Last week, the UK-based Chartered Institute of Public Finance and Accountancy (CIPFA), the world's only professional accountancy body dedicated to public finance, signed a MoU with the Institute of Chartered Accountants of Pakistan (ICAP), during the inaugural session of the Public Financial Management Conference organized by ICAP at Serena Hotel Islamabad.
At the conference, BR Research managed to get a hold of Ian Ball, CIPFA's chairman, to shed some light on the MoU, and why governments ought to move from cash basis to accrual based accounting system. Ian, whose first training was as an accountant, before he did his PhD in government finance and administration, has been the chair of CIPFA International since 2013.
He is the former Chief Executive of the International Federation of Accountants, and led IFAC from 2002 to 2013. In 2009, he oversaw the publication of the first comprehensive suite of International Public Sector Accounting Standards. Prior to joining IFAC, Ian worked in his native New Zealand where he oversaw the modernisation of public sector management practices. He is a member of CIPFA and also a fellow of the New Zealand Institute of Chartered Accountants and of CPA Australia.
Below are edited transcripts from that sit-down.
BR Research: Tell us a bit about the MoU that CIPFA has signed with the ICAP. What is the idea behind it?
Ian Ball: CIPFA is the only professional accounting organisation in the world that focuses on the public sector. We have developed a lot of material over a very long period, and recognising that many countries are moving from cash-based accounting and financial management to one that is accrual-based, we believe that creates a real need for accounting resources specific for the public sector.
So the reason we want to engage with other institutes through MoUs is relatively straightforward. We have resources that could be of great use to governments and particularly to other professional accounting organisations across the world. So we produced what we call an institute to institute offer, which is saying to other institutes that we are very open to collaborate and share some of the resources and expertise that we have.
BRR: But why not set up your own shop here, like ACCA and CIMA have done?
IB: It's not what we are trying to do. CIPFA is a charity that operates in the public interest. What we are trying to do is to work through the existing accounting institutes in a country. Say the government of Pakistan is looking to move from cash to accrual accounting to improve its public financial management, then our view is that a primary resource must lie with the local institutes, which in this case is the ICAP.
We recognise that many of the national institutes in the world don't have a strong capability and understanding of public sector accounting issues, so we offer to make our resources available through the professional accounting body and its members. The best way we can help is to strengthen ICAP and its members in terms of their public sector resources and expertise. We see ourselves as operating very much through the national institutes and working in collaboration with them rather than in competition.
BRR: What is next line of action after the MoU? What kind of milestones and timelines we are looking at?
IB: As we see it, we have signed the agreement today which outlines the general areas in which we will collaborate. The next step is to develop the specific actions. But certainly it's our and ICAP's intention to work quickly and get on with it. It's certainly our intention that existing ICAP members with appropriate experience can start getting CIPFA membership within a year.
BRR: One of CIPFA's services is offering comprehensive data about public services. Would that be available in Pakistan?
IB: We wouldn't rule out anything in the discussion. But there are some areas where CIPFA in the UK has either some governmental agreement or some statutory authority, which CIPFA wouldn't necessarily seek or get in Pakistan. However, for example, if the Pakistani government wanted a similar service from the ICAP, we would be absolutely happy to engage and discuss with them how those services might be provided.
BRR: How reconcilable is accrual-based government accounting system with conventional macroeconomic measurements?
IB: Actually, the macroeconomic statistics model is fundamentally an accrual based model. If you read the principles underlying the IMF's government finance statistics or the UN SNA or the Eurostat methodology, those all rest on accrual concepts.
So in principle, the basic model of macroeconomic statistics and the accounting frameworks - whether it is International Accounting Reporting Standards (IFRS) or International Public Sector Accounting Standards (IPSAS) - both are accrual based.
It is only in the ministries of finance at the national level where people believe that cash is an adequate measure of resource flows. This is being practised in most countries across the world, but it is inconsistent with the principles that underpin macroeconomic statistics. It is also an inadequate measure of resource consumption and fiscal position.
BRR: Can you share an example of how would accrual-based government accounting help?
IB: Assume that you are the head of government body and your public service union wants increased pay, but you are bit strapped for cash. What do you do? You do a deal with them where your cash payment will not go up, but the pension will go up quite a lot. So you don't have to pay anything this year.
