1. Page 1 | Proprietary and Copyrighted Information Accountability Now! and IPSASs FCPA Anne Owuor PAODC Member and former IPSASB Member 2008-2013 September 25, 2014 ICPAK, Mombasa, Kenya

2. Page 2 | Proprietary and Copyrighted Information Why we need change

3. Page 3 | Proprietary and Copyrighted Information Governments around the world contribute significantly to GDP but transparency and accountability for the resources they have stewardship of remains poor – many stop at cash accounting Unlike IFRS, there is little to compel sovereign governments to improve their accounting – even financial ruin hasn’t motivated some Long list of countries committed to adopting IPSAS much shorter list of those reporting against them Improving financial management is a complex and crowded space and so convincing accountants that things needs to change is not enough The problem we need to address

4. Page 4 | Proprietary and Copyrighted Information Public interest issue and IFAC has invested in developing a robust set of global standards Unlike other standards, the baseline in the public sector is much more uneven and progress has been particularly slow Closely related to the relevance and contribution of accountants – even global organizations are less than convinced about the role and importance of accounting as a foundation to improving financial management Why is this important to IFAC?

5. Page 5 | Proprietary and Copyrighted Information Citizens should be demanding greater accountability of their governments Now! Global coalition being established to ensure support from a broad stakeholder base Working closely with the Global Public Sector Leaders in Big Six to draw on their expertise World Economic Forum engaged and convening meetings with stakeholders – initial meeting in Geneva in August with Big Six A campaign, not a project or initiative, because a political problem requires a political solution – we need our voice heard and real action to follow Global campaign aimed at promoting awareness at regional platforms Accountability Now!

6. Page 6 | Proprietary and Copyrighted Information Raising awareness is not enough – need to move governments along the adoption and implementation path – including IPSASs in legislation is a necessary but not sufficient step Country-level actions include using our convening power to bring together key decision-makers to develop roadmaps for implementation – recognizing each jurisdiction has specific issues and needs to address Close ties with our PAO capacity building efforts Implementation left to the market to compete for – coopetition model of working Real action at a country level is needed

7. Page 7 | Proprietary and Copyrighted Information Why accountability? Accountability, in a general sense, is a responsibility of stewards or agents to provide relevant and reliable information relating to resources under their control. For governments, accountability is the government’s responsibility to justify to its citizenry the raising of public revenues and to account for the use of those public resources. Accountability information can be used to support decision making, but it also fulfils the citizenry’s “right to know” how public resources have been spent. (GASB 2005, page 5).

8. Page 8 | Proprietary and Copyrighted Information ACCRUAL BASIS OF ACCOUNTING Financial statements prepared under the accrual basis of accounting inform users of those statements of past transactions involving the payment and receipt of cash during the reporting period, obligations to pay cash or sacrifice other resources of the entity in the future and the resources of the entity at the reporting date. Therefore, they provide information about past transactions and other events that is more useful to users for accountability purposes and as input for decision-making than is information provided by the cash basis or other bases of accounting and financial reporting.

9. Page 9 | Proprietary and Copyrighted Information Accrual accounting in the public sector Public sector assets and liabilities need to be accounted for – completely! Infrastructure - needs to provide service potential Public sector entities have no quick and easy solutions such as bankruptcy, they need to finance their activities GFS Analytic Framework is on accrual basis Citizens and other resource providers want accountability Decision makers need a reliable basis for their decisions 9 Transparency and Accountability

10. Page 10 | Proprietary and Copyrighted Information Relevance of accrual accounting Allows overview of all assets and liabilities of an entity Shows service potential embodied in public infrastructure Provides a complete financial overview of an entity through consolidated financial statements Forms the basis for the GFS analytical framework Decision makers need a reliable basis for their decisions Research finding DFID-IFAC Global Accountancy Developments: –Higher levels of fiscal transparency are associated with lower levels of debt and with better fiscal solvency (see IMF 2012) Accrual vs. cash-based accounting

11. Page 11 | Proprietary and Copyrighted Information What is the value added of using harmonized accrual accounting standards/IPSAS? Better national/international comparability and consistency of financial information Transparency in government financial reporting which influences government’s cost of refinancing Increased level of confidence in gov. financial reporting IPSAS allows for mobility of resources/know-how Basis for improved decision-making, e.g. through focus also on assets/non-financial liabilities and performance Enhances cost efficiency Convergence with GFS => Improvement of the quality of statistical data Accrual Accounting

