Public Sector Accounting and Auditing in Europe

The Challenge of Harmonization

I. Brusca, E. Caperchione, S. Cohen, F Manes Rossi, I. Brusca, E. Caperchione, S. Cohen, F Manes Rossi

• Publisher: Palgrave Macmillan
• Year: 2016
• Print ISBN: 9781349690077, 9781137461339
• eBook ISBN: 9781137461346
• Topic: Politics & International Relations
• Subtopic: Accounting
• Index: Politics & International Relations

The book provides an overview of the governmental accounting status quo in Europe by analysing the public sector accounting, budgeting and auditing systems in fourteen European countries. IT sheds light on the challenges faced by European countries as they move towards adoption of the European Public Sector Accounting Standards (EPSAS).

1

Standard Setting in the Public Sector: State of the Art

Eugenio Caperchione

1.1 Introduction

Public sector accounting has been the object of great renewal, in many a country, for more than 20 years. Although quite often this change is referred to as a trend, a uniform and consistent movement towards a common goal, it has to be recognized that most reforms have been largely a product of individual countries, both in the decision on scope and timing and in implementation choices. The design may have been nearly the same in different countries, but not its actual development. Unsurprisingly, the persistence of national traditions on the one side (Kvaal and Nobes, 2012) and the relevance of public sector accounting to the national sovereignty on the other, have played a significant role, so that the features of many reforms remain country specific.

Consequently, this book’s first objective is to give an account of public sector accounting reforms in a panel of European countries. A thorough empirical analysis will allow us to understand the commonalities and differences of reforms that are all placed under a New Public Management (NPM) umbrella (Caperchione, 2006).

The 14 countries we have chosen to this aim are different in size, administrative framework, accounting tradition, legal system, geographical area, and degree of accounting innovation. All, except Switzerland, are EU members.

Thus, the following chapters present the budgeting, accounting, financial reporting and auditing systems in place in each country at each government level; while the last chapter synthetizes the findings and gives an account of similarities and differences.

As it will become clear, the latter are still quite relevant, so that the request to strive for an increased harmonization of accounting systems is increasingly supported. An international harmonization of public sector accounting, it is claimed, should produce a number of benefits, and appears as an unavoidable challenge.

We come to our second objective: clarifying what accounting harmonization is, whether it really deserves to be achieved, how this can happen, what we can expect from it. Since harmonization has many facets, we discuss them all in the next paragraph.

Having data based on 14 countries also helps us to check the degree of vertical harmonization existing in each country, as well as the distance between them. A tool to reduce this distance, and to enhance comparability among financial reports, may be the adoption of widely accepted standards.

This book’s third objective is therefore to discuss international accounting standards. In order to do this, each country chapter reports on whether and to what extent public sector accounting follows any set of international standards, or if it still refers to national standards.

This updated picture of public sector accounting and auditing in a large group of European countries gives us relevant information on the need and room for harmonization policies, on the choices made as far as accounting standards are concerned, and on possible attitudes towards the future adoption of newly established standards (such as the, so-called, European Public Sector Accounting Standards (EPSAS)).

Having set these aims, this chapter deals with theoretical questions on the above mentioned items – while the last one will present a number of open issues.

1.2 First challenge: international harmonization

Accounting harmonization is currently an important issue, in both the private and public sectors.

According to Nobes (1991: 70) it is “a process of increasing the compatibility of accounting practices by setting bounds to their degree of variation”.

Thus, harmonized accounting systems should be largely homogeneous, under a number of relevant aspects, such as underlying assumptions, list, format and content of documents, evaluation principles and measurement bases among others.

Historically, concerns for country-based harmonization appeared largely before requests for international harmonization – and are continuing to play a significant role in the decisions of many key actors (Nobes, 2013).

If we focus on the public sector, a country-based harmonization can be pursued between the accounting systems used at different government levels in a single country (vertical harmonization) or between a country’s private and public accounting systems: public administrations, private companies, associations and non-profit organizations should all have similar or “harmonized” accounts (horizontal harmonization).