You think the problem is solved. But it is not, because while you may not be paying out the cash immediately, you are indeed consuming resources, it's just that you are not reflecting those flows that have a deferred payment. You are putting them off to a future time. If you were measuring resource flows, as you ought to according to the principles of underlying macroeconomics, you would be including the payments you make to the employees, the cash you give them, plus the additional liability you incur for future pension payments.
This is why cash based system does not give you an adequate measure of your fiscal position at the end of the year because it doesn't account for the fact that you incurred a liability. If you were to use the accrual mode, then from a political perspective there would be no great benefit of pretending that the liability does not exist.
Similarly, the gross debt to GDP is used as an indicator of the strength of your fiscal position. But for the same reason, it is significantly flawed because it does not reflect the liabilities other than debt, especially public service pension liabilities.
BRR: But for developing economies there are two potential barriers. First the efforts required to implement accrual-based system are huge. And second political parties in these economies often use government offices and public sector entities as parking lot for political appointments, so then recording all those pensions means your annual fiscal deficit will hit through the roofs?
IB: The view you are expressing is a common one. I completely agree that moving from cash to accrual based public financial accounting is a very big job in a developing country like Pakistan.
To me the right way to think about it is that the size of the job is more or less directly a measure of your present information disadvantage. That is to say that all the information that you have to collect is information you do not currently have. So if you are running a government without all that information - there are two ways you can view it - you can say - that's something that is too difficult to do, or you can say we really can't go on managing this economy with this lack of information. We need to do something about it.
And your fiscal deficit wouldn't necessarily go through the roof because if you have got that kind of information then you can manage yourself much better. Government finances and overall management is much tighter and in much better control, once you have all that information.
BRR: How many developed and developing countries had adopted the accrual model before the global financial crises and how many adopted after the crisis? And what is the progress report so far?
IB: The number of countries that had accrual accounting before the crises was around 50, whereas after the crises it has increased to approximately 80.
We do not know how much of that is attributed to the global crises, but I think the crisis has attracted more attention to fiscal position, and identified gaps in governments' knowledge about their fiscal position. It was a signal that governments were not accounting properly, they didn't have good financial information, the information they had couldn't be relied on. But the overall reaction from governments was minimal. It was truly disappointing.
It's clear that governments have not reacted to the sovereign debt crises in comparison to how they react to a crisis in the private sector, say after the Enron crisis. Enron generated a huge response from the government and the global accounting community, but the sovereign debt crisis did not result in governments around the world moving as quickly to improve the quality of their own accounting.
BRR: How long does it practically take a country like Pakistan to roll out the accrual-based accounting in public finance management?
IB: There are certain areas, where you could make significant improvements very quickly, for instance including the liabilities such as pensions into your gross debt to GDP calculations, or reporting your net debt on an IPSAS basis. I believe you could do that in most countries within a year at the most, probably much quicker. As for making the complete transition from cash to accrual-based accounting, it really depends how the government chooses to go about doing it, and how committed it is to making the change.
Commitment means that you are prepared to pay what is needed to develop and run that system. It means changing some of the rules, changing the budget system. It also means changing the nature of appropriations, so that the parliament's approval processes don't look at cash numbers but also accrual numbers.
BRR: Does accrual-based system makes economic sense in poor economies, considering that it is costlier to develop and maintain such a public financial management system?
IB: One of the difficulties in a country like Pakistan, and it was the same in New Zealand to a lesser degree, and certainly the same in many other countries is that the cost of introducing an accrual accounting system looks like a quite a lot of money with generally not so large immediate results; especially when you compare it with other government programmes such as improving drinking water or inoculations.
At some level, this is understandable, and it may be a short term problem and disincentive. In the long term, however, it's the other way around. If you don't spend money on accrual accounting system to improve your public financial management systems, then in the long run you don't get the quality of government management that is needed to ensure that you have the resources to provide services like drinking water or inoculations.
This is a really challenge to the political process because you have to say that we are going to bite the bullet on this and roll out a better financial system so you can better manage your resources in the long run. So the benefits of knowing the pensions of your roads department, and how much your roads costs, and how much of that resource you are consuming each year, and how much maintenance you have to incur each year, is about effective management of your road and transports and traffic systems and not about producing a set of financial statements just to put a number out there. In other words, the benefits of accrual accounting come largely from having better management information, leading to better decisions and better performance. That is what it is really about.
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