What needs to be done?
What needs to be done?
Issues to be taken in consideration & questions to be answered
A workable solution to implement a harmonised budgeting and accounting regime for EU Member States with different legal traditions is a
severe challenge. Therefore, especially the following aspects should be taken into consideration:
- A complete orientation towards IPSAS, which has so far not been derived from budgeting and accounting purposes of public entities,
can result in problems: IPSAS are still oriented towards and derived from regulations of private sector IAS/IFRS. Based on the available
IAS/IFRS, the IPSAS Board has compiled a core series of fundamental IPSAS in its first, by now completed, phase. Thereafter, the Board dealt
with those topics that so far did not have any corresponding IAS/IFRS and/or that were - referring to the core series - problematic. This
is particularly the case for public sector budgeting: The general orientation
of IPSAS on IAS/IFRS can be explained by the orientation towards the priority given to ex-post financial reporting.
Only recently, work on an independent framework for IPSAS (which is aligned to public matters) has
begun. Therefore its importance for the standardisation will increase.
At the end the question arises, to what extent EPSAS have to be newly developed and to what extent can they be derived from IPSAS.
- As already mentioned above, IPSAS primarily focus on accounting, i.e. ex-post financial reporting. High quality standards on financial
reporting (such as IPSAS) are - without a doubt - very important for successfully modernising public financial management. In focusing on accounting, however, one vital part
is left out: budgeting. A reform relying solely on implementing accrual-based accounting standards but neglecting the implementation of corresponding
accrual-based budgeting standards would considerably limit the benefits of such a reform. In practice, a public entity's annual budget is still one of the most
(if not the most) important financial management instrument(s) for public decision makers. Allowing public entities to continue using cash-based
budgeting inheres the risk of letting decision makers proceed thinking and managing in cash-based, input-oriented patterns.
Accordingly, a pure accounting reform carries along the risk of not substantially improving public decision making. Given the enormous costs of such a
reform project, this kind of risk is hardly acceptable. Additionally, the usage of cash-based budgeting and accrual-based accounting also
increases the annual operating costs for financial management systems since it requires public entities to maintain two different systems parallely.
Therefore, it is absolutely essential to complement the (IPSAS-based) accounting standards with corresponding budgeting standards.
- Another issue that arises, concerns the scope of EPSAS, i.e. the area of application: Are all public entities and sub-sectors suitable
for an EU-wide implementation of EPSAS? What would be the consequences for public sector enterprises within national accounting regimes, when the public
parent is required to present annual financial statements, budgets, and consolidated financial statements based on EPSAS? Rules of consolidation
and conversion, therefore, have to be developed synchronously with the new budgeting and accounting system.
- One crucial aspect for EPSAS is the design of the IPSAS-based endorsement process: Who will be part of a European Public Sector Accounting Standard
Setting Board, and what is the legal basis of it? The involvement of academics as well as actors from national public sector
accounting standard setting boards seems to be crucial - but also expertise from public and private auditors is needed.
- What are the costs of the conversion towards EPSAS? The creation of financial reports, budgets, IT training, communication strategies,
data conversion, etc. will lead to a severe financial burden for public sector entities. Also, the (first) valuation of assets will be costly
- especially for public entities with cash-based systems.
- What would be a realistic schedule for introducing such a new public budgeting and accounting system in the EU?
Considering that introducing EPSAS would probably stand for one of the largest administrative reforms in Europe's history, a conversion
towards EPSAS is not an overnight endeavour. In order not to overburden public administrations, such a reform must therefore be regarded as a
mid- to long-term project.