12. Page 12 | Proprietary and Copyrighted Information Direct returns to projects: Assets “found”, risks identified – easily add up to about half of the project cost Returns from accrual reporting: –Debt management policy can identify non-bond types of debt more easily and limit/reduce that; debt «shifting» is effectively prevented –Assets are more actively managed, leading to disinvestment or better usage –Lower interest rates (e.g. State of Geneva -0.5%/Hiler 2012) –Accrual accounting (A) assists debt breaks/fiscal rules (F) as it keeps track and helps to prevent “workarounds”, especially Financial Instruments Return is easily higher than cost

13. Page 13 | Proprietary and Copyrighted Information Government Reporting IFAC has long recognized that a fundamental way to protect the public interest is to develop, promote, and enforce a common set of high-quality international financial reporting standards for the public sector. IFAC believes that in order to change the paradigm for government reporting, governments should adopt the accrual-based International Public Sector Accounting Standards (IPSASs), set by the International Public Sector Accounting Standards Board (IPSASB). Ian Ball Former CEO IFAC

14. Page 14 | Proprietary and Copyrighted Information Public Sector Critical: Environment IMF-Fiscal Affairs Department is addressing issue of transparency in a comprehensive paper –Fiscal transparency does matter –Harmonization of Accounting and Statistics needed –ROSC initiative should be followed up Eurostat Report –Endorsement mechanism as expected –Alignment with GFS(Government Finance Statistics) is an emphasis –Some caution the risk of dual standards (EPSAS) and of a backward step for those on IFRS/IPSAS (e.g. UK, Spain, Austria, Baltic countries) G20 Finance Ministers press release February 2013 –Strengthening government balance sheet  looking at financial reporting

15. Page 15 | Proprietary and Copyrighted Information Accrual Accounting- Challenges There are many obstacles cited, including lack of resources, financial reporting policy issues, lack of trained professionals, development of accounting systems, constitutional and legal restrictions. Lack of resources in developing nations is a legitimate issue and a true obstacle. To address this issue, there are cash- based IPSASs for those jurisdictions that wish to be transparent, but do not have the necessary resources yet to move to an accrual basis Capacity in developing nations can be overcome if there is the political will for high quality financial management

16. Page 16 | Proprietary and Copyrighted Information IPSASs as a foundation for PFM reform

17. Page 17 | Proprietary and Copyrighted Information Objective of IPSASB To serve the public interest by developing high quality accounting standards for use by public sector entities around the world in the preparation of general purpose financial statements. This will enhance the quality and transparency of public sector financial reporting and strengthen public confidence in public sector financial management. In pursuit of this objective, the IPSASB supports the convergence of international and national public sector accounting standards and the convergence of accounting and statistical bases of financial reporting where appropriate. IPSASB standards set out are based on recognition, measurement presentation and disclosure requirements relating to transactions and events to be synthesized in general purpose FS.

18. Page 18 | Proprietary and Copyrighted Information Who is IPSAS Board? Independent Accounting Standards Setter under IFAC Setting standards for Public Sector Entities except Government Business Enterprises (GBE) 18 members 10 international organizations with formal observers status, including IMF, World Bank, EU 8 staff, mainly based in Toronto/Canada Funding by IFAC (approx 50 percent) and various Voluntary Contributions from Governments and Observers

19. Page 19 | Proprietary and Copyrighted Information Rigorous Process All meetings and agenda materials are public Consultative process 4-6 months response period Issue exposure drafts of proposed accounting treatment for feedback from stakeholders All responses posted on website IPSASB must approve all public documents with 2/3 vote IPSAS BOARD

20. Page 20 | Proprietary and Copyrighted Information IPSASB has created a full suite of standards 32 Standards approved (accrual basis) covering all main areas of government activity, 1 cash basis standard Substantial convergence at December 31, 2009 with IFRSs at December 31, 2008 –All relevant IFRS converged –2009 IFRS improvements incorporated at 1 January 2011 Standards include sector specific standards –Disclosure of Information about the GGS (Financial Statistics) –Revenues from Non-Exchange Transactions (Transfers and Taxes) –Presentation of Budget Information –Service Concession Arrangements: Grantor 20

