I had the pleasure of speaking at the National Treasury’s recent public finance management (PFM) conference on “Innovative and ethical public financial management in challenging times”. In the panel where I participated with others, we discussed how to build ethical systems and practices in government. The act of accounting, how accounting standards are developed and implemented, and those who prepare the financial statements have a role to play in the fight against corruption.
I was asked to answer these two questions, and these were my responses… Question 1 - How can the development and implementation of robust accounting standards contribute to the prevention and detection of financial irregularities and corruption in public financial management? Accounting standard-setters are often asked this question. There is an expectation that there will be a line item somewhere in the financial statements that identifies “fraud/corruption”. This is of course not the case. Detection The basic principles underlying the development of accounting standards facilitate the interrogation of financial statements by users that can aid in the detection of irregularities. A key principle in the preparation of financial statements is comparability. This principle aims to ensure that like items look alike, and unlike items don’t. This means that if you look at financial statements across the sector you should be able to understand if a certain entity has the same transactions/items but has a different accounting result. What you see – or don’t see in the financial statements – can lead you to ask questions about a particular transaction or event. There could be deliberate manipulation of the accounting principles to have a particular outcome that is favourable to the entity and its officials. Secondly, the financial statements provide predictive information. By reviewing the current and previous financial results, you would likely be able to determine whether you would see upward or downward trends. If the information is not “behaving” as anticipated, this should be interrogated. Prevention A key deterrent to fraud, corruption and financial irregularities more broadly is the use of accrual accounting. This means that all assets and liabilities are reported in the financial statements. This would certainly stop entities from “hiding” the state of their assets and possible liabilities. The requirement to recognise assets and liabilities and to measure them in certain ways means that entities have to comply with these prescripts, unless they are immaterial. Non-compliance with the Standards may only be done if a better fair presentation can be achieved. Departures from the accounting standards can indicate a desire to achieve a particular outcome, which is fraud – not honestly reflecting transactions and events on the financial statements to intentionally mislead users, knowing it will influence their decisions. It is critical that all entities in the public sector apply accrual accounting. It is critical that National and Provincial Departments adopt accrual accounting to provide a more comprehensive view of government’s financial position and performance. Question 2 - What are some best practices in ensuring that accounting standards align with transparency and accountability principles? It is critical that accounting standards – and any other principles that are prescribed in the PFM environment – follow a robust due process. If we think about accounting standards, their application should result in information in the financial statements that enables entities to be held accountable and to aid decision-making of a wide range of users. In this instance, the users of the financial statements are those people that - provide resources to an entity;
- rely on government’s services; or
- representatives of these users, including members of Parliament, legislatures and municipal councils.
A robust consultation process means that the standard-setter consults with parties that are affected by, or have an interest in, government’s financial statements. It is critical that the potential users of the financial statements are identified at the start of any project and that they are involved in the process of development and public consultation. Once the users are known, users’ needs need to be identified and how the principles in the Standards can be developed to meet these needs.
Another key aspect of the standard-setting process is reviewing the effective implementation of Standards, and/or whether they are meeting their stated objective. As the ASB, we undertake two reviews and one post-implementation review in every three year cycle.
Reviews are a way of assessing the implementation of the Standard by entities, mainly to identify compliance issues and any emerging issues in practice. Our reviews are based on published financial statements, although we may consult with stakeholders to understand results and/or confirm findings.
Post-implementation reviews assess whether a Standard is meeting its objective. These reviews include a robust consultation process with users, preparers, auditors and other interested parties to assess a Standard’s effectiveness, and identify any application or implementation issues.
A last observation on the role of ethics and accounting We are probably keenly aware of the role of ethics and the Code of Conduct for auditors. It is easy to forget that professional ethics is just as important for preparers of the financial statements as it is for auditors. The application of sound ethical principles within a robust system of financial management is critical for the production of relevant, credible, transparent financial statements. As accountants, we have a critical role to represent the public’s interest and to act ethically.
As we celebrate Global Ethics Day on the 18th of October, keep an eye out for details of an event we will be hosting with SAICA on the importance of ethics and accounting. | 
