For the next generation
5 Jan 10
Mike Hathorn argues that coming clean on the fiscal sustainability of public policy is something we owe to the citizens of the future
by Mike Hathorn
At the time of writing, I am preparing to step down as chair of the International Public Sector Accounting Standards Board (IPSASB). My term ends on 31 December.
I have been chair for three years, deputy chair three years before, and a board member since 2001. Prior to that, I stood in for Sir John Bourn as UK representative. During that time, IPSASB has taken on some major issues, including how to bring greater transparency, accountability and comparability to public sector financial reporting, and how to achieve convergence between the public sector reporting standards, IPSASs, and the private sector’s international financial reporting standards (IFRSs).
Much progress has been made. Accrual accounting has been in use in the private sector for 200 years, but it is only 20 years ago that the first government began to follow suit. In 2000, the first IPSASs were published and only a handful of governments had adopted full accrual accounting. Today, four countries are known to have adopted IPSAs and more than 80 countries have agreed processes, or have a project in place, to adopt or align with international standards. Brazil (by 2010), Russia, India and China have indicated their intention to adopt the standards, and leading organisations such as the United Nations, NATO European Commission and Interpol are also adopters.
One of the hardest challenges, and one of the biggest disappointments, was the failure to deliver a standard on social policy obligations. Can such obligations – like the commitment to a state pension – be portrayed as liabilities? This has proved to be problematic. Government policy is a statement of intent, but of course a government, or its successor, can change the policy and reduce its obligations by changing the law and/or regulations.
We needed to find a way of reporting those issues, outside the general purpose financial statements. This is also one of the issues for IPSASB’s conceptual framework project.
Historically, it has been accepted that a government has the ability to raise sufficient funds to meet all of its obligations. The events of the past 18 months, however, have brought this issue to the fore. It is no longer feasible that, for example, the UK Government could raise enough tax, in the short term, to pay off all the debt incurred through its interventions during the financial crisis.
This was one of the key drivers behind the publication of the board’s paper Reporting on the Long-Term Fiscal Sustainability of Public Finances.
We worked with, among others, economists and statisticians to see how information on the sustainability of government programmes could be used to complement what was already available in traditional financial statements. There is a growing awareness that such information can be crucial in allowing citizens to evaluate the scale of the fiscal challenges facing governments, so that the impact on future generations can be better understood.
For the future, I hope to see progress on issues such as consolidating government accounts so that the position of major liabilities, such as public sector employee pensions and benefits, is understandable and transparent. I believe this is a fundamental issue.
There are two pieces of unfinished business as I prepare to step down as chair of IPSASB. One is the conceptual framework, for which the sustainability paper forms part of the groundwork. The other is the governance and credibility of IPSASB itself.
I have long argued that the G20 governments should apply to themselves the same criteria for transparency and accountability that they demand for the private sector. That means challenging government practices, but it is the essence of what IPSASB is all about.
IFAC has agreed to consult with governments on appropriate governance measures for IPSASB, to ensure that our work is acceptable to our stakeholders. IPSASB will have to demonstrate that it is independent, objective and fit for purpose and I am sure that under my successor, Andreas Bergmann, it will do so.
MIKE HATHORN is the outgoing chair of IPSASB and a senior partner with Moore Stephens International. He is a past president of ICAS.
Reporting on the Long-Term Fiscal Sustainability of Public Finances can be downloaded from the IFAC website www.ifac.org and comments are invited by 30 April 2010.