INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
International Conference
Role of IFAC in Restoring Public Confidence in the Accounting
Profession
February 1 - 2, 2006
Karachi, Pakistan
GOVERNMENT ACCOUNTING
Presentation by Ian Ball, Chief Executive
International Federation of Accountants
The 10th anniversary of IFAC’s program to establish international public sector
financial reporting standards is approaching. Ian Ball’s presentation will cover
the progress made in governmental financial reporting during this period
against the backdrop of financial reporting failures in the private sector,
actions by governmental and regulatory authorities to restore confidence in
financial reporting, pressure for more efficient and accountable government
and, from a corporate governance perspective, the importance of
governments leading by example. Ian’s presentation will also touch on recent
developments and current topics in international financial reporting and
auditing.
Introduction
Ladies and gentlemen, thank you for inviting me to address you today.
As the title of my presentation suggests, I am going to talk about public sector
financial reporting and why we need to raise our expectations of governments.
However, I want to frame my comments in the context of our expectations of
financial reporting in the private sector. Over recent years our expectations of
the quality of financial reporting and auditing in the private sector have
increased dramatically, and the efforts that have been devoted to achieving
those changed expectations have been enormous. I wish to contrast this with
what has happened, or more accurately, what has not happened, in the public
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sector. To be clear, I am not suggesting that nothing has happened in the
public sector. Indeed I have been personally involved in some of that change,
as, I am sure, have many of you. However, I do observe a large gulf between
the inclination of governments internationally to act to enhance private sector
financial reporting and the relative lack of urgency devoted to improving their
own financial reporting and financial management.
Let me begin with some comments on corporate failures and the response of
regulators and the accountancy profession to those failures.
The Response to Corporate Failures
We are all only too well aware of the scandals that have rocked the private
sector in recent years. Examples, from around the globe, include Enron,
Global Crossing, Royal Ahold, HIH Ltd, WorldCom and Parmalat. Such
failures weaken the public’s confidence in the integrity and transparency of
securities markets. The sheer size of the companies concerned, and the
impact on public confidence, has been so great that the failures have led to
dramatic national and international responses – responses that might be
described as a watershed similar to that of the 1930s securities legislation.
Over the last few years there has been a raft of regulatory and professional
reforms designed to protect investors from financial reporting and audit failure,
and from other forms of corporate malfeasance.
The reforms have been especially dramatic in the United States, where,
amongst other things, the Sarbanes-Oxley Act created the Public Company
Accounting Oversight Board (PCAOB). These reforms have given the
Securities and Exchange Commission (SEC) and the PCAOB extensive
powers over private sector accounting and auditing, putting in place
regulations that affect every facet of private sector accounting and auditing in
America and that have had far-reaching international ramifications as well. To
curb corporate corruption, strengthen corporate governance and ensure
reliable and accurate financial reporting, the Sarbanes-Oxley Act did, amongst
other things, make accountants and auditors more accountable, stiffened
fines for law-breaking by corporate officers and directors, limited insiders from
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selling stock during "blackout periods" and directed the SEC to create new
rules for financial reporting. Whether the very broad scope of the reforms is
cost-effective remains to be seen, but the Act has provided impetus for similar
reforms around the world and has unquestionably resulted in significant
benefits.
In Europe, the European Commission, through its requirement for the
adoption of International Financial Reporting Standards (IFRSs) and its
strengthening of the Eighth Directive on Company Law, is also raising the bar
significantly for private sector accounting and auditing. As with the Sarbanes
Oxley Act, there is debate about the scope and rigidity of the Directive, which
is designed to improve governance of EU-listed organizations and the quality
of audits. Like Sarbanes-Oxley, at the core of the Eighth Directive is a
commitment to restore investor confidence in the markets. So, for example,
the Directive specifies the responsibilities of audit committees to include
oversight of the internal audit function, internal controls and auditor
independence.
The changes we have seen in the US and in Europe have been mirrored in
many other countries. There really has been a dramatic shift in the regulation
of financial reporting and the accounting profession internationally.
The corporate failures have resulted not just in regulatory action. There has
been action by accounting professional institutes at national and international
levels, and by accounting firms, amongst others.
I could spend quite some while outlining the actions and initiatives taken by
these groups, but will not. It will suffice to sketch just some of the key
responses by IFAC and by the firms.
IFAC has developed a series of reforms to help ensure that its standardsetting activities reflect the public interest and are fully transparent. This set of
reforms is the most significant shift in IFAC’s governance since its creation in
1977. One of these reforms was the establishment, early last year, of the
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Public Interest Oversight Board (PIOB). The PIOB oversees the work of
IFAC's auditing, ethics and education standard-setting committees and of its
Member Body Compliance Program, to ensure that those issues of greatest
importance to the public interest are properly addressed. The membership of
the PIOB is chosen by a Nominating Committee comprised of representatives
of the International Organization of Securities Commissions, the Basel
Committee on Banking Supervision, the International Association of Insurance
Supervisors and the World Bank.
IFAC has also released a revised Code of Ethics to provide more guidance to
all members of the profession – including those in business, public practice,
education, and government – on how they can meet their responsibilities to
act with integrity and independence.
IFAC has also, through its International Auditing and Assurance Standards
Board (IAASB), issued two standards on quality control in relation to audits,
which significantly enhance the requirements for quality control in relation to
audits.
Audit firms, too, have taken a very hard look at their operations, clients, and
services to determine how they could best respond to the changed
environment. I will mention just a few, by no means all, of the examples of the
response by audit firms to the new regulatory environment.

