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EPSAS.eu  »  Why do we need EPSAS?

  Why do we need EPSAS?

On the necessity of introducing a harmonised budgeting and accounting system in Europe

Public sector budgeting and accounting is in a worldwide state of upheaval. It is part of a general change from bureaucratic control to management-oriented public administrations. To implement such transparent, efficient, and effective management mechanisms of public resources a new budgeting and accounting regime is essential.

The inadequacy of the traditional cash-based system (cameralistics) is one main reason for the emergence and accumulation of the financial crisis of administrative bodies during the last decades. The cash-based system holds an inherent trend to run out of control as well as to increase public debt by imaginarily creating the impression that there is a scope of action to the decision-makers (which, however, does not exist in reality). Moreover, this leads to a growing activism in crises, and to a legal vacuum in the public sector. Throughout the years, increasing debts on the federal, federal state, and local government level as well as enduring budget consolidation concepts on the local level (some of which are not even approved by the local authorities' supervisory bodies) reveal the urgent need for fundamental reforms. Because of this, not only scientists, administrative practitioners, and audit institutions, but also politicians see the main aspect of reforming public financial management in restructuring management and decision-making processes on public resources in a way, that e.g. prevents the increased accumulation of debt, facilitates improvements in effectiveness and efficiency of a administrations' actions, and ensures an intergenerationally equitable fiscal policy. The shortcomings of cash-based systems and their consequences have led to a general change from "cash-based budgeting and accounting" to "accrual-based budgeting and accounting".

Accrual accounting is an accounting methodology under which transactions are recognised as the underlying economic events occur, regardless of the timing of related cash flows. Following this methodology, revenues are recognized when income is earned, and expenses are recognized when liabilities are incurred or resources are consumed. This contrasts with the cash-based system under which income/expenditures are recognized when a cash inflow/outflow is realised. For the transition to accrual accounting see e.g. here.

Accrual budgeting and accounting systems have already been implemented in several EU Member States (e.g. local governments in Germany, federal government in Austria). The systems, however, show high degrees of heterogeneity. Comparisons based on performance indicators or financial indicators, therefore, are difficult if not impossible. A cross-border "learning from the best" is barely feasible. Hence, the highly heterogenous budgeting and accounting systems in Europe avert the usage of best practice methods which could lead to improved effectiveness and efficiency as well as increased financial transparency.

In order to enable governments to exploit the benefits mentioned above, introducing a uniform, accrual-based public sector budgeting and accounting system for EU Member States - i.e. a homogeneous European Public Sector Accounting System (EPSAS) - seems to be a mid- to long-term project worth aspiring. EPSAS can improve the quality of general purpose financial reporting by public sector entities, leading to better informed assessments of the resource allocation decisions made by governments, thereby increasing transparency and accountability as well as efficiency and effectiveness of government actions.

An international system of accrual-based public accounting standards that is already (fully or partly) applied in many countries (e.g. Switzerland, Austria, Netherlands, France) and several international organisations (e.g. OECD, NATO, UN) are the so-called "International Public Sector Accounting Standards" (IPSAS). The IPSAS could therefore serve as a starting point and reference model for the development of harmonised public sector accounting standards in Europe (e.g. by using an IPSAS-based endorsement procedure). A true modernisation of public sector financial management, however, stringently requires the implementation of harmonised accrual-based budgeting standards, too. Reforming public sector budgeting is vital because the annual budget is still one of the most (if not the most) important financial governance instrument(s) in the public sector. Relying solely on reforming accounting systems, therefore, inheres the risk of significantly limiting the benefits of such a reform project. Given the immense costs of the reform, this risk must be addressed. Accordingly, it is mandatory to also develop harmonised accrual-based public sector budgeting standards. A possible starting point for the development of accrual-based budgeting standards can be found, for example, in the budgetary laws of those Member States that already use accrual-based budgeting.

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