weekends summit in Toronto calling on governments to fix public sector accounting.
In the letter addressed to the G-20 Secretariat, the accounting organization urges the Group of 20 world leaders to improve government transparency and accountability as a means toward global fiscal sustainability. Rebuilding confidence in sovereign debt, IFAC CEO Ian Ball argues, requires coordinated, international action by G20 governments and better accounting.
Sovereign debt concerns in European countries illustrate the stark implications and urgency of this issue confidence in sovereign debt has been seriously damaged by accounting and auditing failures.
Governments require that private sector companies report high-quality financial information to their investors and stakeholders. Its time for the public sector to practice what it preaches, said Ball. The problems associated with public finance and government debt require a coordinated, international approach that global leaders have been slow to address. Sovereign debt concerns in European countries illustrate the stark implications and urgency of this issue confidence in sovereign debt has been seriously damaged by accounting and auditing failures. These failures have occurred not only on the national level but also on the regional, state and local levels.
Taxpayers, investors and citizens in all nations are entitled to accurate and complete financial information about their governments, according to IFAC. They should demand that their governments provide a comprehensive picture of fiscal performance and position. This includes an accrual-based measure of surplus or deficit as well as full details of debt, other liabilities, contingent liabilities and guarantees, and future expenditures and the resources needed to support them.
IFACs letter contains several specific, actionable recommendations, including a suggestion that the G-20 should encourage governments to adopt accrual-based accounting. Cash basis accounting, which is employed by governments in some of the worlds largest and most interconnected economies, lacks transparency and accountability, IFAC argues. It does not measure many of the assets and liabilities necessary to assess fiscal policy and fiscal sustainability. Governments should instead adopt accrual-based accounting, which is required of public companies in all countries. This would provide a much better indication of all of a governments liabilities, significantly improve the quality of financial management, and provide better information for all stakeholders.
Despite the clear benefits of accrual-based accounting and the fact that governments require it for public companies many governments continue to use cash accounting, continued Ball. Politicians often criticize businesses for being focused on short term financial results, but the typical public sector financial report does not adequately reflect all assets and liabilities, some of which have significant long term financial implications. Indeed, many countries have substantial civil service pension liabilities that are not reflected in their financial reports at all. Accrual accounting will compel governments to take a longer term view and be honest with citizens about how todays decisions will need to be paid for by future generations.
IFAC also wants the G-20 to improve the transparency and accountability of stimulus programs and bailouts. The global financial crisis has forced governments to act quickly to alleviate the collapse of financial markets and prevent problems from spreading from one country to the next, said the organization. Many governments have launched unprecedented stimulus programs, to provide jobs, economic activity and long-term investment in domestic industries, and bailout plans, to provide monies for banks, purchase toxic assets, and modify loans for mortgage-holders. These actions will result in new assets, liabilities, and contingent liabilities being assumed by governments, all of which have long-term economic implications.
These stimulus and bailout programs must have mechanisms for clear, comprehensive financial reporting so that their actual and intended outcomes can be understood by investors, taxpayers and other stakeholders, are measurable, and restore confidence in government fiscal transparency. These mechanisms will also help prevent inefficiency, mismanagement and corruption.
IFAC also wants the G-20 to adopt international standards to improve the quality of financial information.
Global accounting and auditing standards for both the public and private sectors will improve the quality of financial information around the world and make it more consistent, according to IFAC. This, in turn, will facilitate the comparability of financial information, create a more level playing field for global investors, facilitate cross-border investment flows, and enhance economic and financial stability.
We urge the individual G-20 governments to adopt and implement common global standards for public sector accounting as well as for auditing, auditor independence and private sector accounting as a demonstration of their leadership on these global issues, said Ball.
Importantly, public sector accounting standards will provide better information regarding systemic risks associated with government debt and liabilities. While the use of international standards would not necessarily have helped avoid the current crisis, the financial information from such standards would help public officials and other groups assess the implications of governments fiscal decisions, and could have mitigated the current crisis and help prevent future crises.
It is critical for taxpayers, investors and the general public to understand the full impact of decisions made by governments with respect to their financial performance, financial position and cash flows, said Ball. As the stewards of taxpayer funds, governments must be accountable for and transparent about the financial impact of their decisions on this and future generations. Anything less is a serious violation of the public trust.
The letter to the G20 with the full recommendations is posted on the IFAC website at www.ifac.org/financial-crisis.
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