EC: Assessment of the suitability of International public sector accounting standards for the member states – public consultation

Comments from ACCA to the European Commission (EUROSTAT), May 2012.

Comments from ACCA to the European Commission (EUROSTAT), May 2012

1. Please state the main motivations for your interest in this public consultation.

ACCA (the Association of Chartered Certified Accountants) is a professional accountancy body which offers business-relevant qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management in the public and private sectors.

We support our 147,000 members and 424,000 students in 170 countries, helping them to develop successful careers in accounting and business, and equipping them with the skills required by employers. We work through a network of 83 offices and centres (eight offices across Europe) and more than 8,500 Approved Employers worldwide, who provide high standards of employee learning and development. Through our public interest remit, we promote the appropriate regulation of accounting. We also conduct relevant research to ensure that the reputation and influence of the accountancy profession continues to grow, proving its public value in society.

More specifically, our policy positions for the public sector are set out in our publication 'Setting high professional standards for public services around the world' (2010) http://www.accaglobal.com/en/technical-activities/technical-library/public-sector.html. We outline what we believe are the factors for achieving effective financial management and our policy position on international accounting standards.

For many years ACCA has worked with ministries of finance and supreme audit institutions around the world to help implement strong financial management, international financial accounting standards and auditing standards. Most recently, we have worked on IPSAS training and awareness programmes with countries such as Cyprus, Vietnam, and Sri Lanka. We also work closely with organisations such as IFAC, FEE and CAPA, and with international organisations such as INTOSAI and ESAAG. In December 2011 we hosted our third international public sector conference which brought together ministry of finance representatives from France and the UK to discuss their experiences and lessons learnt when preparing the whole of government accounts.       

2. Do you consider that International Public Sector Accounting Standards (IPSASs) are suitable for implementation in the EU Member States (Yes/No/Partly)

Yes, we believe that IPSASs have an important role to play for EU member states in dealing with specific public sector issues. But equally, we support IFRSs as a number of governments including the UK have already successfully adopted IFRSs for preparing financial statements albeit with some modifications.  In our view irrespective of whether a government complies with IFRSs or IPSASs there should be no conflict between the two sets of standards as there are more similarities than differences.   

Please explain the main reasons for your answer, and provide any available supporting information for your answer. If answered “partly” or “no” do you consider that accruals accounting standards would nevertheless be suitable for implementation in the EU Member States?

The amount of expenditure on public services is significant with government finances accounting for more than one-third of GDP in most member states. The sovereign debt crisis has emphasised the need for better transparency, effective financial management and high quality financial statements in the public sector.  Concerns about rising government deficits, debts and defaults continues to create alarm in the financial markets and has led to a down grading in members states credit ratings and a crisis of confidence in the markets. Also, this comes at a time when public expectations about the quality of financial statements are growing and long-lasting improvements are being sought in accountability and transparency.

ACCA supports the implementation of global accounting standards based on either IPSASs or IFRSs for member states.  We do not see any conflict between them, although we do recognise that IPSASs can have an important role to play in dealing with specific public sector issues for which there is no IFRS. For example, service concessions: grantors.  We strongly believe that compliance with IPSASs or IFRSs contributes to:

  • increased transparency and accountability for public money;
  • helping with the operation of public sector organisations across member states by improving the flow of financial information and reducing the burden of regulation and compliance;
  • complementing the statistically based set of National Accounts currently complied by members states;
  • assisting understanding by users of financial information, including both the national and European parliaments, as well and the general public, service users and institutional investors;
  • reducing the costs of the preparation of financial statements and reports by decreasing the amount of restatement of information and reports in different countries;
  • helping to simplify the education and training of accountants and auditors by having a common set of principles to understand;
  • opening the market to wider participation by audit firms on the basis that if all public sector bodies report against IPSASs then any firm in any member state should be able to contribute; and
  • raising the credibility of financial information by removing unjustified differences in the treatment of similar accounting items between different countries.

3. What do you consider would be the main advantages, opportunities and benefits from any future implementation of IPSAS in EU Member States?

We believe that the key advantages, opportunities and benefits of implementing IPSASs include:

  • Assisting with the harmonisation and comparability of accounting information across EU member states.  In our view this is an important pre condition for the development of a common European fiscal policy. According to an INTOSAI (2009) global survey of 109 countries there was wide variation in accounting and reporting practices. Countries were complying with IPSAS accruals standards, the IPSAS cash standard, IFRS or national standards established by their country’s independent standard-setting agency.  EUROSAI member countries were no different. For example, the UK currently complies with IFRS, Ireland prepares financial statements on a cash modified basis, Poland and the Czech Republic follow national accounting standards and Slovakia follows IPSAS accruals.

