6 promoting transparency

The quality of state level financial management and governance demands urgent attention both in the UK and around the world.

The poor quality of governments’ financial management demands urgent, sustained and well-designed reform efforts in almost every country. While much of the blame for the global financial crisis, and in particular the consequent sovereign debt crisis, is placed on banks, too little attention has been paid to the contribution of deficient accounting and poor auditing and financial management by governments. This problem is not confined to any one part of the world or category of countries.

The debt crisis has highlighted a variety of unacceptable financial management practices and exposed the fact that some governments’ were running unsustainable financial positions. These positions were disguised by inadequate accounting systems.

Without good financial information and advice, policy makers and managers of public services fail to make sound decisions, leading to poor use of public money, inefficient services and the exposure of services, economies and people to avoidable risk.

Financial regulations are being revised internationally to ensure banks recapitalise, but there has been no corresponding drive to manage government balance sheets better for the long term. While the UK has started to publish Whole of Government Accounts, the information is not yet used as an integral part of public spending architecture.

  Accrual Accounting

When accrual accounts and budgets were originally introduced in the UK these were accompanied by output targets in the form of Public Service Agreement targets. PSAs were intended to improve resource allocation, policy-making and effective service delivery with consistent policy outputs and outcomes – delivering better value for money. But PSAs were designed to enhance HM Treasury’s controls, and were never reinforced through the Parliamentary Estimates process. PSAs evolved over time, but this explicit focus on outputs has been lost through subsequent series of reforms and ceased altogether in 2010.

In contrast, the New Zealand Estimates of Appropriations and the Statement of Intent form the framework for defining objectives and performance indicators within departments, who report performance against objectives in their annual reports. Reforms in France led to the budget being voted on the basis of ‘missions’ related to the government’s outcome objectives, with each mission having performance objectives, thereby improving parliamentary control over the budget.

  Transparency

The most fundamental motivation for better government accounting is that it enables higher levels of economic growth, determining a society’s ability to meet the needs of its citizens, and it impacts on levels of employment and therefore individuals’ welfare. Transparency acts to inform voters and constrain decisions which have unsustainable financial consequences. The relationship between good numbers and good decisions is universal, and Greece provides the most dramatic example of the damage that can be done by poor and weak financial management.

It might have been expected that an accounting failure by a sovereign government with huge national, regional and global ramifications would have generated the momentum for reform. But even in Greece, despite many hundreds of reform requirements imposed by the ‘Troika’, we are yet to see any serious steps towards adopting accruals based accounting and reporting for its government.