Category: Accounting Profession Issues and Trends

Emergency Action

Text of an article published in Accountancy International (June 1999)

June 1999

The financial crises of South East Asia rocked the world. What began as a local Japanese problem spread across the region with devastating speed destroying investor and consumer confidence and raising the terrifying possibility of total economic collapse.

While some economies have begun to recover, the shock waves continue to reverberate and the powerhouses of the West are feeling the impact. But it is the countries of the developing world which stand to suffer most from the long term effects.

Developing nations are especially vulnerable to this sort of catastrophe. Most have only recently embarked on the road to economic, political and social reform. Their infrastructures are fragile and their populations sometimes volatile. They are ill equipped to withstand the impact of sudden change.

Faced with global recession, these countries will have to cope with diminished exports, reduced productivity, rising unemployment and inflation. International relief programmes can do much to help, but outside support is unlikely to be forthcoming unless there is reasonable assurance - usually from recipient governments - that it will be put to proper use.

But the accountancy profession can play a large part in help developing countries to deal with what can seem an almost insurmountable challenge. It can help them not only to cope with the present, but also to build for the future.

The key ingredients for economic growth and social wellbeing are stability and sustainability. But these are tough aims for countries where inefficiency hinders production, where integrity is suspect, where civil war weakens the fabric of society, and where levels of illiteracy, poverty and hardship are often beyond the imagination of most westerners.

Stability and sustainability require strong institutional capacity, effective governance and proper public sector management. And for these to be achieved, measurable and comparable standards of practice must be introduced to make sure that there is accountability, transparency and responsibility in all sectors of society from the top down.

The advantages of internationally harmonised accounting and auditing standards for the private sector are generally recognised. It is now widely accepted that investors along with other stakeholders - including employees, customers, suppliers, local communities and other pressure groups - need to base their financial decisions on reliable, comprehensive and consistent information that is comparable at both domestic and international levels.

Standards issued by the International Accounting Standards Committee and by IFAC's International Auditing Practices Committee meet this need. These can be and in many countries are already, easily adopted. Minor modifications can be implemented to take account of local circumstances. This is useful for developing nations which might otherwise lack the necessary resources to develop their own national guidance.

The case for international standards in the public sector has been less widely debated. But the public is becoming more aware of cases of maladministration in both the developed and developing world and demands for greater accountability right up to ministerial level are increasing.

The Western, despite its fair share of scandals, is used to the idea of running the public sector along the lines of private enterprise. The idea of the taxpayer as the "customer", and government departments, agencies and private sector contractors as "suppliers" is now an established feature.

The concept of maximum efficiency and minimum cost is seen to be as relevant to the public sector as to private enterprise. And this means that acceptable, easily enforced standards of practice are just as important in both sectors.

Nevertheless, the public sector has some peculiarities that need separate treatment, and it was for this reason that IFAC's Public Sector Committee (PSC) began to develop guidance in this area two years ago. Last year it published an exposure draft guideline for government financial reporting to help governments using, or looking for, a particular basis of accounting for their financial reports.

Since then, the PSC has embarked on the second stage - the development of a set of international public sector accounting standards. It has now circulated eight exposure drafts to finance ministries, supreme audit institutions, professional accountancy bodies, and other interested individuals and organisations worldwide and is waiting to hear comments. The first definitive pronouncements will be published early next year.

Most developing countries are acutely aware of the need to introduce guidance in the public sector, but they lack the means to do so. In Malawi, for instance, the Government has now embarked upon a review of its public sector reporting systems as a first step towards reform. The World Bank has agreed to support the review stage of this project, but implementation of the proposed new systems will stall without additional funding.

Malawi now needs help to strengthen its applications for financial support so that potential donors are satisfied about the quality and feasibility of the project and are confident that the money provided will be properly spent. IFAC, in cooperation with the regional organisation of accountancy bodies, has already offered its help to identify foreign experts who can do the work and monitor the allocation of funding aid in Malawi. It has agreed to offer similar support to other countries that wish it.

IFAC has also led negotiations with the World Bank, the International Monetary Fund and other international lending and development agencies which culminated in the establishment of a new International Forum on Accounting Development. This will identify the issues involved in offering support to developing nations, encourage assistance programmes, and ensure that all the practical resources of the accountancy profession and the financial resources of aid agencies are being utilised to maximum effect.

One problem is that developing nations are desperately short of accountants in both the public and private sectors. Short-term support from foreign accountants can give a huge boost to professional competence. Such experts not only encourage better financial reporting and governance and introduce new training methodologies, but can also help to train local professionals. This, in turn, will create a sustainable profession for the country's future.

This solution may help Malawi and countries open to outside help, but others have problems importing foreign expertise. It seems that these countries have yet to realise that protectionism, even on grounds of domestic unemployment, is not the answer: they will only gain the benefits of advice and experience and accelerate change if they open their doors to international experts.

A further difficulty for many governments is remuneration. They will have to accept that they will retain experienced accountants only if they pay competitive salaries - a serious issue in places where this could send accountants' salaries soaring above those of their colleagues in other government positions and agencies. There is no easy solution to this problem.

The accountancy profession can also contribute to the fight against corruption. Although this is a global problem, it thrives best in areas where infrastructure is weak and poverty drives need. It is a matter of grave concern to those who seek progress, not simply because it diverts money from fragile economies into private pockets, but also because it can deter foreign investment.

IFAC is raising this sensitive issue for public debate. Its Council has been asked to approve the publication of an awareness paper for distribution to the profession, governments, international regulators and agencies as well as to any others with interest or influence in this area.

This will raise important moral questions about the obligations of professionals and the need to provide appropriate regulatory infrastructures. Steps must be taken to define what constitutes a corrupt act, to ensure that anti-corruption legislation is in place, and to provide protection for whistle-blowers who could be put at risk by legal compulsion to expose corruption.

The paper makes it clear that the accountancy profession cannot act alone: governments must legislate, other professions must participate, and there must be public support. But the issue can no longer be ignored.

Developing nations need stability at home if they are to reform and grow. They also need to inspire confidence abroad and encourage inward investment and trading links. These goals are possible only if they demonstrate accountability and transparency.

IFAC's work is being backed up by the many local accounting bodies and firms of accountants which are aiding the development of the profession and the growth of capacity and capability in countries with emerging economies. This work is vital, but there is still much more to be done.

This article first appeared in the June 1999 "Accounting Technician" journal.