  • Supporting long-term decision making to help governments anticipate future financial difficulties (deficits) and meet future obligations, such as pension liabilities, social benefits and PFI liabilities etc.  Similar to other member states the UK does not account for PFI liabilities in the National Accounts under public sector net debt (PSND).  This is unhelpful for both ensuring transparency and highlighting the future liabilities that governments are expected to meet. In 2011, the UK government published its first set of Whole of Government Accounts (2009-10) and disclosed £29 billion of PFI liabilities on the balance sheet as required to do so by IFRS. This meant that a new light was shone on future liabilities and how these were to be funded in the long-term, as well as influencing future government policy in this area. 

  • Providing better information regarding systemic risks associated with government liabilities and provisions in achieving the financial transparency of member states.

  • Highlighting critical policy areas that cash accounting cannot reveal for both assets and liabilities. The former will provide valuable information about the value of assets, allowing governments to assess whether these are being used effectively and cost efficiently e.g. information on the trade-off between spending and repairs and letting the assets deteriorate.

  • Providing the necessary financial, fiscal, cash flow and performance information to make effective decisions about resources available to the governments resulting in better public services.

  • Improving the quality of financial information reported by public entities, which is critical for investors, taxpayers, and the general public to understand the full impact of decisions made by governments with respect to their financial performance, financial position, and cash flows.

  • Providing member states with greater opportunities to develop reliable cost and management information which affects decision-making.

  • Reducing the scope of selectivity of accounting policies by member states and opportunities for 'cherry picking' policies.

  • Providing valuable information to facilitate outcome based budgeting.

  • Providing the users of the accounts with better quality information about debtors, creditors and assets.

  • Allowing for the identification of the public sector cost of capital.

4. What do you consider would be the main obstacles and disadvantages concerning any future implementation of IPSAS in EU Member States?

The main obstacles and disadvantages will depend on the circumstances operating in each member state. The path and scope of reform will vary by country and within the sector e.g. central, regional and local government.  In our experience of working with governments around the world on the implementation of accounting standards we found that successful change is highly dependent on the context and political choices made by governments and the base from which some countries are starting.  In most cases the absence of political was a key barrier to change together with the absence of skills and capacity.  In addition, in countries where there was initial political will this was often not sustained throughout the change process because of the length of time taken to change, complexities and costs involved and failure to recognise the overall benefits.

It is also important to recognise that where member states are accounting on a cash basis the journey to transitioning to accruals will be a significant step to take when compared to a country moving from IFRS to IPSAS. The latter will require no change in matters of accounting substance, but will require only some presentational changes. 

The costs and resources required to implement accruals accounts and the availability of qualified accountants in the public sector with experience of IPSASs are also potential barriers. Major change programmes require a significant investment in capacity, training and technical support, as well as the introduction of new IT accounting systems.  The UK’s experience of moving from cash based system to an accruals basis required a major overhaul of systems and governance arrangements. Even today further restructuring of the governance processes is needed to align disparate reporting and funding mechanisms under the current Government’s “clear line of sight programme”. There are still problems with publishing the ‘whole of government accounts’ because non-central government bodies don’t follow the same systems and deadlines.  However, there are valuable lessons to be learnt from the UK’s experience of transitioning to accruals.

There will be a need to be a focus on cultural as well as structural change. This will require support from the whole of government and not just the finance functions. For example, politicians, policy makers and service managers will need to understand accruals information if better decision making is to be achieved as a result of the change.

Also, key data may also not be readily available and will need to be generated or estimated, for example, the identification and valuation of assets. There will be also challenges in obtaining opening balances for assets and liabilities.

Despite the obstacles outlined above, ACCA believes that the advantages of accruals accounts outweigh the disadvantages in the long-term.  The costs of implementing accruals accounting may be significant but the costs of poor decision making based on poor quality financial information has the potential to be far greater. With the support and political will of the governments, strengthening the standard setting and regulatory bodies, building capacity within the profession and having a clear strategy for implementation with clear deadlines we can have effective transition. Finally, any change in accounting practice needs to be supported with adequate infrastructure and systems to manage the transition together with effective communication and process management.

