Public Sector Accounting, Financial Accountability and Viability in Times of Crisis (Public Sector Financial Management) 3031047443, 9783031047442

Citation preview

PUBLIC SECTOR FINANCIAL MANAGEMENT

Public Sector Accounting, Financial Accountability and Viability in Times of Crisis Edited by Giovanna Dabbicco Marco Bisogno Josette Caruana Johan Christiaens

Public Sector Financial Management Series Editors

Sandra Cohen Athens University of Economics and Business Athens, Greece Eugenio Caperchione University of Modena and Reggio Emilia Modena, Italy Isabel Brusca University of Zaragoza Zaragoza, Spain Francesca Manes-Rossi University of Naples Federico II Napoli, Italy

This series brings together cutting edge research in public administration on the new budgeting and accounting methodologies and their impact across the public sector, from central and local government to public health care and education. It considers the need for better quality accounting information for decision-making, planning and control in the public sector; the development of the IPSAS (International Public Sector Accounting Standards) and the EPSAS (European Public Sector Accounting Standards), including their merits and role in accounting harmonisation; accounting information’s role in governments’ financial sustainability and crisis confrontation; the contribution of sophisticated ICT systems to public sector financial, cost and management accounting deployment; and the relationship between robust accounting information and performance measurement. New trends in public sector reporting and auditing are covered as well. The series fills a significant gap in the market in which works on public sector accounting and financial management are sparse, while research in the area is experiencing unprecedented growth.

Giovanna Dabbicco Marco Bisogno  •  Josette Caruana Johan Christiaens Editors

Public Sector Accounting, Financial Accountability and Viability in Times of Crisis

Editors Giovanna Dabbicco National Accounts Directorate National Statistical Office (ISTAT) Rome, Italy Josette Caruana Department of Accountancy Faculty of Economics Management and Accountancy University of Malta Msida, Malta

Marco Bisogno Department of Management and Innovation Systems University of Salerno Fisciano, Italy Johan Christiaens Department of Accounting Corporate Finance and Taxation Ghent University Ghent, Belgium

Public Sector Financial Management ISBN 978-3-031-04744-2    ISBN 978-3-031-04745-9 (eBook) https://doi.org/10.1007/978-3-031-04745-9 © The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2022 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the ­publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and ­institutional affiliations. This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Foreword

As we prepare for the post-covid-19 world, a, global, collective exercise of sensemaking is taking place, seeking an understanding of how countries, governments, organizations and individuals coped with an unprecedented crisis, and reflecting what we can learn from it. This book provides a timely contribution to this worthy sensemaking exercise. First, it allows us to appreciate the central role played by governments and, more generally, public services and policies in navigating the difficult times of the pandemic. Second, more specifically, it sheds lights on the multiple ways in which financial capacities, and budgeting, accounting and accountability systems have shaped responses to shocks. Third, in doing so, it also provides important reflections on future challenges, critical issues which accounting and financial management systems will need to tackle, and which lessons can be learned from the recent pandemic to be ready to face the (uncertain) future waiting for us. We generally realize the relevance of accounting and financial management systems especially when they fail. It is when scandals happen, when budgets do not allow to respond to citizens’ expectations, when reports do not provide the needed information or allow to anticipate risks and understand vulnerabilities, when reporting and auditing do not prevent frauds and corruption, when people feel constrained, rather than empowered by them, that we realize the “power” and impact of these systems on our lives, and on the good and smooth functioning of our democracies, of organizations, public services and policies. Crises will especially put such systems to the test. Systems, which are often built to focus our attention on budgetary compliance, routinary v

vi 

FOREWORD

planning of activities and allocation of resources, to monitor the correct execution of budgets and plan, to drive managers and organizations to be efficient and effective, to keep track of probable risks, may not be built to anticipate highly unexpected, or to encourage the building of large slacks and reserves for coping with unprecedented shocks. In short, systems built to focus on maximizing outputs and minimizing inputs, may not always encourage to “think outside the box” or to prepare for the unexpected, or may be more or less open to the type of sudden innovation and radical transformation which may be needed to face big, unexpected, unsettling challenges. Yet, we are now entering an era where crises have become “normalized”, people have become accustomed to shifting priorities, and even shifting expectations and behavioral requirements. The experience of the pandemic has made us even more aware than before of the pluralistic (and even polarizing) nature of societal expectations and values. This may require a paradigmatic shift in the ways we govern public services, in the dimensions of performance are considered relevant, and worth measuring and reporting against, and also the ways in which we plan, assess risks, allocate resources, and hold managers and politicians accountable for performance. This book provides an important step in this direction. It provides a rich account of the pervasive and important roles played by public sector accounting, financial management, auditing, budgeting systems during the pandemic (on this, see also Anessi-Pessina et al., 2020; Leoni et al., 2021, 2022), but also on the critical issues they may have raised, or not contributed to avoid. As such, the book points to the importance of constantly rethinking, checking the functionality and usefulness of current accounting, accountability, financial management systems and standards to reflect continuous changes in the material world we live in, in the environment, in technologies, as well as in the values, beliefs and culture expressed by our society. In doing so, this book also provides important stimuli, and a future sense of direction, on how we should reconsider current accounting, budgeting, reporting, auditing systems and learn from past lessons to “prepare” them for a future where new capacities (such as capacities for resilience, anticipation and coping with uncertainty, as well as capacities for making citizens and public servants included, engaged, treated fairly, see also Barbera et al., 2020; Bracci et al., 2021) will need to

 FOREWORD 

vii

be built in the public sector, and where systems for planning, measurement, accountability will be central in supporting the building, nurturing and maintenance of those capacities. Essex Business School University of Essex Colchester, UK

Ileana Steccolini

References Anessi-Pessina, E., Barbera, C., Langella, C., Manes-Rossi, F., Sancino, A., Sicilia, M., & Steccolini, I. (2020). Reconsidering public budgeting after the COVID-19 outbreak: Key lessons and future challenges. Journal of Public Budgeting, Accounting & Financial Management, 32(5), 957–965. Barbera, C., Guarini, E., & Steccolini, I. (2020). How do governments cope with austerity? The roles of accounting in shaping governmental financial resilience. Accounting, Auditing & Accountability Journal, 33(3), 529–558. Bracci, E., Saliterer, I., Sicilia, M., & Steccolini, I. (2021). Accounting for (public) value(s): Reconsidering publicness in accounting research and practice. Accounting, Auditing & Accountability Journal, 34(7), 1513–1526. Leoni, G., Lai, A., Stacchezzini, R., Steccolini, I., Brammer, S., Linnenluecke, M., & Demirag, I. (2021). Accounting, management and accountability in times of crisis: lessons from the COVID-19 pandemic. Accounting, Auditing & Accountability Journal, 34(6), 1305–1319. Leoni, G., Lai, A., Stacchezzini, R., Steccolini, I., Brammer, S., Linnenluecke, M., & Demirag, I. (2022). The pervasive role of accounting and accountability during the COVID-19 emergency. Accounting, Auditing & Accountability Journal.

Contents

1 The  Contribution of Public Sector Accounting and Public Financial Management During and After Times of Crisis  1 Giovanna Dabbicco, Marco Bisogno, Josette Caruana, and Johan Christiaens 1.1 Introduction  1 1.2 The Scope of the Book  3 1.3 Methodological Approaches  5 1.4 Theoretical Frameworks  5 1.5 The Implications of the Book Chapters for Public Sector Accounting  5 1.5.1 Public Sector Accounting in Times of Crisis  5 1.5.2 Financial Accountability and Auditing in Times of Crisis  7 1.6 Conclusion 10 References 12 Part I Public Sector Accounting in Times of Crisis  15 2 Budget  Process and Budget Structure Under the COVID-19 Pandemic in Indonesia 17 Aichiro Suryo Prabowo 2.1 Introduction 17 2.2 The Context: Indonesia and the Pandemic 18 2.3 Methodology 20 ix

x 

Contents

2.4 Budget Process 21 2.4.1 Preparation 22 2.4.2 Approval 23 2.4.3 Execution 26 2.4.4 Evaluation 28 2.5 Budget Structure: A Discussion 31 2.5.1 Aggregate Fiscal Discipline 32 2.5.2 Allocative Efficiency 35 2.6 Conclusion 37 References 38 3 The  Role of the Balance Sheet for Reporting Deficits and Debts by EU Member States: Lessons from the COVID-19 Pandemic 43 Giovanna Dabbicco and Josette Caruana 3.1 Introduction 43 3.2 Literature Review 46 3.3 Methodology 53 3.4 Findings 56 3.4.1 Revenues and Expenditures 56 3.4.2 Assets and Liabilities 57 3.4.3 Emphasizing the Balance Sheet Perspective 58 3.5 Discussion and Conclusion 60 Appendix 64 References 71 4 Accounting  for Collective Services, Individual Services, and Emergency Relief: Reconsideration in Times of a Pandemic 75 Natalia Aversano, Giuseppe Nicolò, Giuseppe Sannino, and Paolo Tartaglia Polcini 4.1 Introduction 75 4.2 Impact of COVID-19 on Government Financial Statements 77 4.2.1 Overview of the Main Types of Public Programs, in Response to the COVID-19 Crisis 78 4.2.2 Financial Reporting Guidance from the Standard Setters 78 4.3 Previous Studies on Accounting for Emergency Relief 80

 Contents 

xi

4.4 ED 67: “Collective and Individual Services and Emergency Relief” 83 4.5 Research Methodology 85 4.5.1 Previous Studies on Comment Letters’ Analysis in the IPSASB Standard-Setting Process 85 4.5.2 Research Method: Analysis of the Comment Letters Sent to ED 67  86 4.6 Analysis of Comment Letters to the ED 67: Findings 88 4.6.1 Respondents’ Profiles 88 4.6.2 Respondents’ Support of ED 63  90 4.6.3 Accounting Treatment for Emergency Relief: The Analysis of the Comment Letters 92 4.7 Conclusions 94 References 96 5 Impact  of Integrated Financial Management Information System Practices in Public Finance Management Performance During COVID-19 Pandemic: Turkey Case101 Seval Kardeş Selimoğlu, Gül Yeşilçelebi, and Mehtap Altunel 5.1 Introduction101 5.2 General Structure of IFMIS104 5.2.1 IFMIS Concept and Its Implementation Process104 5.2.2 Benefits and Challenges of IFMIS Implementation108 5.3 Research Methodology109 5.3.1 Research Aim109 5.3.2 Research Design110 5.3.3 Population and Sample111 5.3.4 Data Collection Tool112 5.3.5 Data Analysis113 5.4 Findings113 5.5 Results and Recommendations122 References123

xii 

Contents

Part II Financial Accountability and Auditing in Times of Crisis 127 6 COVID-19  Business Support in the Netherlands; Governance and Accountability in Times of Turbulence129 Jan van Helden, Tjerk Budding, Bharti Girjasing, and Lizette Pleyte 6.1 Introduction129 6.2 An Overview of COVID-19-Related Business Support Measures131 6.3 Theoretical Lenses on Turbulence and Accountability133 6.3.1 Turbulence133 6.3.2 Accountabilities and Information Needs135 6.4 Arrangement on Wage Supplementation Due to Loss of Income (NOW)136 6.4.1 NOW1137 6.4.2 NOW2138 6.4.3 NOW3138 6.4.4 NOW4140 6.4.5 Abuse and Improper Use140 6.4.6 Impacts141 6.5 Arrangement on Fixed Cost Supplementation Due to Income Loss (TVL)143 6.5.1 TVL Q3 2020144 6.5.2 TVL Q4 2020145 6.5.3 TVL Q1 2021145 6.5.4 TVL Q2 2021 and Q3 2021145 6.5.5 Abuse and Improper Use146 6.5.6 Impacts146 6.6 Accountability148 6.6.1 Regulatory Framework on Accountability of Government to Parliament148 6.6.2 Analysis of Accountability of Government to Parliament149 6.7 Conclusion and Discussion151

 Contents 

xiii

6.7.1 Goals, Design and Redesign of the Business Support Arrangements151 6.7.2 Strategies to Cope with Turbulence152 6.7.3 Accountability152 6.7.4 Miscellaneous Issues153 References155 7 “Stretching  the Public Purse”: What Does It Mean in Terms of Government Accounting?159 Jens Heiling, Dmitrij Cesniuk, and Tim Meglitsch 7.1 Introduction159 7.2 Accountability161 7.3 Research Methodology163 7.4 Background Information About the COVID-­19 Pandemic and the Policy Responses by the Four Governments165 7.5 Analysis of the Financial Statements168 7.5.1 Analysis of the Financial Performance170 7.5.2 Analysis of the Financial Position172 7.5.3 Analysis of the Financial Statements from an Accountability Perspective174 7.6 Discussion of the Results176 7.7 Conclusion178 Annex179 References195 8 A  Disclosure Theory Approach to Government Transparency: Implications for Accountability in Times of a Pandemic197 Claudio Columbano 8.1 Introduction197 8.2 A Sketch of Disclosure Theory200 8.3 Applications: Disclosing Information on SARS-­CoV-2 Mortality204 8.4 Discussion and Conclusions208 References210

xiv 

Contents

9 Value  for Money Assessment of a Wage Supplement Scheme Aimed to Address Distress Induced by the Pandemic215 Josette Caruana and Mary Jane Buttigieg 9.1 Introduction215 9.2 The Covid-19 Wage Supplement Scheme219 9.3 Operational Auditing: A Literature Review221 9.3.1 Objectives of Operational Audits221 9.3.2 Economy222 9.3.3 Efficiency223 9.3.4 Effectiveness224 9.4 Research Methodology226 9.4.1 Interviews227 9.4.2 Questionnaire227 9.4.3 Research Limitations227 9.5 Findings and Discussion228 9.5.1 Objectives, Application Process and Funding of the Wage Supplement Scheme230 9.5.2 Resources and Economy231 9.5.3 Efficiency233 9.5.4 Effectiveness235 9.6 Conclusion236 Appendix237 Part 1: Relating to Sect. 9.4 Research Methodology 238 Part 2: Relating to Sect. 9.5 Findings and Discussion 240 References245 10 The  Role of Public Audit: Challenges and Opportunities for the European Court of Auditors to Contribute to a Sustainable Crisis Response249 Katharina Bryan 10.1 Introduction249 10.2 Methodology and Introduction to ECA as an Institution251 10.3 The Role of ECA to Ensure Accountability at EU-Level252 10.4 The Contribution of ECA to a Sustainable Recovery255 10.4.1 Expectations on ECA’s Audit Work on the EU’s Response255

 Contents 

xv

10.4.2 A Large But Still Limited ECA Mandate to Audit in Times of Crises256 10.4.3 From ECA Financial and Performance Audit and Non-­audit Work: What Challenges arise from the Pandemic? 258 10.4.4 The Innovative Set Up of the RRF: A Challenge for Audit?262 10.4.5 Implications for Resources and Future ECA-SAI Cooperation265 10.5 Discussion and Conclusions267 References268 Index275

Notes on Contributors

Mehtap  Altunel is a PhD student at Anadolu University, Turkey. She graduated from Akdeniz University, the School of Economics and Administrative Sciences, Faculty of Business in 2013. She completed her master’s degree from Recep Tayyip Erdogan University, Institute of Social Sciences, Department of Business Administration in 2018. She was accepted into the doctoral program in Anadolu University, Institute of Social Sciences, Department of Accounting in 2018. She continues doctoral program in Anadolu University. She is at the dissertation stage, and the doctoral process is still ongoing. She published articles and book chapters in the fields of independent auditing, internal auditing, and accounting. Natalia  Aversano is Associate Professor of Accounting and Financial Reporting at the Department of Management and Innovation Systems of the University of Salerno (Italy), where she teaches courses in financial accounting, management accounting, and non-financial reporting. She holds a PhD in Public Sector Accounting. Her research interests are International Public Sector Accounting Standards (IPSAS), public sector accounting, heritage assets, performance measurement systems in the university, intellectual capital, non-financial disclosure, gender diversity, and accounting education. Natalia is a member of the Italian Society of Accounting and Business Economics Professors (SIDREA), the Italian Academy of Business Administration and Management (AIDEA), the European Academy of Management (EURAM), and the European Accounting Association (EAA).

xvii

xviii 

NOTES ON CONTRIBUTORS

Marco Bisogno  is an associate professor in Accounting at the University of Salerno—Department of Management and Innovation Systems (Italy). He received his PhD from the University of Naples “Federico II”. He co-­ chairs the Task Force representing three research networks on public sector accounting, namely, IRSPM A&A SIG, CIGAR and EGPA PSG XII. He is associate editor of the Public Money & Management—CIGAR annual issue and a member of the Editorial Board of the Journal of Public Budgeting, Accounting and Financial Management. His projects are on international public sector accounting standards, earnings management and financial distress of public sector entities. Katharina Bryan  is working as Head of Private Office of a Member of the European Court of Auditors (ECA) in Luxembourg. She is responsible for the strategy and audit work, the management of teams and stakeholder relations. She has specialised in sustainability and climate change. Before joining the ECA, she was Head of an EU Structural Funds’ Managing Authority in Austria. She holds a doctorate in Economic and Social Sciences from Vienna University of Economics and Business, a master’s in European Law from the University of Liverpool and a master’s in International Business Relations from the University of Applied Sciences, Burgenland. Tjerk Budding  is the program director of the postgraduate program for Certified Public Controller at the School of Business and Economics of the Vrije Universiteit Amsterdam, the Netherlands. His research interests include financial reporting, management accounting, privatization and e-government. He is co-author of the book Public Sector Accounting (2015). Furthermore, his articles have appeared in journals such as International Public Management Journal, Local Government Studies, and Management Accounting Research. He is a member of the executive board of the CIGAR-Network and a member of the editorial boards of Public Money & Management and Journal of Public Budgeting, Accounting & Financial Management. Mary Jane Buttigieg  is an Audit Senior with KPMG Malta. She graduated from the University of Malta with a master’s in Accountancy in 2021, and with a Bachelor of Commerce in Accountancy and Banking and Finance in 2019. Mary Jane is a Member of the Malta Institute of Accountants. Even though a recent graduate, Mary Jane gained experience during her studies with two apprenticeships, namely with KPMG

  NOTES ON CONTRIBUTORS 

xix

Malta and with a sole practitioner. The main focus of her work is the audit of gaming companies. Mary Jane’s most recent experience is an extensive audit focusing on investments. Josette Caruana  is a certified public accountant and an associate professor at the Department of Accountancy of the University of Malta. She co-­ordinates and lectures on courses related to public sector accounting, which is her area of research interest. Josette is a member of the CIGAR (Comparative International Governmental Accounting Research) network Advisory Board. Dmitrij Cesniuk  is a senior with EY Germany. Dmitrij is a BSc graduate of the ESB Business School Reutlingen, where he majored in accounting and finance. He has over five years of experience in public sector accounting with a focus on International Public Sector Accounting Standards (IPSAS) and works at the Financial Accounting and Advisory Services Department in EY Germany’s headquarters in Stuttgart. He is also involved in the audits of various public enterprises as well as privately held companies. Johan Christiaens  is a full professor in the Department of Accounting, Corporate Finance and Taxation at Ghent University. Until 2020 he has been registered auditor specialized in public and not-for-profit sector within EY. This explains his continuing relationship with oversight bodies, governments, legislators and standard setting bodies in terms of reform projects, coaching, advisory boards. Claudio  Columbano  is an assistant professor at the Department of Business Studies of Roma Tre University. After earning his PhD from IE University with a thesis on the informational value of fiscal reports, he joined a team of researchers appointed by the Italian State Accounting Office to study the ongoing process of public sector accounting harmonization. Giovanna  Dabbicco is a researcher at the Italian National Statistical Office (ISTAT) and has been Adjunct Assistant Professor of Planning and Control in Public administrations at the University of Roma Tre, Department of Business studies, Italy. She held previous positions as a statistical officer at the European Commission (Eurostat). She received her PhD from the University of Naples ‘Parthenope’, and she is a Chartered Certified Accountant. She is a member of the CIGAR network and of the

xx 

NOTES ON CONTRIBUTORS

Task Force representing three research networks on public sector accounting, namely, IRSPM A&A SIG, CIGAR and EGPA PSG XII. Her research develops at the interface among public sector accounting, government finance statistics and financial management. Bharti Girjasing  studied systems engineering, policy analysis and management at the University of Technology in Delft and public administration at the Erasmus University of Rotterdam. She has worked as a policy advisor and consultant in different domains within the public sector (international, local and regional), with a focus on financial systems with regard to social affairs and sustainability. She works for the Ministry of Finance in the Netherlands and focuses on the budgeting and accountability of the national government. During the Covid-19 crisis, she was involved with the accountability of a few Covid-19 arrangements. Jens Heiling,  PhD, is a senior manager with EY Germany. He has over 20  years of experience in public sector accounting with a focus on International Public Sector Accounting Standards (IPSAS) and European Public Sector Accounting Standards (EPSAS) and works at the Financial Accounting and Advisory Services Department in EY Germany’s headquarters in Stuttgart. From October 2011 to January 2013, he was seconded to the IPSAS-Board as a Technical Manager working on a project on First-time Adoption of accrual basis IPSAS. He is also involved in the CIGAR Network since 2003. Seval Kardeş  Selimoğlu  is a professor in the Faculty of Economics and Administrative Sciences, Department of Business, Anadolu University, Turkey. She received her master’s degree and doctoral degree from Anadolu University and received her second master’s degree in the USA from Baldwin-Wallace University. She has received the title of Assistant Professor in 1995, Associate Professor in 2002 and Professor in 2007. Her main academic studies are in the fields of independent audit, ethics, accounting frauds, corruption, internal audit, internal control, financial statements analysis and risk management. She is serving as a member of the Public Accounting Standards Board, Chartered Accountant, and Independent Auditor. Tim  Meglitsch is studying Management Science (MSc) with special focus on Accounting, Finance and Taxation at University of Leipzig after completing his BA in Accounting, Taxation, Commercial Law and with a specialization in Auditing at Baden-Wuerttemberg Cooperative State

  NOTES ON CONTRIBUTORS 

xxi

University. In his Bachelor thesis on public sector accounting, he focused on German Standards of Governmental Accrual Accounting, International Public Sector Accounting Standards (IPSAS) and European Public Sector Accounting Standards (EPSAS). He worked for five years at the Audit Department in EY Germany’s headquarters in Stuttgart and conducted projects in the public sector next to his audits. Giuseppe  Nicolò,  PhD, Europaeus in Public Sector Accounting, is a senior researcher in the Department of Management and Innovation Systems at the University of Salerno (Italy), where he is also Lecturer in Business Administration and Financial Accounting. His research is mainly focused on non-financial disclosure including Intellectual Capital, Integrated Reporting, risk management and other social and environmental issues. He is also interested in studying corporate governance mechanisms—including gender diversity—and their impact on corporate performance and reporting practices. Giuseppe is a corresponding member of the Italian Society of Ragioneria and Economia Aziendale (SIDREA) and European Accounting Association (EAA). Lizette  Pleyte  graduated as an accountant at the Vrije Universiteit in Amsterdam and worked for about ten years in the public accounting practice. In 2010 she made the transition to the Dutch government and started at Statistics Netherlands as head of business administration. Since 2017 she has been working at the Ministry of Finance at the Budget Unit and in recent years as head of the department that focuses on financial management and reporting issues of the Dutch national government. Paolo Tartaglia Polcini  is Full Professor of Accounting at the Department of Management and Innovation Systems at the University of Salerno (Italy), where he teaches Accounting and Management Accounting. His research interests are performance measurement systems in universities, fair value, business combination, intellectual capital, financial and non-­ financial disclosure, gender diversity, and international accounting standards in both the private and public sectors. Paolo is a member of the Italian Society of Accounting and Business Economics Professors (SIDREA) and the Italian Academy of Business Administration and Management (AIDEA). Giuseppe  Sannino is Full Professor in Accounting and Financial Reporting in the Economics Department at the University of Campania “Luigi Vanvitelli” (Italy), where he teaches courses in financial accounting,

xxii 

NOTES ON CONTRIBUTORS

managerial control, and mergers and acquisitions. He holds a PhD in International Financial Accounting from the University of Naples “Federico II.” His primary research areas include financial reporting, financial and non-financial disclosure, earnings management, corporate governance, gender diversity, public sector accounting, and performance management systems. Giuseppe is a member of the Italian Society of Accounting and Business Economics Professors (SIDREA) and the Italian Academy of Business Administration and Management (AIDEA). Aichiro  Suryo  Prabowo  is a doctoral candidate specializing in public budgeting and finance at the University of Maryland School of Public Policy. He has previously served as an associate director at the Office of the President of Indonesia (UKP4) and acted as a consultant to the World Bank in Jakarta and Washington, DC.  In 2019, he was selected as the Australian National University’s New Mandala Indonesia Correspondent Fellow to write about infrastructure finance and policy during Indonesia’s presidential elections. Aichiro holds a master’s degree in Public Policy from the University of Chicago. Jan van Helden  is Emeritus Professor of Management Accounting at the Faculty of Economics and Business of the University of Groningen, the Netherlands. From 2001 until 2005 he has also been vice-dean of his faculty for the teaching domain. In the 1980s he was a member of the Executive of the Province of Groningen and responsible for financial and human resources affairs. During the last twenty-five years his research has focused on management and accounting changes in public sector organizations, with a special attention to performance measurement, benchmarking and cost management, as well as the role of consultants and researchers in those changes. Gül  Yeşilçelebi is an assistant professor in the Academy of Applied Sciences, Department of Aviation Management at Gumushane University, Turkey. She received her master’s degree and PhD in Accounting from Anadolu University. Her research activities lie in the areas of independent audit, internal audit, financial accounting, corporate sustainability, and integrated reporting. She published a series of papers on her research interests and presented papers in various conferences. She teaches financial accounting, corporate accounting, cost accounting, managerial accounting, and financial statement analysis in undergraduate degree; independent auditing standards, internal audit and risk management in master’s degree; sustainability and integrated reporting in doctoral degree.

Acronyms

AAP ACC APP AUD BC BPKP CBO CFR COFOG CP CPB CRII CRRF CSR CSR DOL EC ECA ECB ECP ED EDP EFTA EIB EIF

Accelerated and Advance Payment Accident Compensation Corporation Asset purchase programmes Australian dollar Basis for conclusions Badan Pengawasan Keuangan dan Pembangunan—Government Internal Auditor, in Indonesia Congressional Budget Office Case Fatality Rate Classification of the Functions of Government Consultation paper Centraal Planbureau (Netherlands Bureau for Economic Policy Analysis) Coronavirus Response Investment Initiative Covid-19 Response and Recovery Fund Corporate social responsibility Country-specific recommendations Department of Labor European Commission European Court of Auditors European Central Bank European commercial paper Exposure Draft Excessive Deficit Procedure European Free Trade Association European Investment Bank European Investment Fund xxiii

xxiv 

ACRONYMS

EIPs EMU EPSAS ESA ESM EU EU 27 EUR FASAB Fed FEMA FICA FY GAAP GDP GFS GG GPFRs GST GVA HHS HUD IFAC IFMIS IFR IFRS IMF INTOSAI IPSAS IPSASB ISSAI IT KPK LGFA LKPP LSAP ME MEESD

Economic Impact Payments Economic Monetary Union European Public Sector Accounting Standards European System of Accounts European Stability Mechanism European Union The 27 EU countries Euro currency Federal Accounting Standards Advisory Board Federal Reserve Bank Federal Emergency Management Agency Federal Insurance Contributions Act tax Fiscal Year Generally Accepted Accounting Principles Gross Domestic Product Government Finance Statistics General Government General-Purpose Financial Reports Goods and services tax Gross value added US Department of Health and Human Services Housing and Urban Development International Federation of Accountants Integrated Financial Management Information System Infection Fatality Rate International Financial Reporting Standards International Monetary Fund International Organization of Supreme Audit Institutions International Public Sector Accounting Standards International Public Sector Accounting Standards Board International Standards of Supreme Audit Institutions Information technology Komisi Pemberantasan Korupsi—Corruption Eradication Commission, in Indonesia Local Government Funding Agency Lembaga Pengadaan Barang/Jasa Pemerintah—National Procurement Agency Regulation No. 13 of 2018, in Indonesia Large-scale asset purchase Malta Enterprise Ministry for Energy, Enterprise, and Sustainable Development— in Malta

 ACRONYMS 

MEIB MFF MHRA MOF MTA n.d. NACE NATT NGEU NOW NPM NRRPs NZ NZD NZGB NZS NZTA OECD PBE PEN PFM PHSSEF PMCCF PPP PSA PSAP PY Q&A RBA RBNZ Rp RPG RQ RRF RT-PCR

Ministry for the Economy, Investment and Small Business— in Malta Multiannual Financial Framework Malta Hotels and Restaurants Association Ministry of Finance Malta Tourism Authority Not dated Nomenclature statistique des activités économiques dans la Communauté Nucleic Acid Amplification Test EU Next Generation instrument Tijdelijke Noodmaatregel Overbrugging Werkgelegenheid (Wage supplementation due to income loss for businesses and non-profit agencies) New Public Management National Recovery and Resilience Plans New Zealand New Zealand dollar New Zealand Government Bonds New Zealand Superannuation Fund New Zealand Transport Agency Organisation for Economic Co-operation and Development Public Benefit Entity Pemulihan Ekonomi Nasional—National Economic Recovery program, in Indonesia Public Financial Management Public Health and Social Services Emergency Fund Primary Market Corporate Credit Facility Paycheck Protection Program Public Sector Accounting Pernyataan Standar Akuntansi Pemerintahan—existing accounting standards, in Indonesia Previous year Questions and Answers Reserve Bank of Australia Reserve Bank of New Zealand Rupiah (Indonesian currency) Recommended Practice Guideline Research question Recovery and Resilience Facility Real-time polymerase chain reaction

xxv

xxvi  RVO

ACRONYMS

Rijksdienst voor Ondernemend Nederland (Netherlands Enterprise Agency) SAI Supreme Audit Institution SAIs Supreme Audit Institutions SBA Small Business Administration SGP Stability and Growth Pact SMCCF Secondary Market Corporate Credit Facility SMCs Specific matters for comment SME Small and Medium Enterprises SMEs Small and Medium Enterprises SMEs Small-Medium Enterprises SNA System of National Accounts SPV Special purpose vehicles SURE Support to mitigate Unemployment Risks in an Emergency TCJA Tax Cuts and Jobs Act of 2017 TFEU Treaty of the Functioning of the EU TFF Term Funding Facility TOZO Tijdelijke overbruggingsregeling zelfstandig ondernemers (Wage supplementation for single person businesses) Tr Trillion TUBITAK General Directorate of Public Accounts and the Scientific and Technological Research Council of Turkey TVL/TOGS Tegemoetkoming Vaste Lasten/Tegemoetkoming Ondernemers Getroffen Sectoren COVID-19 (Fixed cost supplementation due to loss of income) UI Unemployment Insurance UK NAO National Audit Office of the United Kingdom USD United States dollar UWV Employee Insurance Agency (Uitvoeringsinstituut Werknemersverzekeringen) VAT Value added tax VFM Value for money WHO World Health Organization WSF German Economic Stabilisation Fund

List of Figures

Fig. 2.1 Fig. 3.1 Fig. 3.2 Fig. 4.1 Fig. 4.2 Fig. 5.1 Fig. 9.1 Fig. 9.2 Fig. 9.3 Fig. 9.4 Fig. 9.5 Fig. 9.6 Fig. 9.7 Fig. 9.8

General budget process in the Indonesian government. (Note: Illustration is based on the “Scrambled Budget Cycles” in Lee et al. (2021), with adaptation to the Indonesian context) 21 General Government consolidated gross debt for EU 27 (in Euro billions). (Data extracted on 21/10/2021 from Eurostat) 55 General Government consolidated gross debt for EU 27 as % of GDP. (Data extracted on 21/10/2021 from Eurostat) 55 Affiliation of the respondents to the ED 67 89 Geographic area of the respondents to the ED 67 90 Integrated Financial Management Information System infrastructure in Turkey. (Adapted by Turkey Minister of Treasury and Finance, 2021) 107 The negative effect of the pandemic on the Gross value added (GVA) for accommodation. (Source: The Economic Survey October 2020, pg. 8) 218 The relationship between the 3 E’s. (Source: Modified from UK NAO [the National Audit Office of the United Kingdom], n.d.)223 Average number of employees during summer 2019 and 2020 229 Average number of employees during summer 2020 229 The mean of labour cost as a percentage of turnover during summer 2019 and 2020 230 Positively worded efficiency statements error bar graph 241 Negatively worded efficiency statements error bar graph 242 Positively worded effectiveness statements error bar graph 244

xxvii

List of Tables

Table 2.1 Table 2.2 Table 2.3 Table 2.4 Table 2.5 Table 3.1 Table 3.2 Table 3.3 Table 3.4 Table 3.5 Table 3.6 Table 4.1 Table 5.1 Table 5.2 Table 5.3 Table 6.1

Presidencies and dates when the original and amended budgets are passed, FYs 2004–2022 25 FY 2020 budget execution rate 28 Accounting guidance to reporting entities during the COVID-19 pandemic 30 Budget structure FYs 2015–2021 (in trillion Rupiah) 33 Sectoral allocation before and after COVID-19 pandemic 35 The fiscal impact of COVID-19 government interventions 51 GFS transactions reflecting government measures 64 GFS transactions reflecting government measures by COFOG 67 Government revenue, expenditure and aggregates for EU 27 (in Eur billions) and % change 68 General government financial assets/liabilities EU 27 (stock) (Euro billions) 69 General government % change in the more relevant financial assets/liabilities EU 27, and the effect on the main assets and liabilities70 Overview answers to the ED 67 91 Distribution of the most important aspects of the use of IFMIS in any public institution according to the answers given by the participants 115 Distribution of the changes IFMIS brought with it compared to the pre-implementation according to the answers given by the participants 115 Distribution of results in relations to the reduction of IT risks according to the answers given by the participants 117 Overview of COVID-19-related measures 132 xxix

xxx 

List of Tables

Table 6.2 Table 6.3 Table 7.1 Table 7.2 Table 7.3 Table 7.4 Table 7.5 Table 7.6 Table 7.7 Table 7.8 Table 7.9 Table 7.10 Table 7.11 Table 7.12 Table 7.13 Table 7.14 Table 7.15 Table 9.1 Table 9.2 Table 9.3 Table 9.4 Table 9.5 Table 9.6 Table 9.7 Table 9.8 Table 9.9 Table 9.10

NOW: Regulations and impacts in subsequent periods 142 TVL: Regulations and impacts in subsequent periods 147 Overview of the financial statements subject to the analysis 169 Key metrics related to the financial performance of the four countries171 Key metrics related to the balance sheet of the four countries 173 Countries within the scope of this study 179 Cases and deaths reported as a result of the COVID-19 pandemic as of the end of December 2020 180 Selected economic indicators for 2020 for the four countries 180 Major measures taken by reserve banks and other financial institutions as a result of the COVID-19 pandemic in 2020 181 Major legislative measures taken by the respective governments as a result of the COVID-19 pandemic in 2020 182 Analysis of the Australian Government’s operating statement 184 Analysis of the New Zealand Government’s statement of financial performance 184 Analysis of the US Government’s statement of operations and changes in net position/statement of net cost 186 Analysis of the Australian Government’s balance sheet 187 Analysis of the New Zealand Government’s statement of financial position 188 Analysis of the US Government’s balance sheets 190 Analysis of the German Government’s balance sheet 193 Wage supplement according to the percentage drop in sales 220 The population 228 Response rate across hotel categories 228 Operationalizing the 3E’s 238 Friedman test—positively worded efficiency statements 241 Friedman test—negatively worded efficiency statements 241 Kruskal Wallis Test—efficiency statements mean rating score and p-value243 Friedman test—effectiveness statements mean rating score 243 Negatively worded effectiveness statement mean rating score 244 Kruskal Wallis Test—effectiveness statements mean rating score and p-value245

CHAPTER 1

The Contribution of Public Sector Accounting and Public Financial Management During and After Times of Crisis Giovanna Dabbicco, Marco Bisogno, Josette Caruana, and Johan Christiaens

1.1   Introduction During the COVID-19 pandemic, governments, individuals and the public at large have been impacted by significant turbulences for both social and economic aspects. The high level of uncertainty in the changing

G. Dabbicco (*) National Accounts Directorate, National Statistical Office (ISTAT), Rome, Italy e-mail: [email protected] M. Bisogno Department of Management and Innovation Systems, University of Salerno, Fisciano, Italy e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 G. Dabbicco et al. (eds.), Public Sector Accounting, Financial Accountability and Viability in Times of Crisis, Public Sector Financial Management, https://doi.org/10.1007/978-3-031-04745-9_1

1

2 

G. DABBICCO ET AL.

environment has required the allocation and reallocation of significant resources, establishing new priorities. Under the pandemic crisis, the relevance of Public Sector Accounting (PSA) and Public Financial Management (PFM) has intensified, needing adaptations to provide high-­ quality data as the basis for quick responses given by governments through effective measures and the respective use of resources. Such adaptations needed to also consider the different impact/reactions at territorial/ regional level, and the different capacity of recovery and resilience in countries at territorial level. This context brings a parallel need for transparency and accountability by parliaments of the regulations/measures adopted and an understanding of the results of performance-based accounting in the public sector during the crisis. PSA and PFM can provide important information on the capacity of a government to reconfigure its economic and social environment and its resources to face a crisis (e.g., a pandemic), and to understand economic behaviour in times of crises. The reporting requirements ensure the transparency and relevance of information disclosed as a basis for the medium-­ term decisions that needed to be taken. The reaction of governments and international organisations increases the demand for better PSA to provide more reliable data over a larger scope (Belkaoui, 2004), ensuring a better monitoring of countries’ performance and financial sustainability conditions and hopefully enlarging the view to embrace social, sustainability and value for money reporting. The reform of PSA and PFM that is being advocated in order to handle the uncertainty of these critical times should perhaps take the opportunity to divert the focus away from refining the presentation of the income statement and the balance sheet, to one that upholds the importance of sustainability (both financial and social) in the public sector. At the end of the day, it is known that citizens and individual stakeholders are not so

J. Caruana Department of Accountancy, Faculty of Economics, Management and Accountancy, University of Malta, Msida, Malta e-mail: [email protected] J. Christiaens Department of Accounting, Corporate Finance and Taxation, Ghent University, Ghent, Belgium e-mail: [email protected]

1  THE CONTRIBUTION OF PUBLIC SECTOR ACCOUNTING AND PUBLIC… 

3

interested in reading and analysing a national balance sheet (Liguori et al., 2012; Demaj & Summermatter, 2012). Perhaps even the concept of what we mean by the term ‘balance sheet’ should change in the circumstances, and we may need to venture into a more elaborate and holistic statement in order to capture the financial situation of a government, and at the same time, project the financials over the medium and longer term. Even the scope of auditing may need to be widened, with more emphasis being placed on value for money auditing and not just financial and compliance audit. These are facets of PSA and PFM that shall be explored in this book. The main objective of this book is to build up a body of research focusing on the analysis and synthesis of the bundle of measures taken to address the impacts of the pandemic. Studies and research to understand and analyse the effects of these one-off measures are much needed to learn lessons from experience. Due to the unprecedented expenditures that may strain government borrowing, the compilation and use of balance sheet information has become relevant now  more than ever. Furthermore, performance management frameworks should be developed to provide performance indicators for the implemented measures, and to carry out a cost-benefit analysis of these measures (IMF, 2020). In this situation, transparency and accountability mechanisms for accounting and reporting of these measures become very important (Carruthers, 2020). Besides the requirement for governments to properly account to their citizens on the cost of these measures and how they are being funded, such information becomes fundamental to enable policymakers to make informed decisions—decisions that would sustain public finance and, at a global level, allow the world economy to recover from the shocks it is experiencing (Accountancy Europe, 2020).

1.2  The Scope of the Book The chapters in this book describe and assess various initiatives undertaken by governments in different countries. The chapters take us on an interesting tour from the United States to Turkey, Indonesia, Australia and New Zealand. European countries include the Netherlands, Germany and Malta. The studies cover Federal and Central Governments, plus the European Union (EU) and the European Court of Auditors (ECA) as supranational institutions. The underlying objectives of such initiatives are presented. The financial dimension of these government initiatives includes the budgeting

4 

G. DABBICCO ET AL.

aspect, the financial reporting aspect and the public oversight aspect. The topics covered in this book take, as such, a holistic perspective. The government policies and related spending required by the pandemic affect the budgetary process. The political nature of the process is accentuated as funds are diverted towards the health sector, even if only temporarily. The analysis of government financial reporting in various countries reveals that, contrary to expectations, times of crisis do not (yet) seem to lead to disclosure manipulation. In other words, there is no deliberate attempt to withhold information, but rather, the problem is that the information may not be available. However, accountability and transparency would be enhanced if the reasons for non-disclosure of certain data are themselves disclosed. Standard setting could have provided more guidance on adequate financial reporting and disclosure requirements for such emergency measures. Furthermore, it appears that such times of crisis reveal the importance of accounting technologies and operating systems and the need to strengthen reporting adequacy. The public oversight aspect involves audit processes. When considering the amount of funds that are being spent on government initiatives, the role of audit becomes crucial. Also known as value for money audits or performance audits, the audit of specific initiatives could investigate the economy, efficiency and effectiveness of particular schemes and support arrangements. Large amounts of funds are also being spent at supranational level, for example, by the European Commission in Europe. Thus, the mandate of the European Court of Auditors in the audit processes of this huge budget makes an interesting study, especially in the Court’s approach to support long-term recovery. Finally, the book ventures into Government Finance Statistics (GFS) because the financial effect of the measures taken by Governments worldwide is reflected in these statistics, with particular implications for EU member states as to whether they are able to adhere to the requirements of the Treaties that bind them during stressful times. What are the alternatives that could be considered for GFS reporting in times of global emergency situations?

1  THE CONTRIBUTION OF PUBLIC SECTOR ACCOUNTING AND PUBLIC… 

5

1.3   Methodological Approaches The chapters are mainly exploratory and explanatory in nature. Therefore, qualitative research is used throughout the book chapters. Documentary analysis, case studies and interviews are the main research tools used. One study uses a questionnaire and carries out some statistical analysis in order to support the findings from interviews.

1.4  Theoretical Frameworks Accountability takes centre stage in public sector accounting. In fact, all the chapters in this book have accountability and transparency as theoretical frameworks—either indirectly or specifically mentioned. Budget theory, governance theory, agency theory and disclosure theory have accountability as their raison d’être. Thus, the theoretical frameworks used in the book chapters highlight how accountability, transparency and proper recording become paramount in times of crisis and uncertainty (Donatella et al., 2021)—not just for the sake of openness with the citizens, but also for policy makers and decision takers so that actions are taken on a more-informed basis.

1.5  The Implications of the Book Chapters for Public Sector Accounting The scope of this book shows that the themes arising from the book chapters are similar to arguments that carried weight in the sovereign debt crisis (2008–12). However, it appears that the pandemic crisis is more complex and a major uncertainty on the future sustainability of public finance has been introduced into global economic systems. Notwithstanding the improvement seen over the past years, the discussion is still open on how to improve transparency and accountability in public finance. The chapters included in this book are divided into two main areas arising in times of crisis, namely, (a) public sector accounting; and (b) financial accountability and auditing. 1.5.1   Public Sector Accounting in Times of Crisis Prabowo (Chap. 2) emphasises the political nature of the budgeting process. In times of crisis, budget execution encounters a trade-off between

6 

G. DABBICCO ET AL.

flexibility and accountability. In spite of the various mitigation strategies taken in order to counteract this risk, in Indonesia, public corruption cases remained high, as business counterparts benefited from the delicate situation. Furthermore, Indonesia is not immune to the worldwide phenomenon challenging fiscal sustainability during the pandemic, namely that of growing public deficits and the accumulation of debt. Prabowo observes that a mixture of political motives and budgetary rules makes it easier for the government to allocate extra funds as a reaction to an emergency situation rather than for mitigation programmes. This led to a temporary shift of budget priorities, with the government trading infrastructure development for health recovery and social protection. Prabowo concludes that ‘budgeting should therefore be treated as a strategic rather than a rudimentary element’ of public management. In the European scenario, the Stability and Growth Pact (SGP) is being heavily criticised by international organisations, like the IMF and the World Bank. The main concern is that the deficit and debts targets as laid out in the SGP may act as a constraint on economic recovery. Dabbicco and Caruana (Chap. 3) suggest that the framework needs to be revised to be more flexible. For example, it cannot maintain its ‘one-size-fits-all’ design, and the particularities of each member state need to be taken into consideration. While proposing that the SGP could consider taking a balance sheet approach, the authors suggest that flexibility is also required in our perception of what constitutes a balance sheet in government accounting. Government investment in high-risk areas of the economy, such as health, should be recorded and rewarded. While liabilities should incorporate contingent liabilities in a more holistic manner. Dabbicco and Caruana suggest that perhaps even the term ‘balance sheet’ itself should not be used, so that it is not confused with what is done in private sector financial reporting. In 2019, the International Public Sector Accounting Standards Board (IPSASB) had uncannily anticipated the pandemic global upheaval when it published ED 67 ‘Collective and Individual Services and Emergency Relief’. Aversano, Nicolò, Sannino and Tartaglia Polcini’s study (Chap. 4) highlights how the respondents to Exposure Draft (ED) 67 had noted the importance of accounting tools in the governance of disasters; however, a small minority of the respondents did not perceive a need for explicit accounting guidance on emergency relief when a specific event occurs. The IPSASB preferred to take the latter option, resulting in a worrying ‘guidance gap’. With the pandemic, accounting for emergency relief has

1  THE CONTRIBUTION OF PUBLIC SECTOR ACCOUNTING AND PUBLIC… 

7

become more important than ever. With hindsight, the IPSASB’s decision may have been different, and perhaps the decision needs to be re-­ considered and take into consideration the reasons why certain respondents to ED 67 had requested guidance. Chapter 5, by Selimoğlu, Yeşilçelebi and Altunel, deals with the Integrated Financial Management Information System (IFMIS). Based on interviews, they investigated the impact of IFMIS practices on public finance management performance during the pandemic. Indeed, the pandemic has emphasised the centrality of digital tools; accordingly, the authors argue that well-designed IFMIS implementation is of great importance to strengthen all aspects of public financial management, national transparency and accountability. Focusing on the case of Turkey, the chapter examines several critical issues emerging during the pandemic crisis, highlighting the importance of training activities to develop the content of the system, allowing users to better understand the system and to use it correctly. 1.5.2   Financial Accountability and Auditing in Times of Crisis Van Helden, Budding, Girjasing and Pleyte (Chap. 6) use governance in times of turbulence and public sector accountability as their theoretical lenses. The authors offer a very detailed analysis of the financial support efforts undertaken by the Dutch government, as part of mitigating the financial and economic consequences of COVID-19, and of how such initiatives have supported enterprises to presumably avoid large-scale unemployment and the bankruptcy of businesses and other organisations. Van Helden et al. provide important insights on how the Dutch government dealt with accountability, concluding that the information provided by the government was primarily aimed at fulfilling the information needs that are attached to the democratic and constitutional perspective, while a minor role has been played by the learning perspective. As a continuation of an earlier chapter on the budgetary consequences of the pandemic, Heiling, Cesniuk and Meglitsch (Chap. 7) analyse the governmental accounting consequences. The financial statements of Germany, Australia, New Zealand and the United States, before and during the pandemic, were analysed. All four countries were differently affected by the pandemic. Despite different definitions and consolidation of their reporting entity, all countries, except Germany, provide

8 

G. DABBICCO ET AL.

information about their financial position, financial performance and cash flows. They reported in terms of the variations caused by the pandemic. From a financial perspective, liquidity measures taken in the course of the pandemic had the greatest impact on the governments’ financial statements. New Zealand provides the greatest level of detail, and the German financial reporting is limited to the Vermögenrechnung where most non-­ monetary assets such as plant, property and equipment are not included. The country studies showed different levels of accountability, and financial reporting favoured the resource providers more than the service recipients. The chapter indicates that no changes in the accounting policies due to the pandemic were identified, which reduces the presumption of ‘disclosure management’ is equal to ‘window dressing’ in the financial reporting due to the pandemic. Columbano (Chap. 8) contributes to the debate on transparency and accountability in the public sector, using the disclosure theory as a theoretical framework. He argues that a lack of transparency may be due to limits to the knowledge of public officials rather than to a desire to escape accountability. This is particularly true in times of crisis. The chapter investigates the quality of data released by governments on COVID-19 mortality rates during the first wave of the pandemic, discussing their possible application to transparency and accountability. The analysis carried out shows that it could not be possible to provide complete information in such circumstances. Therefore, it is proposed that public officials should discharge their accountability duty by being transparent about the motives that prevent full disclosure. All the chapters in this book have, directly or indirectly, alluded to the various government interventions in the economy, in order to counteract the negative consequences of this global pandemic. The government measures taken require enormous amounts of money—both at a national level and at a supranational level, as the EU is also providing large amounts of financial assistance to its member states. The objectives of the measures may be expressed in different terms, but basically the underlying intention is to assist the economy to avoid falling to levels from which it would be difficult to recover. Caruana and Buttigieg (Chap. 9) focus on the wage supplement scheme provided by the Maltese Government to assist the most vulnerable industry in the country, namely, hospitality. The objective was to enable employers to retain the core human resources so that recovery will be quick. The authors assess the economy, efficiency and effectiveness of the scheme—an important process, that is a value for money

1  THE CONTRIBUTION OF PUBLIC SECTOR ACCOUNTING AND PUBLIC… 

9

(VFM) audit. Similar to the findings related to Indonesia (Prabowo, Chap. 2), a trade-off between flexibility and accountability is observed in order for the scheme to be effective. This increases the risk of fraud and errors that have a negative impact on economy and efficiency. VFM audits are quite rare in spite of the enormous amounts of public funds that are being spent in the current pandemic. Public sector audit bolsters PSA and PFM even during normal times. The audit role is amplified in times of crises. The important role of public sector audit became immediately evident, the day after the crisis. Independent audit on the intervention of governments and the EU is expected by citizens and the public at large. The use of the public scarce resources generated accountability pressures which increased auditing demand more than ever. Bryan (Chap. 10) uses the European Court of Auditors (ECA) as a case study, applying the principal-agent theory of Streim (1994). Bryan identifies two principal-agent relationships which the ECA serves: (a) between EU voters and citizens as principal and Parliament and Council (legislature) as agent; and (b) between Commission/Commissioners as principal and EU bureaucracy as agent. Additional layers of relationships emerge, with the EU as principal (fund provider) and the Member State as agent (fund receiver). The ECA is considered by the European institutions, Parliament and Council and the Commission, as a primary source of information in relation to accountability in the COVID crisis and in the longer-term recovery at both EU and Member State levels. In this perspective Bryan discusses the relevant challenges and opportunities for the ECA and the national Supreme Audit Institutions (SAIs) to contribute to a sustainable crisis response. Bryan provides evidence of a consequent enlargement of the audit mandate, which requires new strategic decisions and appropriate resources. Various EU funding instruments and the important extra-budgetary measures taken by governments in response to the COVID crisis pose a challenge as these do not all automatically fall within the SAI’s mandate. Bryan also highlights the opportunities for the ECA to facilitate a more risk-­ based approach in audit and the delivery of more country-specific information, for example, by focussing on Member States where funds are particularly at risk of fraud and corruption.

10 

G. DABBICCO ET AL.

1.6  Conclusion The chapters in this book have underlined how public sector accountability has evolved various facets due to the pandemic. The COVID-19 pandemic is causing unprecedented effects on the daily routines of citizens and their health conditions, with unparalleled and unpredictable financial consequences for the national economies. Health expenditures and funding the health system have leapt to the top of the priority list for delivering services and protecting citizens. This is evident in many countries, but is perhaps more notable in the less-developed countries. Government expenditures in the health sector would protect both the vulnerable citizens, and also the workforce, which, after all, are the motor of any country’s economy. The Government’s focus then turns on measures that are required in order to maintain a decent standard of living and to sustain the economy. Concessionary loans, cash transfers, tax reliefs, unemployment allowance and insurance, subsidies, and other social benefits to individuals, families and enterprises, are measures undertaken by governments around the world to fight the effects of the pandemic on livelihoods. The finance sector has an important role in helping governments to implement these measures providing the necessary liquidity and guarantees to all the economic sectors (Carruthers, 2020; IMF, 2020). Throughout all this turbulence and uncertainty, the role of public sector accounting remains pervasive in providing accountability and transparency. Accountability towards the citizens is important in order to provide them with peace of mind that their governments (including supranational and international institutions) are doing the best they can in the circumstances. Accountability by national governments towards supranational institutions as to how funds are being managed and expended to implement the policies is in the public interest. Accountability of public service officials towards politicians regarding the proper management of budget allocations is necessary to successfully fulfil policy decisions. Accountability and transparency, even regarding the difficulties encountered, foster trust and encourage a cohesive effort that is required to face the challenges presented by these uncertain times. Van Helden et al. (Chap. 6) point out that: An interesting direction for future research on governmental business support programmes related to COVID-19 addresses an international comparison

1  THE CONTRIBUTION OF PUBLIC SECTOR ACCOUNTING AND PUBLIC… 

11

about the effectiveness of these programmes. Effectiveness could be measured in terms of mitigating employment losses and avoiding bankruptcies, while antecedents for possible impact differences might relate to governmental opportunities for spending resources for these programmes and the resilience of the country’s economy.

In a keynote speech at the Royal Holloway University of London on 18 November 2021, Leonardo Rinaldi referred to a ‘torrent’ of research flowing from all scientific areas of study, including accountancy. The COVID-19 pandemic has presented an opportunity for public sector accounting research to explore and wander into unchartered waters (Rinaldi, 2022). This book is just a narrow stream in comparison; however, we take the opportunity to highlight other areas of research. We can only agree with Leoni et al. (2022) that more questions arise as the pandemic evolves. Research highlights avenues for further studies. What are the lessons learned from this global crisis? How are we going to implement these lessons? What will be the role of public sector accounting and public sector financial and management practices in the world after COVID-19? More specifically, we highlight the following areas of research that need to be explored in depth: • The measures taken by governments involve large expenditures, which may have never been experienced before. They lead governments to borrow at high levels. Thus, the liabilities being borne may be of a unique type and quantity. It would be useful to assess the impact on the public sector balance sheets, where these are compiled, particularly focusing on Contingent Liabilities, Financial Instruments and Long-Term Financial Sustainability. • The suspension of the applicability of the Stability and Growth Pact mechanism at EU level, and the fact that EU member states have been allocated huge budgets to support COVID-19 expenses, require further research. What type of reporting should the EU demand from member states as to how the funds are going to be spent and are actually spent, in order to ensure accountability, transparency and effectiveness? What extent of auditing processes should be in place? • Every measure taken by a government is intended to have a ripple effect across the economy. The effectiveness of the measures could be explored by analysing the performance of COVID-19 expenses in

12 

G. DABBICCO ET AL.

the various sectors of the national economy, including the role of cost accounting in the allocation and spending of funds provided by, for example, a central government to finance COVID-19 efforts. • Since Governments worldwide are taking similar measures to protect their citizens and their economies, it would be useful to take account of such measures, even for comparative purposes. Comparative studies could also delve into the relevance of the accounting basis used (as suggested by Heiling et al. in Chap. 7) and how this affects the accountability and transparency of governments in times of crisis. • Various financial reporting possibilities can be explored and assessed for their capability of providing useful information and for accountability purposes. Budgeting and financial reporting should be tools that present justification for the interest of future generations of expenses and debts, that is, in terms of long-term fiscal sustainability. Accountability is the common thread that holds the chapters of this book together. In the public sector, the importance of accountability is so emphasised in times of crisis that it becomes a basic need. PSA and PFM should be wielded as useful tools that provide accountability, and not the other way around. That is, accountability should not be constrained by financial reporting and accounting practices.

