Direkt zum Inhalt | Direkt zur Navigation

Personal tools

Sektionen
Publications
You are here: Home / Publications / Special Reports / epsas

Document Actions

Intended Implementation of harmonised European Public Sector Accounting Standards (EPSAS) in the Member States of the European Union

The German SAI speaks out against plans to implement harmonised European Public Accounting Standards EPSAS. The project will not accomplish the goal of sustainable public budgets.
Nov 15, 2017

0 Executive Summary
The European Commission (the Commission) intends to introduce harmonised European Public Sector Accounting Standards (EPSAS) in the Member States of the European Union. These standards are intended to provide better comparable data and a more reliable basis for economic and fiscal governance within the EU, thus helping to avoid future sovereign debt crises.

The EPSAS are to be based on accrual accounting and to be binding for all levels of government. According to estimates made by the Commission, the costs of implementing EPSAS in Germany alone are expected to amount to €3.1 billion. However, the reliability of such estimates is doubtful. We believe that the actual financial burdens will be higher.

0.1
The Commission did not submit an overall strategy for the project. Furthermore, the Commission has not explained to what extent the mandatory introduction of EPSAS can actually achieve the intended objectives. It has not considered any alternative options (numbers 4.1 and 4.5).

0.2
Since 2015, the Commission has promoted the voluntary transition to accrual-based accounting systems in the Member States, including by making EU funds available for this purpose. By doing so, the Commission practically pre-empts a decision (number 4.3).

0.3
The Commission closely involves private sector audit firms in the decision-making processes. These firms are key players and exert considerable influence on the development of EPSAS. We consider this a matter of concern because the mandatory introduction of EPSAS would also create business opportunities for management consulting and audit firms (number 4.4).

0.4
By introducing EPSAS, the Commission intends to strengthen confidence in the financial stability of the European Union and to improve fiscal monitoring, thereby helping to avoid future sovereign debt crises.

However, the issue in the European Union is not a lack of information or awareness but of enforcement of European fiscal rules. Past experience has shown that despite grave violations of fiscal rules no financial sanctions have been imposed. The problem is therefore not the lack of high-quality financial data but of a sound fiscal policy and of strict compliance with the European fiscal rules. Neither of these requirements can be enforced by any sort of accounting systems (number 5).

0.5
According to the Commission’s approach, EPSAS is to be the means by which the Member States obtain more robust data, thus rendering better account of the use of public funds. By introducing EPSAS, the Commission also intends to enhance transparency and comparability of public budgets.

The EPSAS are to be aligned with Anglo-American standards oriented towards the capital market. Thus, they are meant to provide investors with information useful for decision-making and are therefore more future-oriented. However, the government must render account of the use of the public funds. In contrast to the accounting of a private-sector enterprise, public sector accounting mainly serves the purpose of ex post oversight (number 6).

Furthermore, the implementation of EPSAS would furnish data on public budgets that only appear to be more reliable and better comparable. In order to actually achieve these qualities, it would be necessary to restrict the influence of subjective factors and to effectively prevent tampering. This, however, is not ensured. On the contrary: Discussions within bodies at EU level show that the introduction of EPSAS would provide the Member States with a wide discretionary scope for choosing among different options (number 7).

0.6
The EPSAS are to furnish additional information on the financial position of the Member States which, from the Commission’s point of view, will provide a more robust basis for decisions.

Recent decisions taken by the German Parliament suggest that, also in the future, the German budget legislator intends to exercise its constitutional right to pass the budget by means of cash-based data. Thus, EPSAS would not be more effective in facilitating parliamentary control.

We assume that, if EPSAS were introduced at the federal level on a mandatory basis, it would be necessary to retain the cash-based system and to introduce an accrual-based system in parallel. As a result, this would mean high implementation costs for Germany not matched by any real benefits. The operation of a parallel system would impose additional burdens on the German budget (number 8).

0.7
The Federal Government should assert its weight at the European level and prevent the mandatory implementation of EPSAS in Germany. Furthermore, it should take steps to ensure that the Commission consider alternative options that would permit any necessary improvements of the transparency and comparability of the Member States’ financial reporting. In this context, consideration should be given to the different administrative and accountability structures of the Member States.

