Author Jeanine Poggiolini CA(SA), CEO at the Accounting Standards Board
It seems recent accounting dialogues centre on the need for sustainability reporting. In a time when our country’s resources are heavily constrained, we need to focus our efforts on our existing commitment as government to build a sustainable system of public financial management. This means focusing on improving the quality of financial statements and other reporting and implementing accrual accounting across the public sector.
Be better storytellers by improving what we already report
When it comes to reporting in the public sector, it is the International Public Sector Accounting Standards Board (IPSASB) that will issue sustainability standards. These are still being developed. At present, it is unclear whether sustainability reporting in the public sector will be linked to the sustainable development goals (SDGs), other goals, other metrics, or a combination of these.
Many governments’ development plans are linked to the SDGs, and reports on their achievement of these goals are already provided. Sustainability reporting will likely require more detailed metrics on the achievement of, for example, certain climate goals. However, my sense is that there is already some information reported on what would be considered ‘sustainability reporting’ – it may just not be labelled as such. It is critical that standard-setters examine how the information already reported by governments fits into the broader ‘sustainability reporting’ landscape.
In the South African context, our National Development Plan is based on the SDGs, and as a result, all government entities performance information is designed with these metrics in mind. The general reports from the Auditor-General frequently highlight that the reports on performance information could be improved.
If accounting and reporting is like storytelling, then users of the financial statements should be able to link financial and performance plans to the actual financial results as well as the performance information. If the story is about building houses, an entity’s annual performance plan should indicate how many houses should be built; the budget should indicate how much the houses should cost; the financial statements should indicate the actual cost of the houses built (eg through functional classification of expenses or the segment report); and the performance report should indicate how many houses were built. Preparers of these reports should make these linkages clearer and become better ‘storytellers’. We need to improve what we already report and not report more.
All government entities should apply accrual accounting
The constitution requires the implementation of ‘generally recognised accounting practice’ alongside the need for uniform norms and standards. The Standards of GRAP issued by the Accounting Standards Board (ASB) are based on international best practice, which includes accrual accounting. Standards of GRAP are applied by all entities in the public sector, except for national and provincial departments.
Accrual accounting provides a holistic view of an entity’s (or government’s) financial picture. The financial statements report revenue and expenses when the transactions occur, and assets and liabilities are when an event creates rights or obligations. At present, departments use a modified cash basis of accounting which means that many transactions are only accounted for when cash is received or paid. Disclosures of some assets and liabilities are included in the notes to the financial statements.
There are at least two SDGs that would benefit from accrual-based information on assets, namely ‘Industry, infrastructure and communities’ and ‘Sustainable cities and communities’. Accrual building blocks are critical to sound sustainability reporting.
Stay focused on the basics
While it is hard to argue with the merits of sustainability reporting that aims to measure our impact on the environment, society and how well we govern these matters, financial resources and how they impact these areas are a key building block. Getting back to these basics is an important step in the journey to sustainability reporting and all it may entail.
