5 minute read 2 Aug 2019
Dr Gerhard Dieterle

How to build confidence in public sector accounting

By

EY Global

Multidisciplinary professional services organization

5 minute read 2 Aug 2019

Show resources

Gerhard Dieterle explains the International Tropical Timber Organization’s experience of adopting international accounting standards.

The International Tropical Timber Organization (ITTO) promotes the sustainable management and conservation of tropical forests. Dr. Gerhard Dieterle is its Executive Director. Until recently, he was the World Bank’s Forest Adviser and Program Manager for the Forest Investment Program (FIP) and the Dedicated Grant Mechanism for Indigenous Peoples and Local Communities (DGM).

The ITTO has recently implemented International Public Sector Accounting Standards (IPSAS). Dr. Dieterle (pictured above) and Simon Kawaguchi of the ITTO were interviewed on this topic by EY member firm representatives from Japan and Germany.

Thomas Müller-Marqués Berger is EY Global Head of International Public Sector Accounting. According to Thomas, IPSAS standard setting was initiated by international donor organizations (such as the World Bank and other development banks) in 1997. These organizations asked the International Federation of Accountants (IFAC) whether their Public Sector Committee (PSC) could take over this task. Having agreed to this task, the PSC was transformed into the IPSAS Board (IPSASB).

The IPSASB is one of four standard-setting boards under the auspices of IFAC, however with an own-governance model involving the Public Interest Committee (PIC). The objective of the IPSASB is the strengthening of public finance management globally through increasing the adoption of accruals-based IPSAS. The purpose of the IPSASB, therefore, is the development and maintenance of globally accepted high-quality accounting standards in order to support accountability and support the decision-making of public sector entities.

Currently, 25% of 150 countries are using accrual accounting, of which around half are applying IPSAS either directly or as reference point. In five years’ time, around 65% of these countries will apply accrual accounting, out of which nearly 75% will use IPSAS in the aforementioned way. Currently, there are IPSAS implementation projects all over the world, involving countries on all continents. The main focus points are in Latin America and the Caribbean, in the Middle East and Africa, but also in South East Asia and China. In Europe, the European Commission is working together with the Member States on the European Public Sector Accounting Standards (EPSAS), which also use IPSAS as a reference point.

Motivations are either external (motivation of donors or investors to increase transparency) or internal (IPSAS implementation as part of a holistic government reform or as instrument to increase credibility of and trust in a government’s or an organization’s financial capacities). Among international organizations, important preparers of general-purpose financial statements – such as the United Nations (UN), North Atlantic Treaty Organization (NATO), Organisation for Economic Co-operation and Development (OECD) and International Federation of Accountants (IFAC), as well as large agencies in Europe (such as European Organization for Nuclear Research (CERN), the European Space Agency (ESA) and European Aviation Safety Agency (EASA) – have already successfully implemented IPSAS or IPSAS-like standards. These IPSAS-based financial statements have already gone through independent external audit in the past years.

Here, Dr. Dieterle and Mr Kawaguchi discuss the ITTO’s experience of adopting IPSAS and outline what other public organizations can learn from the process.

Q: Why did the ITTO decide to implement IPSAS?

A: ITTO had been using modified cash basis accounting for nearly 30 years. ITTO had first decided to migrate toward IPSAS in 2013. But even before that, the European Union (EU), through its seven-pillar assessments, had made recommendations for ITTO to use a more modern accounting system and ITTO had observed the global trend where intergovernmental organizations were starting to adopt IPSAS. ITTO conducted a gap analysis between its current accounting method and IPSAS. But there was not much progress until 2016, when ITTO encountered an issue with the impairment of its investment and the Council revised the financial rules to officially adopt IPSAS as ITTO’s accounting standard in order to improve transparency and accountability.

Q: What benefits do organizations expect to gain from adopting IPSAS?

A: From a member country’s or donor’s perspective, the expectation is that the IPSAS-based financial information pertaining to their funds would be reported in a transparent, accurate, timely and understandable matter. From a management perspective, the expectation is that the IPSAS-based financial information would bring greater credibility, accountability and transparency to the organization, and would help ITTO regain the confidence of the donors.

Q: What challenges did the ITTO face during the implementation project and what were the key success factors?

A: Transitioning to full-accrual accounting was challenging due to the sheer number of accounting changes that had to be made compared with the previous (modified cash basis) method. Due to the financial crisis that ITTO had gone through, the secretariat was tasked with producing financial statements based on IPSAS in six months. This was done in order for ITTO to be able to present at the next Council session that it had resolved all its issues and could regain the confidence of the members.

In order to make this transition quickly, ITTO received advice from BDO Belgium who had expertise with the implementation of IPSAS. ITTO also had a good working relationship with the auditors at BDO Toyo at the time. This enabled ITTO to receive quick feedback on draft IPSAS financial statements that were produced. Other intergovernmental organizations, such as UN organizations, had already published their financial statements based on IPSAS, and due to the similarity in the nature of work, it served as a good reference for ITTO. Internally, a dedicated team for finance was assigned to this task to make sure there was enough human resource allocated for this project.

Q: Have the ITTO’s expectations been fulfilled?

A: Member countries have officially acknowledged at the Council Session that the ITTO’s financial reporting is more transparent and comprehensive, and that its standards are on par with, or better than, other intergovernmental organizations. The expectations for the ITTO’s improved financial management have been more or less fulfilled. The ITTO will continue to work on improving its systems to further regain the confidence of donors and members. Recently, the ITTO developed a new project audit system to improve the reliability of the funds managed by local executing agencies of projects that represent a big portion of project expenses and revenues reported in the ITTO’s financial statements.

Q: What is your view of the IPSASB as a standard setter?

A: In our view, the focus should be laid on simplified approaches targeting middle- and small-sized public organizations. Based on our IPSAS implementation experience, we are interested in simplified accounting structures, which may be better suited to the ITTO’s relatively small-sized structure when compared with larger public organizations.

The views of third parties set out in this article are not necessarily the views of the global  EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.

Summary

By implementing public sector accounting standards, intergovernmental organizations can make their finances more transparent, accurate and understandable – and therefore increase trust among donors and citizens.

About this article

By

EY Global

Multidisciplinary professional services organization