It does this by: Establishing and promoting adherence to high quality professional standards Furthering the international convergence of such standards Speaking out on public interest issues where the profession’s voice is most relevant
For 20 years IFAC has been working ti improve financial reporting and financial management of governments at all levels as well as public sector entities Failing to hold governments to account, can, I believe, compromise and even jeopardize ongoing private sector initiatives to building and maintaining confidence in the financial reporting process, lead to friction within government management, and, in less stable environments, result in significant citizen unrest. In setting the context for the importance of corporate governance in the public sector it is helpful to begin with an understanding of why good financial reporting is critical. I will start with the importance of governments providing clear, understandable and reliable information to those who elect them, to those who pay taxes to them and to those who invest in them. Each of these groups within society is entitled to high quality information about the financial performance and financial position of their governments. Presently, in most countries, they do not get this. While I believe that this high quality financial information is important from a capital market perspective, given the amount of debt held by most governments, the most important reason for insisting on high quality information being provided is the role of information in a democracy.
Need for clear understandable reliable information for taxpayers, electorate and investors Entitled to high quality information about financial position and financial performance Role of information in a democracy is critical Huge amounts of debt traded Firstly, governments, just like companies, need timely and accurate financial information to monitor and manage their performance. Governments internationally shift billions and 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 companies, need timely and accurate financial information to monitor and manage their performance. The second reason is 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. The third reason is that a properly functioning democracy requires that constituents have confidence in politicians and are willing to participate in politics. This confidence is enhanced when governments fully inform their constituents, and enable them to vote, on the basis of reliable financial information. Transparent financial reporting is one means by which politicians can engage constituents in the democratic process and engender confidence. This transparency in financial reporting leads to better management by governments – which is what citizens expect in a democracy.
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. There have been a number of examples of poor financial management and financial reporting by governments. The point is not to single out any one government but to highlight that this is an international problem and yet little progress is made towards resolving it. In comparison 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. Over recent years, our expectations of the quality of financial reporting and auditing in the private sector have increased dramatically. 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. Regulatory and professional reforms designed to protect investors from financial reporting and audit failure and other forms of corporate malfeasance have been nothing short of revolutionary. 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. 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 addition, the economic costs of these reforms have been substantial. Yet the judgment of many 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. This highlights 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. You see, 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.
The changing role of the finance function Improving the delivery of services Modernizing the accounting function Key finance challenges Skill gaps Resistance to change Inadequate technologies Principles of governance The governance framework and its purpose Sources of assurances Adoption of accrual accounting and budgeting The role of Supreme Audit Institutions (SAI) Independence, accountability and transparency Availability of resources Building effective partnerships Communications Interactions with other SAIs
mid 1990’s IFAC development of accounting standards for the Public Sector initiated. Funding obtained in 1995 Standards program began 1996 –Accrual and Cash Accrual – Based on IFRS unless public sector specific reason for departure Cash – partly based on cash flow statement, but without set format, encouraged additional disclosure
Converge unless public sector specific reason for departure Collaboration with IASB important Rules of the road – what is a public sector difference? And does it result in differences in accounting? Promote convergence to IPSASs internationally
Many jurisdictions have not even achieved cash basis financial statements Potential manipulation of information by governments Lack of regulation – public money
Reform of public sector financial management is the main reason for adopting IPSASs. When public sector entities are not required to disclose or report their management of public resources management, it is rare that those resources are effectively managed. In most cases once an entity is required to develop its balance sheet, it rationalizes its assets, and begins to manage its debt and other liabilities. In the United Kingdom, the government paid for the financial management reform program by selling inventory held by the Defense Department that was identified as surplus to operational requirements. Without a balance sheet, the department had no incentive to manage its assets effectively. Most governments provide some information on loans and bond issues, but without the context of the government’s other liabilities, and without information about the assets, we get an obscured view of the government’s financial position. Employee pension liabilities for many governments are the single largest liability – unless the government provides a social security scheme. Few governments report effectively on their long term non-debt liabilities. Once they do, however, they quickly begin to look for ways to manage those liabilities effectively.
Essential to successful outcome Assistance from experienced governments helpful Development of chart of accounts Training of staff Training of political leaders Develop realistic timetable Acknowledge the time frame Political leaders initiate the reform process must be sold on the benefits multi-party acceptance helps can derail the process easily
Fundamental to transparency Financial information that is trusted Open communications with the public How well those elected are discharging their responsibilities IAASB establishes ISAs – works with INTOSAI Effective governance creates safeguards against Poor administration Mismanagement Fraud & corruption At the heart of building confidence in financial reporting and accounting
The UN Group made the decision to adopt IPSASs in 2005- a very major fillip to the Program. A number of other supranational organizations are also using IPSASs for their financial reporting. These include the European Commission and our hosts today the OECD. Whilst relatively few national jursidictions have adopted IPSAS standards outright a number of countries have announced an intention to adopt IPSASs or are in the process of adopting them. Other national public sector standard-setters have issued IPSASB exposure drafts with their own wrap-around: Australia, New Zealand and South Africa have adopted this approach for certain IPSASB Exposure Drafts. The IFAC website contains details of governments that have adopted IPSASs or where IPSASs have been influential.
