Dispatch

• recruitment overdrive vital for reforms
• guarding the guardians
• haven forbid

recruitment overdrive vital for reforms

The introduction of resource accounting in the UK public sector has not brought the improvements to financial management practices that were expected, according to MPs. Reforms have been held back by the failure of government departments to recruit sufficient qualified accountants.

Insufficient progress has been achieved, said the committee, in complying with the UK Treasury's requirement for all departments' finance directors to be qualified accountants, or otherwise to be staff with equivalent skills and a proven track record. As at January last year, just 39% of departments had qualified accountants as finance directors, compared with at least 84% of FTSE100 companies. In addition, said the MPs, departmental boards should do more to reform unproductive activities, which RAB should have highlighted if it is operating effectively.

Edward Leigh MP, chairman of the PAC, said: 'Resource accounting and budgeting must not be a superficial change focusing only on end of year accounts, it must be embedded at the heart of how departments manage their business. Departments now have highly developed mechanisms to help them use their resources more productively. Many departments are not yet using them properly. If they did, they could identify areas of waste of low productivity. Just a small proportion of efficiency gain could save billions of pounds for the taxpayer.'

RAB has been adopted to make public sector accounting practices closer to those of commercial organisations, provide incentives to make more effective use of resources and compare public sector operating costs with those of external service providers. It is accompanied by complementary measures, including the use of three year budgets, public service agreements and approval to carry forward unspent resources. Departments and their agencies spend some £421bn a year and are responsible for assets and liabilities respectively of £334bn and £112bn.

The committee recommended further management reform to achieve better use of resource accounts. Best practice within departments should be identified and publicised by the Treasury. Meetings of departmental boards and audit committees should consider as a matter of course accruals-based financial reports. Departments should adopt positive action plans to enable them to meet the Treasury's requirement for finance directors to be properly qualified, and need to improve their management of debtors, creditors, stock and cash.

Andy Wynne, ACCA's head of public sector technical, responded cautiously to the report. 'What the earlier National Audit Office report and the select committee are saying is departments should do more with the information provided,' he said. 'By now we should be questioning whether the information provided is useful. It is 10 years since the green paper proposing resource accounts and budgeting. There's been a long run-in to this. Yet a significant chunk of departments are not using the information.

'Perhaps the select committee should have asked, 'Is this useful information that is being provided?' Perhaps we should be questioning the efficiency of the RAB reform. The NAO says there is no evidence of increased efficiency. So we have a fairly substantial reform, which presumably cost millions of pounds, and we don't know what the benefits are. In terms of public accountability, there is a question of whether that information is useful for MPs and the public. The accounts that are produced contain a lot more information, but they are a lot more complex. I suspect that most MPs could not understand the information provided.'

But Wynne endorsed the comments of the PAC in calling for the employment of more qualified accountants as departmental finance directors. 'That should lead to an increased quality of financial management,' he agreed.

An ACCA briefing on the arguments for and against the adoption of accrual accounting is available from publicsector@accaglobal.com.

guarding the guardians

A Public Interest Oversight Board (PIOB) has been established to oversee the public interest activities of the International Federation of Accountants (IFAC), with the backing of the World Bank, the International Organisation of Securities Commissions and the Basel Committee on Banking Supervision.

PIOB will oversee IFAC's work on audit performance standards, independence and other ethical standards of auditors, audit quality control and assurance standards, education standards and the Member Body Compliance Programme. In a statement, PIOB said higher quality standards along with strengthened auditor oversight were part of the reforms recognised as necessary by regulators.

IFAC is the worldwide organisation for the accountancy profession dedicated to serving the public interest by strengthening the worldwide accountancy profession and contributing to the development of strong international economies. The organisation sets international standards of ethics, auditing and assurance, education and public sector accounting and issues benchmark guidance and studies to encourage high quality performance by professional accountants in business.

'The creation of the PIOB is the fruit of a convergence of views between the official community and IFAC, and expresses a sense of responsibility among audit practitioners and the international institutions and regulatory organisations involved in promoting financial stability in a globalised economy,' said Michel Prada, chairman of the French Financial Markets Authority and deputy chairman of the IOSCO Technical Committee, who led co-ordination of regulators in setting-up PIOB. 'This undertaking will, in enhancing the quality of financial reports and restoring public confidence, contribute to the implementation of the recommendations of the G7 finance ministers.'

'Public oversight is critical to building credibility and confidence in international standards. This, in turn, contributes to confidence in the financial information produced by companies; in the examinations carried out by their auditors; and, ultimately, in the capital markets that rely on such information,' stated IFAC President Graham Ward. 'The formation of the PIOB, together with the other reforms unanimously approved by international regulators and the IFAC Council, is critical to IFAC achieving its goal of serving the public interest.'

The PIOB will be chaired by Dr Stavros Thomadakis, professor of finance at the University of Athens and former chairman of the Hellenic Capital Market Commission. He said: 'The creation of the PIOB is a landmark in the co-operation of world regulatory organisations for the oversight of international standard setting for auditors. The project of the PIOB is ambitious and represents a novelty for world-level public oversight. Success for the PIOB will mean quality, stability and integrity in companies and world markets. It is a heavy responsibility which must be carried out in close co-operation with national oversight authorities for accountancy, as well as the regulatory organisations and IFAC.'

