Accounting standards have come a long way in recent decades, in their spread and sophistication. But despite the proliferation of these standards, is accountability working adequately?
Bean counters seem to have a good thing going. Sound accounting practices are widely recognized a cornerstone of a well-functioning market economy. With respect to the business sector the accounting profession is well established: accounting standards have been developed and disseminated; professional capacity building is institutionalized; and though adoption rates vary, in many countries regulatory mechanisms are in place to support wider adoption of these standards and practices by market participants.
By way of an example, government regulators often require that companies listed on local stock exchanges publish financial statements that adhere to international or national financial accounting standards.
Arguably, this has contributed to better financial reporting and thus strengthened accountability, in both private and public sectors.
In the corporate sector, sound accounting contributes to broader benefits that are widely acknowledged. For instance, adherence to standardized accounting and reporting make financial reports more easily understandable to external stakeholders (financial institutions, stock exchanges, investors). This helps improve the business climate, as investors gain a common basis to interpret financial information within the industry. Similar benefits accrue to regulators who oversee the financial sector, enabling them to perhaps better manage risks in the financial sector.
In the public sector, the profession has similarly developed a separate set of standards. Experience suggests that when applied consistently, strong conceptual foundations of public sector accounting potentially strengthen public accountability and support efficiency in the management of public resources and delivery of services.
Though accounting standards are well established, is accountability working adequately? What additional mechanisms are needed to reinforce the accountability of managers to stakeholders?
In the for-profit sector, the challenge seems to be to make these standards equally relevant for internal accountability within business organizations. Every so often I hear business managers seeking financial information about their own businesses, which they don’t get from their external financial statements. Questions such as:
- Why am I making less profit than last year?
- How does the financial performance of my division measure up against my competitors?
- How should I change my cost structure to improve my divisional financial performance?
In the public sector, adoption of international government accounting standards has been somewhat patchy and inconsistent across the world. Lack of technical capacity and weak political will has led to a tardy pace in implementing them in many parts of the world. Very few countries have fully adopted International Public Sector Accounting Standards. In part this may also be due to the diversity of forms of government, social and political traditions that vary from country to country, and have a bearing on accountability. Accountability to stakeholders then becomes a casualty. Department heads in the public sector are often unable to generate financial information on budget realization of individual development programs, and compare these with benefits.
These are questions that often don’t get consistent answers from time to time, and where accounting standards have not been defined. These questions point to a gap in standards that weaken accountability. Managers in both public and private sectors will benefit from a standardized accounting and financial reporting protocol that helps them understand the connection between their actions, performance and financial results.