28 May 2020 — Publication
Here we state our key takeaways on what the public sector could do on the short- and long-term to counter the impact of the coronacrisis.
Below we explore how governments can best deal with this on the short term in more detail:
Some of the rapid response programmes for paying social benefits and to support the private sector have required the relaxation of normal control processes. This relaxation of controls is understandable and necessary given the urgent need to support large sections of society.
However, there are already concerns that such schemes are subject to fraud and misuse, such as in the United Kingdom, Ireland and Belgium, where accountants have helped uncover fraud. In the Netherlands, every company drawing on the support programme for amounts in excess of 125 000 € will need a separate audit opinion to confirm that the claims they made with regard to revenue loss and employee costs were correct.
Consequently, once the situation has normalised, we believe that it is necessary that governments implement:
It is also essential that national governments are clear about the financial reporting requirements for recipients of government aid, be they private or public sector. This is to ensure that the recipient is fully transparent on the aid received and the consistent approach to disclosures with support public accountability.
For many public bodies, meeting deadlines for financial and performance reporting will be challenging – due to social distancing demands and staff being seconded to other departments. We consider that, in certain circumstances, there can be a good case for extending reporting deadlines.
However, citizens’ appetite for relevant information will grow, driven by the tax increases that seems inevitable in many countries. Consequently, we believe that public sector bodies should deploy their depleted resources most efficiently.
The public sector should concentrate on disclosing what truly matters in financial and performance reporting. It is important that they prioritise disclosing material information as promptly and accurately as possible.
The coronavirus crisis’ impacts on public sector financial reporting and auditing are similar to those that the private sector experiences. These are fully explored our publication Coronavirus crisis: implications on reporting and auditing (March 2020).
Broadly speaking, such issues include:
Public sector entities and their auditors will face all these issues directly where the government has a stake in private sector entities. Governments frequently have equity holdings in key industries (for example, airlines) and this will probably increase as governments step in to provide further support. The additional equity holding could be an immediate acquisition of additional equity (through cash injection) or deferred, using convertible loan stock. In both circumstances, there will be significant uncertainty on the valuation of such assets, as well as issues over the going concern of the entities supported.
Additionally, the public sector faces its own specific issues in reporting and auditing. Below we will set out the following: 1) going concern, 2) post balance sheet events and contingencies, and 3) provision of (non-financial) information:
1 – Going concern
In respect of going concern, the level of support from the government to other public sector bodies, and the communication of this support, is of paramount importance.
It is unlikely that governments would permit large government bodies to fail, such as health or finance ministries. However, they may decide that they cannot support other public service organisations, particularly if they are quasi-public sector or public-private organisations. Where guidance is not already provided, it is important that governments clearly state how much ongoing support it will provide to such bodies so that management and auditors can assess their going concern.
The situation is even more complex when looking at going concern for the whole of government accounts. Governments are caught between hugely increased costs (for social benefits and supporting private sector businesses) and dramatically reduced income from taxation. It is conceivable that many governments will face a balance sheet with negative net worth, and it will be very difficult to determine the impact of this on the country’s fiscal sustainability.
We believe that governments should be transparent about the negative balance sheet and clearly indicate how they intend to deal with the situation – such as plans for public sector cuts and / or increasing taxation.
2 – Post balance sheet events and contingencies
Depending on the country’s financial reporting date, some public sector bodies will already be considering what should be reported in respect of non-adjusting post balance sheet events. For many public sector entities, these events will be highly material, potentially affecting their going concern and ability to deliver services in the future.
Additionally, loans or loan guarantees are key elements of many of the government support programmes. Due to the relaxation of lending controls, and the likely global recession, it is probable that there will be a significant level of default. This will be a future cost for governments.
The public sector bodies providing or guaranteeing such loans will likely have experience in financial modelling, but the current crisis has introduced unparalleled uncertainty. Consequently, central economic forecasts must factor in new conditions, such as increased social costs and adjustments to tax receipts, and governments should be transparent about these changes.
In respect of contingencies, there must be a close monitoring of loans and loan guarantees. This will help minimise the risk of default and provide a more accurate assessment of the likelihood of default, for financial reporting purposes.
It is not clear that all governments currently have this information – or the systems to obtain this information – so making the necessary changes to accounting, control and information technology systems as soon as possible is a key priority for governments.
3 – Provision of (non-financial) information in management discussion and analysis
Linked to the point above on post balance sheet events and contingencies, where not already provided, there is an urgent need for guidance from central government on what should be disclosed in the management report of their public sector bodies.
Stakeholders will want to know what increased risks public sector entities are facing and what impact these could have on the future provision of services – such as a reduced level of services or an increase in their cost for the citizen.