Roger Adams, ACCA's executive director - technical, welcomed the creation of PIOB. He said: 'Creating a PIOB is a necessary step in rebuilding confidence in the global accounting profession. For IFAC to retain a standard setting role - for auditing, public sector accounting, ethics and education - it had to become more inclusive and has to demonstrate to its stakeholders that there is excellent due process. The PIOB should be able to confirm to the outside world that this is indeed the case.

'Although Enron and Parmalat may now seem an age away, things move much more slowly in regulatory circles - hence the mechanisms which the previous president of IFAC put in place are only becoming operational now under his successor Graham Ward.'

PIOB will oversee the activities of four public interest activity committees (PIACs), the International Auditing and Assurance Standards Board (IAASB), the Ethics Committee, the Education Committee and the Compliance Advisory Panel. As well as establishing the PIOB, IFAC has also agreed to strengthen the standard setting processes, particularly through these PIACs, to create a more transparent nominating process and committee structure and to implement a Member Body Compliance Programme. These moves are backed by a commitment to close ongoing dialogue between IFAC and international regulators.

haven forbid

Governments around the world are losing revenues of $255bn each year through the use of tax havens, according to a report from the Tax Justice Network which is connected to a UK think-tank and pressure group, the New Economics Foundation.

But the overall costs could be even higher, argues the report, given that the figure does not take into account tax losses arising from corporate profits hidden in tax havens, nor does it take into account the indirect impact through the low rate of taxation in offshore centres contributing to downward pressure on tax rates in the major economies.

Tax havens are a key factor in undermining international progress at challenging third world poverty, claims TJN. The lobbyists argue that without changes to the world's tax system, it will be difficult for the United Nations to meet its pledge to eradicate extreme hunger and poverty by 2015 (meeting the aims of the Millennium Development Goals to cut by two-thirds the death rate of under-fives), to halve the proportion of people surviving on less than a dollar a day and to tackle illiteracy in the developing world.

'The issues of tax havens and tax competition are symptomatic of a much wider malaise at the heart of the international financial system,' said David Woodward, director of the Global Economy Programme at the New Economics Foundation. 'This is a critical time for development, and particularly for the achievement of the Millennium Development Goals. If we are serious about reducing poverty, one of the first things we need to tackle is an international financial system run by the rich, for the rich, at the expense of the poor. It is time to rethink what the system is for - and dealing with tax havens and tax competition could be an important first step. US$255bn of lost public revenues is just one part of the price we pay for our failure.'

The Tax Justice Network is calling for tougher action against tax evasion and tax avoidance, aimed at increasing the tax take from large corporations and highest income individuals. It says there must also be greater transparency over investment flows which, they say, drain those economies most in need of economic development. TJN argues that combating international tax avoidance should be a major theme for the UK Government this year, which holds two influential positions - as presidents of the G7 leading economic nations and of the European Union from July.

There is already widespread international support for plans from the UK to write-off debt amongst poorer African nations and for the creation of an International Finance Facility, which would essentially securitise promises for future years' aid payments from the major nations to allow the poorest countries to improve their infrastructures immediately. According to the UK, the initiative would save five million lives over the next decade and would be the only realistic way of meeting the Millennium Goals. But some countries backing the IFF - particularly France and Germany - believe that it should be allied to the 'Tobin Tax', a micro tax on international capital transactions, to assist in the long term repayments.

The Commission for Africa, set-up by UK Prime Minister Tony Blair, has also assisted in increasing international awareness of the severe crisis facing the continent in terms of poverty and disease, particularly AIDS.

'[UK Chancellor] Gordon Brown and the Commission for Africa are ideally placed to act on offshore tax avoidance since so many of the banks and tax havens that facilitate these processes have British links,' argued John Christensen, international co-ordinator of the Tax Justice Network. 'For decades, governments have failed to act against the system of offshore trusts and banking secrecy, which encourages tax avoidance. If Gordon Brown is serious about wanting to tackle global poverty, he should take a lead in pushing for an end to all aspects of offshore secrecy that makes this possible.'

Tax Research, the agency which compiled the figures for TJN, assessed the worldwide value of assets held offshore at $11.5trn. However, this only included assets owned by large corporations and high net worth individuals, who hold cash of more than $1m, and ignored people on lower incomes who use offshore facilities.

'No one has tried to calculate a number like this before,' said Richard Murphy, director of Tax Research. 'To ensure the credibility of our data, we have only used information already in the public domain and produced by some of the most authoritative sources in the world. In addition, we tested our conclusions against three independent sources of information, and all seem to substantially agree, giving us a high degree of confidence in the conclusions we have reached.'

TJN claims that if this international tax loss were collected it would be enough to meet the UK's 10-year international target of aid for the developing world in just two years, or could meet the World Health Organisation's classification of the minimum financing for healthcare services for all people in the world.