References Accountancy Europe. (2020, March 20). Coronavirus crisis: Implications on reporting and auditing. Available from https://www.accountancyeurope.eu/publications/ coronavirus-­crisis-­country-­responses-­to-­the-­implications-­on-­reporting/ Belkaoui, A. R. (2004). Accounting theory (5th ed., 598 pp). Thomson Learning. Carruthers, I. (2020, April 23). How accounting transparency can help with the tough decisions ahead after COVID-19. Public Finance. Available from https:// www.publicfinancefocus.org/viewpoints/2020/04/how-­a ccounting-­ transparency-­can-­help-­tough-­decisions-­ahead-­after-­covid-­19 Demaj, L., & Summermatter, L. (2012). What should we know about politicians’ performance information need and use? International Public Management Review, 13, 85–111. Donatella, P., Haraldsson, M., & Tagesson, T. (2021). Reporting on COVID-19 – Or not? Annual reports disclosure of the pandemic as a subsequent event. Journal of Public Budgeting, Accounting & Financial Management, online first. https://doi.org/10.1108/JPBAFM-­04-­2021-­0074

1  THE CONTRIBUTION OF PUBLIC SECTOR ACCOUNTING AND PUBLIC… 

13

IMF. (2020). Keeping the receipts: Transparency, accountability, and legitimacy in emergency responses. Special Series on Fiscal Policies to Respond to COVID-19. Available from https://www.imf.org/en/Publications/SPROLLs/covid19-­ special-­notes Leoni, G., Lai, A., Stacchezzini, R., Steccolini, I., Brammer, S., Linnenluecke, M., & Demirag, I. (2022). The pervasive role of accounting and accountability during the COVID-19 emergency. Accounting, Auditing & Accountability Journal, 35(1), 1–19. Liguori, M., Sicilia, M., & Steccolini, I. (2012). Some like it non-financial … Politicians’ and managers’ views on the importance of performance information. Public Management Review, 14, 903–922. Rinaldi, L. (2022). Accounting and the COVID-19 pandemic two years on: Insights, gaps, and an agenda for future research. Accounting Forum (forthcoming). https://doi.org/10.1080/01559982.2022.2045418 Streim, H. (1994). Agency problems in the legal political system and supreme auditing institutions. European Journal of Law and Economics, 1(3), 177–191.

PART I

Public Sector Accounting in Times of Crisis

CHAPTER 2

Budget Process and Budget Structure Under the COVID-19 Pandemic in Indonesia Aichiro Suryo Prabowo

2.1   Introduction This study seeks to understand the implications of the coronavirus disease 2019 (COVID-19) pandemic for governments’ budgets. It rests upon the public budgeting and finance literature and uses a case study of Indonesia, focusing on its central government that manages the national budget. Analysis is done in accordance with the four major phases of the budget cycle devised by Lee et al. (2021): preparation, approval, execution, and evaluation. The Indonesian government’s response to the pandemic changed the way government budgets are prepared, approved, executed, and evaluated. Besides, there are fiscal implications, and the discussion is framed around aggregate fiscal discipline and allocative efficiency, which are two of the three public expenditure management elements developed by Schick (1998).

A. Suryo Prabowo (*) School of Public Policy, University of Maryland, College Park, MD, USA e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 G. Dabbicco et al. (eds.), Public Sector Accounting, Financial Accountability and Viability in Times of Crisis, Public Sector Financial Management, https://doi.org/10.1007/978-3-031-04745-9_2

17

18 

A. SURYO PRABOWO

Section 2.2 of this chapter introduces the context to the early development of the COVID-19 outbreak in Indonesia. The methodology, including budgeting concepts that are utilized to guide data collection and analysis, is reviewed in Sect. 2.3. Then, Sect. 2.4 discusses the Indonesian budget process and assesses how it has adapted to facilitate immediate actions during the COVID-19 emergency period. Section 2.5 analyzes how the budget structure changed in response to the pandemic. Finally, Sect. 2.6 draws conclusions.

2.2  The Context: Indonesia and the Pandemic In 2019, Indonesia held a presidential election, which granted the incumbent, Joko Widodo (Jokowi), a second five-year term. In a pragmatic move that perpetuated the typical power-sharing among Indonesian elites but attenuated the political divide at the grass-root level, President Jokowi appointed his former rival, Prabowo Subianto, as the defense minister. In the past, under President Suharto’s infamous regime, such elite alignment and political cohesion contributed to the emergence of Indonesia’s strong developmental state (Vu, 2010). Having formed a solid coalition in the legislature (Dewan Perwakilan Rakyat, DPR), the Jokowi administration was following suit and was looking to accelerate the economic development agenda initiated since its first term (Mujani & Liddle, 2021). All this came to a halt as COVID-19 shattered the region. COVID-19 brought unprecedented challenges and disrupted the global economy, and Indonesia was not immune to its effects. The country confirmed its first positive cases on March 2, 2020, before the World Health Organization (WHO) declared COVID-19 as a pandemic on March 11, 2020. Unfortunately, the president was slow to respond, and some of his ministers initially downplayed the outbreak. The central government was hesitant to impose a nationwide lockdown, worried that it would harm the whole economy and economic growth. Absent clear and coherent directives from the top, local governments were split between imposing and enforcing stay-at-home orders to curb the virus spread and refusing to impose restrictions to keep local economies running. The complexity was coupled with the fact that Indonesia is an archipelagic state: most economic activities are concentrated in Java and Bali, but 75% of the 514 localities (kota and kabupaten) are scattered across other islands. Meanwhile, citizens grew anxious and small businesses were nervous about the bleak outlook.

2  BUDGET PROCESS AND BUDGET STRUCTURE UNDER THE COVID-19… 

19

The president eventually assembled a multi-agency task force on March 13, 2020, and pronounced COVID-19 a national disaster (bencana nasional) one month later. By then, the virus had become so widespread in Indonesia that it was hard to control; data from the WHO COVID-19 Dashboard estimated over 110 new cases daily and 1500 cumulative cases by March 31, 2020 (World Health Organization, 2021). This was just the beginning of more horrifying statistics: at least 55,000 cumulative cases and 2800 deaths as of mid-2020, which increased to more than 740,000 cumulative cases and 22,000 deaths by the end of 2020. These numbers may be understated due to undertesting and underreporting. As the Indonesian constitution prescribes under such an emergency, the president can issue an executive order (formally known as Perppu or Government Regulation in-lieu of Law).1 He signed the order on March 31, 2020,2 which one and a half months later earned an endorsement from the legislature to become Law (Undang-undang, UU).3 During his annual State of the Nation address before the People’s Consultative Assembly (Majelis Permusyawaratan Rakyat, MPR) on August 16, 2020, the president stated that the law “provides legal protection in handling the health and economic crises” (Cabinet Secretariat, 2020a). It serves as the legal basis for the central government to carry out extraordinary measures during this crisis, including to reallocate the necessary budgets, in areas such as public health, social protection, and economic recovery. As this study later finds, the crisis not only had fiscal implications but also changed the way government budgets were managed. A few days into 2021, after the 2020 Christmas and New Year holidays, there was a rise in intensive care unit and isolation bed occupancy rates (COVID-19 Task Force, 2021). At that time, the average rate was reported at 67% nationally, with major provinces experiencing even higher bed occupancy rates, such as the Special Capital Region of Jakarta (84%), Banten (84%), and Special Region of Yogyakarta (83%). This situation continued to worsen, although a sign of improvement was observed at the beginning of the fourth quarter of 2021, thanks to more aggressive measures like mask mandates, community activities restrictions (Pemberlakuan Pembatasan Kegiatan Masyarakat, PPKM), and vaccination programs (Arlinta, 2021; Gitiyarko, 2021). By November 2021, the WHO  Indonesian Constitution, article 22, point (1).  Government Regulation in-lieu of Law No. 1 of 2020. 3  Law No. 2 of 2020. 1 2

20 

A. SURYO PRABOWO

estimated over 4.2 million cumulative cases and 143,000 deaths throughout the country, and the government remains alert for potential subsequent waves, as well as the emergence of new variants.

2.3  Methodology The objective of this study is to analyze changes to the budget process and the budget structure immediately following the coronavirus disease 2019 (COVID-19) pandemic. The study requires context exploration and an in-depth examination of a contemporary phenomenon. Therefore, a case study method is deemed suitable (Yin, 2009). The analysis is geared toward addressing two main questions: (1) how did the budget process adapt to the COVID-19 pandemic, and (2) how has the pandemic altered the budget structure? Both questions are explored using the case of Indonesia, focusing on its central government (hereafter the “government”) that manages the national budget (Anggaran Pendapatan dan Belanja Negara, APBN). The country is purposefully selected as a representative of developing countries. The fact that Indonesia, the world’s third-largest democracy and Southeast Asia’s de facto leader, was among the hardest hit, also makes it an interesting case. In July 2021, The New York Times reported that Indonesia was “the new epicenter of the pandemic, surpassing India and Brazil to become the country with the world’s highest count of new infections” (Abdurachman et al., 2021). Yin (2009) suggests that a case study inquiry needs to build on the prior development of theoretical propositions to guide data collection and analysis. To that end, public budgeting and finance literature is relevant as a guiding reference. To answer the first research question, analysis is conducted according to the four major phases of the budget cycle described by Lee et al. (2021): preparation, approval, execution, and evaluation. As for the second question, the discussion is framed around two of the three public expenditure management elements developed by Schick (1998): aggregate fiscal discipline and allocative efficiency. Findings are narrated throughout the following two sections, and interpretations of these findings stand on relevant public budgeting and finance theories and concepts. Furthermore, this study is interested in understanding the mechanism that typically happens behind the scenes. To add rigor to the causal inquiry, process tracing is utilized. The method helps establish that one event takes place before another and that the former is a cause of the latter (Mahoney, 2012). Process tracing involves various

2  BUDGET PROCESS AND BUDGET STRUCTURE UNDER THE COVID-19… 

21

empirical tests; one of them requires “smoking-gun” evidence, which provides a sufficient but not necessary condition for confirmation (Bennett, 2010). The absence of smoking-gun evidence does not necessarily eliminate a given claim; its presence, however, provides a strong corroboration to it. In this research, the pieces of evidence, each carrying different evidential weights, include government documents (i.e., laws and regulations, press releases, and audit reports), press conferences and media interviews, publications by international organizations, as well as coverage from national newspapers.

2.4   Budget Process The budget process in the Indonesian government is lengthy and involves multiple entities (Suryo Prabowo, 2019). The process is a yearly routine, each budget period going through the same phases from ex-ante preparation to ex-post evaluation. It can also be viewed as a cycle because one budget period is connected to the periods before and after. Figure  2.1 captures the cycle from a multi-year perspective; at a particular time, there appears to be an overlap of multiple cycles. For example, while one budget cycle is in operation, the State Audit Board (Badan Pemeriksa Keuangan, BPK) is conducting an external audit of the previous cycle and the executive is simultaneously working to prepare the next budget cycle. Each phase influences other phases within a cycle, and each cycle interacts with other cycles. None of the components works in isolation, thus a holdup in one component will delay the whole process. 2019 Semester 1 FY 2019 Budget

Execution

FY 2020 Budget

Preparation

FY 2021 Budget FY 2022 Budget

2019 Semester 2

2020 Semester 1

2020 Semester 2

2021 Semester 1

2021 Semester 2

Audit

Approval

Execution

Preparation

Audit

Approval

Execution

Preparation

Approval

Fig. 2.1  General budget process in the Indonesian government. (Note: Illustration is based on the “Scrambled Budget Cycles” in Lee et al. (2021), with adaptation to the Indonesian context)

22 

A. SURYO PRABOWO

2.4.1  Preparation As in many other countries, the process begins with the preparation phase. Around one year prior to the fiscal year (FY), the tripartite Ministry of Planning (Bappenas), Ministry of Finance (MOF), and technical ministry or agency (hereafter, “line ministry”) liaise to align national priorities, macroeconomic and budget outlooks, and sectoral demands. The result is a budget proposal that is subject to scrutiny and approval from the legislature. The preparation of the FY 2020 budget predated the arrival of COVID-19 in Indonesia. Because of that, the budget structure was not particularly suitable for pandemic responses. As COVID-19 spread throughout the country in early 2020, the government had to make prompt adjustments to its programs. Therefore, it initiated a revision process, redoing the original FY 2020 budget to produce the amended FY 2020 budget. In March 2020, the president instructed all heads of line ministries to “refocus programs and reallocate budget” by treating COVID-19 as a priority.4 Such a strong convergence in goal setting had not occurred since the new State Finances Law was passed in 2003. Even in 2008–2009, when the global financial crisis reached the region, the government’s original and amended budgets did not explicitly identify the “economic recession” and “financial crisis” as the only challenges to address. The president also made clear that the finance minister, whose responsibility includes coordinating budget revisions across line ministries, must facilitate a process that is “fast, simple, and accountable.”5 Based on this instruction, the MOF issued new budget preparation guidance in April and August 2020,6 which had to be followed by line ministries that intended to propose COVID-19 responsive programs. Generally, two types of program revisions at the ministry level are relevant to the pandemic: program changes that alter the amount of budget allocated, and program changes in which the budget allocations stay the same. In both instances, the budget preparation was compressed from normally months of process into weeks or even days, expedited, and made simpler. Two examples of procedural changes under the 2020 guidance are as follows:  Presidential Instruction No. 4 of 2020, point 1.  Presidential Instruction No. 4 of 2020, point 6. 6  Minister of Finance Regulation No. 39 of 2020; Minister of Finance Regulation No. 117 of 2020. 4 5

2  BUDGET PROCESS AND BUDGET STRUCTURE UNDER THE COVID-19… 

23

• The review process is faster. Directorate General Budget, under MOF, typically takes up to five days to review revision proposals submitted by line ministries. Now the same process should take no more than two days.7 • The process leverages modern technological tools. Discussion between MOF and line ministries can be done remotely, via phone calls and video conferences. Documents can also be submitted through applications or software developed by the MOF, accessible via the internet.8 Anessi-Pessina et al. (2020) argue that during a crisis, budgeting and its revision (or re-budgeting) processes need to be more flexible so that challenges can be addressed in a timely manner. Evaluating the above changes, the Indonesian government was able to answer that call. In terms of budget preparation, the COVID-19 pandemic brought about a procedural improvement through shorter time and better technology utilization, at least from the standpoint of the MOF as the central budget office. Note, however, that not all adopted changes are permanent and will endure in future fiscal years. For example, for the FY 2021 budget, the budget revision guidance reverted to the five-day review process in the Directorate General Budget, although the policy allowing for technological use during the review process remained in place.9 2.4.2  Approval The next phase in the budget process is approval, in which the legislature plays an equally, if not more, substantial role than the executive. The president, assisted by heads of line ministries, is conferred with greater authority over priorities setting and its operationalization. But it is the legislature that has the mandate to scrutinize and eventually approve the budget proposal. The legislature examines detailed performance information under each line ministry, like organizational units, programs, activities, and types of expenditures.10 The Indonesian parliament is comprised of factions from multiple political parties. Hence, bargaining and compromises are  Minister of Finance Regulation No. 39 of 2020, article 7.  Minister of Finance Regulation No. 117 of 2020, article I. 9  Minister of Finance Regulation No. 208 of 2020, article 20. 10  Law No. 17 of 2003, article 15, point 5. 7 8

24 

A. SURYO PRABOWO

bound to happen to marshal the required majority approval. The borderline between budget preparation and budget approval phases could become blurred as this part involves a considerable amount of negotiation between the executive and the legislature. In normal times, the legislature approval, which officially transforms a budget proposal into the budget law (Undang-undang Anggaran Pendapatan dan Belanja Negara, UU APBN), must be completed two months before the corresponding fiscal year starts.11 This approval phase, however, was bypassed during this emergency period. The requirement for legislature scrutiny on any proposals to include responsive programs to the FY 2020 amended budget was lifted to facilitate immediate government actions.12 Indonesia had experienced another crisis in 2008–2009, albeit less severe (Basri & Rahardja, 2010). Responding to the global financial crisis, the executive and legislature agreed to include articles in the 2009 budget law that allowed for flexibility in budgeting and financing should there be an emergency.13 The articles were explicit about what would be considered an emergency, such as plummeting economic growth to a level below the macroeconomic assumptions, increase in debt financing costs, or a systemic crisis affecting the national banking and financial system. In such instances, the executive branch could seek immediate approval from the legislature to spend on emergency programs not originally planned or even to overspend the initial budget. The government also had leeway to pursue budget virement, obtain additional financing (i.e., from bonds issuance or international creditors), and make use of prior years’ surplus cash (Saldo Anggaran Lebih, SAL). Even after the 2008–2009 recession abated, these provisions were retained in the budget legislation and have since been improved. It is meant to be part of timely fiscal policies that will safeguard the Indonesian economy during a crisis, and it could not have been more relevant than in the COVID-19 pandemic. This legislature approval requirement was back in force when the government undertook the FY 2021 budget preparation. Fortunately, the institutional design is so rigid that timely legislature approval is almost certain. In the case of deadlock, or if the legislature does not approve the proposed budget, the executive is automatically authorized to spend as much as the previous year’s budget ceiling. Table  2.1 summarizes the  Law No. 17 of 2003, article 15, point 4.  Minister of Finance Regulation No. 39 of 2020, article 14. 13  Law No. 23 of 2008, article 23. 11 12

2  BUDGET PROCESS AND BUDGET STRUCTURE UNDER THE COVID-19… 

25

Table 2.1  Presidencies and dates when the original and amended budgets are passed, FYs 2004–2022 (1) FY budget

(2) Presidency

(3) Original budget passed

(4) Amended budget passed

2004 2005

Megawati Megawati; Yudhoyono Yudhoyono Yudhoyono Yudhoyono Yudhoyono Yudhoyono Yudhoyono Yudhoyono Yudhoyono Yudhoyono; Jokowi Jokowi Jokowi Jokowi Jokowi Jokowi Jokowi Jokowi Jokowi

December 9, 2003 October 18, 2004

October 18, 2004 July 11, 2005; October 25, 2005 October 9, 2006 September 22, 2007 May 7, 2008 August 25, 2009 May 25, 2010 August 10, 2011 March 31, 2012 June 18, 2013 June 30, 2014 March 6, 2015 July 26, 2016 August 21, 2017 – – April 3, 2020; June 24, 2020

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

November 18, 2005 November 15, 2006 November 6, 2007 November 10, 2008 October 29, 2009 November 19, 2010 November 24, 2011 November 16, 2012 November 14, 2013 October 14, 2014 November 25, 2015 November 17, 2016 November 20, 2017 November 22, 2018 October 18, 2019 October 26, 2020 September 30, 2021

Source: Compiled by author from the budget legislations (Laws and Executive Orders) FYs 2004–2022. This study deliberately selects FY 2004 as the starting point because it is the year after the modern State Finances Law of 2003 was enacted and became effective

dates of the passage of the budget laws across different presidencies from 2004 to 2022. As shown in Column (3), the budget law is always passed before the corresponding fiscal year begins. Despite the pandemic, the FY 2021 budget was appropriately authorized on October 26, 2020, and the FY 2022 budget was authorized on September 30, 2021. The discipline to pass the budget law overcomes the inevitably political nature of the process. Table 2.1 also shows the government’s inclination to make mid-year budget amendments. The scope of scrutiny is usually narrower in the amended budget review than in the original budget review. Nevertheless, it is a tedious undertaking as both the executive and legislature need to collectively revisit and rework their plans. As seen in Column (4), prior to

26 

A. SURYO PRABOWO

2020 the budgets went through revisions every year, with two exceptions: in 2018 and 2019, for the first time since the State Finances Law era, the government decided to not pursue any budget amendments; the finance minister claimed that this forbearance would “encourage ministries and agencies to focus on implementing their budget plan to the full extent” (Indrawati, 2018). However, the COVID-19 pandemic set the government back to the mid-year budget amendment track, in April and June 2020. In 2005, the national budget was also amended twice, but that was due to an internal factor, namely, the leadership transition from Presidents Megawati to Yudhoyono. The 2020 revisions, unlike the 2005 ones, were driven by an exogenous shock. The double-round budget amendments, along with the president’s executive order, are indicative of the crisis and signify how much uncertainty the Indonesian government faced at that time. 2.4.3  Execution The budget law contains estimates of the government revenues and expenditures for the upcoming fiscal year in Indonesia, which formally runs from January 1 to December 31. It serves as the legal basis for detailed appropriations across line ministries and identifies how much they can spend on each program. With that, spending units in each line ministry can begin the procurement process and look for suppliers of inputs (i.e., goods and services) to execute the programs. The presidential regulation on procurement prescribes that under emergency circumstances (i.e., disasters and social conflicts), special procedures will take effect so that urgent actions can be taken.14 This, clearly, applied to the COVID-19 pandemic. Technical guidance for its implementation is further laid out by the National Procurement Agency (Lembaga Pengadaan Barang/Jasa Pemerintah, LKPP) regulation.15 Certain provisions applicable during normal times, such as requirements to announce open bidding through the national procurement website, conduct thorough price assessment, or select third-party suppliers through competitive bidding, were temporarily waived.16 Overall, the process was  Presidential Regulation No. 16 of 2018.  National Procurement Agency Regulation No. 13 of 2018. 16  Head of National Procurement Agency Circular Letter No. 3 of 2020. 14 15

2  BUDGET PROCESS AND BUDGET STRUCTURE UNDER THE COVID-19… 

27

simplified, leading to quicker turnarounds, with hopes that inputs such as medical supplies and protective equipment would be ready by the time they are needed as part of the government COVID-responsive programs. While simplified procedures enable urgent purchases and bring about faster program delivery, they also come with risks. Without competitive bidding, similar goods and services may cost more. As controls are eliminated, there is greater opportunity for fraudulent practices throughout the procurement process. Budget execution encounters a tradeoff between flexibility and accountability. Being aware of such risk, the government carried out multiple mitigation strategies. The president specifically gave instructions to the Government Internal Auditor (Badan Pengawasan Keuangan dan Pembangunan, BPKP) to supervise and oversee the line ministries’ compliance with the LKPP provisions for ensuring reliability.17 At the same time, LKPP emphasized that, in the event of non-competitive selection, the supplier must either have a good record of providing similar goods or services to the government or be electronically registered in the government vendor database.18 Yet, corruption cases remain prevalent to date. In mid-2020, the Corruption Eradication Commission (Komisi Pemberantasan Korupsi, KPK) arrested the then-Minister of Social Affairs for receiving bribes to select particular suppliers for COVID-related programs. KPK also named public officials (walikota, bupati) in several local governments, along with their confidants and business counterparts who benefited largely from the delicate situation, as suspects in graft cases (Harbowo, 2021). Indonesia has had a long history of public corruption and that sadly did not seem to dissipate during this crisis. When President Jokowi took office in 2014, the country’s Corruption Perception Index score was 34 (out of 100), placing the country behind China (36), India (38), Malaysia (52), and Singapore (84). In 2020, Indonesia’s relative position remained behind these neighboring countries, and its score only marginally improved to 37 (Transparency International, 2020). At the end of 2020, the government claimed to have spent 94.7% of the budget (State Audit Board, 2021), as Table  2.2 illustrates. This implies that not all funds were used according to the initial plan. One possible explanation for this is that the competitive procurement process generated cost-efficiency in some programs, and hence the actual outlay was lower.  Presidential Instruction No. 4 of 2020, point 6.  Head of National Procurement Agency Circular Letter No. 3 of 2020.

17 18

28 

A. SURYO PRABOWO

Table 2.2  FY 2020 budget execution rate

(a) Revenues (b) Expenditures (c) = (a) – (b) Surplus (or deficit) (d) Financing (e) = (c) + (d) Remaining balance

(1) Budget (tr Rupiah)

(2) Actual (tr Rupiah)

(3) = (2) / (1) Execution rate (%)

1699

1647

96.9

2739

2595

94.7

(1039)

(947)

91.2

1039

1193

114.8

245

Source: State Audit Board (2021) tr trillion

Another explanation is that some programs were not fully executed, leaving the funds in the government accounts. In previous years, the annual budget execution rates were around or above 90%, but never actually achieved or exceeded 100%: 89.50% (2016), 94.10% (2017), 99.66% (2018), and 94.75% (2019) (State Audit Board, 2017, 2018, 2019, 2020). Note that underspending has no direct bearing on surplus and deficit. Underspending (or overspending) is indicated by an execution rate that is lower (or higher) than 100%. This corresponds to Column (3) in Table 2.2, which is obtained from dividing the actual amount in Column (2) by the initial budget in Column (1). Meanwhile, surplus (or deficit) in Row (c) is the result of vertical summation of revenues in Row (a) and expenditures in Row (b). 2.4.4  Evaluation The final phase of the budget process is evaluation. Line ministries can individually conduct internal evaluations to study the effectiveness and efficiency of their operations. BPKP can also perform the same oversight over all line ministries. This section, however, focuses more on the external evaluation or audit conducted by the State Audit Board. Throughout the year, every line ministry engages in economic activities and acquires inputs to deliver programs. All transactions need to be recorded and then presented in a way that complies with the accepted

2  BUDGET PROCESS AND BUDGET STRUCTURE UNDER THE COVID-19… 

29

accounting standards. The final products of this exercise are financial statements that contain information about each ministry’s financial positions, operations, and cash flows. During the pandemic, no changes or additions were made to the existing accounting standards (Pernyataan Standar Akuntansi Pemerintahan, PSAP). The Governmental Accounting Standards Committee (Komite Standar Akuntansi Pemerintahan, KSAP), consisting of career bureaucrats and academics responsible for setting governmental accounting standards in Indonesia, argued that the current standards were sufficient, and hence remained effective.19 Nevertheless, reporting entities are strongly encouraged to maintain transparency and accountability and, accordingly, to disclose material information resulting from the COVID-19 pandemic. The pandemic potentially affects multiple accounts in the financial statements, summarized in Table 2.3. Additional debt might be incurred to compensate for the shortfall as the economy slows down and the government collects fewer revenues. Social assistance programs involve transfers to beneficiaries, which entail specific accounting treatment using the accrual basis. Given the uncertainty, assets may also decrease in value while the completion of some capital projects is delayed. These, along with other relevant implications of the pandemic, need to be sufficiently disclosed in the financial statements. As the budget is disbursed and the fiscal year is closed, the financial statements are then submitted to the State Audit Board. Led by a nine-­ member board selected by the legislature, the Board is designed to be independent of the executive, with a mission to bring about transparency and accountability within the government. It has also been a member of the International Organization of Supreme Audit Institutions (INTOSAI) since 1968, although the role became much more significant only after the State Financial Management and Accountability Audit Law was passed in 2004.20 From a public choice perspective, however, the intended independence and mission of accountability are not always clear, especially when members are dominated by politicians. Nevertheless, their audit results have often become a public reference to assess how “good” the government is in terms of financial management.

19  Guidance Letter from the Chairman of Governmental Accounting Standards Committee on July 30, 2020. 20  Law No. 15 of 2004.

30 

A. SURYO PRABOWO

Table 2.3  Accounting guidance to reporting entities during the COVID-19 pandemic Accounting standard number

Topic

PSAP 01

Presentation of Disclosure in the Notes to Financial Statements is financial reports required to explain significant changes to accounts affected by the COVID-19 pandemic Budget Disclosure in the Notes to Financial Statements is execution required to explain significant changes to cash-based reports, cash items affected by the COVID-19 pandemic basis Notes to Sufficient disclosure includes a discussion of the fiscal Financial implications of the COVID-19 pandemic, budget Statements reallocation to contingency accounts, revenue drops due to economic slowdown, and inventories affected by the delay in the completion of construction projects Investment Capital injection to state-owned enterprises as part of accounting stabilization policy, and the possibilities that assets value decrease due to COVID-19 Liabilities Debts incurred to finance COVID-responsive programs should be disclosed in the Notes to Financial Statements Grants Grants from the central government to local governments, organizations, or individuals Social Government assistance that is directly transferred to assistance, beneficiaries accrual basis Revenues, Reporting tax-related revenues accrual basis

PSAP 02

PSAP 04

PSAP 06

PSAP 09

Technical bulletin 13 Technical bulletin 19 Technical bulletin 24

Details

Source: Governmental Accounting Standards Committee (2020)

The threat of COVID-19 poses challenges to auditing procedures in Indonesia. On one hand, the availability of digital documents is limited, and, on the other hand, mobility to conduct physical inspections is constrained. In November 2020, the State Audit Board issued technical guidance for its auditors conducting financial audits to government entities in an emergency setting like the COVID-19 pandemic.21 The specified

 State Audit Board Regulation No. 4 of 2020.

21

2  BUDGET PROCESS AND BUDGET STRUCTURE UNDER THE COVID-19… 

31

actions included streamlining IT supports for remote audits, big data analytics, and safety protocol when physical verifications are necessary. The government engages in two categories of external audits. The first is the audit of financial statements of each line ministry. In its 2021 audit reports, the State Audit Board (2021) suggested that 85 (out of 87) line ministries earned an unqualified (or “clean”) opinion for their FY 2020 financial statements. These entities were found to have adequate disclosures, effective internal control, and sufficient compliance with the governmental accounting standards. The second category is the audit of the whole government’s consolidated financial reports, which also earned the central government another unqualified opinion. All despite the pandemic, hence the Indonesian government deserves some credit in that regard. Despite decent execution rates and unqualified opinions, the State Audit Board additionally noted 26 problems with the government’s internal controls. Amongst others, these have to do with specific disclosure of tax-related transactions and non-compliance with financial management regulations. In relation to COVID-19, the State Audit Board made several remarks. There was a lack of clarity in the mechanisms to report policies and programs specifically intended to tackle the pandemic. There were also concerns regarding debt vulnerability. For example, key metrics such as debt service to revenues ratio and total debt to revenues ratio were found to be higher than the conventional levels recommended by the International Monetary Fund (IMF). A more elaborate discussion of the fiscal implications of COVID-19 is presented in the next section.

2.5   Budget Structure: A Discussion The revisions to the FY 2020 budget have changed the budget structure of the Indonesian central government. The discussion in this section is framed around two of the three public expenditure management elements developed by Schick (1998): namely, aggregate fiscal discipline and allocative efficiency. The other element, operational efficiency, considers compliance with rules and controls over government spending; it has been covered in the budget process section, as part of the execution phase, and therefore is not specifically discussed here to avoid redundancy.

32 

A. SURYO PRABOWO

2.5.1   Aggregate Fiscal Discipline Aggregate fiscal discipline deals with the totals of two budget flows, revenues and expenditures, and policies to maintain their sustainability over the longer term. Experiences of other emerging economies, including neighboring countries China (Wu & Lin, 2020) and India (Jose et  al., 2021), suggest that following the COVID-19 pandemic, the government’s total expenditures increase but revenues drop. As a result, fiscal sustainability is challenged by growing deficits, as well as the accumulation of debt. The same fiscal implications are also found among developed countries like South Korea (Kim, 2020), the United Kingdom (Heald & Hodges, 2020), and the United States (Joyce & Suryo Prabowo, 2020). The Indonesian experience appears to be similar. Revisions to the original FY 2020 budget changed the budget structure, which overall is characterized by lower revenues, higher spending, and accordingly greater deficits to be financed, as shown across Columns (6), (7), and (8) in Table 2.4. Incrementalism explains why the budget tends to increase gradually from year to year (Dempster & Wildavsky, 1979). In the budget process, decision-makers rarely exhaust all alternatives and actively review the whole budget. Instead, the most reasonable action for them is to develop each year’s budget based on the previous year’s budget. As seen in Table 2.4, from FY 2015 to FY 2019, the government spending outlook was in an upward trend overall, with a relatively small number of changes. The theory also explains how budget increments may encounter a “shift point,” typically caused by external factors such as war, depression, and inflation. Within three months of its onset, the COVID-19 pandemic reversed Indonesia’s good economic momentum that had been building up at the end of 2019 (Crystallin & Abdurohman, 2021). While COVID-19 would seem to be a plausible impetus for such a budget shift, the figures do not appear to support that. Extending to 2020, when COVID-19 cases were on the rise, and then to FY 2021, the spending remained in an upward trend. A more obvious “shift” is reflected in the revenue side. The IMF (2021) conveyed that high COVID-19 cases in Indonesia weigh on its growth prospect; in 2020, economic growth was 2.1%, although projected growths in 2021 and 2022 are expected to bounce back to 4.3% and 5.8%, respectively. With COVID-19 around, many businesses had to shut down and people could not travel or work. As overall productivity decreased, the government lost some of its potential revenue sources, including income

1822

(2095)

273

12,402

2.15

28.33

1793

(2039)

246

11,526

2.20

27.43

(2) 2016

29.40

2.41

13,590

330

(2080)

1750

(3) 2017

29.98

2.19

14,839

326

(2221)

1895

(4) 2018

29.80

1.84

15,832

296

(2461)

2165

(5) 2019

1.76

17,443*

307

(2540)

2233

(6) 2020 (Original budget)

5.07

16,824*

853

(2614)

1761

(7) 2020 (Amended budget I)

38.68

6.34

16,391

1039

(2739)

1699

(8) 2020 (Amended budget II)

5.70

17,656

1006

(2750)

1743

(9) 2021

Notes: Revenue, spending, deficit, and deficit to GDP ratio are ex-ante estimates according to the budget law of 2015, 2016, 2017, 2018, 2019, and 2020, as well as the two budget revisions as per Presidential Regulations No. 54 of 2020 and No. 72 of 2020. Star (*) marks data that are imputed due to unavailability from the primary source. GDP estimates are from Statistics Indonesia (2021) and Ministry of Finance (2021a). Debt to GDP figures are estimates from Katadata (2021). Exchange rate for 1 USD is around 14,300 Rupiah (Rp) as of November 2021 (Bank Indonesia, 2021). Numbers presented may not add up precisely due to rounding

Revenue (tr Rp) Spending (tr Rp) Deficits (tr Rp) GDP (tr Rp) Deficits to GDP (%) Debt to GDP (%)

(1) 2015

Table 2.4  Budget structure FYs 2015–2021 (in trillion Rupiah)

2  BUDGET PROCESS AND BUDGET STRUCTURE UNDER THE COVID-19… 

33

34 

A. SURYO PRABOWO

tax and value added tax, as well as non-tax revenues. That put enough pressure on the government that it was required to adjust the revenue estimates down by more than 20%. In 2020, revenue was projected to be Rupiah (Rp)2233 tr (Original Budget) but then corrected to Rp1761 tr (Amended Budget I) and further to Rp1699 tr (Amended Budget II). Declines in revenues and increases in spending create more deficits. The government saw it coming and therefore relaxed the conventional 3% deficit to Gross Domestic Product (GDP) ratio restrictions through the president’s executive order, as an allowance to get around the growing shortfall.22 As Table 2.4 displays, Indonesia was able to maintain deficits to GDP ratios well below 3% in FYs 2015 (2.20%), 2016 (2.15%), 2017 (2.41%), 2018 (2.19%), and 2019 (1.84%). Without the COVID-19 pandemic, the original FY 2020 budget would have generated a 1.76% deficit. The amended FY 2020 budget and FY 2021 budget estimated the deficit to be as high as 6.34% and 5.70%, respectively. The leeway is meant to be temporary. The executive order specifies that the deficit to GDP ratio must return to the below 3% level in 2023 and after. Deficits are financed by issuing debt, and as they accumulate, a greater share of the government budget will be devoted to servicing the debt. Also, more government borrowing could theoretically drive interest rates up. All these should be managed prudently if the country does not want to jeopardize longer-term fiscal sustainability while managing the COVID-19 pandemic. As part of the countercyclical measures toward economic recovery, the government also introduced the National Economic Recovery (Pemulihan Ekonomi Nasional, PEN) program (Ministry of Finance, 2020). With a total of Rp695 tr, the stimulus package aimed to improve healthcare capacity, support vulnerable households, and sustain businesses operations. Among the provisions are tax incentives and credit for business (Rp120 tr), stimulus and subsidy for small and medium enterprises (Rp123 tr), and capital injection to state-owned enterprises and financing for corporations (Rp53 tr). The PEN program continued to 2021, although with a significantly smaller budget of only Rp356 tr.

 Government Regulation in-lieu of Law No. 1 of 2020, article 2.

22

2  BUDGET PROCESS AND BUDGET STRUCTURE UNDER THE COVID-19… 

35

2.5.2   Allocative Efficiency Allocative efficiency is concerned with government priorities and how they are reflected in budget allocations across different sectors. To unpack this, the study analyzes sectoral allocations over the last six years, mainly to identify budget distribution changes in nominal and proportional terms before and after the pandemic struck. The health sector receives special attention, given its relevance to COVID-19 measures. Additionally, three major sectors that have been prioritized under the Jokowi administration—social, education, and infrastructure—are also evaluated. Table 2.5 details sectoral allocations in FYs 2015–2021, capturing budget distributions before and after the COVID-19 outbreak. Rows (1) to (5) describe the nominal expenditures, whereas Rows (6) to (10) lay out the proportion (as a share of aggregate budget) of each sector in a given year. First, specific in the health sector, the allocated budget increased in nominal terms, parallel to the aggregate budget size that has also been growing. Indonesian law prescribes the government to fulfill a health budget allocation of at least 5% of the total expenditure, excluding salaries for

Table 2.5  Sectoral allocation before and after COVID-19 pandemic Year

(1) 2015

(2) 2016

(3) 2017

(4) 2018

(5) 2019

(6) (7) (8) 2020 OB 2020 AB 2021

113.6 378.2 460.3 394.1 2461

132.2 385.3 505.8 419.2 2540

212.5 495.0 547.8 281.1 2739

169.7 419.3 549.5 414.0 2750

4.62 15.37 18.70 16.01 100

5.20 15.17 19.91 16.50 100

7.76 18.07 20.00 10.26 100

6.17 15.25 19.98 15.05 100

Sector Nominal expenditure (in trillion Rupiah) (1) Health 65.9 91.4 92.4 109.0 (2) Social 249.4 259.7 273.3 353.9 (3) Education 390.1 370.9 406.1 431.7 (4) Infrastructure 256.1 269.1 379.4 394.0 (5) Aggregate 2039 2096 2080 2221 As a share of the aggregate annual expenditure (%) (6) Health 3.23 4.36 4.44 4.91 (7) Social 12.23 12.39 13.14 15.93 (8) Education 19.13 17.70 19.52 19.44 (9) Infrastructure 12.56 12.84 18.24 17.74 (10) Aggregate 100 100 100 100

Notes: OB original budget, AB amended budget. Proportions are calculated by author. 2015–2017 sectoral figures are from Ministry of Finance (2018). 2018–2021 sectoral figures are from the Ministry of Finance (2020), except 2020 original budgets are from Ministry of Finance (2019). Aggregate figures are from the budget law of the respective year

36 

A. SURYO PRABOWO

healthcare workers.23 As seen in Row (6), the proportion allocated for the health sector remained roughly 5% until FY 2020. After the pandemic, its share jumped to 7.76% in the amended FY 2020 budget and 6.17% in the FY 2021 budget. In his remarks to the legislature, the president expressed his plan to use the increased health funding for procuring vaccines, supporting nutrition programs for pregnant and breastfeeding women and children, curing infectious disease, and accelerating stunting reduction (Cabinet Secretariat, 2020b). The abrupt jump in the health sector allocations is consistent with Donahue and Joyce’s arguments (2001) regarding emergency budgeting and disaster spending in the US federal government. A mixture of political motives and budgetary rules makes it easier for the government to allocate extra funds for response programs rather than for mitigation programs. Similarly, rational politicians and policymakers in Indonesia would have greater incentives to react after a pandemic crisis than to act before it happens. Worthy programs like additional compensation for healthcare workers or promoting vaccine research and development, which would likely not have received additional funding during normal days, easily gained political (and accordingly financial) support amidst the COVID-19 pandemic (Ministry of Communication and Information, 2020; Ministry of Finance, 2021b). Second, overall budget priorities changed throughout the pandemic. In proportional and nominal terms, significant gains are observed in the health and social sectors immediately after the pandemic. In 2020, allocation to the health sector increased by 60%, from originally Rp132.2 tr to Rp212.5 tr in the amendment. Allocation to the social sector also increased by more than 25%, from Rp385.3 tr to Rp495.0 tr. The proportion allocated for the education sector did not change much—around 20%, in compliance with the constitutional mandate.24 Meanwhile, allocation to the infrastructure sector was slashed by a little over 30%, dropping from Rp419.2 tr to Rp281.1 tr. During a hearing with the legislature in April 2020, the Minister of Public Works admitted that several projects, such as irrigation networks and dams, were postponed to 2021 because of the budget reallocation to other priorities (Ramli, 2020). Cash management proved to be a reasonable action over the short run given the financial pressure.  Law No. 36 of 2009, article 171.  Indonesian Constitution, article 31, point (4).

23 24

2  BUDGET PROCESS AND BUDGET STRUCTURE UNDER THE COVID-19… 

37

The government’s decision to trade infrastructure development for health recovery and social protection appears to be only temporary. In FY 2021, budget allocations for health and social sectors are lower than in the amended FY 2020 budget, while infrastructure is back to its pre-pandemic trajectory. As Columns 7 and 8 of Table 2.5 reflect, allocations for health and social sectors decreased by around 16% and 15%, respectively, from Rp202.5 tr to Rp169.7 tr and from Rp495 tr to Rp419.3 tr. This is quite counterintuitive, considering how the pandemic negatively developed in late 2020 and at the beginning of 2021. By spending relatively less on the health and social sectors, the government is more financially constrained in providing essential support for doctors and nurses, low-income households, and communities disproportionately harmed by COVID-19. Meanwhile, the infrastructure budget increased by 47%, from Rp281.1 tr to Rp414.0 tr. Given its tangible and immediate results, building infrastructure would always be appealing to Indonesian politicians and policymakers.

2.6  Conclusion The COVID-19 pandemic presents new challenges that have changed the way the government budget is managed. As this study finds, all four phases of the budget process in the Indonesian central government adapted. Budget preparation underwent a procedural improvement (i.e., shorter time and better use of technology) and legislature approval was temporarily lifted. In the execution phase, the procurement process was simplified. Meanwhile, the national budget structure also changed in response to the pandemic. In aggregate terms, revenues dropped and expenditures increased, resulting in a growing deficit and debt. As policy priorities shifted, sectoral allocations changed. In the first year of the COVID-19 crisis, budget allocations for health and social sectors increased, while allocations for infrastructure decreased, albeit only temporarily. These are indicative of the implications of the COVID-19 pandemic for the budget structure. From a normative perspective, there are at least two lessons learned that are relevant for Indonesia and other developing countries going through similar situations today and in the future. First, urgent measures to tackle COVID-19 can be executed only when there is sufficient funding, suggesting the importance of maintaining aggregate fiscal discipline. But even when the money is there, the implementation of programs could still be

38 

A. SURYO PRABOWO

ineffective if the process to transform input to output—that is, the budget process—is troublesome. In policymaking, processes matter, and budgeting should therefore be treated as a strategic rather than rudimentary element. Second, there is a tradeoff between flexibility and accountability within every design of the budget process. During a crisis, budget preparation, approval, and execution may be simplified; the case of Indonesia shows how these changes enabled urgent purchases and brought about faster program delivery amidst the COVID-19 pandemic. Such flexibility, however, should be carefully designed, since the failure to mitigate the risk might compromise accountability and provide greater opportunity for fraudulent practices, which ultimately harms public interest. Finally, public budgeting entails abundant technical procedures from ex-ante preparation to ex-post evaluation. But most of it is inherently a political exercise. This study finds how the budget process and budget structure came out differently before and after the pandemic crisis, depending on how politicians and policymakers perceived the situation. Understanding its political nature, however, should not discourage scholars and practitioners, especially those striving for a “better” public budgeting. Rather, it should motivate them to find the middle ground between what is ideal and what is realistic, while pushing the field forward both in theories and in practices.

References Abdurachman, F., Paddock, R. C., & Suhartono, M. (2021, July 17). The pandemic has a new epicenter: Indonesia. The New York Times. Retrieved November 1, 2021, from https://www.nytimes.com/2021/07/17/world/asia/ indonesia-­covid.html Anessi-Pessina, E., Barbera, C., Langella, C., Manes-Rossi, F., Sancino, A., Sicilia, M., & Steccolini, I. (2020). Reconsidering public budgeting after the COVID-19 outbreak: Key lessons and future challenges. Journal of Public Budgeting, Accounting & Financial Management. Arlinta, D. (2021, October 9). Penanganan Covid-19 Membaik, Kewaspadaan Tak Boleh Kendur (Handling of COVID-19 improves, people should remain alert). Kompas. Retrieved November 1, 2021, from https://www.kompas. id/baca/ilmu-­p engetahuan-­t eknologi/2021/10/09/penanganan-­c ovid-­ 19-­membaik-­kewaspadaan-­tak-­boleh-­kendur Bank Indonesia. (2021). Foreign exchange rates. Available at https://www.bi.go. id/en/statistik/informasi-­kurs/transaksi-­bi/Default.aspx Basri, M. C., & Rahardja, S. (2010). The Indonesian economy amidst the global crisis: Good policy and good luck. ASEAN Economic Bulletin, 77–97.

2  BUDGET PROCESS AND BUDGET STRUCTURE UNDER THE COVID-19… 

39

Bennett, A. (2010). Process tracing and causal inference. In H. E. Brady, & D. Collier (Eds.), Rethinking Social Inquiry: Diverse Tools, Shared Standards (2nd ed., pp. 207–219). Cabinet Secretariat. (2020a). State of the nation address. Available at https:// setkab.go.id/en/state-­of-­the-­nation-­address-­of-­the-­president-­of-­the-­republic-­ of-­indonesia-­at-­the-­annual-­session-­of-­the-­peoples-­consultative-­assembly-­mpr-­ of-­the-­republic-­of-­indonesia-­and-­the-­joint-­se/ Cabinet Secretariat. (2020b). Pidato Presiden Republik Indonesia pada Penyampaian Keterangan Pemerintah Atas Rancangan Undang-undang tentang Anggaran Pendapatan dan Belanja Negara (Presidential Speech on the notes to the budget proposal). Available at https://setkab.go.id/ pidato-­p residen-­r epublik-­i ndonesia-­p ada-­p enyampaian-­k eterangan-­ pemerintah-­atas-­rancangan-­undang-­undang-­tentang-­anggaran-­pendapatan-­ dan-­belanja-­negara-­apbn-­tahun-­anggaran-­2021-­beserta-­nota-­keua/ COVID-19 Task Force. (2021). January 5th press conference. Crystallin, M., & Abdurohman. (2021). Fiscal policy in managing the economic recovery. In B.  D. Lewis & F.  Witoelar (Eds.), Economic dimensions of Covid-19 in Indonesia. Yusof Ishak Institute. Dempster, M. A., & Wildavsky, A. (1979). On change: Or, there is no magic size for an increment. Political Studies, 27(3), 371–389. Donahue, A.  K., & Joyce, P.  G. (2001). A framework for analyzing emergency management with an application to federal budgeting. Public Administration Review, 61(6), 728–740. Gitiyarko, V. (2021, August 1). PSBB Hingga PPKM, Kebijakan Pemerintah Menekan Laju Penularan Covid-19 (Government policy to curb COVID-19 transmission). Kompas. Retrieved November 1, 2021, from https://kompaspedia.kompas.id/baca/paparan-­t opik/psbb-­h ingga-­p pkm-­k ebijakan-­ pemerintah-­menekan-­laju-­penularan-­covid-­19 Governmental Accounting Standards Committee. (2020). Guidance Letter from the Chairman of Governmental Accounting Standards Committee on July 30, 2020. Harbowo, N. (2021). “Arisan” Korupsi Para Kepala Daerah (Corruption “arisan” of local government leaders). Retrieved November 1, 2021, from https://www. kompas.id/baca/polhuk/2021/08/18/arisan-­korupsi-­para-­kepala-­daerah Heald, D., & Hodges, R. (2020). The accounting, budgeting and fiscal impact of COVID-19 on the United Kingdom. Journal of Public Budgeting, Accounting & Financial Management. Indrawati, S.  M. (2018, December 31). Refleksi akhir tahun (End of year reflection). Facebook. https://www.facebook.com/permalink.php?story_fbi d=2392045844202737&id=1236496389757694 International Monetary Fund. (2021). World economic outlook: Managing divergent recoveries, April 2021 edition.

40 

A. SURYO PRABOWO

Jose, J., Mishra, P., & Pathak, R. (2021). Fiscal and monetary response to the COVID-19 pandemic in India. Journal of Public Budgeting, Accounting & Financial Management. Joyce, P. G., & Suryo Prabowo, A. (2020). Government responses to the coronavirus in the United States: Immediate remedial actions, rising debt levels and budgetary hangovers. Journal of Public Budgeting, Accounting & Financial Management. Katadata. (2021). Rasio Utang Pemerintah dari Soeharto sampai Jokowi (Government debt ratio from the Suharto to Jokowi era). Available at https:// databoks.katadata.co.id/datapublish/2021/06/09/rasio-­utang-­pemerintah-­ dari-­soeharto-­sampai-­jokowi Kim, B. H. (2020). Budgetary responses to COVID-19: The case of South Korea. Journal of Public Budgeting, Accounting & Financial Management. Lee, R. D., Jr., Johnson, R. W., & Joyce, P. G. (2021). Public budgeting systems. Jones & Bartlett Learning. Mahoney, J. (2012). The logic of process tracing tests in the social sciences. Sociological Methods & Research, 41(4), 570–597. Ministry of Communication and Information. (2020). Inilah besaran insentif tenaga Kesehatan tangani COVID-19 (This is the amount of incentives provided to healthcare workers handling COVID-19). Available at https:// kominfo.go.id/content/detail/26181/inilah-­b esaran-­i nsentif-­t enaga-­ kesehatan-­tangani-­covid-­19/0/berita Ministry of Finance. (2018). Advertorial Rancangan APBN 2019 (2019 Budget Proposal Advertorial). Ministry of Finance. (2019). Advertorial RAPBN 2020 (2020 Budget Proposal Advertorial). Ministry of Finance. (2020). Advertorial RAPBN 2021 (2021 Budget Proposal Advertorial). Ministry of Finance. (2021a). Asumsi Dasar Ekonomi Makro. Retrieved June 15, 2021, from http://www.data-­apbn.kemenkeu.go.id/Dataset/Details/1010 Ministry of Finance. (2021b). Penanggulangan pandemi COVID-19 melalui program pengadaan vaksin dan pelaksanaan vaksinasi COVID-19 (Overcoming the COVID-19 pandemic through the vaccine procurement program and the implementation of the COVID-19 vaccination). Available at https://anggaran.kemenkeu.go.id/in/post/penanggulangan-­pandemi-­covid-­19-­melalui-­ program-­pengadaan-­vaksin-­dan-­pelaksanaan-­vaksinasi-­covid-­19 Mujani, S., & Liddle, R.  W. (2021). Indonesia: Jokowi Sidelines democracy. Journal of Democracy, 32(4), 72–86. Ramli, R. (2020, April 22). Imbas Corona, Ini Proyek-proyek Infrastruktur yang ditunda pemerintah (These are the government projects that are being postponed due to COVID-19). Kompas. https://money. kompas.com/r ead/2020/04/22/060100526/imbas-­c or ona-­i ni-­ proyek-­proyek-­infrastruktur-­yang-­ditunda-­pemerintah

2  BUDGET PROCESS AND BUDGET STRUCTURE UNDER THE COVID-19… 

41

Schick, A. (1998). A contemporary approach to public expenditure management. World Bank Institute. State Audit Board. (2017). Laporan Hasil Pemeriksaan BPK RI Atas Laporan Keuangan Pemerintah Pusat Tahun 2016 (Report of Audit Results of the 2016 Central Government Financial Statements). State Audit Board. (2018). Laporan Hasil Pemeriksaan BPK RI Atas Laporan Keuangan Pemerintah Pusat Tahun 2017 (Report of Audit Results of the 2017 Central Government Financial Statements). State Audit Board. (2019). Laporan Hasil Pemeriksaan BPK RI Atas Laporan Keuangan Pemerintah Pusat Tahun 2018 (Report of Audit Results of the 2018 Central Government Financial Statements). State Audit Board. (2020). Laporan Hasil Pemeriksaan BPK RI Atas Laporan Keuangan Pemerintah Pusat Tahun 2019 (Report of Audit Results of the 2019 Central Government Financial Statements). State Audit Board. (2021). Laporan Hasil Pemeriksaan BPK RI Atas Laporan Keuangan Pemerintah Pusat Tahun 2020 (Report of Audit Results of the 2020 Central Government Financial Statements). Statistics Indonesia. (2021). Produk Domestic Bruto (Lapangan Usaha) (Gross domestic product, industry). Available at https://www.bps.go.id/subject/11/ produk-­domestik-­bruto-­lapangan-­usaha-­.html#subjekViewTab3.html Suryo Prabowo, A. (2019). Performance budgeting in Indonesia: Brief history, progress, and lessons learned. In A. T.-k. Ho, M. de Jong, & Z. Zhao (Eds.), Performance budgeting reform: Theories and international practices (pp. 177–189). Routledge. Transparency International. (2020). Corruption perception index. Available at https://www.transparency.org/en/cpi/2020/index/nzl Vu, T. (2010). Paths to development in Asia: South Korea, Vietnam, China, and Indonesia. Cambridge University Press. World Health Organization. (2020, March 11). WHO Director-General’s opening remarks at the media briefing on COVID-19. Available at https://www.who. int/director-­g eneral/speeches/detail/who-­d irector-­g eneral-­s -­o pening-­ remarks-­at-­the-­media-­briefing-­on-­covid-­19%2D%2D-­11-­march-­2020 World Health Organization. (2021). Indonesia: WHO Coronavirus Disease (COVID-19) dashboard. Retrieved October 7, 2021, from https://covid19. who.int/region/searo/country/id Wu, S., & Lin, M. (2020). Analyzing the Chinese budgetary responses to COVID-19: Balancing prevention and control with socioeconomic recovery. Journal of Public Budgeting, Accounting & Financial Management. Yin, R. (2009). Case study research: Design and methods (4th ed.). Sage Publications.

