Towards implementing European Public Sector Accounting Standards (EPSAS) for EU member states: public consultation on future EPSAS governance principles and structures

Comments from ACCA to Eurostat. 16 February 2014

General comments

This consultation is directly relevant to ACCA because we have a significant number of members and students working in the public sector across Europe who will be affected by proposals to change accounting practices and standards.  

The future development of European Public Sector Accounting Standards (EPSAS) has the potential to change technical accounting policy, education and training for ACCA’s members and students.  We are a member body of the International Federation of Accountants (IFAC) and have responsibility for promoting the role of the International Public Sector Accounting Board (IPSASB) that works closely with the International Accounting Standards Board (IASB) to interpret International Financial Reporting Standards (IFRS) for the public sector and the development of International Accounting Public Sector Accounting Standards (IPSAS). We currently support both sets of accounting standards as set out in our policy document ‘Setting high professional accounting standards for public services around the world’ (2013).  We are also a member body of the Federation of European Accountants (FEE) and have an active role on the public sector committee that takes leadership in representing the accounting profession for European public services.

We believe our professional accountancy expertise; experience and international reach across the public sector will allow us to make an informed contribution to this consultation and future accounting developments. Therefore we very much welcome the opportunity to comment on future EPSAS governance principles and structures. The views expressed in this response reflect the opinions of the ACCA Global Forum for the Public Sector, which includes senior finance professionals, academics and advisors from around the world.

Responses to specific questions

Key governance principle

1. Do you consider that the sets of principles described for the EPSAS governance structure and process as well as for the EPSAS standards are relevant?


2. Please provide any comments or proposals on the principles.

International consistency and comparability of accounting standards for the public sector should be at the heart of the objectives of the EPSAS governance structure. Accounting standards are converging globally, particularly within developing countries that are looking towards introducing IFRS and IPSAS. We believe that the changes in IPSASB’s approach over the last few years have meant that IPSASs have converged with IFRS except where there have been good public sector reasons for not doing so.  Also, IPSASB has been plugging the gaps where necessary as recently set out in its 2014/15 work plan.  We hope that the sentiments outlined in EUROSTAT’s report ‘Towards implementing harmonised European Public Sector Accounting Standards’ of using IPSAS standards as an ‘indisputable reference point’ will be implemented so that potential deviations and interpretations from the suite of IPSAS standards are minimised.

EPSAS should be soundly based on IPSAS so that public sector accounting standards are aligned with those of the rest of the world and are consistent with the listed company sector that complies with IFRS. Clear lessons can be learnt from how IFRS was adopted across the European Union (EU) for listed companies. The endorsement process adopted was relatively efficient and meant that there were few deviations from the full IFRS. In light of IFRS endorsement experience any plans for significant deviations from IPSAS should be carefully considered in the context of achieving consistency and comparability of government accounting around the world. 

In relation to the specific principles outlined for the governance structure, we believe that accountancy is one of the most respected professions in the world and ethics in accounting and the setting of accounting standards are of the utmost importance.  It is critical that the proposed governance structure reflects these principles and adopts the highest standards of practice and ethical conduct for setting accounting standards. The principles adopted should be future proofed and widely understood by all those involved in the standard setting process, irrespective of whether they are government representatives or accounting specialists. Therefore, in the context of this consultation, the seven principles outlined for the EPSAS governance structure appear reasonable. We are also pleased to see that the principles are closely referenced to the IFAC good governance standard for the public sector.

However, we are surprised that the key principle of ‘objectivity’ is absent.  In our view an explicit reference to this principle can further strengthen the governance framework. It is important because it explicitly excludes bias, prejudice and compromise and allows for fair and impartial consideration to the accounting standard setting process.  Like integrity, this is a fundamental principle and requires that judgment be exercised which is not affected by conflicts of interest.  Also, ‘objectivity’ is a widely understood principle across both the public and private sectors and is at the heart of good corporate governance.

Overall, we understand the need for EPSAS to be decided at the political level by Member States’ representatives. In our experience this will help to engage politicians in the process. All too often we find that the lack of political will and engagement are key obstacles preventing countries from adopting accruals based accounting.