21. Page 21 | Proprietary and Copyrighted Information Adoption and implementation guidance –Study 14 Non-authoritative Pratically oriented («How to do it») Including hints for project management –Current project: First time adoption ED providing relief published – IPSAS expected December 2014 21 IPSASB has created a full suite of standards

22. Page 22 | Proprietary and Copyrighted Information Relevant issues and work program of the IPSASB Current Status Relevant Issues Public sector specifics Conversion to accrual- based systems Output-orientation Intergenerational Equity Need for whole-of- government perspective Restructuring to increase efficiency Harmonization with GFS Work Program of the IPSASB Conceptual Framework First Time Adoption Service Perf Reporting Update of IPSAS 6 to 8 PS Combinations GBEs GFS Alignment PS Fin Instruments Social benefits Emissions trading schemes

23. Page 23 | Proprietary and Copyrighted Information Adoption of IPSASs Direct vs. indirect adoption –Same can be observed for IFRS 23 IPSAS Legislation refers to IPSAS Jurisdictional Standards based on IPSAS Legislation refers to Jurisdictional Standards Accounting Manual Implementation Source: Bergmann, A: Public Sector Financial Management. FT Prentice Hall, 2009.

24. Page 24 | Proprietary and Copyrighted Information Increase in adoption and implementation –Over 40 Countries apply Accrual IPSAS; including South Africa, New Zealand, Switzerland, Russia, Israel, Slovakia, Brazil, Indonesia Some apply it directly (e.g. Switzerland, Austria, Estonia, Lithuania, Chile) Some others indirectly through National Standards (e.g. South Africa, Brazil, Indonesia, Malaysia, Spain, New Zealand) –Some apply it for lower levels of government, e.g. Prefecture of Tokyo, State of Geneva –Entire UN System, OECD, NATO, Interpol and EC –Eurostat: IPSAS indisputable reference for a EU framework 24 Momentum in Adoption

25. Page 25 | Proprietary and Copyrighted Information Normative change: Legislative basis, endorsement of standards, development of operational guidance («manual») Configuration of IT/ERP-Systems Collection and verification of data, especially in areas not accounted for previously (e.g. asset register) Verification/audit Cross cutting: Training Implementation of IPSASs requires Implementation is challenging

26. Page 26 | Proprietary and Copyrighted Information Normative change: 5% IT/ERP-Systems: 75% Collection and verification of data: 10% Verification/audit: pro memo Cross cutting: Training 10% The need to implement a new IT/ERP (or not!) largely determines the total cost and explains the substantial variance observed Cost of Implementation Implementation cost can be substantial

27. Page 27 | Proprietary and Copyrighted Information Conclusion on IPSAS IPSASs are a full suite of standards, designed for the public sector set by an independent, international standard setter They can implemented directly or indirectly through standards set at jurisdictional level Time and cost required for implementation are substantial – but returns are easily higher –Identification of assets; more actively managed –Better accountability and decision making –Lower debt levels and lower interest rates (e.g. State of Geneva - 0.5%/Hiler 2012)

28. Page 28 | Proprietary and Copyrighted Information PSASB - Kenya

29. Page 29 | Proprietary and Copyrighted Information Kenyan Case Public Finance Management Act 2012 section 192, 193(1) 193(5) established PSASB National Treasury through Gazette Notice No.1199 published the names of the nine Board Members Members are nominated from National Treasury, Controller of Budget, Intergovernmental Budget & Economic Council, Auditor General, Institute of Certified Public Accountants of Kenya, Institute of Certified Public Secretaries of Kenya, Association of Professional Societies of East Africa, Capital Markets Authority & Institute of Internal Auditors of Kenya PSASB -K

30. Page 30 | Proprietary and Copyrighted Information The Board works through 4 committees, namely: – (i) Government Owned Enterprises Committee –(ii) National and County Government Committee –(iii) Internal Audit Committee & –(iv) Governance and Strategy Committee to assist in fast tracking the implementation of the new reporting framework. The National Treasury appointed 5 officers to form the Secretariat to support the work of the committees and the Board. These officers are drawn from various National Treasury departments. PSASB

31. Page 31 | Proprietary and Copyrighted Information Functions Set generally accepted accounting and financial standards and Internal Audit Standards. Prescribe minimum standards of maintenance of proper books of accounts for all levels of government. Prescribe formats for financial statements and reporting by all state organs and public entities PSASB-K

