Keynote address for ICAB – 30 June 2023

Role of public sector accounting standards, the importance of professional accountants in government

Good morning everyone and thank you for inviting me to address you on the second day of your conference.

Having looked at the themes of the conference, there is no doubt that any accounting or finance professional would be excited at the topics being discussed.

Looking at the range of themes/topics, the one thing that struck me is the increased focus on what I would call the role of accounting in “accountability”. Being “accountable” means taking responsibility for one’s actions. As long as there is more acknowledgement that we live in a global village (and that we are all responsible for one another’s well-being), entities and their management are being held accountable for more and more of their actions.

Some of the topics I saw such as sustainability reporting, reporting on natural resources, integrated reporting, emphasise firstly, that an entity’s responsibility to create value is beyond just creating value for investors, and secondly that entities have a custodial responsibility for various resources – which could include those in its immediate community, or more broadly to include country/jurisdictional resources.

While I am a professional accountant, I am a standard-setter at heart. So, my key preoccupation most days is why financial statements and accounting standards matter. What I am about to say may sound idealistic, but I do believe that what I do as a standard-setter and what “we” – collectively all of us as professional accountants do in this room – contributes greatly to enhancing both our financial and social wellbeing. You just need to reflect on corporate failures to understand how much of a role accounting standards, financial statements and professional accountants play in society.

Most of you would be aware of the role that financial statements play in the private sector. The role of the financial statements – and hence the focus of the standard-setter – is on providing information to current and potential investors to maximise investment opportunities along with returns on or of capital. At this moment, sustainability reporting also focuses on investors, and I think we all hope it will start to reflect the broader impact of entities’ activities on a range of areas.

You may be aware that the IFRS Foundation through the International Sustainability Standards Board issued the inaugural sustainability Standards ISS 1 and ISS 2 on Monday. This is a significant achievement given that it only two years since the process commenced. It is also significant as it marks the dawning of a new era in reporting which will impact both preparers and assurance providers.

But back to our discussion on the important of accounting standards…

Corporate failures can affect entire communities through job losses, lost investments, loss of livelihoods. While these losses can be significant, this pales into comparison when compared to the impact that could be felt if a government entity, a level of government, or a whole government should fail. The OECD estimated in 2019 that governments accounted for 40% of the GDP of OECD countries. The GDP % could of course be higher in less developed countries. If governments fail, our livelihood, wellbeing and existence would be significantly altered.

It seems obvious that we cannot have a situation where governments do no produce relevant, credible information to society to enable accountability to be exercised and for the right decisions to be taken. Yet, the importance of accounting standards for government is not necessarily a top priority for the profession and working in the public sector is not always seen as desirable.

Why do we need different standards? Aren’t the decisions the same? I will spend a bit of time explaining why specific standards are needed for the public sector.
The best way to do this, is to explain the decisions that the users will likely make – bearing in mind that the users are broadly all those who rely on government services and those who provide government with resources.

I will focus on three decisions:
• Holding management accountable.
• Facilitating decision-making.
• Helping to uncover fraud and corrupt activities.

Holding management accountable

Unlike the private sector where the financial statements are focused on investors and returns on or of capital, the accounting standards in the public sector focus on providing information to hold entities and officials accountable for the public resources they receive. Holding them accountable means that it is not just about the money (economic benefits) they generate. Accountability means reflecting all benefits received or used by entities during a reporting period.

As examples of how this is demonstrated:
• The first example – the financial statements in the public sector reflect items that not only generate or reduce economic benefits, but also those that either increase or reduce service potential. This is given impetus by the recognition, for example, of heritage assets, natural resources that are held and preserved for future generations as opposed to them being held for their economic benefits.

• In a second example, the recognition of non-exchange transactions in the sector. Non-exchange transactions are transactions that are concluded between parties where (a) value is not directly exchanged between the parties, or (b) the value exchanged between parties is not equal. The accounting principles in the private sector (for the most part) only require the recognition of transactions when a fee is paid or received, and this is usually the transaction cost used. The accounting requirements for the public sector ensure that non-exchange transactions are recognised and measured in the financial statements at fair value which reflects – for accountability purposes – the value of the transactions in the market.