First, most major firms have restructured their services, divesting their
consulting arms.

Firms are also more focused on educating clients and investors,
producing a plethora of guidance for clients and investors.

Quality control processes have been strengthened.

Additional focus is placed on internal control, including the provision of
resources for investors and financial market participants.

There is greater transparency as to the structure of the firm networks.

The firms have also acted to strengthen their independence policies.
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To summarize thus far: the financial reporting failures in the private sector
have had a dramatic impact on the regulatory landscape, on accounting
professional institutes and on accounting firms. In rounding out this section of
my presentation, I would note that there has been a lot of attention given
recently to the cost of these reforms. Around the time of the introduction of the
Sarbanes-Oxley Act, some smaller firms estimated the cost of complying with
the new legislation at between $300,000 and $500,000 annually.1 More
recently estimates of the average cost of compliance with Sarbanes-Oxley for
an individual company have ranged from $2m to $3m. According to Financial
Executives International (FEI), just complying with section 404 of the Act will
cost an average of 62% more than previously anticipated, create a 109% rise
in internal costs, a 42% jump in external costs, and a 40% increase in the fees
charged by external auditors (PR Newswire, 2004). Estimates of the total cost
of compliance for US businesses range from $2bn to $5bn per year.
My point is this: the new regulatory environment implies very substantial
costs. While the costs may be higher than anticipated, it was always clear that
the cost would be high. The judgment of the US Government and the
European Commission, mirrored by many other governments, is that high
quality financial reporting is worth that cost, given the benefits it creates
through improved accountability, better decision-making and public
confidence in institutions.
The reason I have begun this talk by focusing on corporate failures and their
consequences is to highlight the importance to investors and others of being
able to rely on the financial information produced by companies and to note
the dramatic steps taken to enhance the quality of financial reporting in the
private sector. When the objective is important enough, action can be rapid
and radical. The crucial importance of financial reporting in the private sector
is a useful benchmark when considering financial reporting in the public
sector.
1
Ronald J. Klammer, “Why SOX May Cause "Nanocaps" To Liquidate, Sell Or Go Private,” July 2003,
http://www.bofabusinesscapital.com/resources/capeyes/a07-03-172.html
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IFAC’s Mission
IFAC's mission is to “serve the public interest, strengthen the worldwide
accountancy profession, and contribute to the development of strong
international economies by establishing and promoting adherence to highquality professional standards, furthering the international convergence of
such standards, and speaking out on public interest issues where the
profession's expertise is most relevant.”
The public interest objective outlined in IFAC’s mission statement
encompasses both public and private sectors. Companies influence the
strength of an economy – but so, too, do governments. Given the size of the
public sector internationally, poor financial management results in a huge
economic cost to the world’s economy, and that really is important.
While there are certainly public interest issues associated with the transparent
reporting of information on a company’s performance – I would argue that
there is an even stronger public interest argument for demanding transparent
financial reporting from governments.
Governmental financial reporting
In my discussion of private sector financial reporting, I highlighted the
recurring theme of restoring public confidence in financial reporting and
financial markets. I wish now to consider the extent to which we can have
confidence in governmental financial reporting, but, before doing that, it is
appropriate to remind ourselves of the reasons we should expect high quality
reporting from governments.
There are at least three key reasons:

