The International Federation of Accountants (IFAC), the global organization for the accountancy profession with members and associates in 125 countries, applauds Europe’s focus on resolving the current financial crisis. However, IFAC warns that—in addition to addressing the symptoms—the underlying causes must also be addressed, by reforming governments’ substandard financial management practices. 

The situation in Greece is only the tip of the iceberg. Substandard accounting, auditing, and financial management led eventually to financial reporting fraud by the Greek Government, and ultimately triggered a market reaction that revealed much more widespread financial fragility in the European public sector, evidenced by the need for bail-outs and increased debt servicing costs. In Germany, the government recently disclosed an accounting error equivalent to 2.6% of GDP. To put the size of that error in context, the cost of Japan’s earthquake and tsunami in early 2011 was equivalent to approximately 5% of GDP. That this error was not obvious to Germany’s Ministry of Finance is indicative of the general state of government financial management. A similar, though smaller, error reported in the Irish Government’s financial statements this week corroborates this negative assessment of the state of public sector financial management.

Fiscal mismanagement in the public sector is not isolated to Europe; it is a global problem. At the core, it stems from political shortsightedness and the inadequate systems that governments use to manage public finances, in particular the use of cash-based accounts in a highly complex financial world.

“The fact that most governments in the developed world pretend they can manage and control their finances using only cash information tells us that something is seriously wrong,” said Ian Ball, IFAC chief executive officer. "The cash-based information commonly used for budgeting and accounting is both simplistic and anachronistic, and doesn’t come close to accurately describing the complexity of their financial positions. It is a virtual guarantee of financial mismanagement.”

“If we asked a typical household to prepare a balance sheet they would include all of their assets and liabilities—including their house and car, loans, mortgages, etc.—not just their cash. If governments ran their health systems without using available modern medical information and technology, they would be held negligent. Yet, in essence, this is what governments do in their financial management. It is easier for them to operate this way, but it is potentially fatal to economic growth and financial stability,” added Göran Tidström, IFAC president.

As early as 2007, IFAC stated that it “is concerned that the standards and regulations governing sovereign issuers are not of sufficient quality to protect investors and ensure the stability of capital markets.” In 2011, the consequences of poor financial management in the public sector are all too apparent.  Consistent with its recent submission to the G-20, IFAC calls for urgent research and action to address this critical, but neglected, component of the international financial system.

IFAC recommends that work should be conducted or commissioned by the Financial Stability Board (FSB), to consider the nature of institutional changes that are needed in public sector financial management to facilitate greater transparency and accountability and to protect the public and investors in government bonds. IFAC believes the FSB should examine reformed fiscal arrangements which include:

• Audited financial statements within six months of year end;
• Budgeting, appropriations, and reporting on the accrual basis;
• Full transparency in fiscal positions ahead of general elections, ensuring that voting is fully informed;
• Independent, audited projections of fiscal position to accompany budgets; and
• Limitations on deficit spending, or at least full transparency around the reasons for deficit spending and explanations of how, over an economic cycle, fiscal balance will be restored.

In calling for financial management reform in governments, IFAC stands willing to assist the FSB or other relevant authorities in bringing about such change.

About IFAC

IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC is comprised of 164 members and associates in 125 countries and jurisdictions, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce. 

#   #   #

The International Federation of Accountants (IFAC) is pleased to provide a series of recommendations for consideration by the G-20 at its meeting on November 3-4, 2011 in Cannes, France.

In a letter submitted this week, the International Federation of Accountants (IFAC), the global organization for the accountancy profession with members and associates in 125 countries, urged the G-20 leaders at their November 3-4, 2011 meeting in Cannes, France, to focus on three long-term initiatives aimed at promoting global economic stability and greater fiscal sustainability: 1) public sector financial reporting and management reforms; 2) global regulatory convergence; and 3) development of integrated reporting.