0.8
The German Federal Ministry of Finance stated that it strongly agrees with the German SAI’s key issues of concern. The Ministry also assured us that the Federal Government would continue to intensively monitor the EPSAS implementation process in conjunction with the federal states and would ensure that consideration will be given to Germany’s interests.

European Commission chooses wrong instrument risking waste of funds

The German SAI speaks out against plans to implement harmonised European Public Sector Accounting Standards EPSAS. The project will not accomplish the goal of sustainable public budgets.

 

“The key to avoiding sovereign debt crises in the European Union is a sound fiscal policy. Such a policy cannot be imposed by enforcing a specific public sector accounting system”, said Kay Scheller, President of the German SAI, on the publication of a special report on the proposed harmonisation of accounting systems in the EU. To enhance fiscal surveillance, the European Commission seeks to obtain more reliable and comparable public budget data from Member States. The costs of implementing EPSAS are estimated at €3.1 billion in Germany alone. Kay Scheller stated: “When it comes to fiscal surveillance the EU does not lack information but enforcement of fiscal rules. In many cases Member States do not practice the necessary fiscal discipline and are reluctant to make tough policy decisions with the ensuing consequences. To seek better comparability of budget data will not serve the purpose. We can strengthen confidence in the stability of the Economic and Monetary Union only, if all Member States apply European fiscal rules consistently. The applicable legal framework already stipulates the need for Member States to seek structurally balanced budgets and a reduction in public debt. Compliance with the fiscal rules in place is thus the best safeguard for a stable Economic and Monetary Union. By opting for EPSAS to cure what ails, the Commission misses the point. Member States should abandon the project and instead use the funds saved to consolidate their budgets.”

The Commission seeks to implement EPSAS as binding standards across all Member States. The purpose is to obtain more reliable financial data from the Member States to improve fiscal transparency. The Commission estimates the costs of implementing EPSAS to amount to €3.1 billion in Germany alone. However, the reliability of such estimates is doubtful. We believe that the financial burden is likely to exceed this amount by far and that substantial difficulties will emerge at the transition stage.

In our special report we urgently warn Federal Parliament against the Commission’s project of implementing EPSAS as binding standards in the Member States and particularly in Germany. In our view, harmonising public-sector accounting based on compulsory standards - which is the approach adopted by the Commission - does not serve the goal of putting in place sustainable public budgets.

It has become apparent, already at this time, that EPSAS will open up additional accounting choices, options and leeway for Member States in recognising individual budgetary items. This fact alone would undermine the goal of obtaining more reliable and comparable public budget data. In addition, the Commission has initiated this multi-billion euro effort without having developed an overarching framework or having explored any alternative options to implementing EPSAS.

Furthermore, the German SAI is concerned that from the outset the Commission largely relied on private sector audit firms in the entire planning and deliberation processes such as the wording of the standards and the substantive requirements for the future public sector accounting system. These companies are key players in the field and would be in the position to exert major influence on the development of EPSAS. The German SAI warns that in case EPSAS are implemented as compulsory standards the demand for support and consultancy services in the relevant Member States will create a multi-billion market for just these audit firms. “This conflict of interest is not tolerable. The scope for government action is strongly affected, if profit-driven private-sector firms are closely involved in developing the potential legal framework in the European Union”, said Kay Scheller. At national level, we repeatedly expressed strong opposition to such endeavours.

The new Federal Government should bring momentum to bear on the European Union in order to prevent the compulsory implementation of EPSAS. In addition to that, the Federal Government should urge the Commission to study alternative options that may help enhance the transparency and comparability of financial information obtained from Member States as needed. In doing so, the Commission needs to respect the various administrative and oversight structures in place in the Member States.

All Member States of the European Union have the duty to comply with the applicable European fiscal rules. In accordance with the Stability and Growth Pact, the Member States have undertaken to achieve a nearly balanced budget or a surplus budget in the medium term. To accomplish this objective, the structural public deficit ratio and the public debt ratio are not to exceed 0.5 per cent and 60 per cent of gross domestic product, respectively.

Courtesy Translation

of the letter dated 17 January 2018 Mr. Kay Scheller,

President of the German Supreme Audit Institution [Bundesrechnungshof] sent (in German)

to Prof. Dr. Klaus-Peter Naumann, Chief Executive Officer of the IDW [Institut der Wirtschaftsprüfer in Deutschland e. V.]

