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December 10, 2012

Poor quality government accounting – an issue for all

The recent International Monetary Fund (IMF) report Fiscal Transparency, Accountability, and Risk notes only 12 of 184 national governments publish accrual-based balance sheets – the UK and Australia are members of a select group! The rest are leading and managing their countries without the benefit of information about their own financial position and are not open about their true level of debt.

This is an unsurprising result given the prevalence of cash accounting, which ignores government liabilities. How can governments fix an economy when they can’t even see the problems? And the loss of trust the public has in a government’s ability to manage their country’s financial position is a consequence of that opaqueness.

Notwithstanding these observations, the Group of Twenty (G20) has persistently ignored the issue of poor quality government accounting in its examination of the financial crisis. The leaders of the UK and Australian governments must change that.

2011 saw the UK publish its first audited whole of government financial statements. Successive Australian Governments over the last sixteen years have been held to at least the same level of integrity and transparency by its citizens as that demanded of companies.

I believe that a willingness by governments to commit to the adoption of accrual accounting standards-based financial and budget reporting is critical for the effective management of government and its entities – a necessary precondition for good economic decision making. A more transparent government reporting regime is evidence of government commitment to being accountable, itself a necessary step to regaining the trust of the public.

The poor quality of accounting practised by most governments of the world is a huge issue confronting the world’s economies. The governments of the UK and Australia need to work together to have the G20 examine this issue. To not take action is likely to result in many governments repeating the actions that caused the current crises and fail to understand fully the financial consequences of those actions. The last five years shows this cannot be a good outcome for anyone.

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