Despite the positive aspects of political engagement, we have some concerns about the independence and neutrality of the governance proposals. Given that the governance proposals recommend a European Commission (EC) chair for each committee and participation is primarily drawn from representatives of national governments, it is difficult to see how the governance structure can be politically neutral and independent. This consultation does not address the key question of whether or not the public would perceive the governance structure as independent. If the answer is no then public trust and confidence in the standard setting process will be undermined. The governance structure needs to instill both public confidence and withstand scrutiny.

We believe a balance has to be struck between participation of experts, national standard setters and government representatives. This may go some way to alleviate the issue of independence. If we recall correctly, the lack of a robust governance framework and European representativeness were key criticisms impacting on the assessment of IPSAS for EU adoption. We would not want to see the same issue repeated here.

In our view the proposals and principles outlined do not currently give a sufficient guarantee of either independence or transparency in the accounting setting process. We would encourage the EC to give further consideration to the composition and balance of professional and government representatives on the EPSAS committee, working group(s) and task forces so that the principles of independence and objectivity can be achieved.

It is not clear from the proposals whether or not alternative structures and models of governance have been considered. There are no options presented in the consultation paper. This is an important issue, particularly given the recent consultation issued by the World Bank, IMF & OECD on the governance and oversight of IPSASB. It is unfortunate that both consultations have been issued independently of each other without a joined up approach. A key criticism in EUROSTAT’s report for not adopting IPSAS was the lack of governance and oversight of IPSASB. An alternative approach to governance could have included the EC considering how it could play a more significant role in the work of IPSASB. This would include seeking to influence IPSASB’s oversight process so that a governance framework could be developed that would meet the EU’s needs together with those of the rest of the world.

Governance oversight

3. Following the normal institutional organisation within the EU, the EPSAS governance would be subject to oversight by the Commission itself, and by the Council, the European Parliament and the European Court of Auditors. Do you consider that any further oversight function should be established?


4a. Do you consider that the oversight role of the EPSAS Governance Advisory Board as outlined in the consultation paper would be appropriate for EPSAS?*


4b. Please provide any comments or proposals on the oversight.

We welcome the proposal to introduce an EPSAS Governance Advisory Board. The suggested procedure to follow, namely, the European Statistical Governance Advisory Board (ESGAB) model appears to be a reasonable structure to follow and will save re-inventing the wheel. Nonetheless, implementation will be critical. It will be important that appointees fulfil both the independence and objectivity criteria, as well as having credibility and expertise in the accounting standard setting arena. We believe the accounting profession should be central to both oversight and standard setting developments. Arguably, this may lead to technocratic approach, but the reality is standard setting requires technical expertise. Without such assurance and credibility of the governance framework it is more than likely that both the oversight role and the process of standard setting will be undermined.

The success of the EPSAS Governance Advisory Board will inevitably depend on how it organizes oversight of the standard setting process. If stakeholders including users, professional accountants and auditors etc, are not sufficiently involved in the standard setting process, the duties and responsibilities of the Advisory Board will become increasingly important.

5. Taking into account that stakeholders` views could be collected by open consultations during the standard setting process, do you consider that an organised, formal representation of EPSAS stakeholders should be established?


6a. Do you consider that the role of the EPSAS Technical Advisory Group as outlined in the consultation paper would be appropriate for EPSAS?*


6b.  Please provide any comments or proposals on stakeholder involvement.

We believe that the quality of accounting debates can only be enhanced if these benefit from the views of experts and the accounting professions. The key benefits are that they have a more diversified and wider background on accounting issues.  A system of formal consultation and representation is important, but most importantly the process should not be a consultation for consultation’s sake, it must allow for stakeholders to exert influence over accounting standards developments. The governance framework must allow for due process to take place. The EPSAS committee, as well as the working group (s) should have access as wider access to the views of stakeholders as possible. This will also help to ensure political neutrality.

The EC should be aware that the pool of accounting experts with an understanding and knowledge of IPSAS accruals accounting to draw upon is relatively small.  The problem is exacerbated by the fact that a number of Member States still prepare accounts on a single entry basis or cash basis. Also, in some Member States there is a shortfall in accountants working in national, regional and local governments, which will pose problems for implementation in the future.  Although the proposed standard setting process may be robust, without the necessary expertise and capacity it will be difficult for Member States to effectively participate and enact change.  Notwithstanding these factors, a number of Member States have already expressed resistance to change as outlined in EUROSTAT’s initial consultation, final report and IPSAS conference in May 2013.  In addition, it is disappointing about the lack of engagement of Supreme Audit Institutions (SAIs).  These challenges make it even more important that the EC draws on the expertise of the wider accounting profession and works with them to develop both accounting standards ‘fit for purpose’ and support the building of an effective accountancy and auditing profession across Members States.

