Accountability. Now. We Must Enhance Government Accountability and Transparency

In the public sector, the lack of transparency and accountability presents a major risk to the efficiency of capital markets, global financial stability, and long term sustainability. We need to create greater public awareness among all levels of society. From world leaders to policymakers and citizens, people must gain a better understanding of the importance of financial reporting in the public sector. If we want to build a society that is sustainable and stable in the long-term, we must be prepared to take responsibility for the changes that will be required to more effectively manage public sector resources.

The International Federation of Accountants (IFAC) recently launched the Accountability.Now initiative, which is designed to raise awareness of the need for greater transparency and accountability in public sector financial management. At the core of this initiative is the drive for governments and public sector entities to implement robust and effective accrual-based financial reporting systems, such as those based on International Public Sector Accounting Standards (IPSASs), developed by the International Public Sector Accounting Standards Board (IPSASB). 

The Need for High-Quality and Timely Accrual-Based Financial Reporting in the Public Sector 

A key issue for public sector financial reporting is that many governments still adhere to the cash basis of accounting, and therefore provide minimal disclosures relative to what the public, banks, investors, and credit providers generally expect of the private sector. Given the multitude of banks and private sector investors that hold government debt, it is no surprise that there is a growing demand for the same level of financial transparency and accountability from the public sector as is already expected from the private sector.

Accrual-based accounting ensures greater transparency and accountability in public sector finances as well as better monitoring of government debt and liabilities.

i)  Greater transparency and accountability in public sector finances

In a time when government reporting and transparency are being questioned, it is critical that governments work to establish—as a priority—greater trust between themselves and their constituents. Governments use taxpayers’ resources to invest in infrastructure and provide services and need to be accountable for how those resources are used. To establish trust, it is important that governments provide accurate and complete information on assets and liabilities as well as revenues and expenses.  Providing complete information on all transactions demonstrates accountability and stewardship; reinforces credibility; and provides clear and comprehensive information regarding the financial consequences of economic, political, and social decisions.

This information must focus on both the short-term and longer-term impacts of decision making; the latter of which cannot be achieved through the reporting and disclosure of only cash flows. That is, the type of information required can only be provided through a high-quality, robust, and effective accrual-based financial reporting system.

ii) Monitoring of government debt and liabilities for their true economic implications

The sovereign debt crisis, and the consequences that are still being felt around the globe, illustrate the public sector balance sheet management failures by many governments, and highlight the inability of organizations such as global financial institutions, investors in government debt, and credit rating agencies to adequately monitor the financial positions of governments. It is important to consider the balance sheet in debt financing since long-term investments may be partly financed by long-term debt—just like any household using a mortgage to finance a home.

A major priority for all governments should be reducing economic uncertainties and the significant threats posed by inappropriately managed debt. However, it is important to recognize that government debt alone does not provide a comprehensive picture of fiscal soundness. The full disclosure of all assets, liabilities, and contingent liabilities is vital for assessing the true economic implications of public sector financial management. Furthermore, the disclosure of all liabilities, including a government’s long-term obligations (e.g., pension obligations), may encourage government leaders to make decisions that focus on long-term sustainability, and that are not driven by short-term political incentives.

Only through a high-quality, robust, and effective accrual-based financial reporting system can all government assets and liabilities (including debt) be appropriately recorded, reported, and disclosed, and hence effectively monitored.

Governments need to address long-term sustainability and the welfare of future generations should compel governments to recognize and act, now and into the future, to enhance the reporting, transparency, accountability, and decision-making of the public sector.

Adoption and Implementation of IPSASs

The adoption of IPSASs by governments worldwide will improve the quality of financial information reported by public entities. Global adoption of these standards will facilitate the comparability of such information on a global basis and assist in internal management decisions in resource allocation (planning and budgeting), monitoring, and accountability.

While the application of IPSASs alone would not solve the problems highlighted by the sovereign debt crisis, the financial information would assist public officials and other groups in assessing the implications of fiscal decisions proposed or made by governments. Indeed, it can be argued that without better reporting and enhanced transparency and accountability, the problems highlighted by the current sovereign debt crisis will never be truly resolved.

Public Interest

It is a major public interest concern that strong financial reporting and financial management arrangements are not in place in many countries around the world. Governments have a responsibility to enact legislation, formulate and implement policy, and deliver products and services to their citizens. The decisions made and actions taken in fulfilling these ambitions should be undertaken in the public interest.

Indeed, there is political accountability on the part of governments to ensure that they do act in the public interest. Governments have coercive powers to tax. Monies raised through taxation are allocated to spending, both recurrent (e.g., paying wages to public sector employees) and capital (e.g., spending on major infrastructure projects, such as roads and railways), for the benefit of the country and its citizens. This responsibility obliges governments to discharge their accountability by demonstrating the manner in which they have effectively and efficiently used the resources at their disposal. Additionally, where governments have shortfalls between amounts raised through taxation and amounts dispersed as government spending, they raise funds through debt markets. Where this is done, governments have a public interest obligation to market participants—investors and potential investors—to provide timely, reliable, and detailed information of their financial performance and positions—in the same way that listed companies have obligations to equity market participants.

However, without robust, transparent, and accountable arrangements for financial reporting and financial management, it is not possible to reliably assess whether decision making by governments has been in the public interest. Furthermore, it is unlikely that governments will be able to adequately discharge their accountability, and provide the standard of information required by investors, without being able to publicly report and disclose high-quality financial information. 

Andreas Bergmann is Chair of the International Public Sector Accounting Standards Board (IPSASB). He will be chairing Enhancing Government Transparency and Accountability: A Way to Economic Growth at the World Congress of Accountants 2014  this November 10 – 14, in Rome, Italy (Plenary II).  He will be joined by Ian Ball, Chair, Chartered Institute of Public Finance and Accountancy International, UK; Thomas Muller-Marques Berger, Member, IPSASB, and Chair, Public Sector Group, Federation of European Accountants, Germany; Yu Weiping, Assistant Minister of the Ministry of Finance, P. R. China; and Zaifun Yernazarova, Director, Department of Budget Procedures Methodology, Ministry of Finance, Republic of Kazakhstan.