This study considers the current state of the adoption of IPSAS across the world. Our examination of different countries suggests IPSAS adoption has started to provide significant and common advantages across the public sector, yet important challenges remain in the roadmap to full adoption.
Benefits of IPSAS Adoption
- Greater accountability and transparency. There is compelling evidence that IPSAS provide greater clarity on the financial position of public sector entities across the world. IPSAS are important in promoting transparency and thereby curbing fraud and corruption. Financial statements prepared in accordance with IPSAS capture what a government receives and allocates, as well as what it owns and owes.
- Better decision-making. Knowing both the financial position of an entity and the financial implications of a proposed policy measure helps decision-makers to make better financial judgements about an entity and its activities. Public bodies and other stakeholders are assisted in planning for the future.
- Improved efficiency. The adoption of IPSAS has become essential in improving efficiency and effectiveness in financial reporting and auditing processes across the sector. Increased standardisation supports the delivery of more effective audits and helps mitigate the risks of significant material misstatements. The use of IPSAS is instrumental in forging closer integration between financial and critical non-financial information, providing a more holistic understanding of the true performance of public sector entities. IPSAS can streamline standard reporting processes and support the consolidation of all the activities and accounts of various government entities and sub-entities; so providing a meaningful audit report. Consolidated accounts are the basis for more informed, and subsequently better, decision-making.
- Data consistency and application. Greater standardisation of the reporting processes and underlying data provides more opportunities to analyse data and improve decision-making. Supreme audit institutions can access standardised information created through the use of IPSAS to make meaningful judgements and comparisons through the application of techniques such as data analytics.
- Sound financial management. The adoption of IPSAS is instrumental in driving improved financial management practices in the public sector, providing a robust platform on which internal reporting practices can flourish, and acting as a catalyst for stronger financial capability and ‘value add’. The pillars of sound financial management practices such as budgetary control, cost accounting, financial performance management, strategic investment planning and forecasting are better supported.
- Professionalisation and access to talent. The adoption of IPSAS plays a significant part in increasing ‘professionalisation’ of the finance function and accounting across the public sector. It presents significant opportunities to increase the influence of the finance organisation, while capitalising on the skills of younger entrants into the profession within the sector, ensuring that the public sector becomes a desirable career destination of choice for professional accountants.
- Broader economic and social advantages. A key driver for IPSAS adoption is the importance of attracting ongoing inward investment into the public sector, particularly in emerging economies. Financial statements prepared in accordance with IPSAS provide confidence and comparability for investors at an international level. These investments potentially create spin-off benefits for the broader economy in terms of jobs, welfare and societal improvement.
- Government stability. Reforms brought about through IPSAS adoption can help create a more stable government, leading to a better investment climate, more jobs and higher incomes. Adoption of IPSAS can support policy makers in explaining, and generating support for, their plans for government. The reporting and consolidation process brings together all stakeholders in the reporting supply chain. Truer and fairer reporting, and greater disclosure, lead to more engagement from stakeholders and service users.
- International comparability. Speaking the universal IPSAS language leads to better international comparability between public sector entities, while strengthening understandability through uniformity. The adoption of IPSAS also removes additional reporting requirements from donors, many of whom report using the standards.
Further considerations: A roadmap to adoption
Despite these strong benefits, there is a wide variation in the rate of progress made with IPSAS adoption. Taking our sample of countries as examples, our review suggests progress remains slower than is desirable. Specific, complex and consistent implementation challenges have faced adopting countries, which need to be overcome.
Here are further issues to consider in the transition towards successful full adoption of IPSAS:
- Stakeholder engagement. The level of awareness and understanding of the IPSAS framework varies significantly across jurisdictions, as does the level of stakeholder engagement in its adoption. Public sector entities, ministries, parliaments, politicians and the public are accustomed to cash accounting principles. Successful IPSAS adoption requires the understanding, education and engagement of key stakeholders, including political office holders, auditor generals, accountants general, state banks and ministries. This is difficult and the executive arm of government needs to be engaged and supportive of the process, along with the public accounts committee (or equivalent), and the audit and finance functions. The change will not succeed if it is imposed: implementation requires political will and ‘champions’ to create momentum. Similarly, IPSAS adoption requires successful internal engagement too; there needs to be cross functional support - a strong partnership between finance and audit. The support of the audit function is particularly essential.
