|Global Knowledge Gateway||
For Economic Growth, the World Needs Accountants
by Dag Detter, Managing Partner & Founder, Detter & Co. | March 26, 2019 |
The largest wealth segment in the world is hidden.
It is held by governments but the assets are mis-measured and mis-managed. Citizens—the ultimate owners of these assets—should demand better. If “public wealth” was properly measured, managed and better understood, society as a whole would benefit. But this requires modern accounting in the public sector and professional accountants to help build robust public finances.
If the world wants growth, it needs accounting and accountants in the public sector.
The global stock market is worth about US $78 trillion, which is roughly equivalent to the size of the global economy—or global GDP. This wealth segment is scrutinized at every moment by armies of analysts, brokers, investors, regulators, tax authorities and media. Much of the information that is analyzed is based on audited accounts using modern accounting standards refined over the last 800 years. The development of these accounting standards has not only enabled capital market development but also of the wealth that we all enjoy today.
Although the value of public assets is twice that of global stock markets, or 2x global GDP, according to estimates from the International Monetary Fund, it remains unaudited, unsupervised and unregulated. Even worse, it is almost entirely unaccounted for. Most governments largely ignore these assets and, the value that could be generated from them, when developing their budgets.
The question is are public assets being used and managed in the best interests of citizens? Sadly, the answer is probably not. Better accounting may not guarantee that assets will be better managed. But knowing what assets you have and what they are worth is a prerequisite for professional management, and increases the odds for a return back to society—instead of raising taxes.
In fact, professional management of public assets could, across advanced economies, generate annually more revenues than governments receive in corporate tax collections. This could also multiply the funds available for infrastructure investments or the UN’s Sustainable Development Goals.
Politicians consistently underestimate, or completely ignore, the value of public assets and liabilities, including the cost of pension promises made to public sector workers. Although this is clearly a recipe for poor governance, if not outright corruption, it is only rarely heard in political debate. The main reason could be that this is about accounting—a topic of limited interest to many politicians.
Furthermore, according to IFAC, the global organization for the accountancy profession, only 8% of all professional accountants are in the public sector. The relative dearth of public sector accountants is directly reflected in the poor quality of information used by governments in their financial management. Managing financial performance and position without sound information is like flying blind into a storm. And, the area where the financial information is weakest is asset management.
This does not benefit anyone, since poor or risky accounting practices can shake, and ultimately bring down, entire societies. Accounting affects us all, as becomes apparent whenever there is a financial crisis, be it for banks, corporates or governments. Proper accounting is essential for the public sector—and by proper accounting we mean the type of accounting that has been used in the corporate sector for centuries.
The reality is that most governments are stuck in the Middle Ages when it comes to accounting. They have for too long been influenced by economists whose perspective on the management of public finances is limited to simple measures of cash flows and debt. This is like trying to manage a modern corporation using only the information available from the cash transactions recorded in the bank statements. Company accounting requires more complex information than this. This is equally true of governments.
For managing the financial affairs of a modern, highly complex government, the right tool is accrual accounting. A modern government needs a different mindset, a mindset that will recognize that managing public assets can generate revenues to pay for public services, fund infrastructure investments and boost the economy—without raising taxes. Like in the private sector, this means shifting the focus to net worth instead of a focus on cash and debt alone.
So far, only New Zealand has introduced modern accounting and integrated its balance sheet with the budget, using it as a tool for its budgeting, appropriations, and financial reporting. Since the public sector reforms in the mid-1980s, New Zealand has achieved and maintained significantly positive net worth, where most comparable governments like Australia and Canada, or larger countries such as the UK and US, have a negative net worth.
We rely on engineers using modern technology to design and build robust bridges. To build robust public finances, we need accountants using modern accounting systems.
This will benefit societies today and reduce the burden on future generations.
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