Volume 4, Issue 3 - Harmonising European Public Sector Accounting Standards (EPSAS): Issues and Perspectives for Europe’s Economy and Society

Accounting systems play a hidden but fundamental role as mode and instrument of representation, coordination and organisation for the public sector and its specific public action. Therefore, financial and accounting reforms transform, implement and reshape public policies as well as the working and very existence of public administration. Last March 2013, the European Commission started a relevant project with the intention to create harmonised “European Public Sector Accounting Standards” (EPSAS) and implement them in the Member States. Between 1995 and 2002, a similar project was already achieved for private sector accounting standards-setting, leading to adoption and implementation of International Financial Reporting Standards (IFRS) issued by International Accounting Standards Board (IASB). The EPSAS project should decide if public sector accounting standards-setting shall follow a similar pattern to converge towards the International Public Sector Accounting Standards (IPSAS) that transplant the IFRS in the public sector. This choice may have fundamental implications for the European (Monetary) Union, since public sector accounting and public finances are fundamental elements of its institutional framework. This thematic issue aims to provide analyses and perspectives on this ongoing public sector accounting harmonisation process in Europe, addressing its governance and contents, as well as its consequences and implications for Europe’s economy and society.

In the last decade, the European Union (EU) has reformed its accounting system, issuing its own conceptual framework and 18 accounting standards that draw upon the International Public Sector Accounting Standards (IPSAS) issued by the IPSAS Board. The aim of this article is to analyse this renewed EU accounting system that frames and shapes financial accounting and reporting of the European Communities (EC), in order to assess its capacity to “truly and fairly” represent EC economic activity as a non-business entity. The EU accounting rules are analysed from a theoretical perspective that disentangles three different accrual-based accounting representations focusing respectively on wealth (static accounting), cash flow and economic flow (dynamic accounting). Our analysis retains a modified dynamic accounting representation that fits the specific economy of public administration. This modified dynamic accounting representation is then applied to assess the representational quality of the EU accounting system. This legal-economic, normative analysis of consistency with our theoretical model is complemented and somehow corroborated by documental analysis, financial analysis and few semi-structured interviews with EU officials. Generally speaking, our analysis shows that the EU accounting system provides a consistent representation of the EC economic and financial activities, although the reference to the IPSAS has somewhat involved the application of a balance sheet accounting approach that is inconsistent with this representation. In particular, the new EU accounting system has improved on some objectives of financial accounting and reporting, such as: the economic function of redistribution related to the economic solidarity between its constituencies (Member States); the prevention of frauds concerned with transfers and financial operations; the accomplishment of intergenerational and transnational equity, through the recovery of incurred expenditures by constituencies (Member States and, indirectly, taxpayers) located in different places at different times. These findings seem relevant not only to assess the quality of accounting representation provided by the EU accounting system but also in the view of its possible influence on the European Public Sector Accounting Standards – making process launched since 2013. This process is expected to reframe and reshape EU Member States’ accounting systems in the near future.

The European Commission initiated a project to introduce accrual accounting in European countries that meets the objective of improving the reliability, transparency and comparability of public accounts. This article describes the importance of defining the governance model for future European public sector accounting standards, explains the need to define accounting standards taking into consideration the specific features of the public sector and illustrates these points with the accounting treatment of financial liabilities.

The Finnish government accounting has developed from its own premises which used to emphasise the importance of budgetary accounting and prudence. Since the 1990s and the impact of New Public Financial Management, the Finnish government financial accounting has been accruals based. However, the Finnish application of accruals is based on the income statement approach, realisation principle and prudence. The International Public Sector Accounting Standards (IPSAS) based more on the balance sheet approach and fair value accounting are not suitable for the Finnish government accounting culture and practice. Furthermore, this means from the Finnish perspective that the EPSAS standards should not be based on IPSAS but on a conceptual framework especially developed for the European context.

This paper offers a UK perspective on the proposal to develop European Public Sector Accounting Standards (EPSAS). It offers the fundamentals of the UK government’s system of budgeting and accounting, which is the responsibility of the UK Treasury, being one part of its responsibilities for the UK’s fiscal and monetary policies. In the light of this, the EPSAS proposal remains a puzzle and a peripheral one at that. The paper ponders on the forces underlying the EPSAS proposal and notes that for the government practitioner in an EU member state, rules emanating from the EU would naturally have a macro-level focus. Consequently, any potential advantages of an accrual accounting system at micro-level may not be fully appreciated.

Business-style accrual accounting for governmental budgeting and financial reporting is widely promoted as appropriate for governments and promoted as successful in the countries that have already adopted it. There are, however, both constitutional and democratic reasons for close attention to their implications and effects. Accounting has a power of its own and, matters that “appear on the surface to be technical … can be found to be intimately tied up with political, behavioural and constitutional concerns” (Pallot, 1991a). Drawing on the case of New Zealand, a leader in adopting these practices, this article notes the constitutional weakness of that country’s fused executive and legislature and shows that the business-style governmental budgeting and financial reporting system have strengthened the executive government’s powers over public finance. Unlimited power, without prior parliamentary scrutiny, is delegated to the Minister of Finance to conduct all borrowing, lending, investing and financial market activities. Public attention is directed to a fiscal target focused on net debt and thus deflected from the gross figures that reveal a pattern of increasingly leveraged public assets and deepening government immersion in capital markets. There is a danger that misunderstanding of business-style financial information by politicians and officials alike may lead to inappropriate policies and actions, and the inclusion of biases (known as incentives) in detailed financial rules that affect the financial reports increases that danger. With the direction of change in accounting standard-setting being to target sophisticated financial market analysts as the users of published financial reports, the likelihood that the “vast majority of readers will not understand [governments’] published financial reports” (Damant, 2003) carries with it constitutional and democratic implications that require further thought.

In March 2013, the EC started a project aimed at harmonizing accrual-based public sector accounting systems through a set of harmonized accrual-based public sector accounting standards. The entire project is based on the assumption that the “superiority of the accruals principle, whether for macro or micro fiscal monitoring, is indisputable” (EC, 2013, p. 6). The paper offers critical perspective on the possible adoption of the European Public Sector Accounting Standards (EPSAS) inspired by the International Public Sector Accounting Standards (IPSAS). More specifically, the paper deals with the theoretical concepts of harmonization, standardization, and unification, as defined by the international accounting literature, with a view to identify the possible consequences of the public accounting unification process that is going to be promoted by the EU. In the European Union perspective, accounting unification is a desirable outcome, a pre-condition for attaining, measuring, controlling, and demonstrating budgetary equilibrium, according to a strictly rational logic consistent with a functionalist perspective of public sector accounting. Such an approach, it is argued in the paper, leads to a misunderstanding of public sector accounting, which is considered as a neutral technology whereas it is actually a tool of commensuration with a strong influence on the economic and political life of social communities, since it generates interpretative categories and contributes to change social relationships and values prioritization.