By Paul Mason, Assistant Director, Professional Standards and Central Government at CIPFA
Public sector financial reporting needs to improve. This has been the clear and consistent message from international bodies including the G20, the International Monetary Fund (IMF) and Eurostat. A flurry of activity at the end of 2012, and the beginning of 2013, saw all three organisations reiterate this fact and recognise the need for improved financial reporting to help governments recover from the sovereign debt crisis.
While weak public sector financial reporting may not have been the initial cause of the crisis, in some countries with poor public financial management it definitely exacerbated the situation and showed that improved reporting is an essential tool for policy makers in repairing the damage and protecting against future problems. We need to know the scale of the problem before we can fix it but public sector financial reporting as it currently stands in some countries (excluding the UK) does not always give public finance officials what they need.
The Eurozone has experienced particular problems as a result of the sovereign debt crisis, and this has prompted the European Commission and Eurostat to seek ways of improving the quality of government financial information in the EU. Indeed, the commission is considering mandating public sector accounting standards across Europe as part of this drive for improved financial information.
These calls for improvement are aimed at national governments, many of whom still account on a cash basis. Public sector organisations in the UK may be ahead of many of their continental cousins in producing high quality, audited, accruals-based financial statements, but the UK cannot be complacent. We have our own difficulties to overcome.
That was highlighted in the recent report by the Public Accounts Committee on the Whole of Government Accounts, which noted that the Treasury ‘does not have a clear plan to realise that potential or improve the quality and timeliness of the WGA to improve its usefulness’ and that ‘more needs to be done to make the accounts easier to understand’.
Similar criticisms have been made about local authority accounts. The need to produce financial statements that address both an accounting framework and a legislative framework does lead to complexity. This ‘dual reporting’ approach not only results in additional information being provided – additional notes required by regulations – but also requires some items to be accounted for in ways that do not reflect how the authority manages its budget. Timing differences in recognising expenditure and a service analysis that reflects national accounts – rather than how the authority is organised – are just two examples.
Consequently, decision makers can struggle to understand financial statements, and the valuable information they contain can be overlooked when policies and strategies are being considered. It is in this context that CIPFA is publishing Financial Statements: A Good Practice Guide. This guide will help authorities identify immaterial disclosures that can be omitted from the financial statements, and present material disclosures in more accessible ways.