CHAPTER 3

The Role of the Balance Sheet for Reporting Deficits and Debts by EU Member States: Lessons from the COVID-19 Pandemic Giovanna Dabbicco and Josette Caruana

3.1   Introduction The worldwide battle against the COVID-19 pandemic has seen unprecedented government expenditure in the health sector. Governments are also injecting vast sums into their economies in order to assist businesses and households to ride out the enormous turbulence caused by the pandemic. The high level of government spending and depressed revenues

G. Dabbicco (*) National Accounts Directorate, National Statistical Office (ISTAT), Rome, Italy e-mail: [email protected] J. Caruana Department of Accountancy, Faculty of Economics, Management and Accountancy, University of Malta, Msida, Malta e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 G. Dabbicco et al. (eds.), Public Sector Accounting, Financial Accountability and Viability in Times of Crisis, Public Sector Financial Management, https://doi.org/10.1007/978-3-031-04745-9_3

43

44 

G. DABBICCO AND J. CARUANA

during 2020 were unexpected. Consequently, government deficits increased significantly. Furthermore, government borrowing levels increased threefold when compared to 2019, with OECD (Organization for Economic Co-Operation and Development) countries borrowing 60% more in absolute terms (Rutter, 2021). The fiscal effects of the measures being taken by governments worldwide will be reflected in Government Finance Statistics (GFS) for 2020 and beyond. This has particular consequences for EU member states because there are implications on the ability of these countries to adhere to the requirements of the Treaties that bind them. The requirements of the Stability and Growth Pact (SGP) were suspended in 2020 and may remain so in the near future. Notably, future fiscal policy needs to consider the policy constraints, if and once they are re-introduced, as well as the future of the SGP in general. It is noted that governments of different countries are taking quite similar measures that can be classified into two categories: a) Measures that have an immediate effect on cash flow and government performance, for example, wage supplements, utility and rent subsidies, quarantine/furlough pay, deferral of tax revenue; and b) Measures that have a potential effect on a government’s financial position, for example, loan guarantee schemes and equity injections. Therefore, besides the impact on performance, the immediate and potential effects of such policies need to be analysed through the balance sheet. Balance sheet–based policies need to be designed and assessed in a fiscally responsible way, even in countries where the fiscal legislation ignores the balance sheet (OECD, 2021). The reactions of governments to the pandemic have emphasized the fact that sound fiscal management needs to embrace government assets and liabilities. Thus, the balance sheet takes on an important role in such circumstances (IFAC, 2020, 2021). According to Metcalfe (2020), only by taking such a balance sheet approach can governments fully account for their spending interventions and gain a more holistic picture of the public finances. ‘This will enable public sector leaders to make better informed decisions on how to build back economies in the most effective and sustainable way’ (Metcalfe, 2020). Metcalfe (2020) points out that almost half of government’s COVID-19-related policy interventions during 2020 have been ‘belowthe-line’ measures, which are not properly captured by traditional

3  THE ROLE OF THE BALANCE SHEET FOR REPORTING DEFICITS… 

45

economic metrics, like debt to GDP (gross domestic product) ratios. In fact, the International Monetary Fund (IMF) estimates that the global total fiscal policy response has cost US$9trn, with just over half of that ($4.6trn), in these ‘below-the-line’ measures, such as loan guarantees and equity injections (as of August 2020). In such an extremely exceptional situation generated by the pandemic and its recovery phase, the applicability of the SGP may need to be revised to take into account further discretionary stimulus and coordinated action. In this context, the ‘expected’ reform for the SGP could be, usefully, developed on a balance sheet approach. The objective of this chapter is to explore and analyse this possibility in order to meet important information needs, which have been reinforced by the ongoing pandemic. This study attempts to bring together the objectives of the use of balance sheet data in the future for fiscal policy under recovery with a possible modification of the SGP (based on statistics). More specifically, this study carries out the following: a) Analysis of fiscal data reported by EU member states prior to the pandemic and during the first pandemic year; and b) Assessment of the completeness of the data for financial management purposes. In the process, the study will identify the main balance sheet items that could prove useful for sound financial management decisions and as indicators of the potential for recovery. Since the EU member states will receive major funding from the EU budget to support COVID-19-related expenses (both during the crisis and for recovery), it is worthwhile to examine what type of data on COVID-19-related expenses, and broader data on governments’ financial positions, should be required from the EU member states. Besides ensuring accountability and transparency, the careful and detailed reporting of such expenditure, and its impact on governments’ financial positions, can be used as a basis for assessing the capability of the governments’ finances to recover from this type of shock. In fact, the IMF (2020) asked governments to do ‘whatever it takes but keep the receipts’. Moreover, these findings may help to assess the capability of a balance sheet approach to improve the SGP.

46 

G. DABBICCO AND J. CARUANA

3.2   Literature Review There is prior literature that promotes the balance sheet approach for public sector management (Ball, 2018), especially in times of crisis (Ball, 2020; Ball & Pflugrath, 2012; IFAC, 2021); other literature does not perceive it as a suitable approach in the public sector context (e.g. Biondi, 2012, 2018; Mautz, 1981). On the other hand, one needs to clarify what is meant by the balance sheet approach, and which elements in the statement of financial position are being perceived as important indicators. In a democratic society, the primary users of public sector financial statements are the citizens. And the citizens’ main need is that of accountability (Mann et  al., 2019). Budget control is the traditional essence of public sector accountability (Monsen, 2019). Financial statements that are not somehow linked to budgetary execution cannot satisfy public sector budgetary control and accountability (Ellwood & Newberry, 2016). Barton (2005) identifies the requirement of public accountability as the fundamental difference in the financial reporting of governments and private entities. However, accounting information is also useful for decision making. The emphasis on decision-usefulness is typical of private sector accounting, as investors are identified as the main users of accounting information (Rutherford, 2000). In the private sector, all assets are held for revenue generating purposes. Thus, the asset and liability-led approach has developed over time, emphasizing the importance of the balance sheet (Biondi, 2016). The balance sheet approach forms the basis of the IASB’s standard setting, as is evident from the conceptual framework. The reason is that the objective of financial statements in the private sector is to assist decision making. This approach is not without criticism, even in the private sector, as the IASB was advised not to ignore the performance aspect of reporting (Deloitte, 2015). There is a branch of literature that criticizes the utility of the balance sheet approach (or the static view of accounting) in the public sector (Anthony, 1978; Biondi, 2016). By their nature, many public sector entities do not generate income. The main sources of income are nonexchange transactions, and there is no relationship between the assets in the balance sheet and the ability to generate revenue (Biondi, 2012). The expectation that asset costs are recoverable does not hold in a public sector context (Mautz, 1981; Pallot, 1992; Christiaens & Rommel, 2008). A balance sheet focus is said to be inconsistent with the specificities of public

3  THE ROLE OF THE BALANCE SHEET FOR REPORTING DEFICITS… 

47

financial management, because the operational and financial capacities of governmental entities are assessed through their sovereign powers to raise taxes and collect fees (Biondi, 2018). These capacities can only very loosely be linked with balance sheet items, if at all. Thus, public sector specificities support the revenue-expense-led approach. In his suggestions for a suitable conceptual framework for public sector accounting, Oulasvirta (2021) supports ‘the income statement first approach’. Oulasvirta (2021) presents a transaction-led method, stating that it is closer to the traditional core of public sector accounting than the balance sheet approach as promoted by International Public Sector Accounting Standards (IPSAS). It is presented as a realistic and practical way to implement current accounting in public sector entities financed by taxation. In the wake of the pandemic, the main thrust of the advice provided by international fora is for governments to take a balance sheet approach, as this enables a comprehensive view of fiscal policy making from the perspective of government financial statements. This seems to conflict with the existing literature. In October 2020, the World Bank released a paper reflecting on how governments could use existing financial reporting systems during the pandemic while identifying opportunities for their improvement after the pandemic. The paper also contemplated the possible impact of the pandemic on governments’ financial performance, position and cash flows. Together with the earlier IFAC (2020) publication—the COVID-19 Intervention Assessment Tool—the two publications offer advice on how to assess the COVID-19 impact. Both publications promote a balance sheet approach. IFAC (2020) pointed out that the degree to which a country can use the balance sheet approach largely depends on the reliability of its accounting and financial reporting system, as well as the inclination of key decision makers to use information in the financial statements. It also highlighted that countries with a strong accrual basis of financial reporting would be in a better position to assess the impact of COVID-19. The OECD (2020b) called attention to the importance of ‘the management of balance sheet risks and guarantees and other contingent liabilities risks that dramatically increased in the wake of the Covid-19 crisis’. Guarantees and loan schemes with favourable terms are being offered by various jurisdictions, presenting challenges about uncertain budgetary risks surrounding expenditure forecasts in the future. It is feared that traditional economic measures, such as the debt to GDP ratio and the Public

48 

G. DABBICCO AND J. CARUANA

Sector Net Debt, do not reflect the effects of a good part of government policy interventions addressing COVID-19 impacts. Metcalfe and Taylor (2020) call for governments to use accounting data and take a balance sheet approach to effectively manage their finances through the COVID-19 crisis. Their advice is based on a study that sets out the impact of COVID-19-related fiscal policy interventions on the public sector balance sheets in ten countries, namely the US, Japan, the UK, Italy, Brazil, Canada, South Africa, Indonesia, New Zealand and Turkey. Just over half of the government interventions by the ten countries in Metcalfe and Taylor’s (2020) sample are in the form of ‘below-the-line’ activity, such as guarantees and equity injections.1 Olowo-Okere (2020) clarifies that, unlike government spending and borrowing, many of these below-the-line interventions do not show up in the traditional economic measures unless, for example, a guarantee is called in and money flows. A loan guarantee would only affect debt to GDP if a loss is realized. These provisions or contingent liabilities can have a substantial impact on public finances if they crystallize. Therefore, besides keeping track of eventual spending consequences, it is also critical for governments to record and manage the assets and liabilities being created through the below-the-line policy measures. Understanding the impact that policies have on a country’s public sector net worth is required for the protection of the sustainability of public finances, for the current and future generations (Olowo-Okere, 2020). A further study by the OECD (2020a) analysed a number of countries including European countries (such as Austria, Belgium, France, Germany, Greece and Italy) in terms of supporting measures and levels of government. The study discussed the cascading effects of the COVID crisis on regional and sub-national governments, notably the impacts on subnational government assets, liabilities and budgets. The study observes a strong and asymmetric pressure (p. 15) on both flows and stocks, that is, on particular items of expenditure and reduced revenues, as well as on debt and guarantee schemes. It also highlighted the difficulty to quantify the impact of the crisis on sub-national finances due to the uncertainties, 1  The fiscal policy interventions announced by Italy, the UK, Japan and Turkey were dominated by ‘below the line interventions’. On the other hand, the interventions of the US and New Zealand were mainly direct fiscal expenditures, with very minimal ‘below the line’ interventions (Metcalfe & Taylor, 2020, p. 30).

3  THE ROLE OF THE BALANCE SHEET FOR REPORTING DEFICITS… 

49

severity, territorial differences and effectiveness of the supporting measures. This suggests the need to improve the quality of data at the micro level, including balance sheets for a complete and reliable understanding of the crisis and its impact. Metcalfe and Taylor (2020, p. 7) claim that governments shall benefit ‘by adopting a balance-sheet approach through: (a) increased clarity on the true position of the public finances, as well as an understanding of the fiscal room available for further Government action; (b) improved value for money and financially sustainable policies, and (c) enhanced public sector resilience and the embedding of key financial metrics to drive performance management’. Governments can also use the balance sheet approach to ‘cure’ public finances post-COVID.  This approach would reduce reliance on public spending cuts and tax increases and focus on maximizing the return on public assets, value for money in the use of public resources and ‘taking a multi-capital approach by expanding the scope of the public sector balance sheet’ (Metcalfe & Taylor, 2020, p. 8). Capital items could include natural, human, social and physical/financial capital. The balance sheet approach is perceived as extremely useful as it can improve decision making and provide the benchmarks for new fiscal targets (Metcalfe & Taylor, 2020). Even governments that operate on a cash basis can apply a mind-set of balance sheet management to their decision making by considering the implications for net worth (Metcalfe & Taylor, 2020). Without taking account of net worth, governments may be tempted to sell public assets at a loss in order to improve their cash holdings. A balance sheet approach will show the net profit or loss arising from asset sales. There are two common reference frameworks used in the public sector for reporting financial information. These are the Public Sector Accounting (such as IPSAS) and the National Accounts (such as the System of National Accounts (SNA) and its brother at the European level, the European System of Accounts (ESA)), including an integrated approach for the general government sector by Government Finance Statistics (GFS, based on SNA and ESA). Both require the presentation of a public sector balance sheet, but the contents and presentation differ due to the particular objectives and paradigm of each framework. However, these frameworks for managing public finances need to be expanded to adopt public sector net worth as a key indicator. This would require the balance sheet to present a complete picture of a government’s financial position that includes

50 

G. DABBICCO AND J. CARUANA

non-debt liabilities (e.g. loan guarantees) and public assets (e.g. property, plant and equipment and investments) (Dabbicco, 2016). However, the process of compiling the required public sector balance sheet is fraught with difficulties (Metcalfe & Taylor, 2020; FIPECO, 2020, 2021; IMF, 2021). Certain assets and liabilities are difficult to measure reliably (e.g. heritage assets). The existence of a substantial unmeasured intangible asset (the power to tax) makes it possible for governments to maintain a negative equity position. Since many public assets are illiquid, it is important that governments remain committed to effective cash management. Furthermore, some asset valuations fluctuate or are very difficult to measure (e.g. non-listed equity holdings). Metcalfe and Taylor (2020) suggest that these problems can be mitigated by referring to IPSAS; however, they excluded non-produced assets from the data presented in their study because of the variability in their measurement and incomplete data in certain jurisdictions. In the sample of countries studied by Metcalfe and Taylor (2020), government net worth to GDP deteriorated from 2019 to 2020 and is expected to continue deteriorating in 2021 and 2022. This broad indication of deterioration accounts for only the immediate fiscal policy response by governments to COVID-19. The full impact of COVID-19 on public sector balance sheets will be much worse since other factors, such as reduced tax receipts and increased health and social benefit spending, will put additional negative pressure on public finances. Such COVID-19related fiscal policy interventions can only increase government liabilities over time. Table 3.1 provides an overview of the possible fiscal impact from a conceptual standpoint, according to IFAC (2021). According to Metcalfe and Taylor (2020), a sustained recovery from the COVID-19 crisis will require the effective allocation of public resources, for example, through public infrastructure investment. This must be incorporated into each jurisdiction’s vision for rebuilding its economy, taking into consideration government spending multipliers and the size of government investment as a share of GDP. Furthermore, transparent reporting is required to inform citizens about the recovery measures that are being taken. Thus, Metcalfe and Taylor (2020) recommend reference to the non-authoritative guidance issued by the IPSASB on reporting long-­ term financial sustainability (Recommended Practice Guideline [RPG] 1) and on financial statement discussion and analysis (RPG 2).

3  THE ROLE OF THE BALANCE SHEET FOR REPORTING DEFICITS… 

51

Table 3.1  The fiscal impact of COVID-19 government interventions Statement of financial performance Overall decrease in tax revenues, including value added, profit and wage taxes Overall increase in public expenditures, including public health, unemployment benefits, social security, subsidies and grants, disaster relief packages, and lending to public enterprises and lower levels of government A higher deficit could be reported at the end of the reporting period Statement of financial position Lower revenues and higher expenditures, caused by the pandemic, could lead to a decrease in the overall level of assets, particularly of current assets, including cash and cash equivalents The overall level of liabilities, particularly public debt, provisions and pension liabilities could be higher Net assets/equity could be lower, leading to decreasing net worth to gross domestic product ratios Cash flow statement Operating activities could generate large cash outflows, given the decrease in tax revenues and increase in expenditures Investing activities could also generate large cash outflows, mainly because of lower spending on capital expenditure in infrastructure and other government fixed assets Financing activities may show large cash inflows in several countries, reflecting an increase in borrowing A net decrease in cash and cash equivalents is expected Source: IFAC (2021)

As in previous crises, Public Sector Balance Sheets can act as a tool for ‘socializing risk’ during the COVID-19 pandemic. By ‘socializing risk’, we understand this to mean that the risks being faced by governments during a crisis are comprehensively described and disclosed in the notes to the financial statements. The notes to financial statements are an opportunity to make the financial information more understandable to users by explaining materially large figures and significant changes caused by the crisis. With regard to the COVID-19 pandemic and the government responses thereto, disclosures would be needed that deal with contingent liabilities and guarantees, public debt and borrowing facilities, extraordinary expenditures and arrears of tax revenue. Further disclosures would need to elaborate on the long-term social risks associated with financial performance and financial position of the government. The underlying aim is always to fulfil accountability with the citizens. Such detailed analysis would also assist policy makers and decision takers to be well-informed and to maintain the required perspective.

52 

G. DABBICCO AND J. CARUANA

The literature analysed shows that, while in normal circumstances the balance sheet approach is not deemed suitable by many for public finances, it is the main tool referred to in times of crisis. From another perspective, the impact of the pandemic has led to the discussion around the adequacy of SGP rules in the case of economic crisis or low economic growth—notably the weakness of its ‘one size fits all’ model, and the need to revise the rules (Alves & Afonso, 2007). The discussion on this current model which does not consider the different positions and weights of the member states in the expanded EU has been re-launched by the European Commission (EC) (ICAEW, 2021) notably in connection with a future exit from the suspension of the Pact. In this context, it appears that ‘fiscal remedies’ and addressing government debts are at the centre of the discussion. Indeed, in recent years the Commission’s analysis underlying the SGP has developed from a focus on absolute deficit and debt levels, towards a more detailed and nuanced approach (e.g. expenditure benchmarks and structural deficit). However, the extraordinary shock and the ongoing climate of uncertainty from the pandemic will make it difficult to put in place the remedial actions, and overall there are perceived risks from the quality of underlying data (Hauptmeier & Leiner-Killinger, 2020). Thus, also from this point of view, the literature analysed suggests a more balance sheet–based approach to fiscal management and the need to consider introducing elements of flexibility in the Pact (Kopits, 2018). However, it appears that the discussion on the revision of the Pact should go further. The extension of the analysis to the use of information from balance sheets would introduce a more complete and reliable basis. There is also the need to integrate information from notes and disclosures in the accounts for certain items, such as contingent liabilities and the financial positions of controlled public entities (ICAEW, 2021). This study seeks to investigate whether it is true that it is necessary to consider balance sheet aspects when dire circumstances hit or whether this is just a matter of ‘clinging on to false impressions’. Besides the 60% debt to GDP rule, the SGP requirements do not place much importance on the balance sheet. This study seeks to establish whether this could have been the main factor that led for the SGP requirements to be relaxed in the European context. This study seeks to identify the main balance sheet items that could prove useful as indicators for sound financial management decisions and a greater resilience in times of crises. In the process, the study seeks to gather some proposals on the direction of future changes to the SGP.

3  THE ROLE OF THE BALANCE SHEET FOR REPORTING DEFICITS… 

53

3.3   Methodology The study is qualitative in nature, utilizing data analysis as the research tool. The main source of data is that submitted by EU member states to the EC on general government2 net lending/borrowing, debt and overall financial position. The analysis takes five-year data (from 2016 to 2020) and analyses the trend, with a particular focus on 2020 through the lens of the emergency measures taken. The data were extracted from the Eurostat database on GFS, which is publicly available, and referred to annual general government accounts and annual financial accounts including the various sub-sectors. The data were extracted on 21 October 2021. The data tables include aggregates of government revenue and expenditure, transactions in financial assets and liabilities and balance sheets. The data present individual data for all the EU member states, as well as aggregates for the EU and the euro area. Data for the EFTA (European Free Trade Association) countries Iceland, Norway and Switzerland were also included. For practical reasons, the tables included in this chapter only refer to totals for the EU27 (the 27 EU countries); however, the data at country level is available at https://ec.europa.eu/eurostat/databrowser/product/page/ The main measures and type of public programmes in response to the COVID-19 crisis may be summarized as follows: • Direct government expenditure: This type reflects an increase in government spending such as for social benefits and provision for the health sector, and measures to support employment and households. • Measures to support business and household liquidity such as tax credits, grants, loan grants under favourable conditions, suspension of mortgage repayments and equity or quasi equity investments. • Tax-related measures: These interventions include the delay of deadlines for tax payments (i.e. postponement and not cancellation) and social contribution under specific conditions and the suspension (i.e. cancellation) of some instalments of several taxes. • Other liquidity provisions and public guarantee schemes to support business activity: These measures include the launch of new

2  These data do not include public corporations, and therefore COVID-19-related interventions conducted by public corporations will not be reflected directly.

54 

G. DABBICCO AND J. CARUANA

guarantee schemes or enhancement of existing guarantee schemes and specific operations to safeguard companies’ assets. • Support for financial system, usually through Central Banks, such as purchasing bonds and other assets-backed securities; lowering interest rates. The measures are usually of common design across several countries. The accounting records that capture the financial effects of these measures are used as the basis for the preparation of GFS reports, which ultimately are the foundations of the SGP measures. Table 3.23 shows the possible type of transactions affected by the measures to be recorded in GFS reporting. One may observe that social protection measures will be recorded mainly as other social insurance benefits and mostly in the social security funds sub-sector, where the social security fund is the main provider of the measures. On the other hand, Table 3.3 shows the main activity/function of government expenditure that could be impacted by the measures. Table 3.4 illustrates the main GFS items of revenue and expenditure affecting the government accounts (i.e. compensation of employees and VAT) by sub-sector in time series from 2016 to 2020, expressed in billions of euro, as well as in time series percentage change year-on-year. Table 3.5 shows the corresponding financial balance sheet items (known as stocks) in time series from 2016 to 2020, expressed in current value (billions of euro), while Table 3.6 focuses on financial liabilities, showing the data in time series as percentage changes year-on-year, in order to observe which operations have a balance sheet impact, and which will not (at least in this phase) such as guarantees, which are not generally recorded in GFS until they are called. On the other hand, Figs. 3.1 and 3.2 illustrate the spike in the debt to GDP % ratio, which is the result of the measures taken by EU member states in response to the pandemic. It should be noted that the debt included here is not the same as the financial liabilities shown in Table 3.5 under ESA 2010, because only the liabilities F2 (currency and deposits), F3 (debt securities) and F4 (loans) are taken into consideration for surveillance purposes (i.e. for the Excessive Deficit Procedure [EDP]) (Dabbicco, 2018). In the ESA 2010, there is no definition of ‘debt’ as such, but a broader concept than the Maastricht (EDP) debt is defined as ‘total financial liabilities incurred by the general government sector’ (p.  513). The 3

 Tables 3.2, 3.3, 3.4, 3.5 and 3.6 can be found in an appendix to this chapter.

3  THE ROLE OF THE BALANCE SHEET FOR REPORTING DEFICITS… 

55

12,500.0

In Euro billions

12,000.0 11,500.0 11,000.0 10,500.0 10,000.0 9,500.0 Series1

2016

2017

2018

2019

2020

10,530.3

10,636.7

10,732.9

10,823.5

12,067.3

Fig. 3.1  General Government consolidated gross debt for EU 27 (in Euro billions). (Data extracted on 21/10/2021 from Eurostat)

Percentage of GDP

95. 90. 85. 80. 75. 70. Series1

2016

2017

2018

2019

2020

83.9

81.3

79.3

77.2

90.1

Fig. 3.2  General Government consolidated gross debt for EU 27 as % of GDP. (Data extracted on 21/10/2021 from Eurostat)

definitions also differ in terms of measurement as Maastricht debt is valued at nominal value (specifically defined as face value), while under ESA/GFS valuation of liabilities (and assets) is mostly at current market price, that is, except for loans which are valued at nominal value (p. 515). Moreover, the scope of the liabilities under both ESA and Maastricht debt does not include some categories such as contingent and potential liabilities and

56 

G. DABBICCO AND J. CARUANA

unfunded pension schemes, which would be instead relevant in assessing the financial positions of countries, notably in pandemic circumstances. A limitation has been noted in our methodology related to the use of EU published data. The limitation relates to an element of guesswork that is required when attempting to interpret this data, for example, the EDP Tables. Eurostat publishes these Tables, explaining their contents and their evolution over time by holding press meetings or by issuing press releases and notes to analyse them.4 Perhaps there is room for improvement in this respect.

3.4   Findings 3.4.1   Revenues and Expenditures Our analysis starts from the main non-financial aggregates, that is, regarding revenues and expenditures (Table 3.4). On the revenue side, changes in 2020 compared to 2019 that may be observed are the reduction of VAT receipts, taxes on production and imports, and current taxes on income, wealth in absolute terms, as well as in property incomes in percentage change. At the country level, Germany, Ireland, Greece, Spain, France, Croatia, Italy, Cyprus, Malta and Portugal were the most affected. Perhaps surprisingly, revenue from other taxes did not fall so much compared with 2019. Substantial reductions can also be observed for current taxes on income, wealth and so on, in countries such as Spain, Luxembourg and Hungary. Social security contributions were expected to be much lower in 2020; however, staff on furlough are still paying contributions, so the downward impact was reduced. As for the expenditure side, the analysis shows higher subsidies, social benefits and other current transfers payable from central government. It appears that many countries include furlough payments to businesses as subsidies on production, resulting in increased subsidies. Social benefits increased because many countries widened the category of people eligible for them, besides increasing their amounts. The impact from higher social benefits paid by the central government sector is particularly observable in 4  For example, a note on the stock-flow adjustment, which explains the link between EDP tables, is published by Eurostat on its website to explain these adjustments for the period considered 2016–2019. Refer to: https://ec.europa.eu/eurostat/documents/1015035/ 10710640/SFA-PR-2020-Apr.pdf/8ca06461-ea44-8cf4-93e2-49f59f5c7b01

3  THE ROLE OF THE BALANCE SHEET FOR REPORTING DEFICITS… 

57

Greece and Denmark. Subsidies payable from central government went up for many countries, as well as in social security funds. The movements in other current transfers for Italy could be explained by intra-sector transfers, which would also explain the improvement in the local government financial position. The net effect of revenues and expenditures are illustrated in the Net Lending/Net Borrowing balance, better known as the Surplus/Deficit. At central government level, one can note a constant improvement in the years until 2019 as the deficit level decreased over time. This momentum took a sharp reverse in 2020, as deficit levels increased by a notable 555% over 2019. In the other sub-sectors, fluctuations in surplus/deficit can be observed over time, but the negative spike in 2020 is obvious in all sectors. This trend in the surplus/deficit levels is not mirrored in the Financial Net Worth balance for some sub-sectors, as shall be noted in the next sections. 3.4.2   Assets and Liabilities On the financial assets side (Table  3.5), the main increase is in central government’s loan assets. This is probably largely attributable to businesses, especially in Denmark, Spain, Poland and Germany. As expected, large movements from 2019 to 2020 are observable in liabilities in debt securities. This appears mainly due to EU member states borrowing in debt securities (boosted by low interest rates, European Central Bank (ECB) intervention, etc.). At the country level, this is particularly true for Estonia, Cyprus, Romania and Denmark. Big increases in debt securities as liabilities at the level of local government and Social Security Funds are observable in France, and also for local government in Austria and Portugal. Whilst loans do not appear to have been the main borrowing instrument used across central and local governments, the data show large increases in loans taken by Social Security Funds at the level of EU 27 countries and in some countries, such as Portugal, Croatia, Germany and Czechia. The analysis in the time series for annual financial accounts—on the liabilities side (Table  3.6)—focusing on changes in net financial worth (financial assets less liabilities) shows huge decreases at EU 27 level for central government in 2020, as well as significant decreases in the Social Security Funds sector. But interestingly, the net financial worth has moved

58 

G. DABBICCO AND J. CARUANA

from negative to positive for local government. This may indicate a movement to be further investigated; for example, it could be the result of a shift of financing burden between sub-sectors. However, looking at the amounts, it may be observed that the local government figures are much smaller than central government. Overall, except for the central government sector, the % changes in the net financial worth are not in tandem with the % change in surplus/deficit over time. At the country level, one can observe the largest decreases in net financial worth in Sweden, Denmark and Bulgaria for central government, in Austria for local governments and in Slovakia and Portugal for Social Security Funds. 3.4.3   Emphasizing the Balance Sheet Perspective In National Accounts, the balance sheet is called the Financial Account. As can be observed in Table 3.5, the picture that this balance sheet captures is confined to that relating to financial assets and financial liabilities. This is quite different from the balance sheet referred to by accountants in the literature (e.g. Metcalfe & Taylor, 2020). The main difference lies in the treatment of non-current assets (Caruana et al. 2019). Non-current assets are capitalized in the accountant’s balance sheet. On the other hand, acquisitions of non-current assets are called ‘gross fixed capital formation’ in GFS and are included as expenditures when calculating the balance of Net Lending/Net Borrowing. The literature implies that, should the gross fixed capital formation be capitalized instead of being treated as expenditure, the result would be more helpful as a basis on which to calculate the net worth percentages (Metcalfe & Taylor, 2020). We did not find consolidated EU data relating to stocks of Non-current Assets in the publicly available databases (such as the OECD, Eurostat and the IMF/GFS). Data availability seems limited and appears at the moment under development, showing shortcomings related to limited coverage and different methodologies for reporting data across countries, and therefore, we could not estimate or illustrate the effect of a changed accounting treatment on the % changes in net lending/borrowing and financial net worth. However, due to the difficulties elaborated in the literature, we would expect that any significant effects on the % trends would only be observable in the long term. Furthermore, the changes in debts and net debts as illustrated in Table 3.6 and Figs. 3.1 and 3.2 (Maastricht definition) are more indicative and may prove to be more

3  THE ROLE OF THE BALANCE SHEET FOR REPORTING DEFICITS… 

59

helpful if supported by further disclosures on contingent liabilities together with risk analysis of their crystallization. In other words, the below-theline activity needs to be reported in more depth. Care should be taken when interpreting ‘the capitalisation of gross fixed capital formation’. This does not necessarily imply a balance sheet like the one prepared by private-sector entities. As emphasized in the literature, the detailed reporting of ‘Property, Plant and Equipment’ may not prove useful for governments; however, recording accumulated gross fixed capital formation expenditures would prove useful in the long term in order to assess the sustainability of government asset stock and its contributions to government productivity changes. Such a record would illustrate the effect of government policy over time. It would measure the extent of investment that a government is doing in the various sectors of the country’s economy—health, education, infrastructure and so on. Therefore, such records would also assess the level of public owned assets such as railways, ports, roads, airports and natural resources and the resilience of a government to face critical situations such as the pandemic. In terms of this balance sheet approach, it might be beneficial that the SGP further moves the focus from deficit and debt levels and expenditure benchmarks towards the use of information from balance sheets, to make it more complete and reliable. We also need to integrate information from notes and disclosures in the accounts for certain items, such as contingent liabilities and the financial positions of controlled public entities. Balance sheets can provide a fuller overview, informing on debt positions, and also on the assets side in terms of wealth (including a calculation of structure, solidity, liquidity and illiquid position, net working capital and other relevant indicators) with relevant ratio analysis. European governments may need to prepare complete balance sheets to inform this approach. Many EU countries have balance sheets, or have started on them, at some levels of government, but there are many gaps remaining (ICAEW, 2021). At least, a record of cumulative investment in capital projects and infrastructure should be maintained, which could also prove useful when assessing the condition of a member state. It would also be ideal for governments to maintain cumulative records of their social investment, spending on climate change measures, heritage maintenance, gender equality, special needs and health care policies. These activities represent financial efforts that cannot be captured as assets on a balance sheet. However, they are very important to communicate in terms of sustainability and accountability to citizens, the EC and international organizations.

60 

G. DABBICCO AND J. CARUANA

The use of a balance sheet approach could also help the SGP to be more ‘principles-based’ (instead of ‘rules-based’) and then standards could be applied according to each member state’s circumstances (Blanchard et al., 2020). However, on their own, such records would not be useful. Benchmarks are required. Therefore, the SGP could be revised to include indicators of long-term investment required in the various economic sectors.

3.5  Discussion and Conclusion The financial impact of the various types of government responses to the COVID-19 is initially reflected in the government accounting records. The data from these records are used for budgetary and financial reporting. The same data is also used for GFS. Therefore, the quality of the accounting data shall be reflected in the quality of the GFS. Perhaps the first issue can be noted from Table 3.2. The measures taken by governments across the EU could not all be allocated to one particular sector of the general government. Overlaps could be noted. It may be suggested that costs which can be directly traced to pandemic measures should be classified in a separate sector, as a sort of emergency sector. This would reduce the impact on the previously reported data and thus decrease significant fluctuations in that data. Furthermore, such separate recording of these extraordinary costs would also assist the EC to assess the justification of the financial assistance being provided to the member states. As the pandemic measures are reduced, the reduction in the costs of the sector shall be evident, until they are eventually eradicated and the need for the sector is removed. Our data analysis reveals some important impacts seen in 2020 data which change the established trends in prior years. The data reveals drastic movements in certain line items, for example, subsidies and social benefits and loans. Data for 2021 onwards will probably show the effect on COFOG (Classification of the Functions of Government) categories. Furthermore, one would have expected that, in the time of the pandemic, certain expenditures would have been prioritized. For example, we expected that expenditures on gross fixed capital formation would have decreased as funds would be directed towards health, for example. But this is not yet evident from the data which clearly shows that gross fixed capital

3  THE ROLE OF THE BALANCE SHEET FOR REPORTING DEFICITS… 

61

formation has remained relatively stable over time. This might be explained by the fact that investment decisions were taken prior to the pandemic and are not quickly redirected without further supporting plans (i.e. the Recovery and Resilience Plan at national level). It appears that stocks of annual financial accounts (i.e. financial assets and liabilities) were shaken by significant changes in EU member states, and these may require quite a long time to absorb that shock. On the other hand, significant fiscal measures remain necessary to protect citizens and business also in 2021 and beyond. The increased public debt levels will need a sustainable fiscal policy. In parallel, the need of reforms accompanying the launch of the necessary new investments will stress the ceilings of debt and deficit and need an appropriate strategy from the EU. The research demonstrates that availability and analysis of comprehensive balance sheets that include information on contingent liabilities—providing a complete picture of a government’s financial situation—should be the basis for recommendations to address fiscal imbalances and remedial actions after the pandemic. It is nevertheless important to underline that a principle-based SGP would still need thresholds and an alarm system based on commonly agreed measures of fiscal situation. These common measures may come from statistical and/or financial accounting information (ICAEW, 2021). In this context, our research shows that a significant revision of the SGP should probably be considered, in terms of flexibility in times of crises. Member states will undoubtedly find it very hard to recover from the drastic fiscal shake-up delivered by COVID. Countries have made extraordinary expenses and taken on major new debts. Therefore, the rules need to be more flexible in order to allow recovery. The activation of the general escape clause (which already exists in the SGP) and the temporary framework for state aid allowed national governments to put in place a farreaching level of fiscal support in 2020, alongside the provision of liquidity. The question by the authorities is whether premature withdrawal of fiscal support should be avoided. In fact, as of June 2021, the EC had already announced that the escape clause shall remain in force even for 2022 and is expected to be deactivated in 2023. In the meantime, the EC is taking the opportunity to consider revising the SGP rules. The analysis in this chapter indicates that any changes in SGP could better appreciate the balance sheet approach. The pandemic has revealed

62 

G. DABBICCO AND J. CARUANA

the importance of flexibility in fiscal rules. We need to be flexible also in the use of balance sheets as part of improvements in the SGP. The current basis of the SGP is statistics, which can of course be further developed. To extend to public financial accounting would require common public accounting standards in Europe, and their implementation across countries and levels of government (which is being worked on by the EC in the European Public Sector Accounting Standards (EPSAS) project). But this is easier said than done (ICAEW, 2021). Furthermore, it seems very important to elaborate what we mean by the balance sheet approach. In fact, this may be developed in different ways, such as under the cash basis (e.g. as prepared by the US), or the accrual balance sheet extracted from accounting systems compliant with accrual accounting standards. Balance sheets from National Accounts/ GFS may be one further way based on the accrual accounting basis. Compiling a full balance sheet that shows non-financial assets as an element should be further investigated (also on the basis of government financial statements data) as it may appear to be less useful to policymakers, especially in the short term. The balance sheet approach that we are suggesting goes beyond the balance sheet as understood in traditional private-sector financial statements. In a public sector context, less emphasis is traditionally placed on the extent of fixed assets reported, while there is more focus on liabilities. The recognition principles for assets and liabilities might also be different in the public sector. This debate has taken place over many years in the context of the development of IPSAS, and more recently in the EPSAS project. Having said this, we do suggest that gross fixed capital formation is accumulated over time, in order to illustrate the cumulative level of investment being made by a government in the economy. Correspondingly, the SGP criteria could consist of benchmarks for the investment required in the various economic sectors. Furthermore, the focus should be more on those ‘hidden liabilities’ that are in fact not captured in a balance sheet, that is, the contingent liabilities arising from guarantees. It is rather complicated to establish

3  THE ROLE OF THE BALANCE SHEET FOR REPORTING DEFICITS… 

63

provisions for guarantees in financial reporting statements. Such provisions are often absent in national accounts (Heald & Hodges, 2018). The ESA 2010 attempts to make up for this deficiency by (a) establishing the concept of standardized guarantees, where a liability can be estimated based on expected costs, effectively leading to a provision; and (b) requiring more disclosure of contingent liabilities by member states. Perhaps the focus of future changes to the SGP should be along these lines, as this would lead to enhanced risk socialization. As they stand, the SGP rules are too restrictive, and in fact, they had to be suspended as soon as calamity hit the member states in March 2020. Changes in the future could also include the requirement for member states to build buffers which would be available in times of crises and to take a more balance sheet–based approach to fiscal management. Furthermore, it could also be considered that the SGP takes a more principles-based approach (instead of a rules-based approach) and sets standards that could then be applied according to the circumstances of each member state. In extraordinary times as those presented by the global pandemic, it is very important for risk to be socialized. Socializing risk entails more transparency. Greater transparency is a key feature of democratic accountability during a period of crises. Thus, there is the need to collect data for highquality information to ensure effective policymaking and financial planning. The application of the SGP should incorporate transparent standards of accounting. Reliable information is vital to regain trust in these uncertain times, and reliability can be enhanced with robust financial reporting. Many governments have already established measures to provide both financial and non-financial assistance, and this prioritizes the need to assess the effectiveness of the measures taken, thus ensuring the proper use of public funds.

ESA/GFS transactions recording

Local government (excluding social security funds)b

Gross fixed capital formation

Compensation of employees

Social transfers in kind

Intermediate consumption and/or gross fixed capital form Other miscellaneous current transfers

Central government Compensation of employees (excluding social security funds)a

Sector of general government

Donations to Civil Protection Department to support the fight against the epidemiological emergency by COVID-19 Measures to support spa and wellness industry: establishment of a fund at the Ministry of Economic Development for vouchers to purchase thermal therapy Increase of the fund for the care of subjects with autism spectrum disorder Additional financing aimed to pay additional remuneration to employees in the National Health System due to the COVID-19 emergency Possibility of hiring doctors, nurses and other full-time employees for Local Health Units Regions and autonomous provinces are authorized to hire personnel Installation of temporary sanitary areas with simplified procedures (building works) Reorganization of hospital network: Increase of the number of means of transport for COVID-19 patients

Strengthening human resources of the Ministry of Health (hiring with fixed-term contracts) Temporary recruitment of military doctors and nurses, and other technical professions Urgent provisions to ensure continuity to activities of Institute for Health Human resources Temporary recruitment of military doctors and nurses, and other technical professions Increase in remuneration of health military personnel Strengthening of military health structures

Measure

Table 3.2  GFS transactions reflecting government measures

Appendix

64  G. DABBICCO AND J. CARUANA

Social security fundsc

Compensation of employees Social benefits (including social transfers in kind, other current transfers) Subsidies and loans

Intermediate consumption

Subsidies and loans

Social transfers in kind

Intermediate consumption and social transfers in kind Intermediate consumption and/or compensation of employees Social transfers in kind

Intermediate consumption and compensation of employees

(continued)

Incentives to corporations for activity on information, assistance, health safety and preventative advice

Strengthening at local level health assistance: enlargement of agreements with private structures Urgent provisions regarding waiting lists: in-patient and out-patient health care Incentives to corporations for production and supply of medical devices (subsides or loans) Strengthening human resources of the National Insurance with new contracts for professionals/autonomous (consultants/contractors); sanitization cost for medical aids, medical devices; strengthening IT systems; purchases of health services Hiring extra staff School feeding programmes. Sick leave, fee waivers, transfer to businesses

Extraordinary measures for hiring specializing doctors, assignment of self-employment contracts to health care personnel and fixed-term contracts Measures to strengthen local health care for early tracking of cases, providing assistance and increasing treatment services at home to patients in self-isolation at home Strengthening of health services, also with the possibility of hiring of nurses, social workers and psychologists Home care for pupils and people with disabilities Strengthening of home care for people with particular fragility Remuneration of personnel of emergency call center number)

3  THE ROLE OF THE BALANCE SHEET FOR REPORTING DEFICITS… 

65

Gross fixed capital formation Intermediate consumption and/or gross fixed capital form Loan capital, equity capital. Loan guarantees, lines of credit debt securities, other accounts receivable/ payable Social transfers in kind Various

Common to several sectors

Financing ‘refuge-homes’ for victims of domestic violence Strengthening and reorganizing the assistance network; Constant monitoring and early tracking of cases/contacts; Active surveillance and monitoring at assisted health residences and other residential structures Organization of a network of laboratories and identification of a regional public laboratory with coordination tasks Possibility of renting structures for isolating COVID patients Possibility for local health units of providing integrated or equivalent home assistance activities for patients in isolation Activation of regional operation centres Reorganization of hospital network: strengthening of intensive and semi-intensive care with increase in the number of beds Reorganization of hospital network: activation of moveable intensive care structures Reorganization of hospital network: restructuring of first aid departments to separate them from other departments

Financing—all measures

Purchase of devices for assisted ventilation Possibility of requisitioning, in use or property, of real estate units

Measure

b

a

Some of the measures recorded by central government could be attributable to state government Some of the measures recorded by local government could be attributable to state government c EU member states that do not have social security funds would record the effects of these measures under central/state/local government

ESA/GFS transactions recording

Sector of general government

Table 3.2 (continued)

66  G. DABBICCO AND J. CARUANA

07.13; 07.22; 07.32; 07.40—Health

Health measures such as procurement of protective gear, medical products and equipment, support to hospitals and funding for vaccine research; out-patient services. Specialized Hospital services (COVID centres); immunization Family benefits: Paid sick leave Family benefits: Parental leave benefits Baby-sitting bonus Unemployment benefits: Wage supplementation schemes Allowances for self-employed and to former staff Other benefits: Emergency income

10.71—Social exclusion n.e.c.

10.51—Unemployment

10.41—Family/children

10.11—Sickness

COFOG

Measure

Table 3.3  GFS transactions reflecting government measures by COFOG

3  THE ROLE OF THE BALANCE SHEET FOR REPORTING DEFICITS… 

67

2653.9 2538.3 12439.6 2358.1

4% 3% –2% 5% 11% 3% 3% 4% –4% 4% 4% 7% –2% 2% 0% 2% 5% 3% 2% –27%

6% 4% –13% –8% –2% 6% –5% 1% –6% 4%

3% 2% –5% –2% 3% 1% 5% 4% 2%

–17%

–2%

3% 6% –7% 3% 0% 4% 3% 5% 3%

–1% 1% –8% 0% 6% 5% 3% 2% 5% 3%

555%

3% 63% –10% 14% 1% 21% 10% 6% 16%

–9% –7% 42% –15% –12% –5% 0% 3% –3% –6%

2020/2019

Central government 2018/2017 2019/2018

Data extracted on 21/10/2021 from Eurostat

Net lending (+) /net borrowing (–)

REVENUES (extracts) VAT, receivable Taxes on production and imports, receivable Other subsidies on production, receivable Interest, receivable Property income, receivable Current taxes on income, wealth, etc., receivable Net social contributions, receivable Other current transfers, receivable Capital taxes, receivable Total general government revenue EXPENDITURES (extracts) Compensation of employees, payable Subsidies, payable Interest, payable Social benefits payable (not in kind) Social transfers payable (in kind) Other current transfers, payable Gross fixed capital formation Intermediate consumption Total general government expenditure

2017/2016

–774.7

–118.3

–121.1

3627.1 –2.9

709.3

–473%

3% 0% –4% 3% 2% 4% 3% 1% 2%

0% 2% 3% –12% –3% 7% 3% 4% –5% 4%

2017/2016

10.8

724.2 5.9

788.5

–35%

3% 3% –7% 4% 0% 5% 7% 5% 5%

5% 5% 3% –2% 1% 5% 3% 4% 7% 5%

–16%

5% 8% –9% 5% 4% 5% 3% 4% 3%

5% 5% 8% –1% –2% 4% 4% 2% –1% 3%

State government 2018/2017 2019/2018

7.1

762.8

–857%

5% 97% –16% 7% 2% 15% 7% 17% 12%

0% –1% 6% –21% –24% –2% 3% 21% 13% 6%

2020/2019

–44.7

883.2 24.5

1371.1

2%

3% -3% –11% 4% 0% 6% 6% 3% 3%

13% 4% 0% –11% –2% 4% 4% 2% 0% 3%

2017/2016

25.0

1411.6

0.2

1523.2

–13%

3% 0% –7% 2% 1% 3% 13% 3% 4%

41% 6% –8% –1% 4% 2% 4% 2% –2% 3%

–99%

4% 5% –6% 3% 3% 2% 10% 3% 4%

6% 3% –10% –1% –1% 1% 3% 4% 4% 3%

Local government 2018/2017 2019/2018

21.8

1464.1

868%

3% 14% –16% 6% 2% –1% –1% 2% 3%

–3% –5% 14% –17% –8% –3% 0% 11% –27% 3%

2020/2019

1.7

1561.5

6.9

2251.0

298%

3% 2% 0% 3% 4% 8% –5% 5% 4%

–3% 2% –11% –9% –5% 3% 5% 3% 17% 4%

2017/2016

27.3

2330.8

35.7

2502.6

49%

1% 11% –6% 3% 4% 6% –2% 3% 3%

–18% 0% –6% 1% 2% 20% 4% 0% 24% 3%

–12%

1% 7% –10% 4% 5% 4% 0% 4% 4%

372% 62% –2% –3% 1% –3% 3% 6% 12% 4%

Social security funds 2018/2017 2019/2018

40.7

2398.9

–393%

5% 486% –21% 9% 3% 21% 7% 7% 10%

–2% 2% 12% –12% –18% –1% –1% 32% 1% 5%

2020/2019

–104.8

2758.8

–199.4

3137.4

3002.8

2930.6

Net lending (+) /net borrowing (–)

3058.2

523.6 126.2 8.9 58.8 509.0 104.6 8.3 55.1 484.4 100.2 8.3 53.0 467.5 94.9 8.4 51.5 451.5 87.6 8.9 49.0 132.9 102.8 194.0 378.5 130.9 103.5 196.5 372.2 127.2 101.7 178.3 362.1

125.5 99.0 157.8 350.8

125.0 93.4 148.3 340.0

46.0 182.7 49.7 123.3

45.1 158.3 46.5 105.0

43.5 150.2 45.3 101.4

43.4 143.6 42.5 97.1

42.6 138.1 41.0 95.8

49.9 1577.1 185.9 262.5

49.3 1306.5 168.9 246.6

49.4 1261.8 164.1 233.8

49.3 1231.3 156.6 226.1

47.8 1218.5 149.1 217.5

–166.4

111.8 59.2 2.9 1852.0 106.6 10.1 3.7 1695.7 105.3 9.4 4.1 1624.2 104.1 8.5 4.4 1582.3 101.5 8.4 4.4 1530.4 508.1 50.1 7.0 134.9 493.5 44.1 8.4 127.0

476.0 42.1 8.9 123.4

464.2 41.8 9.6 121.5

0.0 2257.9

450.0 43.1 10.7 117.1

1563.2

138.4 1776.1 606.1 0.0 139.6 1797.1 459.8 0.0 144.2 1751.8 434.9 0.0 116.0 1616.7 424.4

46.2

119.7 1690.8 436.2 0.0

2020

277.1 53.5 13.3 92.6

1523.4

286.5 13.3 725.5 2.4

47.0

102.0 0.3 7.7 14.3

2019

100.0 0.3 8.8 17.4

9.9 61.9 0.3 9.1 17.2

61.8 0.3 9.0 16.9

60.6 0.3 9.9 17.8

2018

12.1

12.5

265.2 27.1 15.9 86.4

1485.9

296.1 13.2 654.8 3.3

23.5 259.7 5.3 3.5 19.0

253.0 25.0 17.4 82.1

1436.6

1395.5

293.8 12.9 630.4 3.1

24.1 273.7 4.7 4.2 20.7

244.8 24.3 18.7 78.7

838.5

289.4 12.4 619.6 3.2

278.8 12.0 606.5 3.2

22.7 265.6 5.2 4.2 20.9

Social security funds 2017

2016

237.3 24.3 19.5 76.2

794.4

235.8 34.9 304.0 14.0

16.1 251.3 5.6 4.3 20.1

14.2 240.6 5.6 4.8 20.5

2020

566.8 204.9 172.0 410.5

769.9

240.6 33.9 251.8 12.4

164.5 0.3 2.7 4.8

120.2

2019

552.3 126.0 191.9 358.6

735.1

706.4

2852.4

3019.1

2937.1

2836.4

2731.2

231.1 32.5 246.2 12.5

166.3 0.3 3.5 6.4

120.1

2018

Local government 2017

2016

534.0 118.9 207.4 347.4

219.3 31.6 236.9 11.7

205.1 30.5 227.0 12.4

1086.4 136.2 118.2 21.1

1142.3 136.6 115.1 21.7

1087.9 133.0 113.3 20.8

1058.5 129.0 108.7 21.6

999.8 135.4 107.2 23.0

159.0 0.3 3.5 6.5

114.7

2020

511.9 110.9 211.3 342.0

151.1 0.3 3.6 6.4

148.4 0.3 4.1 6.6

2019

496.2 109.2 222.7 348.8

109.1

109.0

741.0 1246.1 0.4 16.5 63.1

811.1 1346.9 0.3 19.4 71.5

818.0 1334.7 0.3 19.4 67.6

2018

State government 2017

2016

788.6

2020

1291.3 0.3 18.6 60.9

2019

745.0

2018

Central government

2017

1238.0 0.4 20.1 62.3

2016

EXPENDITURES (extracts) Compensation of employees, payable Subsidies, payable Interest, payable Social benefits payable (not in kind) Social transfers payable (in kind) Other current transfers, payable Gross fixed capital formation Intermediate consumption Total general government expenditure

SECTOR TIME REVENUES (extracts) VAT, receivable Taxes on production and imports, receivable Other subsidies on production, receivable Interest, receivable Property income, receivable Current taxes on income, wealth, etc., receivable Net social contributions, receivable Other current transfers, receivable Capital taxes, receivable Total general government revenue

Table 3.4  Government revenue, expenditure and aggregates for EU 27 (in Eur billions) and % change

68  G. DABBICCO AND J. CARUANA

F1 F2 F3 F31 F32 F4 F41 F42 F5 F6 F61

–7468.5

10869.3

5.7 38.4 449.5

1.2 477.1 8813.1 503.3 8309.8 1049.2 114.0 935.1 10.8 30.0 0.4 23.9

3400.8

0.0 –2.9 566.8

0.0 402.0 141.2 7.5 133.7 836.8 79.2 757.7 1455.9 1.0 1.0 0.0

2016

–7496.2

10969.1

8.6 34.2 500.4

1.1 483.0 8873.3 475.6 8397.7 1029.7 109.7 919.9 11.5 35.9 0.4 26.9

3472.9

0.0 –14.5 573.5

0.0 433.3 135.4 13.3 122.1 857.2 80.0 777.2 1487.1 1.0 1.0 0.0

–7493.0

11029.2

10.1 37.7 525.7

1.1 508.5 8890.8 449.6 8441.2 1017.8 104.9 912.9 9.7 37.9 0.3 27.5

3536.2

0.0 –6.7 598.8

0.0 458.2 131.3 14.1 117.2 877.2 77.8 799.4 1476.3 1.1 1.1 0.0

–7805.9

11535.0

11.2 50.0 548.7

1.1 519.6 9376.7 427.1 8949.7 987.5 91.6 895.9 10.0 41.4 1.5 28.8

3729.2

0.0 –10.6 628.0

0.0 435.4 154.7 13.9 140.8 880.9 72.9 808.0 1639.6 1.2 1.2 0.0

Central government 2017 2018 2019

Data extracted 21/10/2021 15:53:27 from Eurostat

Total financial assets/liabilities

Financial net worth

F

BF90

Provisions for calls under standardised guarantees Financial derivatives and employee stock options Other accounts receivable / payable

Financial liabilities Monetary gold and special drawing rights (SDRs) Currency and deposits Debt securities Short-term debt securities Long-term debt securities Loans Short-term - Loans Long-term - Loans Equity and investment fund shares Insurance, pensions and standardised guarantees Non-life insurance technical reserves

Pension entitlements, claims of pension funds on pension managers and entitlements to non-pension benefits

Total financial assets/liabilities

F

F66 F7 F8

Provisions for calls under standardised guarantees Financial derivatives and employee stock options Other accounts receivable / payable

F66 F7 F8

F63_F64_F65

Monetary gold and special drawing rights (SDRs) Currency and deposits Debt securities Short-term debt securities Long-term debt securities Loans Short-term - Loans Long-term - Loans Equity and investment fund shares Insurance, pensions and standardised guarantees Non-life insurance technical reserves Pension entitlements, claims of pension funds on pension managers and entitlements to non-pension benefits

SECTOR TIME

F1 F2 F3 F31 F32 F4 F41 F42 F5 F6 F61 F63_F64_F65

Financial assets

–8805.0

12988.1

23.4 58.2 585.4

1.1 556.8 1062.1 747.2 9914.9 1056.0 117.7 938.2 10.2 58.4 1.1 33.9

4183.1

0.0 –19.4 669.7

0.0 681.6 150.1 9.6 140.4 991.6 78.7 912.9 1708.3 1.1 1.1 0.0

2020

–708.2

1074.2

0.1 0.3 48.4

0.0 0.0 469.3 17.3 452.0 554.0 31.7 522.2 2.1 0.1 0.0 0.0

365.9

0.0 –9.1 34.3

0.0 94.5 35.5 0.5 35.0 83.1 0.9 82.2 127.4 0.3 0.3 0.0

2016

–681.4

1046.5

0.1 0.3 45.9

0.0 0.0 453.4 15.2 438.2 545.1 29.5 515.6 1.7 0.1 0.0 0.0

365.1

0.0 –6.1 38.2

0.0 90.7 29.5 0.5 29.0 79.8 1.3 78.5 132.6 0.3 0.3 0.0

–680.0

1041.3

0.1 1.4 47.7

0.0 0.0 446.8 13.0 433.8 543.3 25.7 517.6 2.0 0.1 0.0 0.0

361.3

0.0 –5.7 36.6

0.0 98.5 28.4 0.5 28.0 77.2 1.5 75.7 125.9 0.3 0.3 0.0

–680.9

1065.9

0.1 1.9 48.2

0.0 0.0 470.9 13.7 457.3 543.5 31.6 512.0 1.3 0.1 0.0 0.0

385.1

0.0 –12.8 41.5

0.0 111.4 30.7 0.4 30.3 77.5 1.6 75.9 136.5 0.3 0.3 0.0

State government 2017 2018 2019

–736.5

1154.1

0.1 2.2 47.2

0.0 0.0 549.7 13.0 536.7 553.5 38.1 515.4 1.2 0.1 0.0 0.0

417.6

0.0 –12.7 48.4

0.0 131.2 30.7 0.8 29.9 78.0 1.1 76.9 141.7 0.3 0.3 0.0

2020

–97.6

998.7

0.0 3.4 189.5

0.0 2.2 66.7 7.2 59.5 717.8 55.9 661.9 7.7 11.4 0.0 11.4

901.2

0.0 1.2 119.4

0.0 225.8 26.9 2.1 24.8 98.0 11.7 86.3 423.2 6.7 6.7 0.0

2016

–55.3

1,002.0

0.0 2.6 199.7

0.0 2.1 69.5 6.9 62.6 708.6 52.3 656.3 7.5 11.9 0.0 11.9

946.7

0.0 2.0 125.3

0.0 246.3 27.5 2.4 25.1 98.7 12.4 86.3 440.0 6.9 6.9 0.0

–22.2

1,010.3

0.0 2.5 209.2

0.0 2.2 74.8 8.6 66.2 701.6 48.0 653.5 7.6 12.5 0.0 12.5

988.0

0.0 2.4 132.5

0.0 264.3 27.8 2.5 25.3 100.1 12.7 87.4 454.0 6.9 6.9 0.0

–4.1

1,022.5

0.0 3.0 212.1

0.0 2.1 82.1 8.5 73.7 702.4 46.9 655.5 7.4 13.4 0.0 13.4

1018.4

0.0 2.6 135.9

0.0 268.8 26.7 2.4 24.3 102.4 13.2 89.2 475.0 7.2 7.2 0.0

Local government 2017 2018 2019

Table 3.5  General government financial assets/liabilities EU 27 (stock) (Euro billions)