Performance: Governments internationally shift billions, trillions, of
dollars from the private sector to the public sector, with the objective of
improving the well-being of the society and economy. If governments do
not operate in an efficient and effective manner, or invest wisely, this
represents a huge drain on an economy. Governments, just like
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companies, need timely and accurate financial information to monitor
and manage their performance.

Accountability: Governments are not spending their own money. They
are spending our money. They are entrusted with the management of
assets and liabilities that have been built up over decades and which will
have an impact on the welfare of citizens for many more decades.
Taxpayers and citizens are entitled to information which allows then to
hold governments accountable for their use of public resources, including
the extent to which current revenues are sufficient to pay for the services
provided, and whether balance sheets are strong enough to withstand
external shocks, not to mention meeting their current obligations
associated with long-term trends like an aging population.

Representative government: A government, regardless of the form it
takes, represents the interests of the people it governs. Good
government requires that constituents have confidence in those that
govern. This confidence is enhanced when governments fully inform their
constituents, and provide them with reliable financial information.
Transparent financial reporting is one means by which governments can
engage constituents in the political process and engender confidence.
Having established that we have a right to demand high quality reporting from
our governments, what do we see in practice? Internationally, we see
widespread and continuing poor quality financial reporting. By contrast with
many governments, Enron would be a model of transparency. Such reporting
failures do not generally lead to the bankruptcy of governments, but they do
impose an enormous burden on an economy and have a very direct impact on
economic growth.
Let me give you a very few examples of poor financial management and
financial reporting by governments.
Argentina
In late December 2001, Argentina declared the largest sovereign debt default
in contemporary history. The aftermath of that debt default is still being
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worked through. There were a number of contributing factors: the growth in
public debt, the denomination of that debt, Argentina’s unusual exchange rate
regime and the Argentine government’s failure to adequately manage its
liabilities.
One element of the poor financial management observed in many jurisdictions
is the poor quality of financial information. If the Argentine government had
prepared timely financial reports based on generally accepted accrual
accounting practices, its failure to properly manage its liabilities would have
been evident much earlier, and the government, lenders or the citizens of
Argentina would have had the opportunity to take action earlier.
Greece
In 2004, the European Commission launched legal action against Greece for
drastically under-reporting its deficit. Following a request by a new Greek
government, the Commission revised Greece’s general government deficit for
the years between 1997 and 2003.2
Eurostat, the EU's statistical agency, was summoned to investigate the
findings.3 Military expenditures and interest payments had been serially
under-recorded, and the surplus recorded in the social security account had
been overstated. The revised figures showed that Greece had been in breach
of the EU budget rules every single year since 1997. Had the revised figures
been known at the time, Athens would not have been allowed to join the euro
zone in 2001.
This saga prompted calls for an improvement in the quality of financial
information provided by governments in the European Union, a strengthening
of the independent process for compilation of such information, and the need
for an independent audit of the output. Little substantive action has yet
resulted.
2
Costas Simitis, “Greece’s deficit revision damaged Europe”, 22 December, 2004, Financial Times
European Commission, Economic and Financial Affairs. Report by Eurostat on the Revision of Greek Government
Deficit and Debt Figures. 22 November 2004
3
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Italy
Only a short time after it launched legal action against Greece, the
Commission also initiated an investigation into Italy’s public accounts. 4 Doubts
about the accuracy of Italy’s financial reporting arose from the fact that
forecast annual budget deficits over the period 1997 to 2004 were consistently
lower than the amount of cash borrowed to finance those deficits. In addition,
Italy’s public debt had been falling more slowly than expected.
Subsequent revisions to the 2003 and 2004 deficit figures by Eurostat showed
Italy in breach of the 3 per cent limit on budget deficits imposed by European
Union rules.5
Government of Pakistan
We might think that the problems experienced by these countries have
nothing to do with us here in Pakistan. Unfortunately, this is not true.
Just last month “The International News” reported that the National
Accountability Bureau had confirmed the existence of a multi-billion rupees
fraud involving “ghost” pensioners. The scam was so large that more than half
the pensions being paid through the Pakistan post office’s savings bank
account system were reported as being fraudulent. By one account, after the
fraud was uncovered the number of pensions being paid through the post
office’s savings bank in one area dropped from 35,000 to 13,000.
Had an appropriate level of financial management and reporting been in
place, this fraud may not have been able to reach such proportions and may
have been uncovered earlier.
The good news is that the Government of Pakistan has taken some initial
steps to improve financial management and reporting in the public sector. In
4
George Parker and Tony Barber, “Brussels raises doubts about Italy’s official budget figures”, Financial Times,
7 December, 2004. Gregg Benzow, “A Case of Cosi fan Tutte in Brussels?”, Deutsche Welle, 8 December 2004.
5
George Parker, Ralph Atkins, and Tony Barber, “Italy sets test for deficit rules”, 23 May, 2005, Financial Times,
www.FT.com
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2002 it established the National Accountability Bureau to monitor
accountability of government entities, and established the Project for
Improvement in Financial Reporting and Accounting with the assistance of
PricewaterhouseCoopers. I would be very pleased to hear of the progress of
this project. These are both significant developments which deserve to be
encouraged.
US Federal Government
In the USA the federal, state and local governments report on an accrual
basis in accordance with generally accepted accounting practice, and their
financial statements are subject to independent audit. However, despite a
long standing drive for better financial information and millions of dollars being
spent on upgrading financial systems, the US federal Government continues
to experience difficulty in getting a clean audit report on its financial
statements and has a deteriorating fiscal condition. Technically, it has not
received an audit opinion at all, the auditor, the Comptroller-General, having
declined to express an opinion on the grounds that the information was
insufficiently reliable.
The 2004 financial report shows: 6

