In light of the European sovereign debt crisis
the International Federation of Accountants (IFAC) has called for a
reform of governments’ ‘substandard’ financial management practices
to enable greater transparency and accountability to protect the
public and investors in government bonds.

IFAC said that substandard accounting,
auditing, and financial management has, “eventually led to the
financial reporting fraud by the Greek Government, and ultimately
triggered a market reaction that revealed much more widespread
financial fragility in the European public sector, evidenced by the
need for bail-outs and increased debt servicing costs”.

“In Germany, the government recently disclosed
an accounting error equivalent to 2.6% of GDP. That this error was
not obvious to Germany’s Mnistry of Finance is indicative of the
general state of government financial management,” IFAC warned.

The body also added that fiscal mismanagement
in the public sector stems from, “political shortsightedness and
the inadequate systems that governments use to manage public
finances, in particular the use of cash-based accounts in a highly
complex financial world”.

IFAC chief executive officer Ian Ball said
that the fact that most governments in the developed world assume
they can manage and control their finances using only cash
information indicates that something is seriously wrong.

“The cash-based information commonly used for
budgeting and accounting is both simplistic and anachronistic, and
doesn’t come close to accurately describing the complexity of their
financial positions. It is a virtual guarantee of financial
mismanagement,” he said,

IFAC recommended that the Financial Stability
Board (FSB) should be commissioned to consider the nature of
institutional changes that are needed in public sector financial
management.

IFAC believes the FSB should examine reforming
fiscal arrangements which include:

  • Audited financial statements within six months of year
    end,
  • Budgeting, appropriations, and reporting on the accrual
    basis,
  • Full transparency in fiscal positions ahead of general
    elections, ensuring that voting is fully informed,
  • Independent, audited projections of fiscal position to
    accompany budgets, and,
  • Limitations on deficit spending, or at least full transparency
    around the reasons for deficit spending and explanations of how,
    over an economic cycle, fiscal balance will be restored.