The differences between government budgeting, national accounting and the accounting discipline have also been considered, which might also deserve some reconciliation within countries (Jones, 2003).

Eventually, a demand for a harmonization between countries (or international harmonization) emerged. As Lüder and Kampmann (1993: 63) suggested, this demand was originally due to a number of specific events, like the growth of international capital markets or the increasing role of international organizations in granting loans to national governments and public institutions. At the same time, harmonization gained support as a tool to enhance government accountability, to make life easier for parties interested in reading and comparing financial reports and in evaluating the different governments’ performance, and for transparency.

Some doubts about the usefulness of international harmonization have nevertheless been raised by scholars. Among them, Nobes (1988: 204) suggested that while “for commercial accounting there are obvious beneficiaries of harmonization”, this would not be the case for public sector accounting: individuals rarely “lend internationally to governments”. There are, we could add, institutional investors operating internationally, but these can receive tailored information from governments asking for financial assistance.

There is also a feasibility issue to consider: countries hardly ever start from the same point; accountants have different backgrounds and qualifications; the amount of investment needed to harmonize can be enormous. All this meant letting go of any prospect of a worldwide harmonization, and suggesting the pursuance of some sort of “regional” international harmonization in homogeneous clusters of countries (Monsen, 1994).

This sort of circumscribed harmonization could be quite interesting for the member states of the European Union that have agreed to coordinate their economies in many respects; comparing budgets, financial reports and performance measures should then be common practice, both for governments and citizens.

Additionally, as Lüder and Kampmann (1993: 74–78) noticed, harmonizing at EU level would allow for the production of good quality data to be used with a view to assessing each country’s compliance with the parameters established in European treaties.

This same position has been quite recently taken by the EU Commission (2013: 5), which believes that the statistical data needed for the compilation of macroeconomic statistics on government (art. 338 of the Treaty on the Functioning of the European Union) “would be considerably improved if all government entities used harmonised accounting standards”.

The Commission (ibid.) suggests that “harmonised standards for public sector accounting would enhance transparency, comparability and cost efficiency”.

The variety of accounting systems throughout the EU is seen as an obstacle to fiscal transparency and surveillance and, ultimately, as a threat to an acceptable European governance. The financial crisis, the Commission adds (ibid.), “underlines the importance of timely and reliable financial and fiscal data, and evidences the consequences of insufficiently complete and comparable financial reporting in the public sector”.

International harmonization, we can conclude, has many supporters, and raises big expectations. Whether these can really be met is debatable, however. The evidence collected by this book’s authors, and presented in the following chapters, suggests many governments are reluctant to strive for this Europe-wide harmonization. Despite some formal backing, governments mainly work inside their country to achieve internal vertical or horizontal harmonization.

This is no surprise. Public sector accounting is one aspect of a country’s sovereignty, which cannot be disposed of without very compelling reasons. A testimony of this can be found in the recent creation of a number of national standard setters (such as the Conseil suisse de présentation des comptes publics, the French Conseil de normalisation des comptes publics, or the German Gremium zur Standardisierung des staatlichen Rechnungswesens, all established in the period 2008–2009).

The creation of these bodies, and the missions officially attributed to them, confirm that the main orientation of standard setters continues to be national; when a reference is made to the international perspective and to the production of international standards, this is more to influence them than to get inspiration from them or to work towards an agreed upon harmonization (Caperchione and Mori, 2013: 326).

The most convinced supporters of harmonization are other parties, who are more genuinely linked to an international dimension. The major auditing firms, investment funds, consulting teams, as well as the international standard setters, are all in favour of whatever action may lead to a convergence of accounting systems. As Christensen (2005) suggests, these players promote and back accounting reforms and, in so doing, use private sector accounting as the substantial benchmark for the public sector.

