|
By Ronald Fink
Governments could help restore investor confidence in their ability to service their debt if they improved their financial reporting practices, an international accounting group said today.
In a letter to the G20 in advance of its meeting next week in Toronto, the International Federation of Accountants wrote that governments should "practice what they preach" by dropping their use of cost accounting and adopting the accrual system, which the governments typically require of public companies.
In a press release accompanying the letter, IFA president Ian Ball said that the sovereign debt crisis afflicting Greece and other heavily indebted European nations was due in large part to the shoddy bookkeeping based on cost accounting.
"Confidence in sovereign debt has been seriously damaged by accounting and auditing failures," said Ball.
In the most egregious example, Greece's federal government hid much of its debt through the use of currency swaps created by Goldman Sachs. But Ball suggested the problem wasn't limited to that government.
"Sovereign debt concerns in European countries illustrate the stark implications and urgency of this issue," he added. "These failures have occurred not only on the national level but also on the regional, state and local levels."
In cost accounting, countries simply book annual revenues and expenditures to calculate whether they are running a deficit or surplus in a given year. But without current estimates of future revenue and expenses based on all of a government's assets and liabilities, Ball said taxpayers and investors lack "a comprehensive picture of fiscal performance and position." He called for the use of an accrual-based measure that includes "full details of debt, other liabilities, contingent liabilities and guarantees, and future expenditures and the resources needed to support them."
In urging the G20 to endorse such a change, Ball observed that the predicament that governments face is ironic. "Politicians often criticize businesses for being focused on short term financial results," he wrote, "but the typical public sector financial report does not adequately reflect all assets and liabilities, some of which have significant long term financial implications."
He noted that many countries have substantial civil service pension liabilities that are not reflected in their financial reports. And he said accrual accounting would compel governments to take a longer term view and "be honest with citizens about how today's decisions will need to be paid for by future generations."
 |
in CFO Conversations by 
Subscribe to this comment's feed