Address Public Sector Debt Problems: Encourage Review of Institutional Changes in Public Sector Financial Management and Adoption of Accrual-Based Accounting

In order to address the sovereign debt crisis, IFAC recommends that the G-20 commission the Financial Stability Board (FSB) to consider the institutional changes that are needed in public sector financial management to protect investors in government bonds, as well as the public. Further, the G-20 should actively encourage the adoption of accrual-based accounting and budgeting by governments and public sector institutions, which will promote greater transparency and accountability in public sector finances and allow for monitoring of government debt and liabilities for their true economic implications. IFAC also encourages the adoption and implementation of International Public Sector Accounting Standards (IPSASs).

“It is increasingly apparent to the general public that this is an urgent issue. The sovereign debt crisis engulfing the European Union and the government debt issues affecting the United States and potentially other countries around the world are cause for major concern,” said IFAC Chief Executive Officer Ian Ball. “The crisis highlights that fiscal management is clearly deficient in many countries, with inadequate constraints or incentives for governments to protect the public interest and investors. This failure of fiscal management is widespread and has economic consequences that will far exceed the impact of corporate reporting failures, such as Enron, WorldCom, Parmalat, and Lehman Brothers.”

Maintain Momentum for Regulatory Convergence, including Adoption and Implementation of International Standards

IFAC recommends that the G-20 strengthen its resolve for adoption and implementation of common global standards for financial reporting, auditing, and auditor independence, including International Financial Reporting Standards (IFRS), International Standards on Auditing (ISAs), and the auditor independence requirements set out in the Code of Ethics for Professional Accountants. These standards will enable the consistent interpretation of financial information around the world, which in turn will facilitate cross-border activity, promote economic and financial stability, and strengthen transparency and accountability in the capital markets. IFAC also urges the implementation of the recommendations contained in the recently submitted Private Sector Taskforce of Regulated Professions and Industries Report. In addition, IFAC encourages internationally consistent, robust regulation of credit ratings agencies.

The Needs of the Future: Support Integrated Reporting

IFAC calls on the G-20 to formally signal its support for the work of the International Integrated Reporting Committee (IIRC), a collaboration of leaders from the corporate, investment, accounting, securities, regulatory, academic, and standard-setting sectors, as well as civil society. The IIRC is currently developing an integrated reporting framework, which aims to bring together financial, social, and governance information in a clear, consistent, and comparable format. Integrated reporting links the strategy, governance, and financial performance of an organization with the social, environmental, and economic contexts in which it operates. As a result, the framework will help entities make more sustainable decisions and enable investors and other stakeholders to better understand an organization’s true performance. Integrated reporting will help governments and private sector entities better understand the longer-term impacts of financial and operating decisions on all areas of society.

“The global financial crisis showed us clearly that a focus on short-term risks and rewards can encourage behaviors that lead to disastrous outcomes,” said IFAC President Göran Tidström. “The accountancy profession’s involvement in the IIRC and the future of integrated reporting represent our efforts to mitigate the current financial crisis, avoid future crises, and contribute to a more sustainable, global economy.”

In conclusion, Mr. Tidström stated, “Problems that began as isolated issues have led to the global financial crisis—proving just how interconnected our world has become. We all have a stake in the solutions, and those solutions require a coordinated international approach. Global leaders should resist unilateral policy reform initiatives which potentially undermine the cause of convergence. Instead, we have an opportunity to enhance coordination and consultation with all stakeholders and work collectively to support global economic stability.”

The letter to the G-20 with the full recommendations is posted on the here.

About IFAC

IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC is comprised of 164 members and associates in 125 countries and jurisdictions, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce.

#       #       #

IFAC CEO Ian Ball comments on the FT's commentary – as well as the policy debate – on the sovereign debt crisis.

El propósito de esta Norma es establecer la forma en que los estados financieros de carácter general deberían presentarse sobre la base contable de efectivo.

