Public accounts are dubious

BRUSSELS – The head of the International Federation of Accountants has lambasted the quality of accounting by many governments around the world, branding it inferior to improved standards used by listed companies. Speaking in the wake of a Greek budget deficit revision which sparked an outcry in Europe, IFAC Chief Executive Ian Ball urged governments worldwide to quickly follow moves in the private sector to boost the transparency of financial reports. Reacting to a wave of corporate scandals, including the bankruptcy of former energy trader Enron, the USA has toughened its rules on accounting to make it difficult to hide items off the balance sheet. In the European Union, also hit by scandals at Italy’s food firm Parmalat and Dutch retailer Ahold, 7,000 firms will adopt stringent International Financial Reporting Standards (IFRS) from Jan. 1. But as the private sector moves on, many governments around the world are still using cash-based accounting, an outdated methodology under which only paid items are shown on the books. «Most governments report finances in a way that is unintelligible to their electorate,» Ball, whose organization represents 2.5 million private and public sector accountants, told Reuters in a recent interview. «Their financial reporting is extremely bad by comparison to the private sector. We see things that would not be tolerated for half a second in the private sector capital market.» Ball noted that some governments were taking steps to improve public accounts, singling out the United States and New Zealand, and in Europe, Britain and Sweden. In Greece, recently published data on military spending led last month to a startling revision of the Greek budget deficit and showed the country had persistently exceeded the European Union deficit limit of 3 percent of gross domestic product since 2000. The public sector makes up about 40 percent of European GDP, according to the European Federation of Accountants (FEE). Model standards? To boost the quality of government data, the IFAC drafted a set of International Public Sector Accounting Standards, a project stemming from the Asian financial crisis of the mid-1990s and supported by the International Monetary Fund and the World Bank. «One of the key concerns was the lack of any standards in the public sector,» Ball said. The standards are based on accruals accounting, which forces public authorities to immediately book planned expenses rather than wait until the bills are paid. They should serve as a model for EU and other governments, Ball said. «For most governments the standards are very radical, as they are based on accruals accounting,» he said. «Most government reporting is done on a cash basis and there is very little consistency in the way governments report.» The bookkeeping rules are the public sector version of IFRS standards that all EU-listed firms will start using next year but have been adapted to reflect specific public sector needs, such as the need to incorporate tax revenues. The European Commission, which has the difficult task of assessing EU governments’ data, will start using global public sector accounting standards for its own reporting next year, a move welcomed by the accounting industry. Organizations such as NATO and the Organization for Economic Cooperation and Development are already doing so. But no EU state has adopted the newly drafted public sector accounting standards to date and all are at different stages of adoption of the accruals accounting method. Ball said Britain and Sweden were at a very advanced stage. France, he added, has also announced it would move to accruals accounting but did not want to include in the calculation historic assets such as public sector pension liabilities. Around the world, New Zealand had probably the most advanced accounting as it had been using accruals accounting for both its public sector budgeting and reporting for 15 years. The US government was also making considerable efforts, Ball said. «Transparency is desirable in all institutions when there is a public interest. It is really an issue of political commitment,» Ball said.