Government financial information not being used by the public
- Report suggests public sector accounting is modernizing but few ratings agencies, financing institutions, or citizens are seen as key users by governments
LONDON, MOSCOW, 24 November 2011: Essential stakeholders in the ongoing debt crisis and sovereign financial instability – such as international financing institutions, rating agencies, and the general public – are not seen as key users of governmental financial statements in many countries around the world according to a new EY report launched today. Toward transparency: A comparative study on the challenges of reporting for governments and public bodies around the world, surveyed governmental financial officials across 33 countries and found that, compared to a significant majority (84%) listing governments and parliaments as key users, under a third (33%) listed ratings agencies, just over a third (39%) mention international financial institutions, and half (51%) see citizens being key users of financial statements issued by governments.
Philippe Peuch-Lestrade, Global Government & Public Sector Leader at EY, said: “These findings suggest that many governments are not disclosing their financial status effectively to external audiences. This has potential ramifications for the global economy if those audiences making critical investment, regulatory, and political decisions do not have the most relevant and reliable information. Governments should be motivated following the financial crisis to put in place the conditions for modern management and to reform their accounting methodologies but more progress is still needed to address concerns about transparency, accountability, and sustainability.”
The study aims to identify trends and developments in public sector accounting including making an assessment of the global transition from cash basis accounting towards accrual accounting, and onto the ultimate goal of International Public Sector Accounting Standards (IPSAS).
Global financial regulatory convergence is something that the G20 and many other countries have called for to create stability for capital markets and investors. The study found out that national financial reporting standards are still mostly unique, making true financial comparisons between governments very difficult. The large majority of the countries in the survey each use their own accounting and financial reporting system which means that most are unable to compare their level of efficiency with other governments.
A clear trend towards IPSAS or standards that use IPSAS as a reference was observable in the study; however there is further evidence that countries are creating unnecessary barriers to transparency and comparability for cross-border investors.
The majority of the entities surveyed had already converted to (modified) accrual accounting (52%) and identified clear benefits in doing so, including that it facilitates decision making, improves asset and cash management, and improves cost awareness and efficiency. Most do not plan though to further reform their accounting system. Of particular concern is that a third of those (55%) who are not planning any changes are based in Europe where there is continued sovereign fiscal instability.
A large majority of the countries (75%) identified “fair presentation” as the main focus of information presented in financial reports. The fact that countries using cash basis also gave that answer may be seen as contradictory because cash based accounting is according to accounting experts not in line with a fair presentation of a country’s financial situation. Therefore, one can conclude that from a global perspective there is obviously no common understanding of fair presentation. Finally, most government financial administrations know about IPSAS, but only three countries in the study had actually implemented the standards (IPSAS accrual basis).
Thomas Mueller-Marqués Berger, Global Public Accounting Leader at EY, says, “Public finance thinkers and policymakers increasingly believe that the complex financial challenges their countries face have been made more difficult to resolve because of their continued reliance on antiquated, cash-based accounting systems. It is encouraging to see therefore the modernization of public sector accounting being driven from within governments and that the financial crisis does not appear to have shaken resolve. The private sector has had to incorporate measures that address transparency and usability of financial statements – the public sector urgently needs to do the same.”
Peuch-Lestrade says, “The sovereign debt crisis has focused the need for transparency on government finances within Europe in particular, but it is important for governments around the world to ensure their financial statements are as accurate as possible by using modern accounting methods that give a more complete picture of government.”
Maxim Savostyanov, Partner, says: “Implementation of large scale budget reform covering all levels of the budget system of the RF (including both federal and municipal levels) and all stages of the budget process requires a unified methodological framework for all the areas of the budget reform. Similar to IFRS for the private sector, IPSAS is a good and proven starting point for developing national accounting standards to be used by budget organizations, adapting it to the needs and conditions of the Russian public sector”.
About the report
The study covered 33 countries with a balanced representation both by geography and level of individual country development. The survey was based on a seven-page questionnaire designed by the EY Competence Center for Public Sector Accounting led by Thomas Müller-Marqués Berger in cooperation with the Institute of Public Management. The questionnaires were completed during the first half of 2011 based on research by EY offices in the respective countries which included meetings with high-level financial officials in charge of public accounting for their respective states (either within the Ministry of Finance or the specific agency dealing with this issue). The following 33 countries took part in the study: Australia, Austria, Brazil, Canada, Croatia, Egypt, France, Germany, India, Indonesia, Israel, Italy, Japan, Kenya, Lithuania, Mozambique, Nepal, Netherlands, New Zealand, People’s Republic of China, Poland, Senegal, South Africa, South Korea, Spain, Sweden, Switzerland, Uganda, Ukraine, United Arab Emirates (Abu Dhabi), United Kingdom, United States of America, and Zimbabwe.
About EY’s Global Government & Public Sector Center
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