Government revenues of $1.9 trillion;

Net cost of the government's operations of $2.5 trillion; and

A net operating cost of $615.6 billion.
The reported deficit of $615.6 billion in the financial statements is more than
the actual “budget deficit” of $412 billion referred to on the Office of
Management and Budget website.7 In the words of one commentator: “It
mostly has to do with Social Security costs and cash vs. accrual accounting.”8
And so it may, but wouldn’t it be easier for the public if forecast and actual
budget outturns were calculated using the same rules as the financial
6
2004 Financial Report of the United States Government, Download PDF of report (04frusg.pdf)
http://www.fms.treas.gov/fr/04frusg/04frusg.pdf
7
http://www.whitehouse.gov/omb/budget/fy2006/outlook.html
8
John Crudele, “Beltway Bandits' Storm: $615b Deficit Snow Job,” New York Post, 28 December, 2004
http://www.nypost.com/business/37285.htm
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statements? If we are to have informed public debate, it helps if we are all
using the same numbers. I will discuss recent moves to align different
systems of reporting later in this speech, but would note again that such
reporting disparities would not be tolerated by the government in relation to
listed companies.
The US Government Accountability Office (GAO) report also highlighted
concerns with the government’s reported fiscal position. Last year (May 20,
2005) the Comptroller General, David M. Walker, told a group of New York
CPAs that the federal government's current fiscal business model isn't
sustainable and major changes need to be made. As well as expressing
concern about the government’s worsening financial state, Mr. Walker called
on CPAs to educate the public about these issues, noting that as CPAs they
had a responsibility to act in the public interest.
There is one particular statement in the latest GAO report on the US federal
government’s financial statements that warrants mention. To quote:
“As in the seven previous fiscal years, certain material weaknesses in internal
control and in selected accounting and financial reporting practices resulted in
conditions that continued to prevent us from being able to provide the
Congress and American citizens an opinion as to whether the consolidated
financial statements of the U.S. government are fairly stated in conformity with
U.S. generally accepted accounting principles.”
Why the disclaimer? The reasons are discussed more fully in the audit report,
but let me quote just one, telling, paragraph:
The federal government did not maintain adequate systems or have sufficient,
reliable evidence to support certain material information reported in the
accompanying consolidated financial statements, as briefly described below.
The largest and most challenging impediment to rendering any opinion on the
U.S. government’s consolidated financial statements continues to be serious
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financial management problems at DOD. These material deficiencies (which
also represent material weaknesses), which generally have existed for years,
contributed to our disclaimer of opinion and also constitute material
weaknesses in internal control. Appendix II describes the material deficiencies
in more detail and highlights the primary effects of these material weaknesses
on the accompanying consolidated financial statements and on the
management of federal government operations. These material deficiencies
were the federal government’s inability to:
•
satisfactorily determine that property, plant, and equipment and inventories
and related property, primarily held by DOD, were properly reported in the
consolidated financial statements;
•
reasonably estimate or adequately support amounts reported for certain
liabilities, such as environmental and disposal liabilities, or determine
whether commitments and contingencies were complete and properly
reported;
•
support significant portions of the total net cost of operations, most notably
related to DOD, and adequately reconcile disbursement activity at certain
agencies;
•
ensure that the federal government’s consolidated financial statements
were consistent with the underlying audited agency financial statements,
balanced, and in conformity with GAAP;
•
adequately account for and reconcile intragovernmental activity and
balances between federal agencies; and
•
resolve material differences that exist between the total net outlays