5. If you have any observations concerning the connections or links between possible future IPSAS implementation and financial reporting for the Excessive Deficit Procedure, please provide them here.

The benefits of IPSAS adoption are wider than the excessive debt procedure. As stated in our answer to question (3) the publication of the whole of government accounts in the UK has shone a new light on long-term liabilities such as pension liabilities of £1.2trillion and PFI liabilities of £29billion which weren't previously recognised in the national accounts.  In our view financial statements prepared using internationally accepted accounting standards will complement existing financial information such as the national accounts. This will support transparency and effective policy decision-making. 

6. Please give any views or comments concerning the process and timetable for any future implementation of IPSAS in EU Member States.

In our experience the implementation of accruals accounts have usually accompanied a broader package of public service reforms. Also, the scope and pace of reform has varied between countries. In relation to the UK, resource accounts were launched as part of public sector reform in 1993 and the date on which a published set of accounts was made available was 31 March 2000.  Seven years had elapsed between the formulation of the idea and implementation, whereas, it has taken 17 years to publish its first set of whole of government accounts. Despite effective project management, resourcing, and scheduling there were still project overruns.

We are aware of at least one country, Malaysia which is implementing a five year implementation plan.  Overall, in our view there will not be a 'one size' fits all timescale. It would be more appropriate for countries to demonstrate their progress through an implementation plan which sets out key milestones, resources and a realistic timescale on how they intend to achieve accruals based financial statements.  This could form the basis of a monitoring statement at both national and EC level.

Most importantly, any future implementation programme will also need to take account of the skills, capacity and resources of member states to implement accruals. In many member states there is currently a shortage of professional accountants working within the public sector and this will have implications for the successful implementation of accruals accounting. A number of member states will have to make a considerable investment in developing professional accountancy skills to navigate the complexities of accruals accounting.    

7. Please provide any other observations or information you would like to make available which are not covered by your earlier answers.

The project to align National Accounts with IPSASs will over time provide a greater consistency between a government's financial statements and the public sector element of the National Accounts. We have stated in our response that financial statements based upon accruals will complement existing financial information and will not be a substitute for other financial information produced by other bodies.

In relation to the National Accounts and accruals based financial statements compiled by governments it should be noted that the two systems of accounting have evolved independently of each other, use different international standards and have been designed to suit different purposes. While the National Accounts remain the measures used to assess the economic and fiscal position for member states policy purposes the financial statements of government show how public finances have been spent. In the UK the whole of government accounts provides an accounting standards-based presentation to offer new insights into long- term sustainability, as well as presenting the figures in a format familiar to the commercial sector and the wider accountancy profession.

We also want to draw attention to the fact that considerable disparities remain in relation to how member states account for ‘arm’s length’ bodies in National Accounts.  Therefore using a common standard in terms of how we report is very important, but we also need to have agreement and harmonisation as to which sorts of public bodies are included and excluded in public accounts at a national level.

The value gained by the introduction of accruals accounting will be greatly enhanced by audit. In our experience audit has a valuable role to play in providing overall governance and audit assurance. It also has a key role to play in helping governments manage the transition process by providing support. Overall, a strong audit system can help identify poor financial reporting and increase the quality of financial experience.

We strongly believe that the implementation of accruals accounting is not a panacea for effective financial management nor will lead to deficit reduction.  Combinations of factors need to be in place and reform should be viewed as part of a broader suite of financial management changes. As set out on page 8 of our publication 'Setting high professional standards for public services around the world' there are four key areas for achieving effective public financial management which include including paying attention to:

  • Aggregate financial management (fiscal sustainability, resource mobilisation and allocation)
  • Operational management (performance, value for money and strategic financial planning and management)
  • Governance (transparency and accountability), and
  • Fiduciary risk management (controls, compliance and oversight).

If these for factors are working in tandem, member states will be better placed to achieve strong financial management.  In addition, this consultation needs to reflect other relevant developments which may impact on member states, such as the current work programme of:

  • The International Integrated reporting Committee (IIRC) with respect to the development of integrated reporting. ACCA’s Chief Executive is a member of the board and we are currently one of the pilot organisations.  Currently, developments are still in an early stage, but given their potential wide scope there may well be further implications for the public sector.

  • Best practice reporting on performance information is being considered by IPSASB, as well as reporting on long-term financial sustainability.

Finally, consistent electronic reporting and harmonisation of financial reporting through for example XBRL would be easier to achieve if there was a common accounting basis and implementation of IPSAS or IFRS would achieve this.