IFAC Study Examines Public-Sector Corporate Governance

In July the International Federation of Accountants released for comment a proposed study intended to improve public-sector entities’ self-governance. Corporate Governance in the Public Sector: A Governing Body Perspective recommends that governments use private-sector corporate governance concepts and practices to achieve their objectives more openly and effectively, and in the process, better serve their constituencies.

The study was conducted under the auspices of IFAC’s public-sector committee. One of its authors, Marianne Brown, a public-sector project director with the South African Institute of Chartered Accountants, said the study’s recommendations are part of IFAC’s growing body of knowledge, principles and practices designed to enhance public-sector performance and reporting on a global basis.

IFAC had issued the world’s first authoritative independent public-sector financial reporting standards in May. Now, Brown said, “IFAC is working to identify the governance framework in which these standards can best be applied. For example, we need to determine how a governing body should be structured and what its responsibilities should be.”

To that end, the study focused on three fundamental principles of corporate governance (openness, integrity and accountability) cited in a document, known as the Cadbury report, produced in 1992 by the United Kingdom’s committee on the financial aspects of corporate governance.

“These principles are as relevant to all public-sector entities as they are to [their private-sector counterparts],” the study said. “[Furthermore], they apply equally to all public-sector entities, irrespective of whether [their] governing bodies are elected or appointed, and whether or not they comprise a group…or an individual.”

But the public-sector committee needed to support this claim. “So, as we did the study, we asked ourselves what private-sector precepts we could apply to the public sector,” Brown said. The answer lay in research done in 1995 by the United Kingdom’s Chartered Institute of Public Finance and Accountancy (CIPFA), which broke new ground by arguing persuasively that the Cadbury report’s private-sector principles could be applied to U.K. public-service bodies. “We then took the CIPFA findings and applied them on an international basis,” she added.

“But unlike private entities, which are more uniform, the public sector’s structure varies significantly around the world,” Brown said. “We had to balance the needs of developing countries with the importance of issuing something that would be accepted on a global basis.”

The study recommended that governing bodies view governance principles as innately linked to each other and support them as a whole. It also emphasized the importance of clearly advising government employees of their role in good governance and noted that, in many countries, structural and managerial changes—such as the establishment of specialized agencies serving narrowly defined constituencies—are fostering alliances through which the private sector manages prisons and provides other services traditionally rendered by public entities—a situation the study said requires close oversight to ensure cost containment does not diminish the quality of services rendered.

Brown conceded, however, that the biggest challenge—implementation—lies ahead, and she looks forward to the international community’s feedback on the feasibility of IFAC’s recommendations. Once the comments have been evaluated and the study is issued in final form, she said, applying its recommended principles will require some flexibility.

“For example, take a corporate governance principle that is readily accepted in the private sector—to balance power, there must be a nonexecutive element in an entity’s governing body,” she said. “It’s not so easy to accomplish that in a central government, where most of the executives are employed by the organization. So, an alternative could be to set up an advisory board that would serve as the central government’s nonexecutive element.”

For governing bodies that wish to evaluate their governance capabilities, the study also provides a useful checklist of diagnostic questions on statutory accountability, accountability for public funds, communication with stakeholders, roles and responsibilities within the governing body, reporting and internal control, and standards of behavior.

A second checklist guides governing bodies’ senior management through issues related to their organization’s performance and the information they need to make astute decisions and be appropriately accountable for them.

Brown and her colleagues want the study to encourage dialogue among the world’s nations. “We’re saying, ‘Here’s a mechanism used in another country, this is how it works and why it’s effective.’ It’s a sharing of experience,” she said.

The proposed study is available on the IFAC Web site, www.ifac.org. Comments are due by November 30.