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This article was first published in the February 2018 China edition of Accounting and Business magazine.

The global financial crisis of 2008 highlighted the shortfalls in some governments’ reporting of their cash-based financial statements and underlined the need for better transparency and accountability in national financial reporting – especially in order to attract further foreign direct investment.

Since then, many countries have begun financial management reform programmes – though at varying speeds – in a move towards adopting the International Public Sector Accounting Standards (IPSAS) issued by the International Public Sector Accounting Standards Board.

Just as International Financial Reporting Standards (IFRS) have improved listed companies’ financial reporting and accounting practices, the implementation of IPSAS by public entities should bring greater clarity and accountability to public sector entities’ financial positions and have a significant beneficial impact on their ability to attract international investment.

But while it has been gaining momentum, a recent ACCA study concludes that overall ‘progress has remained slower than is desirable’, with adopting countries facing multifaceted and consistent implementation challenges.

The report, IPSAS implementation: current status and challenges, draws on the experiences of developed and developing countries currently in the process of adopting IPSAS and concludes that few have completed it successfully and seamlessly. Full adoption and compliance with IPSAS ‘remains at best what can be described as work in progress’, says the report.

There is compelling evidence that adopting IPSAS gives public sector entities better clarity on their financial position, with enhanced standardisation of information helping them improve efficiency in their auditing processes, financial reporting and policy development.

Adopting IPSAS can also have a broader economic impact, reassuring international investors and in turn creating spin-off benefits in terms of employment, for example.

Despite these significant benefits, however, there are still disparities in the rate of adoption. Furthermore, the level of awareness and understanding of the IPSAS framework also varies widely.

The researchers note that while some of the challenges affecting adoption can be linked to broader change management and programme management issues, there are more basic challenges among emerging countries related to limited IT infrastructure and poor record keeping.

Because public sector entities are more used to cash-based accounting principles, successful IPSAS adoption necessitates training key stakeholders to facilitate the necessary cultural changes, as well as the development of essential new skills. ‘The change will not succeed if it is imposed: implementation requires political will and “champions” to create momentum,’ the report argues.

The structural reforms required for IPSAS implementation are also time consuming and present significant legal and regulatory challenges. Survey respondents indicated that 10 years was a realistic transition period for full implementation, although countries operating a federal and state model could need as long as 20 years.

In South-East Asia, IPSAS adoption is ongoing. Following a number of initiatives, ranging from legislative revisions to the development of change management strategies, Malaysia’s federal government adopted IPSAS accrual-based standards in 2015, with state governments following in 2016.

Implementation has had its challenges, however. Lack of accurate records to determine opening balances and difficulties in valuing particular asset types and complex financial instruments, as well as broader concerns such as insufficient skills, were just some of the issues encountered.

The National Audit Office’s audit of the federal government’s financial statements for 2016 noted an improvement in financial management that year over the previous year and concluded that the statement as a whole reflected ‘a true and fair view’. However, the financial management audit also revealed that several ministries and departments were not fully compliant with financial regulations.

It pointed to negligence in complying with stipulated financial rules and procedures, as well as a lack of financial management training, insufficient staff and inadequate supervision.

Lagging behind

Having first established its public sector reform programme in 1999, Indonesia adopted IPSAS-type standards in 2015. As a result, audit outcomes for Indonesian government entities, especially at regional level, have improved substantially. And for the first time in 12 years, central government consolidation accounts received an unqualified audit opinion for 2016.

While there has been progress, the implementation process is still a work in progress, the report notes. Disclosure standards on related parties and financial instruments, for example, have yet to be included and accounting standards have not been developed for employee benefits and financial instruments to account for the complexities in the balances and transactions.

The adoption of IPSAS-type standards has also yet to be embraced by local governments, which are still preparing their accounts on a modified cash and partial accrual basis, the study notes.

Vietnam meanwhile is lagging behind and is still in the initial assessment stages of adopting IPSAS-type standards, even though the International Federation of Accountants (IFAC) reported as far back as 2007 that the country was in the process of moving to IPSAS.

While a revised accounting law came into effect in January 2017 mandating the adoption of accrual-based standards for the public sector, the standards have yet to be issued. As such, there still remain significant differences between the public sector’s accounting practices and cash-basis IPSAS, including recognition of receipt of funds as revenue and the use of Ministry of Finance (MOF) exchange rates to record revenue and expenditure in a foreign currency.

An independent academic study recently argued that additional public sector management reforms are  necessary and pointed out that at present Vietnam was only in a position to apply modified IPSAS.

Overall the ACCA study underlines the need for governments adopting and implementing IPSAS to have ‘a clear strategy, with realistic timescales, milestones and resources’.

It notes that most countries seem to favour a phased approach, rather than a ‘big bang’ one, but suggests that implementation plans should be adopted on a country-wide basis, taking a project management approach.

Professional accountancy organisations can and should support public entities by helping raise awareness of the need for transparent financial reports, but should also go beyond providing training on accounting standards.

‘It’s time for governments, public sector entities, the users of financial reports and the accountancy profession to come together to achieve our common goal: transparent financial reports that improve accountability, public sector financial management, decision-making and ultimately taxpayer’s value for money,’ comments Maggie McGhee, ACCA’s director of professional insights.

Sonia Kolesnikov-Jessop, journalist