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Importance of Financial Reporting in Light of the Accession Process to the EU

Oct 14, 2014

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Former Chief Executive of the Chartered Institute of Public Finance and Accountancy (CIPFA) Mr. Noel Hepworth shared with us his reflections on the importance of financial reporting in the light of the process of joining to the EU. Mr. Hepworth regularly lectures at the CEF. Our learning events importantly contribute to the discussions about the relevance of recent developments in the government financial reporting for South East Europe.

Financial reporting in many countries is a much misunderstood term. Many countries interpret financial reporting as simply a matter for the treasury and for the finance departments of line ministries and other public organizations and then only as a comparison between actual expenditure, maybe including commitments and what was allocated in the budget.

There is often little or no provision of information to the managers of departments, divisions or units of line ministries or other public organizations. Such managers frequently do not know their budgets and they are not informed about levels of actual spending. Generally finance departments have no understanding of why they should provide the information. ‘Why should managers be told’ is a common response or at best the reaction is that they have their own records or they can look at the treasury system if they want to know and that is regarded as sufficient. Compounding this lack of information is a view that at best a manager should only be concerned with the procurement element of the budget.

But all countries which have joined, or are in the process of joining the European Union, or are neighborhood countries are obliged or encouraged to introduce public internal financial control arrangements in accordance with the provisions of Chapter 32 of the accession treaty. Two critical elements of this are ‘managerial accountability’ and ‘value for money. Both require the existence of a financially aware management. If these requirements are to be met the manager needs financial information not just about procurement but about all aspects of the budget.

‘Managerial accountability’ and ‘value for money’ both mean that the manager should be informed about the totality of the budget (i.e. employee, goods and services and all other costs) and financial reports (which ought to be at least monthly) should equally cover all headings. If a manager is to be responsible for improving ‘value for money’ that manager must not only have information about all aspects of the budget but also needs information in a form that helps with the evaluation of the present and future arrangements for service or activity delivery. To enable the manager to fulfil this responsibility he/she requires one set of financial information for financial control purposes and other financial information to enable an assessment to be made as to whether or not value for money is being delivered and if not what are the alternative arrangements that might be made.

If countries are to improve efficiency and effectiveness of financial reporting a financial analytical capability is essential and this requires very much more than traditional bookkeeping skills or knowledge (as is so often the case) of how to fill in accounting record forms. Cost and management accounting information is required along with a capacity to interpret that information. So, meeting the European Union requirements requires a complete rethink of attitudes to financial reporting and the need by managers for financial information.



About
Noel Hepworth
Noel Hepworth was Chief Executive of Chartered Institute of Public Finance and Accountancy (CIPFA) from 1980-1996. He was Chairman of the Féderation des Experts Comptables Européens Public Sector Committee from its establishment in 1985 to 2003. As part of this he was responsible for providing a European perspective on the IFAC public sector standards proposals. In addition on behalf of the Féderation des Experts Comptables Européens he was responsible for the development of their agenda of activity and managed the work of the European profession on the introduction of the single currency across the EU, 1996 to 2001. He was also a technical adviser to the IFAC public sector committee for a period of years. More recently, he has worked extensively with OECD/SIGMA and completed peer reviews and annual assessments of public financial management in many Balkans and Eastern European countries. He is also the external adviser to the Palestine Ministry of Finance Audit Committee.
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