Europe slow to adopt new accounting standard despite Greek crisis

In the five years since the eurozone crisis exploded, the European Union has adopted a great number of measures to improve its fiscal governance. Yet amazingly, it still does not have a robust, harmonized way of measuring and monitoring the financial activities of its member states, reports the Wall Street Journal.

Each country has its own national rules for public-sector accounting. Currently only 11 of the 28 EU member states use accruals-based accounting at some level of government, according to a study by consultants PWC for the European Commission. In many countries, different systems operate across the public sector. Most are cash-based, which creates opportunities for governments to arrange the timing of payments to suit political objectives.

Some of the strongest pressure for reform is coming from Eurostat, the statistical arm of the European Commission. As things stand, it is obliged to present government deficit and debt data on an accruals basis to enable cross-border comparisons. But it has to estimate the true state of national balance sheets by making its own adjustments and approximations to the cash-based data supplied by most governments.

By Eurostat’s own admission, the current approach to compiling EU public-sector financial data is incoherent and reaching its limits. It wants the EU to adopt a harmonized system of accruals-based public-sector accounting.

Eurostat believes the benefits of high-quality public accounting extend far beyond inoculating the eurozone against future Greek-style disasters. Indeed, high quality record-keeping has been a feature of all commercially successful economies, from Renaissance Italy to the Dutch Republic to 19th-century Britain, notes Jacob Soll, professor of history and accounting at the University of Southern California, in his book “The Reckoning.”

In ancient Athens, a complex system of bookkeeping and public auditing was seen as being at the heart of democratic government. The Athenian treasury was considered sacred and kept at Delos under the watchful eyes of its treasurers.

In contrast, most financial collapses, like that of modern Greece, can be traced to accounting failures. This reflects the role that accounting plays not only in providing an accurate picture of a country’s financial health, but also in promoting greater transparency that allows for better decision-making and helps combat corruption. Perhaps not surprisingly, the country whose public accounting scored most poorly after Greece in the PWC survey was Italy.

But while the EU has held consultations and established a number of working groups, progress toward an accruals-based public accounting standard for Europe has been slow. Eurozone governments have ruled out adopting International Public Sector Accounting Standards, a new-ish set of global rules closely modelled on the International Financial Reporting Standards used widely in the corporate sector, despite the clear benefits these have brought to countries that have already adopted them, including New Zealand, Australia and Switzerland.

Instead, the EU is now debating whether to introduce its own European Public Sector Accounting Standards, a second-best option that would allow the EU to retain legal control. But this too faces opposition, partly on the grounds of cost and partly because some countries, including Germany, remain wedded to their cash-based systems.

To many observers, this reluctance to embrace even EPSAS appears short-sighted. Momentum is building behind IPSAS as a new global standard supported by an alliance of international organizations including the IMF, the World Bank, the Organization for Economic Cooperation and Development and the International Federation of Accountants.

Europe risks getting left behind. While the costs and benefits for individual countries may be difficult to quantify, the long-term benefits of robust, harmonized data could boost confidence in the eurozone. That in turn could lead to lower borrowing costs and help foster the trust required to underpin further integration.

As for Greece, an analysis by hedge fund Japonica Partners suggests a switch to accruals-based accounting would show that after debt relief already received, Greece’s long-term position isn’t as dire as it looks on a cash basis. Of course, this verdict may be as unwelcome to the current government as pre-crisis reality was to past administrations.