Transcript of "eng"
Latin American Regional Conference Strengthening Public Sector Accounting & Auditing Stephenie Fox Technical Director, IPSASB
IFAC’s Mission <ul><li>To serve the public interest, IFAC will continue to strengthen the worldwide accountancy profession and contribute to the development of strong international economies </li></ul>IFAC
Government Reporting <ul><li>Fiscal accountability of governments enhances economic growth & development worldwide </li></ul><ul><li>Good financial reporting critical </li></ul><ul><li>Need clear understandable & reliable information for those who elect, pay tax and invest </li></ul>IFAC
Government Financial Reporting <ul><li>Expect high quality reporting: </li></ul><ul><li>A ccountability – spending our money </li></ul><ul><li>Timely, accurate financial information – to monitor and manage performance </li></ul><ul><li>Transparency – engages constituents in democratic process; engenders confidence </li></ul>IFAC
Current practice <ul><li>Widespread poor quality financial reporting </li></ul><ul><li>Imposes burden on economy </li></ul><ul><li>Disconnect between government response to private sector failures and lack of urgency devoted to improving own financial reporting and management </li></ul>IFAC
Challenges <ul><li>Educating taxpayers – Have a right to information about use of their taxes </li></ul><ul><li>Educating governments – Fiduciary obligation to be accountable </li></ul><ul><li>Use of public funds - a higher obligation/level of accountability owed </li></ul>IFAC Changing paradigms:
Strengthening Public Sector Accounting and Auditing <ul><li>IFAC contributes to governance in multiple ways: </li></ul><ul><li>Public sector accounting standards </li></ul><ul><li>External audit </li></ul><ul><li>Ethic standards </li></ul><ul><li>Independence standards for professional accountants in government </li></ul>
IPSASB’s Mission <ul><ul><li>To serve the public interest by developing high-quality accounting standards for use by public sector entities around the world in the preparation of general purpose financial statements </li></ul></ul>
<ul><li>Develops International Public Sector Accounting Standards (IPSASs) - cash and accrual </li></ul><ul><li>Supported/adopted by the UN, World Bank, OECD, NATO and others </li></ul><ul><li>Facilitates convergence of national and international public sector standards </li></ul>IPSASB IPSASB IPSASB
Rationale for IPSASs <ul><li>Standards -essential to high quality reporting </li></ul><ul><li>High quality reporting - essential to governmental performance and accountability </li></ul><ul><li>Governmental transparency - key element of quality of governance </li></ul><ul><li>Quality of governance -leads to economic growth and all that goes with it </li></ul>
IPSASs <ul><li>A foundation for better financial reporting by governments </li></ul>
IPSASB <ul><li>3 meetings per year </li></ul><ul><li>Open to the public </li></ul><ul><li>All materials publicly available – posted on internet </li></ul><ul><li>Transparent due process </li></ul><ul><li>15 from member bodies; 3 public members </li></ul>
Developing Standards <ul><li>Accrual basis standards based on IFRSs </li></ul><ul><li>Convergence with IFRSs unless public sector specific reason for departure </li></ul><ul><li>Current hierarchy – where no IPSAS exists consider IASB standards or national standards </li></ul><ul><li>Public sector specific standards </li></ul><ul><li>Cash basis IPSAS </li></ul>
<ul><li>Broad spectrum of practice internationally </li></ul><ul><li>Availability of resources within jurisdictions </li></ul><ul><li>Previous limited resources for IPSASB has delayed full standard setting program </li></ul>Challenges IPSASB
Conditions for IPSAS Implementation <ul><li>Acceptance by Government of need for comprehensive financial reporting </li></ul><ul><li>Effective external audit </li></ul><ul><li>Independent interpretation </li></ul><ul><li>Trained professionals – accountants, auditors, managers </li></ul><ul><li>Political will to be accountable </li></ul>
Financial Management Reform <ul><li>Main reason for adopting IPSASs: reform of public sector financial management </li></ul><ul><li>Improve the use and management of all public sector resources – can’t manage that which you have no information about </li></ul>
Benefits of Financial Management Reform <ul><li>Improved information for public sector managers </li></ul><ul><li>Knowledge is power </li></ul><ul><li>Better financial reporting: </li></ul><ul><ul><li>Greater transparency in public sector finances builds trust with the constituency </li></ul></ul><ul><ul><li>Easier access to international capital markets </li></ul></ul><ul><ul><li>Cheaper access to capital markets </li></ul></ul>
Financial Management Reform <ul><li>IPSASs fundamental </li></ul><ul><li>Awareness of financial position leads to managing it </li></ul><ul><li>Need high quality information systems </li></ul><ul><li>Adoption of IPSASs and accrual basis of financial reporting is critical in financial management reform. </li></ul>
Implementing IPSASs <ul><li>Start with cash basis </li></ul><ul><li>Strong implementation of cash basis a solid first step toward accrual accounting </li></ul><ul><li>Adopt cash basis and ensure that institutional framework supports this standard </li></ul><ul><li>Plan adequately for transition to accruals </li></ul><ul><li>Role of external audit </li></ul>
IFAC and IPSASB help by: <ul><li>Assisting with development of accountancy profession </li></ul><ul><li>Developing public sector accounting standards </li></ul><ul><li>Developing auditing standards – enhance trust </li></ul><ul><li>Ethics & education standards </li></ul><ul><li>Providing standards free of charge </li></ul>
How are we doing? <ul><li>UN System (28 bodies) </li></ul><ul><li>OECD, NATO (21 bodies), EC, IFAC, INTERPOL </li></ul><ul><li>58 countries have agreed processes or have a project in place to adopt IPSASs or align with IPSASs </li></ul>
International Federation of Accountants www.ifac.org
A particular slide catching your eye?
Clipping is a handy way to collect important slides you want to go back to later.