The push for governments around the world to move from cash to accruals accounting has been immense and on-going since the financial crisis started in 2008. From a crisis of confidence in financial markets, we have, for a few years, been facing a crisis of confidence in governments. Public trust has been weak.
A healthy and strong public sector is seen to be a critical factor in ensuring a healthy wider economy. At the core of this, taxpayers require confidence and trust. This trust comes from having strong public financial management and transparent and reliable financial information. But, to rebuild public confidence and long-term economic resilience, policy-makers must master the tools for tackling borrowing and large-scale government deficits.
Financing and refinancing of public debt requires responsible policies which remain consistent with existing commitments and allow for new liabilities to be undertaken only if they can be serviced. But the changes in the political cycles can destabilise the balance of commitments and capabilities. Taxpayers thrive on transparency. A consistent accounting framework that highlights and links current decisions to future commitments is necessary to stablise expectations. Accruals accounting and a consistent set of accounting and auditing standards for the public sector offer the transparency that is needed to work towards stronger markets and stronger economies.
Many governments, however, have struggled with the process of making this change of moving from cash to accruals accounting, because of the significance of the task. The scale of the task is not a one year project. It is one that requires the commitment of successive governments to come. It is no longer enough to simply think in term of cash in and cash out. There is a need for more sophisticated accounting techniques and skilled professionals to ensure that the financial position of governments are properly understood and managed.
Most of the information about public sector reform has been about the detail of the benefits of making the change and the detail of the accounting standards. There is very little information on the practical aspects of how governments should actually make the change. This is what governments have found the most challenging.
ICAEW has therefore published a toolkit which takes users through the practical steps needed to put into place a system of modern public finance management.
What are the building blocks?
The Building blocks to better PFM: a cash to accruals accounting toolkit provides a framework to deliver a successful change management programme. The building blocks are:
- Structures and ownership – the political and wider organisational and leadership structures that need to be in place to deliver the change.
- Structures and ownership – the political and wider organisational and leadership structures that need to be in place to deliver the change.
- Project delivery – setting up the project team and running the project with appropriate governance and oversight.
- People and resources – the right people, with the right skills, knowledge and approach to drive the reforms supported by adequate resources. We discuss how capacity can be built and strengthened in developing countries and emerging economies.
- Standards and policies – the standards in accordance with which financial statements will be produced, the process for setting them and the policies that will be adopted.
- Systems and processes – putting in place the right infrastructure, corporate governance and business processes to enable high quality information to be provided so policymakers can make the right decisions to achieve the right outcomes.
Who is the toolkit for?
The toolkit is intended for those government entities that have made the decision to implement accruals accounting, including potential sponsors of a project to make the transition to accruals accounting and all those charged with delivery of such a project. It is also a useful guide for policymakers, standard setters, senior administrative officials, auditors or regulators who will have some involvement in the project. It is relevant to countries whose governments are still planning their transition as well as those already part-way through the process.
Strong PFM is vital for strong economies
Strong PFM is central and critical to all parts of the public sector. Improving the quality of public services is vital to citizens and the economy. But it’s a complex task. With better information and tools, public finances can be better managed and lead to stronger economies.
A summary of the publication Building blocks to better PFM – A cash to accruals accounting toolkit is available via the link below. The full publication is priced at £30. To obtain the full version, please check our website for ordering information or contact maria.pires@icaew.com.
Sumita Shah, Regulatory Policy Manager, Public Sector
Public Sector Group, June 2017