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By Paul Mason, Assistant Director, Professional Standards and Central Government at CIPFA
The sovereign debt crisis has prompted a number of stakeholders to consider what steps can be taken to prevent a recurrence of the factors that lead to it. This will require a global improvement in public financial management, including the adoption of the accruals-based accounts that are essential for a full understanding of a country’s assets and liabilities. But how will such changes be implemented? Only time – and politics – will tell whether the recent Eurostat report will form a key part of the global step-change in public financial management (PFM) that CIPFA believes is necessary.
The main recommendation of the report is the adoption of accrual accounting across the public sector. Central, state and local government bodies would be required to prepare accrual-based accounts. As the report acknowledges, accrual accounting is the only generally accepted information system that provides a complete and reliable picture of the financial and economic position and performance of any organisation, whether that organisation is a company or a government.
The report also recommends harmonised accrual-based government accounting, noting that this would improve transparency, accountability and the comparability of financial reporting across the public sector. To an extent, this replicates the approach taken by in the private sector; since 2005, listed companies have been required to prepare their financial statements using IFRS.
One key difference, however, is that the report does not recommend direct adoption of International Public Sector Accounting Standards (IPSAS) for the public sector in the same way that IFRS has been adopted for the private sector. Instead, whilst recognising that IPSASs represent an ‘indisputable’ reference point for the development of harmonised accounting standards in Europe, it recommends the development of European Public Sector Accounting Standards (EPSAS).
This proposed approach reflects the lack of consensus seen in the responses to the 2012 Eurostat consultation. But the possibility of a new set of standards raises concerns about comparability with the financial statements of non-EU government bodies. Government bonds are now traded in global capital markets, and comparable financial statements are necessary to understand fully governments’ relative financial situations and risk exposures.
This comparability could be damaged if EPSAS are not closely based on IPSAS. And there is a risk that the EPSAS development process might be used to re-debate issues already decided in setting IPSASs, leading to differences between the standards. CIPFA therefore welcomes Eurostat’s statement that there should be no unnecessary divergences. But ideally, the EU should invest its time and effort in supporting IPSAS development and adoption with EPSAS being based closely on IPSAS rather than developing a new set of standards.
So will the report kick-start the step-change in PFM across Europe that CIPFA has called for? Acceptance of the recommendation to adopt accrual accounting is an essential starting point. How IPSAS or EPSAS are implemented will then determine whether we look back in ten years time and see a successful outcome or a missed opportunity. It’s still all very much to play for.