reported in federal agencies’ Statements of Budgetary Resources and the
records used by Treasury to prepare the Statements of Changes in Cash
Balance.
Just as concerning, the GAO gave an adverse opinion on internal control. As
a consequence of poor internal controls, some agencies are meeting their
financial reporting requirements by preparing information outside the financial
reporting systems. This, as we all know, is an extremely inefficient and risky
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way to prepare financial statements. What is more, and worse, it tells us that
this financial information is not available for financial management purposes
within the period.
For fiscal year 2004, 18 of 23 CFO Act agencies received unqualified audit
opinions. This is two less than in 2003 and 2002. This means that
approximately 80% of CFO agencies received an unqualified report. However,
20% did not. The government would not accept this standard of financial
reporting from the private sector.
As we can see, even in a country that has relatively advance public sector
financial reporting, problems can arise.
Responses to governmental failure
The examples I have given you are merely a snapshot of poor financial
reporting and poor financial management by governments internationally.
There were many, many more examples I could have used.
In the private sector we have witnessed the immediate and powerful reaction
of regulators and the profession to large scale corporate failures. By contrast,
who is demanding action and who is taking action in relation to governmental
financial management and financial reporting failure? While there are some
who are attempting to address these issues, and IFAC can be counted
amongst those, the primary actors, governments themselves, are not doing
enough. Neither is there sufficient comment on these issues in the media.
I find it interesting and regrettable that, despite the widespread international
adoption of International Financial Reporting Standards (IFRSs) in the private
sector, there have been few commentators arguing for the adoption of
equivalent international standards by governments. As I will discuss presently,
such standards are available.
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There are, however, a number of organizations that are involved
internationally in improving the quality of governmental financial reporting,
and, more broadly, the transparency of governments.
My focus today is on the international scene, and I would like to give some
examples of what has been happening internationally and in other countries to
strengthen government financial reporting.
IFAC
Let me start with my own organization – IFAC.
IFAC’s International Public Sector Accounting Standards Board (IPSASB)
focuses on the accounting, auditing, and financial reporting needs of
governments and government agencies. This Board has produced
International Public Sector Accounting Standards (IPSASs), based on IFRSs,
for the best part of a decade. The IPSASB has now issued 21 accrual basis
standards and one comprehensive, cash basis, IPSAS. It has also produced
other studies and papers designed to provide information on the adoption of
accrual accounting and financial reporting initiatives in various jurisdictions.
I think it appropriate at this point to acknowledge the contribution of Mr.
Mohammed Rafi, who served as the Pakistan member on the IPSASB’s
predecessor the Public Sector Committee from 2000 to 2002. Mr. Rafi has
long been active in the Institute of Cost and Management Accountants in
Pakistan and is currently a member of that IFAC Member Body’s Council. The
development of standards by the IPSASB takes considerable time, effort and
expertise – all on a voluntary basis – and IFAC is extremely grateful for the
contribution of IPSASB and PSC members such as Mr. Rafi.
Key components of any governance and accountability system in the public
sector are the preparation of financial statements in accordance with well
understood and generally accepted accounting standards. IPSASs, therefore,
provide the foundations for better reporting. We must move beyond the
situation where each government writes its own financial reporting rules to
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one where governments report using the same set of standards. Again, it
would not be acceptable for a reporting entity in the private sector to write its
own rules, yet this is the case for virtually all national level governments.