- Structural and legal transformation. The task of structural reform to accommodate IPSAS implementation presents a significant challenge. Legal changes are required, as well as new regulations and governance practices; these may be complex and time consuming and will vary on a country-by-country basis. A government standards body and a finance committee will also be required, in order to consider and deliberate on country specific interpretations and applications. Some countries have opted for an advanced cash standard to be introduced as a helpful milestone towards full IPSAS implementation. Participants contributing to this study typically believe a 10-year time period for transition to full IPSAS is realistic, though countries operating a federal and state model may take longer – perhaps up to 20 years. Implementation plans need to reflect the constitutional, national, provincial, state and local circumstances.
- Transformation and change management. Most countries that have adopted IPSAS benefited from a consequent and important transformation and change imperative. IPSAS programme adoption requires effective project management, supported by change management capability and relevant experience – effective communication is also essential. The cultural change that IPSAS necessitates is a significant challenge and can not be underestimated.
- Skills capacity. Governments and public sector organisations may not have the skills, competence and staffing levels needed; adopting IPSAS has been a challenge in many countries. Implementation requires a programme of training to raise skills and there will be additional pressures to recruit and retain IPSAS-focused and skilled staff. The skills challenge goes beyond a lack of core IPSAS knowledge and understanding; other challenges will include the translation of standards and guidance materials. Skill gaps identified in this study include some reporting areas, particularly in the narrative reporting accompanying the financial statements to clarify what the financial data is telling the users. IPSAS adoption not only requires a paradigm shift in skills, but also a change in finance culture and mindset to exploit the opportunities presented by professional accountants to drive value. In addition to the technical skills required, there are country specific language challenges that need to be addressed. The overall accountancy capacity within a country will impact on its ability to recruit and retain qualified staff within government, and implementation will require up-skilling. This may lead to staff leaving the organisation, but can also be viewed as an opportunity to develop existing staff. A consideration here should be the balance between internal and also external resources. External consultants should be used with care, while ensuring the appropriate knowledge transfer to internal staff takes place in the longer term. Lengthy implementation timescales mean that entities must consider how to retain institutional memory and tacit organisational knowledge throughout the process as staff may not be involved for the duration. Implementation will also require new business models and charts of accounts.
- Cost. The costs of implementation (both financial and resource based) should not be under-estimated from both a finance and audit perspective. Costs will be incurred for training, the use of specialised external consultants, IT upgrades and the development of appropriate guidance and translation tools. Adequate financial resources should also be devoted to targeted stakeholder engagement and for other engagement and awareness activities. Most countries in this study adopted IPSAS in conjunction with a wider public financial management improvement programme, which requires additional investment.
- Technology and infrastructure. Existing technology will not necessarily support implementation. This can be costly and will require expert advice and consultancy to support configuration, training of users and transfer to business as usual. Adoption is likely to require the replacement or adaptation of some existing IT systems, data structures and charts of accounts. Reporting systems and structures may need to be updated as part of the transition process.
- Implementation approach. Implementation plans should be considered on a country wide basis. Most countries we examined favoured a phased approach, as opposed to a ‘big bang’ implementation. A project management approach – including change management – was important for implementation. It is necessary to learn from others who have already undertaken the process and identify best and repeatable practices. Implementation of IPSAS may have a short-term adverse impact on service delivery and this risk must be managed.
- External support. Governments and public sector entities can benefit from external support. Professional accountancy organisations can help to raise awareness of the need for transparent financial reports in the public sector, including – but going beyond – providing training on accounting standards. Donors can support the professionalisation of public sector financial management, while audit firms and other stakeholders can assist with public finance management training, expertise and capacity building.