Unconsolidated can mean unseen. Greater
visibility, on the other hand, holds out the hope that something might be done
to address the underlying issues. The transparency drive in UK government
accounting managed to avoid exacerbating sovereign debt jitters this month;
maybe it can be a genuine asset in the longer term. (Financial Times 2011a)
On the day after the
UK government finally issued its first ‘Whole of Government Accounts (WGA)’, at
least one media commentator recognised the significance of the event. The
transparency and accountability associated with preparing and publishing
accounts, on an accrual basis, for the entire government did not ‘spook’
markets at a time of great uncertainty; rather it may have had a positive
effect. Critically, there is recognition that transparent, robust,
accrual-based financial reporting by governments may assist in addressing
‘underlying issues’. In its Global
Financial Stability Report (April 2011), the International Monetary Fund
(IMF) recognised the importance of strengthening sovereign balance sheets, and
the need for ‘improved governance of fiscal decision making, including through
independent monitoring of targets and enhanced transparency over accruing
obligations and contingent liabilities’ (International Monetary Fund 2011, p.
… public choice, like
the economic model of rational behavior on which it
rests, assumes that people are guided chiefly by their own self-interests and,
more importantly, that the motivations of people in the political process are
no different from those of people in the steak, housing, or car market. They
are the same human beings, after all. As such, voters ‘vote their pocketbooks,’
supporting candidates they think will make them personally better off;
bureaucrats strive to advance their own careers; and politicians seek election
or re-election to office. Public choice, in other words, simply transfers the
rational actor model of economic theory to the realm of politics. (Shughart II 2007)
This theory suggests
that politicians and public servants do not always act in the public interest.
Indeed, it may help explain why governments do not want transparency, why they
do not want anyone else setting their financial reporting standards, and why
ministries of finance generally do not advocate for better accounting (Ball
The need for better reporting
arrangements for public-sector financial management provide incentives for
politicians and voters to behave in ways that are arguably contrary to the
general public interest, efforts should be made to redesign the institutional
arrangements to achieve better long-term alignment between the interests of
decision-makers and the general public. Actions taken by many governments
during the global financial crisis have caused that crisis to ‘morph’ into a
sovereign debt crisis. While some actions by governments were clearly necessary
to stem financial sector contagion risk, and to guard against systemic
meltdowns, not all governments were fully aware of the implications of the
decisions they were making. Simply, they did not have financial management
systems and processes adequate to the task. Of course, in at least one
situation, the accounting and reporting by a government was not merely
deficient, but also fraudulent. In the case of Greece it seems that
self-interested politicians and public servants were keen to ensure that an
accurate picture of the country’s finances was not made available. While
changing reporting arrangements and processes will not of itself ensure that
fraudulent reporting is eliminated, implementing a system that is based on a
structured, robust framework permits reported information to be audited – that
is, it allows independent assurance about the reliability of the information
presented, and whether it is free from material misstatement.
‘Traditional’ and ‘modern’ methods of government
investors deserve more reliable and complete financial information, and greater
transparency and accountability, from governments. The costs of not doing so
are just too high. The Chairman of the International Accounting Standards Board
noted that ‘without transparency,
neither can there be trust or accountability’ (Hoogervorst
2011). Governments that employ traditional cash-based public-sector accounting
cannot be transparent; their reporting necessarily presents only part of the
total picture. Traditional methods of government accounting – cash-based
accounting, or at the best an inadequate form of accrual accounting – are simply
insufficient to allow governments to discharge accountability to the public, or
to permit investors and potential investors to make fully informed decisions.
Better accounting practices are required. Once it is accepted that government
debt is not ‘risk free’, risk premiums must be determined, and that requires
The majority of PFI debt still does not appear in government debt or deficit
Government departments can use PFI to leverage up their budgets without
using their allotted capital budget – the investment is additional and not
unrelated to value for money need to be removed. (House of Commons 2011,
A consequence of
continuing to budget and report on a cash basis is that governments and
politicians will continue to be less accountable and less transparent than the
private-sector organisations that they regulate.