Recently, the United Nations’ High Level Committee of Management
announced that it would recommend to the General Assembly later this year,
that the UN System adopt IPSASs as the basis for preparing financial
statements by entities within the UN System.
A press release issued following a high level conference in September 2004,
organized jointly by the European Commission and the Fédération des
Experts Comptables Européens (FEE), the representative body of the
European accountancy profession, advocated the adoption of IPSASs as
essential to the development and strengthening of financial reporting by
governments.
In 2004, Sir Andrew Likierman, until recently Head of the Government
Accountancy Service of the UK Treasury, chaired a Review Panel which
conducted an independent review of the activities of the IPSASB, then called
the Public Sector Committee (PSC).9 The review panel made a number of
recommendations concerning the composition and governance arrangements
of the PSC. The report of the panel noted that over 85% of the respondents to
a survey it conducted supported the existence of an independent financial
reporting standard setter for the public sector.
The panel concluded that the PSC had made an effective contribution to
global public sector financial reporting through its pronouncements.
The World Bank, along with others, has supported the development of these
standards and encourages their adoption. IPSASs have been, or are being,
adopted by a number of governments and public bodies (for example, the
Organisation for Economic Co-operation and Development (OECD), the
9
Report of the Externally Chaired Review Panel on the Governance, Role and Organisation of the International
Federation of Accountants Public Sector Committee, June 2004, Chaired by Sir Andrew Likierman
15
European Commission and the North Atlantic Treaty Organisation (NATO))
and are having a very significant influence on the development of national
standards.
In addition, the report stated:
“The success of the Standards Program cannot be gauged purely through the
number of jurisdictions and entities that have adopted IPSASs. There is
considerable evidence emerging, particularly from East, Central and Southern
Africa, South America, Asia and Europe that the pronouncements of the
Committee are becoming more influential. … National standard-setters are
increasingly reflecting the views of the PSC in their own debates on public
sector financial reporting.”
I am very pleased indeed that the IPSASs are having this level of influence
internationally. However, I am also aware that we have a very long way to go
before there is general adoption of these standards around the world.
Obviously, I would want to encourage you all in the ICAP to work to align
Pakistan’s public sector accounting standards with international standards.
Setting financial reporting standards is not the only means by which IFAC is
seeking to improve the quality of financial management and financial reporting
in the public sector. IFAC is also working to ensure that all professional
accountants – whether in public practice, business, industry, or in the public
sector – have high quality guidance on ethical conduct. IFAC’s International
Ethics Standards Board for Accountants has been progressing a project to
develop additional guidance for professional accountants in government. The
project will consider whether Part C of the Code (which applies to professional
accountants in business) should contain additional guidance for professional
accountants who work in government. The project will also develop
independence guidance for professional accountants in government.
In relation to the International Standards on Auditing that IFAC’s International
Auditing and Assurance Standards Board sets, there has been increasingly
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close cooperation with International Organization of Supreme Audit
Institutions (INTOSAI).
INTOSAI
INTOSAI is the international organization of supreme audit institutions in
countries that belong to the United Nations or its specialist agencies. The
Office of the Auditor General of Pakistan is a member of INTOSAI.
The Auditing Standards Committee (ASC) of INTOSAI is working in close
cooperation with IFAC’s IAASB in developing financial audit guidelines. The
IAASB develops International Standards on Auditing for the private sector.
The ASC is working with the IAASB with the aim of including public sector
considerations in the ISAs.
Other ongoing work of the ASC includes:

