G20 states unlikely to come clean on government accounting

August 24, 2009

By Huw Jones
LONDON, Aug 24 (Reuters) – Governments are responding to the credit crisis by trying to make corporate accounting more transparent. But they look set to resist pressure to come clean on their own finances.

Accounting industry bodies are urging governments of the G20 group of major nations to give taxpayers a complete picture of their liabilities, which have been swollen by measures to shore up banks and economies during the crisis.

But political sensitivities over the scale of ballooning public debt mean governments are unlikely to take more than minor steps toward reforming the way they keep their books.

“It’s very hard for governments to be completely sincere to request a high level of transparency from corporates when they don’t do it themselves,” said Ian Ball, chief executive of the International Federation of Accountants (IFAC).

“There is nothing technically difficult to doing it. You have to question whether there is the political will.”

When G20 leaders meet to discuss the crisis in the U.S. city of Pittsburgh on Sept. 24-25, the IFAC will ask them to commit to commit in full to a set of public sector accounting principles that have been a decade in the making.

The rules were drawn up by the International Public Sector Accounting Standards Board, and aim to fully introduce “accrual accounting”; countries would publish government accounts in a format showing all assets and long-term liabilities clearly.

Many governments have become more open about their liabilities than they were a decade ago. But most remain far from adopting the spirit, let alone the letter, of the principles. New Zealand is the only major government which produces a comprehensive financial statement each month.

Meanwhile, the credit crisis has produced a dramatic rise in the sums of money that may be hidden by murky accounting. Credit ratings agency Fitch estimated the world’s top-rated governments have raised or committed to raise about 1.8 trillion euros ($2.6 trillion) in support for the financial system.

They have also extended 7.2 trillion euros in explicit guarantees and asset insurance, equivalent to over a quarter of the countries’ combined economic output. That money does not appear in debt figures because it has not been spent as outright purchases of assets.

Willem Buiter, a former member of the Bank of England’s monetary policy committee, denounced this arrangement in a blog posting this year.

“In a rational world — or even a world that is merely not terminally stupid and/or bent on escaping accountability — the fair value of the contingent liability represented by the government’s insurance scheme would be entered as a liability on the comprehensive public sector balance sheet,” he wrote.

Rating agency Moody’s said governments’ lack of full transparency was of limited interest in the past, because triple-A rated public debt used to appear rock solid.

But huge commitments to shore up national banking sectors have now made the accounting issue more urgent, said Arnaud Mares, a senior vice president at Moody’s in London.

“The more the elements are known, the easier it is to assess what type of risk the government is exposed to and for the government to take appropriate strategies to manage these risks,” he said.

Mares added that more disclosure by governments probably would not change their credit ratings, but it would help both policymakers and investors better understand the risks as governments laid plans to wind down fiscal stimulus schemes.

That could have an impact on government bond markets, where yields have faced upward pressure because of concern about the huge volumes of debt issuance expected this year and next.

But accounting industry sources do not expect a major change of approach by governments any time soon. In Pittsburgh, the G20 nations, which include the United States, Japan and major European economies as well as developing giants such as China and India, appear unlikely to go beyond a broad statement of commitment to transparency.

Proper accounting with independent audits, such as those which companies must undergo, would make it harder to squirrel away politically unpalatable liabilities off governments’ balance sheets.

At a time when electorates are increasingly worried about surging public debt and its eventual impact on the provision of public services, governments are unlikely to reduce their room for creative accounting with much tighter rules.

For example, some governments, including Britain, do not include promised pensions for civil servants in public debt figures. Doing so would add billions of dollars to published liabilities.

Critics of the IFAC’s approach also argue that the definition of government debt is hard to pin down — for example, the amount of public spending on public-private partnerships for infrastructure projects such as roads and hospitals can take years to become clear.

The administration of U.S. President Barack Obama, which has said it is determined to make government accounting more accurate, is expected on Tuesday to cut its deficit estimate for the 2009 fiscal year to $1.58 trillion from $1.84 trillion, largely by eliminating funds originally set aside for bank rescues.

And even if governments did adopt a full set of easily digestible accounts, the numbers would still have to be treated cautiously because governments, unlike companies, can sometimes alter their finances quite quickly through tax changes.

The result may be that G20 nations continue inching part-way towards transparency, adopting the public sector accounting rules in a piecemeal way over time.

“I think we are unlikely to get the full picture, but small steps are a positive,” said Deutsche Bank economist Mark Wall.

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