7.8

1,068.1

0.0 3.7 226.5

0.0 2.0 102.7 10.5 92.2 710.9 43.0 667.9 7.4 14.8 0.0 14.8

1075.9

0.0 3.0 134.8

0.0 303.9 26.9 3.0 23.8 108.2 14.4 93.8 491.6 7.6 7.6 0.0

2020

566.8

564.8

0.0 8.3 221.7

0.0 0.0 213.5 44.0 169.5 117.6 50.4 67.3 1.7 2.0 0.0 2.0

1131.6

0.0 6.0 248.9

0.0 205.6 250.2 8.9 241.2 27.7 8.7 19.0 393.2 0.0 0.0 0.0

2016

626.3

574.6

0.0 8.4 241.8

0.0 0.0 208.0 45.4 162.6 112.2 44.5 67.7 1.8 2.3 0.0 2.3

1200.9

0.0 6.0 268.2

0.0 231.0 242.1 8.5 233.6 27.0 9.4 17.6 426.6 0.0 0.0 0.0

639.7

559.7

0.0 8.7 241.8

0.0 0.0 187.3 36.8 150.5 117.4 42.3 75.1 2.0 2.6 0.0 2.6

1199.5

0.0 6.6 262.1

0.0 246.3 234.5 8.7 225.8 29.5 12.6 16.9 420.6 0.0 0.0 0.0

739.9

570.3

0.0 8.9 253.2

0.0 0.0 176.4 41.8 134.6 126.4 37.9 88.4 2.2 3.2 0.0 3.2

1310.1

0.0 7.1 269.8

0.0 261.9 244.1 6.3 237.8 35.0 14.9 20.1 492.2 0.0 0.0 0.0

Social security funds 2017 2018 2019

676.4

692.2

0.0 9.6 269.5

0.0 0.0 242.1 113.4 128.7 164.9 46.8 118.1 2.2 3.9 0.0 3.9

1368.6

0.0 10.4 299.7

0.0 269.1 232.4 2.5 230.0 40.5 16.7 23.8 516.6 0.0 0.0 0.0

2020

3  THE ROLE OF THE BALANCE SHEET FOR REPORTING DEFICITS… 

69

2% 5% 0% –5% 1% –1% –4% –1% –16% 5% –22% 2% 16% 10% 5%

52% –11% 11%

0.4%

0.0%

Data extracted 21/10/2021 15:53:27 from Eurostat

Financial net worth

1%

2%

2% –7% 1% 1% –5% 1% –2% –4% –2% 6% 20% –6% 13%

Total financial assets/liabilities

Monetary gold and special drawing rights (SDRs) Currency and deposits Debt securities Short-term debt securities Long-term debt securities Loans Short-term - Loans Long-term - Loans Equity and investment fund shares Insurance, pensions and standardised guarantees Non-life insurance technical reserves Pension entitlements, claims of pension funds on pension managers and entitlements to non-pension benefits Provisions for calls under standardised guarantees Financial derivatives and employee stock options Other accounts receivable / payable 1%

0% –54% 4%

0% 403% 1%

Total financial assets/liabilities

0% 6% –3% 6% –4% 2% –3% 3% –1% 10% 10% 0%

0% 8% –4% 78% –9% 2% 1% 3% 2% –4% –4% 0%

Monetary gold and special drawing rights (SDRs) Currency and deposits Debt securities Short-term debt securities Long-term debt securities Loans Short-term - Loans Long-term - Loans Equity and investment fund shares Insurance, pensions and standardised guarantees Non-life insurance technical reserves Pension entitlements, claims of pension funds on pension managers and entitlements to non-pension benefits Provisions for calls under standardised guarantees Financial derivatives and employee stock options Other accounts receivable / payable

4.2%

5%

11% 33% 4%

2% 2% 5% –5% 6% –3% –13% –2% 3% 9% 402% 4%

5%

0% 59% 5%

0% –5% 18% –1% 20% 0% –6% 1% 11% 8% 8% 0%

12.8%

13%

109% 16% 7%

–4% 7% 14% 75% 11% 7% 29% 5% 2% 41% –23% 18%

12%

0% 83% 7%

0% 57% –3% –31% 0% 13% 8% 13% 4% –5% –5% 0%

Central government 2017/2016 2018/2017 2019/2018 2020/2019

–3.8%

–3%

8% –16% –5%

0% 0% –3% –12% –3% –2% –7% –1% –18% 8% 0% 0%

0%

0% –33% 11%

0% –4% –17% 5% –17% –4% 53% –5% 4% 3% 3% 0%

–0.2%

0%

–1% 413% 4%

0% 0% –1% –15% –1% 0% –13% 0% 18% –1% 0% 0%

–1%

0% –7% –4%

0% 9% –4% –4% –4% –3% 11% –4% –5% 3% 3% 0%

0.1%

2%

20% 31% 1%

0% 0% 5% 5% 5% 0% 23% –1% –37% 20% 0% 0%

7%

0% 126% 13%

0% 13% 8% –11% 9% 0% 7% 0% 8% 3% 3% 0%

8.2%

8%

10% 20% –2%

0% 0% 17% –5% 17% 2% 21% 1% –2% 10% 0% 0%

8%

0% –1% 17%

0% 18% 0% 90% –1% 1% –34% 1% 4% 2% 2% 0%

State government 2017/2016 2018/2017 2019/2018 2020/2019

–43.3%

0%

0% –24% 5%

0% –5% 4% –4% 5% –1% –6% –1% –1% 4% 0% 4%

5%

0% 59% 5%

0% 9% 2% 10% 1% 1% 6% 0% 4% 3% 3% 0%

–59.8%

1%

0% –5% 5%

0% 2% 8% 24% 6% –1% –8% 0% 0% 5% 0% 5%

4%

0% 21% 6%

0% 7% 1% 5% 1% 1% 3% 1% 3% 0% 0% 0%

–81.8%

1%

0% 21% 1%

0% –3% 10% –1% 11% 0% –2% 0% –2% 7% 0% 7%

3%

0% 9% 3%

0% 2% –4% –5% –4% 2% 4% 2% 5% 4% 4% 0%

–293.0%

4%

0% 24% 7%

0% –3% 25% 24% 25% 1% –8% 2% 0% 10% 0% 10%

6%

0% 16% –1%

0% 13% 1% 27% –2% 6% 9% 5% 3% 5% 5% 0%

Local government 2017/2016 2018/2017 2019/2018 2020/2019

10.5%

2%

0% 1% 9%

0% 0% –3% 3% –4% –5% –12% 1% 8% 11% 0% 11%

6%

0% 1% 8%

0% 12% –3% –5% –3% –3% 8% –8% 8% –12% –12% 0%

2.1%

–3%

0% 3% 0%

0% 14% –10% –19% –7% 5% –5% 11% 8% 15% 0% 15%

0%

0% 9% –2%

0% 7% –3% 3% –3% 9% 34% –4% –1% –97% –97% 0%

15.6%

2%

0% 3% 5%

0% 0% –6% 14% –11% 8% –10% 18% 9% 23% 0% 23%

9%

0% 8% 3%

0% 6% 4% –28% 5% 19% 19% 19% 17% –11% –11% 0%

–8.6%

21%

0% 7% 6%

0% 0% 37% 171% –4% 31% 23% 34% 4% 22% 0% 22%

4%

0% 47% 11%

0% 3% –5% –61% –3% 16% 12% 18% 5% 13% 13% 0%

Social security funds 2017/2016 2018/2017 2019/2018 2020/2019

Table 3.6  General government % change in the more relevant financial assets/liabilities EU 27, and the effect on the main assets and liabilities

70  G. DABBICCO AND J. CARUANA

3  THE ROLE OF THE BALANCE SHEET FOR REPORTING DEFICITS… 

71

References Alves, R. H., & Afonso, O. (2007). The “new” stability and growth pact: More flexible, less stupid? Intereconomics, 42(4), 218–225. Anthony, N.  R. (1978). Financial accounting in non-business organizations. An exploratory study of conceptual issues, research report. Financial Accounting Standards Board. Ball, I. (2018, October 11). Balance sheets and fiscal policy: The New Zealand example. Public Finance Focus. Available at https://www.publicfinancefocus. org/opinion/2018/10/balance-­sheets-­and-­fiscal-­policy-­new-­zealand-­example Ball, I. (2020, April 21). Back to the future for fiscal policy? Public Finance Focus. Available at https://www.publicfinancefocus.org/viewpoints/2020/04/back­future-­fiscal-­policy Ball, I., & Pflugrath, G. (2012). Government accounting. World Economics, 13, 9–26. Barton, A. (2005). Professional accounting standards and the public sector—A mismatch accounting system. Abacus, 41(2), 138–158. Biondi, Y. (2012). Should business and non-business accounting be different? A comparative perspective applied to the new French governmental accounting standards. International Journal of Public Administration, 35(9), 603–619. Biondi, Y. (2016). Governmental accounting and austerity policies: Accounting representations of public debt and deficit in Europe and abroad. Accounting Forum, 40, 89–105. Biondi, Y. (2018). The financial sustainability conundrum in central government. Accounting, Economics and Law, 8(3), 1–3. Blanchard, O., Leandro, A., & Zettelmeyer, A. (2020). Revisiting the EU fiscal framework in an era of low interest rates. Available at https://ec.europa.eu/ info/sites/default/files/s3-­p_blanchard_et_al_0.pdf Christiaens, J., & Rommel, J. (2008). Accrual accounting reforms: Only for businesslike (parts of) governments. Financial Accountability and Management, 24(1), 59–75. Dabbicco, G. (2016). A comparison of Government Accounting and Government Finance Statistics, Doctoral Thesis in Economics of public sector entities, University of Naples “Parthenope”, Italy. Dabbicco, G. (2018). A comparison of debt measures in fiscal statistics and public sector financial statements. Public Money & Management, 38(7), 511–518. Deloitte. (2015). Comments to the exposure draft 2015/3. In Conceptual Framework for financial reporting. IASB. Ellwood, S. M., & Newberry, S. M. (2016). New development. The conceptual underpinnings of international public sector accounting. Public Money & Management, 36(3), 231–234. FIPECO (Finances publiques et économie). (2020). Are the public debt and the public deficit good indicators? Available at https://www.fipeco.fr/fiche/La-­dette-­ publique-­et-­le-­d%C3%A9ficit-­public-­sont-­ils-­de-­bons-­indicateurs-­%3F

72 

G. DABBICCO AND J. CARUANA

FIPECO. (2021). Public debt and European fiscal rules. Available at https://www. fipeco.fr/commentair e/La%20dette%20publique%20et%20les%20 r%C3%A8gles%20budg%C3%A9taires%20europ%C3%A9ennes#haut Hauptmeier, S., & Leiner-Killinger, N. (2020). Reflections on the stability and growth pact’s preventive arm in light of the COVID-19 crisis. Intereconomics, 55, 296–300. https://doi.org/10.1007/s10272-­020-­0919-­8 Heald, D., & Hodges, R. (2018). Accounting for government guarantees: Perspectives on fiscal transparency from four modes of accounting. Accounting and Business Research, 48(7), 782–804. ICAEW. (2021, October 5). A balance sheet approach may be needed by the EU following COVID. ICAEW Insights. https://www.icaew.com/insights/ viewpoints-­on-­the-­news/2021/Nov-­2021/A-­balance-­sheet-­approach-­may-­ be-­needed-­by-­the-­EU-­following-­COVID IFAC. (2020). COVID-19 intervention assessment tool. https://www.ifac.org/ knowledge-­g ateway/supporting-­i nternational-­s tandards/discussion/ covid-­19-­intervention-­assessment-­tool IFAC. (2021). Emerging role of government balance sheets for sustainable public finances in the post-COVID-19 world. Available at http://www.ifac.org IMF. (2020). https://www.imf.org/en/News/Articles/2020/04/15/tr041520­transcript-­of-­the-­april-­2020-­fiscal-­monitor-­press-­briefing IMF. (2021). https://www.imf.org/en/Publications/Policy-­Papers/Issues/ 2021/02/03/Review-­of-­The-­Debt-­Sustainability-­Framework-­For-­Market-­ Access-­Countries-­50060 Kopits, G. (2018, April). How could the stability and growth pact be simplified? Committee on Economic and Monetary Affairs, European Parliament. Mann, B., Lorson, P., Oulasvirta, L., & Haustein, E. (2019). The quest for a primary EPSAS purpose—Insights from literature and CFs. Accounting in Europe. https://doi.org/10.1080/17449480.2019.1632467 Mautz, R. (1981). Financial reporting: Should government emulate business? Journal of Accountancy, 152(2), 53–60. Metcalfe, A. (2020, August 13). Covid-19: Time for a balance sheet approach to accounting? Public Finance. Available at http://www.publicfinance.co.uk Metcalfe, A., & Taylor, M. (2020). Sustainable public finances through COVID-19. Available at https://www.accaglobal.com/gb/en/professional-­insights/ global-­profession/Sustainable_public_finances_Covid-­19.html Monsen, N. (2019). Commercial accounting, fund accounting and cameral accounting: Introduction and comparison with a view to use in the governmental sector. Norwegian School of Economics (NHH). OECD. (2020a). The territorial impact of COVID-19: Managing the crisis across levels of government Updated 10 November 2020. Available at https://www. oecd.org/coronavirus/policy-­responses/the-­territorial-­impact-­of-­covid-­19-­ managing-­the-­crisis-­across-­levels-­of-­government-­d3e314e1/

3  THE ROLE OF THE BALANCE SHEET FOR REPORTING DEFICITS… 

73

OECD. (2020b). Managing fiscal risks: Lessons from case studies of selected OECD countries. Available at http://www.oecd.org/officialdocuments/publicdisplay documentpdf/?cote=GOV/PGC/SBO(2020)6&docLanguage=En OECD. (2021). Balance sheet-based policies in COVID-19 fiscal packages. How to improve transparency and risk analysis? (GOV/PGC/SBO(2021)6). Olowo-Okere, E. (2020). Foreword to sustainable public finances through COVID-19. Available at https://www.accaglobal.com/gb/en/professional-­ insights/global-­profession/Sustainable_public_finances_Covid-­19.html Oulasvirta, L. (2021). A consistent bottom-up approach for deriving a conceptual framework for public sector financial accounting. Public Money & Management. https://doi.org/10.1080/09540962.2021.1881235 Pallot, J. (1992). Elements of a theoretical framework for public sector accounting. Accounting, Auditing & Accountability Journal, 5(1), 38–59. Rutherford, B. A. (2000). An introduction to modern financial reporting theory. Paul Chapman Publishing. Rutter, C. (2021, February 25). OECD countries’ Covid-19 borrowing upsurge swamps 2008 levels. Public Finance. Available at http://www.publicfinance.co.uk World Bank. (2020). Government financial reporting in times of the COVID-19 pandemic. Available at https://openknowledge.worldbank.org/bitstream/ handle/10986/34792/154283.pdf?sequence=4&isAllowed=y

CHAPTER 4

Accounting for Collective Services, Individual Services, and Emergency Relief: Reconsideration in Times of a Pandemic Natalia Aversano, Giuseppe Nicolò, Giuseppe Sannino, and Paolo Tartaglia Polcini

4.1   Introduction In the public administration context, the current COVID-19 pandemic has reinforced the need—already evidenced in the 2008 financial crisis— to apply an accounting system that is more suitable to providing vital information about the economic consequences of the disasters that have occurred.

N. Aversano (*) • G. Nicolò • P. Tartaglia Polcini Department of Management and Innovation Systems, University of Salerno, Fisciano, Italy e-mail: [email protected]; [email protected]; [email protected] G. Sannino Economics Department, University of Campania “Luigi Vanvitelli”, Capua, Italy e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 G. Dabbicco et al. (eds.), Public Sector Accounting, Financial Accountability and Viability in Times of Crisis, Public Sector Financial Management, https://doi.org/10.1007/978-3-031-04745-9_4

75

76 

N. AVERSANO ET AL.

In January 2019, the International Public Sector Accounting Standards Board (IPSASB) had anticipated these issues, publishing an Exposure Draft (ED) titled “Collective and Individual Services and Emergency Relief.” With this ED, the IPSASB solicited discussion on four specific matters for comment (SMCs) relative to: (1) the definitions of collective services and individual services, (2) the recognition of collective services, (3) the recognition of individual services, and (4) the accounting treatment for emergency relief. This ED also proposed amendments to International Public Sector Accounting Standard (IPSAS) 19, “Provisions, Contingent Liabilities and Contingent Assets,” and IPSAS 42, “Social Benefits.” In May 2019, the ED attracted 29 comment letters. The discussion on the accounting treatment of collective and individual services led to amendments to IPSAS 19, but the discussion on accounting for emergency relief was temporarily shelved. The economic crisis caused by the COVID-19 pandemic put the spotlight on these issues; it had become vitally important to show the crisis’ impact via public sector financial reporting (Cohen et al., 2021). From a public sector financial reporting perspective, the literature on accounting for emergency relief is scarce. A reaction was expected from IPSASB to provide guidelines around an issue that had become such an important element of public sector financial reporting. The IPSASB had chosen not to proceed with guidance on the topic, creating a gap in accounting for emergency relief. In the wake of these arguments, this chapter joins the debate via a document and content analysis of all comment letters submitted by the various stakeholders to ED 67. The ultimate goal of this study is to identify possible guidance for the accounting treatment of emergency relief. This chapter is thus useful for policy- and decision-makers and for standard-­setting boards, since it offers fresh knowledge about financial reporting on collective services, individual services, and emergency relief. It provides financial statement users and preparers with information about the possible future stages of their accounting policy. The chapter is organized in seven sections. Section 4.2 shows the impact of COVID-19 on Government Financial Statements and proposes an overview of the main types of public programs in response to the COVID-19 crisis. Section 4.3 offers a literature review regarding accounting for emergency relief; while Sect. 4.4 describes the content of ED 67.

4  ACCOUNTING FOR COLLECTIVE SERVICES, INDIVIDUAL SERVICES… 

77

Section 4.5 defines the research method; and Sect. 4.6 illustrates the study’s results. The last section shares the study’s conclusions.

4.2   Impact of COVID-19 on Government Financial Statements In response to the global Covid-19 crisis, governments have put numerous interventions into place and are providing various types of financial support to both individuals and businesses (PWC, 2020; Cohen et  al., 2021). The nature and scale of these interventions vary widely across jurisdictions, as will their longer-term impacts. The upheaval caused by the pandemic, following the crisis of 2008, again shines the spotlight on the ongoing need for better accounting systems. High-quality accrual-based financial reporting is thus needed—now, more than ever. Such reporting provides better information for the decision-­making process. It improves transparency on how public resources are used and allows citizens to hold decision-makers accountable for the pandemic’s financial impact. An accrual-based accounting system is considered more suited to provide complete information about the financial position of public sector entities (e.g., the value of investments, impairments of fixed assets, contingent liabilities on loan guarantees, and financial performance), including the effects of decreasing revenue and increasing expenses. An accrual-­ based accounting system would also disclose the long-term effects of investment-related decisions around financial management, intergenerational equity, and sustainability (Cohen et al., 2021). The economic impact of the COVID-19 pandemic on governments’ reported financial information should be harmonized among all public sector entities—or, at least, among all EU public administrations. COVID-19 presents an important opportunity to accelerate the harmonization process directed towards adopting accrual accounting and the IPSAS. By applying a harmonized public sector framework for the accounting treatment of social services, collective services, and emergency relief, the consistent reporting of large amounts of government expenditure across the European Union (EU) Member States can be enabled.

78 

N. AVERSANO ET AL.

4.2.1   Overview of the Main Types of Public Programs, in Response to the COVID-19 Crisis The financial impact of COVID-19 is truly global, and the pandemic has had numerous implications for the nature and extent of government support provided. Government interventions can be categorized in a variety of ways, but they generally fall into the following categories (IPSASB, 2020a; PWC, 2020), namely, direct government expenditure, and support for individuals, for businesses and for financial systems. Direct government expenditure refers to the significant public resources directed at strengthening the healthcare sector and civil protection mechanisms and supporting affected workers and economic sectors. Governments, for instance, use money from the European Regional Development Fund and the European Social Fund to invest in their healthcare systems, by purchasing health and protective equipment, including medical devices (e.g., respirators, masks, and similar); disease prevention; e-health; securing the working environment in the health care sector; and ensuring access to health care for vulnerable groups. 4.2.2   Financial Reporting Guidance from the Standard Setters Governments are implementing a wide range of interventions to mitigate the impact of COVID-19 on citizens. They are providing several types of support for individuals, including increased access to social benefits, such as income support and unemployment benefits; extension of tax payment deadlines; and deferrals of tax instalments. The IPSASB (2020a), with its “Questions and Answers (Q&A) publication,” released in 2020, showed that the prime source of guidance for the accounting of these types of expenses is IPSAS 19, “Provisions, Contingent Liabilities and Contingent Assets.” This document provides requirements for evaluating when a provision should be recognized for an economic intervention that has been planned to reduce the financial impact of COVID-19. In January 2020, the IPSASB (2020b) published amendments to IPSAS 19, to provide guidance on accounting for collective and individual services. The IPSASB (2020a) suggests that some relevant IPSASs can be used as guidance for these types of interventions. More specifically, IPSAS 39 “Employee Benefits” can be applied to the increase in employment

4  ACCOUNTING FOR COLLECTIVE SERVICES, INDIVIDUAL SERVICES… 

79

termination benefits, whereas IPSAS 42 “Social Benefits” can be used for the increase in unemployment benefits. Meanwhile, IPSAS 19 provides: • public sector accounting requirements related to cash transfers and other benefits provided to individuals and/or households to mitigate the effect of social risks; and • accounting requirements for collective services and individual services provided to address the needs of society as a whole. IPSAS 19 may be relevant as governments make interventions to reduce the negative impacts of COVID-19 by increasing government benefits, such as guaranteeing a minimum level of income. IPSAS 19 can also be used as guidance in the case of support for businesses and other public sector entities, to evaluate when a provision should be recognized for an economic intervention that is planned to reduce the financial impact of COVID-19. What appears strange in the document analysis is that, in providing a guide for government expenses connected to the COVID-19 pandemic, the IPSAS does not refer to the emergency relief to which ED 67 has also been devoted. Therefore, to identify possible guidance regarding the accounting treatment of emergency relief, previous studies on the topic have been considered. The content of comment letters sent to ED 67 has likewise been analyzed. In the public domain, as in the private sector, the IPSASB must follow steps to ensure due process before issuing its final standards. The standard-­ setting body issues a consultation paper (CP) or an ED, asking constituents to provide feedback in the form of Comment Letters, which are to be sent within a specific timeframe. The IPSASB’s due process can be seen as a political activity (Watts & Zimmerman, 1986), rather than a technical or economic process. The process has potential social and economic consequences. This is because the IPSASB analyzes the comment letters it receives, to better understand the issues raised by various participants regarding the potential implementation problems and costs associated with the future standards (Orens et al., 2011). The process thus represents a “procedural due process”— one that offers an impartial opportunity for interested parties to provide input in the standard-setting process. Stakeholder participation is an important indicator of the standard setters’ legitimacy (Durocher &

80 

N. AVERSANO ET AL.

Fortin, 2011). According to Richardson and Eberlein’s (2011) normative model of procedural legitimacy, however, the inputs provided by the interested parties represent just the first of three stages of legitimacy. “Input legitimacy” is followed by “throughput legitimacy” (represented by the analysis of the inputs received) and “output legitimacy” (represented by the issuance of the final standards).

4.3  Previous Studies on Accounting for Emergency Relief Disasters can be defined as “calamitous natural or human-caused emergency events that suddenly result in extensive negative economic and social consequences for the populations they affect” (Donahue & Joyce, 2001, p. 728). Disasters can vary in scale; yet they all threaten the general welfare of the populace. Government interventions to minimize the negative consequences of the disaster, and to restore order, are warranted and expected. The defining feature of a disaster is a loss of productive capacity that is sufficiently large, in relation to the income and wealth of the affected country, that it reduces consumption and welfare (Borensztein et  al., 2009). Nevertheless, it is difficult to measure and compare the losses from disasters across countries (Phaup & Kirschner, 2010). For example, Phaup and Kirschner’s (2010) study shows that the International Disaster Database considers only damage to property and infrastructure, without taking into consideration costs connected to the social sphere. Within the overall concept of disaster, natural disasters were previously seen as adverse natural events that occurred relatively infrequently, throughout the developed and developing worlds (Fassin & Pandolfi, 2010). In recent years, due to climate change and global warming, these events appear to have become more numerous (Sargiacomo, 2015), and a series of interrelated classification processes influences whether and how governments and the international community respond. The first set of classifications pertains to the scale of the natural event. For example, earthquakes are usually measured and classified according to the Mercalli or the Richter Scale (Richter, 1935). Hurricanes are measured by the Saffir-Simpson 1–5 scale (Simpson, 1974), whereas volcanic eruptions are observed by the Volcanic Explosivity 0–8 Index (Newhall & Self, 1982). These

4  ACCOUNTING FOR COLLECTIVE SERVICES, INDIVIDUAL SERVICES… 

81

classifications of adverse natural events represent a starting point for governments’ classification of their social and economic consequences. They are also important in framing the governance process for such disasters (Sargiacomo, 2015). Disasters vary also in terms of predictability. Some catastrophic events are easier to predict than others, and may likewise vary in terms of human capacity to moderate their consequences (Phaup & Kirschner, 2010). Although these variations are important to the design of disaster governance, they are less relevant to budgeting and reporting. According to several authors (Kastberg, 2014; Sargiacomo, 2015; Vosslamber, 2015), the role of accounting in disaster relief is not limited to a calculative function nor to an inactive recording of events. Sargiacomo et al.’s (2014) study of the Abruzzo earthquake showed the importance of accounting, when it came to overcoming opportunities for fraud related to the large sums of money flowing toward relief efforts. Various functions can thus be attributed to accounting. First, accounting can be seen as a means of promoting efficiency and effectiveness in relief efforts, which should be the cornerstones of the government’s new approach to public management (Everett, 2003). Efficiency refers to the prompt allocation of resources and the distribution of funds without any waste or fraud, while effectiveness implies both a “managerial and social dimension.” The managerial dimension refers to direct assistance provided to the maximum number of individuals, enterprises, and public institutions to return to the normal conditions of life, while the social dimension is related to the need to “regain the population’s lost serenity and dignity as individuals and families.” Therefore, accounting can be seen as a means of “indirectly mitigating suffering, thus reducing individuals’ vulnerability” (Sargiacomo et al., 2014). Natural disasters are clearly sites where accounting does matter (Sargiacomo, 2015). Secondly, through financial reporting and calculations for damage reimbursement, accounting can facilitate dialogue and create mutual understanding and trust between stakeholders, supporting the accountability process (Lai et al., 2014). In accounting for emergency relief, there will usually be several different stages in the relief programme. Under the US federal system, for example, planning for natural disasters is designated as the local government’s responsibility. When a local government exhausts its resources, it requests resources from the state level. The request then proceeds from the state level to the federal government (Baker, 2014).

82 

N. AVERSANO ET AL.

The case of Hurricane Katrina—one of the most costly and deadly hurricanes ever experienced in the United States—showed how breakdowns in accountability can occur in the face of a natural disaster. These breakdowns in accountability may be manifested by a lack of communication and by a failure on the part of government officials to act responsibly on behalf of the victims. McKernan (2012) highlights the crucial need to bring “responsible caring for the other” into the “moral” aspect of the concept of accountability. Thirdly, accounting can become a key facilitating technology in monitoring and evaluating recovery projects (Walker, 2014). Tools of the accounting system—such as budget, unit cost calculation, and storage bookkeeping—can be used by researchers to understand what really happens and how society responses to disasters. Vital lessons can thus be learned for the next generation, especially in terms of responding to disasters. Budgeting for disasters can reduce the population’s exposure to risk. It can support efforts to moderate the effects of a disaster before losses are incurred, and it can also contribute to developing fiscal stability over the long term (Phaup & Kirschner, 2010). There are two options in budgeting for disasters. In ex-ante budgeting, the cost connected to disaster relief is recognized before a loss event has occurred. In ex-post budgeting (which is more closely related to financial reporting than to budgeting), the liquidation of an obligation is made after the loss has been incurred. Many countries engage in ex-ante budgeting for disasters, because it offers some benefits for governments. Even if it is very difficult to predict a disaster, the presence of ex-ante budgeting can be useful to help maintain an efficient decision-making process during the disaster. It is thus important that governments act in advance of a loss, rather than waiting until it has occurred. Countries must invest in early warning systems for disasters, as well as in other pre-disaster mechanisms. As “focusing events,” natural disasters have the potential to provide new insights regarding the intersections among governance and accounting, including the consequences for people and the planet (Atkeson & Maestas, 2012, p. 27). From the analysis of the previous studies on emergency relief it emerges that clear and specific indications for the accounting treatment of emergency relief is missing. In the international scenario, the IPSAS domain lacks a specific standard devoted to this issue, and the ED 67 represented an important point

4  ACCOUNTING FOR COLLECTIVE SERVICES, INDIVIDUAL SERVICES… 

83

of departure in this area. Therefore, it becomes important to analyze the comment letters sent on ED 67  in order to identify possible guidance regarding the accounting treatment of emergency relief.

4.4  ED 67: “Collective and Individual Services and Emergency Relief” Released in January 2019, ED 67 “Collective and Individual Services and Emergency Relief (Amendments to IPSAS 19)” aimed to propose improvements to the relevance, faithful representativeness, and comparability of the information that a reporting entity provides in its financial statements regarding collective services, individual services, and emergency relief. With ED 67, the IPSASB solicited discussion on accounting for collective and individual services and emergency relief, through four SMCs: 1. SMC 1 Do you agree with the definitions of collective services and individual services that are included in this Exposure Draft? If not, what changes would you make to the definitions? 2. SMC 2 Do you agree that no provision should be recognized for collective services? If not, under what circumstances do you think a provision would arise? 3. SMC 3 Do you agree that no provision should be recognized for individual services? If not, under what circumstances do you think a provision would arise? 4. SMC 4 Do you agree with the proposed accounting for emergency relief? If not, how do you think emergency relief should be accounted for? The IPSASB has proposed that governments and other public sector entities should deliver emergency relief to individuals and/or families who have been negatively affected by circumstances such as natural disasters (i.e., flooding, earthquakes, food shortages, and volcanic eruptions) and the displacement of individuals and/or households because of war, civil commotion, or economic failure. Governments deliver emergency relief to individuals and/or families through the following types of transactions: (a) the provision of services, (b) the provision of goods, (c) the replacement of assets, and (d) cash transfers.

84 

N. AVERSANO ET AL.

Emergency relief may be provided in response to specific emergencies or, alternatively, it may be delivered as an ongoing government activity (or via other public sector entities). The delivery of emergency relief in response to specific emergencies requires that an explicit policy decision is made and communicated by a government or other public sector entity (e.g., via government announcements). This decision could give rise to a present obligation, requiring the recognition of a provision, when the criteria in paragraphs 22–34 of the IPSAS 19 are satisfied.1 Where an event does not give rise to a present obligation that satisfies the criteria for the recognition of a provision, an entity shall consider whether paragraphs 35–38 of this Standard require the disclosure of a contingent liability. The nature of the obligation may change because of later announcements or actions, such as the enactment of legislation. Where the delivery of emergency relief is an ongoing activity of government (or any other public sector entity) and is analogous to the delivery of collective services and/or individual services, as set out in paragraphs AG2–AG16, no provision is recognized before the relief is delivered. Concerning the disclosure information around emergency relief, IPSAS 1 “Presentation of Financial Statements” requires an entity to “present, either on the face of the statement of financial performance or in the notes, an analysis of expenses using a classification based on either the nature of expenses or their function within the entity, whichever provides information that is faithfully representative and more relevant.” The IPSAS 18 “Segment Reporting,” instead, provides information about the recognition of the segment expense. Finally, the IPSASB also considered whether specific disclosures for emergency relief were required. The Board concluded, however, that the existing requirements in IPSAS 1, IPSAS 18, and IPSAS 19 would provide sufficient information to meet users’ needs. The IPSASB thus decided not to require any specific disclosures for emergency relief.

1  According to the IPSAS 19, par 22: “A provision shall be recognized when: (a) An entity has a present obligation (legal or constructive) as a result of a past event; (b) It is probable that an outflow of resources embodying economic benefits or service potential will be required to settle the obligation; and (c) A reliable estimate can be made of the amount of the obligation.”

4  ACCOUNTING FOR COLLECTIVE SERVICES, INDIVIDUAL SERVICES… 

85

4.5  Research Methodology 4.5.1   Previous Studies on Comment Letters’ Analysis in the IPSASB Standard-Setting Process Sutton defined “actions which interested parties take to influence the rule-­ making body” (1984, p. 81) as “lobbying.” The comment letters submitted by the interested parties can be classified as a direct and formal channel for lobbying activities (Sutton, 1984; Morris, 1986). Several researchers focus their attention on the key role played by stakeholders’ lobbying activities in accounting standard-setting processes in both the private and public sectors (e.g., Sutton, 1984; Tutticci et al., 1994; Ryan et al., 2000; Georgiou, 2010; Durocher & Fortin, 2011; Jorissen et al., 2013; Kidwell & Lowensohn, 2019; Aversano et al., 2020; De Wolf & Christiaens, 2021). Comment letters sent by interested parties during the standard-setting process are the lobbying tools most analyzed in prior studies. Mainly conducted in the private domain, these studies have investigated the geographic origin and affiliation of respondents and the reasons that led them to engage in lobbying. Regarding the standard-setting process in the private sector, these studies show that the majority of respondents come from English-speaking countries (e.g., the United Kingdom, the United States, and Australia) and EU member states (Jorissen et  al., 2012; Larson & Herz, 2013). Preparers of financial statements have been found to be the major participants, while users of financial statements participate the least (Morris, 1986; Sutton, 1984; Tutticci et al., 1994; Jorissen et al., 2013). This unequal representation of respondents can be explained via the theory of economic democracy (Downs, 1957), which suggests that an interested party will decide to lobby if the benefits of lobbying exceed the costs of lobbying. Interested parties’ perceptions of their own ability to influence the standard setters also impact their decisions around participating in the standard-setter process (Gavens et al., 1989; Georgiou, 2010). In terms of timing, Sutton (1984) suggested that lobbying in the early stages of the due process increases the probability of making a difference in the outcome of the process. In the public sector, research focusing on lobbying in the IPSASB standard-­setting process is scarce. Such studies have mainly analyzed the comment letters sent as feedback to a single consultation document

86 

N. AVERSANO ET AL.

(Bisogno et  al., 2015; Manes Rossi & Aversano, 2015; Aversano et  al., 2020; De Wolf et al., 2020; De Wolf & Christiaens, 2021). Manes Rossi and Aversano (2015) examined the CP “Reporting Service Performance Information,” while Bisogno et al. (2015) examined ED 49 “Consolidated Financial Statements.” Both studies show that most respondents are affiliated with public sector entities and professional associations, as well as international organizations. Tutticci et al. (1994) noted that governmental organizations were willing to respond, with the aim of maintaining their legitimacy and enhancing their credibility. Geographically, most respondents came from Europe and Oceania. Aversano et al. (2020) and De Wolf et al. (2020) both analyzed the CP “Financial Reporting for Heritage in the Public Sector.” In this case too, the majority of respondents were affiliated with public sector entities and professional associations. De Wolf and Christiaens (2021) analyzed comment letters responding to ED 63 “Social Benefits” to investigate the extent to which respondents’ inputs were considered and integrated into the final IPSAS. This study’s results showed that, while some input was integrated, there was lack of transparency regarding the IPSASB decision-making process and how respondents’ inputs are analyzed. Kidwell and Lowensohn (2019) conducted a comprehensive study on the IPSASB’s input legitimacy. They examined which stakeholders participated in the consultation process for the period from 2010 to 2017, finding that respondents were from 42 different countries (13 EU members and 29 non-EU countries). Most respondents were affiliated with professional associations, national standard setters, treasuries, ministries of finance, and audit offices. 4.5.2   Research Method: Analysis of the Comment Letters Sent to ED 67 ED 67 “Collective and Individual Services and Emergency Relief (Amendments to IPSAS 19)” received 29 comment letters from several stakeholders, by May 31, 2019. In January 2020, after analyzing the suggestions included in the comment letters, the IPSASB released a document titled “Collective and Individual Services (Amendments to IPSAS 19).”

4  ACCOUNTING FOR COLLECTIVE SERVICES, INDIVIDUAL SERVICES… 

87

The amendments applied to the IPSAS 19 via this document (IPSASB, 2020b), included some suggestions on the definition and the recognition of the Collective and Individual Services. The IPSASB decided, however, not to proceed with the guidance on emergency relief proposed in ED 67. The present research thus attempts to analyze the documents released by the IPSASB in 2020, and the content of the comment letters received in response to ED 67, in order to explore: 1. The positions of the various respondents regarding the definition and recognition of emergency relief in governmental financial reporting. 2. The arguments included in the comment letters, to support or contradict their positions. In light of these arguments, this analysis aims to show which information is relevant for the several stakeholders. From a methodological point of view, a content analysis (O’Keefe & Soloman, 1985; Yen et al., 2007) was performed. First, following the process used in previous studies (Bisogno et  al., 2015; Manes Rossi & Aversano, 2015; Kidwell & Lowensohn, 2019; Aversano et al., 2020; De Wolf et al., 2020; De Wolf and Christiaens, 2021), the respondents of the comment letters were classified by geographic origin (e.g., Europe, Oceania, Asia, Africa, International, North America or South America). They were also categorized by affiliation (e.g., governmental organizations; professional associations; other such interested groups, academic, or professional organizations; standard setters; international organizations; and audit consulting firms), to consider whether their positions of concordance or disagreement and their motivations could somehow be explained by these characteristics. The ED includes four questions aimed at understanding the level of agreement or disagreement of the respondents around four issues: (1) Definitions of collective services and individual services (2) Recognition of collective services (3) Recognition of individual services (4) Accounting for emergency relief. In the second step, all responses to these four questions were analyzed by two independent researchers. As in previous studies (Kidwell & Lowensohn, 2019; Aversano et  al., 2020; De Wolf and Christiaens, 2021), the responses were classified into four categories (“agree,” “partially agree,” “disagree,” and “no reply”).

88 

N. AVERSANO ET AL.

To identify the correct categories into which each respondent should fall, the two independent researchers followed the criteria identified in previous studies (O’Keefe & Soloman, 1985; Tutticci et al., 1994; Kidwell & Lowensohn, 2019). Tutticci et  al.’s (1994) study asserted that a respondent who agreed with the proposed issue usually did not provide a supporting argument, instead presenting a clear and synthetic response. Respondents who did not agree or only partially agreed highlighted economic consequences and/or provided conceptually based arguments to convince standard setters of their views. “Form-oriented analysis,” developed by O’Keefe and Soloman (1985), has been useful in analyzing the strength of respondents’ positions on each of the issues. This study asserted that respondents who state that they strongly agree/disagree tend to use language that expresses a strong position (e.g., emotive language). In the case of SMC 4, the comments concerning the definition and recognition of emergency relief issues were read particularly closely. The reasons that respondents raised, to support their positions of agreement or disagreement around accounting for emergency relief issues, have been identified and categorized.

4.6  Analysis of Comment Letters to the ED 67: Findings 4.6.1   Respondents’ Profiles ED 67 prompted 29 letters of comment, in total. This can be appreciated as a relatively high level of interest for IPSAS, considering the average of 23 responses over the past 10 ED-related consultations. The responses reflect a good mix of geographic origin and affiliation. The main respondent groups were affiliated with professional associations (n. 15; 52%), followed by governmental organizations (n. 6; 21%) and standard setters (n. 5; 17%) (See Fig. 4.1). These results are in line with previous studies (Bisogno et  al., 2015; Manes Rossi & Aversano, 2015; Aversano et  al., 2020; De Wolf et  al., 2020; De Wolf and Christiaens, 2021), which found representatives of these categories to be those most likely to participate in the IPSASB standard-­setting process.

4  ACCOUNTING FOR COLLECTIVE SERVICES, INDIVIDUAL SERVICES… 

89

Affiliation of the respondents 7%

3%

21% 52%

17%

Professional association

Standard setters

Governmental organisation

Audit consulting firms

Other (interesting group, accademic)

Fig. 4.1  Affiliation of the respondents to the ED 67

As asserted in the literature review, the preparers of financial statements participate more often than the users of financial statements (Morris, 1986; Sutton, 1984; Tutticci et al., 1994; Jorissen et al., 2013). The theory of economic democracy, according to which, the benefits of participation are higher than the lobbying costs, can also be applied to each of these categories (Downs, 1957). The participation level of governmental organizations can particularly be read in the light of legitimacy theory; they tend to participate more, with the aim of maintaining their legitimacy (Tutticci et al., 1994). Geographically, most respondents came from Europe, North America, and Africa (each with 6 respondents; 21%), followed by Asia (n. 5; 17%), Oceania (n. 4; 14%), and South America and International (each with 1 respondent; 3%) (See Fig. 4.2). This shows that responses came from various countries, with relevant differences in culture, administrative traditions, accounting maturity, and accounting systems. These may all influence the ideas and the specific issues raised by respondents (Schmidthuber et  al., 2020; Christiaens et al., 2015).

90 

N. AVERSANO ET AL.

Geographic area of respondents’ comment letters International

3%

South america

3% 14%

Oceania

17%

Asia North america

21%

Africa

21%

Europe

21%

0%

5%

10%

15%

20%

25%

Fig. 4.2  Geographic area of the respondents to the ED 67

The European comment letter participants were mainly from France and the UK, while the North American respondents were from Canada. As evidenced by Kidwell and Lowensohn (2019), representatives of these countries are more participative because the first chairpersons of the Public Sector Committee (PSC) and IPSASB were of these nationalities. Jorissen et al. (2013) showed that these countries’ higher participation level can be also explained by their higher levels of familiarity with the English language, with systems of private standard setting, and with general accounting values (transparency and professional judgment). 4.6.2   Respondents’ Support of ED 63 To address the research objectives, the content of comment letters was analyzed and the responses were designated as falling into one of the four previously indicated categories. Table 4.1 indicates the rates of agreement, partial agreement, disagreement, and non-response for the questions included in the ED. The majority of respondents (23; 79%) agreed with the definitions of collective services and individual services proposed by ED 67. Those who “partially agreed” (1; 4%) or disagreed (5; 17%) provided several

4  ACCOUNTING FOR COLLECTIVE SERVICES, INDIVIDUAL SERVICES… 

91

Table 4.1  Overview answers to the ED 67 Specific matter for comments of the ED 67

Agree (%)

Partially agree (%)

Disagree (%)

No reply (%)

SMC 1: Do you agree with the definitions of collective services and individual services that are included in this ED? SMC 2: Do you agree that no provision should be recognized for collective services? SMC 3: Do you agree that no provision should be recognized for individual services? SMC 4: Do you agree with the proposed accounting for emergency relief?

79

4

17

–

86

3

10

–

83

7

10

–

83

10

14

3

suggestions to make the proposed definitions clearer and more complete. Most respondents supported the IPSASB’s decision to exclude collective and individual services from the scope of social benefits. Regarding collective and individual services, many respondents agreed with the proposal to avoid providing recognition for collective services (25; 86%) and individual services (24; 83%) before the services are delivered. In January 2020, just before the breakout of the pandemic, the IPSASB issued a final pronouncement (IPSASB, 2020b) amending IPSAS 19 by enriching several paragraphs and including Application Guidance (AG1– AG20) for determining whether a provision arises for collective and individual services as an integral part of IPSAS 19. By means of these amendments, the IPSASB confirmed the definitions proposed. It also specified that the intention to deliver collective services, the budget approval to deliver those services, or the existence of legislation in respect of those services are not—in themselves—sufficient to give rise to a present obligation. Regarding the accounting treatment for emergency relief, the majority of respondents (24; 83%) agreed with the accounting proposed by the IPSASB via ED 67. Another 14% (4) of respondents disagreed and 10% (3) partially agreed. Emergency relief issues, relative to the other three issues included in ED 67, present higher levels of partial agreement and of disagreement. Thus, even though many respondents were supportive of providing guidance for the accounting of emergency relief, several issues were identified.

92 

N. AVERSANO ET AL.

In light of these concerns, the IPSASB decided not to proceed with the guidance on emergency relief proposed in ED 67. Instead, the Board decided to consider the topic in developing its Mid-Term Work Program Consultation 2021. Thus, despite the great relevance of this topic in such a period of crisis, no guidance has been issued or included within the amendments applied to the IPSAS 19. The Board’s decision could be explained by the need for more time to define guidelines reflecting the various issues raised by the respondents. Moreover, another reason could be that the IPSASB’s decision was taken in January 2020, that is, before the pandemic. However, the Mid-Term Work Program Consultation 2021, issued in June 2021, makes no reference to emergency relief. The outbreak of the pandemic makes understanding the issues raised by the various respondents more relevant in order to identify possible guidance around the accounting treatment of emergency relief. 4.6.3   Accounting Treatment for Emergency Relief: The Analysis of the Comment Letters First, it is to be noted that the respondents who agreed with the guidelines provided short and direct answers. They did not provide insight into the economic consequences or conceptually based arguments to reinforce their positions, but merely asked the standard setters to be more precise in some statements. The respondents who partially agreed were from North America while those who did not agree were from Brazil, New Zealand, Korea, and India. These respondents gave longer and more in-depth responses, in which they offered various conceptual and economic reasons to strengthen their positions. These respondents’ first conceptual motivation was their lack of agreement with the need to provide explicit guidance on emergency relief where a specific event occurs. They noted that, since the principles around when an entity has a present obligation and provision in the Conceptual Framework and IPSAS 19 are clear, therefore, it was unclear why explicit guidance around specific types of transactions was necessary. The second issue raised was more directly related to the practical application of ED 67. The respondents highlighted that some definitions were necessary to correctly understand the field of application of the ED 67. Terms like “emergency relief,” “economic failure,” and “explicit policy

4  ACCOUNTING FOR COLLECTIVE SERVICES, INDIVIDUAL SERVICES… 

93

decision” should be better explained, since they could have different meanings in different jurisdictions. More specifically, a respondent from New Zealand considered the ED to be insufficiently clear in distinguishing whether emergency relief “is in response to specific emergencies” or is delivered as “an ongoing activity of government and is analogous to the delivery of collective services and/or individual services.” It may be especially difficult to make this distinction as different levels of government come together. Some responses may result from an explicit policy decision, while others may form part of the ongoing activities of government (such as firefighting services, ambulance services, the distribution of food parcels, etc.). Each jurisdiction will have a different way in which it responds to emergencies, and most governments will likely show a combination of ways in which they respond. Providing explicit guidance for different scenarios, could lead to uncertainty regarding how to account for the transactions, as well as who should account for them, where different levels of government work together. Third, some economic consequences were raised. Respondents questioned how other assistance that did not fall within the scope of emergency relief should be accounted for. ED 67 appears to limit its consideration to natural events that trigger emergency relief. The Board should thus consider whether other types of events, such as financial crises, should be included in the scope of emergency relief, since these have triggered still greater government interventions in recent years, in many jurisdictions. The respondents also asked the Board to specify whether the proposed guidance is appropriate for events such as dam failures, nuclear accidents or weapons accidents; if not, additional application guidance was requested for such situations. A motivation based on the economic consequences of the application of ED 67 has also been raised by a respondent from Brazil. This respondent does not agree that public sector entities consider transactions only from the moment of occurrence of the disaster. In Brazil, a government agency monitors natural disasters, the risks of occurrence of such events, and their impacts; there are thus bases for the recognition of provision or disclosure of contingent liabilities. In line with the literature review, this position shows the important role of ex-ante budgeting in accounting for emergency relief (Phaup & Kirschner, 2010). The usefulness of accounting information could be key

94 

N. AVERSANO ET AL.

in this case and could justify the costs of providing disaster relief information in financial statements. Other respondents also highlighted that, following the mobilization of a relief effort and/or the announcement of a state of national emergency, a contingent liability should be disclosed concerning the estimated additional costs of the emergency relief plans that a government has indicated it will undertake. It would thus be helpful to preparers and users if the Application Guidance were extended to provide a clearer indication of the categories of cost to be included (or excluded) from the determination of the costs of emergency relief. Accounting classification schemes have been shown to influence the scope and scale of emergency relief activities (Phaup & Kirschner, 2010). Guidance on cost classification would help improve consistency in applying standards and the opportunities for comparative international assessments. A clear guide for the accounting of the emergency relief could be useful to facilitating the dialogue between the governments and the stakeholder (Lai et al., 2014); moreover, it helps to improve the assessment and measurement of the recovery projects (Walker, 2014).

4.7  Conclusions Accounting for emergency relief has become vitally important within government and public sector accounting, due to the economic crises caused by the COVID-19 pandemic. In January 2019, the IPSASB had anticipated this issue when publishing ED 67 “Collective and Individual Services and Emergency Relief,” soliciting a discussion around the definition and recognition of collective services, individual services and overall emergency relief. Yet, while the issues raised around accounting for collective and individual services have been included in the amendments to IPSAS 19, the IPSASB decided not to proceed with the guidance on emergency relief proposed in ED. Subsequently, the pandemic brought to the fore the relevance of such guidance. To help fill this gap, this chapter comprises a document and content analysis of all comment letters submitted from the various stakeholders to the ED 67, aiming to offer possible guidance around the accounting treatment of emergency relief. Previous studies on the topic show that accounting (via budgeting and reporting) plays an important role in disaster relief. It can help prevent

4  ACCOUNTING FOR COLLECTIVE SERVICES, INDIVIDUAL SERVICES… 

95

opportunities for fraud and promote the efficient and effective use of public resources (Kastberg, 2014; Sargiacomo et al., 2014; Sargiacomo, 2015; Vosslamber, 2015). On the one hand, through financial reporting and calculations for damage reimbursement, accounting allows for an accountability process—facilitating dialogue and trust between stakeholders (Lai et  al., 2014). On the other hand, budgeting allows risk exposure to be reduced and mitigated before a loss is incurred (Phaup & Kirschner, 2010; Walker, 2014). Among the several issues raised in the comment letters submitted to the IPSASB, the respondents to ED 67 noted the importance of accounting tools in the governance of disasters. Yet, a small minority of the respondents did not perceive a need to provide explicit accounting guidance on emergency relief when a specific event occurs. The respondents believed that a broader definition of emergency relief was needed, expanding its definition to include other specific cases not currently covered by ED 67. They also requested a clearer indication of the cost categories to include (or exclude), to determine the costs of emergency relief. Likewise, it was deemed important to explain what is considered to be an “explicit policy decision” that gives rise to a provision, even though it is very difficult to provide an indication that will be appropriate in all instances. The respondents questioned whether the proposed distinction between emergency relief that is an ongoing activity of government and emergency relief that is provided in response to specific emergencies was always appropriate and whether it could be applied consistently. They also noted that, in cases where it is possible to measure impacts, such a provision should be recognized. While reliable measurement is very difficult in most situations, a contingent liability should at least be disclosed. As evidenced by several authors (Kastberg, 2014; Sargiacomo et  al., 2014; Sargiacomo, 2015; Vosslamber, 2015), accounting information could be key, to justify the costs of providing disaster relief information in financial statements. The numerous and varied concerns raised by the respondents may have motivated the IPSASB’s decision not to provide guidelines after the ED 67, giving the Board more time to prepare a proposal that reflects the needs voiced by the various stakeholders. Yet this has also resulted in a troubling “guidance gap” at a time when accounting for emergency relief has become more vital than ever before. The aim of this chapter is to help policy-makers and standard-setting

96 

N. AVERSANO ET AL.

boards to understand the more important issues to be considered when developing specific guidance around accounting for emergency relief. This study is not free of limitations. The main limitation is that the research method has focused almost exclusively on the document and content analysis of the comment letters. Further research could include interviews with standard setters to better understand their point of view.

References Atkeson, L. R., & Maestas, C. D. (2012). Catastrophic politics: How extraordinary events redefine perceptions of government. Cambridge University Press. Aversano, N., Christiaens, J., Polcini, P. T., & Sannino, G. (2020). Accounting for heritage assets: An analysis of governmental organization comment letters on the IPSAS consultation paper. International Journal of Public Sector Management, 33(2/3), 307–322. Baker, C. R. (2014). Breakdowns of accountability in the face of natural disasters: The case of Hurricane Katrina. Critical Perspectives on Accounting, 25(7), 620–632. Bisogno, M., Santis, S., & Tommasetti, A. (2015). Public-sector consolidated financial statements: An analysis of the comment letters on IPSASB’s exposure draft no. 49. International Journal of Public Administration, 38(4), 311–324. Borensztein, E., Cavallo, E., & Valenzuela, P. (2009). Debt sustainability under catastrophic risk: The case for government budget insurance. Risk Management and Insurance Review, 12(2), 273–294. Christiaens, J., Vanhee, C., Manes-Rossi, F., Aversano, N., & Van Cauwenberge, P. (2015). The effect of IPSAS on reforming governmental financial reporting: An international comparison. International Review of Administrative Sciences, 81(1), 158–177. Cohen, S., Rossi, F. M., Caperchione, E., & Brusca, I. (2021). Debate: If not now, then when? Covid-19 as an accelerator for public sector accrual accounting in Europe. Public Money & Management, 41(1), 10–12. De Wolf, A., & Christiaens, J. (2021). Stakeholder participation in the development of international public sector accounting standard 42, social benefits. Financial Accountability & Management, 1–16. De Wolf, A., Christiaens, J., & Aversano, N. (2020). Heritage assets in the due process of the International Public Sector Accounting Standards Board (IPSASB). Public Money & Management, 1–11. Donahue, A.  K., & Joyce, P.  G. (2001). A framework for analysing emergency management with an application to federal budgeting. Public Administration Review, 61(6), 728–740. Downs, A. (1957). An economic theory of democracy. Harper & Row.