32. Page 32 | Proprietary and Copyrighted Information Publish and publicize the accounting and financial standards and any directives and guidelines prescribed by the Board. In consultation with the Cabinet Secretary agree on effective date of implementation and gazetting. Perform any other function related to advancing financial and accounting systems management and reporting in the public sector Functions continued

33. Page 33 | Proprietary and Copyrighted Information Achievements Approved the adoption of the – International Financial Reporting Standards (IFRS), –the International Public Sector Accounting Standards (IPSAS) and – International Professional Practice Framework (IPPF) for Internal Auditing Standards by all State organs and Public Sector Entities. The effective date was 1 st July, 2014 and this was communicated to the entities through a Treasury circular and gazetted PSASB-K

34. Page 34 | Proprietary and Copyrighted Information Application as follows: – National and County government shall apply IPSAS Cash based Standard –Regulatory and other non- commercial entities to apply IPSAS accrual based Standards –State and County Corporations to apply IFRS Board developed guidelines and financial reporting tools to be applied in the preparation of the financial statements. Road map on implementation and capacity building being undertaken by assistance of auditing firms. Use of Accounting Standards PSASAB

35. Page 35 | Proprietary and Copyrighted Information Training on the preparation of financial statements for state organs and public entities based on the standards adopted by the PSASB have been carried out. Entities trained include: County Governments, National Government – Ministries, Departments and Agencies, State Corporations & Semi Autonomous Government Agencies (SAGAs) & External Auditors (KENAO) Capacity Building PSASB

36. Page 36 | Proprietary and Copyrighted Information Consultancy services were contracted to; -provide hands on technical support and guidance to accounting personnel –conduct training and capacity building activities –prepare training manuals. Two Auditing firms were contracted to carry out these exercises, – Ernst & Young to support National government Ministries, Departments and Agencies whilst – Deloitte & Touche was to support the state corporations and Semi – Autonomous Government Agencies World Bank funded consultancy being procured for County Capacity Building through Technical Assistance PSASB

37. Page 37 | Proprietary and Copyrighted Information The Board has responsibility of developing guidelines for performing Internal Auditing in the public sector in line with section 73 of the PFM Act 2013 and the International Professional Practice Framework (IPPF) The Board in consultation with the Internal Auditor General Department is working together towards accomplishing these tasks in a few months to come. Internal Audit and Risk Guidelines PSASB

38. Page 38 | Proprietary and Copyrighted Information Continuous capacity building, Benchmarking visits, attending seminars, workshops and regular training programmes in region and other parts of the world Participation in the Financial Reporting Excellence Award for Public Sector entities from next year once the initial financial statements have been audited. Long term- consolidated government accounts FUTURE STRATEGY PSASB

39. Page 39 | Proprietary and Copyrighted Information Budgetary allocation –. To be seen to be independent the Board should have its own budget. Lean team through the Secretariat – The Secretariat staff are seconded from the National Treasury, and support from external consultants. Training and Capacity Building of the Stakeholders. Change management – Resistance by entities who want status quo to remain. Deadlines for financial reporting for financial year 2013/2014 too short and requires total dedication. CHALLENGES PSASB

40. Page 40 | Proprietary and Copyrighted Information To quote Bill Clinton, “The price of doing the same old thing is far higher than the price of change.” I suspect all of us here today can agree that the same old thing, does not work; the current state of affairs proves that. So there must be change. Financial management reform, and the convergence to one set of high quality international public sector accounting standards are critical steps for prosperity and long-term fiscal sustainability Champions of Change conclusion

41. Page 41 | Proprietary and Copyrighted Information Champions of Change I believe the accountancy profession does have a pivotal and influential role to make the difference. We have all attended events like this one, and have presented at numerous venues in our professional lifetimes. We have all experienced the enthusiasm, commitment and motivation that come from working together, and sharing ideas. THEN WHAT???

42. Page 42 | Proprietary and Copyrighted Information Champions of Change We go back to our busy and chaotic lives, and the enthusiasm wanes. We cannot let that happen this time. LET US BE THE: Champions of Change! ‖ ―a representative in the rally for accountability, transparency and stability.. THANK YOU FOR LISTENING TO ME !!!!!!