Facilitating decision-making

A key part of setting accounting standards for the public sector means thinking about the types of decisions that users would want to take with the information in the financial statements. Of course, there are specific “internal” decisions that can be taken using the financial statements. Using accounting for assets as an example, there are so many decisions that can be influenced by recognising assets on the balance sheet at a value, along with recognising depreciation, potential impairment, and other items. The depreciation reflects the consumption of the asset, which is critical in the costing of services provided to the public. Impairment reflects a reduction in the ability to use an asset to deliver services, or it may indicate that the asset is not fit for purpose based on community needs for services in a specific area. These simple accounting entries also drive key questions about the adequacy of repairs and maintenance and replacement of decisions.

While these detailed decisions are critical, the most important decisions are those taken by voters. Without going into the detailed voting behaviours of individuals, a key factor that should influence how you vote, is the financial statements of the municipality, state or national government you are voting for. Quite surprisingly, here in South Africa if you ask who examines the financial statements prior to voting, the answer is most often that voters don’t use the financial statement.

The fact that users don’t fully utilise the information in the financial statements is something that should occupy the minds of standard-setters. Educating users on the role of the financial statements and what they mean should be a key responsibility of standard-setters.

The last area is uncovering fraud and corruption

The public generally has an expectation that the financial statements will highlight fraud and corruption in a well labelled line item or disclosure – which of course, you will not find. There are no specific standards that deal with the reporting of fraud and corrupt activities, transactions or balances.

The requirements of the Standards (and this is in the public and private sector) are designed to report information to a wide range of users – those who provide resources to the entity, and those who rely on an entity’s services – to enable them to hold entities accountable and to make decisions. While the financial statements do not actively seek to identify fraud and corruption, the information in the financial statements can be used to identify trends and to predict certain outcomes. If there are anomalies or inconsistencies in the information based on users’ expectations, this allows users an opportunity to interrogate and investigate the underlying information. While not all inconsistencies and anomalies are related to fraud and corruption, they may warrant more attention.

The Standards also indicate that information not specifically required by the Standards should be disclosed to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance. Judgement should be exercised by preparers to assess whether or what information related to fraud and corruption is required in the financial statements, and/or whether presentation elsewhere in the annual report may be more appropriate.

Another factor that contributes to accounting standards being helpful in the fight against fraud and corruption, is that the financial statements are usually prepared by a professional accountant, who abides by a Code of Ethics. Professional accountants are duty bound to act in the public interest and to report any misdeeds identified during the preparation of the financial statements.

Lastly, I thought I would reflect on the adoption of accounting standards for government.

As much as it is clear that accounting standards are critical to relevant, credible reporting in the public sector, the adoption of accounting standards is low.
The International Public Sector Accounting Standards Board (IPSASB) sets accrual based accounting standards for the public sector. They undertake a survey every 5 years to understand the state of accounting across the globe. Out of the 165 countries surveyed in 2020:
• 55 applied cash accounting
• 66 applied partial accrual accounting
• 59 applied full accrual accounting

In 2025, the forecast is that:
• 25 will apply cash accounting
• 77 will apply partial accrual accounting
• 83 will apply full accrual accounting – of this number, only 61 will apply IPSAS.

That’s a very low number – particularly given the importance of government finances.
In my opening remarks, I indicated that there is often a reluctance for professional accountants to work in the public sector.

Reflecting on my own career, when I finished university and started my articles, I wanted nothing more than to be a banker. I found myself only working on public sector clients during my articles, and I really saw the need for skilled professionals that could contribute to professionalising the sector.

While there are about 1.8 million professional accountants worldwide, I could not get statistics for how many work in the public sector. My own anecdotal feeling, is that there are not enough.

In closing….

As you continue with your conference, I hope that the public sector features in your discussions, but more importantly, you think about how you can (a) contribute to advancing public sector reporting and financial management through academic research, (b) promoting the adoption of accrual based accounting standards by various levels of government and international organisations, and (c) be involved in the public sector as an employer, member of a governance committee, volunteering certain services.

Thank you, and all the best for the remainder of your conference.
Jeanine Poggiolini
Chief Executive Officer