4  ACCOUNTING FOR COLLECTIVE SERVICES, INDIVIDUAL SERVICES… 

97

Durocher, S., & Fortin, A. (2011). Practitioners’ participation in the accounting standard-setting process. Accounting and Business Research, 41, 29–50. Everett, J. (2003). The politics of comprehensive auditing in fields of high outcome and cause uncertainty. Critical Perspectives on Accounting, 14(1–2), 77–104. Fassin, D., & Pandolfi, M. (2010). Contemporary states of emergency: The politics of military and humanitarian interventions. Zone Books. Gavens, J. J., Carnegie, G. D., & Gibson, R. W. (1989). Company participation in the Australian accounting standard-setting process. Accounting and Finance, 29(2), 47–58. Georgiou, G. (2010). The IASB standard-setting process: Participation and perceptions of financial statement users. The British Accounting Review, 42(2), 103–118. IPSASB. (2020a). COVID-19: Relevant IPSASB accounting guidance. Available on line at the https://www.ipsasb.org/publications/ covid-­19-­relevant-­ipsasb-­accounting-­guidance IPSASB. (2020b). Collective and individual services, Amendments to IPSAS 19. Available at https://www.ipsasb.org/publications/ collective-­and-­individual-­services-­amendments-­ipsas-­19 Jorissen, A., Lybaert, N., Orens, R., & Van Der Tas, L. (2012). Formal participation in the IASB’s due process of standard setting: A multi-issue/multi-period analysis. European Accounting Review, 21(4), 693–729. Jorissen, A., Lybaert, N., Orens, R., & Van der Tas, L. (2013). A geographic analysis of constituents’ formal participation in the process of international accounting standard setting: Do we have a level playing field? Journal of Accounting and Public Policy, 32(4), 237–270. Kastberg, G. (2014). Framing shared services: Accounting, control and overflows. Critical Perspectives on Accounting, 25(8), 743–756. Kidwell, L. A., & Lowensohn, S. (2019). Participation in the process of setting public sector accounting standards: The case of IPSASB. Accounting in Europe, 16(2), 177–194. Lai, A., Leoni, G., & Stacchezzini, R. (2014). The socialising effects of accounting in flood recovery. Critical Perspectives on Accounting, 25(7), 579–603. Larson, R. K., & Herz, P. J. (2013). A multi-issue/multi-period analysis of the geographic diversity of IASB comment letter participation. Accounting in Europe, 10(1), 99–151. Manes Rossi, F., & Aversano, N. (2015). Advancing performance measurement: Italian local government vis-à-vis the IPSASB project. International Journal of Productivity and Performance Management, 64(1), 76–93. McKernan, J.  F. (2012). Accountability as aporia, testimony, and gift. Critical Perspectives on Accounting, 23(3), 258–278.

98 

N. AVERSANO ET AL.

Morris, R. (1986). Lobbying on proposed accounting standards. The Chartered Accountant in Australia, 46–51. Newhall, C. G., & Self, S. (1982). The Volcanic Explosivity Index (VEI): An estimate of explosive magnitude for historical volcanism. Journal of Geophysical Research, 87, 1231–1238. O’Keefe, T. B., & Soloman, S. Y. (1985). Do managers believe the efficient market hypothesis? Additional evidence. Accounting and Business Research, 67–79. Orens, R., Jorissen, A., Lybaert, N., & van der Tas, L. (2011). Corporate lobbying in private accounting standard setting: Does the IASB have to reckon with national differences? Accounting in Europe, 8(2), 211–234. Phaup, M., & Kirschner, C. (2010). Budgeting for disasters: Focusing on the good times. OECD Journal on Budgeting, 10(1), 1–24. PWC. (2020). Government accounting, EPSAS and supporting the COVID-19 response. Available online at https://ec.europa.eu/eurostat/documents/9101903/9700113/EPSAS_paper_on_Covid-­19.pdf Richardson, A., & Eberlein, B. (2011). Legitimating transnational standard-­ setting: The case of the International Accounting Standards Board. Journal of Business Ethics, 98(2), 217–245. Richter, C. F. (1935). An instrumental earthquake magnitude scale. Bulletin of the Seismological Society of America, 25, 1–32. Ryan, C., Dunstan, K., & Stanley, T. (2000). Local government accounting standard-­ setting in Australia: Did constituents participate? Financial Accountability & Management, 16(4), 373–396. Sargiacomo, M. (2015). Earthquakes, exceptional government and extraordinary accounting. Accounting, Organisations and Society, 42, 67–89. Sargiacomo, M., Ianni, L., & Everett, J. (2014). Accounting for suffering: Calculative practices in the field of disaster relief. Critical Perspectives on Accounting, 25(7), 652–669. Schmidthuber, L., Hilgers, D., & Hofmann, S. (2020). International Public Sector Accounting Standards (IPSASs): A systematic literature review and future research agenda. Financial Accountability & Management, 1–24. Simpson, R.  H. (1974). The hurricane disaster potential scale. Weatherwise, 27, 169–186. Sutton, T. G. (1984). Lobbying of accounting standard-setting bodies in the UK and the USA: A Downsian analysis. Accounting, Organisations and Society, 9(1), 81–95. Tutticci, I., Dunstan, K., & Holmes, S. (1994). Respondent lobbying in the Australian accounting standard-setting process: ED49–a case study. Accounting, Auditing & Accountability Journal, 7(2), 86–104. Vosslamber, R. (2015). After the earth moved: Accounting and accountability for earthquake relief and recovery in early twentieth-century New Zealand. Accounting History, 20(4), 518–535.

4  ACCOUNTING FOR COLLECTIVE SERVICES, INDIVIDUAL SERVICES… 

99

Walker, S. P. (2014). Drought, resettlement and accounting. Critical Perspectives on Accounting, 25(7), 604–619. Watts, R. G., & Zimmerman, J. L. (1986). Positive accounting theory. Prentice-Hall. Yen, A. C., Hirst, D. E., & Hopkins, P. E. (2007). A content analysis of the comprehensive income exposure draft comment letters. Research in Accounting Regulation, 19, 53–79.

CHAPTER 5

Impact of Integrated Financial Management Information System Practices in Public Finance Management Performance During COVID-19 Pandemic: Turkey Case Seval Kardeş Selimoğlu, Gül Yeşilçelebi, and Mehtap Altunel

5.1   Introduction According to Caplan (1966), the main objectives of the management accounting process as an information system is to provide data that will facilitate the decision-making function related to planning and control across levels of management and to serve as a communication medium. More broadly, it explores the complex and ongoing relationship between the corporate economy, framework, actions, and institutions, and

S. Kardeş Selimoğlu (*) Faculty of Economics and Administrative Sciences, Department of Business Administration, Anadolu University, Eskişehir, Turkey e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 G. Dabbicco et al. (eds.), Public Sector Accounting, Financial Accountability and Viability in Times of Crisis, Public Sector Financial Management, https://doi.org/10.1007/978-3-031-04745-9_5

101

102 

S. KARDEŞ SELIMOĞLU ET AL.

demonstrates the importance of organizational routines and institutions in shaping processes of management accounting change (Burns & Scapens, 2000: 3). Information technology (IT) will have an impact on accounting, as it has on many issues (Muigai, 2012: 15). Therefore, it can be concluded that the technological-based and integrated work of management accounting in government institutions is inevitable. Integrated Financial Management Information System (IFMIS) is an information system that enables the integration of central systems developed for the execution of financial transactions within the body of the Central Government together with the management information systems under the responsibility of other institutions in line with the principles of interoperability. It aims to integrate information systems in which financial transactions are carried out in the public sector, under the coordination of the Ministry of Finance in Turkey. It has been developed with the aim of automatic recording, thus preventing duplicate data entry through a process-­ oriented approach for the business and for transactions by the accounting units of public administrations, starting from the spending process through electronic document setup. It should be clearly stated that automatic registration does not guarantee the prevention or detection of duplicate data. The IFMIS has been designed to include modern practices and methods such as e-procurement, e-invoice, e-collection, e-audit, financial statement analysis, risk analysis, decision support system, and early warning system. After the General Accounting Law No. 1050, accepted in 1927, the most important regulations in Turkey are based on the Public Financial Management and Control Law (law No. 5018), adopted in 2003 (Akçay, 2017: 162), which deals with public accounting, and public financial management. It was the initiation of a new process in government accounting, announced in the Integrated Public Financial Management Information System Policy Document and Action Plan with the circular published in the Official Gazette No. 30068 dated May 16, 2017 (Akçay, 2017: 166). G. Yeşilçelebi Academy of Applied Sciences, Department of Aviation Management, Gumushane University, Gümüşhane, Turkey e-mail: [email protected] M. Altunel Institute of Social Sciences, Department of Accounting, Anadolu University, Eskişehir, Turkey e-mail: [email protected]

5  IMPACT OF INTEGRATED FINANCIAL MANAGEMENT INFORMATION… 

103

Due to the COVID-19 pandemic, we are going through a period in which the importance of using digital tools by individuals and businesses to interact with the state is increasing. This situation is even more important in a period when the spread of the virus needs to be controlled around the world (De Mello & Ter-Minassian, 2020). IFMIS allows a central authority to: (i) regulate security access that enhances overall data integrity and security, gathering information in one place; (ii) prevent or detect financial fraud; (iii) improve the management of cash, debt, and liabilities, as well as budget modeling processes through the use of historical information to provide increased decision-making efficiency (Quarm et  al., 2020). In this stage, the quality and efficiency of local expenditures will be increased through advanced digital technologies (De Mello & Ter-­ Minassian, 2020). Therefore, well-designed IFMIS implementation is of great importance to strengthen all aspects of public financial management (PFM) and facilitate national transparency and accountability. This study investigates the Turkish IFMIS, which came into force with the Prime Ministry Circular No. 2017/7, including the evaluation of the project in the digital age. In addition, it is aimed to determine the impact of IFMIS implementation on universities and the provided benefits during the COVID-19 pandemic. Preliminary research was carried out on all Turkish universities to obtain information about whether they have implemented IFMIS or not. This research was carried out primarily for Higher Education Institutions in the context of the current list of universities in Turkey as of 2021. Then, the authors determined in which of these universities the Department of Strategy Development used IFMIS or not. The relevant interview form was sent to the universities that used IFMIS in the Strategy Development Department; answers were collected, and analysis was carried out. In addition, since the Ministry of Treasury and Finance is fully aware of the transition process to the IFMIS application, opinions were received from a limited number of officials in the Ministry about the IFMIS application. In this study, which uses qualitative data collection techniques, semi-­ structured interviews were compiled and administered. In this context, interviews were conducted with ten interviewees. The data relating to the IFMIS implementation in Turkey is considered as a conceptual framework. In this sense, this study is expected to contribute to the direction of measuring the effects of the IFMIS implementation in Turkey. The study

104 

S. KARDEŞ SELIMOĞLU ET AL.

consists of four parts: the general structure of IFMIS, research methodology, findings, conclusion, and recommendations.

5.2   General Structure of IFMIS 5.2.1   IFMIS Concept and Its Implementation Process With the rapid development of information technology, especially within developed countries, these have increased their tendency to digitize their activities related to public financial management and to move these processes to an electronic environment. The most common of these activities are initiatives to create the Integrated Financial Management Information Systems (IFMIS), which allows the digitalization of key aspects of budget execution and accounting operations across public institutions. Modern financial management is based on accounting practices expressed by an accrual accounting system. Currently, the double-sided registration method has not been fundamentally changed, and it is used by both public and private sector enterprises by updating them in terms of assets and resources according to the needs of the time (Uysal & Aldemir, 2018). IFMIS is defined as a system that can provide fast and effective access to reliable financial data and can help strengthen the financial controls of the state/public authorities, improve the efficient and effective delivery of public activities, move the budget process to a higher level of transparency and accountability, and accelerate public activities (Diamond & Khemani, 2005). The term integrated refers to the general architecture that will be formed after the information systems that the institutions operate within (the framework of their authority and job descriptions) are integrated with each other in line with the principles of interoperability, rather than a central information system under the authority and responsibility of a single institution (Turkey Minister of Finance, 2017). In Turkey, the first step was taken in the early 1990s within the scope of public financial management. In 1995, an agreement was signed with the World Bank for the restructuring of public financial management. Since then, various regulations have been introduced on the necessity of the system. Then, in 2002, with the Principal Decision No. 2002/3, the “Restructuring of Public Financial Management and Financial Transparency Specialization Commission” prepared a report and explained the necessity of a new system. The Public Financial Management and Control Law No. 5018 was adopted in 2003 as the basis for the

5  IMPACT OF INTEGRATED FINANCIAL MANAGEMENT INFORMATION… 

105

shortcomings in this report. This law contains the requirements for performing the budgeting, accounting, reporting, and auditing activities including the integrated system. In order to fulfill the requirements of the new system, public administrations benefit from information and communication technologies as much as possible. However, a sufficient level of automation could not be reached during the creation and use of information systems. This resulted in inefficient use of resources. In addition, an accountable and transparent public administration could not be ensured. Instead, the inconsistency and risk of data made it difficult for the public administration and decision makers to create the data set they needed. Due to these setbacks, the “Integrated Government” has been developed for the purposes of increasing the efficiency of public expenditures and integrating the information systems infrastructures used in public financial management. This was done through the Tenth Development Plan, the Rationalization of Public Expenditures Program, the National e-­Government Strategy and Action Plan, the Medium-Term Program, and the Medium-Term Fiscal Plans. All this was planned to establish the “Integrated Public Financial Management Information System” (Uysal & Aldemir, 2018). IFMIS entered into force in Turkey with the Prime Ministry Circular No. 2017/7 and it has been implemented as of January 2018. This regulation aims to ensure that the transactions in the Public Financial Management and Control Law No. 5018 are carried out in an electronic environment and in an integrated manner. It determines the procedures and principles regarding the creation, recording, transmission, preservation, and submission of books, records, documents, and similar content that is required to be kept or regulated in the relevant legislation. It also specifies interoperability standards and security policies between information systems for the processes within the scope of the aforementioned law (Turkey Minister of Finance, 2018). IFMIS refers to the system created by software that supports the following functional processes regarding public financial management, interacts with each other, and shares information when necessary. • Macroeconomic forecasting and planning • Financial planning • Budget management • Cash management • Debt management • Revenue management

106 

S. KARDEŞ SELIMOĞLU ET AL.

• Public Personnel management • Asset management • Expenditure management • Accounting and financial reporting • Monitoring and evaluation • Audit (Turkey Minister of Finance, 2018) Figure 5.1 shows the Integrated Financial Management Information System infrastructure in Turkey. The IFMIS implementation phase consists of four basic stages. These are “Preparation Phase,” “System Design Phase,” “Procurement Phase,” and “Implementation Phase.” • Preparation phase: This phase can be expressed as a feasibility study. In this context, user needs, human resource needs, technological requirements, design needs, and purchasing needs should be determined (Hashim, 2014). The preparation phase also involves the assessment of the preliminary concept design including institutional and organizational arrangements, analysis of the importance problem areas which will act as main objectives the system is to address, feasibility studies, designing the project and draft project proposal, formal approval of the project that also involves securing government approval and donor funding (Diamond & Khemani, 2005). • System Design Phase: This phase includes designing who will need access to the application. The system design phase consists of developing the functional features of the system, outlining the information technology strategies to cover software and organizational issues, and finally preparing the tender documents (Diamond & Khemani, 2005). • Procurement Phase: This phase includes issue of tenders for hardware and software and associated requirements and the evaluation of bids and awarding of contract. • System Implementation Phase: This involves the application software configuration (testing and integration of the components), detailing the business processes and gap analysis required for system functionality, detailing the action plan for phased implementation and the pilot run of the system, agreeing on the customization and configuration of the system, determining the training needs and conducting training of personnel, rolling out the system, phased imple-

STRATEGY, PROJECT AND ACTIVITY MANAGEMENT

HUMAN RESOURCES MANAGEMENT

HUMAN RESOURCES MANAGEMENT

DEBT MANAGEMENT

CASH MANAGEMENT

INCOME MANAGEMENT

ASSET MANAGEMENT

COMMITMENT AND CONTRACT MANAGEMENT

SUPPLY MANAGEMENT

EXTERNAL AUDIT

ASSET MANAGEMENT

EXPENDITURE AND SUPPLY MANAGEMENT

PAYMENT MANAGEMENT

ACCOUNTING MANAGEMENT

BUDGET MANAGEMENT

MACRO ECONOMIC PLANNING STATISTICS AND DECISION SUPPORT MANAGEMENT

CIVIL SOCIETY ORGANIZATIONS

PRIVATE SECTOR

CITIZEN

Fig. 5.1  Integrated Financial Management Information System infrastructure in Turkey. (Adapted by Turkey Minister of Treasury and Finance, 2021)

BUDGET AND ACCOUNTING MANAGEMENT

PROGRAM MANAGEMENT

STRATEGY MANAGEMENT

IFMIS

ADMINISTRATION

ECOSYSTEM 5  IMPACT OF INTEGRATED FINANCIAL MANAGEMENT INFORMATION… 

107

108 

S. KARDEŞ SELIMOĞLU ET AL.

mentation of additional modules and strengthening of internal system support, step by step phase out of contractor support and finally the continuous system maintenance (Diamond & Khemani, 2005). The pilot system phase includes the establishment of the application in the pilot area, transferring the data and starting the application. The transition to IFMIS application consists of transition in all other areas and without training the practitioners. In addition, after the implementation of IFMIS, continuous maintenance and updating should be done (Mugaga, 2017). 5.2.2   Benefits and Challenges of IFMIS Implementation IFMIS has many advantages as well as disadvantages. The main benefits include: • Increased data integrity and security due to a central authority regulating the security access. • There is a self-control of the application when there is an attempt to perpetrate financial fraud due to the collection of data in one place. • Contribute to cash, debt, and liability development. • Better budget modeling processes and increased decision-making efficiency due to the application’s ability to use historical information. • Performing financial transactions at low cost (Quarm et al., 2020). Considering that “an important challenge is also the transition which often takes a number of years and requires adequate ‘change management’” (Hendriks, 2012: 6), there are several challenges of the application: • Lack of capacity: One of the common challenges faced by developing countries is the lack of capacity. Human resources with the necessary knowledge and skills are needed for the successful execution of IFMIS applications. Therefore, it is preferred to train the current employees or to recruit competent human resources from outside. However, according to Chene (2009), considering that the IFMIS application is information technology-based, it will not be enough to provide training for the institution. To solve this problem, it is suggested by Farelo and Morris (2006) that the education system should be harmonized with information and communication technologies

5  IMPACT OF INTEGRATED FINANCIAL MANAGEMENT INFORMATION… 

109

in order to train human resources with the competence that governments need. • Technical challenges: Many IFMIS projects have failed because the basic system functionality was not clearly specified from the onset of the intervention. An IFMIS application should be carefully designed to meet the need to fulfill accounting and financial management issues effectively. At this point, it may prefer ready-to-use or special systems in accordance with the country’s requirements (Chene, 2009). • Political changes: The implementation of IFMIS brings with it a high rate of procedural changes. In this context, there is risky, complex, and intensive resource use. Also, old users who will resist change are ignored in the IFMIS application. Therefore, in order to counter this resistance, the benefits of the system should be conveyed to the users through various communication channels. Since it is not clear who should be responsible in IFMIs practice, it may lead to loss of accountability and real responsibility. • Institutional challenges: While IFMIS is a simple technological innovation, it represents both efficiency and reforms that change existing procedures. Therefore, the management of public finances, business processes, and corporate governance regulations are deeply affected. Therefore, failure to implement the necessary parallel reforms for the adoption of IFMIS may lead to an unsuccessful execution. (Chene, 2009).

5.3  Research Methodology 5.3.1   Research Aim This study aims to examine the personal feelings, preferences, experiences or dislikes and distrust, of people involved in the setting up and development of IFMIS in Turkey. In order to contribute to the literature related to this study, by trying to determine the usage of IFMIS in Turkey, various suggestions have been presented on how IFMIS can be proliferated in Turkey. The authors preferred to concentrate on the participants’ perceptions, impressions, opinions, ideas, preferences, attitudes in the study. In this respect, the scope of the research was limited to the opinions of the participants.

110 

S. KARDEŞ SELIMOĞLU ET AL.

5.3.2   Research Design The research—conducted for the purpose of examining the use and system development of the IFMIS in Turkey—was designed based on a qualitative research model. The scope of the research is to acquire impressions, opinions, and ideas. Qualitative data was preferred for this research because it collects information that tries to describe a subject rather than measure it. Qualitative research aims to delve deeper into the subject to gain insight into people’s motivations, thoughts, and attitudes. The interview technique was chosen to carry out the research. Interview questions were applied to experts and evaluations were made regarding the intelligibility of the questions. While forming the questions, the studies carried out by Kasalu (2016) and Lamba (2018) were mainly discussed. The study conducted by Kasalu (2016) is on information technology risk management associated with IFMIS in Kenya. The study is based on the answers given by the employees of the National treasury in Kenya. The main purpose of Lamba (2018) was to determine the effect of IFMIS on public financial management performance in Kenya. For this purpose, information was collected from 260 participants working in the Kenya Power and Lighting Company, using the questionnaire method. It consists of questions about risk management practices, follow-up mechanisms, real time reporting, and optimal resource allocation. As a result of the study, it was concluded that if IFMIS were implemented effectively, it would encourage effective financial management. The questionnaire method was used in this study. Interview questions were developed by the authors and pre-applied for their intelligibility. Assistance was obtained from experts on this subject and submitted for their approval. The questionnaire was revised according to feedback from the experts. In this context, an open-ended, semi-structured interview was conducted with the participants. The data obtained from the interview were analyzed with qualitative analysis methods. Three objectives were taken into account when designing the study. These were: . Detection of information technology risks associated with IFMIS, 1 2. Measures to reduce information technology risks associated with IFMIS, 3. Effectiveness of measures against IT risks.

5  IMPACT OF INTEGRATED FINANCIAL MANAGEMENT INFORMATION… 

111

As a result of the study, it was concluded that the main risk due to the use of the IFMIS application is system failure. Another result is that passwords are mostly used to protect against IT risks. Finally, it has been found that antivirus programs are the most effective measures taken against IT risks. Since IFMIS will be implemented for the first time in Turkey, the first question is aimed to explore how personnel training or personnel needs are determined. Based on Lamba (2018), the second question aimed to reveal the views on how the IFMIS application in Turkey would add value to the institution. The third question focuses on the advantages and disadvantages of IFMS implementation. The fourth and fifth questions were asked to get the opinions of the participants about the IT risks that have become more important with COVID-19 and to determine what precautions are being taken against them. The sixth question was asked to the participants in order to determine whether measures were taken against IT risks in this period when remote work became a necessity with COVID-19. The remaining questions dealt with the IFMIS application and implementation. 5.3.3   Population and Sample The universities in Turkey were found to be the most effective users of the IFMIS system. As a result of the examinations made, it was found that the Strategy Development Department played a crucial role in the IFMIS implementation in universities. According to the Council of Higher Education page, there are 129 state universities, 74 private universities, and 4 private vocational schools, in total 207 universities. The interview form was sent to managers or employees of these 207 universities who have implemented the IFMIS system and as well as those who work in the Strategy Development Department. Participants were asked to submit their answers to researchers within a certain period. The answers received from the participants were analyzed using the descriptive analysis technique. The purposive sampling method was adopted in the selection of the sample. The purposive sampling method allows for in-depth study of situations that are thought to have rich information. The opinions and thoughts of the people who use IFMIS personally are important at this point. Therefore, purposive sampling method was used in the study. Accordingly, the population of the research consists of the personnel working in the Department of Strategy Development at universities in Turkey and those people working at the Ministry of Treasury and Finance

112 

S. KARDEŞ SELIMOĞLU ET AL.

that use IFMIS. The interviewees were selected from among the people who were within the scope of the research universe and who agreed to participate in the research. Taking the opinions of the people who use IFMIS is important in terms of reflecting on the ideas about the efficiency and development of the system. 5.3.4   Data Collection Tool This study, which uses qualitative data collection techniques, used semi-­ structured interview techniques. Semi-structured interviews are neither as rigid as fully structured discussions, nor as flexible as unstructured negotiations, but find a compromise between the two. The semi-structured interview technique was used as it provides flexibility to researchers. Criterion sampling method, one of the purposeful sampling methods, was used to determine the study group. The basic criterion determined by the researchers is that the interviewee is familiar with the IFMIS implemented at the university and the interviewee has certain knowledge within the scope of IFMIS implementation. The participants needed to be in a position to assess the value that IFMIS adds to the university and the impact of IFMIS during the COVID-19 pandemic. In order to obtain comparative results, the preferred semi-structured interview form was developed for IFMIS practitioners within the scope of universities in line with research questions and information in the literature. The interview form included questions about the level of awareness of the universities within the scope of IFMIS implementation, the extent of the implementation, the impact of the IFMIS implementation on universities, how the universities benefit from the IFMIS implementation within the scope of the difficulties experienced as a result of the remote working practices during the COVID-19 pandemic, the benefits of the IFMIS implementation during the pandemic period, and the difficulties encountered. The interview form was first submitted to a panel of experts to check to what extent the questions served their purpose and to also check for clarity and applicability. The interviews were held by e-mail, telephone, and video interview, depending on the requests of the interviewees, so as to protect everyone against the virus during the COVID-19 outbreak. In line with the purpose and conceptual framework of the research, interview questions prepared by the researchers were applied to experts and evaluations were made about IFMIS. At this stage, open-ended questions were prepared, and the interview form, using semi-structured

5  IMPACT OF INTEGRATED FINANCIAL MANAGEMENT INFORMATION… 

113

interview technique was shown to experts. After the approval of experts, it was edited and prepared again. The prepared interview form consists of two parts. While the first part aims to obtain personal information about the participant, the second part aims to determine the effectiveness of the use of IFMIS in Turkey and what needs to be done to improve the system. While preparing the second part, the relevant literature research was used. 5.3.5   Data Analysis The interview forms used in the research were directed to ten participants. The interviews were conducted face-to-face and via e-mail. Face-to-face interviews were recorded with a voice recorder with the permission of the participant and then analyzed. After the interviews with the ten participants were concluded, the stage of documenting and analyzing the data was started. In qualitative data analysis, semi-structured interview data was subjected to content analysis. At this stage, the data obtained with the voice recorder during the interview were transferred to a computer. Each author listened to the audio recordings and transcribed them, and then the analyzes were compared. An expert in the field was consulted to ensure the validity of the data transferred from the interview form. These questions are basically questions to determine the status of an application that is still in the installation phase in Turkey. For this purpose, questions were asked to the participants about the risks and benefits of IFMIS. In addition, since it is an application that is likely to be exposed to information technology risks, the authors tried to determine which applications are used to protect from IT risks during the COVID-19 remote working process.

5.4  Findings Within the scope of the research, ten questions were asked during the interviews with the participants. One of these questions is about getting to know the participant, and the other nine are about the use of IFMIS. In this section, the findings obtained as a result of evaluating the use and effectiveness of IFMIS according to participants’ opinions are presented. Question 1- “Could you inform us about your transition to the IFMIS implementation process, the training process, how long you have been using the application, the staff’s reaction to the application, and the

114 

S. KARDEŞ SELIMOĞLU ET AL.

recruitment of non-staff members available for the application?” The answers given by the participants to this question are as follows: In the period before 2018, the Say2000i Accounting Automation System and the Public Expenditure and Accounting Information System were used in universities in Turkey. As of January 01, 2018, the implementation of the Integrated Financial Management Information System (IFMIS) for universities in Turkey was passed. As of January 1, 2018, IFMIS accounting, expenditure, and identity management systems have been used. In addition to these applications, some applications within Public Expenditure and Accounting Information System continue to be used. A one-day training was organized by the Ministry of Treasury and Finance General Directorate of Public Accounts on October 24, 2017 regarding the transition phase of the IFMIS. In addition, guides and videos have been prepared, and the test environment for the application of the system has been put into use. During the implementation phase of IFMIS, Ndaiga (2016) stated that the most important factor is training the users. In another study, it was stated that education programs should be carried out together with change management (Rodin-Brown, 2008: 25). Therefore, the fact that the participants in our study stated that they had received training on IFMIS indicates that the results were in the same direction as the literature. According to the participants, the old system was abolished and replaced by IFMIS, and they lost the comfort of using the system they were used to. This was in addition to the difficulties in learning something new, some deficiencies in the application, and the fact that the new process-based system had increased their previous job completion times. Furthermore, the participants agree that no additional personnel were recruited other than the existing personnel for the implementation. Question 2- “What do you think is the most important achievement of using IFMIS in any public institution?” Table 5.1 shows the distribution of the answers given by the participants to the question 2. Looking at the answers given by the participants in Table 5.1, it can be said that the most important achievement of IFMIS is the increase in accountability (8 participants). Risk management (6) and real time reporting (6) were the next most important themes; monitoring improvement (4) and resource usage (4) came next, and in last place was the integration of expenditure processes (2). Question 3- “What changes did IFMIS bring with it compared to the pre-implementation? What are the benefits to the institution? What is its

5  IMPACT OF INTEGRATED FINANCIAL MANAGEMENT INFORMATION… 

115

Table 5.1  Distribution of the most important aspects of the use of IFMIS in any public institution according to the answers given by the participants Themes

P1 P2 P3 P4 P5 P6 P7 P8 P9 P10

Risk management Monitoring improvement Real time reporting Resource usage Increasing accountability The integration of expenditure processes

X X X X X X

X

X

X X X X X

X X X X

X X X X X

X

X

X X

X

X X

X

Created by the authors

Table 5.2  Distribution of the changes IFMIS brought with it compared to the pre-implementation according to the answers given by the participants Themes Financial reporting accuracy Timing of financial report presentation Real time payment Easy registration Financial efficiency Risk reduction Ease of analysis Reducing the waste of resources Reporting implementations Data quality System speed System content Providing decision support Accountability Automatic data transfer

P1 P2 P3 P4 P5 P6 P7 P8 P9 P10

−

− =

+

−

+ + + + + + + +

+

+ − +

+ + =

+

+ + + + + + + +

+ +

− −

+ − +

+

+

+ + +

+ + + + + + + +

+

+

= + −

+

+

Created by the authors Note: = the two systems are the same – the new system is worse than the old system + the new system is better than the old system

contribution to the university? Can you make an assessment about the before and after IFMIS within the scope of the following topics?” The distribution of the answers given by the participants to question 3 is shown in Table 5.2.

116 

S. KARDEŞ SELIMOĞLU ET AL.

Looking at the answers given by the participants in Table 5.2 above, it can be said that there are advantages or disadvantages to using IFMIS (new system) or Say2000i (old system). According to P1, in the initial implementation stages of the new system, some reporting practices were found to be more inadequate than the old system. According to P3, the old system is user friendly. Question 4- “Do you think you are exposed to more risk with IFMIS? How and to what extent are IT Risks faced with IFMIS? (system hacking, unauthorized access to system reports or materials, unauthorized modification of data, system crash, malicious damage to computer and data, virus attack, lack of IT skills and knowledge of security measures, power outage, physical damage to computers, key trained personnel turnover, high technology change rate, etc.)” The answers given by the participants to question 4 are as follows: P1- In terms of business management, there is no doubt that this practice poses a coordination problem. But I don’t know if it has affected security more positively in terms of system management at the technical level. The negative development affecting data security in practice was related to the unauthorized use of the system by the actors in the spending processes. The distinction in the financial management legislation, as the “preparer of the transactions” (assessment officer) and the “payment order” (spending authority), necessitated the need to separate the actors in the process management of the system. System user definitions were also made based on such mandatory separation according to actors. However, in practice, it has been noted that those users operate with each other’s user authorizations due to the lack of personnel in some spending units, especially in the provinces. This is an important risk factor in terms of spending system practices. P2- IFMIS, the fact that the system is an internet-based application; It is an application where software operations are carried out by the Ministry of Treasury and Finance, General Directorate of Public Accounts and the Scientific and Technological Research Council of Turkey (TUBITAK) officials. For this reason, those institutions are exposed to most of the risks. Defense processes against these risks are also carried out by the institutions. The measures that can be taken by the university’s staff are limited to the protection of the system login passwords. P6Considering the inability of the old system to adapt to new information technologies, the new system used is more secure. P7- I think there is more

5  IMPACT OF INTEGRATED FINANCIAL MANAGEMENT INFORMATION… 

117

exposure to risk due to the use of IFMIS. P8- P9-P10- We did not witness any exposure to risk. Although the majority of the participants do not think that the institutions are exposed to IT risks to a large extent, they think that it will cause various risks in the system as a result of the personnel giving their password and other information to other personnel and making them use it. When the study by Kasalu (2016) is examined, the participants think that system failure and hacking are the main risks as a result of using IFMIS. In the study conducted by Eggers (2016), it was stated that internet-based systems are exposed to cyber risks. Therefore, the studies by Eggers (2016) and Kasalu (2016) support each other. On the other hand, it can be said that the majority of the participants in this study consider the risks arising from the access of internal users to the system rather than being exposed to IT risks, which is different from the results of Kasalu (2016) and Eggers (2016). Question 5- “Which of the following (or other) measures are taken to reduce IT risks? What measures were taken to protect from risks, especially within the scope of working from home with COVID-19?” Table  5.3 shows the distribution of the answers given by the participants to question 5. According to most of the participants, it was emphasized that no measures were taken to avoid risks. According to four of the participants, for system security, changes to user passwords are made mandatory in the Table 5.3  Distribution of results in relations to the reduction of IT risks according to the answers given by the participants Themes Regular change of passwords Use of Firewalls Encryption of data System rights restriction Training of personnel on new technologies Educating staff on security awareness Continuous updating of antivirus Keeps backing up copies Uninterruptible power supply usage Good compensation package for staff Created by the authors

P1 P2 P3 P4 P5 P6 P7 P8 P9 P10 X X X X X X X X X X

X

X

X X X X

X

X X X X

X X X

118 

S. KARDEŞ SELIMOĞLU ET AL.

system every so often. In addition, according to P7- To reduce IT risks some transactions are prevented from being used outside the internal network. P2For IFMIS, risk assessments in terms of the above and non-existing data are evaluated by the Ministry of Treasury and Finance and TUBITAK officials, and necessary preventive measures are put into effect. IFMIS users in Turkey did not express a definite measure to be protected from risks. However, the participants emphasized the password change to avoid risk. Also, similar to the study conducted by Kasalu (2016), the use of antivirus programs was expressed by three participants. Question 6- “Does IFMIS impose system access limits on personnel based on their job descriptions? If so, have restrictions been removed from working part-time with COVID-19, regardless of IFMIS job descriptions?” The answers given by the participants to question 6 are as follows: P1-The new system is configured as “internet-based” unlike the old one. With this feature, it has provided the opportunity to operate in a structure that provides independent access opportunities from any location. Therefore, thanks to this feature of the system, it was able to provide remote use without changing job descriptions, and this was an advantage during the COVID-19 pandemic. P2- There are job definitions on the accounting and expenditure (Financial Management System) on IFMIS, and the personnel have the authority to make transactions. During the COVID-19 period, employees worked from home on the system, and their access to the system was not limited in any way. P3- System access to personnel is limited, and restrictions have not been removed with COVID-19. P4- During the COVID-19 pandemic, the introduction of a flexible working/part-time system allowed the service to continue without causing any disruption to the public. P5- Authorization definitions for accessing the system are made by the accounting officer over unit requests, and people cannot log in to a system and role that is not defined for the person. P6- There is a limitation on the menus that can be entered by the system only with accounting officer information. No restrictions have been placed on the job descriptions of other personnel, and since the system is a general system, the authority to limit is under the responsibility of the ministry. P7- IFMIS imposes system access limits on personnel based on their job descriptions. These limitations remained unchanged during the part-time study period. P8- In the IFMIS system, until now, there has been no limitation depending on the job description. P9- The personnel who will use the IFMIS system applications are authorized by the Accounting Officer upon the request

5  IMPACT OF INTEGRATED FINANCIAL MANAGEMENT INFORMATION… 

119

of the Spending Departments. With COVID-19, the limitations of working part-time, regardless of the IFMIS job descriptions, have not been removed. According to the majority of the participants, system access limits are imposed on the personnel depending on their job descriptions in IFMIS applications. However, the limitations arising from working part-time with COVID-19, regardless of the IFMIS job descriptions, have not been removed. There are internet-based systems behind the way of doing business in the public and private sectors. Therefore, although it positively affects public institutions with interconnectivity, it also brings IT risks. Furthermore, it is not possible to completely eliminate these risks before or after COVID-19, but it is important how these risks are tackled (Eggers, 2016: 153). Considering the answers received from the participants, it can be concluded that preventive measures were not taken against these risks during the remote working process. Question 7- “When you evaluate the IFMIS application, do you think it is a good risk management application? In this context, is it an application that increases information security and helps reduce errors and fraud?” The answers given by the participants to question 7 are as follows: P1- Considering especially in terms of accounting and expenditure management, it can be said that control mechanisms can reduce risks since the new system presents a “process-based” structure. P2- IFMIS is a risk-reduced system compared to the previous implementation. P3- I cannot say it helped reduce errors. P5- Although the system is designed to reduce the risk and creates records in this direction, some problems still exist in the system and the fact that the accounting management side of the system does not show the accounting records to the people who make the transactions increases the risk for individuals who are used to the old system expenditure management system. In some cases, the spending units do not understand whether data is entered into the system from the right place or not. Although the system setup is designed to make it user friendly, it still causes difficulties for most users as some find it very confusing to user. This causes many users to have difficulty because the system is confusing to the users. Anyone who does not understand the system correctly will be prone to error. However, for someone who understands the system correctly, the system is helpful in reducing errors. P6- The IFMIS application offers good risk management, and, in this context, it increases information security and helps to reduce errors and frauds. P7- The IFMIS application provides good practice in terms of risk management. It includes measures to prevent errors and fraud. Information security is an issue that can be evaluated by the Ministry of Treasury and Finance. P8- The

120 

S. KARDEŞ SELIMOĞLU ET AL.

IFMS system is a secure system in terms of reducing errors and fraudulent records. P9- IFMIS applications not only ensure information security, but also minimize errors and ensure the correct creation of financial statements. P10-The IFMIS application has a very good infrastructure in risk management and is open to development with its dynamic structure. I find it sufficient in terms of information security. According to the majority of the participants, the IFMIS application is considered sufficient in terms of risk management and information security. Question 8- “Is IFMIS fully implemented in Turkey? What can you suggest to improve the system?” The answers given by the participants to question 8 are as follows: P1- Although the accounting component of the IFMIS system in Turkey has been completed, the integrated system that will be formed by the integration of this system with other systems such as tax, cash, debt, and asset management has not been completed yet. In the new accounting system, which replaced “say2000i”, I think that a significant part of the problems experienced when the system was first renewed may have been improved with revisions and updates. P2- I don’t think IFMIS is inherently complete. The needs of the system that arise during the implementation are conveyed to the officials of the Ministry of Treasury and Finance by the practitioners, and the ones that are deemed appropriate are added to the system in the form of additional software. In this way, they try to ensure that the system operates more effectively. For this reason, I think that the implementation of the current system has become more effective compared to 2018 and 2019.P3- They should definitely respond to the demands coming from the field, keep the system alive, as mostly the problems related to the system are left unaddressed, and they take a long time to be resolved. P4- It’s in very good shape now. P5- All public and private budget institutions have been put into the system and the system is actively used. There are still deficiencies in the system, and over time, the deficiencies can be overcome, albeit slowly. Although progress has been made in this 3.5-­ year period, the system still has shortcomings. As long as the problems experienced by the users of the system are conveyed to the software departments in an accurate and complete manner, the deficiencies in the system will be resolved as soon as possible. P6- The system is not designed perfectly and has deficiencies. Since compulsory documents such as invoices attached to the payment documents cannot be provided electronically and integrated into the system, some payment documents still come to our unit physically. This part is seen as an important shortcoming. P7- I don’t think the system is fully implemented.

5  IMPACT OF INTEGRATED FINANCIAL MANAGEMENT INFORMATION… 

121

I think some features are not used because they are not known by all users. I think this can be solved by notifying users. Some operations related to unused modules are still being replaced with manual records. This should be prevented. P8- In the IFMIS system, there are tender contract amount codes related to off-balance sheet accounts. However, for the system does not allow for additional increases or price differences for contracts. P9- Improvement can be made for the delayed production of financial reports received through the New Government Accounting System. Systemic errors that the system frequently gives are corrected over time, but there are delays in payment transactions until they are fixed. Efforts should be made to eliminate these systemic errors. Improvements should be made in the system for querying and reporting the modules in the Expenditure Management System application used in the spending units. The system does show that the transactions to the beneficiary with the Payment Order Document are paid, but the date of the payment is not seen on the Expenditure Management System by the spending units. An arrangement should be made showing the date of the payment. P10- It is difficult to say that IFMIS is fully implemented in Turkey. However, increasing the number of trained personnel and ensuring personnel continuity will be very beneficial in improving the practice. Not all participants think that IFMIS is fully implemented in Turkey. It has been reported that the system has improved over the years, but there are still various deficiencies in the system. Question 9- “If you have other opinions and thoughts about IFMIS applications, tell/write them.” The answers given by the participants to question 9 are as follows: P1- It is not clear whether coordination with other institutions has been fully achieved in the completion of the integrated system, which should be integrated with other parts of the financial system such as tax, cash, debt, and asset management. Significant internal and external resistances have emerged in the construction of processes. P2-I think that the IFMIS system will have a wider and more effective application area especially with applications such as purchasing added to its structure. P5- The system is tiring in terms of the excess of transitions between modules and still could not fully satisfy the users coming from a simpler system like say2000i. As users who have been using the system for about four years, we have the facility to communicate all our issues to the designated people and institutions that can help us solve these issues. Despite this, there are delays in terms of solutions and slowdowns and disruptions are still experienced in the system. If the system can be made to work without any problems and simplify all the modules of the system, it is a

122 

S. KARDEŞ SELIMOĞLU ET AL.

system that can help in many issues from efficient use of resources to reducing risks in the future. However, in this case, the fact that the transactions are made through many intermediate modules, this extends the transaction process. P6- The suddenness of the implementation and the insufficient training of the personnel caused problems at first. The transition process of these and similar systems needs to be better planned. P7- IFMIS applications have been developed and continue to be developed on the realization of accounting transactions. In the next development process, applications that will contribute to issues such as risk management of public institutions, providing decision support and monitoring of plans should be added. In this context, it is important that public institutions can receive their data in IFMIS applications via web services. P8- With escrow exits, once you have inputted a collective operation, the system does not allow you to input another collective operation before three hours have passed. This obviously causes delays in the system. When a second transaction is made regarding the transaction for which we gave a collective escrow exit, we receive warnings about a collective escrow exit after three hours by the system. For example, when we make the union escrow exit collectively, we must wait for hours for the second union transaction so that it can perform a collective transaction.

5.5  Results and Recommendations Currently in Turkey, Administrations with General and Special Budgets are included in IFMIS. Local Authorities are not yet included in the system. However, in the future, is the system plans to include “Administrations within the Scope of General Management” within the scope of Law No. 5018, and the project is going in this direction. Currently, only the auditors have the authority to view and examine the reports within the system. Internal auditors have not yet been included in the system and have not worked on these reports, especially in terms of financial auditing. Based on the opinions received, it can be concluded that although the implementation phase, which is the last step of the IFMIS application process, has been reached, the pilot implementation phase has not been exited since there is still limited use. On the other hand, one of the main difficulties is the provision of training for personnel who have to use the application. Despite the fact that the ministry employees, who are among the main responsible, were given training in the IFMIS application, training was not provided to the public employees who were the main users of the system. According to Chene (2009), it is already difficult to train existing human

5  IMPACT OF INTEGRATED FINANCIAL MANAGEMENT INFORMATION… 

123

resources in information technology-based applications. Therefore, it is clear that the lack of training about the application will cause great problems in the effective execution of the application. Although IFMIS has many benefits, Demirhan (2020) stated that there is still not sufficient information available for Turkey. Demirhan (2020) suggested that as a solution to this situation, training should be given to increase the awareness of IFMIS in public institutions. However, the interviewees in our study stated that they did not receive any training during the transition to IFMIS. As a result, the IFMIS application is in its infancy in Turkey. In this sense, training should be given to the users in order to develop the content of the system, to understand the system more clearly and to determine the needs of the system correctly. The importance of an innovative and technology-­oriented approach in public financial management during the COVID-19 process has been highlighted once again. In this context, IFMIS is being developed further and the system is transformed into a structure where the financial integrity of the public can be seen instantly. Thus, it will be ensured that strategic decisions can be taken faster and much more proactively. As the fight against the COVID-19 pandemic continues, plans are to complete an accounting-oriented information system infrastructure with new technological opportunities such as e-­document, e-signature, e-archive, e-invoice for public administrations within the scope of the central government by the end of 2022. The COVID-19 process has provided a unique opportunity to understand the importance of implementing, rolling out, and expanding the scope of IFMIS.  In the local literature, considering the impact of the COVID-19 pandemic, it may be beneficial for the future to identify the factors affecting financial management and conduct research on them.

References Akçay, S. (2017). Kamu mali yönetiminde devlet muhasebesinin rolünün etkinleştirilmesi çabaları ve bütünleşik yeni devlet muhasebesine geçiş. International Journal of Disciplines Economics & Administrative Sciences Studies, 3(3), 162–176. Burns, J., & Scapens, R.  W. (2000). Conceptualizing management accounting change: An institutional framework. Management Accounting Research, 11, 3–25. Caplan, E.  H. (1966). Behavioral assumptions of management accounting. The Accounting Review, 41(3), 496–509. https://www.jstor.org/stable/244479

124 

S. KARDEŞ SELIMOĞLU ET AL.

Chene, M. (2009). The implementation of integrated financial information management systems (IFMIS). Anti-Corruption Resources Centre, Transparency International. De Mello, L., & Ter-Minassian, T. (2020). Digitalisation challenges and opportunities for subnational governments (OECD working papers on fiscal federalism, no. 31). OECD Publishing. https://doi.org/10.1787/9582594a-­en Demirhan, H. (2020). Integrated public financial management information systems in Turkey. In Public financial management reforms in Turkey: Progress and challenges (Vol. 1, pp. 215–228). Springer. Diamond, J., & Khemani, P. (2005). Introducing financial management information systems in developing countries (IMF working paper). https://www.imf. org/external/pubs/ft/wp/2005/wp05196.pdf Eggers, W. D. (2016). Government’s cyber challenge: Protecting sensitive data for the public good. Deloitte Review, 19, 138–155. Farelo, M., & Morris, C. (2006). Status of e-government in South Africa. http:// citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.584.5046&rep=r ep1&type=pdf Hashim, A. (2014). A handbook on financial management information systems for government. A Practitioners Guide for Setting Reform Priorities, Systems Design and Implementation. Hendriks, C.  J. (2012). Integrated financial management information systems: Guidelines for effective implementation by the public sector of South Africa. SA Journal of Information Management, 14(1), 1–9. https://doi. org/10.4102/sajim.v14i1.529 Kasalu, T. (2016). Information technology risk management in integrated financial management information system in Kenya (Doctoral dissertation). University of Nairobi. Lamba, S. (2018). Effects of IFMIS practices in public finance management performance: A case study of Kenya power and lighting company. United States International University. http://41.204.183.105/bitstream/handle/11732/3967/SAMMY%20LAMBA%20MBA%202018.pdf?sequence=1 &isAllowed=y Mugaga, S. (2017). The effects of integrated financial management information system (IFMIS) on the financial statements (Master thesis). Selçuk University. Muigai, E. K. (2012). The effect of integrated financial management information systems on the financial management of public sector in Kenya: A case of the Kenyan Ministries (Doctoral dissertation). University of Nairobi: Department of Accounting and Finance. Ndaiga, P.  M. (2016). Determinants of the adoption of an integrated financial management system: A case of Mombasa County government (Doctoral dissertation). University of Nairobi.

5  IMPACT OF INTEGRATED FINANCIAL MANAGEMENT INFORMATION… 

125

Quarm, R. S., Sam-Quarm, R., & Sam-Quarm, R. (2020). The ramifications of the treasury single account, the IFMIS platform, and government cash management in developing economies in the wake of the COVID-19 pandemic: Ghana’s empirical example. Journal of Economics and Business, 3(4), 1654–1672. Available at SSRN: https://ssrn.com/abstract=3753227 Rodin-Brown, E. (2008). Integrated Financial Management Information Systems: A practical guide. https://www.pempal.org/sites/pempal/files/attachments/ PNADK595.pdf Turkey Minister of Finance. (2017). Bütünleşik Kamu Mali Yönetim Bilişim Sistemi Politika Belgesi ve Eylem Planı (2017–2020). https://gazi.edu.tr/ posts/download?id=193154. Accessed 15 Feb 2021. Turkey Minister of Finance. (2018). Bütünleşik Kamu Mali Yönetim Bilişim Sistemi Uygulama Usul Ve Esasları Hakkında Yönetmelik. https://www.resmigazete.gov.tr/eskiler/2018/06/20180626-­5.htm. Accessed 15 Feb 2021. Turkey Minister of Treasury and Finance. (2021). Bütünleşik Kamu Mali Yönetim Bilişim Sistemi (BKMYBS) Çalışma Grubu Bilgilendirme Sunumu. https:// muhasebat.hmb.gov.tr/dokumanlar. Accessed 15 Feb 2021. Uysal, T., & Aldemir, C. (2018). Dijital kamu mali yönetim sistemi ve blok zinciri teknolojisi. Muhasebe ve Vergi Uygulamaları Dergisi, 11(3), 505–522.

PART II

Financial Accountability and Auditing in Times of Crisis

CHAPTER 6

COVID-19 Business Support in the Netherlands; Governance and Accountability in Times of Turbulence Jan van Helden, Tjerk Budding, Bharti Girjasing, and Lizette Pleyte

6.1   Introduction Like many other countries, the Netherlands was affected by the COVID-19 pandemic in March 2020 and onwards (Capano et al., 2020). Dutch government reacted promptly by announcing a lockdown and several business support arrangements in order to prevent that business firms and other organizations would go bankrupt and consequently employees would lose their jobs. Business support was implemented in subsequent tranches, that

J. van Helden (*) University of Groningen, Groningen, The Netherlands e-mail: [email protected] T. Budding Vrije Universiteit Amsterdam, Amsterdam, The Netherlands e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 G. Dabbicco et al. (eds.), Public Sector Accounting, Financial Accountability and Viability in Times of Crisis, Public Sector Financial Management, https://doi.org/10.1007/978-3-031-04745-9_6

129

130 

J. VAN HELDEN ET AL.

is, April–June, July–September and October–December 2020 and January–September 2021. This support amounts to around 40 billion euros. Due to these additional government expenditures and decreasing tax income, governmental budget deficits were substantial in 2020 and 2021, while the unemployment rates increased significantly (but for a short period). However, the impact of the pandemic on the economy and public finances has been much more moderate in the Netherlands than in many other European countries (see, for instance, Heald & Hodges, 2020, about the UK). Our study aims to show how Dutch central government designed and adapted its business support arrangements related to the COVID-19 pandemic and how it organized its accountability to parliament in terms of expenditures and achievements. We will focus on the two most important business support arrangements, that is, on wage supplementation and fixed cost supplementation due to income losses of firms, covering the period March 2020–September 2021. The design of business support arrangements can be seen as governance forms, which relate to structures, procedures, rules and mechanisms for steering purposes (Almquist et al., 2013, p. 480). Our study particularly aims to answer the following research questions: RQ1 Which goals did Dutch central government want to achieve with? RQ2 Which adaptations Dutch central government conducted to cope with turbulence? RQ3 How did Dutch central government organize its accountability towards parliament? The empirical evidence of our study relies predominantly on a documentary study, including policy proposals, budgets, accountability reports

B. Girjasing • L. Pleyte Participating in the Research as Private Person, The Hague, The Netherlands e-mail: [email protected]; [email protected]

6  COVID-19 BUSINESS SUPPORT IN THE NETHERLANDS; GOVERNANCE… 

131

and minutes of meetings of the parliament or parliamentary commissions. In addition, we asked for a fact check about our description and analysis of each of the arrangements from experts of the ministries, and we interviewed representatives of the agencies that were responsible for the execution of both arrangements. Our analysis of the data wishes to unravel how the selected business support arrangements have been designed and redesigned in the course of time. This is a mainly descriptive approach. We enriched this description with an analysis that is informed by theoretical lenses about governance in times of turbulence and public sector accountability, as introduced in Sect. 6.3. Although corona-related business support is widely applied around the world (see CPB, 2021a, for a comparison of European countries), there is not much research that provides an in-depth analysis of this phenomenon. Whilst there are three special issues on budgeting and accounting in COVID-19 times in prestigious accounting journals (Covaleski & Hoque, 2020; Grossi et al., 2020; Leoni et al., 2021), only two papers are discussing governmental business support due to the pandemic. Because the focus of these papers (Andrew et al., 2021; Nurunnabi, 2020) is limited compared to our work, our study potentially makes a distinctive contribution by its in-depth analysis of COVID-19-related business support. This chapter is structured as follows. Section 6.2 gives an overview of all business support packages, including their financial consequences. Section 6.3 introduces theoretical lenses about turbulence and accountability, which will enrich our interpretations of the selected business support arrangements. These are presented in Sects. 6.4 and 6.5. Because accountability in parliament is not addressed separately for each of these arrangements, accountability is discussed in general terms related to business support in Sect. 6.6. Section 6.7 concludes our chapter with a summary of main findings and related reflections.

6.2   An Overview of COVID-19-Related Business Support Measures Dutch government decided to initiate a substantial and varied programme of COVID-19 business support measures at the start of the pandemic, March 2020. Table  6.1 gives an overview of these measures, and other COVID-19-related measures, including estimated budget figures over 2020 and 2021, as well as multi-annual estimates between 2022 and 2026. Table  6.1 shows that the total expenditures of COVID-19-related

132 

J. VAN HELDEN ET AL.

Table 6.1  Overview of COVID-19-related measures COVID-19 measures; Dutch label in parentheses, where appropriate I. Expenditures (EMU-relevant, EMU = Economic Monetary Union) (in million euros) Kingdom matters International Affairs Justice and Safety Internal Affairs Education, national programme Miscellaneous education Finance and national debt Defence Public transport Miscellaneous infrastructure and water affairs Fixed cost supplementation, mainly for small business (TVL/TOGS) Miscellaneous economic affairs Agriculture Wage supplementation due to income loss for businesses and non-profit agencies (NOW) Wage supplementation for single person businesses Miscellaneous social affairs Health care (including testing and vaccination) Municipalities Delayed liabilities National programme education Miscellaneous delayed liabilities Total EMU-relevant expenditures

2020

2021

2022–2026 Total

50 7 137 46 0 715 298 43 800 3 1957

56 18 199 213 3169 1119 561 28 2001 339 7200

0 0 0 25 4652 64 −91 7 140 0 540

106 25 336 284 7821 1898 768 77 2941 342 9697

550 245 13,219

921 254 7701

838 2 2791

2309 500 23,711

2728 147 594 643 5557 12,614 848 1034 0 0 0 1176 27,795 39,393

−9 308 2631 103 702 969 13,678

2866 1545 20,803 1985 702 2145 80,866

Source: Letter to Parliament, 2021–2022, 35925, Budget for 2022, September 2021

measures amount to 81 billion euros, whereas business support measures sum up to around 40 billion euros (business support measures are presented in Italics; row and column totals may show small rounding of differences). In addition to specific financial support to the health care sector, two measures are by far the largest: wage supplementation due to income loss for businesses and non-profit agencies (NOW) and fixed cost supplementation, mainly for small business (TVL/TOGS—Tegemoetkoming Vaste

6  COVID-19 BUSINESS SUPPORT IN THE NETHERLANDS; GOVERNANCE… 

133

Lasten/Tegemoetkoming Ondernemers Getroffen Sectoren COVID-19). These are the subject of our investigations in the Sects. 6.4 and 6.5. Almost half of the Dutch business firms benefited from COVID-19-­related support. This table further reveals that a broad spectrum of branches is supported, ranging from culture to education, and from public transport to local government. It has to be emphasized that business support measures also include fiscal facilities such as tax payment deferrals as well as loans and guarantees, which are not disclosed in Table 6.1. The government decided that business support expenditures did not need to lead to reductions in other planned expenditures, which meant that the EMU-debt (EMU  =  Economic Monetary Union) would rise from around 49% before the pandemic to 62% in 2021. However, due to a prosperous economic growth after the pandemic, EMU-debt is only expected to rise to circa 56% in 2023 (Source: CPB, 2021b). Accountability to parliament about business support, including its financial impacts, has been substantial throughout the relevant period, March 2020–September 2021 (see further Sects. 6.4, 6.5 and 6.6).