 

Special Report pursuant to Article 99 Federal Budget Code on the intended implementation of harmonised European Public Sector Accounting Standards (EPSAS) in the Member States of the European Union

 

Your letter dated 1 December 2017

 

Dear Professor Naumann,

It is with great interest that I read your letter dated 1 December 2017 sent on behalf of the Institut der Wirtschaftsprüfer in Deutschland e. V. (IDW) commenting on our report on harmonised European Public Sector Accounting Standards (EPSAS). In this letter, you address various aspects of the EPSAS implementation.

I decided to reply to your letter (letter of IDW) by means of this open letter, as it does not accurately convey some of the contents of our report and draws the wrong conclusions concerning our position. In particular, I wish to draw your kind attention to the following:

 

Basic features of the implementation of EPSAS

 

The European Commission (the Commission) is planning to implement EPSAS in the Member States of the European Union. The EPSAS are to be based on accrual accounting and are to be binding for all levels of government. These standards are intended to provide more reliable data of the EU Member States and to improve their fiscal monitoring, thus helping to avoid future sovereign debt crises. According to rough estimates made by the Commission, the costs of implementing EPSAS are to amount to €3.1 billion in Germany alone.

We speak out against the implementation of EPSAS

 

In contrast to the statements in your letter, our report does not assess the pros and cons of accrual accounting versus cash-based accounting. Neither does it advocate for or against implementing accrual accounting at the federal government level. Furthermore, you may be aware that the Budgetary Principles Act permits the Federal Government and the Federal States to use either cash- based or accrual-based accounting.

A sustainable budgetary and fiscal policy is possible both in a cash-based and an accrual-based system. In our annual report, we have listed the steps to be taken by the Federal Government to achieve fiscal sustainability. Based on our experience, accrual accounting does not ensure sound public finances.

Our report explicitly opposes the compulsory implementation of EPSAS since with this project, the Commission is applying the wrong cure and does not address the genuine problem. The Commission already has access to the financial data necessary for fiscal oversight, that is, even without EPSAS.

In our opinion, the European Union does not face a lack of information. The experience has shown that, in spite of blatant infringements of the European fiscal rules, no financial sanctions have been imposed against the EU Member States. There is not a lack of high-quality financial data but of a sound budgetary and fiscal policy and of consistent enforcement of the European fiscal rules.

Implementing EPSAS would not solve this problem. The current figures on the deficit and public debt ratios in the EU area furnished by the Federal Statistical Office (DESTATIS) on 11 January 2018 again provide ample evidence that in a number of EU Member States fiscal sustainability has been at risk for years.

 

Cost and benefit of implementing EPSAS

 

Your letter notes that our report does not distinguish between costs directly associated with implementing accrual accounting and additional costs for long overdue IT maintenance and administrative improvement. Your letter also points to the merits of accrual accounting in comparison to cash accounting and advocates in favour of implementing EPSAS.

On this, first of all I wish to note that – as highlighted and described in detail in our report – the Commission has so far neither submitted an overall strategy nor a cost-benefit analysis for the implementation of EPSAS. Thus, a key requirement for the proper and efficient use of public funds has not been met. This approach does not comply with the value for money principle laid down in the German Constitution and is unacceptable given that the costs are likely to amount to billions of euros and that considerable difficulties in budgetary practice are likely to emerge when implementing EPSAS.

We also believe that it is not enough to merely list potential benefits of accrual accounting over cash-based accounting without assessing the specific monetary benefit of accrual accounting for a public budget against the cost of EPSAS implementation. This does not allow a well informed decision. Especially for the federal budget as a transfer budget, evidence would be needed that the effort associated with the transition is justified. If the IDW holds sound data on which it bases its decision in favour of the EPSAS, I suggest that these be made available for the public discussion.

Our report refers to the statements made by the Commission and the audit firm PricewaterhouseCoopers (PwC) on the expected costs of implementing EPSAS. Our report provides explanations on why these cost estimates are not robust. In contrast to your letter, the Commission and PwC point out that the estimates have attempted to include only those costs that are solely attributable to the implementation of EPSAS. In this context, PwC speaks of unavoidable costs.

