Developing skills to face financial challenges

Governments worldwide are responsible for the provision of public services and for spending and receiving public money. Public sector spending alone represents a large proportion of spending for most major economies. In the UK, it is nearly 60% of GDP. Public sector departments in the UK are currently engaged in providing very challenging and very diverse programmes of change. Officials that work within these departments are accountable for ensuring that public business is conducted in accordance with the law and that proper standards are maintained for the use of public money. Financial management, skills and competencies in the public sector are, therefore, more important than ever.

We are currently dealing with the biggest economic crisis which is having, not just, a financial impact but also a social and political impact. Over the last few years, governments around the world have become increasingly exposed to financial reporting fraud leaving them exposed to financial fragility and thus needing publically funded bail-outs and increased debt servicing costs.

The crisis, both economic and financial has led to a number of debates and discussions about financial reporting, auditing and the quality and reliability of the financial statements of governments around the world. One of the biggest weaknesses around the world has been the lack of proper accounting structures to manage public finances and in particular, the wide-spread (continued) use of cash-based accounts.

Accountants Key Role
At the heart of all of these debates is the accountancy profession. Accountants have a key role to play in helping to spread accounting standards, manage financial structures and to manage finances within organisations. The private and public sectors are inextricably linked and therefore cannot function or prosper without each other.

Many of the factors that affect the private sector also affect the public sector although possibly in different ways. Integrity in the business is all-important. And the need to achieve value from information systems and manage assets and liabilities is a key must. All of this needs great leadership.

Finance is an important aspect of the key business processes within any organisation. The profession has a key role to play in steering the stewardship and accountability systems that ensure that governments are conducting their business in the public interest and in an ethical manner. They also make an important contribution to the corporate governance of public services and ensure that public bodies manage their performance and use their resources wisely and in the public interest. It is perhaps a little obvious then to suggest that you need people with financial mind-sets to manage, control and shape the finances and to achieve the necessary cost reductions.

Ironically however, given the key role that accountants have to play in the running of the country’s finances, it is only recently, that the UK has had qualified accountants leading each of its key finance functions. Would this have happened in the private sector?

Over recent years, the public sector has been grappling with issues around convergence of accounting and auditing standards to international standards, public private partnerships and with the protection of the volumes of information that they inevitably have to manage.

With these changes, government departments are now able to consider the balance sheet and implications of policy decisions. This allows policy-makers to fully consider the costs of their business decisions, and obtain reliable cost data on the outputs they deliver. Reliable financial reporting information is available, but do managers know how to make the most of this data in supporting business decisions?

The last year or so has also been an interesting one for financial reporting in the UK, with the publication of the Whole of Government Accounts (WGA) which marks the first step towards full public disclosure of the health of UK’s public finances. WGA represents a new policy tool to help the UK Government and policy makers manage national debt.

Looking at the figures contained in the WGA, it brings home the breadth and depth of public finances and more importantly the challenges the UK faces as a nation. And they highlight just how important transparent financial information is for decision making.

But, the benefits of WGA as a planning tool have yet to be realised within government.

Are the right skills in place?
Challenges facing government departments include how to implement and improve financial management while managing a cost-cutting exercise across the board. The NAO highlighted in a recent report that although departments have managed to make cuts and achieve some savings, they will be unable to maintain this as most of these cuts were short-term measures. The NAO also suggested that departments were not well placed to make further changes as their planning was ‘not based on a strategic view’.

So, with all of these challenges in the current environment, does the UK have the right leadership, culture, skills and capabilities in place to take the UK through these times of austerity? Budget cuts will likely lead to reductions in staff, so what does the public sector need to do to get through these challenging times?

Good financial management and reporting have always been central to the effective and efficient delivery of public services – at a time of reduced public confidence in public spending – the accountancy profession has an important part to play in the improvement of financial discipline and to restoring credibility to government finances and taxpayers’ money. Indeed the need for accurate and timely financial reporting to aid decision making has never been greater.

This especially at a time when government needs to plan for a reduction in the resources available to support expenditure plans.

Departments will therefore need to assess their delivery objectives and make sure that the skills of their staff align with their needs.

Leadership and culture
The public sector needs to develop its managers to lead, in a diverse and changing environment. Leadership and culture are derived from a clear tone from the top, perhaps starting at the boardroom with the Chair and the Non-Executive Directors (NEDs). Board members should be taking a keen interest in improving financial knowledge in current times.

Finance directors need to able to communicate, engage and build effective relationships with board members to help build confidence in the ability of the finance function to contribute to board-level decision-making. A strong finance director should be able to demonstrate strong leadership and commitment to improving financial understanding at board level as well as within and across departments.

Mechanisms need to be put into place to facilitate, integrate and enable the implementation of effective financial management within the organisation.

Finance needs to be embedded throughout each department, not restricted to just the finance function. Integration will help to provide a better basis for priorities to be set and will improve the visibility of costs against delivery of outputs and outcomes.

Professional qualifications and developments
It is important that financial management within public sector organisations is led by a dedicated, qualified and skilled team of individuals. Departments need to retain high quality staff and ensure that they continue to be trained and developed. Staff will need to continuously enhance their skills and competencies to enable them to deal with the changing environment. They will need to learn to operate with fewer resources.

Accounting standards
Financial reporting standards need to be applied appropriately to ensure that there is consistency and transparency. High quality systems and processes need to generate timely and relevant information for key decision-makers to drive the performance of the organisation as a whole.

ICAEW has consistently called for greater transparency, better management information, improved accountability, better risk management and governance and all round financial awareness. It now calls for better skills and capabilities in government.

There needs to be strong financial management, integrated with performance reporting if government is to succeed in
its policy-making, planning and delivering policy objectives. The finance function should be at the heart of the policy, delivery and decision making role – finance’s role is not just to account for money after it has been spent, it needs to be involved with projects from the beginning before funds are committed. Strong financial management needs leadership from the top. Changes in culture, integration and embedding of the finance function throughout the organisation, and communication and engagement at all levels is a must. Accounting standards need to be applied and the quality of information improved to ensure consistency and transparency. Developing staff and enhancing their skills and qualifications will be absolutely necessary to enable them to stay in tune with the current environment
and learn to do more with less.

Further information
The Institute of Chartered Accountants in England and Wales is a professional membership organisation, supporting over 138,000 chartered accountants around the world. ICAEW was granted a Royal Charter by Queen Victoria in 1880, giving its members the right to use the designation ‘chartered accountant’.