7. If you think that both the EPSAS Governance Advisory Board and the EPSAS Technical Advisory Group would be appropriate for EPSAS, could their role and tasks be fulfilled by a single advisory group?


8a. Please provide any comments or proposals on a single advisory group.*

We prefer the direct involvement of a wide range of stakeholders into the standard setting process rather than through an additional channel of an advisory group. Creating an additional committee and process would add additional layers of bureaucracy and would have no formal role in the decision-making process. It also has the potential to make the standard setting process unwieldy and inefficient. 

Interpretation of the standards

8b. Do you consider that an interpretation function should be foreseen for EPSAS?


9a. Do you consider that this interpretation function should be kept separate from the standard setting function?

We do not see an urgent need for a separate EPSAS interpretation group. This should be part of the standard setting group. As stated in our answer to question (3) the objective of the proposed governance structure should be to minimize the need for interpretation and deviation of IPSAS standards. The focus of the governance structure should be on developing high quality accruals based accounting standards for the public sector, based on IPSASs where practically possible in order to avoid the re-invention of the wheel.  The committee structure should be as streamlined as possible to facilitate efficient standard setting.

9b. Please provide any comments or proposals on the interpretation?

A key aspect missing from the proposed governance structure is consideration of the budget. Strong public financial management is much wider than financial reporting and directly links to the policy and decision-making processes through the budget process. This is one of the factors that make the public sector unique. Generally, across governments there is a stronger emphasis placed on the budget setting and budget execution processes.  In order for accruals based accounts to be compared against budget, changes will be required to budget setting process. Budgets will need to be compiled on an accruals basis so that like for like comparisons can be made. Once again budget practices are patchy across the EU and will need aligning. We encourage the EC to consider changes to Member States budget practices so that accruals budgets are compiled alongside accruals based accounts.

As stated earlier, we noted the low level of engagement throughout the process by European SAIs. The proposed governance model includes the involvement of the European Court of Auditors (ECA) but not seemingly the SAIs of Member States. This imbalance needs addressing in the governance model, particularly as the ECA only has responsibility for auditing the EC and not national governments.

Also, we strongly believe that European SAIs will be able to provide valuable insights on the governance and oversight structure proposed, as well as the development of EPSAS accounting standards. In addition, they will have a key role to play in supporting Member States to implement EPSAS standards in the future.  The support of the National Audit Office (NAO) and UK Parliament was critical for helping the UK government move from a cash based system to resource-based accounts in 2000. The EC should further reach out to engage audit institutions in the process, in particular, EUROSAI members.

In terms of practicalities, it is also worth noting that the timescales for implementing accruals based accounts can be lengthy. It will be important to inject some realism into the process of moving to accruals. The timescale for implementation in the UK central government’s case was 7 years from the announcement of a Green Paper in 1993 to the Government Resources and Accounts Act 2000. To our knowledge a number of developing countries are seeking to convert to IPSAS in five years, but to date we have few examples of countries successfully making the transition within the planned time period.  

We are clear that there are immense benefits to be gained by Member States moving to accruals based accounts in terms of better information, improved decision-making and public accountability. These benefits are particularly important given the size of public expenditure involved 6.2 trillion Euros. But of course, this necessitates significant cultural change and political commitment by the EU in the long - term.  Because of this it will be important for governance principles and structures to withstand the test of time and be embedded in the DNA of the EU.

As well as having representatives from IPSASB in the governance structure, we believe that it will be equally important for the EC to have a voice on the IPSASB board to ensure a close working relationship and work towards international consistency and comparability of EPSAS and IPSAS standards for the public sector. It is not explicitly clear in the consultation how this will work. Therefore we urge the EC to give this issue further consideration.

Overall, we believe that the proposed governance structures outlined in the consultation appear reasonable, subject to the EC considering further and/or addressing the points made throughout this response. We strongly believe that the standard setting process should be principle based and without a significant reworking of existing public sector accounting standards (IPSAS). The approach to be taken by the EC should be proportionate and targeted and it should be at all times seeking to minimize risk and duplication of effort. The accounting profession, including ACCA, has a major role to play in future developments.