In This Issue:

1. IPSASB Accelerates Conceptual Framework Initiative
2. Work Started on Reviewing IPSASB's Governance Structures
3. IPSASB Issues Service Concession ED
4. Communications Report Released at April IPSASB Meeting
5. Share IPSASB eNews with your Colleagues

1. IPSASB Accelerates Conceptual Framework Initiative

The International Public Sector Accounting Standards Board (IPSASB) is accelerating its efforts in the development of the Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities (the Framework), with the goal of completing it as quickly as reasonably possible.

The Framework initiative is the IPSASB's most important project over the next three years and is therefore being prioritized in all planning and resource allocations. It will explicitly identify and explain the concepts, definitions and principles underpinning IPSASs and related guidance. John Stanford, IPSASB's Deputy Director, has taken on the role of Project Coordinator in order to ensure that all components can be completed expeditiously and are well integrated.

This project, launched in 2006, involves four phases, which are progressing as follows:
1. Reviewing the responses (now over 50) from stakeholders to the Consultation Paper Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities: The Objectives of Financial Reporting; The Scope of Financial Reporting; The Qualitative Characteristics of Information Included in General Purpose Financial Reports; The Reporting Entity.
2. Discussing issues related to the definition and recognition of elements
3. Discussing issues related to measurement
4. Discussing issues related to presentation and disclosure

The IPSASB is well under way in phases 2 and 3, for which Consultation Papers are expected to be released in 2010. The Consultation Paper for phase 4 is expected in early 2011.

The first Consultation Paper, published in September 2008, can be accessed at IFAC's Exposure Drafts and Consultation Papers webpage. 
2. Work Started on Reviewing the IPSASB's Governance Structures

The IPSASB has launched discussions regarding developing a new plan for its strategy and operations, including proposed fundamental changes to some of its governance structures. These discussions are in the early stages and have been informed by various comments and concerns that have been raised by constituents at IPSASB meetings and various other meetings.

One of the most important aspects of these discussions is the need to develop a process for public oversight of the board's work. Unlike the other IFAC standard-setting boards, the IPSASB is currently not subject to oversight by the Public Interest Oversight Board (PIOB). The public sector clearly has a strong public interest mandate, and the need for oversight for the IPSASB has been anticipated by IFAC's reform process.

IFAC and the IPSASB will continue to discuss this and other related issues and together are developing a plan for consulting with various governments and other stakeholders on proposed changes and the related impacts.

3. IPSASB Issues Service Concession ED

The IPSASB is seeking comments on an exposure draft (ED) that addresses accounting for service concession arrangements (SCAs) by the grantor. Titled Service Concession Arrangements: Grantor, the ED presents requirements and guidance on how grantors recognize, account for, and disclose assets in service concession arrangements.

Service concession arrangements, often called Public-Private Partnerships, or PPPs, involve an operator providing services to the public on behalf of a grantor - usually the government or another public sector entity. There has been a demand for more accounting guidance for the grantor and the IPSASB's ability to develop draft guidance is strongly supported by constituents.

Comments on the exposure draft are requested by June 30, 2010. To access the exposure draft or submit a comment, visit the IFAC Exposure Drafts and Consultation Papers webpage. 

4. Communications Report Released at April IPSASB Meeting

The IPSASB prepared a Communications Report outlining the full extent of the communications and liaison activities undertaken by IPSASB Members, Technical Advisors (TAs) and staff during 2009.

In summary, the report revealed the following details:

• Over the course of 2009, an impressive array and volume of communications and liaison activities were undertaken on behalf of the IPSASB. Over 82% of Members (14/17), as well as many TAs and IPSASB staff, undertook these activities;
• Over 150 activities took place in 2009, including meetings, presentations, publications and teleconferences;
• These communication activities reached all geographical regions around the world; and
• Approximately 30 countries and over 50 cities worldwide were visited.

5. Share IPSASB eNews with Your Colleagues

The IPSASB issues regular eNews updates to keep you current on its activities and recent publications. Please forward this eNews to any interested colleagues and let them know that they can subscribe to this and other eNews bulletins at the eNews sign-up page at www.ifac.org/e-news.