These include the costs for implementing the standards and the central IT systems associated. Costs not included are e.g. the costs of a comprehensive reform of the financial reporting system.

 

Suboptimal management caused by cash-based accounting

 

Your letter states that especially cash-based accounting has resulted in suboptimal financial management, arguing that it only focuses on inflow and outflow of cash and therefore has not deterred the deferral of urgently needed measures to maintain the national infrastructure. Your letter states that the dilapidation of e.g. motorways, bridges, local schools and kindergartens has occurred only because cash-based accounting does not sanction such deferrals.

Your letter thus suggests that the poor condition of public infrastructure in Germany is primarily attributable to cash-based accounting and its inherent risk of poor management. We doubt that this positive correlation can be substantiated. At any rate, a look at the situation in those EU Member States that have for many years relied on accrual-based accounting and reporting systems does not confirm this assumption. Despite accrual-based accounting, large public deficits and debt ratios as well as dilapidated infrastructure can be found in those countries.

In this context your letter seems to ignore Parliament’s right to control the budget. This right enshrined in the Constitution is one of the oldest and most important privileges of Parliament, enabling it to exert decisive influence on the way in which government operates and sets its priorities. Neither cash-based accounting nor accrual-based accounting can or should sanction the budget legislator or limit its scope for fiscal policy decisions. The applicable constitutional debt rule stipulates that the budget legislator is free to decide how it intends to ensure a balanced budget in compliance with the debt rule. Restricting this right would mean a substantial encroachment on Parliament’s constitutional right to control the budget.

Furthermore, your letter seems to disregard the fact that mismanagement is not necessarily the only cause for the poor condition of public infrastructure. Rather than that, various other factors can account for the fact that necessary maintenance work is not carried out. The reason may be e.g. that budget funds or planning or building capacities are allocated to programmes considered to be more urgent from a policy point of view. I wish to refer to the special situation after the German unification when the increased demand for investments in the public infrastructure of Germany’s eastern states was given due priority.

On top of this, the depreciations assessed and recognized under accrual accounting do not reliably reflect the loss of value of physical assets and the age- related loss of productivity and efficiency of assets. In road construction, for example, the maintenance needs are already assessed much more accurately by means of methodologies that permit sound projections of the changes in the condition of the pavements over time. In addition, maintenance and funding programmes for civil engineering structures (including bridges) throughout Germany may be steered by means of the building structures management system.

 

Completeness of the statement of assets and liabilities

 

Your letter correctly points out that the Federal Government’s statement of assets and liabilities is not complete. Several material items are not disclosed in it.

In our annual report on federal financial management, we also regularly alert to the fact that the statement of assets and liabilities does not fully disclose the assets and liabilities of the Federal Government. We did so recently in December 2017. However, we acknowledge that the Federal Ministry of Finance has made considerable efforts over the past few years to complement the statement of assets and liabilities and to enhance its transparency.

Differing from the statements made in your letter, our position in this matter has remained the same. We hold that further efforts are needed, also in view of the legal requirement imposed by Article 73 Federal Budget Code and therefore support the Ministry of Finance in its efforts to complement and enhance the statement of assets and liabilities.

 

Involvement of private-sector audit firms in the decision-making processes

 

Your letter states that it is common practice and essential to draw on external knowledge and expertise when drafting laws and regulations. Your letter states that for this reason, our demand not to rely on the expertise and experience of the audit profession in connection with the implementation of EPSAS is therefore difficult to comprehend.

In contrast to what your letter states, our report does not make this demand. We have merely pointed out that from the outset, the Commission largely relied on private-sector audit firms in the project. These are key players with vested interests and can therefore exert considerable influence on the development of EPSAS. We still consider this a matter of concern because, in case of a compulsory implementation of EPSAS, the demand for support and consultancy services in the public sector of the respective EU Member States will create a market worth billions of euros for exactly these audit firms. This conflict of interest is apparent and unacceptable.

We stand by our opinion that governments’ leeway is eroded if private sector firms gain significant influence on potential European Union legislation and can thereby create new markets and sources of revenue in their favour.

I hope I have been able to clarify our position on the intended implementation of EPSAS and remove any potential misunderstandings.

Yours sincerely, 

Kay Scheller

Filed under:
© 2018 Bundesrechnungshof