Getting to grips with good governance

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With its myriad accountabilities and central role, the public sector needs a clearer understanding of good governance, argues the chief executive of the International Federation of Accountants

Anyone who works in the public sector knows the major role it plays in society, but the person in the street may not be so well informed. The public sector’s impact on our lives reaches beyond its responsibility for enacting legislation, delivering services, redistributing income and promoting fairness, peace and sound international relations to its significant contributions to GDP, its breadth as an employer and its participation in the capital markets.

The central role of the public sector makes effective governance critical for better-informed, long-term decision-making, as well as for an efficient and effective use of resources. The sovereign debt crisis – along with a constant stream of issues such as nepotism, inefficiency, political opportunism, corruption and poor financial management – is a daily reminder of the importance of good governance.

While governments often establish regulations for good governance in the private sector, the public sector, paradoxically, remains without consistent, comprehensive and transparent protocols.

This is why the International Federation of Accountants, as an advocate of clear, transparent public sector financial reporting and a strong supporter of good governance in the sector, has teamed with CIPFA to release our International framework: good governance in the public sector. This aims to establish benchmarks for governance and provide some guiding principles.

Good governance is characterised by a focus on strong organisational leadership, appropriate checks and balances, management, accountability and oversight, and aims to generate better outcomes and improve long-term, sustainable performance.

The first step on the road to good governance is to define the intended outcomes and determine the necessary interventions to achieve them. By their nature, public sector organisations don’t have the same free rein that private organisations do; instead, they are usually established with clear parameters and regulations governing what they do and how they do it, and given a specifically defined mandate. They also strive for more than just financial results, market share and happy investors.

Therefore, they must ensure their decisions and actions achieve the intended benefits while remaining within the limits of their authority and resources. They also need to ensure communication and consultation with stakeholders, and to undertake an ongoing review of their decisions, execution and outcomes. This is vital to their success when balancing competing demands for finite resources.

To operate effectively, a public sector entity needs the right structures and leadership, as well as qualified people with the right skills, and the governing body must ensure that the entity has the capacity to fulfil its mandate. Risk management and internal control are integral to achieving outcomes, and the governing body must ensure that the entity implements – and can sustain – an effective performance management system, including strong financial management, strategic resource allocation, efficient service delivery and accountability.

As an example of poor risk management and governance, take the Yucca Mountain nuclear waste repository in Nevada, US. The site was established over significant opposition; later, it was determined that it falsified data on the repository’s safekeeping of nuclear waste. But if governance had been handled appropriately, these risks would have been addressed and managed earlier.

On the other end of the spectrum, Transnet – the South African government-owned custodian of freight rail, ports and pipelines – is a positive example of effective governance. Transnet embeds risk management within its entire business. Its 2012 annual report explains its risk management arrangements, with examples throughout of actual risks encountered and measures taken.

Another step on the road to good governance is promoting transparency to ensure that decision-makers are responsible for their choices. To demonstrate that they have delivered on their commitments – and, in doing so, used public resources effectively – public sector organisations should issue annual reports so stakeholders can evaluate performance. And, of course, audits, both external and internal, also promote transparency and contribute to effective accountability.

The central government of New Zealand’s audited annual report, for example, gives all stakeholders the ability to evaluate performance and resource stewardship. The report provides a detailed comparison of budgeted amounts to actuals, as well as brief analyses of major variations. It also includes a description of the progress the government has made in implementing its fiscal strategy.

Budgets and forecasts are prepared on the same accounting basis as is used for the accounts. The forecasts comply with New Zealand accounting standards which, among other things, require that assumptions be reasonable and supportable, internally consistent and published.

This ties in quite closely to IFAC’s view on public sector reporting. The international framework – although not intended to replace national governance codes – provides guidance for updating existing codes, and where specific rules do not already exist, helps to stimulate progress. It can also serve as a tool to challenge governance in public sector organisations where substandard practices have persisted.

IFAC has also developed a supplement that includes key questions along with implementation tips, examples and readings for all types of public sector entities. So whether you’re a regulator, a practitioner or one of the myriad public sector stakeholders, the framework should help you to play your part in achieving good governance.

Fayezul Choudhury is chief executive of the International Federation of Accountants. He is speaking at the CIPFA annual conference on 1–3 July 2014. More information on the framework can be found at the IFAC Global Knowledge Gateway at www.ifac.org

This opinion piece was first published in the July/August edition of Public Finance magazine

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