Some academics, such as Budäus et al. (2013), are also quite clear in expressing their agreement for a profound change of governmental accounting and believe harmonization is a must. This enthusiasm, however, is not shared by many.

If this is the landscape in which the issue has to be dealt with, there probably are some suggestions for the prospective promoters of a successful harmonization.

A first obvious recommendation would be not to forget the, already mentioned, relevance of public sector accounting to a country’s sovereignty.

A second point concerns the very nature of harmonization, which should be much more a matter of convergence, to be obtained over time, than the search for uniformity (Lüder, 2014: 424–425). The latter, consisting of “the imposition of a more rigid and narrow set of rules”, could rather be called standardization (Nobes, 1991: 70). As Adam et al. (2014: 146) clearly point out, standardization can hardly be seen as a realistic prospect for EU member countries, which will quite probably wish to keep a significant autonomy and are therefore unlikely to accept a situation in which all accounting rules would be unified with no room left for options.

We then have to consider that the various kinds of harmonization do not always work in the same direction; if a country is requiring public sector accounting to move towards the same country’s private sector accounting, this may be to the detriment of an external harmonization. Similarly, the satisfaction of specific information needs at local level, where many decisions are taken, can hinder the move towards a common international framework. This makes it necessary that any harmonization action clarify and balance its objectives and priorities.

Finally, the process is important. As things stand, harmonization requires that governments arrive at a truly agreed upon proposal. At European level, this is more likely to happen not only if the different voices can be heard, but also if the proposal concentrates on what is really needed.

1.3 Second challenge: choice and implementation of international accounting standards

Most recent interventions on governmental accounting systems have been driven by the move to accrual. This is an apparent trend, which has significantly influenced many a legislation, as can be seen extensively in the following chapters.

The reasons behind this move, and its outcomes, have been largely discussed in the scientific community. Lüder was a pioneer in this debate, suggesting the public sector should adopt “an approach somewhere between traditional public sector cash-based accounting and business accounting, but closer to the latter” (1988: 100) and promoting pilot studies in German local administrations. Other scholars have also supported the diffusion of accrual, while some voices have underlined a number of possible shortcomings to this move (e.g. Ellwood and Newberry, 2007; Lapsley et al., 2009; Hyndman and Connolly, 2011), so the debate is still open.

The adoption of accrual, a system intrinsically characterized by the existence of possible alternative criteria in evaluating assets, liabilities, revenues and expenses, requires the introduction of a set of accounting standards. These can reduce the subjectivity and discretionary power of preparers of financial statements and limit the possibility of adopting window dressing policies.

Accounting standards, generally made up of a conceptual framework and book-keeping and measurement standards, have been quite frequently derived from business accounting – although the need remains to set specific standards whenever public sector specificities have to be tackled.

Depending on the relevant country’s legal system and accounting tradition, the production of national standards has followed different paths, as has their enforcement (Caperchione, 2000).

Similarly to what has happened in the private sector, the awareness of these common and often overlapping developments was at the basis of...

Table of contents

• Cover
• Title
• 1  Standard Setting in the Public Sector: State of the Art
• 2  Public Sector Accounting and Auditing in Austria
• 3  Public Sector Accounting and Auditing in Belgium
• 4  Public Sector Accounting and Auditing in Denmark
• 5  Public Sector Accounting and Auditing in Finland
• 6  Public Sector Accounting and Auditing in France
• 7  Public Sector Accounting and Auditing in Germany
• 8  Public Sector Accounting and Auditing in Greece
• 9  Public Sector Accounting and Auditing in Italy
• 10  Public Sector Accounting and Auditing in the Netherlands
• 11  Public Sector Accounting and Auditing in Portugal
• 12  Public Sector Accounting and Auditing in Spain
• 13  Public Sector Accounting and Auditing in Sweden
• 14  Public Sector Accounting and Auditing in Switzerland
• 15  Public Sector Accounting and Auditing in the United Kingdom
• 16  Comparing Accounting Systems in Europe
• Index