6.3  Theoretical Lenses on Turbulence and Accountability 6.3.1  Turbulence The Dutch Prime Minister has repeatedly argued that his government had to take actions due to the pandemic pretending 100% certainty, while available knowledge of their impacts was only 50%. This statement articulates eloquently what turbulence in the planning of interventions for battling the corona crisis means. Turbulence is, according to Ansell et  al. (2021), characterized by surprising, inconsistent, unpredictable and uncertain events. Due to turbulence, governments and businesses alike are faced with social and economic disruptions. These authors indicate that turbulence calls for cross-boundary collaboration, innovation and robustness, where robustness implies that planned interventions are adaptable to changing circumstances. In addition, it requires political leadership that relies on transparent advice of experts and wishes to contribute to the trustworthiness of policymaking for its citizens (see, e.g., Hopper, 2020 about COVID-19 policymaking).

134 

J. VAN HELDEN ET AL.

Turbulence is related to—but in some ways dissimilar to—the emergence of what are called wicked problems. Wicked problems are ill-defined, so without a clear indication about cause-and-effect relationships. This implies that both problems and their possible solutions are unclear, or are at least contested, so with diverging preferences among stakeholders (Cuppen, 2012; Head & Alford, 2015). In the context of COVID-19, institutions or groups of citizens might have divergent opinions on the types of measures to be taken, for instance, related to opening of schools and shops or travelling constraints. Wicked problems cannot be easily solved, but helping actors to get a shared understanding of a problem and possible solutions might be a feasible option (Head & Alford, 2015, p. 718). Uncertainty and unpredictability of the impacts of COVID-19 measures on physical health, the economy and the mental-social well-­ being are symptoms of wicked problems. This is also true for the concept of turbulence, but in addition, turbulence embraces uncertainty about the dynamics of these phenomena, so the context is not only uncertain but also volatile. This means that what is effective in an early stage of the pandemic can lose its effectiveness at a later stage, because citizens no longer recognize the urgency or effectiveness of certain measures, for example, the need for avoiding crowded spaces. Robustness strategies are seen as an adequate response to problems of turbulence. Key words for robustness strategies are flexibility, adaptation, agile modification and pragmatism in redirecting governance. Various more specific strategies can be suggested (these strategies, which relate to governance forms, are illustrated with COVID-19 examples and are partly based on Ansell et al., 2021, pp. 4–5): • Striving for stability due to flexibility in opportunities for upscaling and downscaling of capacities, for example, in intensive care capacities. • Planning of interventions spanning a short period in order to enable learning through experience, and, when desirable, adaptation of the planning for subsequent short periods. This strategy is key to corona policy making, for example, in relation to travelling constraints, as well as closing or opening of schools and shops. • Regularly considering of the trade-off between an adapted continuation of measures, and the abolition of measures taken for getting back to ‘normal’ circumstances. This strategy is particularly important with regard to business support: on the one hand, giving too

6  COVID-19 BUSINESS SUPPORT IN THE NETHERLANDS; GOVERNANCE… 

135

limited support could lead to unnecessary bankruptcies and employment losses, whereas on the other hand, an overly extensive and long-lasting support might bring the risk that firms become too accustomed to governmental support and are no longer able to react appropriately to changing market circumstances. • Modularization, that is, the creation of solutions for series of modules, such as field labs for social distancing in sports and cultural events. • Bounded autonomy, that is, giving a certain extent of autonomy to a group or institution for dealing with certain issues, for example, by giving individual schools discretion to organize social distancing in their classrooms. The above indicated robustness strategies for coping with circumstances of turbulence can deepen our understanding of the findings about the two arrangements in Sects. 6.4 and 6.5. 6.3.2   Accountabilities and Information Needs In the Netherlands, all proposed legislation (including those on business support) is discussed in parliament and laws must be adopted by a majority of representatives in order to be accepted. Furthermore, parliament has to check that the government carries out its work properly. In order to fulfil these tasks, parliament has to be informed about policy intentions and effects, as well as budgeted and actual financial means involved. Therefore, an adequate accountability framework should be in place. In its broadest sense, accountability simply refers to the giving and demanding of reasons for conduct (Roberts & Scapens, 1995, p.  447). However, Llewellyn (1998) stipulates that only when responsibilities have been ascribed, accountabilities can be constructed. Following this line of reasoning, Gray and Jenkins (1993) define accountability as ‘an obligation to present an account of and answer for the execution of responsibilities to those who entrusted those responsibilities’. Bovens et al. (2008) further extend the definition of accountability and describe this term as ‘a relationship between an actor and a forum, in which the actor has an obligation to explain and justify his or her conduct, the forum can pose questions and pass judgment, and the actor may face consequences’ (p. 227). Furthermore, they distinguish between three perspectives of accountability and discuss the information needs coupled to

136 

J. VAN HELDEN ET AL.

these perspectives. The first dimension is the democratic perspective, which is about control by citizens’ elected representatives. Accountability enables citizens and their representatives to make those holding public office answer for their deeds. Therefore, these should be informed about the conduct and consequences of executives’ actions. The constitutional perspective is the second perspective. Accountability is expected to help prevent corruption and abuse of power. Therefore, information should be available on whether the behaviour of the agent (the executive branch) is in accordance with laws, regulations and norms. The third, the learning perspective is about enhancing government effectiveness. Here accountability is seen as a tool to make and keep governments effective in keeping to their promises, and to learn. Therefore, information should yield an accurate, timely and clear diagnosis of important performance dimensions.

6.4   Arrangement on Wage Supplementation Due to Loss of Income (NOW) This section is about NOW (Tijdelijke Noodmaatregel Overbrugging Werkgelegenheid) and is literally the ‘Temporary Emergency Bridging Measure Retention of Employment’ but can be labelled more pragmatically as ‘Wage supplementation arrangement due to loss of income’. The goals of NOW are outlined, as well as how the arrangement works and was adapted in the course of time, and what impacts it has had. Section 6.6 addresses accountability issues. NOW aims to provide central government financial support to business firms and for non-profit organizations in, for example, culture and sports for avoiding bankruptcy and employment losses due to the pandemic measures, such as closing of shops and travel constraints. Two criteria underly this arrangement: it has to give rapid support for immediately helping businesses when they are faced with income losses, and it has to be robust (Source: Letter to Parliament, 2020–2021, 35420, No. 142 Support and Recovery Package, 30 September 2020). The latter criterion implies that complicated rules have to be avoided, particularly to meet requirements of the Employee Insurance Agency (UWV—Uitvoeringsinstituut Werknemersverzekeringen) which has to handle thousands of requests from employers. So, there is little room for customization to specific business sectors. This arrangement was scheduled for four subsequent periods, March–May 2020 (NOW1), June–September 2020 (NOW2), October

6  COVID-19 BUSINESS SUPPORT IN THE NETHERLANDS; GOVERNANCE… 

137

2020–June 2021 (NOW3, subdivided into three sub-periods of three months each) and July–September 2021 (NOW4). 6.4.1  NOW1 The first tranche of this regulation, NOW1, stipulates that employers with at least a 20% income reduction can apply for this support, which then covers 90% of their wage cost proportionate to the loss of income. The annual 2019 income is used as a benchmark for establishing the income loss during the pandemic. Applicants receive an 80% deposit on their wage cost recovery. Firms are assumed to keep their employees on board and to cover the remaining wage costs and other costs themselves, which resonates with their entrepreneurial risk (although they can, at a later stage also apply for another support package, TVL, for covering a part of their fixed costs, see Sect. 6.5). Possibly as a consequence of the simplicity requirement of NOW, start-up firms, so without an income in 2019, are not allowed to apply for financial support. Formally, the amount of financial support to a firm applying for NOW is based on the following formula (Source: Laws’ bank, 2020): Financial support = A × B × 3 × 1.3 × 0.9 In which: A = income loss as percentage B = wage costs of employees per reference month in 2019 3  =  number of months for which support is requested, normally three months 1.3 = flat-rate surcharge for wage-related employer’s costs 0.9 = income recovery percentage (this is revised in later stages, see below) Exhibit 1 gives an example about how NOW works. Some general observations can be noted. First, NOW regulations seem to be especially beneficial to firms with a labour-intensive exploitation, while capital intensive firms are taking far less advantage of this business support package. Second, firms with an adaptable cost structure that can easily reduce costs due to income losses have better chances of survival than firms with non-­ adaptable cost structures.

138 

J. VAN HELDEN ET AL.

6.4.2  NOW2 NOW2 is generally similar to NOW1. Employers applying for NOW2 are strongly encouraged to stimulate their employees to take part in retraining and further training activities that are required due to changing economic circumstances. Moreover, applications for dismissal of employees are becoming allowable for economic reasons, but then NOW support will be reduced. This reduction will not be applied if the employer and the labour unions come to an agreement about the reduction of the workforce (Source: Letter to Parliament, 2019–2020, 35420, No. 84, Support and Recovery Package, 22 June 2020). 6.4.3  NOW3 The government announced important revisions in NOW3, spanning the period October 2020–June 2021, in comparison to NOW1 and 2 by the end of August 2020. First, the minimum income loss is increased from 20% to 30% starting in January 2021, while wage cost recovery percentages are gradually reduced from 80% in the period October–December 2020, via 70% in January–March 2021, to 60% in April–June 2021 (Source: Letter to Parliament, 2019–2020, 35420, No. 105, Support and Recovery Package, 28 August 2020). The underlying reasoning is that firms have to gradually get accustomed to normal economic circumstances that will emerge at the end of the pandemic, in which subsidies are no longer available. The obligation not to dismiss employees has been abolished because firms are explicitly enabled to scale down their activities and thus reduce their workforce and related wage costs in the subsequent three sub-­periods by 10%, 15% and 20% respectively, due to a changing economic context. Firms benefiting from NOW3 are not allowed to pay bonuses and dividends to their employees as well as to buy back their own shares, because governmental financial support has to accord with restraint. However, subsidiaries with foreign headquarters do not have to comply with these restrictions, which leads to the strange situation that their shareholders can receive dividend and their managers’ bonuses, unlike the financial support given by Dutch government. At a later stage, on 9 December 2020, the government indicated that, given the large uncertainties for firms and employees, business support had to be continued further. Government decided not to tighten the

6  COVID-19 BUSINESS SUPPORT IN THE NETHERLANDS; GOVERNANCE… 

139

application conditions for NOW in the first quarter of 2021 compared to the fourth quarter of 2020; the compensation percentage, 80% of wage costs, remained the same as in the last quarter of 2020, as did the turnover threshold of 20% (Source: Letter to Parliament, 2019–2020, 35420, No. 237, Support and Recovery Package, 9 December 2020). Exhibit 1 How NOW works A hotel-restaurant is obliged to partially close down due to the pandemic regulations. Before the pandemic, its summer period income (covering the months July–September) was 800,000 euros, whereas its income is expected to be reduced to 300,000 euros in the same period during the pandemic. Under normal circumstances its salary costs (including employer’s salary costs) amounted to 50% of sales, its food and beverage costs to 30% and remaining costs (including building rent, energy, insurance and taxes) to 20%. This firm breaks even before the pandemic. Below is illustrated how NOW works for this firm (all figures in euros × 1000). Profit and loss account before pandemic Expected profit and loss account during pandemic Income Income from sales 800 Income from Sales 300 Income from NOW 225* Total income 800 Total income 525 Costs Salaries (50% of sales) 400 Salaries (have to be kept unchanged) 400 Food and beverages (30% of sales) 240 Food and beverages (30% of sales) 90 Remaining (20% of sales) 160 Remaining (partially variable to sales) 110 Total costs 800 Total costs 600 Profit/loss 0 Loss 75 Source: the authors Income loss due to pandemic is 62.5% (= (800 – 300) / 800). NOW covers 90% (cost coverage percentage NOW1) of 0.9 × 62.5% of 400 (the normal salary costs) = 225. During the pandemic, the firm is obliged to continue its payment for all salary costs

*

This example shows that NOW1 is very beneficial to this hotel-restaurant. From a breakeven situation before the pandemic, it has to bear a loss of 75 over a total income of 525 during the pandemic, which probably has to be covered through an equity reduction, if available, or by increasing a bank loan. The example also reveals that cost structure matters. If costs are mainly fixed, so they do not vary with revenue changes, the NOW support is less beneficial. Evidently, the availability of financial buffers, especially the amount of equity over total liabilities, is important for coping with serious income decreases

On 12 January 2021, the lockdown that began on 14 December 2020 was extended and subsequently government announced a substantial expansion of the business support packages to help as many firms and employees as possible (Source: Letter to Parliament, 2020–2021, 35420, No. 217, Support and Recovery Package, 21 January 2021). The

140 

J. VAN HELDEN ET AL.

government also explicitly called other parties (banks, landlords and other creditors) to accept their responsibilities and keep healthy businesses afloat. An important change compared to December 2020 is that the government has decided, in consultation with the social partners, to increase the wage cost recovery percentage from 80% to 85% up to July 2021. The increase will provide additional support for the wage costs if the turnover declines further as a result of the lockdown. 6.4.4  NOW4 The final track of NOW covers the months July–September 2021. Although the wage recovery percentage remained the same in comparison with NOW3 (85%), this wage recovery percentage does no longer apply to a loss of turnover above 80%. With a loss of turnover of 80–100%, a maximum of 68% of the wage costs applies instead of a maximum of 85% (=  85% cost recovery over 80% income loss  =  68%) (Source: Letter to Parliament, 2020–2021, 35420, No. 363 Support and recovery package, 20 September 2021). 6.4.5   Abuse and Improper Use Abuse of NOW is seen as a serious risk: wage supplementation received will be audited, and unjustified support has to be recovered. If the income loss is actually lower than the minimum loss of income, financial support needs to be repaid; in a similar vein, if the income loss meets the minimum threshold but is actually lower than estimated, this difference demands a proportionate repayment of the provisional financial support. Moreover, an auditing report is required when the deposit of the financial support is higher than 100,000 euros or the final declaration is higher than 125,000 euros (Sources: Letter to Parliament, 2019–2020, 35420, No. 105, Support and Recovery Package, 28 August 2020; Letter to Parliament, 2020–2021, 35420, No. 142, Support and Recovery Package, 30 September 2020). In September 2020, the Netherlands Court of Audit investigated abuse of NOW. The Court finds that a quickly implementable and simple regulation was regarded as more important than a regulation that avoids risks of misuse and improper use. It also observes that audits of NOW applications were mainly conducted after the financial support was supplied and not before the applications were granted. It advised putting more effort into

6  COVID-19 BUSINESS SUPPORT IN THE NETHERLANDS; GOVERNANCE… 

141

ex-ante audits in the further NOW tranches (Source: Netherlands Court of Audit, Auditing abuse and improper use of NOW, 2020). However, these ex-ante audits would challenge the capacity of the Employee Insurance Agency and the main goal of the NOW, to provide fast financial support to firms with income losses. 6.4.6  Impacts Table 6.2 gives an overview of the NOW regulations and impacts in the subsequent periods. With respect to the regulatory aspects of NOW, the table shows that originally the loss of income threshold should increase over time, but at a later stage this threshold remained unchanged. In a similar vein, the cost recovery percentage should decrease over time, but at a later stage this percentage remained almost the same. Both developments in the regulations point to the original will of government for tapering off the wage support due to income losses but maintaining support regulations was ultimately settled. Obviously, helping businesses through an increasing period of income losses was seen as more important than gradually making businesses less dependent from government support. In this respect, government adapted its regulations due to experience and learning, but also as a consequence of a changing view on the goals of the arrangement (see Sect. 6.3.1 about coping with turbulence). Table 6.2 further reveals that many firms benefited from NOW.  The total number of applications amounts to approximately 410,000. Although the wage supplementation decreased over time, on average around 70,000 firms with 1.3 million employees were supported. The total support indicates a significant amount of around 23 million euros. Specific branches dominate the NOW statistics, especially catering and restaurants/hotels (35%), retail (15%) and remaining commercial services (11%). It is remarkable that NOW support decreased over time, because the strict lockdown between December 2020 and May 2021 would suggest a continuing need for helping businesses through the corona crisis. A large majority of the applications was granted with only an approximately 5% being rejected. About 40% of the NOW decisions 2020 will involve a supplementary payment, while 60% will lead to a reimbursement (Source: Letter to Parliament, 2020–2021, 35420, No. 199 Support and Recovery Package, 3 December 2020). For about 80% of the repayments, the recovery is due to a lower loss of turnover than expected, for example, due to a revival of the economy. An interview with

142 

J. VAN HELDEN ET AL.

Table 6.2  NOW: Regulations and impacts in subsequent periods Tranche

NOW1 NOW2 (March– (June– May 2020) September 2020)

NOW3-01 (October– December 2020)

NOW3-02 (January– March 2021)

NOW3-­ 03 (April– June 2021)

NOW4 (July– September 2021)*

Income loss threshold (original plan) Income loss threshold (revised plan) Wage recovery percentage (original plan) Wage recovery percentage (revised plan) Number of applications granted** Number of employees*** Amount of wage support (billion euros)****

20%

20%

20%

30%

30%

20%

20%

20%

20%

20%

20%

20%

90%

90%

80%

70%

60%

85%

90%

90%

80%

85%

85%

85%*****

140,000

64,000

78,000

75,000

45,000

14,000

2,700,000

1,300,000

1,300,000 1,300,000

800,000

200,000

9.9

5.4

3.5

2.5

0.7

4.1

Source: Letter to Parliament, 2020–2021, 35420, No. 363 Support and recovery package, 20 September 2021 *

NOW4, figures are best guesses available end of September 2021 Rounded to thousands of applications

**

Rounded to thousands of employees

***

Rounded to millions of wage support

****

This wage recovery percentage does not apply to a loss of turnover above 80%. With a loss of turnover above 80%, a maximum of 68% of the wage costs applies instead of a maximum of 85% *****

6  COVID-19 BUSINESS SUPPORT IN THE NETHERLANDS; GOVERNANCE… 

143

a representative of the Employee Insurance Agency (Uitvoeringsinstituut Werknemersverzekeringen), which is responsible for NOW’s execution, indicates that UWV received 450 million euros for this task over 2020, which is a quite low 3.4% of the total NOW expenditures. This interviewee also emphasizes that whilst NOW has been adapted in the course of time, its simplicity and easy implementation have remained.

6.5   Arrangement on Fixed Cost Supplementation Due to Income Loss (TVL) As in the previous section, here we discuss the second arrangement, that is, TVL. It outlines its goals, how the arrangement works and was adapted in the course of time, and what impacts it has had. Accountability issues are addressed in Sect. 6.6. In addition to wage costs, which are partly fixed and partly variable, remaining fixed costs were seen as a problem for many businesses. Therefore, in May 2020 the ministry of Economic Affairs and Climate introduced a subsidy for small and medium-sized businesses that were hit most severely by the COVID-19 crisis, including restaurants, bars, recreation facilities, gyms, events, fairs, gaming machine halls, stages and theatres; this type of reaction is exemplary for robustness strategies, see Sect. 6.3.2. The Rijksdienst voor Ondernemend Nederland (RVO, Netherlands Enterprise Agency) is in charge of executing this arrangement, called Tegemoetkoming Vaste Lasten MKB (TVL, Fixed cost supplementation due to loss of income). The allowance depends on the business size, the share of fixed costs as part of the total turnover and the extent of lost sales, up to a maximum of 20,000 euros per three months. Admission to this arrangement required a minimum of 30% lost sales compared to the same quarter in the previous year. The costs of the TVL were originally budgeted at around 1 billion euros, and as a generic subsidy scheme its execution was designed to enable large numbers of requests. Initially, the TVL was meant to be temporary for a period of three months. Based upon the pandemic developments, experiences and newly developed knowledge, however, the conditions were adapted (this is an example of a robustness strategy, as introduced in Sect. 6.3.1). The second wave of the COVID-19 virus and its economic consequences led not only to an extension of the TVL, at least until the third quarter of 2021, but

144 

J. VAN HELDEN ET AL.

also to extension of the target group and an increase of both the subsidy percentage and the maximum allowance per entrepreneur. The closure of additional industries in December 2020 had a large impact on the budget of the TVL. Moreover, the subsidy percentage was raised for both the last quarter of 2020 and the first quarter of 2021, and specific modules were developed to compensate for inventory losses for companies in the food and beverage sector as well as the retail industry, which were closed (Source: Letter to Parliament, 2020–2021, 34520, No. 210). The maximum amounts were also raised to 330,000 euros for SMEs and 400,000 euros for large businesses, and in the second quarter of 2021 even 100% was subsidized. 6.5.1   TVL Q3 2020 The first TVL arrangement was meant to support specific industries. It covered the months July–September 2020. Just before its start several anti-COVID-19 measures were relaxed, and businesses were faced with a lower loss of sales. The advance payments were 80% of the granted subsidy. After a specific time span, an applicant has to prove the amount lost in sales. Based upon a justification, the RVO decides about the final amount of the subsidy. In some instances this implies that the entrepreneur has to pay back part of the subsidy, although, the terms of payment could be negotiable. Amounts of less than 500 euros are not reclaimed. Exhibit 2 gives an example about how TVL works. Exhibit 2 How TVL works Example based on TVL 1 Q3 2020 A restaurant has fixed costs, such as salaries, rent and electricity costs. It had to close its doors due to COVID-19 constraints and therefore did not have any turnover. The salaries could be compensated to a large extent by the NOW arrangement. In this case lost turnover was more than 30% and the fixed costs are at least 4000 euros. The remuneration percentage is 50%. The fixed costs minus the wage costs could be compensated by the TVL arrangement, to a maximum of 50,000 euros. Fixed costs, excluding salaries, 10,000 euros per month; loss of sales: 100%; subsidy TVL: 0.5 × 10,000 = 5000 euros per month In order to explain how the TVL works, we used a fixed sum, but in reality, the average percentage within the sector (based on data of the national statistical office, Statistics Netherlands) is used to measure the fixed costs. Source: the authors

6  COVID-19 BUSINESS SUPPORT IN THE NETHERLANDS; GOVERNANCE… 

145

6.5.2   TVL Q4 2020 TVL Q4 was introduced in August 2020 as part of a larger business support programme and covered the months October–December 2020. Three adaptations were enacted: first, the arrangement was opened to all industries; second, the maximum allowance was raised to 90,000 euros; and third, a markup was introduced for restaurants and bars in order to compensate for lost inventories (Source: Letter to Parliament, 2020–2021, 2021D10697 and 34520, No. 105). Here too, an advance payment of 80% was granted. 6.5.3   TVL Q1 2021 TVL Q1 2021 was opened on 15 February 2021 and its admission time was extended to 18 May 2021  as a result of the continued COVID-19 measures. Seventy per cent of the requests were decided within one week and 90% of them within three weeks (Source: Letter to Parliament, 2020–2021, 2021D10697). As a result of the extension of the COVID-19 constraints, several adaptations were implemented, hereby meeting the requests of parliament (Source: Letter to Parliament, 2020–2021, 2021D10697): • Raising the maximum allowance from 90,000 euros to 550,000 euros for SMEs and 600,000 euros for non-SMEs; • Admission of non-SMEs to TVL; • Raising the subsidy percentage to 85%; • Raising the minimum allowance to 1500 euros; • Lowering the minimum fixed costs to 1500 euros; • Extension and raising of the markup Subsidy Inventory Closed Retail companies to 21%, with a maximum of 300,000 euros; • Implementation of a markup for the cancellation costs for the travel industry; • Implementation of a markup for specific costs in the agriculture and culture sectors. 6.5.4   TVL Q2 2021 and Q3 2021 As a result of a parliamentary proposal, the subsidy percentage was raised to 100% for TVL Q2 2021 and TVLQ3 2021 (Source: Letter to Parliament, 2020–2021, 25295, No. 1044).

146 

J. VAN HELDEN ET AL.

As with the wage cost supplementation, we see various adaptations in the regulations of TVL due to experience and learning, as well as changing goals (see Sect. 6.3.1 on robustness strategies for coping with turbulence). 6.5.5   Abuse and Improper Use TVL is an arrangement that is susceptible to fraud. In order to mitigate risks with the execution of the TVL, RVO has implemented a system of risk management. Additionally, the RVO receives signals from external sources such as the digital RVO fraud reporting channel, and inspectorates and the Dutch Association of Banks (Source: Letter to Parliament, 2020–2021, 35420, No. 210). The Dutch Association of Banks made an announcement of abuse and improper use. In total 270 businesses applied for a subsidy but did not receive any payments of sales on their bank account in Q4 2020. Therefore, apparently, they did not have a loss of turnover in that period. Most of these companies did receive an advance payment from TVL Q3 2020 or TVL Q4 2020 (Source: Letter to Parliament, 2020–2021, 35420, No. 210). RVO is currently investigating these practices. In case of abuse or improper use, penalties can be imposed, such as reclamation or even lodging a complaint. 6.5.6  Impacts Table 6.3 presents an overview of the TVL regulations and their impacts in five subsequent periods. This table shows that the target group of the arrangement has been expanded substantially in the course of time. It was firstly restricted to SMEs but was later extended to all sectors. As a consequence of this extension, the maximum subsidy per applicant was significantly increased. The turnover loss threshold and fixed costs threshold for receiving financial support remained the same over the total period, but the subsidy percentage increased considerably. Table 6.3 shows that TVL total subsidies substantially increased from the first to the second period (Q3 and Q4 2020), which was mainly a consequence of a rising number of applications granted. This is due to the relaxation of pandemic measures during the summer but its strengthening in the autumn, when more businesses had to close. This especially regards the sector of restaurants/cafes/hotels, but also the retail sector, such as clothing stores, that suffered from restrictions regarding opening hours

6  COVID-19 BUSINESS SUPPORT IN THE NETHERLANDS; GOVERNANCE… 

147

Table 6.3  TVL: Regulations and impacts in subsequent periods Tranche

TVL 1 Q3 2020 (June– September 2020)

Target group

TVL Q4 2020 (October– December 2020)

SMEs, SMEs, all sectors hit sectors most by virus Turnover loss 30% 30% threshold Fixed costs € 4000 € 3000 threshold Subsidy 50% 50–70% percentage Average € 13,038 € 15,084 subsidy Average loss 65% 68% of sales Number of 47,669 90,496 applications Number of 42,547 79,692 applications granted Subsidies € 556 m € 1200 m granted Largest 56 Food & 56 Food & industries beverage beverage (SBI codes) (154 m) (358 m) 90 Arts 55 Lodging (56 m) (86 m) 93 Sports 01 (51 m) Agriculture 55 Lodging (77 m) (49 m) 46 Wholesale 46 Wholesale (75 m) (38 m) 47 Retail (63 m)

TVL Q1 2021 (January– March 2021)

TVL Q2 2021 TVL Q3 (April–June 2021 2021) (July– September 2021)*

SMEs and non-SMEs, all sectors 30%

SMEs and non-SMEs, all sectors 30%

SMEs and non-SMEs, all sectors 30%

€ 1500

€ 1500

€ 1500

85%

100%

100%

€ 23,930

€ 21,086

€ 14,917

75%

67%

69%

114,044

63,276

14,082

99,311

52,267

8201

€ 2375 m

€ 1080 m

€ 120 m

56 Food & beverage (447 m) 47 Retail (442 m) 55 Lodging (189 m) 46 Wholesale (170 m) 93 Sports (126 m) 55 Lodging (33 m)

56 Food & beverage (336 m) 01 Agriculture (137 m) 93 Sports (76 m) 55 Lodging (71 m) 90 Art (64 m)

56 Food & beverage (27 m) 90 Art (11 m) 49 Transport (10 m) 46 Wholesale (8 m) 93 Sports (7 m)

Source: Letter to Parliament, 2020–2021, 2021Z17443 *

Figures are preliminary

m millions

148 

J. VAN HELDEN ET AL.

and distancing. Whereas the number of applications was much higher in the fourth quarter of 2020, the percentage of rejected applications also raised considerably. In the spring and summer of 2021 TVL subsidies decreased significantly. The total number of TVL applications amounts to 350,000 over 2020 and 2021, and transaction costs for handling and monitoring are around 44 million euros, which equals approximately 0.5% of the total TVL expenditures, being a relatively low level of transaction costs (Source: interview with representative of RVO, which is responsible for TVL execution).

6.6   Accountability This section addresses accountability about the business support programme by the government towards the parliament, and especially the two arrangements as discussed in the previous sections, so NOW and TVL. 6.6.1   Regulatory Framework on Accountability of Government to Parliament Article 105 of the Dutch constitution allocates budgetary competences and powers to parliament, which means that both the Lower House and the Senate need to approve budget proposals from ministers before the policy in question is implemented. Based on the cash-commitment system of Dutch central government, both planned expenditures and commitments for expenditures are included in the budget. Ministers are accountable to the parliament for supplementary budgets, so budgets providing additional resources to certain destinations, after the original budget has been approved. The Government Accounts Act stipulates that additional resources, in comparison to the original budget, cannot be spent without parliament’s consent. However, in exceptional cases when additional expenditures are urgent, a minister is allowed to ask parliamentary consent after these expenditures are made (article 2.27, section 2, Governments Accounts Act), but he/she has to inform the parliament beforehand and has to explain that a delay in the implementation would not be beneficial to the state. During the COVID-19 pandemic, expenditures related to measures for supporting businesses were often regarded as urgent expenditures with an ex-post consent by parliament. With respect to NOW, article 2.27, section 2 of Government Accounts Act was invoked in three cases, while in the other cases the minister obtained parliamentary consent

6  COVID-19 BUSINESS SUPPORT IN THE NETHERLANDS; GOVERNANCE… 

149

before implementing a new NOW stage, with additional expenditures (Source: rijksfinancien.nl/13 review supplementary budgets with apply for CW 2.27). For the TVL the Ministry of Economic Affairs made use of this article three times in 2020 (Source: Annual report, 2020 of the Dutch government). 6.6.2   Analysis of Accountability of Government to Parliament In order to explore how the accountability to the parliament was safeguarded, we analysed all letters to parliament in which the NOW and/or TVL were discussed and could be found on the parliament website (http://www.tweedekamer.nl), which are part of dossier 35420 ‘Emergency package employment and economy’. We acknowledge that ministries might have informed parliament in other letters and reports as well, but for the scope of this analysis, we studied exclusively the dossier 35420, which was seen as core of the accountability relationship between government and parliament. In addition, we investigated the minutes of subsequent debates between the minister of social affairs and employment and members of parliament about the design, redesign and accounts of the business support arrangements, including NOW and TVL. This analysis reveals that parliament was frequently informed about the changes made to the arrangements and the number of applicants for these arrangements (such as NOW and TVL). The ministries also actively disclosed the budgeted expenditures of the arrangements. Only at the start of the arrangements (between 17 March and 20 May 2020) no monetary information was provided. The first letter to parliament about the business support emergency arrangements (of 17 March 2020) indicated a ‘potential use of billions of euros per month’, and also emphasized that ‘financial resources are no constraining factor for delivering appropriate support’. The members of parliament showed decided interest in the applicability of business support arrangements for specific target groups, for example, whether businesses with seasonal work could apply for arrangements based on a suitable reference period in the previous year, or whether businesses that started their operations just before the pandemic could also apply for financial support. Moreover, members of parliament put pressure on the ministers in question to enable a timely payment of the financial support to applicants. In these respects members of parliament clearly acted as representatives of certain groups of citizens (Sources: Debates between Minister of Social Affairs and Employment, 25 March 2020, No. 14, 14

150 

J. VAN HELDEN ET AL.

April 2020, No. 32, 24 June 2020, No. 35473, 24 September 2020, No. 35542). We found hardly any information about realized expenditures, most of the time budgeted costs were mentioned, part of them in absolute numbers or mentioning the additional budgeted costs. Another issue of accountability was abuse and improper use of arrangements. Several letters addressed this risk (see also Sects. 6.4.5 and 6.5.5). The cabinet stated that it wanted to make sure that the payments were received by businesses that qualify for the arrangement. However, it was also emphasized that automated systems had to be used to deal with the enormous number of requests. A letter dated 28 August 2020 mentioned that ‘these and other risks are addressed as much as possible by control measures, but it is realistic to expect that not all risks can be mitigated, and residual risks have to be accepted’. Members of parliament did not seem to be very interested in the abuse or improper use of the business support arrangements, but they were extensively informed about these risks. Whereas the desirable effects were discussed in general terms, these were not made explicit in quantitative terms. This also applied to realized effects. However, we found several statements about the positive effects of arrangements (e.g., the arrangements ‘worked out well’—letter of 9 December 2020). Several letters discussed extensively the developments in the labour market, but a direct link between the arrangements and these developments (in terms of employment, number of bankruptcies, or income) was not made. In several places we found implicit links. The letter of 28 August 2020, for example, mentioned that ‘although the economic damage and increase in unemployment are very large and have an enormous impact on everybody, these are lower than in surrounding countries’. The letter of 27 October 2020 suggested a direct causal relationship between the NOW arrangement and the number of jobs: ‘The more subsidy that is provided via NOW, the more jobs we keep in the Netherlands’. In response to a request from members of parliament, the cabinet announced in the letter of 18 December 2020 an evaluation of the economic effects of the arrangements, to be conducted by the Netherlands Bureau for Economic Policy Analysis, CPB (see Sect. 6.7.4, which summarizes this analysis). We also scrutinized the letters to parliament for specific learning effects of the arrangements and reasons adaptations were made. The most important argument for making changes was that COVID-19 measures at times were relaxed and at other times were made stricter, with related economic

6  COVID-19 BUSINESS SUPPORT IN THE NETHERLANDS; GOVERNANCE… 

151

consequences. The cabinet also stated, quite early (20 May 2020. Source: House of Commons, parliamentary year 2019–2020, 35420, No. 38), that as ‘it realised that the virus and economic effects will remain longer, employees, businesses and entrepreneurs should adapt more and more to a new economic reality. The cabinet aims to support businesses and employees in the adaptation process’. It also underlined the importance of continuously discussing the measures with the social partners (i.e., confederation of employers and labour unions, business, and finance providers), but we did not find explicit information about the contents or outcomes of these discussions. The abolition or continuation of business support was discussed later during the pandemic (which is an example of a robustness strategy for coping with turbulence, see Sect. 6.3.1). An important issue of debate was whether businesses needed to get accustomed as soon as possible to normal economic conditions after the pandemic ended or its impact was reduced, or whether continued support would be desirable. A special issue was the need to arrange a long period for repayment of tax debts by firms that heavily suffered from the pandemic.

6.7  Conclusion and Discussion 6.7.1   Goals, Design and Redesign of the Business Support Arrangements Our study shows that the Dutch government responded promptly to the largely unexpected and unprecedented COVID-19 pandemic by launching a business support programme, spanning the period March 2020– September 2021, and that its main goals were to avoid bankruptcies and unemployment. This programme amounted to around 40 billion euros, which equals about 5% of Dutch annual GDP. Our analysis focuses on the two most important arrangements, that is, wage supplementation and fixed cost supplementation due to income losses. We analysed the goals of these arrangements, how they were designed and redesigned, as part of the governance of the pandemic, as well as the accountability of government to parliament for these measures. The analysis reveals that priority was given to simple and generally applicable arrangements that could provide quick financial support. Arrangements were designed for subsequent short periods of mostly three to six months, in order to enable adaptations as a result of experiences and turbulence in the changing economic

152 

J. VAN HELDEN ET AL.

conditions due to the pandemic. Adaptations are regarding target groups, the minimum loss in sales for receiving support and the amount of support related to an income loss. 6.7.2   Strategies to Cope with Turbulence Turbulence emerged because of the unexpected and unprecedented impacts of the pandemic that required a quick reaction. In addition, during the pandemic circumstances were highly volatile, where relaxing measures regarding opening of facilities were alternated with stricter rules and guidelines, with corresponding consequences. The following robustness strategies for coping with turbulence were observed. • Business support was directed to wage supplementation at first, which is understandable given the urgency of avoiding bankruptcies and unemployment, but was later followed by supplementation of fixed costs, because in the longer term all major cost categories could not be recovered due to loss of income. • The business support arrangements were designed for short periods in order to enable making adaptations due to experience and learning; we observed that income thresholds for qualifying for financial support were adapted in the course of time, that is, mostly they became less strict, and moreover subsidy percentages were changed in the course of time, mostly these were increased due to the more severe economic consequences as the pandemic lasted longer. • In the course of time regulations were adapted in order to cope with the specific circumstances of certain target groups, such as season sensitive firms and starting firms. • Unintended consequences, for example, related to misuse and improper use of arrangements, gave rise to revised or tighter rules. • Later, during the pandemic debates intensified about abolishing or continuing business support, which reflects the delicate trade-off between getting back to normal and avoiding a too early termination of the support. 6.7.3  Accountability Impacts of business support arrangements were a main part of debates between responsible ministers and members of parliament, including

6  COVID-19 BUSINESS SUPPORT IN THE NETHERLANDS; GOVERNANCE… 

153

impacts with regard to budgetary consequences, the numbers of firms benefiting from this support, including sector-specific effects, and risks of abuse or improper use of the arrangements. However, it was difficult to link the individual support arrangements to impacts of avoiding bankruptcies and employment losses. Accountability to the parliament focused on the applicability of arrangements for specific groups, such as season sensitive businesses. The accomplishments of ultimate goals of avoiding bankruptcies and unemployment were merely addressed in general terms. Financial means involved with the arrangements were mostly expressed in budgetary terms. However, the expenditures realized are part of the annual reports of the ministries which were published on 19 May 2021. In sum, we can conclude for accountability that the information provided by the ministries was primarily aimed at fulfilling the information needs that are attached to what Bovens et al. (2008) call the democratic and constitutional perspective, and less to the learning perspective. 6.7.4   Miscellaneous Issues The Dutch Minister of Finance claimed that the healthy financial condition of the Dutch government, in the sense of a relatively low governmental debt over GDP, has been beneficial to a generous business support programme. Although this seems to be a sound argument, international comparative research reveals that governments’ indebtedness was not correlated with the degree to which financial measures were taken to fight the pandemic (de Jong & Ho, 2021). Nevertheless, recent forecasts indicate a prosperous future of the Dutch economy: the growth of the economy in 2021 is estimated to be around 3.9% and in 2022 3.5%, and the unemployment rate will be around 3.5% in 2022, which equals the average unemployment rate in pre-corona years. Government’s debt over GDP also shows positive prospects: whilst it was 49% in 2019, it rose to 54.3% in 2020 and 57.5% in 2021, but is expected to decrease to 56.5% in 2022, which is below the European Union guideline of a 60% debt rate (CPB, 2021a). A more particular issue is the impact of the business support programme on employment in the Netherlands. Recently, around 1 October 2021, CPB, the Netherlands Bureau for Economic Policy Analysis, conducted an assessment of the economic impacts of business support in the Netherlands due to COVID-19 restrictions over 2020. Business support was high in the Netherlands in comparison with other European countries. Also the

154 

J. VAN HELDEN ET AL.

extent of support, for example in the form of 75% of wage costs due to income loss, was high. Business support was effective because it avoided bankruptcies and helped employees to keep their jobs. Two branches benefited from support to the largest extent, that is, catering (hotels, cafes, restaurants) and business services. The unemployment rate would have been between 0.7 and 2.0 percentage points higher in the absence of business support. Business support also contributed to a limitation of a drop in demand for products and services, because many employees, who could not work due to the constraints, kept their income. Despite these positive effects, relatively many young employees and self-employed employees lost their jobs. According to CPB, business support had a negative influence on the dynamics of markets, that is, it kept vulnerable firms with a low labour productivity alive. This also regards firms with a high solvency rate that could have survived without support. The effectivity of business support diminished as the COVID-19 crisis lasted longer. Simplicity and a generally applicable programme of business support arrangements can give rise to negative side-effects. On the one hand, firms that actually deserve support may not receive it due to their specific circumstances, for example, because they only recently entered the business. On the other hand, firms that do not actually deserve support because their income loss is a consequence of economic dynamics unrelated to the pandemic, receive it anyway. A challenging direction for future research would be a comparison between the ‘Dutch approach’ of simple and generally applicable support with support philosophies that more thoroughly assess the conditions under which firms and other organizations deserve government subsidies for avoiding bankruptcies. A preliminary attempt to compare governmental business support in the European Union shows that a large number of European countries enacted business support programmes in 2020. Business support in the Netherlands was above the European average (3.6% against 3.3% of GDP). Some countries, especially the UK and Italy showed a higher amount of support (6.2% and 4.8% respectively), but the support was lower in many other countries, such as Germany and France (both around 3.3%) (CPB, 2021a, pp. 9–12). An interesting direction for future research on governmental business support programmes related to COVID-19 addresses an international comparison about the effectiveness of these programmes. Effectiveness could be measured in terms of mitigating employment losses and avoiding bankruptcies, while antecedents for possible impact differences might

6  COVID-19 BUSINESS SUPPORT IN THE NETHERLANDS; GOVERNANCE… 

155

relate to governmental opportunities for spending resources for these programmes and the resilience of the country’s economy. Our study is important both from a practical and an academic viewpoint. It provides pointers for practitioners, such as suppliers and users of public sector accounting information in the context of turbulence, in which governments are challenged to a quick response with effective measures that at the same time meet requirements of rigorousness and fairness. From a theoretical point of view, our study further enhances our understanding of performance-based accounting devices in the public sector during a crisis (see further van Helden & Reichard, 2019) and the way parliament is involved in the way laws and regulations are developed (Budding & Klink,  2020). Our study contributes to the field of public sector performance budgeting in the following way (compare Raudla, 2022). Whilst performance budgeting in the sense of linking performances to impacts on budgeted resources is difficult to achieve, there is an asymmetry between budgeting and accountability. Budgeted performances were mostly expressed in a qualitative manner, so avoiding bankruptcies and unemployment as much as possible, whereas accountability could provide more quantitative information about these goals. In mid-November 2021, when the text of this chapter was completed, corona infections were dramatically rising again, and Dutch government reacted by announcing severe constraints which could also affect business firms and other organizations. A reviving of business support measures is therefore likely. So, the story of this chapter continues.

References Almquist, R., Grossi, G., van Helden, J., & Reichard, C. (2013). Editorial public sector governance and accountability. Critical Perspectives on Accounting, 24(7–8), 479–487. Andrew, J., Baker, M., & Guthrie, J. (2021). Accounting, inequality and COVID-19  in Australia. Accounting, Auditing & Accountability Journal, 34(6), 1471–1483. Ansell, C., Sørensen, E., & Torfing, J. (2021). The COVID-19 pandemic as a game changer for public administration and leadership? The need for robust governance responses to turbulent problems. Public Management Review, 23(7), 949–960. Bovens, M., Schillemans, T., & Hart, P. ‘t. (2008). Does public accountability work? An assessment tool. Public Administration, 86(1), 225–242.

156 

J. VAN HELDEN ET AL.

Budding, T., & Klink, J. (2020). The influence of parliamentarians on the development of financial management regulations for executive agencies. Journal of Public Budgeting, Accounting & Financial Management, 32(3), 421–438. Capano, G., Howlett, M., Jarvis, D.  S. L., Ramesh, M., & Goyal, N. (2020). Mobilizing policy (in)capacity to fight COVID-19: Understanding variations in state responses. Policy and Society, 39(3), 285–308. Centraal Planbureau (CPB). (2021a, September). Economische analyse steunpakket 2020 (Economic Assessment business support 2020), Den Haag. Centraal Planbureau (CPB). (2021b, September). Macro Economische Verkenning 2022 (Macro Economic exploration 2022), Den Haag. Covaleski, M., & Hoque, Z. (2020). Guest editorial. Journal of Accounting & Organizational Change, 16(4), 517–526. Cuppen, E. (2012). Diversity and constructive conflict in stakeholder dialogue: Considerations for design and methods. Policy Sciences, 45, 23–46. de Jong, M., & Ho, A. T. (2021). Emerging fiscal health and governance concerns resulting from COVID-19 challenges. Journal of Public Budgeting, Accounting & Financial Management, 33(1), 1–11. Gray, A., & Jenkins, B. (1993). Codes of accountability in the new public sector. Accounting, Auditing & Accountability Journal, 6(3), 52–67. Grossi, G., Ho, A.  T., & Joyce, P.  G. (2020). Budgetary responses to a global pandemic: International experiences and lessons for a sustainable future. Journal of Public Budgeting, Accounting & Financial Management, 32(5), 737–744. Head, B. W., & Alford, J. (2015). Wicked problems: Implications for public policy and management. Administration and Society, 47(6), 711–739. Heald, D., & Hodges, R. (2020). The accounting, budgeting and fiscal impact of COVID-19 on the United Kingdom. Journal of Public Budgeting, Accounting & Financial Management, 32(5), 785–795. Hopper, T. (2020). Swimming in a sea of uncertainty – Business, governance and the coronavirus (COVID-19) pandemic. Journal of Accounting and Organizational Change, 16(4), 533–539. Leoni, G., Lai, A., Stacchezzini, R., Steccolini, I., Brammer, S., Linnenluecke, M., & Demirag, I. (2021). Accounting, management and accountability in times of crisis: Lessons from the COVID-19 pandemic. Accounting, Auditing & Accountability Journal, 34(6), 1305–1319. Llewellyn, S. (1998). Pushing budgets down the line: Ascribing financial responsibility in the UK social services. Accounting Auditing & Accountability Journal, 11(3), 292–308. Nurunnabi, M. (2020). Recovery planning and resilience of SMEs during the COVID-19: Experience from Saudi Arabia. Journal of Accounting & Organizational Change, 16(4), 643–653. Raudla, R. (2022). Politicians’ use of performance information in the budget process. Public Money and Management, 42(3), 144–151.

6  COVID-19 BUSINESS SUPPORT IN THE NETHERLANDS; GOVERNANCE… 

157

Roberts, J., & Scapens, R. (1995). Accounting systems and systems of accountability – Understanding accounting practices in their organisational contexts. Accounting, Organizations and Society, 10(4), 443–456. van Helden, J., & Reichard, C. (2019). Making sense of the users of public sector accounting information and their needs. Journal of Public Budgeting, Accounting & Financial Management, 31(4), 478–495.

Documentary Sources Annual Report 2020 of the Dutch government. Summary. https://www.rijksfinancien.nl/financieel-­jaarverslag/2020/924384 Government, Miljoenennota 2021. Bijlage 1.3. coronagerelateerde uitgavenmaatregelen. https://www.rijksoverheid.nl/onderwerpen/prinsjesdag/ miljoenennota-­en-­andere-­officiele-­stukken. (Budget memorandum appendix 1.3 on COVID-19 measures). Letter to Parliament, 2019–2020, 35420, Nos 2 (17 March 2020), 6 (27 March 2020), 8 (31 March 2020), 14 (3 April 2020), 17 (6 April 2020), 16 (7 April 2020), 24 (15 April 2020), 28 (1 May 2020), 36 (1 May 2020), 38 (20 May 2020), 39 (20 May 2020), 40 (20 May 2020), 41 (27 May 2020), 42 (28 May 2020), 179 (29 May 2020), 84 (22 June 2020), 88 (23 June 2020), 87 (29 June 2020), 95 (9 July 2020), (Parliament, 2019–2020, 35420, etc.). Letter to Parliament, 2020–2021, 35 420, Nos 105 (28 August 2020), 108 (7 September 2020), 107 (8 September 2020), 142 (30 September 2020), 148 (9 October 2020), 151 (26 October 2020), 193 (27 October 2020), 195 (3 December 2020), 199 (3 December 2020), 237 (9 December 2020), 207 (16 December 2020), 214 (18 December 2020), 227 (18 December 2020), 217 (21 January 2021), 246 (29 January 2021), 231 (17 February 2021), 232 (23 February 2021), 236 (9 March 2021), 238 (12 March 2021), 248 (12 March 2021), 243 (22 March 2021), 265 (11 May 2021), (Parliament, 2019–2020, 35420, 2021Z17443, 35925, 35420, No. 363, etc.).

General Government Sources Comptabiliteitswet (Government Accounts Act). Grondwet (Constitution).

Governmental Sources About NOW and TVL Algemene Rekenkamer, Uitkomsten onderzoek M&O beleid van NOW regeling (Netherlands Court of Audit, Auditing abuse and improper use of NOW), September 2020.

158 

J. VAN HELDEN ET AL.

Beraadslagingen van minister SoZaWe en Kamercommissie over coronasteun aan bedrijfsleven (Debates between Minister of Social Affairs and Employment about COVID-19 business support packages): 25 March 2020, No. 14, 14 April 2020, No. 32, 24 June 2020, No. 35473, 24 September 2020. Brief Minister SoZaWE over NOW3 en vaststelling NOW 1 en NOW2 (Letter about NOW3 and establishment of NOW 1 and NOW2), 30 September 2020. Financieel jaarverslag van het Rijk 2020 (Annual report 2020 of the Dutch government), May 2021. Regeling vaststelling Aanwijzingen voor subsidieverstrekking (Regulation on the determination of the ultimate granted financial support). Tweede Kamer Zittingsjaar 2020–2021 (Letter to Parliament, parliamentary year 2020–2021), numbers 25295-1044, 25295-1044, 2021D10697, and 34520, No. 105). Wettenbank 2020, Eerste tijdelijke noodmaatregel overbrugging voor behoud van werkgelegenheid, artikel 10 (Laws’ bank, 2020).

Media Reports, Among Others Volkskrant, 24 April 2021, 21 May 2021.

CHAPTER 7

“Stretching the Public Purse”: What Does It Mean in Terms of Government Accounting? Jens Heiling, Dmitrij Cesniuk, and Tim Meglitsch

7.1   Introduction The special issue “Stretching the Public Purse: Budgetary Responses to a Global Pandemic” of the Journal of Public Budgeting, Accounting and Financial Management (Grossi et al., 2020, 2021) focused on the immediate budgetary responses to the COVID-19 pandemic by different countries and elaborated on the possible implications of these policies. The special issue explored questions such as “What budgetary and fiscal measures were used in the early response to the pandemic?”, “What are the short and long-term fiscal implications of these budgetary responses?” or “Will it [the pandemic] cause any permanent changes and unintended consequences to existing budgetary institutions, accounting rules and

J. Heiling (*) • D. Cesniuk Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Stuttgart, Germany e-mail: [email protected]; [email protected] T. Meglitsch University of Leipzig, Leipzig, Germany © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 G. Dabbicco et al. (eds.), Public Sector Accounting, Financial Accountability and Viability in Times of Crisis, Public Sector Financial Management, https://doi.org/10.1007/978-3-031-04745-9_7

159

160 

J. HEILING ET AL.

practices of fiscal governance?” (p.  1). In the authors’ opinion, the COVID-19 pandemic is not only worth assessing from a budgetary perspective but also analyzing from a government accounting perspective. Heiling and Chan (2012) found that there is an evolving relationship between accounting and budgeting in government. Over time, accounting has gained in importance and influence over budgeting, but it was acknowledged that “budgeting will remain as the “master” in directing public resources, with accounting playing an advisory role at best (next to its supervisory function)” (Heiling & Chan, 2012, p.  35). Against this background, it will be interesting to see what government financial statements can add to the debate around “Stretching the Public Purse”. It is undeniable that the outbreak of the COVID-19 pandemic had and still has an unprecedented impact on governments’ public finances around the world. The International Monetary Fund (IMF, 2021a) stated in its April 2021 Fiscal Monitor that the fiscal policy response “has been unprecedented in speed and size” (p. ix). From the outbreak of the COVID-19 pandemic until March 2021, governments have announced 16 trUSD (US dollar) in fiscal actions in response to the pandemic (IMF, 2021a). The fiscal support provided by governments has prevented more severe economic contractions and larger job losses, whereas government deficits and debt have risen to unprecedented levels. According to the IMF Fiscal Monitor 2021, the average overall deficits as a share of gross domestic product (GDP) in 2020 were 11.7% for advanced economies and 9.8% for emerging market economies. Similarly, average public debt worldwide reached 97% of GDP in 2020. These extraordinary budgetary and financing measures emphasize the importance of transparency and accountability about the use of those funds. Jacobs (2016) identifies four theoretical bases used by government accounting studies: (1) Accountability theory; (2) New Public Management (NPM) theory; (3) Critical Habermas theory and (4) Neo-­institutional theory/isomorphism. Jacobs found that accountability is “the most persistent conceptual tool mobilized in highly cited research papers” (p. 474). Pallot (1992) stated that “accountability is the cornerstone of all financial reporting in government” (p. 38). Coy et al. (2001) already argued for a conceptual framework based on stewardship and public accountability. As suggested by Bergmann et al. (2019), this chapter uses the accountability theory and the IPSASB’s Conceptual Framework (International Public Sector Accounting Standards Board) as theoretical frameworks (Sect. 7.2). Section 7.3 of this chapter describes the research methodology. Section

7  “STRETCHING THE PUBLIC PURSE”: WHAT DOES IT MEAN IN TERMS… 

161

7.4 provides some background information about the COVID-19 pandemic and the policy responses by the four governments within the scope of the study. The core part of the chapter is in Sects. 7.5 and 7.6 with the analysis of the financial statements of the four governments and the discussion of the results. Section 7.7 summarizes the findings and derives some practical implications.

7.2   Accountability The focus of this chapter is on financial accountability, rather than on political or managerial accountability (Sinclair, 1995). The concept of accountability is grounded in agency theory (Broadbent et  al., 1996). Llewelyn (2003) describes the need for responsibility (of an agent) to and for others, in addition to the organizational structure with the goal of holding its agents accountable. It has to be noted that the concept of accountability also has its roots in NPM (Hood, 1995, 1998). The IPSASB’s Conceptual Framework identifies accountability and decision making as the main objectives of financial reporting by public sector entities. It is underlined by the IPSASB (2014) that “financial reporting is not an end in itself. Its purpose is to provide information useful to users of General Purpose Financial Reports (GPFRs)” (para. 2.2). The IPSASB (2014) argues that taxpayers, donors, lenders and others provide resources for use in the provision of services to citizens and other service recipients during the reporting period and over the longer term. In turn, governments and other public sector entities that raise those resources are accountable for their management and the use of those resources to the respective resource providers and to those that depend on them (e.g., social welfare recipients). Because of these accountability obligations, public sector entities prepare GPFRs to respond to the information needs of service recipients and resource providers who do not have the authority to require the information they need for accountability and decision-making purposes. Despite the fact that the IPSASB’s Conceptual Framework distinguishes between accountability and decision making as the objectives of financial reporting in the public sector, the IPSASB (2014) clarifies that “information provided in GPFRs for accountability purposes will contribute to, and inform, decision making” (para. 2.10). The focus of this study is the financial information in the form of financial statements provided by governments to service recipients and resource providers in the context of the COVID-19 pandemic. To the best of the

162 

J. HEILING ET AL.

authors’ knowledge, no study has been published so far that assesses financial statements by governments in the context of a global pandemic. In addition, the question arises about what information is needed by service recipients and resource providers for accountability purposes. With respect to GPFRs, the IPSASB suggested that service recipients as well as resource providers require information about the financial position, the financial performance and the cash flows of an entity. To assist users to better understand, interpret and place in context the information presented in the financial statements, GPFRs may also provide financial and non-financial information that enhances, complements and supplements the financial statements. This information may be presented in the notes to the financial statements. The Conceptual Framework does not provide information about whether extraordinary events (such as a pandemic and related financial consequences) will require the presentation of additional information in general purpose financial statements to users. Because of the approved budget’s significance, the Conceptual Framework adds: “[…] information that enables users to compare financial results with the budget facilitates an assessment of the extent to which a public sector entity has met its financial objectives” (IPSASB, 2014, para. 2.21). It is argued that the provision of such information promotes accountability (IPSASB, 2014; Heiling, 2019). “The inclusion within GPFRs of information that assists users in assessing the extent to which revenues, expenses, cash flows and financial results of the entity comply with the estimates reflected in approved budgets, and the entity’s adherence to relevant legislation or other authority governing the raising and use of resources, is important in determining how well a public sector entity has met its financial objectives” (IPSASB, 2014, para. 2.21). By doing so, a government can discharge accountability to its constituents, and it enhances the assessment of the financial performance of the entity. IPSAS 24 (International Public Sector Accounting Standard 24), the international public sector accounting standard for the reporting of budget information in financial statements, requires disclosure of an explanation of the reasons for material differences between the budget and actual amounts. Therefore, this Standard becomes particularly relevant in case of larger differences between budgeted and actual amounts. The IPSASB’s Conceptual Framework does not specifically address extraordinary events such as a pandemic. The only reference that the IPSASB’s Conceptual Framework provides is to governments’ obligations to transfer resources to those affected by disasters. Promises by ­governments

7  “STRETCHING THE PUBLIC PURSE”: WHAT DOES IT MEAN IN TERMS… 

163

to provide financial support in the context of natural disasters are discussed in the context of a constructive obligation (BC5.32, “non-­legally binding obligation”) (Basis for Conclusions). The effects of disasters on financial reporting are, however, not addressed in IPSASB’s Conceptual Framework. However, IPSAS 1 BC10 clarifies that items of revenue and expense can be presented as extraordinary items, either on the face of the statement of financial performance, or in the notes. In January 2019, the IPSASB’s Exposure Draft 67, Collective and Individual Services and Emergency Relief (Amendments to IPSAS 19) proposed having guidance on accounting for emergency relief in response to specific emergencies, such as natural disasters. However, the IPSASB decided not to proceed with having such guidance in IPSAS 19. IPSAS 19 BC20 states that the diverse practices across jurisdictions make it difficult to identify a definition for emergency relief and that the proposed distinction between emergency relief that is an ongoing activity of government and emergency relief provided in response to specific emergencies may not always be appropriate and may not always be applied consistently. Therefore, it might be questionable whether the COVID-19 pandemic could be subsumed under the definition of emergency relief. Respondents to the consultation also questioned how other assistance that did not fall within the scope of emergency relief should be accounted for. In this context, it will be interesting to see how governments make use of their financial statements to fulfill their accountability obligations.

7.3  Research Methodology The research objective of this chapter is to assess what information governments provide to resource providers and service recipients with respect to the COVID-19 pandemic in their financial statements. The effects of the pandemic on selected items of governments’ balance sheets, statements of financial performance, cash flow statements and key financial metrics such as net worth (Ball, 2020) will be assessed in the light of the concept of accountability (Heiling, 2021). Overall, the chapter aims at contributing to a better understanding of financial reporting by governments in the context of the COVID-19 pandemic. Based on IPSASB’s concept of accountability as outlined in its Conceptual Framework, the following three research questions (RQs) were identified:

164 

J. HEILING ET AL.

1. RQ 1: What information do governments provide to resource providers and service recipients with respect to the COVID-19 pandemic in their financial statements for accountability purposes? 2. RQ 2: Do governments provide additional information with regard to extraordinary changes or items in the financial statements? 3. RQ 3: To what extent do governments make use of the possibility to assist users to better understand, interpret and place in context the information presented in the financial statements with respect to the financial effects of the COVID-19 pandemic? A detailed analysis of the notes to the financial statements will contribute to all RQs, and particularly to RQ3. In terms of the scope of this study, the central government financial statements of four countries from three different continents were analyzed: Australia, Germany, New Zealand and the United States. The authors assessed the financial statements of the financial year before the COVID-19 pandemic and the financial statements published during the first year of the pandemic. The financial statements of these four countries were selected as they were affected by the pandemic to varying degrees, that is from strongly affected (United States) to affected (Germany) and less affected (Australia and New Zealand) by COVID-19 cases and deaths. Table 7.4 in the Annex provides some details about the financial statements within the scope of this study. For Germany it has to be noted that the Vermögensrechnung only comprises a balance sheet but no statement of financial performance. According to Article 114 paragraph 1 of the German Basic Law, the Federal Minister of Finance is required by the Constitution to submit accounts of assets and liabilities to the German Bundestag and the Bundesrat for the purpose of discharging the accountability of the Federal Government. To fulfill these obligations, the Federal Ministry of Finance prepares the Vermögensrechnung on an annual basis. Since 2009, the Vermögensrechnung is published on the website of the Federal Ministry of Finance. The authors have chosen Germany against the backdrop that in international comparative research the selection of dissimilar units of analysis can be fruitful in terms of the outcome of the comparative analysis (Chan, 2007). In addition, Germany was selected on the basis that it is the authors’ home country and that adding a country applying the modified cash basis (including a balance sheet) could add value to the comparison (Chan, 2007). The research questions are phrased in such a way that they

7  “STRETCHING THE PUBLIC PURSE”: WHAT DOES IT MEAN IN TERMS… 

165

can also be used for countries applying the modified cash basis of accounting. Given its limited scope, this study is exploratory in nature and the authors may extend this study with additional countries at a later point in time. With regard to the research process, the authors first identified in the financial statements of the four governments the items with material changes in the statement of financial position (balance sheet) and in the statement of financial performance (operating statement). For each item, the relative as well as the absolute variations of the reported balances as compared to the previous year were calculated. For analytical purposes, a materiality threshold of +/− 1% of total assets was set for the absolute variations in the statement of financial position and in the statement of financial performance and a materiality threshold of +/− 10% was set for the relative variations of the items. This approach allowed the authors to focus on the material changes in the respective financial statements. The items that were material both in their absolute as well as relative variation were scrutinized further to see if the variation could be attributed in total or at least partially to the COVID-19 pandemic-related factors. The limitations of the study rest on the fact that only a limited number of financial statements were analyzed and a generalization of the findings is therefore not possible. A further limitation is the incongruence of the reporting dates of the Australian and New Zealand financial statements (30 June 2020), the German Vermögensrechnung (31 December 2020) and the US Government Financial Statements (30 September 2020). The Australian and the New Zealand financial statements cover a relatively brief period of the pandemic, as compared to Germany with a fiscal year ending on 31 December. This aspect certainly leads to focus on more short-term measures taken by the two countries. However, it does not necessarily affect the presentation in the financial statements, which is the main focus of the article.

7.4  Background Information About the COVID-­19 Pandemic and the Policy Responses by the Four Governments Out of the four countries, the United States are the country which is by far the most affected by the pandemic. The United States reported more than 7 million cases and more than 207,000 deaths as of the end of

166 

J. HEILING ET AL.

September 2020 (this equals the end of the financial year 2020 of the Financial Report of the US Government). Table 7.5 in the Annex summarizes the situation in the four countries at the end of the calendar year 2020, which also corresponds to the financial year end of Germany—the most recent of the four. As a result of this situation, the authors expected that the policy responses taken by the US Government to be the most comprehensive and the effect on the US economy the most significant. National and various state governments in the United States began imposing restrictions on individuals and businesses around March 2020. Joyce and Suryo Prabowo (2020) outlined that in the United States “COVID-19 virtually shut down the economy” and “businesses laid off employees by the millions” (p. 745). A closer look at the economic indicators of the four countries shows that the German GDP was the most significant hit by the pandemic with a contraction of −3.4% followed by the US economy with a decline of –2.3%. In line with the number of cases and deaths reported, the economic indicators show that Australia’s and New Zealand’s economies were significantly less affected than the German’s and the United States’ (Table 7.6 in the Annex). The following is a brief overview of the policy responses between the very beginning of the COVID-19 pandemic and the respective reporting date of the four governments, including their respective reserve banks and other financial institutions, subject to the study. More details about the policy responses taken by the various jurisdictions can be found in Tables 7.7 and 7.8 of the Annex of this chapter. With respect to Australia, Andrew et  al. (2020) reported that “like other countries around the world, in response to the COVID-19 crisis, Australia has taken unprecedented steps to manage public health and economic risks” (p.  760). In late February 2020, as the magnitude of the pandemic became apparent, the Australian government reacted quickly and formulated three primary directives. These directives led to a tightening of border controls, boosting the capacity of the health system and enforcing social distancing measures to manage health risks. In Germany, the first confirmed COVID-19 case was reported on 27 January 2020. The federal government and state governments reacted similar to other countries in Europe to contain the spread of virus. Border closures, closure of schools and non-essential businesses, social distancing requirements, enforcement of mask-wearing and a ban on public

7  “STRETCHING THE PUBLIC PURSE”: WHAT DOES IT MEAN IN TERMS… 

167

gatherings were the main measures taken. During the first wave, there were ­relatively few deaths due to COVID-19 in Germany. However, the second, more deadly wave from October 2020 threatened the recovery of the economy (Dauderstädt, 2021). The German federal government took a strong debt-financed economic policy response, which was rather surprising against the “black zero” budget policy of previous fiscal years. In New Zealand, the first confirmed COVID-19 case was reported only on 28 February 2020. On 19 March 2020, the New Zealand Government closed all borders to non-residents with returning residents required to enter into two weeks of supervised quarantine. End of March 2020, New Zealand moved to alert level 4 restrictions after domestic transmission of the virus was found. A state of emergency was declared and authorities implemented strong containment measures, including the closure of all non-essential businesses, cancellation of all events and gatherings, and closure of schools (IMF, 2021b). Ball (2020) stated that the New Zealand Government “has progressively unveiled a wide range of measures, with the two major packages announced in March and May […]” (Ball, 2020). In terms of the measures taken by the US Government, it was reported that national as well as state and local governments were forced to respond through both direct action and various relief measures (Joyce & Suryo Prabowo, 2020). The United States saw a widening outbreak of the pandemic in March and April 2020, but the number of new cases declined in the following months after a range of containment measures were put in place. In early summer, when economic activity and traveling resumed, infections rose again but gradually declined over the summer following stricter prevention measures. In terms of the effects of the pandemic on the US tax revenues, Joyce and Suryo Prabowo (2020) expected “substantial effects on major revenue sources, such as the sales and income tax”. For the United States it has to be noted that given the lack of early leadership from the White House, and the fact that fiscal effects take longer to enact and implement, the Federal Reserve Bank (Fed) took several actions initially to combat the economic effects of the pandemic (Joyce & Suryo Prabowo, 2020). The Congress then reacted relatively quickly to enact legislation leading to four laws being passed and signed by the President between 6 March and 24 April 2020. As shown earlier, all four countries were differently affected by the COVID-19 pandemic. However, in terms of the major policy responses, taken by the respective governments, similarities between the four can be identified. For example, in all four countries significant measures such as

168 

J. HEILING ET AL.

wage subsidies and spending programs can be identified. A study of 23 OECD countries (Organisation for Economic Co-operation and Development) (Dauderstädt, 2021) confirmed that the most important government stimuli to the economy came in the policy fields of monetary and fiscal policy as well as through aid measures for households and companies, further spending programs and labor market policy.

7.5   Analysis of the Financial Statements In this section we will first provide an overview of the financial statements and some background information to the reporting entity, before we analyze the financial performance and financial position of each jurisdiction. Finally, we will analyze the four financial statements from an accountability perspective. Table 7.1 provides an overview of the financial statements subject to the comparative analysis in terms of their underlying accounting framework and the basis of preparation. Given that Germany applies the modified cash basis at the federal level of government, we have placed Germany as the final column in the table and have highlighted the text in italics. The financial statements of the Government of Australia comprise the executive (ministers and their departments), the legislature (Parliament) and the judiciary (courts). The reporting entity includes the Australian Government Departments of State, Parliamentary Departments, other non-corporate Commonwealth entities, corporate Commonwealth entities and companies which the Australian Government controls. The Reserve Bank of Australia is also part of the reporting entity. The financial statements of the Government of New Zealand consolidate the Core Crown entities (i.e., Ministers of the Crown, Government departments, Offices of Parliament, the Reserve Bank of New Zealand and the New Zealand Superannuation Fund), State-owned Enterprises, Crown entities (excluding universities), Air New Zealand Limited and a number of other entities. In addition, 12 entities are equity-consolidated (e.g., universities). The financial statements of the US Government include the financial status and activities of the executive, legislative and judicial branches of the US federal government. The reporting entity consolidates 24 Chief Financial Officer Act Consolidation Entities (especially the various Departments), 16 additional Significant Consolidation Entities (e.g., US Postal Service or the Securities and Exchange Commission) and 124

Consolidated Financial Statements for the Commonwealth of Australia Australian Accounting Standards which are primarily based on International Financial Reporting Standards (IFRS)

Prepared on the accrual basis Prepared for the whole of government and the General Government Sector Assets and liabilities are measured at market value

30 June 2020 30 June 2019

Title of financial statements Accounting framework on which the financial statements are prepared

Basis of preparation

Financial year ends included

Australia

Assets and liabilities are measured at depreciated historical cost modified by the revaluation of certain assets and liabilities 30 June 2020 30 June 2019

30 September 2020 30 September 2019

Assets and liabilities are measured using a mixed measurement approach depending on the type of assets and liabilities

Prepared on the accrual basis Prepared on a consolidated basis

Assets and liabilities are generally measured at depreciated historical cost 31 December 2020 31 December 2019

Prepared on the modified cash basis No consolidation

German GAAP

US GAAP (Generally Accepted Accounting Principles), which are primarily based on FASAB’s (Federal Accounting Standards Advisory Board) Federal Accounting Standards and Other Pronouncements

New Zealand Generally Accepted Accounting Practice (NZ GAAP) which are based on Public Sector PBE (Public Benefit Entity) Accounting Standards (PBE Standards)—Tier 1; PBE Accounting Standards are derived from IPSAS Prepared on the accrual basis Prepared on a consolidated basis

Germany Vermögensrechnung

United States

Financial Statements of the Financial Report of the United Government of New Zealand States Government

New Zealand

Table 7.1  Overview of the financial statements subject to the analysis 7  “STRETCHING THE PUBLIC PURSE”: WHAT DOES IT MEAN IN TERMS… 

169

170 

J. HEILING ET AL.

additional consolidation entities. Unlike Australia and New Zealand, the Federal Reserve System (including the Fed) and Special Purpose Vehicles are not consolidated and are considered as Disclosure Entities. As outlined earlier, the financial statements of the German Government comprise only a balance sheet—there is no statement of financial performance—that exclusively includes the assets and liabilities of the territorial entity “Federal Republic of Germany”. The reporting entity comprises all authorities of the core administration of the Federal Republic (i.e., the constitutional bodies of the Federal Republic, the Federal Chancellery and the Federal Ministries, the other supreme federal authorities and the entire subordinate federal administration). The statement of financial position further extends to special and trust funds of the Federal Republic. As in the United States, the Federal Reserve Bank (“Deutsche Bundesbank”) is not consolidated. A specific characteristic of the German Vermögensrechnung is that, besides the core administration of the federal government, no other entities are consolidated (e.g., the Institute for Federal Real Estate [BImA], which owns major parts of the real estate of the German Government). 7.5.1   Analysis of the Financial Performance Tables 7.9, 7.10 and 7.11 in the Annex show the major variations and the percentage change of material items due to the COVID-19 pandemic in the respective statements of financial performance. The analysis of the financial performance as presented in the Australian Government’s operating statement as at 30 June 2020 shows an increase in total expenses from 504.6 bnAUD (Australian dollar) to 600.0 bnAUD, that is, an increase of +18.9%, whereas total revenues declined from 507.8 bnAUD to 500.3 bnAUD (−1.5%). Taxation revenue only slightly decreased by −8.7 bnAUD which represents a decrease of just −1.9% compared to prior year. The analysis of the operating statement shows that no major variations have taken place in revenues. Besides the subsidy expenses and personal benefits, no major variations in the expenses were identified. When it comes to the financial performance as presented in the Government of New Zealand’s financial statements at the end of 30 June 2020, total expenses increased from 111.4 bnNZD (New Zealand dollar) to 138.9 bnNZD, that is, an increase of 24.7%, whereas total revenues decreased from 119.1 bnNZD to 116.0 bnNZD, that is, a decrease of −2.6%. Taxation revenue slightly decreased from 85.5 bnNZD to 84.5 bnNZD (−1.4%). The operating balance as of 30 June 2020 showed a

7  “STRETCHING THE PUBLIC PURSE”: WHAT DOES IT MEAN IN TERMS… 

171

deficit of −30.4 bnNZD and was 5.1 bnNZD better than the budget forecast. For the financial performance as reported in the financial statements of the US Government, one can observe that total expenses (“net costs”) have increased from 5068 bnUSD to 7412 bnUSD, that is, an increase of +46.3% whereas total revenues have slightly decreased from 3621 bnUSD to 3572 bnUSD, that is, a decrease of −1.3%. The operating balance (“net operating cost”) as of 30 September 2020 showed a deficit of −26,796 bnUSD (an increase of +16.7% compared to prior year). Tax revenues decreased by 2.0%, that is, by 75 bnUSD from 3704 bnUSD to 3629 bnUSD in the financial year 2020. Given the fact that the financial statements of the German Government do not comprise a statement of financial performance, no performance analysis in terms of the accrual figures can be provided here. The budget execution report of the German Government is prepared on the basis of cash payments and cash receipts and is used instead to analyze financial performance. It was found that in terms of the cash figures reported in the budget executions reports, total cash payments of the period increased from 343.6 bnEUR (Euro currency) to 443.4 bnEUR due to the pandemic. This represents an increase of +29.0% whereas total cash receipts (without borrowings) have decreased from 357.1 bnEUR to 312.9 bnEUR, a decrease of −12.4%. Taxation revenue significantly decreased from 329.0 bnEUR to 283.3 bnEUR, that is, a decrease of −13.9%. Table 7.2 summarizes the key metrics related to the financial performance of the four countries:

Table 7.2  Key metrics related to the financial performance of the four countries

Increase in total expenses (cash payments in the case of Germany) Decrease in total revenues (cash receipts in the case of Germany) Decrease in tax revenues (cash receipts in the case of Germany)

Australia

New Zealand

United States

Germany

+18.9%

+24.7%

+46.3%

+29.0%

−1.5%

−2.6%

−1.3%

−12.4%

−1.9%

−1.4%

−2.0%

−13.9%

In the case of Germany, the authors used the cash payments (without allocations to reserves) and cash receipts (without borrowings) as reported in the budget execution report of 2019 and 2020

172 

J. HEILING ET AL.

The large increase in total expenses for the United States can be explained by the fact that it was hit much harder by the pandemic than Australia or New Zealand. In addition, one has to consider that the 2019/2020 financial statements of Australia and New Zealand present the financial performance as of 30 June 2020 whereas the US financial statements are prepared as of 30 September 2020 covering one quarter more of the pandemic. In terms of the decrease in total revenues, the decline in the United States is even lower than in Australia or New Zealand. The analysis showed that Germany was the country most affected by the decrease in total revenues. When looking at the decrease in tax revenues, one can see that by far Germany is the country that was hit most by tax shortfalls due to the pandemic. These tax shortfalls can be explained by the significant tax concessions the German Federal Government provided to taxpayers. Taxpayers were given the opportunity to defer tax payments without interest and they had the option of reducing the advance payments for income tax, corporate income tax and trade tax. 7.5.2   Analysis of the Financial Position Tables 7.12, 7.13, 7.14 and 7.15 in the Annex present the major variations and the percentage change of material items due to the COVID-19 pandemic in the statement of financial position (balance sheet). The balance sheet of the Government of Australia as of 30 June 2020 comprised total assets of 838.6 bnAUD compared to 737.4 bnAUD in prior year and a decrease in net assets/equity (“Total Net Worth”) from −545.2 bnAUD to −679.9 bnAUD. The negative net assets/equity therefore increased by 134.8 bnAUD or 24.7%. Net borrowings increased from 8.5 bnAUD to 107.4 bnAUD which represents a relative increase of 1164%. The balance sheet of the Government of New Zealand as of 30 June 2020 comprised total assets of 393.4 bNZD compared to 364.7 bnNZD in prior year and a decrease in net assets/equity (“Total Net Worth”) of −27.4 bnNZD (−19.1%) as at 30 June 2020. Total borrowings increased from 110.2 bnNZD to 152.7 bnNZD (+38.5%). The balance sheet of the US Government as of 30 September 2020 comprised total assets of 5951 bnUSD compared to 3992 bnUSD in prior year (+49.1%) and an increase in the negative net assets/equity (“Total net position”) from −22,968 bnUSD to −26,796 bnUSD (+16.7%) as at 30 September 2020. Federal debt and interest payable increased from 16,861

7  “STRETCHING THE PUBLIC PURSE”: WHAT DOES IT MEAN IN TERMS… 

173

bnUSD to 21,083 bnUSD, that is, an increase of 4222 bnUSD (+25.0%). In terms of the reaction of the US Government to the pandemic, it is important to note that the US Government invested in Special Purpose Vehicles (SPVs) for the purpose of enhancing the liquidity of the US financial system. In the operating statement of the US Government, the government-­wide net costs are presented only in total in the statement of operations and changes in net position, but within the statement of net cost by significant entity. The balance sheet as at 31 December 2020 of the German Government comprised total assets of 572.3 bnEUR compared to 298.4 bnEUR in prior year and a decrease in net assets/equity from −1732.4 bnEUR to −1861.1 bnEUR. Total liabilities increased from 2030.7 bnEUR to 2433.4 bnEUR (+19.8%). In terms of the balance sheet of the German Federal Government, it has to be noted that the governments’ assets are limited to financial assets, receivables and other assets, securities, and cash and cash equivalents, whereas other non-current (tangible and intangible) assets are excluded (Table 7.3). The analysis of the balance sheets of the four countries showed that in all four countries, the provision of liquidity to the respective financial systems was one of the major goals during the pandemic. The strongest increase in total assets was observed for Germany with almost doubling of total assets. This increase can be explained by the significant issuance of federal securities by the German Government. However, the relative increase in total assets is higher than in the other jurisdictions, given the fact that their entire legacy capital stock is included whereas for Germany this is not the case. When it comes to the total liabilities, New Zealand reported with a plus of 25.4% the strongest increase, followed by the Table 7.3  Key metrics related to the balance sheet of the four countries Australia New Zealand United States Germanya Increase in total assets Increase in total liabilities Decrease in total net assets/equity

+46.3% +18.4% −24.7%

+7.9% +25.4% −19.1%

+49.1% +21.5% −16.7%

+91.8% +19.8% −7.4%

The accounting system of the German Federal Government is based on the modified cash basis of accounting and the Vermögensrechnung does, for example, not account for property, plant and equipment or intangible assets. The absence of property, plant and equipment and intangible assets in total assets could explain partly this rather high increase in total assets, since property, plant and equipment represent huge amounts and are normally rather stable a

174 

J. HEILING ET AL.

United States, Germany and then Australia. New Zealand’s increase in total liabilities is mainly related to liquidity measures initiated by the New Zealand government. Finally, with respect to the analysis of total net assets/equity, Australia showed the strongest decrease, whereas Germany’s net assets/equity decreased just by −7.4%. 7.5.3   Analysis of the Financial Statements from an Accountability Perspective As outlined in the theoretical part, service recipients as well as resource providers require information about the financial position, the financial performance and the cash flows of an entity. The analysis of the financial statements shows that, besides Germany, all other countries provide information about their financial position, their financial performance and their cash flows. For Germany, financial accountability toward service recipients and resource providers is therefore limited. In addition, the differing reporting perimeters by countries have a significant effect on the composition of the financial statements. The inclusion of the central banks by Australia and New Zealand in their consolidated financial statements determines several financial line items in their financial statements. The comparison of those financial statements with the financial statements of the United States is difficult and would require adjustments. The theory highlights that “information that enables users to compare financial results with the budget facilitates an assessment of the extent to which a public sector entity has met its financial objectives”. The analysis of the financial statements showed that the financial statements of Australia provide a reconciliation to the original budget and the New Zealand financial statements provide a comparison of budget and actual amounts on the face of the statement of financial performance, the statement of financial position and the statement of cash flows. As such, the New Zealand financial statements provide even more information to what is required by IPSAS 24. The US Government’s financial statements reconcile the net operating cost on the statement of operations and changes in net position to the budget deficit, whereas Germany’s financial statements do not provide such reconciliations. In terms of budgetary accountability, one can say that New Zealand provides the highest degree of accountability, whereas the Vermögensrechnung in Germany does not address such accountability.

7  “STRETCHING THE PUBLIC PURSE”: WHAT DOES IT MEAN IN TERMS… 

175

When it comes to the accountability related to the measures taken as a result of the COVID-19 pandemic, the analysis of the financial statements of all four countries has shown that they provide information in terms of the variations caused by the COVID-19 pandemic. The detailed analysis of the notes has shown that, besides Germany, in all other countries the major financial effects of the pandemic are well explained. New Zealand and the United States provide even specific notes addressing the COVID-19 pandemic. The greatest level of detail of the various COVID-­19-related financial effects was identified in the case of New Zealand. New Zealand provides extensive information on the COVID-19 impacts and measures both in the commentary, in the separate COVID-19 note, in the respective affected notes on the detailed accounting and variances, as well as in the subsequent event note and budget comparison. Australia provides detailed information on the pandemic in the ­commentary as well as in the budget comparison. In the individual notes, however, only general accounting and measurement information is provided, but no detailed pandemic-related analysis. The United States also provides detailed information on COVID-19-related effects and measures in the commentary (management discussion) and in the separate note on COVID-19 as well as in the subsequent event note, but in the item-­specific notes, the information is largely only on a department basis and the users would have to assess the COVID-19-related changes in the individual financial statements of the departments. Germany, as the only examined country that applies the modified cash basis, does not provide detailed information about the COVID-19-related financial effects. The financial statements explain only sporadically the pandemic-induced deviations. The considerably less disclosures related to the pandemic compared to the other three countries can also be explained by the fact that the German Federal government applies the modified cash basis of accounting and the financial statements do not comprise a statement of financial performance and a cash flow statement. In that context, the authors found that Australia’s, New Zealand’s and the United States’ financial statements made use of the possibility to assist users to better understand, interpret and place in context the information presented in the financial statements with respect to the financial effects of the COVID-19 pandemic. From a user’s perspective, the different types for explaining COVID-19 effects (COVID-19-related notes in the individual items or a separate COVID-19 note or commentary) might be secondary. However, the examples of New Zealand and the United States

176 

J. HEILING ET AL.

show that the scope of the measures taken by the respective government may justify having a separate COVID-19 note or commentary. Such an approach allows to also present the financial impact in one single place within the financial statements. With respect to extraordinary items in the financial statements, we have noted that, in the case of New Zealand, extraordinary items were introduced into the financial statements (e.g., losses on large-scale asset purchases) whereas no such extraordinary items have been noted in the case of Australia and Germany. New Zealand’s approach allows users to better distinguish ordinary items from extraordinary items caused by the pandemic. The United States has taken a different approach to New Zealand and has created Special Purpose Vehicles (SPVs) which are then ­appropriately reported in the financial statements—consolidated at equity.1 With the “Economic Stabilization Fund”, Germany has also created a separate entity similar to the SPVs in the United States. Generally, it can be said that, with the creation of SPVs, so-called below-the-line measures, such as equity injections, asset purchases, loans, debt assumptions, including through extra-budgetary funds, seem to be more common in Germany and in the United States rather than in Australia and New Zealand. In the latter jurisdictions, the focus is more on above-the-line measures, such as additional spending and foregone revenue. Finally, no changes in the accounting policies due to the pandemic were identified in all four countries. This supports the consistency and comparability characteristics of financial statements and, in the end, contributes to accountability.

7.6  Discussion of the Results The comparison of the four financial statements has shown that the financial picture of the governments significantly depends on the definition of the reporting entity. In the United States and in Germany, the Federal Reserve System is not included within the reporting entity of the US Government and of the Federal Government of Germany respectively, whereas in Australia and New Zealand the Reserve Banks were part of the reporting entity. Actions of the Australian and New Zealand Reserve Banks due to the COVID-19 pandemic had a significant impact on the 1  Both the financial statements of the SPVs and those of the different Departments can be retrieved online.

7  “STRETCHING THE PUBLIC PURSE”: WHAT DOES IT MEAN IN TERMS… 

177

reported financial position and financial performance. In addition, the effects on the financial statements depend on the respective consolidation of state-owned enterprises versus equity investments or state aid. In New Zealand, for example, the fully consolidated airline Air New Zealand had a significant impact on the decline in assets and the largest share of the increase in impairment. The analysis of the financial position of the four jurisdictions showed that net assets/equity had decreased in all four cases. None of them were able to at least keep the level of net assets/equity. With regard to the comprehensive measures taken by the German Government, it can be said that these are reflected in the financial position under the changes in the special funds and in the loans (especially those given to the Federal Employment Agency). However, since these funds and loans are used by institutions which are not consolidated, no further accountability is given on how those funds and loans were eventually used. Due to the lack of information about the federal government’s financial performance and the small scope of consolidation, the financial effects on the financial position and the financial performance due to COVID-19 as well as the use of the funds or loans, such as short-term working allowances paid by the Federal Employment Agency, can only be presented and explained in the financial statements to a limited extent. In terms of the governments’ financial performance, it was found that, for all three countries preparing a statement of financial performance, expenses significantly went up with the most significant increase noted in the United States. Other than expected by the reported cases and deaths in the three countries, New Zealand had a higher increase in expenses than Australia. In terms of the decrease in total revenues and tax revenues, besides Germany, the decrease in all of the other three countries was significantly lower than expected. The financial statements also confirm that the significantly lower number of cases and deaths reported in Australia and New Zealand do not have a material effect on the policy responses taken by governments and their scope. The massive impact on the financial statements in New Zealand and Australia, which at first sight appear to be significantly less affected countries, compared to the United States, is due to the severe restrictions imposed to contain the pandemic (infections and deaths). However, the measures taken by both governments had to be comprehensive to ensure economic stability, business and job support due to the severe restrictions, such as travel restrictions or lockdowns.

178 

J. HEILING ET AL.

Furthermore, it was found that the breadth of measures in the United States was significantly wider and affected financially almost all government departments, whereas in Australia and New Zealand the measures taken seemed more targeted. With regard to the question, if the financial statements provide specific information to service recipients and to resource providers, we have noted that the perspective of the resource providers is significantly more prevalent in the analyzed financial statements than the perspective of the service recipients. In that context, it can be argued that service performance information covering the perspective of the service recipients and addressing value-for-money information needs is reported separately from the financial statements. However, in the context of the current pandemic, the relationship between expenses incurred by governments on the one side and the related goods, services and transfers are of high interest from a citizen’s perspective. Based on our analysis we found that the New Zealand financial statements provided the most detailed information about the financial impact of the measures taken.

7.7  Conclusion The analysis of the financial statements of the four countries within the scope of our study clearly showed that the outbreak of the COVID-19 pandemic had an unprecedented impact on governments’ public finances. The authors identified significant financial effects on entities’ financial position and financial performance. From a financial perspective, liquidity measures taken in the course of the pandemic had the greatest impact on the governments’ financial statements. With the exception of Germany, financial accountability could be confirmed for all countries. The fact that the German financial statements miss detailed pandemic-induced financial information compared to the other three countries can be attributed to the German Federal Government applying the modified cash basis of accounting. The analysis also showed that the differing reporting perimeters by countries have a significant effect on the composition of the financial statements. The inclusion of central banks in countries’ consolidated financial statements determines a number of financial line items in their financial statements. With regard to the measures taken because of the COVID-19 pandemic, the analysis of the financial statements of all four countries has shown that they provide information in terms of the variations caused by the COVID-19

7  “STRETCHING THE PUBLIC PURSE”: WHAT DOES IT MEAN IN TERMS… 

179

pandemic. The authors’ analysis of the notes has shown that the major financial effects of the pandemic are well explained in the financial statements of Australia, New Zealand and the United States, whereas such detailed information is missing in Germany’s financial statements. In that context, we suggest that future studies can specifically investigate the relationship between the accounting basis and the extent of disclosures related to crises. In terms of the practical implications, we would suggest that there should be more guidance by standard setters on how to account for extraordinary events, such as a pandemic. Our analysis of the notes, for example, showed that there could be good arguments for having a dedicated note or commentary on the financial impact of the COVID-19 pandemic. Another lesson learned is that the inclusion of central banks in the financial statements has a significant impact on the financial picture of jurisdictions. To allow for comparisons of financial statements of national governments, standard setters must work on harmonizing the reporting perimeters, especially when it comes to central banks.

Annex Table 7.4  Countries within the scope of this study Entities

Continent

Year end

Financial statements subject to this study

Commonwealth of Australia

Oceania

30 June

Consolidated Financial Statements for the year ended 30 June 2019 Consolidated Financial Statements for the year ended 30 June 2020 Financial Statements of the Government of New Zealand for the year ended 30 June 2019 Financial Statements of the Government of New Zealand for the year ended 30 June 2020 Vermögensrechnung des Bundes 2019 Vermögensrechnung des Bundes 2020 Financial Report of the United States Government, FY19 Financial Report of the United States Government, FY20

New Zealand

30 June

Germany

Europe

31 December

United States

North America

30 September

180 

J. HEILING ET AL.

Table 7.5  Cases and deaths reported as a result of the COVID-19 pandemic as of the end of December 2020

Cases Deaths

Australia

New Zealand

United States

Germany

28,462 909

1826 25

20,154,222 354,982

1,765,666 34,272

Source: World Health Organization (2021), https://covid19.who.int/table

Table 7.6  Selected economic indicators for 2020 for the four countries

Population (in thousands, rounded, 2019) Source: World Bank (n.d.) https://data.worldbank. org/indicator/SP.POP. TOTL (Accessed on 26 September 2021) GDP 2020 (in million USD, estimated figures) Source: OECD (2021a), Gross domestic product (GDP) (indicator). doi: 10.1787/dc2f7aec-en (Accessed on 26 September 2021) Long-term interest rates 2020a Source: OECD (2021b), Long-term interest rates (indicator). doi: 10.1787/662d712c-en (Accessed on 26 September 2021)

Australia

New Zealand

United States

Germany

25,366

4979

328,239

83,093

1,338,882 (PY: 1,346,385) −7503 (−0.6%) PY = previous year

222,875 (PY: 223,650) −775 (−0.3%)

20,936,600 (PY: 21,433,226) (−496,626) (−2.3%)

4,516,935 (PY: 4,676,884) −159,949 (−3.4%)

0.92% (PY: 1.49%)

0.89% (PY: 1.65%)

0.89% (PY: 2.14%)

−0.51% (PY: −0.25%)

Source: OECD (2021a, 2021b), World Bank (n.d.) Long-term interest rates refer to government bonds maturing in ten years

a

Large-Scale Asset Purchase (LSAP) program, 21 March 2020:  The Reserve Bank of New Zealand (RBNZ) announced its LSAP program, in which it would buy, over the year from the date of announcement, New Zealand Government Bonds (NZGBs) and Local Government Funding Agency Bonds on the secondary market, up to a cap of 30 bnNZD  It subsequently increased the cap to 60 bnNZD (13 May 2020)

Yield targeting on 3-year government bonds, 19 March 2020: At the onset of the pandemic, the Reserve Bank of Australia (RBA) announced yield targeting on 3-year government bonds at around 0.25% through purchases of government bonds in the secondary market. To support liquidity, the RBA conducts one-month and three-month repo operations daily until further notice. To assist with the smooth functioning of Australian capital markets, the RBA has broadened the range of eligible collateral for open market operations to include securities issued by non-bank corporations with an investment grade Swap line with the US Federal Reserve Bank, March 2020: The RBA has established a swap line with the US Federal Reserve Bank for the provision of up to 60 bnUSD of liquidity. To support the provision of credit, especially to SMEs (Small and Medium Enterprises), the RBA established a term funding facility (TFF) in March for banks to access three-year funding at 25 basis points until September 2020. The facility was subsequently further expanded, with access extended through June 2021 Interest rate actions, 3 March 2020 and 15 March 2020:   On 3 March 2020, the central bank cut the federal funds rate by a half a percentage point, and on 15 March 2020 by an additional full percentage point Asset purchases, between 12 March and 23 March 2020:   The Federal Reserve System (Fed) purchased almost 1.9 trUSD in assets between 12 March and 23 March 2020. The asset purchases included almost 1.4 trUSD in long-term treasury securities Liquidity measures, various points in time:   The Fed engaged in various other liquidity measures estimated to add up to almost 2 trUSD to the economy Loan programs, various points in time:   The Fed targeted various lending programs, estimated to provide more than 2 trUSD in relief, primarily designed to cushion the COVID-19 blow to various industries

Measures taken by the Federal Reserve Bank

Source: International Monetary Fund (2021b), Joyce and Suryo Prabowo (2020)

Measures taken by the Reserve Bank of New Zealand

Measures taken by the Reserve Bank of Australia

The German financial authorities extended all European Central Bank (ECB)-issued regulatory and operational relief to German banks under national supervision. In addition to measures at the euro area level: (i) release of the countercyclical capital buffer for banks from 0.25% to zero; (ii) additional 100 bnEUR to refinance expanded short-term liquidity provision to companies through the public development bank KfW, in partnership with commercial banks; and (iii) following the structure of the former Financial Stabilization Fund, 100 bnEUR is allocated within the WSF (German Economic Stabilization Fund) to directly acquire equity of larger affected companies and strengthen their capital position A three-month payment moratorium on consumer loans established before 15 March was granted until 30 June 2020 for households financially affected by the COVID19 crisis. Loans issued under KfW guarantees are exempt from the calculation of lenders’ own funds requirement, their leverage ratio, as well as the large exposure limit. In March 2020, Parliament passed a temporary suspension of the obligation for insolvency filing by over-indebted or illiquid firms. The suspension deadline was extended for over-indebted firms from 30 September to 31 December 2020

Measures taken by the German financial authorities (Deutsche Bundesbank, Federal Financial Supervisory Authority (“BaFin”) and the Federal Ministry of Finance)

Table 7.7  Major measures taken by reserve banks and other financial institutions as a result of the COVID-19 pandemic in 2020

US Government This Act comprises estimated cost of 1.7 trUSD over ten years (with the majority of the cost occurring in the first two fiscal years) and consists of:   A total of 377 bnUSD for Small Business Administration loans, primarily associated with the newly established Paycheck Protection Program (PPP), which would guarantee up to 10 mUSD in loans for the purpose of maintaining payrolls of individual small businesses, nonprofits and independent contractors   A total of 170 bnUSD in funding for medical care responses, including 100 bnUSD to reimburse healthcare providers for lost revenues   A total of 140 bnUSD in funds made available to federal agencies for funding to provide assistance to businesses and governments affected by COVID-19. This includes 44 bnUSD to the Federal Emergency Management Agency (FEMA) to support state and local response and recovery, 35 bnUSD in assistance to airports and transit systems, 31 bnUSD to state and local governments and higher education institutions, and 25 bnUSD for various nutritional programs and rural programs   An expansion of unemployment benefits to extend those benefits to 31 December 2020, and provide for an increase in benefits by 600 USD a week through 31 July 2020. Congressional Budget Office (CBO) estimated that the combination of the extension and the increase would cost more than 210 bnUSD. In addition, individuals who have exhausted regular state and federal unemployment benefits will receive up to an additional 13 weeks of benefits, at a cost of 51 bnUSD   A refundable tax credit of 1200 USD per qualifying adult and 500 USD per dependent child. This benefit is estimated to cost just under 300 bnUSD between FY20 and FY21

New Zealand Government Package of measures, 7 March 2020: Major measures of the package were a wage subsidy scheme (starting immediately) to support employers severely affected by the impact of COVID-19, an income support package for the most vulnerable, healthcare-related spending, the cost of managed isolation, and the purchasing of vaccines and a package of business tax changes Temporary removal of tariffs on all medical and hygiene imports, 28 March 2020: Temporary removal of tariffs on all medical and hygiene imports needed for the COVID-19 response Debt funding agreement with Air New Zealand, 9 April 2020: The New Zealand government approved a 1.5 bnNZD debt funding agreement (convertible to equity) with Air New Zealand to ensure continued freight operations, domestic flights and limited international flights Package of measures announced by the Government in its Wellbeing Budget 2020, 14 May 2020: The Government established the COVID-19 Response and Recovery Fund (CRRF) and set aside 50 bnNZD to support a response to and recovery from COVID-19

Australian Government

Measures taken between 12 March 2020 and 19 March 2020:   The instant asset write-off scheme has been extended with 700 mAUD allocated to enable businesses with a turnover of less than 500 mAUD to write off assets worth up to 150,000 AUD instantly   The government introduced two cash payments of 750 AUD to citizens currently entitled to social security. These payments are dedicated to people receiving welfare payments such as the aged pension, unemployment benefits and the disability support pension among others Measures taken from 20 March 2020 to June 2020:   Australians facing hardship as a result of COVID-19 could access up to 20,000 AUD of their superannuation savings early if they met specific criteria   Almost doubling of the level of the JobSeeker (unemployment) payment to address the economic fallout of the COVID-19 pandemic   JobKeeper scheme, that is, a temporary wage subsidy payment scheme administered through businesses and paid to employees to retain the employer/ employee relationship. It consists of 1500 AUD paid per fortnight to businesses to subsidize the wages of each eligible employee and targets employees who were working in companies that have reduced revenue as a result of the public health measures

  The German Federal Government has adopted two supplementary budgets in 2020: 156 bnEUR (4.7% of GDP) in March 2020 and 130 bnEUR (3.9% of GDP) in June 2020   The measures included:   Spending on healthcare equipment, hospital capacity and research and development (R&D) (vaccine)   Expanded access to short-term work (“Kurzarbeit”) subsidy to preserve jobs and workers’ incomes, expanded childcare benefits for low-income parents and easier access to basic income support for the self-employed   50 bnEUR in grants to small business owners and self-employed persons severely affected by the COVID-19 outbreak in addition to interest-free tax deferrals until year end and 2 bnEUR of venture capital funding for start-ups   Temporarily expanded duration of unemployment insurance and parental leave benefits   The stimulus package in June 2020 comprised:    A temporary VAT reduction    Income support for families    Grants for hard-hit SMEs    Financial support for local governments    Expanded credit guarantees for exporters and export-financing banks, and    Subsidies/investment in green energy and digitalization   In August 2020, the government extended the maximum duration of short-term work benefits from 12 to 24 months

German Federal Government

Table 7.8  Major legislative measures taken by the respective governments as a result of the COVID-19 pandemic in 2020

  Two provisions designed to cushion losses for businesses   With the newly created economic and corporations. First, a refundable tax credit (cost of 55 stabilization fund (WSF) and the public bnUSD between FY20 and FY21) against payroll taxes, for development bank (KfW), the government employers forced to either shut down or experiencing a expanded the volume of available guarantees significant decline in revenue. Second, permitting businesses and access to public guarantees for firms of to offset against taxable income net operating losses different sizes, credit insurers and non-profit between 1 January 2018 and 31 December 2020, at a institutions. The WSF and KfW also offer ten-year cost of 26 bnUSD facilities for public equity injection into firms with strategic importance   Individual taxpayers who are not corporations are permitted to use the full amount of business losses to offset nonbusiness income for tax years 2018–2020 (2018–2025 At the end of 2020, the German Government introduced additional fiscal measures to support for farm losses), at a ten-year cost of 135 bnUSD families and young workers, and enhanced   A total of 150 bnUSD was provided to state, local and existing ones to support affected businesses, tribal governments, on the basis of population, to offset expenses stemming from the pandemic. Up to 45% of each including revenue compensation for state’s allocation may be provided directly to units of local November-December 2020 (of up to 75%), as well as, extended access to grants, government within the state Paycheck Protection and Health Care Enhancement Act, 24 apprenticeship subsidies, public loan guarantees, and tax loss carryback April 2020 Estimated cost of 500 bnUSD; About one-third of this cost was in discretionary spending, with the other two-thirds an increase in direct spending   Discretionary spending: A total of 162 bnUSD in discretionary outlays, resulting from 75 bnUSD in supplemental appropriations provided to reimburse healthcare providers for lost revenues, 25 bnUSD to develop, purchase, administer, process and analyze tests for COVID-19, and 62 bnUSD for salaries and expenses and for loan programs of the Small Business Administration   Direct spending: The 321 bnUSD in direct spending represents an equivalent increase in the subsidy appropriation (the losses to the federal governments from providing direct loans and loan guarantees to small businesses affected by COVID-19) for the Small Business Administration (SBA) Paycheck Protection Program (PPP) that had been created under the CARES Act

Source: Andrew et al. (2020), Ball (2020), Joyce and Suryo Prabowo (2020) and IMF (2021b)

Further package of measures was decided by Cabinet in July, and a summary of those initiatives released on 14 August 2020: These initiatives covered a wide range of different activities, including both capital and operating expenditure

184 

J. HEILING ET AL.

Table 7.9  Analysis of the Australian Government’s operating statement Line items

Expenses Subsidy expenses

Personal benefits

Variations

Explanation of variation

mAUD

%

+55,870

+492%

+19,391

+15%

The increase primarily reflects JobKeeper payments and the temporary tax-free cash flow boosts to support businesses as part of the Government’s economic response to the COVID-19 pandemic The increase in personal benefits is primarily due to the time limited COVID-19 Supplement and the first payment of the Economic Support Payment to assist households as part of the Government’s economic response to the COVID-19 pandemic, together with changes in recipient numbers and average payment rate of social welfare payments as a result of the impact of COVID-19 on the economy

Table 7.10  Analysis of the New Zealand Government’s statement of financial performance Line items

Variations to prior year mNZD

Expenses Transfer payments and subsidies Wage subsidy scheme

Explanation of variation

%

+14,521 +52%

+12,095

The major share of the increase in transfer payments and subsidies is attributable to the introduction of a wage subsidy scheme in response to the COVID-19 pandemic. The wage subsidy scheme is meant to support employers adversely affected by the pandemic. Employers could continue to pay their employees and support workers to ensure they continue to receive an income, and stay connected to their employer, even if they are unable to work their normal hours (continued)

7  “STRETCHING THE PUBLIC PURSE”: WHAT DOES IT MEAN IN TERMS… 

185

Table 7.10 (continued) Line items

Variations to prior year mNZD

Other measures

+2426

Other operating expenses Amortization and impairment of non-financial assets

+9890

% The increase was scattered nearly half in half between the New Zealand Superannuation on one side and other support activities on the other, including family tax credit, jobseeker support and emergency benefit, accommodation assistance, supported living payment, and sole parent support, but is only partly due to pandemic-related effects or measures. Other measures included increases in health funding, a permanent increase in a range of benefits by 25 USD per week from 1 April 2020 (e.g., jobseeker support), the temporary doubling of the rate of the Winter Energy Payment from 1 May 2020 and the introduction of the essential workers leave scheme through alert level 4 lockdown +23%

+1441

Impairment of financial assets

+573

Grants and subsidies Other operating expenses Net losses on large-scale asset purchases

+2337 +1942

+3258

Explanation of variation

N/A

The increase in amortization and impairment expenditure of non-financial assets is largely related to expenses incurred as a result of the COVID-19 pandemic. This includes the impairment losses of 1068 mNZD recognized against the Air New Zealand aircraft fleet due to the pandemic’s impact on the market value of the asset The increased impairment of financial assets is largely due to the fair value write-down of the Small Business Cashflow (Loan) Scheme, eligible to small businesses to manage the impact of lower cash flows due to the COVID-19 pandemic, measured at fair value The increase is attributable to grants and subsidies, which also cover funding provided to local universities The increase in other operating expenses could be COVID-19-related but the financial statements do not provide any further information Under the LSAP, New Zealand Government Bonds (NZGBs) are purchased by the Reserve Bank at market prices and are purchased directly from the market. The resulting net losses on LSAP represent the difference between the Reserve Bank’s purchase price of the NZGBs (driven by the market price on purchase date) and the NZGBs liability (valued at amortized cost). Eliminating this difference results in a loss that is included in the operating balance reported in the statement of financial performance

+452.7

+405.0

+184.8

Treasury

HHS (US Department of Health and Human Services)

+2344.30 +559.1

bnUSD

+15%

+260%

+1118%

+46% +559,000%

%

Variation to prior year

DOL

Expenses Net cost SBA

Line items

The costs of that SPV are attributable in great part to pandemic relief efforts. The Paycheck Protection Program (PPP), administered by Small Business Administration (SBA), is a loan guarantee program designed to provide a direct incentive for small businesses to retain employees by providing loan forgiveness for amounts used for eligible expenses for payroll and benefit costs, interest on mortgages, rent and utilities A 559.1 bnUSD increase in net costs at the SBA, driven primarily by a 527.8 bnUSD increase in loan subsidy costs, including re-estimates, attributable to the PPP and Debt Relief programs under the CARES Act. As noted earlier, the PPP provides loan forgiveness for amounts used for eligible expenses for payroll and benefit costs Through its Unemployment Insurance (UI) Program, Department of Labor (DOL) expands states’ ability to provide unemployment insurance for many workers impacted by the pandemic, including for workers who are not eligible for regular/traditional unemployment benefits A 452.7 bnUSD increase at DOL, much of which is attributable to a 461.4 bnUSD increase primarily associated with unemployment benefits authorized by the CARES Act; (p. 5 and p. 22) The increase in Treasury net costs is largely due to the issuance of “Economic Impact Payments” (EIPs) to individuals to help stimulate the economy. Treasury’s net cost increase is also due in part from Coronavirus relief fund payments made to affected state, local, territorial and tribal governments. Treasury costs also include financial assistance payments to passenger air carriers, air cargo carriers, and contractors, and to provide payroll support to aviation workers Attributable in great part to pandemic relief efforts as well as increases in benefit expenses from the social insurance programs administered by HHS (e.g., Medicare and Medicaid programs) The net cost primarily increased at HHS due to an increase to the Public Health and Social Services Emergency Fund (PHSSEF) to fund a wide range of efforts, including, but not limited to reimbursements to healthcare providers for expenses or lost revenues, and development and purchase of vaccines, therapeutic treatment, testing and medical supplies

Explanation of variation

Table 7.11  Analysis of the US Government’s statement of operations and changes in net position/statement of net cost

7  “STRETCHING THE PUBLIC PURSE”: WHAT DOES IT MEAN IN TERMS… 

187

Table 7.12  Analysis of the Australian Government’s balance sheet Line items

Variation to prior year mAUD

Assets Other receivables +13,501 and accrued revenue

Investments, loans and placements

Liabilities Deposits held

Government securities

% +25%

+60,759

+18%

+44,929

+132%

+106,649

+17%

Other provisions +26,637

Explanation of variation

+59%

The increase of this item is primarily driven by an increase in net tax receivables relating to payment deferrals granted to taxpayers experiencing financial hardship as a result of the COVID-19 pandemic and an increase in other receivables in respect of the advances that were paid to the states for the goods and services tax (GST) during 2019–20 The increase is primarily driven by the increase in government securities held by the Reserve Bank of Australia from purchases in the secondary market, conducted as part of a range of monetary policy measures to lower funding costs across the economy in response to the COVID-19 pandemic The increase primarily reflects the increase in balances held in exchange settlement accounts, as a result of the enhanced liquidity operations of the Reserve Bank of Australia in response to the COVID-19 pandemic The increase in Australian Government Securities primarily reflects the Government’s increased borrowing requirements stemming from the response to, and impacts of, the COVID-19 pandemic. The reduction in market yields has also led to a higher valuation in the debt outstanding The increase in other provisions relates mainly to future payments for JobKeeper and cash flow boost payments to businesses as part of the Government’s economic response to the COVID-19 pandemic. Also the change in the actuarial valuation of the military compensation provisions affected that item

Treasury bills

Assets Marketable securities, deposits and derivatives in gain (financial assets) Marketable securities held by the Reserve Bank Long-term deposits Liabilities Borrowings Settlement deposits

Line items

+7814

+39% Settlement deposits with the Reserve Bank increased mainly owing to the LSAP. The repurchase of Government bonds by the Reserve Bank has the impact of reducing Government bonds (as the bonds are eliminated on consolidation of the Financial Statements of the Government) and increasing bank settlement deposits. Under the LSAP, the Reserve Bank has purchased 21,025 mNZD New Zealand Government Bonds (NZGBs) and 964 mNZD Local Government Funding Agency (LGFA) bonds, resulting in a net effect of 4300 mNZD borrowings as the level of the increase in settlement deposits with the Reserve Bank is greater than the reduction in Government bonds backed out on consolidation (historical costs of 17,700 mNZD) Treasury bills increased by 7814 mNZD owing to changes in the Crown’s borrowing program. The short-term liquidity tool has been used to help fund the residual cash deficit

Primarily a result of Kāinga Ora’s (Homes and Communities) debt issuance to fund capital projects which led to financial assets for the Crown

+1100

+42,469 +16,136

Primarily as a consequence of Reserve Bank balance sheet management and open market operations in response to the COVID-19 pandemic, the Reserve Bank implemented a large-scale asset purchase program (LSAP) in order to provide a sizeable liquidity buffer to manage funding and liquidity risks

+40%

%

Explanation of variation

+9100

+17,389

mNZD

Variation to prior year

Table 7.13  Analysis of the New Zealand Government’s statement of financial position

+6284

+1628

Other borrowings

Derivatives in loss Provisions Provision for employee entitlements

Other provisions +862

+2892 +953

+7489

Government bonds

+21% The increase of the provision for employee entitlements representing annual leave, accrued long service leave, retiring leave and sick leave entitlements accrued by employees. The increase was driven by fewer employees taking leave during the last quarter of the 2019/2020 fiscal year compared to pre-COVID-19 pandemic levels. As a result, leave entitlements accruing to employees have increased, which increases the employee entitlement provision on 30 June 2020 The increase in “Other Provisions” relates partly to the Business Finance Guarantee Scheme: The scheme supports the provision of bank loans to businesses where 80% of the value of the loans are indemnified. The indemnities under the scheme are initially reported at fair value as a financial guarantee contract and included as part of other provisions

