At the heart of the enduring financial and economic crisis in the EU is a crisis of confidence and trust. Not only have doubts been raised in the financial markets about the creditworthiness of certain member states but increasingly citizens are questioning the EU’s ability to implement its policies and achieve its fundamental objectives.
The focus of EU policy-makers has rightly been on resolving problems of economic governance. However, the European Court of Auditors (ECA) and the Supreme Audit Institutions (SAIs) of the member states have been quick to warn of the need to take due account of the principles of transparency, accountability, and public audit where public funds are at stake. In particular, SAIs underlined the importance of ensuring sufficient transparency, in the form of reliable and timely information (including national statistics) on the actual or intended use of public funds, and the risks to which they are exposed.
Public auditors have an important two-fold role to play in encouraging improvements in transparency. First, we must use our audit mandates to report publicly on the quality of existing information and identify deficiencies. And second, we should promote comprehensive financial reporting and audit frameworks that cover the needs of all stakeholders, markets and citizens.
It is clear that a key element in that financial reporting framework should be the adoption by governments of the accrual basis of accounting. Even before the crisis, there was a growing trend towards public sector entities in the EU adopting accrual-based accounting. With the crisis the arguments for making the transition have been further strengthened.
EU governments are now facing increased competition for funding in capital markets, which are used to financial statements produced on the accrual basis. This is particularly true in the eurozone where investors have a choice of government bonds denominated in euros.
The accrual basis of accounting also provides a framework for systematically identifying existing liabilities, and potential and contingent liabilities: the deficiency of current national accounting systems in this respect is a continuing source of uncertainty.
Furthermore, there are working examples of how a successful transition can be achieved. The European Commission successfully adopted accrual-based accounting for the EU budget five years ago. And the UK’s Whole of Government Accounts (WGA) initiative provides an example at member state level.
As the recent exposure drafts and consultation papers of the International Public Sector Accounting Standards Board (IPSASB) acknowledge, the framework for financial reporting may have to extend beyond the preparation of traditional financial statements. It should require governments to report on key aspects of the sustainability of public finances, such as debt and deficits, as well as on whether public funds were used economically, efficiently and effectively and for the purposes intended.
If such reporting is to be credible and contribute to restoring trust, it will need to be independently audited in accordance with a comprehensive framework of high quality audit standards, such as the International Standards of Supreme Audit Institutions (ISSAIs).
Vítor Caldeira has been the Portuguese member of the European Court of Auditors since 2000 and president of the ECA since January 2008
This article was originally published in Sustainable Public Finances: Global Views. Previous articles include Carlo Cottarelli, IMF director of fiscal affairs, Ian Ball, chief executive officer at IFAC, Ken Beeton, former Treasury director, European Parliament member Dr Wolf Klinz, Philipp Rother, head of the fiscal policies division at the European Central Bank, and Robert Chote, chairman of the Office for Budget Responsibility