Public sector, sovereign debt
Raphael Gordon, GUEST COLUMNIST
The financial and sovereign debt crises have brought to light the need for better financial reporting by governments worldwide, and the need for improvements in the management of public-sector resources.
Many governments operate on a cash basis and do not account for many significant items, such as liabilities for public-sector pensions and financial instruments.
Accrual accounting is a fundamental tenet of strong accounting and reporting for public companies, and so it should be for governments as well.
The International Federation of Accountants (IFAC) advocates the adoption of accrual accounting in the public interest—which will result in a more comprehensive and accurate view of financial position, and help ensure that governments and other public-sector entities are transparent and accountable.
A fundamental way to protect the public interest is to develop, promote, and enforce internationally recognised standards as a means of ensuring the credibility of information upon which investors and other stakeholders depend.
The International Public Sector Accounting Standards Board (IPSASB), an independent standard-setting board supported by IFAC, has developed and issued a suite of 31 accrual standards, and a cash-basis standard for countries moving toward full accrual accounting.
IFAC convened key decision makers, politicians, public finance management leaders and others at a seminar titled ' The Sovereign Debt Crisis, A Matter of Urgency - From Lessons to Reform' over two days in Vienna.
The presentations, debates, and discussions sought a comprehensive understanding of the causes contributing to the international sovereign debt crisis and conveyed a clear and consistent message that the fiscal stress and instability associated with the crisis need to be addressed urgently, through a radical reform of public financial management systems and institutions in many countries. There were a number of key findings.
The sovereign debt crisis has identified a compelling and urgent need for governments to address seriously the quality of their public financial management systems and institutions.
The fiscal risks associated with the ageing population in many countries amplify the risks associated with poor fiscal measurement and management that have been exposed by the sovereign debt crisis.
The current crisis has emphasized the deficiencies associated with cash-based accounting and budgeting.
Governments need to adopt accrual accounting and budgeting to better measure and manage fiscal position.
The adoption of International Public Sector Accounting Standards (IPSASs) is necessary to provide global consistency and comparability in public-sector financial reporting.
Accrual accounting and IPSASs are being successfully implemented in many countries, including Australia, Austria, New Zealand, Spain, Switzerland, and Sweden. These countries now have the tools for better resource allocation and fiscal decision making.
The accounting profession has a key role to play in this transformation, and should be leaders and catalysts for change.
The cost of failure
Politicians, governments, and ministers of finance need to recognise the political advantages of high-quality financial management systems in absorbing and managing economic shocks.
Conversely, politicians, governments, and ministers of finance need to recognise that the cost of failure in financial management can be loss of sovereignty.
Many stakeholders have a role to play; International organisations - like the Financial Stability Board - should consider the institutional changes necessary; citizens, investors, credit-rating agencies, and auditors general need to be educated, communicated with, and engaged.
The IPSASB must have strong governance and legitimacy, as well as financial and operational stability.
Jamaica needs to move urgently to accrual accounting so that we can know what we owe, what we are owed and what we own.
Recoverable taxation is a fairly large figure in a number of pension funds, companies and other entities financial statements and this asset is non-performing.
For pension funds, the earnings capacity and ability to fund pensions and other benefits is being significantly reduced.
Consideration should be given by the tax authority to allow, by all taxpayers, the deduction of refunds due from the current taxation payable.
This may encourage more persons to file tax returns and increase tax intake as tax payers feel more confident that over payments will be recovered within a certain and reasonable time frame.
For pension funds and other bodies with tax exemptions, the exemptions from the requirement to withhold tax at source should be issued to banks, financial institutions, etc, so that they can get their income gross.
Raphael E. Gordon is retired managing partner of KPMG. email@example.com