ACCOUNTANTS: SUSTAINING VALUE CREATION

The 18th World Congress of Accountants, hosted by the Malaysian Institute of Accountants and IFAC, is November 8-11, 2010.  The Congress will offer more than thirty panel discussions and speakers from The World Bank, Transparency International, the Financial Stability Board, the European Commission, IFIAR, and the IASB, among others. Thousands of delegates representing the profession from around the world will attend.

Register now!



For more information about any of the items mentioned above or other information about the IPSASB, please contact: communications@ifac.org or visit the IPSASB's home page at www.ipsasb.org.

About the IPSASB and IFAC

The IPSASB (www.ipsasb.org) develops high quality accounting standards and guidance for use by public sector entities around the world. The IPSASB, an independent standard-setter operating under the auspices of IFAC, promotes adoption of and convergence to its standards globally.

IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC is comprised of 159 members and associates in 124 countries, representing more than 2.5 million accountants in public practice, education, government service, industry and commerce. In addition to setting international accounting standards through the IPSASB, IFAC, through its independent standard-setting boards, sets international auditing and assurance, ethics, and education standards. It also issues guidance to encourage high quality performance by professional accountants in business.

Thank you, Tim, for the introduction. Good afternoon, ladies and gentlemen. It is a pleasure and a privilege to be here today. I note that I am in the after-lunch panel, I am the last of four speakers, and my topic is accounting. Not a good start!

My topic is government transparency and the role financial reporting standards can play. I will draw particular attention to IPSASs, but I will come to that rather than start there. The subject of this panel discussion is "New Rules and Regulations for All." My component of this session is not so much new as more necessary and more urgent than ever before.

The International Public Sector Accounting Standards Board (IPSASB) today released for comment an exposure draft (ED), Key Characteristics of the Public Sector with Potential Implications for Financial Reporting. The paper provides background on issues affecting the development of a conceptual framework for public sector entities and standard setting. In particular, it highlights that public sector entities are likely to depend upon taxation rather than commercially generated profits for their continued existence—and have governance arrangements that generally involve a legislative body holding an executive to account.

The paper is geared toward those who may have limited familiarity with the public sector, particularly those with more experience of financial reporting in the private sector—both for- profit and not-for-profit entities.

One of the main objectives of governments and other public sector entities is to deliver goods and services—not to produce profits, as in the private sector. As a result, there are a large number of financially significant non-exchange transactions in the public sector. These include outflows, such as state pension and social security payments, and inflows from taxation and transfers from other levels of government. However, the paper notes that there are a large number of transactions in the public sector that mirror those in the private sector, and that in such cases, there is no reason why accounting treatments should differ between the two sectors.

The paper also considers the importance of the budget in many jurisdictions. It is often the primary mechanism for communicating with citizens and demonstrating compliance with legal requirements.

Other areas explored include the specialized nature of much of the property, plant, and equipment deployed in the public sector, the regulatory role of government, the responsibilities for a nation’s or area’s heritage, the longevity of most governments and many public sector entities, and the ownership or control of rights to natural resources. The paper also notes that for governments, reporting under statistical bases of accounting is highly important for decision-making purposes and economic analysis.

“When government and public sector financial reporting is mentioned, you often hear a view that the public sector is different; sometimes differences can be exaggerated or underestimated. This exposure draft tries to identify areas that really do need to be considered by standard setters when developing the concepts for public sector financial reporting. We are interested to hear stakeholder views on whether we have identified the right areas,” said IPSASB Chair Andreas Bergmann.

How to Comment
To access the exposure draft or to submit a comment, visit the IFAC website at www.ifac.org/Guidance/EXD-Outstanding.php. Comments on the exposure draft are requested by August 31, 2011. The IPSASB invites all stakeholders to comment on the exposure draft.

About the IPSASB
The IPSASB develops accounting standards and guidance for use by public sector entities. The structures and processes that support the operations of the IPSASB are facilitated by IFAC.

About IFAC
IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. It is comprised of 164 members and associates in 125 countries and jurisdictions, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce.