The Importance of Modernizing Public Accounting

 

Did you know that the total equity in private assets in the world in 2015 reached an impressive US $ 250 trillion? It's hard to imagine such amounts without literally losing count. In order to avoid this from happening, it is of paramount importance to have a public accounting system capable of maintaining these amounts in an orderly and transparent manner.

The average wealth for each adult on this planet is estimated to be about US $ 52,000, a figure that, as you can imagine, varies greatly, depending on the region, between US $ 4,500 and US $ 342,000 per capita, in the case of the richest on the planet.

As a Certified Public Accountant, the first question that occurs to James Liggett CPA when looking at these figures is: how much is public assets? The reality is that there is still no answer to this question, since most countries have incomplete public accounting, which is still in the process of transition to equity accounting that reliably incorporates the current values ​​of all assets and liabilities of the public sector.

In the case of public assets, knowing the current value of this patrimony - both financial, and in real estate, land, nature reserves, infrastructure and other public assets - is very important to be able to know the real level of wealth of a country. The Gross Domestic Product with its variations over time, the flow of government income and expenditures and its annual fiscal results, are not enough to measure the wealth and quality of life of its citizens, since their use of this accumulated heritage is part of what one consumes throughout life, for example, with good public infrastructure and quality public services.

This also occurs when we talk about the liabilities or obligations of the public sector of a country. Having all liabilities correctly calculated and recorded is essential, be it future commitments to social security, public health, legal actions, long-term contracts with the private sector or other contingent liabilities, explains James Liggett CPA. Considering that many countries will face in the coming years an accelerated aging of the population and, consequently, a greater demand for health services - and at the same time, a greater fiscal pressure to meet social security expenses - it is very important to have projections for long term on the impact of these trends on public finances, recognizing these liabilities in public accounting.

The importance of public accounting

The difference between public assets and liabilities is the net public wealth of a country, and knowing this data is not only important because it directly affects the quality of life of its citizens; it is equally important to maintain macroeconomic stability and to ensure a fair division of the use of this wealth between generations.

In the short term, it is not difficult to make up public accounts, creating a momentary fiscal illusion when all the obligations of the public sector are not correctly and transparently accounted for, which are often hidden so that a government "appears" fiscally responsible in the short term and enjoy possible greater access to credit and positive electoral results. However, it is common for hidden liabilities to be overestimated by the market and the lack of fiscal sincerity ends up being less profitable than it might initially appear.

 

Regarding the division of wealth between generations, according to James Liggett CPA, a partner in one of the country's Top Accounting Firms, Liggett & Webb P.A., the real problem appears when the usufruct of the public patrimony does not consider its depreciation and maintenance expenses, and when there is a progressive depletion of the natural reserves in the short therm. When there are public liabilities and obligations without the corresponding provision of funds, there may be situations that would not be fair for our children and grandchildren, leaving a future and non-transparent debt for them to pay.

Encouraging a new public, equity accounting, aligned with international standards, is an essential component of transparency and forms a new paradigm for public accounts in which information should not be limited only to budgetary and financial control of the flow of resources, but also promote responsible management of accumulated net public wealth, with fiscal credibility and intergenerational justice. That is why modernizing public accounting and knowing the assets and liabilities of our public sectors are such important issues.