March 22, 2011Doug Hadden
Doug Hadden, VP Products
Why should governments move to accrual accounting? To international standards? These were some of the themes at the first annual international CIPFA (The Chartered Institute of Public Finance & Accountancy) conference on trust and accountability in London last week.
David Walker, the former comptroller general of the United States spoke about misleading public accounts and the lack of financial transparency. An upcoming study with Standford University and Walker’s Comeback America Initiative will show that New Zealand, the first country to adopt accrual accounting, leads in fiscal transparency.
Ian Ball of the International Federation of Accountants (IFAC) spoke about the move to accrual accounting in New Zealand. Although accrual accounting exposes political expediency, it leads to much better decisions according to Mr. Ball who showed how the value of the Government of New Zealand has increased over time until the financial crisis.
Dr. Ionnis Sarmas described the public debt crisis in Greece. Dr. Sarmas showed how subsequent audits increased the debt estimate. Financial controls were not observed. Professor John Fitzgerald described the public debt crisis in Ireland and the lack of effective oversight in the financial sector. He pointed out that Germany has decided not to adopt even modified cash accounting.
Here are some takeaways:
- The lack of accrual accounting enables governments to “cook the books”. In particular, governments often show pension investments as assets but do not count the present value of pension obligations or entitlements.
- The use of different standards makes it difficult to compare governments around the world and can hide systemic weaknesses.
- The lack of multiple year planning in many countries provides too short a window for substantial change.
- Many vehicles used for managing public finances are dubious from an accounting perspective. As David Walker says, Trust Funds in the US Federal Government are not funded and no one trusts them. There is also concern about the magic bullet of Public Private Partnerships (PPPs). Governments often absorb the liability should the private sector partner fail.
- Perhaps developing countries, like Timor-Leste, will leapfrog more developed countries, on this road to international public sector accounting standards.
- Trust and accountability means that the population needs to see the books. Politicians and public servants need to understand the long-term implications of public policy.