Institutional imperative

19 Mar 12
Ian Ball

International financial institutions should be more assertive about the responsibilities of governments. They must toughen up their codes and insist on high quality accounts

In the run up to the International Federation of Accountants’ Vienna seminar on the sovereign debt crisis, I have been thinking about the challenges in getting more governments to produce credible financial statements. There are some technical and policy issues, and implementation can be a major task – but the highest barriers are political in nature.

The fault, to the extent there is one, does not lie with politicians alone. It lies also with public servants, and more importantly with us as voters. In general, public servants will respond to the incentives that politicians place in front of them, as politicians will respond to what voters want.

This makes the political challenge very tough.  Changing public opinion is not easy, especially when the change sought sounds technical and possibly boring. So politicians are usually in a position where they face little pressure for change in accounting and financial management, while there is usually a clamour for change in other areas.

But politicians and governments are responsive not only to voters; they also pay attention to their peers and to international institutions. Both of these can be sources of pressure for change. Those governments that do have high-quality financial reporting and financial management should be more vocal – they should explain why there is political advantage in good financial information.  They will be more persuasive than advisors could ever be.

International institutions should be more assertive about the responsibilities of governments to their people and to their capital markets. In the context of the sovereign debt crisis, the consequences of poor financial management and financial reporting are only too clear. The cost to the global economy has been huge. And it is not over yet.

Some of the international financial institutions are in especially good positions to speak out strongly, as we at Ifac are seeking to do. But they are also in a position to raise the bar more directly. Two examples come to mind.

First, the IMF’s Code of Good Practices on Fiscal Transparency could be strengthened.  It currently states that: ‘The annual budget and final accounts should indicate the accounting basis used in the compilation and presentation of fiscal data. Generally accepted accounting standards should be followed.’

The reference to ‘generally accepted accounting standards’ is ambiguous when applied to governments, while at the same time there are international standards for public sector accounting that have a significant level of acceptance. These should be explicitly referenced in the code and promoted.

A second example is the International Organisation of Securities Commissions and its Objectives and Principles of Securities Regulation. In the section dealing with principles relating to issuers, it says: ‘The term issuer should be understood broadly.  It includes all those who raise funds on the market.’  It also adds: ‘Accounting and auditing standards should be of a high and internationally acceptable quality.’

The language in this section of the principles suggests they are not intended to apply to sovereign issuers.  It needs to be made clear that they do apply, or at least they should.

As is further stated: ‘The principle of full, timely and accurate disclosure of current and reliable information material to investment decisions is directly related to the objectives of investor protection and fair, efficient and transparent markets.’

This principle also, as we have learned, relates to the objective of financial stability.

Ian Ball is chief executive of the International Federation of Accountants and will be speaking at Ifac’s sovereign debt crisis seminar in Vienna on 19-20 March

  • Ian Ball
    Ian Ball

    Professor of Public Financial Management at Victoria University of Wellington and emeritus chair of CIPFA International

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