These Six Building Blocks Are Critical for Better Public Financial Management

Sumita Shah, Regulatory Policy Manager, Public Sector, Institute of Chartered Accountants of England and Wales | September 25, 2017 |

The push for governments around the world to move from cash to accrual accounting has been immense and ongoing since the financial crisis started in 2008. From a crisis of confidence in financial markets, we have, for a few years, been facing a crisis of confidence in governments. Public trust has been weak. 

Managing tax and spending effectively is very important, but good financial management involves more than managing short-term cash flows. Governments have a duty to deliver effective stewardship of the economy. This means managing for the long term as well as the short term to deliver sustainable economic growth, ensure intergenerational fairness and create the conditions for future prosperity. 

A healthy and strong public sector is critical for a healthy economy. At the core of this, taxpayers demand confidence and trust. This trust comes from having strong public financial management and transparent, reliable financial information. To rebuild public confidence and long-term economic resilience, policy makers must master the tools to tackle borrowing and large-scale government deficits. 

Financing and refinancing public debt requires responsible policies that are consistent with existing commitments and allow for new liabilities to be undertaken only if they can be serviced. However, changes in political cycles can destabilize the balance of commitments and capabilities. As taxpayers thrive on transparency, a consistent accounting framework that highlights and links current decisions to future commitments is necessary to stabilize expectations.

Accrual accounting and a consistent set of accounting and auditing standards for the public sector offer the transparency that is needed to work toward stronger markets and stronger economies. Due to the significance of the task, however, many governments, struggle with the process of moving from cash to accrual accounting. The scale of the task is not a one year project; it requires the commitment of successive governments. It is no longer enough to simply think in term of cash in and cash out.

There is a need for more sophisticated accounting techniques and skilled professionals to ensure that governments’ financial positions are properly understood and managed. Improved public financial management cannot be achieved through improved reporting alone. Ultimately, it is public finance professionals who are at the heart of the system.

While most of the information about public sector reform focuses on the benefits of change, there is very little information on the practical aspects of how governments can implement change and what is needed.

ICAEW has, therefore, published a toolkit that takes users through the practical steps needed to put into place a system of modern public financial management (PFM).

What Are the Building Blocks?

The cash to accruals accounting toolkit provides a framework to deliver a successful change management program.

  1. Structures and ownership: the political and wider organizational and leadership structures that need to be in place to deliver the change
  2. Strategy: an effective, prioritized plan to deliver the change, manage critical dependencies and risks, and ensure staff and stakeholders understand what is required of them and when
  3. Project delivery: setting up the project team and running the project with appropriate governance and oversight
  4. People and resources: the right people, with the right skills, knowledge and approach, to drive the reforms supported by adequate resources
  5. Standards and policies: the standards in accordance with which financial statements will be produced, the process for setting them and the policies that will be adopted
  6. Systems and processes: putting in place the right infrastructure, corporate governance and business processes to enable high-quality information so policymakers can make informed decisions and achieve optimal outcomes

Who Will Find the Toolkit Useful?

The toolkit will be most useful for government entities that have made the decision to implement accrual accounting as well as potential project sponsors and all those charged with its delivery. It is also a useful guide for policymakers, standard setters, senior administrative officials, and auditors or regulators who will have involvement in the project. Its relevance extends to both countries whose governments are still planning their transition as well as those whose governments have already begun the process.

Strong PFM is Vital for Strong Economies

Improving the quality of public services is vital to citizens and the economy but it’s a complex task. With better information and tools, public finances can be better managed and lead to stronger economies. Strong PFM is central and critical to all parts of the public sector.

A summary of the publication Building Blocks to Better PFM – A Cash to Accruals Accounting Toolkit is available online.

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