Principles for independence of SAIs; and

Implementation guidelines for Performance Audit.
World Bank and the IMF
The World Bank and the International Monetary Fund (IMF) have both actively
supported and been involved in the development of IPSASs. The two
agencies have also engaged in their own exercises entitled “Reports of the
Observance of Standards and Codes" (ROSCs) which assess a country’s
observance of selected standards relevant to private and financial sector
development and stability. They include assessments of fiscal transparency.
As part of the ROSC initiative, the World Bank has established a program to
assist its member countries in implementing international accounting and
auditing standards for strengthening the financial reporting regime, including
that of the public sector.
Developments in Various Jurisdictions
Although I have been critical of the standard of financial reporting by
governments, it is only fair to acknowledge that a number of governments
have established or are establishing a high quality of financial reporting. The
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US government is producing accrual based financial statements, as noted
earlier, and that certainly constitutes progress.
The United Kingdom government has adopted accrual accounting within both
local and central government. At present, this is still at an agency and local
authority level, but consolidated audited reports are expected in 2006/07. The
consolidated financial reports will encompass both local and central
government, as, for the purposes of financial reporting, the central
government is considered to control local government.
The Australian and New Zealand governments have been reporting on the
accrual basis for over a decade now. Notably, both countries have recently
announced the adoption of IFRSs in full, not only in respect of companies but
also for the public sector. This move illustrates how governments can lead by
example - reporting in accordance with exactly the same reporting standards
as they expect from companies. In the case of New Zealand, the public sector
currently reports in compliance with New Zealand Financial Reporting
Standards, which are sector-neutral, the same standards applying to both
sectors.
Many other countries are looking to move to adopt an accrual basis of
reporting and, while the direction is to be applauded, the speed and urgency
are, generally, well short of what we should expect and demand.
Those jurisdictions that have fully adopted the accrual basis (incorporated into
appropriations, budgeting and reporting processes) have found it to generate
very significant benefits. I do not consider the impediments to proper
accounting by governments (at least in developed countries) to be related to
cost, nor do I believe them to be related to available expertise. I do believe it
requires more than the goodwill of committed professionals – it requires a
commitment at the political level that transparency is not a choice but an
obligation, and, like the private sector, the rules are written not for the
reporting entity but for the users of the financial statements.
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Conclusion
I began this talk by noting that there have been some serious corporate
failures in the private sector. However, regulators and the profession have
done a very great deal in short order to address failures in accounting,
auditing and financial reporting and to restore public confidence in financial
reporting.
Unfortunately, and notwithstanding the efforts to which I have referred, we
cannot say the same with respect to the public sector. There is ample
evidence of financial reporting failure within governments, and I gave a small
number of examples of this. I noted that there are organizations, including the
ICAP and IFAC, that are working hard to improve the quality of financial
reporting by governments. Occasionally, the media comments on the need for
better quality reporting by governments. However, the response to
governmental financial reporting problems is very much weaker, and appears
to reflect a lower level of concern, than we see in relation to the private sector.
What is most troubling is the lack of demonstrated commitment on the part of
governments themselves to the production of high quality financial reporting.
At best, it seems to be something governments will address as a “nice to
have” “when resources permit.” It is not seen as a fundamental obligation.
Yet, ultimately, investors can choose whether or not to invest in a corporation
– as citizens we have no such choice in relation to the contribution we make
to government through taxation. I would argue that within a representative
government the exercise by governments of the power to tax carries a
fundamental responsibility to account properly for the money so raised.
If governments around the world genuinely believe in the importance of
transparency in financial reporting, as suggested by their regulation of public
companies, then they need to lead by example. The consequences of poor
financial reporting and poor financial management within governments are
arguably even more serious than a loss of confidence in securities markets. It
violates the relationship between the governed and the governing. It creates
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an environment ripe for corruption and fraud. And it puts at risk the growth of
the global economy and, therefore, the welfare of citizens.
Ladies and gentlemen, we must raise our expectations of governments
around the world, just as they have raised their expectations of the private
sector.
Thank you.
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