By Steffen Müller
Weak accounting and financial reporting within Europe's public sector are a major risk for European countries' public finance, a joint report by the Institute of Chartered Accountant and Wales (ICAEW) and PwC has found. It called for a broad accounting and financial reporting reform to achieve better public finances in the EU based on democratic accountability and fiscal sustainability.
The report, Ten insights for achieving sustainable public finances in the EU, is a result of a series of debates bringing together governments, the accountancy profession, academia and other key stakeholders and highlights the importance of the on-going campaign to harmonise EU's public sector accounting standards.
ICAEW regional director for Europe Martin Manuzi said in the report introduction: "According to Eurostat, taking into account all tiers and branches of government and the public sector across EU member states, no two countries currently have the same system or apply the same standards."
The report suggested that a number of interlinked factors are critical to address the current shortcomings in public sector accounting and reporting. Amongst the key issue highlighted in the report is the necessity to improve the financial literacy of citizens, policy-makers and intermediaries.
"We need to further promote a basic understanding of EU countries' financial situation and the impact of future fiscal sustainability challenges," Manuzi said. "Greater awareness of the connections between financial markets and public finances can also help ensure citizens play a more active role in holding policy-makers to account for their decisions."
The report also tackled the question of accrual accounting. While two thirds of the world's governments have moved from cash to accrual accounting, some countries like Germany show no intention to change.
The ICAEW-PwC report suggested that a move from cash to accrual accounting, as proposed by the Eurostat driven European Public Sector Accounting Standards (EPSAS) initiative, is an important step to achieve accountable public finances in the EU, but it is not an end in itself.
PwC global partner for public finance and accounting Patrice Schumesch said: "Accruals accounting is just one piece in the jigsaw - albeit a critical one: to reap the full benefits of reform, a comprehensive change management process, involving the broader financial management and governance systems of the public sector, is required."
However the financial crisis has left most European governments with scarce resources and many politicians have questioned whether their government had the financial capability to support an accounting and financial management reform.
"Change will of course involve costs," Manuzi said. "However, the cost of not reforming is higher than the cost of reform."
Related stories:
Countries bring themselves to account
New wine in old bottles: the strange case of Germany's public sector accounting