Government spending has rocketed over the last few months in order to mitigate some of the consequences of the Covid-19 pandemic, with the IMF calculating spending to be $9 trillion. The Association of Chartered Certified Accountants, the World Bank, and the International Federation of Accountants (IFAC) have expressed concern that public sector fiscal commitment and interventions are not being captured accurately by governments due to the way they account for this.
In a recent report, Sustainable public finances through Covid-19, the three organisations are calling for governments to use public sector balance sheets to properly manage their finances through the pandemic, paying attention to their public sector net worth. For some governments, this will mean a change in accounting methods from cash to accrual accounting.
Author of the report and ACCA head of public sector policy Alex Metcalf said: “This global pandemic crisis could be a catalyst for more governments to adopt this approach, which can improve decision-making, act as the benchmark for new fi2scal targets, and support governments to rebuild economies for a more inclusive and greener future.
The report suggests that by implementing a balance sheet approach, governments will benefit from:
- Increased clarity on the true position of the public finances, with an understanding of the fiscal room available for further government action;
- Improved value for money and financially sustainable decision-making; and
- Enhanced public sector resilience and better adoption of key financial metrics to drive performance management.
IFAC executive director Alta Prinsloo said: This is about global best practice. No one government can go it alone – the global nature of the pandemic makes this apparent. Part of this drive toward global best practice is to ensure that, as a profession, we discuss with colleagues and policymakers the future of financial reporting in the public sector. Professional accountants need to be giving non-finance expert decision makers a clear and trusted view of the sector’s unfolding financial position.”
Other recommendations for governments include:
- the need to either reference or use full-accrual International Public Sector Accounting Standards (IPSAS), the only globally accepted accounting standards for the public sector, in the production of their general purpose financial reports.
- directing independent fiscal policy institutions to begin fiscal sustainability reporting or to increase its frequency. Central finance departments should also be required to respond publicly to these reports in a timely manner.
- provide Supreme Audit Institutions with the independence and necessary resources to conduct performance audits, which may identify cases where public money was not used effectively, efficiently or economically in combatting the COVID-19 crisis.
For finance professionals, ACCA, IFAC, and the World Bank recommends:
- Consider how any redirection of resource to combat COVID-19 impacts broader metrics of societal wellbeing and sustainability.
- Conduct frequent fiscal stress testing, which forecasts the impact of negative scenarios on public sector balance sheets. This could include the impacts of a second wave of a coronavirus or an extended economic downturn.
- Produce accessible summary material, and appropriate narrative and notes within the financial statements. The accompanying narrative in financial statements helps users make sense of the figures and should not be too biased or avoid critical issues.