Financial Reporting for an Open World
A shortage of accountants often makes it difficult for governments to build the capacity required for proper financial reporting, deputy president Anthony Harbinson told ACCA’s fifth annual International Public Sector Conference. Yet the need for high quality financial reporting is increasing with rising public expectations of service standards and infrastructure quality, at a time when austerity is cutting public sector budgets. Meanwhile, debt levels remain too high in many countries.
Some governments do not publish balance sheets or financial reports, undermining political accountability. Professional accountants need to tell public bodies that they should publish comprehensible financial reports. Mr Harbison, who is also chair of CCAB and director of safer communities for the Department of Justice in Northern Ireland, added that ACCA is a leader in the development of financial reporting standards, including in the public sector.
The comments were made in opening remarks at the conference, held in London on the theme of ‘Financial Reporting for an Open World’.
The World Bank is committed to improving financial reporting, including through Integrated Reporting (IR) in the private and public sectors. It is undertaking its own IR pilot programme, explainedits financial reporting and analysis manager, Zinga Venner. IR is essential in the private sector in part because of the disconnect between a company’s tangible asset valuation and its share price. In the 1970s, about 80% of a company’s stock price value was represented by tangible assets: by 2009, this was down to 20%. Yet many intangible assets are not recognised on balance sheets.
IR is equally important in the public sector. Organisations involved in IR pilots find their strategies change, because IR makes them consider more carefully how they use resources. The debt crisis caused countries to be penalised for their debt, a result of investors in the past having insufficient information for their investment decisions.
Professor Ron Hodges of Birmingham University explained that the Private Finance Initiative and other types of Public Private Partnerships had been used by the UK Government to take capital spending off-balance sheet. Based on UK GAAP, £40bn of £56bn of PFI/PPP capital expenditure in the period to 2010 was off-balance sheet. If IFRS/IPSAS had been used at that time, £41bn of £47bn analysed PFI/PPP capital expenditure would have been on-balance sheet.
The change of accounting treatment has dried-up PFI/PPP schemes. But some government guarantees and future types of PPPs may be off-balance sheet, such as the UK’s Help to Buy scheme and guarantees on future nuclear power output prices.
Eurostat’s Alexandre Makaronidis reported that European Public Sector Accounting Standards (EPSAS) will be based on IPSAS, with an IPSAS ‘lite’ for low risk public bodies. Europe’s need for harmonised public sector accounting standards was demonstrated by governments’ debt crises and incorrect financial reporting by some member states. The Commission will issue a communication on EPSAS in 2014, with a draft framework regulation by the end of 2015 and subsequent implementation.
Patrice Schumesch, a PwC global partner, explained that 54% of governments still report on a cash basis, with just 26% using only accrual accounts. Within five years there will be a 142% rise in the application of accrual accounting, with the biggest movement towards the adoption of IPSAS being in Asia, Africa and Latin America. It typically takes three years to transition to accruals: the biggest challenges are shortages in trained staff and IT requirements. A broader reform of the finance function is needed to achieve the full impact of IPSAS.
Philippe Peuch-Lestrade of the International Integrated Reporting Council told the conference how IR would work for the public sector. IR is important, in part, to make financial reports more concise and digestible. In some countries, including France, public sector accounts are too large to be comprehensible and so are read by few people. IR will be developed for the public sector for implementation from 2020. IR encourages integrated thinking and requires a different approach to financial management, for example by recognising and mitigating the future cost of climate change.
Hetan Shah, executive director of the Royal Statistical Society, told delegates that a data revolution is taking place, with the stock of data doubling over the next three years. “We are living in the ‘big data’ era… there is just a lot more data around,” he said. Public bodies are using data to drive down costs, measure impacts, monitor risks and better understand who uses public services and why.
Nida Naeem, an independent consultant and chair of ACCA’s subcommittee for the public sector in Pakistan, argued that there is “a vast difference in governance” between Pakistan and some other developing nations compared to the advanced democracies. Reform of financial reporting standards is less of a priority where governance is weak.
Stephen Emasu, a public financial management expert with the IMF, explained that developing nations that have adopted IPSAS have raised the quality of public financial management, while reducing costs through improved efficiency. IPSAS have increased financial reporting transparency and accountability, but only where reporting is timely.
ACCA’s head of public sector, Gillian Fawcett, closed the conference, saying that speakers had consistently stressed the topicality of the reform of public sector financial reporting and the need to use improvements to strengthen transparency and accountability. Fresh thinking is needed on financial reporting, she said, such as the adoption of IR in the public sector.