Magazine article Public Finance

Spinning out of Control?

Magazine article Public Finance

Spinning out of Control?

Article excerpt

GEORGE OSBORNE'S RECENT Budget highlighted the parlous state of the UK public finances. Borrowing in 2011/12 was expected to be £126bn, with public sector net debt set to peak at 76.3% in 2014/15.

These are frightening figures, but they could have been a lot worse. If the chancellor had chosen to highlight calculations based on Whole of Government Accounts rather than the UK's National Accounts he would have caused a stir. For example, the deficit of £107bn in 2009/10 would have translated to £165bn under WGA.

Decisions such as these provide a dilemma for politicians across the globe. Modern accounting techniques - such as WGA - are based on accepted international standards and use accrual rather than cash accounting. They allow for proper comparisons and are more transparent - it's harder to hide tricky items like pension liabilities or Private Finance Initiative commitments.

But inevitably, this makes the figures look worse. Perhaps, as a result, governments are hardly rushing to introduce accrual-based International Public Sector Accounting Standards. Fewer than 60 countries have introduced accrual-based accounting and only a handful currently use accrual-based budgeting.

To the public this may all seem to be an arcane argument carried out by bean counters with nothing better to do. But it does matter.

Inadequate accounting and auditing have clearly been factors in the sovereign debt crisis affecting Europe, the US and beyond. This was most obvious in Greece, where successive governments misreported official economic data. But the Greeks are not alone in adopting poor or dubious financial practices.

Germany, Italy, the Netherlands and Japan all still use cash accounting, as do India, Brazil and China. The German government recently 'found' an extra euro55bn following an 'accounting error'. This worked in its favour but several German cities are facing huge liabilities arising from interest rate swaps.

Meanwhile, in the US, the Government Accountability Office has been unable to express an opinion on the federal government's consolidated financial statements for the past 15 years. The billionaire philanthropist Bill Gates has described the accounting methods used by some US states as 'so blatant and extreme' that 'Enron would blush'.

We've now had bailouts in Ireland, Greece and Portugal and the introduction of technocratic governments in Athens and Rome. The US has lost its coveted triple-A credit rating and seen its debt levels pass $15.5 trillion.

With the crisis showing little sign of abating, the International Federation of Accountants recently convened a conference in Vienna to find a way forward. In his opening address, chief executive Ian Ball explained the frustration felt by those leading the profession globally.

'It has been a matter of amazement that the crisis and instability that we have been going through for the past four years has resulted in so little examination of the role of the woefully deficient accounting, auditing and financial management provided by many governments.'

Ball has been a vocal critic of the slow progress made by governments with their accounting. He has described what went on in Greece as 'financial reporting fraud' and called for urgent reform.

IFAC used the conference to issue a policy paper calling for greater public sector financial management transparency and accountability. While the problems highlighted by the sovereign debt crisis cannot be solved by better reporting alone, they cannot be solved in the long term without it,' said Ball.

The federation wants governments to commit to several accounting reforms including: publishing audited financial statements within six months of year end; producing budgeting, appropriations and reporting on an accrual basis; and providing full transparency in fiscal positions ahead of general elections.

This will take some doing given where we currently are. Andreas Bergmann, the chair of the International Public Sector Accounting Standards Board, told the conference that progress had been made on accrual-based accounting but currently only four countries, one being the UK, makes use of accrual-based budgeting. …

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