Reforms needed to effect change
Those who rely on
government reporting, such as debt holders, suppliers and citizens, have
expectations that information reported and disclosed by governments is accurate
and reliable. Reforms necessary to ensure robust financial reporting and financial
management arrangements range from changes to systems and processes and the use
of internationally accepted high-quality reporting standards, to developing and
enhancing professional accounting expertise in the public sector, improving
governance and transparency arrangements, and requiring that reported
information be subject to audit. More specifically, institutional arrangements
that could be expected in strong public-sector financial management
arrangements include: high-quality and timely financial reporting; audited
financial statements; budgets and appropriations on the same basis; full
economic and financial transparency ahead of elections; independent, audited
projections to accompany budgets; and limitations on deficit spending, with full
transparency for breaches of limits. For developed nations there is no real
excuse to delay the implementation of these important reforms. The major
obstacle – as noted previously – is the lack of political will.
Reforms that enhance
financial reporting, disclosure and financial management should not be seen as
merely additions to the vast array of statistics and other information
furnished by governments. Furthermore, they should not be seen as substitutes
for some of the information and statistics that are currently being provided.
Statistics such as those provided to the IMF GFS serve an important purpose.
However, the diversity of approaches, the widespread use of cash-based
accounting – representing a failure by many governments to effectively
implement GFS reporting – and the number of areas where information is not
provided, means that these statistics have a limited use in the context of
either political accountability or capital markets.
As global economic
and financial woes continue, and the inadequacy of many governments’ financial
and investment decision-making becomes apparent, there is no better time to
promote the need for – indeed, force – improved public-sector financial
reporting, disclosure and financial management.
Ball, I. (2010)
Keynote address at Chartered Institute of Public Finance and Accountancy 125th
Anniversary Celebration, 8 December.
Ball, I. (2011a)
Keynote address, at Chartered Institute of Public Finance and Accountancy 1st
International Conference, Trust and Accountability in Public Financial
Management, 17 March.
Ball, I. (2011b) What role can accounting standards for the public sector
play in promoting government transparency? Panel Discussion at Government
Borrowers Forum, 11 May .
Cruces, J. & Trebesch, C. (2010) Sovereign defaults: the price of
haircuts (preliminary paper), December.
(2011) Report on the proposal for a Council directive on requirements for
budgetary frameworks of the Member States, 6 May, available online at http://www.europarl.europa.eu/sides/getDoc.do?type=REPORT&reference=A7-2011-0184&language=EN
(accessed 30 December 2011).
Financial Times (2011a) WGA aims to call UK government to
account, 27 July (www.ft.com).
Financial Times (2011b) OECD warns
on funding struggle, 12 December.
(2011) A Time for Change? The Objectives of Financial Reporting, European
Commission Conference, 3 February.
House of Commons
Treasury Committee (2011) Private Finance Initiative Seventeenth Report of
Session 2010–12, August.
Monetary Fund (2001) Government Finance
Statistics Manual 2001, 19 December.
Monetary Fund (2011) Global Financial
Stability Report, April.
Monetary Fund Website, www.elibrary-data.imf.org (accessed
Shughart II, W.F. (2007)
Public choice, in The Concise Encyclopedia of Economics, December.
(2011) Sovereign Fiscal Responsibility
Index 2011, Stanford Institute for Economic Policy Research, 23 March.
1 Progress is being made towards greater consistency between the
reporting requirements under GFS and SNA, and reporting requirements using IPSASs.
A project to update the GFS is currently under way.
2 Currently, in most instances, intangible assets are not recognised
under GFS. However, a project is under way to update the GFS Manual, which is
expected to see a recognition requirement included. Also, in relation to
employee pension liabilities, requirements are to be included in an updated GFS
Manual that are in line with IPSASs.
3 There is also a cash-based IPSAS, which is not widely adopted.
Governments reporting on a cash basis typically do not aim to be tied to a
framework for reporting as strict as cash-based IPSASs.
4 Although a strict framework for cash-based reporting, such as that
provided by cash-based IPSASs, arguably does provide suitable criteria for an
audit to be conducted.