Enhancing public sector financial management transparency and accountability

In recent years, the global economy has experienced several financial crises including debt defaults and write-downs taken by investors in public debt. The sovereign debt crisis currently engulfing the European Union coupled with the escalating government debt affecting the United States, and potentially other countries around the world, are causes for major concern. These crises should prove instructive for countries like Rwanda, which has made significant strides to improve public finance management oversight, transparency and accountability. At the same time, we can learn from a lack of fiscal discipline shown in many Western economies. In the Rwandan context, good public financial management (PFM) underpins the Economic Development and Poverty Reduction Strategy (EDPRS) objectives of economic growth, poverty reduction and improved service delivery through enhanced policy-based budget management and resource allocation, accountability for results and independent audits. Strengthening Rwanda’s system of PFM is therefore a pre-condition for implementing its development agenda.Western economies experiencing debt crises are in danger of breaking the bonds of trust between government, investors and citizens. To establish greater trust, it is important that governments provide accurate and complete information on expenditures and transactions, in order to demonstrate accountability and stewardship and to reinforce their own credibility. Sharing information builds trust. Clear, robust and comprehensive information regarding the financial consequences of economic, political, and social decisions must focus on the longer term impact of decision making. Simply reporting and disclosing cash flows does not build the same level of trust. Given the prominence of banks and private sector investors that hold government debt, there is strong demand for the same level of financial transparency and accountability from the public sector as is expected from the private sector.The type of information required can only be provided through a high-quality, robust, and effective accrual-based financial reporting system which allows for government assets and liabilities (including debt) to be appropriately recorded, reported, and disclosed—and hence effectively monitored. The most globally accepted high-quality accrual-based financial reporting system is International Public Sector Accounting Standards (IPSAS). IPSAS provide for the full disclosure of all assets, liabilities, and contingent liabilities, which is vital for assessing the true economic implications of public sector financial management. Governments have a responsibility to enact legislation, formulate and implement policy, and deliver products and services to their citizens. The decisions made and actions taken in fulfilling these ambitions should be undertaken in the public interest.Indeed, there is political accountability on the part of governments to ensure that they do act in the public interest. Governments have coercive powers to tax. Monies raised through taxation are allocated to spending, both recurrent (such as paying public sector employees wages) and capital (like spending on infrastructure projects, such as roads and railways), for the benefit of the country and its citizens. This responsibility obliges governments to discharge their accountability by demonstrating the manner in which they have effectively and efficiently used the resources at their disposal. Additionally, where governments have shortfalls between amounts raised through taxation and amounts outlaid as government spending, they raise funds through debt markets. Where this is done, governments have a public interest obligation to market participants—investors and potential investors—to provide timely, reliable, and detailed information of their financial performance and positions in the same way that listed companies have obligations to equity market participants. However, without robust, transparent, and accountable arrangements for financial reporting and financial management, it is not possible to reliably assess whether decision making by governments has been in the public interest. Furthermore, it is unlikely that governments will be able to adequately discharge their accountability and provide the standard of information required by investors without being able to publicly report and disclose high-quality financial information. It is a matter of compelling public interest that strong financial reporting and financial management arrangements are not in place in many countries around the world.George Muhia is a Manager with PwC Rwanda Limited