Government bonds have increased by 7489 mNZD compared to the previous year. In line with the Crown’s borrowing program, 31,952 mNZD of Government bonds were issued in the year offset by 5380 mNZD of Government bond repayments. This has been further offset by the Reserve Bank LSAP which reduces the level of Government bonds due to repurchases of government bonds. The NZGBs assets purchased by the Reserve bank are eliminated against the government bonds (i.e., NZGBs borrowings issued by the crown), resulting in a loss reflected in the SFPe Other borrowings have increased by 6284 mNZD. This includes but is not limited to the following COVID-19-related increases:  Borrowings by Crown entities to fund capital projects among others at New Zealand Transport Agency (NZTA) due to increased transport expenses of 600 mNZD, mainly owing to the impact the COVID-19 pandemic has had on projects, for example, project delays and cost pressure on public transport services to which NZTA contributed  Increased issuance of European-Commercial Paper (ECP) through the Crown’s borrowing program. The cash proceeds from issue of ECP as part of short-term borrowings (8.415 mNZD in total) funded the core Crown cash deficit  Increased collateral received on the financial asset portfolio managed by NZS Fund (Superannuation) and Accident Compensation Corporation (ACC). Gains on financial instruments of 1.9 bnNZD in the year have fallen from the 4.4 bnNZD recognized last year. This mainly reflects a more challenging investment environment in the wake of the COVID-19 pandemic (primarily in NZS Fund and ACC portfolios) Derivatives in loss increased by 1.6 bnNZD as a result of market movements, particularly relating to unfavorable interest rate movements

Federal Direct Student Loans and Federal Family Education Loans

Direct loans and loan guarantees receivable, net Disaster Assistance Loans (SBA)

Accounts receivable, net

Assets Cash and other monetary assets

Line items

−32.7

+173.2

+151.60

+83.20

+1402.30

bnUSD

+11%

+35%

+267%

%

Variations to prior year

These receivables increased primarily due to the CARES Act. The CARES Act provides funding for the Small Business Administration (SBA) to offer low-interest economic injury disaster loans for working capital to small businesses suffering substantial economic injury as a result of COVID-19 that can be used to pay fixed debts, payroll, accounts payable and other bills that cannot be paid because of the disaster’s impact. The CARES Act, under the Paycheck Protection Program (PPP) program, also provides incentives for small businesses to keep their workers on the payroll and debt relief for small business loan borrowers. The SBA will pay six months of principal, interest and any associated fees owed by current small business loan borrowers as well as new small business loans Education net loans receivable decreased partly as result of the increased subsidy allowance due to re-estimates related to COVID-19-responses (CARES Act and Presidential Memorandum, supporting students by temporarily suspending nearly all payments and halting all garnishments or collections actions for borrowers in default), offset by increases in loans outstanding and accrued interest receivable

The increase is mostly attributable to the operating cash held by the Treasury and is due to the Treasury maintaining an elevated cash balance to maintain prudent liquidity in light of the size and relative uncertainty of COVID-19-related outflows The increase is mostly due to an increase of taxes receivables. Besides the increase due to a one-time tax pursuant to the Tax Cuts and Jobs Act of 2017 (TCJA), the related allowance for uncollectible taxes receivable decreased due to a change in the methodology for estimating collectibility and the COVID-19-related provisions (CARES Act Section 2302) allowing employers to defer payment of FICA (Federal Insurance Contributions Act tax) Social Security taxes

Explanation of variation

Table 7.14  Analysis of the US Government’s balance sheets

+33.2

+17.3

+9.9

+10.1

Municipal Liquidity Facility

Term Assets Lending Facility

Commercial Paper Funding Facility

+37.4

+108.40

+7.6

Main Street Lending Programs

Federal Housing Admin Loans and Other (HUD) Department of Housing and Urban Development Investments in special purpose vehicles Corporate Credit Facilities N/A

(continued)

SPV to facilitate both the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF) programs in support of providing the flow of credit to employers through corporate bond and loan issuances so that they (a) are better able to maintain business operations and capacity during the period of disruption caused by COVID-19 and (b) by providing liquidity to the market for outstanding corporate bonds SPV to support lending to small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic and have good post-pandemic prospects by purchasing 95% participations in loans originated by eligible lenders SPV to help state and local governments manage cash flow pressures while continuing to serve households and businesses in their communities by purchasing short-term notes directly from eligible US states, counties and cities SPV to support the flow of credit to consumers and businesses for purposes of stabilizing the US financial system by issuance of asset-based securities backed by severals kind of loans, mortgages and certain other assets SPV to provide liquidity to short-term funding markets by purchasing three-month unsecured and asset-backed commercial paper directly from eligible issuers

Due to COVID-19, the CARES Act provides borrowers with federally backed mortgage loans a temporary foreclosure moratorium and a right to forbearance of loan payments for homeowners experiencing financial hardship

Loan guarantees liability

+498.40

+2.297%

+25%

Liabilities Federal debt and +4221.90 interest payable

% 136%

bnUSD

Variations to prior year

+150.70

Other assets

Line items

Table 7.14 (continued)

Treasury expanded its domestic series to include a new special non-marketable Treasury security, known as a Special Purpose Vehicle (SPV) security. Treasury issued these securities to SPVs, which were established by the Federal Reserve to implement its emergency lending facilities under the Federal Reserve Act to respond to the COVID-19 pandemic. An SPV security is a demand deposit certificate of indebtedness for which interest accrues daily and is paid at redemption The significant increase of loan guarantees liability relates almost entirely to the Small Business Loan Programs, which includes the Paycheck Protection Program (PPP), with a significant increase due to the CARES Act provisions

The increase of other assets is primarily due to an increase of advances and prepayments and mainly relate to Department of Health and Human Services (HHS) as well as Treasury. HHS had an increase due to the expansion of the Accelerated and Advance Payment (AAP) program (providing emergency funding and addressing cash flow issues when there is a disruption in claims submission and/or claims processing) for all Medicare providers during the COVID-19 pandemic. Treasury disbursed of financial assistance payments from the Coronavirus Relief Fund to state, local, territorial and tribal governments to cover eligible costs incurred as a result of the pandemic

Explanation of variation

Non-interestbearing treasury bills

+24%

+172,607

(continued)

The increase is mainly due to the fact that federal securities have been added directly to the government’s treasury portfolio in order to provide leeway for the favorable financing of COVID19 crisis measures +649% As with federal bonds, the background to the increased borrowing is also the measures adopted by the German Government to respond to the economic consequences of the COVID-19 pandemic

+27%

+90,673

Explanation of variation

The increase is mainly due to the economic stabilization fund (Wirtschaftsstabilisierungsfonds, WSF) newly established in 2020 to stabilize the German economy in the response to the COVID19 pandemic +11% The increase is mainly due to the increase in loans to other recipients and mainly relates to a loan given in 2020 by the federal government to the Federal Employment Agency (Bundesagentur für Arbeit, BA) to maintain proper cash management, in particular for cyclical short-term working benefits and for the reimbursement of social security contributions to employers in the context of the COVID-19 pandemic +216% The increase is mainly due to the increase in federal securities in 2020, in order to create room for favorable financing of crisis measures against the backdrop of the COVID-19 pandemic +344 The increase mainly relates to balances at banks and other financial institutions and is largely attributable to balances at the Central Bank of the Federal Republic of Germany (“Deutsche Bundesbank”). This is mainly due to the provision for financing the measures that the Federal Government had to take to counter the economic consequences of the COVID-19 pandemic

+66%

%

+295,116

+72,963

Cash and cash equivalents

Liabilities Credit market liabilities Federal bonds

+153,453

+4326

+51,044

mEUR

Variation to prior year

Securities

Assets Assets of the special and trust funds Other receivables

Line items

Table 7.15  Analysis of the German Government’s balance sheet

Secured cash reinforcement loans Liabilities of the special and trust funds

Line items

+43,239

+23,372

mEUR

Explanation of variation

+240% The increase is largely due to the fact that during fiscal year 2020, as a result of the COVID-19 pandemic, the federal government used varying amounts of short-term borrowing for cash financing to balance its central account 54% The increase is mainly due to debt incurred by the Economic Stabilization Fund (Wirtschaftsstabilisierungsfonds; WSF), newly established to stabilize the economy in the wake of the COVID-19 pandemic

%

Variation to prior year

Table 7.15 (continued)

7  “STRETCHING THE PUBLIC PURSE”: WHAT DOES IT MEAN IN TERMS… 

195

References Andrew, J., Baker, M., Guthrie, J., & Martin-Sardesai, A. (2020). Australia’s COVID-19 public budgeting response: The straitjacket of neoliberalism. Journal of Public Budgeting, Accounting & Financial Management, 32(5), 759–770. Ball, I. (2020). Burning the buffer: New Zealand’s budgetary response to COVID-19. Journal of Public Budgeting, Accounting and Financial Management, 33(1), 95–105. Bergmann, A., Fuchs, S., & Schuler, C. (2019). A theoretical basis for public sector accrual accounting research: Current state and perspectives. Public Money & Management, 39(8), 560–570. Broadbent, J., Dietrich, M., & Laughlin, R. (1996). The development of principal–agent, contracting and accountability relationships in the public sector: Conceptual and cultural problems. Critical Perspectives on Accounting, 7(3), 259–284. Chan, J. L. (2007). CIGAR: Paradigm, Methodology and a Perspective, presentation held in June 2007 at the CIGAR PhD Seminar in Coimbra. Coy, D., Fischer, M., & Gordon, T. (2001). Public accountability: A new paradigm for college and university annual reports. Critical Perspectives on Accounting, 12(1), 1–31. Dauderstädt, M. (2021). Wirtschaftsprogramme gegen die Pandemiekrise  – Deutschland im internationalen Vergleich. Wirtschaftsdienst, Heidelberg, 101(5), 362–368. Grossi, G., Ho, A. T., & Joyce, P. G. (2020). Special issue: Stretching the public purse: Budgetary responses to a global pandemic part I. Journal of Public Budgeting, Accounting & Financial Management, 32(5). Grossi, G., Ho, A. T., & Joyce, P. G. (2021). Special issue: Stretching the public purse: Budgetary responses to a global pandemic part II. Journal of Public Budgeting, Accounting & Financial Management, 33(1). Heiling, J. (2019). The presentation of budget information in financial statements  – Challenges in applying IPSAS 24. International Journal on Governmental Financial Management, 19(2), 54–65. Heiling, J. (2021). COVID-19 and CIGAR  – Further thoughts. CIGAR Newsletter, 12(1), 1–4. Heiling, J., & Chan, J. L. (2012). From servant to master? On the evolving relationship between accounting and budgeting in the public sector. Jahrbuch der Schweizerischen Verwaltungswissenschaften, 3(1), 23–38. Hood, C. (1995). The ‘new public management’ in the 1980s: Variations on a theme. Accounting, Organizations and Society, 20(2/3), 93–109. Hood, C. (1998). The art of the state: Culture, rhetoric, and public management. Oxford University Press.

196 

J. HEILING ET AL.

IMF. (2021a, April). Fiscal monitor, A far shot. Washington, DC. IMF. (2021b). https://www.imf.org/en/Topics/imf-­and-­covid19/Policy-­ Responses-­to-­COVID-­19. Accessed 6 June and 26 Sept 2021. IPSASB. (2014, October). The conceptual framework for general purpose financial reporting by public sector entities, New York. Jacobs, K. (2016). Theorising interdisciplinary public sector accounting research. Financial Accountability & Management, 32(4), 469–488. Joyce, P. G., & Suryo Prabowo, A. (2020). Government responses to the coronavirus in the United States: Immediate remedial actions, rising debt levels and budgetary hangovers. Journal of Public Budgeting, Accounting & Financial Management, 32(5), 745–758. Llewelyn, S. (2003). What counts as “theory” in qualitative management and accounting research? Introducing five levels of theorizing. Accounting, Auditing & Accountability Journal, 16(4), 662–708. OECD. (2021a). Gross domestic product (GDP) (indicator). https://doi. org/10.1787/dc2f7aec-­en. Accessed 2 June 2021. OECD. (2021b). Long-term interest rates (indicator). https://doi. org/10.1787/662d712c-­en. Accessed 2 June 2021. Pallot, J. (1992). Elements of a theoretical framework for public sector accounting. Accounting, Auditing & Accountability Journal, 5(1), 38–63. Sinclair, A. (1995). The chameleon of accountability: Forms and discourses. Accounting, Organizations and Society, 20(2/3), 219–237. World Bank. (n.d.). Population, total. Retrieved June 2, 2021, from https://data. worldbank.org/indicator/SP.POP.TOTL. Accessed 2 June 2021. World Health Organization. (2021). WHO Coronavirus (COVID-19) dashboard. Retrieved June 2, 2021, from https://covid19.who.int/table

CHAPTER 8

A Disclosure Theory Approach to Government Transparency: Implications for Accountability in Times of a Pandemic Claudio Columbano

8.1   Introduction This chapter proposes an approach to evaluate the transparency and accountability of public sector entities that is based on disclosure theory (Dye, 2001, 2017; Verrecchia, 2001). Disclosure theory is a branch of information economics that studies, inter alia, the conditions under which organizations release information, the effects of information dissemination, the benefits and costs of reporting mandates, and the strategic nature of reporting choices. While the theory informs many studies on corporate transparency (Beyer et  al., 2010), its use in the public sector domain remains limited (Bisogno et  al., 2017). Against this background, this chapter will argue that a careful application of disclosure theory can

C. Columbano (*) Department of Business Studies, Roma Tre University, Rome, Italy e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 G. Dabbicco et al. (eds.), Public Sector Accounting, Financial Accountability and Viability in Times of Crisis, Public Sector Financial Management, https://doi.org/10.1007/978-3-031-04745-9_8

197

198 

C. COLUMBANO

contribute novel and important insights to research on public sector transparency, accountability, and accounting choice. The main message that this chapter proposes is that a lack of transparency should not always be construed as evidence of public officials’ unwillingness to be accountable. Instead, it is important to examine whether additional ‘frictions’ exist that perturb the process of information acquisition and disclosure by governments. Two of these frictions appear to be of first-order importance in the public sector context and represent the focus of this chapter. First, public officials may be unable to gather the information that they are asked to disclose (Dye, 1985; Jung & Kwon, 1988). Second, acquiring precise information may be too costly given its benefits (Penno, 1997; Verrecchia, 1983). If these frictions are sufficiently strong, even well-intended public officials cannot be fully transparent. In turn, the relative lack of transparency is not induced by, and it is not a sign of, an intent to conceal information. Instead, opaqueness derives from important and often underappreciated limits to the knowledge of public officials. Sometimes these limits to knowledge can be alleviated by establishing a revamped information system. However, information systems do not come for free. On the contrary, they entail a substantial investment in infrastructural, technological, and human capital that may not be justified in light of its expected benefits. What is more, this investment is likely to be costlier, the higher the level of precision required of the information system itself. Questioning the relation between transparency and accountability is important because it invites researchers to reconsider the descriptive validity of prevailing narratives, particularly in the public financial management (PFM) domain. According to most accounts, transparency is a sign of good governance because it helps citizens, firms and investors monitor the ways in which politicians and bureaucrats manage the resources that they are entrusted with (Stiglitz, 1999). This view of transparency is particularly popular with international institutions (Mehrpouya & Salles-Djelic, 2019; The World Bank, 1992). Theoretically, it is informed by models characterized by the separation of principals and agents (Eisenhardt, 1989; Fama & Jensen, 1983; Jensen & Meckling, 1976), where opaqueness is a sign of agents’ intent to hide poor performance while appropriating the rents deriving from superior information (Alesina & Perotti, 1996; Alt et al., 2006). Under this lens, less-than-full transparency deterministically implies an unwillingness to take responsibility for one’s action. Against this background, disclosure theory takes a rather more open stance toward

8  A DISCLOSURE THEORY APPROACH TO GOVERNMENT TRANSPARENCY… 

199

the relation between transparency and accountability by proposing that non-opportunistic frictions are often the drivers of partial disclosure outcomes. To demonstrate the potential benefits of studying the relation between transparency and accountability through the lenses of disclosure theory, the chapter takes the form of a conceptual contribution that makes reference to real-life cases in the spirit of David Heald’s influential article on fiscal transparency (Heald, 2003). Specifically, the disclosure of mortality-­ rate data by governments during the first wave of the COVID-19 pandemic will be examined by referring to official documents released by the World Health Organization (WHO). These contained guidelines on the  procedures that governments should follow when acquiring and reporting COVID-19 data. Although necessarily limited in scope, the case analysis is important because these data provided the foundation for introducing and maintaining restrictive measures. Yet, data have been often criticized for their low quality (Pearce et al., 2020; Pisano et al., 2020). Interestingly, as critics have rarely inquired into the source of low information quality, conspiracy theories have been built and divulgated based on the notion that imprecise information was instrumental to governments’ project of not being accountable for the imposition of restrictive measures. The case analysis will show that disclosure theory allows to characterize the disclosure problem faced by governments confronted by the first wave of the pandemic in a different, ‘benign’ fashion. The importance of transparency as an object of study cannot be overstated. A growing number of articles examine the meaning, drivers, and consequences of transparency—or lack thereof (Cucciniello et al., 2017). The very concept of transparency has attracted scholars from a variety of fields ranging from accounting and public administration to political science and law (Alt, 2019, 2021; Barth & Schipper, 2008; Fenster, 2010; Meijer, 2013). The definition of transparency adopted in this chapter is based on a recent literature review, which defines transparency as “the extent external actors are afforded access to information about the way public organizations operate.” (Cucciniello et al., 2017, p. 36). This definition closely relates transparency to accountability that, since Max Weber’s work, is widely considered to be a defining trait of democratic governance (Weber, 2010). While accountability, too, can be defined in several ways, it is here defined as “a relationship between an actor and a forum, in which the actor has an obligation to explain and to justify his or her conduct, the forum can pose questions and pass judgment, and the

200 

C. COLUMBANO

actor may face consequences.” (Bovens, 2007, p.  107). This definition nicely connects accountability to the acquisition and disclosure of information, because explaining and justifying conduct requires having access to information in the first place to support the decision-making process. The rest of the chapter is structured as follows. Section 8.2 provides a sketch of disclosure theory and concepts, focusing on the notion of ‘frictions’. Section 8.3 presents the case analysis. Section 8.4 briefly discusses the findings and concludes.

8.2   A Sketch of Disclosure Theory To clarify the concepts and terminology used in disclosure theory, it is perhaps useful to begin with an example. Suppose that you are interested in receiving information about a phenomenon—say, the financial health of the central government of the country where you reside, which you do not observe directly. Let us denote this phenomenon with y. The government periodically publishes a measure of financial health—say, the debt at year-end, denoted with m, and that it does not perfectly correspond to y. The difference between m and y is attributable to an error term e; and it can be assumed that at the end of each reporting period, m is related to y by a linear function of the form:

m  y  e

(8.1)

Equation (8.1) states that the financial debt of the government is an imperfect measure of its financial health. The imperfection is captured by the error term e. The error may behave stochastically, in which case random disturbances prevent the information technology to perfectly measure the financial health of the government. Alternatively, the error term may have a systematic component due to e.g., the exclusion of certain financial items from the debt measure. If the error term contains a systematic component, m is an imprecise measure of y because it excludes items that contribute to financial health but that are not ‘counted’ in officially reported debt. For example, the measure of ‘general government gross debt’ used in the process of European Union (EU) fiscal surveillance only includes loans and marketable bonds, while it excludes both commercial debt and pension liabilities (Dabbicco, 2018).

8  A DISCLOSURE THEORY APPROACH TO GOVERNMENT TRANSPARENCY… 

201

Suppose that only public officials have access to information on the financial debt of the entity, which they release to the public at regular intervals. In disclosure theory, the act of releasing m is termed the ‘voluntary disclosure’ of information (Verrecchia, 2001). Therefore, an entity discloses information whenever it shares with the public some data that, without disclosure, would only be observable by its managers.1 The term “observable” requires an explanation, too. In disclosure theory, managers observe certain phenomena—say, a transaction—insofar as they can measure it. Then, disclosure amounts to the public release of data about phenomena that managers know thanks to the prior existence of a measurement system. Measurement systems can be of a very broad nature and are by no means limited to financial accounting. For instance, management accountants are familiar with the notion that costing a cost object requires the introduction of a costing system (Labro, 2019). The costing system represents a systematic way to measure—with varying degrees of precision— the cost of an object that remains, until its measurement, unknown (Datar & Rajan, 2018). Similarly, nonfinancial disclosures amount to the release of data that are accessible to managers only after they are measured. For example, the amount of carbon emission by an air carrier is not known by the entity until it is measured at the airplane level. Measuring a phenomenon of interest endows managers with “private” information until and unless these measures are disclosed. Accordingly, in disclosure theory, information is disclosed whenever managers’ privately observed data are shared with the public. The “public” consists of any audience that, for a variety of reasons, is interested in the information disclosed by managers. In the public sector 1  Visibly, therefore, the very term “disclosure” as used in the theory does not carry the same meaning that it has in the accounting domain. In (financial) accounting, disclosures include information that preparers communicate in annual reports and that do not form part of the financial statements. Similarly, nonfinancial and corporate social responsibility (CSR) “disclosures” include qualitative and quantitative information released by the disclosing entity about items that are not part of the financial statements and that can have a diverse nature, ranging from vision and approach to performance indicators (Bouten et al., 2011). In turn, only information that is included in the financial statements is said to be “recognized” rather than “disclosed”. Accordingly, one says that, for example, accountants recognize certain transactions as assets whenever the applicable recognition requirements are met. Instead, managers disclose, for example, carbon emission targets in voluntary, disharmonized CSR reports. In the vernacular of disclosure theory, this distinction is not made, and disclosure simply refers to the act of publicly releasing any kind of information related to the disclosing entity.

202 

C. COLUMBANO

context, it is often stated that the primary audience consists of taxpayers and citizens as “service recipients and resource providers”, as well as their elected representatives (IPSASB, 2014, p.  13). In fairness, academic research remains skeptical about the extent of actual use of financial disclosures by users, which are often said to be purely hypothetical (Jones & Pendlebury, 2000; van Helden & Reichard, 2019). Either way, it is crucial that the audience is able and willing to penalize or reward managers depending on the information received. Then, managers consider the probable response of the audience when choosing whether, what and when to disclose. The known electoral cycle in transparency (Aaskoven, 2016) may be taken as a sign of the existence of this ‘strategic’ form of interaction whereby, at least in the mind of politicians, citizens are interested in learning about past fiscal outcomes and the quality of management of public financial resources before making their voting choice at the ballot. The earliest analyses of the process of voluntary disclosure of information are Grossman (1981) and Milgrom (1981). Both articles study the condition under which the interaction between audiences and entities result in the complete elimination of information asymmetry through managers’ full disclosure of their private information. Their groundbreaking result was to prove that under certain assumptions, managers are ‘forced’ into full disclosure because the very act of withholding information can only be interpreted negatively by a skeptical audience. This counterintuitive result is obtained because of adverse selection. In particular, all managers that possess positive information have incentives to disclose it. In turn, nondisclosure amounts to evidence that managers possess negative information. Then, a process of adverse selection unfolds until all non-disclosing entities—some of which possess less negative information than others—eventually disclose all the information they have. A recent working paper demonstrates the empirical descriptiveness of this theoretical, ‘unraveling’ result (Bourveau et  al., 2021). In most contexts, however, one sees far less disclosure and far greater heterogeneity in transparency than the unraveling argument would predict. For example, the heterogeneity displayed by several measures of fiscal transparency indicates that full disclosure is rather the exception than the norm in the central government sector (Wang et al., 2015). The question, then, becomes when, how and why can organizations resist the demand for transparency stemming from their audiences?

8  A DISCLOSURE THEORY APPROACH TO GOVERNMENT TRANSPARENCY… 

203

The answer given by disclosure scholars is that most disclosure interactions are affected by ‘frictions’ (Bertomeu et  al., 2021). These frictions include (Suijs, 2007): (i) there is a positive probability that managers do not have information to report, (ii) disclosure is costly, (iii) managers do not make truthful announcements, (iv) managers do not know how audiences will interpret announcements, and (v) audiences interpret information heterogeneously. Some of these frictions are familiar to accounting scholars. For example, untruthful disclosure arises in the case of earnings management (Cohen & Malkogianni, 2021). Divergent interpretations are a typical driver of trading activity that arises out of disagreement about the implications of disclosed information for future performance (Beaver, 1968). If one or more of these theoretical frictions occur in the real world, organizations are able to remain opaque and full disclosure does not arise. Other frictions include the cost of measuring and disclosing m as a reliable measure of y, and the probability that y is actually measured by the disclosing entity. First, consider the case of costly disclosure. Disclosure may be costly for two reasons. On the one hand, entities may withhold information that is ‘proprietary’—that is, information that, if disclosed, would cause damage to the entity and its stakeholders (Verrecchia, 1983). In the corporate sector, evidence shows that disclosure is less frequent in competitive industries (e.g., Ellis et al., 2012). In the public sector, raison-­ d’état is often cited as a reason for secrecy in selected policy areas (Prat, 2005). Alternatively, costly disclosure arises whenever measuring y requires building an information system. If acquiring a measure of y requires an investment of resources, a choice must be made to determine if this investment is worth the effort. In this case, an entity may either refrain from measuring y or disclose an alternative measure that is both less expensive and less precise than the ideal measure—leading to a disclosure quantity/ quality trade-off (Penno, 1997). In summary, disclosure theory posits that a lack of transparency may result from ‘benign’ frictions to the process of information acquisition and disclosure. Of these frictions, it is important to emphasize the insight that limited or imprecise disclosure of information may be caused by excessive costs of information acquisition. These can cause even well-intended public officials to abstain from full disclosure. Naturally, some entities that do have precise information that they prefer to withhold may claim—self-­ servingly—that they do not have information to disclose. In these circumstances, the public cannot tell with certainty that managers possess information. As a result, upon observing nondisclosure, the public cannot

204 

C. COLUMBANO

be certain about the motives for nondisclosure and a probability must be estimated about the true ‘information endowment’ of managers (Dye, 1985; Jung & Kwon, 1988). This circumstance calls for a form of accountability in which public officials convincingly explain that precise information truly is inaccessible. The next section focuses on this insight to explain the  disclosure problem that governments faced when attempting to acquire precise data on the true mortality rate of SARS-CoV-2.

8.3   Applications: Disclosing Information on SARS-­CoV-2 Mortality The COVID-19 crisis began in January 2020, when a novel coronavirus labeled SARS-CoV-2 was discovered in the area of Wuhan, China. The virus—responsible for the COVID-19 disease—was subsequently found to be infecting people across the globe, turning a local outbreak into a global disease. On March 11, 2020, the WHO declared COVID-19 a pandemic. Governments around the world responded to the rapid spread of the virus by gathering data on the diffusion of the virus in the population. According to WHO guidelines (WHO, 2020a), the preferred diagnostic technique to identify an ongoing infection by SARS-CoV-2 would be the Nucleic Acid Amplification Test (NAAT) performed through nasopharyngeal and oropharyngeal swabs, for example, the well-known RT-PCR. The PCR result was effectively binary—positive/negative—with positive marking an ongoing infection. According to official case definitions (WHO, 2020c), a positive case would be known as a confirmed case. As SARS-­ CoV-­2 may either cause the COVID-19 disease or continue in asymptomatic form, confirmed cases were classified as either symptomatic or asymptomatic.2 In turn, symptoms could either evolve into complications that often resulted in the death of the patient or gradually lead to recovery through either treatment or natural response of the organism. A recovered patient would be either one that presented a negative test result and no symptom of infection, or one that presented two consecutive negative test results (WHO, 2020a). 2  Typical symptoms of active infection include headache and body aches, dry cough, fever and, in severe cases, oxygen deficiency and pneumonia. See: Our New COVID-19 Vocabulary—What Does It All Mean? By Kathy Katella, April 7, 2020, at: https://www. yalemedicine.org/news/covid-19-glossary (last access: June 6, 2021).

8  A DISCLOSURE THEORY APPROACH TO GOVERNMENT TRANSPARENCY… 

205

The official data gathered by governments based on these guidelines have been criticized for their low quality (Pearce et al., 2020; Pisano et al., 2020). Since the beginning of the pandemic, one important piece of information demanded by both citizens and the press was the true mortality of SARS-CoV-2. Technically, this indicator is known as the Infection Fatality Rate (IFR), which expresses the ‘probability of dying for a person who is infected’ (Ioannidis, 2021, p. 19). Arithmetically, the IFR is calculated as the number of infected people who die, divided by the total number of infected people. Therefore, on any given day, a real time calculation of the true IFR would require that all the people in a certain region or country receive a reliable diagnostic test.3 By testing the entire population, governments could obtain an accurate IFR denominator that includes all cases of infection and an accurate IFR numerator that includes only those infected patients who die. Alternatively, random sampling of the population could provide indication of the IFR without requiring population-level screening campaigns (Pearce et  al., 2020). In the terminology of Eq. (8.1) above, IFR is y—the phenomenon that the audience wishes to know about. In practice, the IFR was never disclosed during the pandemic (Roser et al., 2020) because no country conducted universal or random screening test at the scale required to calculate this important indicator. Instead, particularly during the first wave of COVID-19, most governments adopted a selective approach to screening techniques. Specifically, the WHO recommended in March 2020 that only individuals who presented symptoms of infection should be administered a NAAT (WHO, 2020b). Following this recommendation generated a measure of IFR known as the Case Fatality Rate (CFR). The CFR is calculated as the number of confirmed cases who die, divided by the number of total confirmed cases. In terms of Eq. (8.1), the CFR represented the measure m of the phenomenon y. As the public was exposed to the CFR in place of the IFR, it received information on m but not on y because an information technology existed that would produce data on m—the administration of RT-PCR test to symptomatic patients—whereas such a system did not exist that could produce reliable data on y. Unfortunately, using CFR as a measure of IFR made m an imprecise and biased measure of y in the presence of asymptomatic infections. To see 3  Alternatively, calculation of IFR can be attempted through seroprevalence studies, ideally by randomly sampling individuals from the population of interest and tracking their medical condition over time. However, this test can only be conducted ex post (Ioannidis, 2021).

206 

C. COLUMBANO

why, suppose that two individuals, A and B, had an ongoing SARS-CoV-2 infection, but only A presented symptoms and received a RT-PCR. Then, A and B would both be positive, but only A would count as a confirmed case. Therefore, the CFR denominator would fall short of the IFR denominator—significantly so if SARS-CoV-2 did not induce symptoms in most patients. Now suppose that both A and B died. If the CFR had been a precise measure of the true IFR, both A and B would have contributed to the IFR numerator. However, because B was never a confirmed case, she did not ‘count’ as a COVID-19 death. Accordingly, the CFR underestimated both the IFR numerator and the denominator and m did not correctly approximate y. Worse yet, the CFR could become a systematically biased measure of IFR if symptomatic patients were more likely to both (i) receive a test, and (ii) develop severe illness that resulted in death.4 In fact, (i) implies that initial symptoms increased the probability that an individual counted as a confirmed case, while (ii) implies that confirmed cases were more likely to be reported as COVID-19 deaths than the rest of the population. Collectively, (i) and (ii) led to an error in the disclosed CFR measure that had a systematic component caused by selectivity in the testing strategy. The systematic component tended to disappear whenever authorities followed a universal or random screening strategy. In these contexts, the precision of CFR as a measure of IFR increased. For example, in Italy, two regions—Lombardy and Veneto—followed two different approaches to screening during the first wave in the winter months of 2020. While Lombardy concentrated its screening efforts on symptomatic patients only, Veneto conducted mass testing at the regional level. The relative quality of their COVID-19 data soon became apparent (Pisano et al., 2020). Next, consider the template that governments use to transmit data to the WHO, known as the ‘Weekly reporting of new cases of COVID-19’.5 The template required governments to report the following data on a weekly basis: 4  Note that the second assumption remains hypothetical. In fact, a recent study (Park et al., 2021) concludes that symptomatic and asymptomatic patients have similar probability of death. However, the study also finds that the symptomatic patients are more likely to require ICU care. If ICU care is available in a country only for a subset of symptomatic patients, these may be more likely to die of COVID-19 compared to asymptomatic patients due to lack of assistance. 5  The template is retrievable at https://apps.who.int/iris/handle/10665/333753 (last access: 7 June 2021).

8  A DISCLOSURE THEORY APPROACH TO GOVERNMENT TRANSPARENCY… 

207

1. Number of confirmed cases and deaths (separately for health workers) 2. Number of probable cases and deaths (separately for health workers) 3. Number of new hospitalized cases 4. Number of new discharged cases 5. Number of persons tested (all methods) 6. Number of persons tested with PCR assay Evidently, the template emphasized the concept of testing required to confirm a case. Thus, while the WHO template allowed calculating the CFR of SARS-CoV-2, it did not contain the information needed to generate the true IFR.  Accordingly, in the weekly governmental reports on COVID-19 diffusion, an imprecise CFR was reported instead of the true IFR of interest. It is tempting to blame governments for having disclosed a CFR measure of mortality that has been imprecise and possibly biased. However, the true fatality rate of SARS-CoV-2 was not disclosed by most governments during the first wave because measuring the IFR would have required systematic testing of the population on a daily or weekly basis. While this approach was certainly conceivable in theory, it was complicated in practice by severe limits on material, labor, and financial resources. Consider the following remarks by the WHO issued in March 2020: The global spread of COVID-19 has dramatically increased the number of suspected cases and the geographic area where laboratory testing needed to be implemented, intensified COVID-19 molecular testing has led to shortages of molecular testing reagents globally for COVID-19 and for other molecular diagnostics. Beyond supply issues, there are significant limitations of absorption capacity in many regions, especially in low- and middle-­ income countries. (WHO, 2020b, p. 1)

The WHO remarks remind us that in the first wave of the pandemic, a rapid surge in demand for testing reagents reduced the practical possibility of conducting (massive) screening tests. Simultaneously, healthcare workers became absorbed by a considerable workload increase. Accordingly, the financial and nonfinancial cost of dedicating resources to a systematic testing campaign increased substantially. The net result was that it became necessary to ‘prioritize’ which individuals would be tested (WHO, 2020b, p.  1). Specifically, the WHO recommended that testing be limited to people-­ at-risk, health workers, and symptomatic patients. As most

208 

C. COLUMBANO

governments followed the WHO guidelines and concentrated their testing effort on these non-representative groups of the population, the only information that could be gathered was related to confirmed cases and confirmed deaths. Accordingly, only the imprecise and biased CFR could be disclosed instead of the true—but costlier to measure—IFR.

8.4  Discussion and Conclusions This chapter has proposed a disclosure theory-based approach to study the relation between transparency and the accountability of public sector entities. This section summarizes the main theoretical and empirical insights and proposes avenues for future research. From a theoretical standpoint, adopting a disclosure theory-based approach leads to conclude that full transparency cannot arise in the presence of ‘frictions’ that perturb the process of information acquisition and disclosure by governments (Bertomeu et al., 2021). Indeed, there are several non-opportunistic rationales that can explain partial disclosure by well-intended public officials. Among these rationales, the chapter has focused on the consequences of having access to imperfect measurement technologies. By providing only imperfect proxies of the phenomena of interest, imperfect measurement systems substantially limit government transparency. While these imperfections may be corrected by investing in better measurement technologies, this investment is costly and not necessarily preferred by the resource providers of the government—taxpayers, legislators, and creditors. Accordingly, the fact that information is withheld or imprecisely disclosed does not always signal public officials’ unwillingness to be accountable. Rather, when frictions occur that prevent precise information to be acquired in the first place, accountability is perhaps best served by openness about their existence and salience, rather than by exposing the public to a ‘data tsunami’ of imprecise information (Birchall, 2014). From an empirical standpoint, the chapter has applied disclosure theory to analyze the challenges that governments faced when acquiring and releasing mortality data on SARS-CoV-2 during the first wave of the pandemic. It was noted that, while the phenomenon of interest was the IFR, that is, the percentage of infected individuals who died out of the total number of infected individuals—governments typically disclosed only the CFR, that is, the percentage of confirmed cases who died out of the total number of confirmed cases. The difference between the two rates is a

8  A DISCLOSURE THEORY APPROACH TO GOVERNMENT TRANSPARENCY… 

209

function of the comprehensiveness of the testing and screening strategy. In this situation, the scarcity of testing reagents, the considerable increase in the workload of healthcare workers, and the adoption of WHO guidelines, forced governments to ‘prioritize’ the individuals who would be administered a test during the first wave of the pandemic. As these were a non-representative sample of the population, the information on COVID-19 diffusion and mortality that reached the public was imprecise. Crucially, improving the precision of these systems once the pandemic hit would have been desirable; yet it was ultimately an unfeasible strategy due to the severe resource constraints faced by governments. Thus, a trade-off arose between the transparent disclosure of precise but costly measures of mortality, and the disclosure of imprecise but inexpensive proxies (Penno, 1997). Disclosure theory helps understanding the resulting level of imprecision as deriving from an inadequate measurement technology rather than a conscious intent to escape accountability for the restrictive measures imposed on the population. Indeed, a disclosure theory approach may suggest that governments should be accountable, not for a lack of transparency, but rather for a lack of resilience (Barbera et al., 2017). The proposed characterization of the relation between transparency and accountability is not present in current conceptual frameworks (Cucciniello et al., 2017). Instead, it complements extant perspectives by inviting scholars to consider a broader range of rationales that governments may have to engage in less-than-full disclosure. As such, the framework proposed in this chapter responds to calls for more research on disclosure in the public sector, of both financial and non-financial information (Bisogno et al., 2017). In addition, because some of the frictions reviewed in this chapter are not attributable to opportunistic motives of public officials, acknowledging their existence is likely to affect the inferences that scholars draw when evaluating governments based on the quantity of information they disclose through, for example, transparency rankings (Wang et  al., 2015). In addition, the theoretical  lenses proposed in this chapter may inform future public sector accounting research. For example, an often-heard reason for non-­adoption of advanced costing systems, such as, Activity-Based Costing is their high implementation and maintenance cost (Datar & Rajan, 2018). Relatedly, a concern with the introduction of accrual accounting for public sector organizations is that the cost of implementing accrual-based systems is excessive when compared to the expected benefits (Adhikari & Gårseth-­Nesbakk, 2016; Connolly & Hyndman, 2006; Hyndman & Connolly, 2011). Studying

210 

C. COLUMBANO

these topics in light of disclosure theory may yield novel insights on the ‘benign’ causes that lead organizations to embrace or rather resist accounting and financial reporting reforms. Acknowledgment  This chapter was conceived during the first weeks of the pandemic, when the availability and quality of data on contagion in Italy went under severe criticism. I am thankful to attendees of the 11th EIASM International Public Sector Conference and the accounting research seminars organized by Birmingham Business School for helpful feedback on earlier drafts. I wish to thank Elisavet Mantzari, in particular, for organizing the seminar at Birmingham.

References Aaskoven, L. (2016). Fiscal transparency, elections and public employment: Evidence from the OECD. Economics and Politics, 28(3), 317–341. Adhikari, P., & Gårseth-Nesbakk, L. (2016). Implementing public sector accruals in OECD member states: Major issues and challenges. Accounting Forum, 40(2), 125–142. Alesina, A., & Perotti, R. (1996). Fiscal discipline and the budget process. American Economic Review, 86(2), 401–407. Alt, J. E. (2019). Twenty years of transparency research. Public Sector Economics, 43(1), 5–13. Alt, J. E. (2021). Keynote presentation on “Effects of fiscal transparency, participation and accountability on macro-fiscal, resource allocation, service delivery, governance, and development outcomes.” In Public Sector Economics Conference 2021, Institute of Public Finance, Zagreb (pp. 1–31). Alt, J.  E., Lassen, D.  D., & Rose, S. (2006). The causes of fiscal transparency: Evidence from the U.S. states. IMF Staff Papers, 53(Special Issue), 30–57. Barbera, C., Jones, M., Korac, S., Saliterer, I., & Steccolini, I. (2017). Governmental financial resilience under austerity in Austria, England and Italy: How do local governments cope with financial shocks? Public Administration, 95(3), 670–697. Barth, M. E., & Schipper, K. (2008). Financial reporting transparency. Journal of Accounting, Auditing & Finance, 23(2), 173–190. Beaver, W.  H. (1968). The information content of annual earnings announcements. Journal of Accounting Research, 6(3), 67–92. Bertomeu, J., Vaysman, I., & Xue, W. (2021). Voluntary versus mandatory disclosure. Review of Accounting Studies. https://doi.org/10.1007/ s11142-­020-­09579-­0 Beyer, A., Cohen, D. A., Lys, T. Z., & Walther, B. R. (2010). The financial reporting environment: Review of the recent literature. Journal of Accounting and Economics, 50(2–3), 296–343.

8  A DISCLOSURE THEORY APPROACH TO GOVERNMENT TRANSPARENCY… 

211

Birchall, C. (2014). Radical transparency? Cultural Studies ↔ Critical Methodologies, 14(1), 77–88. Bisogno, M., Citro, F., Santis, S., & Tommasetti, A. (2017). Disclosure quality measurement in the public sector: A structured literature review. International Journal of Business and Management, 12(12), 119–134. Bourveau, T., Breuer, M., & Stoumbos, R. C. (2021, December 30). Learning to disclose: Disclosure dynamics in the 1890s streetcar industry. Available at SSRN: https://ssrn.com/abstract=3757679 Bouten, L., Everaert, P., Van Liedekerke, L., De Moor, L., & Christiaens, J. (2011). Corporate social responsibility reporting: A comprehensive picture? Accounting Forum, 35(3), 187–204. Bovens, M. (2007). New forms of accountability and EU-governance. Comparative European Politics, 5(1), 104–120. Cohen, S., & Malkogianni, I. (2021). Sustainability measures and earnings management: Evidence from Greek municipalities. Journal of Public Budgeting, Accounting and Financial Management, 33(4), 365–386. Connolly, C., & Hyndman, N. (2006). The actual implementation of accruals accounting: Caveats from a case within the UK public sector. Accounting, Auditing & Accountability Journal, 19(2), 272–290. Cucciniello, M., Porumbescu, G. A., & Grimmelikhuijsen, S. (2017). 25 years of transparency research: Evidence and future directions. Public Administration Review, 77(1), 32–44. Dabbicco, G. (2018). A comparison of debt measures in fiscal statistics and public sector financial statements. Public Money & Management, 38(7), 511–518. Datar, S., & Rajan, M. (2018). Horngren’s cost accounting: A managerial emphasis (16th ed.). Pearson Education, Ltd. Dye, R.  A. (1985). Disclosure of nonproprietary information. Journal of Accounting Research, 23(1), 123–145. Dye, R. A. (2001). An evaluation of “essays on disclosure” and the disclosure literature in accounting. Journal of Accounting and Economics, 32(1–3), 181–235. Dye, R. A. (2017). Some recent advances in the theory of financial reporting and disclosures. Accounting Horizons, 31(3), 39–54. Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of Management Review, 14(1), 57–74. Ellis, J. A., Fee, C. E., & Thomas, S. E. (2012). Proprietary costs and the disclosure of information about customers. Journal of Accounting Research, 50(3), 685–727. Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. The Journal of Law & Economics, 26(2), 301–325. Fenster, M. (2010). Seeing the state: Transparency as metaphor. Administrative Law Review, 62(3), 617–672.

212 

C. COLUMBANO

Grossman, S. J. (1981). The informational role of warranties and private disclosure about product quality. The Journal of Law & Economics, 24(3), 461–483. Heald, D. (2003). Fiscal transparency: Concepts, measurement and UK practice. Public Administration, 81(4), 723–759. Hyndman, N., & Connolly, C. (2011). Accruals accounting in the public sector: A road not always taken. Management Accounting Research, 22(1), 36–45. Ioannidis, J. P. A. (2021). Infection fatality rate of COVID-19 inferred from seroprevalence data. Bulletin of the World Health Organization, 99, 19–33F. IPSASB. (2014). The conceptual framework for general purpose financial reporting by public sector entities. International Federation of Accountants (IFAC). Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics, 3(4), 305–360. Jones, R.  H., & Pendlebury, M.  W. (2000). Public sector accounting (5th ed.). Pearson Education, Ltd. Jung, W.-O., & Kwon, Y.  K. (1988). Disclosure when the market is unsure of information endowment of managers. Journal of Accounting Research, 26(1), 146–153. Labro, E. (2019). Costing systems. Foundations & Trends in Accounting, 13(3–4), 267–404. Mehrpouya, A., & Salles-Djelic, M. L. (2019). Seeing like the market; exploring the mutual rise of transparency and accounting in transnational economic and market governance. Accounting, Organizations and Society, 76, 12–31. Meijer, A. (2013). Understanding the complex dynamics of transparency. Public Administration Review, 73(3), 429–439. Milgrom, P. R. (1981). Good news and bad news: Representation theorems and applications. The Bell Journal of Economics, 12(2), 380–391. Park, H. C., Kim, D. H., Cho, A., Kim, J., Yun, K. S., Kim, J., & Lee, Y. K. (2021). Clinical outcomes of initially asymptomatic patients with COVID-19: A Korean nationwide cohort study. Annals of Medicine, 53(1), 357–364. Pearce, N., Vandenbroucke, J.  P., VanderWeele, T.  J., & Greenland, S. (2020). Accurate statistics on COVID-19 are essential for policy guidance and decisions. American Journal of Public Health, 110, 949–951. Penno, M. C. (1997). Information quality and voluntary disclosure. Accounting Review, 72(2), 275–284. Pisano, G.  P., Sadun, R., & Zanini, M. (2020, March). Lessons from Italy’s response to coronavirus. Harvard Business Review (Website). Prat, A. (2005). The wrong kind of transparency. American Economic Review, 95(3), 862–877. Roser, M., Ritchie, H., Ortiz-Ospina, E., & Hasell, J. (2020). Coronavirus pandemic (COVID-19). Published online at OurWorldInData.Org. Retrieved from https://ourworldindata.org/coronavirus

8  A DISCLOSURE THEORY APPROACH TO GOVERNMENT TRANSPARENCY… 

213

Stiglitz, J. E. (1999, January 27). On liberty, the right to know, and public discourse: The role of transparency in public life. Oxford Amnesty Lecture, Oxford, UK. Suijs, J. (2007). Voluntary disclosure of information when firms are uncertain of investor response. Journal of Accounting and Economics, 43(2–3), 391–410. The World Bank. (1992). Governance and development. Washington, DC. van Helden, J., & Reichard, C. (2019). Making sense of the users of public sector accounting information and their needs. Journal of Public Budgeting, Accounting and Financial Management, 31(4), 478–495. Verrecchia, R.  E. (1983). Discretionary disclosure. Journal of Accounting and Economics, 5, 179–194. Verrecchia, R.  E. (2001). Essays on disclosure. Journal of Accounting and Economics, 32(1–3), 97–180. Wang, R., Irwin, T., & Murara, L. (2015). Trends in fiscal transparency: Evidence from a new database of the coverage of fiscal reporting (No. WP/15/188). IMF working paper. Weber, M. (2010). Weber: Political writings. (P. Lassman & R. Speirs, Eds.) (7th ed.). Cambridge University Press. WHO. (2020a, September 11). Diagnostic testing for SARS-CoV-2. Interim guidance. WHO. (2020b, March 21). Laboratory testing strategy recommendations for COVID-19. Interim guidance. WHO. (2020c, December 16). WHO COVID-19: Case definitions. Updated in public health surveillance for COVID-19.

CHAPTER 9

Value for Money Assessment of a Wage Supplement Scheme Aimed to Address Distress Induced by the Pandemic Josette Caruana and Mary Jane Buttigieg

9.1   Introduction The Covid-19 pandemic has had drastic effects all over the world. Many lives were lost, and, to contain it, governments had to implement quarantines and social distancing, and some governments had to even put their country into lockdown. The extent and speed of the collapse in global activity was unlike anything that was experienced before (Gopinath, 2020). From the last financial crisis of 2008, countries have learnt two lessons. Firstly, governments should act fast to support those businesses in distress and to safeguard jobs. Secondly, any measures and schemes issued to aid businesses should target a broad range of beneficiaries, because the broader J. Caruana (*) Department of Accountancy, Faculty of Economics, Management and Accountancy, University of Malta, Msida, Malta e-mail: [email protected] M. J. Buttigieg KPMG Malta, Pieta, Malta © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 G. Dabbicco et al. (eds.), Public Sector Accounting, Financial Accountability and Viability in Times of Crisis, Public Sector Financial Management, https://doi.org/10.1007/978-3-031-04745-9_9

215

216 

J. CARUANA AND M. J. BUTTIGIEG

the range the better the possibility of shortening the economic crisis. Governments across the globe launched various economic assistance packages, which included tax deferrals, loan guarantees, quarantine leave grants, and furlough payments (PwC, 2020b). On an international level, there are some concerns of misspending surrounding these schemes, since the funds were delivered immediately without focusing much on fraud and customers’ errors, since that would have come at a cost that can cause irreversible economic damage (Alexander, 2020). Now that the urgency seems to have subsided, there is a need for such schemes to be audited, in order to reassure taxpayers that their money is being put to good use. Having said this, one should note that these schemes might have alternative objectives. For example, the JobKeeper programme in Australia was set up to cushion the blow of the pandemic on firms, and was targeted at those whose revenue was set to decline by 30% or 50% compared to the previous year. A Treasury report showed that, during the first six months of the programme, more than one-third of the funds had gone to businesses whose turnover had actually increased during the period. The Treasury argued that revenue growth did not mean they were unaffected by the pandemic, and that the scheme helped support economic output. JobKeeper was specifically designed to enable businesses to adapt and stay open, and not as a furlough scheme. There was no mechanism to claw back payments because this would have reduced the overall level of activity and muted the recovery. According to the Treasury, JobKeeper saved more than 700,000 jobs, making economic recovery possible (Rutter, 2021). An island state with minimal natural resources, the economy of Malta is heavily dependent on services, namely, tourism. In March 2020, in order to contain the pandemic, Malta started implementing the necessary quarantines, social distancing, and closure of certain businesses and schools. The one international airport on the island was closed on 21 March 2020, blocking incoming tourism, and immediately stalling all forms of related activity affecting transport, entertainment, and the hospitality industries. Private industry that had heavily invested in the hotel sector was in distress. The reaction of the Maltese Government was immediate, and it issued a mini budget with a number of measures to encourage the retention of employees and improve cash flow and liquidity concerns that local businesses were facing (PwC, 2020a). This mini budget offered a package of € 1.8 billion, which was around 12.9% of Malta’s Gross Domestic Product in 2019. The package included the wage supplement scheme, with the main objective being to avoid an increase in unemployment (PwC, 2020b).

9  VALUE FOR MONEY ASSESSMENT OF A WAGE SUPPLEMENT SCHEME… 

217

In June 2020, the Maltese Government issued a plan to regenerate the economy. This plan included several new measures to ease the impact on those businesses that were mostly affected by the pandemic, for example, rent refund, electricity bill refund, and the waiver of business licences. Some existing initiatives, like the wage supplement scheme, were extended with some amendments (Government of Malta, 2020). In October 2020, the Government’s annual budget for 2021 confirmed the continuation of the wage supplement scheme up to March 2021. For those businesses that suffered the most due to the pandemic, this was again extended until the end of 2021 (Diacono, 2021). Under the wage supplement scheme, the Government paid employers an amount of money for every employee on their payroll, on condition that this money was passed on to the employees in lieu of their normal wages. The objective of the Government was to incentivise employers not to fire their employees, so that after the pandemic, it would be easier for businesses to resume economic activity. The objective of the wage supplement scheme is the same as, for example, furlough pay, that is, job retention. The difference is that with furlough pay, the employer would claim a percentage of wages cost. In any case, the scheme involves the application of public funds. Assurance about the proper handling and distribution of public funds is a matter of public concern. This chapter presents a study on the Covid-19 wage supplement scheme given by the Maltese authorities, namely, Malta Enterprise (ME), to those businesses that were mostly impacted by the pandemic. This study focuses on the hotel sector, because this was one of the most negatively affected sectors (refer to Fig. 9.1—the Hotel sector is part of “Wholesale and retail, Transportation & Accommodation”) due to the closure of airports in Malta and abroad, and the restriction to travel imposed by countries which resulted in less tourism on a global scale. More specifically, the objectives of the study are: 1. To describe the objectives and the context in which the Covid-19 wage supplement scheme was being provided; 2. To identify the resources dedicated by ME to the scheme and assess its economy; 3. To assess the efficiency of the resources dedicated; and 4. To analyse the effectiveness of the wage supplement scheme, as also reflected in the level of satisfaction expressed by the beneficiaries.

218 

J. CARUANA AND M. J. BUTTIGIEG

Chart 1.3

Contribution to Growth in Gross Value Added percentage points Gross Value Added

Arts Entertainment and Recreation Public admininstration, education & human health Professional, scientific and technical activities Real estate activities Financial and Insurance activities Information and Communication Wholescale and retail, Transportation, & Accomodation* Construction Manfacturing Mining, Quarrying, Electricity and Water Agriculture and fishing

–6

–4 2020 Jan-June

–2

0

2

4

6

8

2019 Jan-June

* Includes food and services activities Source: National Statistics Office

Fig. 9.1  The negative effect of the pandemic on the Gross value added (GVA) for accommodation. (Source: The Economic Survey October 2020, pg. 8)

The major limitation of this study is that it focuses on just one scheme, namely, the wages subsidy scheme, from the various ones launched by the Government of Malta in order to tackle the negative impacts of the pandemic. Furthermore, this study focuses on one sector that benefited from the wage supplement scheme, that is, the hotel sector, as hotels were the most affected by the pandemic, and tourism is one of the most important industries of the Maltese economy. The chapter proceeds by first presenting more details about the Wage Supplement Scheme as operated by the Maltese Government. The literature review covers operational audit and value for money (VFM). After describing the methodology employed, the findings are presented and discussed. The results show that the operator of the scheme (ME) realised from the outset that some economy needs to be sacrificed for the sake of effectiveness. If the scheme was delayed in order to plan and implement controls from the outset, it may have been too late to avoid job redundancies.

9  VALUE FOR MONEY ASSESSMENT OF A WAGE SUPPLEMENT SCHEME… 

219

9.2  The Covid-19 Wage Supplement Scheme The wage supplement scheme was introduced in the Maltese economy to help businesses survive the Covid-19 pandemic. The scheme aimed to safeguard jobs by providing employees with a basic wage. The funds were given to the employers, who in turn were obliged to forward them to the employees. It was up to the employer to decide whether to continue paying the employees their full pay and retain the supplement received to compensate for the cost, or to stop paying normal wages and pass on the supplement, in full, to the employees. This simplified the administrative process of the funds (ME, 2020b), but the question about whether these funds were correctly passed on to the employees is pertinent. However, this compliance issue is beyond the scope of this study, and could be the subject of future research. The funds were not available to all employers, but only to those sectors that were mostly disrupted due to the Covid-19 pandemic. The funds were divided into four different periods, namely, March–June 2020; July– December 2020; January–March 2021; and April–December 2021. For each period, there was a change in those eligible for the funds and the amount of the entitlement (ME, 2020b). At first, eligibility for the scheme depended on the NACE code1 of the employer’s activity. The ME published lists categorising NACE codes into those drastically affected by the pandemic (e.g., those businesses that had to suspend operations due to an order by the Superintendent of Public Health) and those otherwise adversely affected. The March to June 2020 wage supplement was available to full-time and part-time employees (or self-employed) engaged within such sectors. The maximum monthly wage subsidy amounted to € 800,2 and was reduced pro-rata (according to hours worked) for part-time employees (ME, 2020b). The March to June 2020 wage supplement was only intended to cover a person’s main source of income; therefore, those employees in receipt of a government pension and students receiving a stipend, were not eligible (ME, 2020b). The July to December 2020 wage supplement was adjusted to continue supporting the hardest hit sectors (e.g., tourist accommodation, travel 1  A NACE code is a statistical classification of economic activities in the EU. NACE is the abbreviation for Nomenclature statistique des activités économiques dans la Communauté. 2  The national minimum monthly wage in Malta amounted to € 777  in 2020 and € 785 in 2021.

220 

J. CARUANA AND M. J. BUTTIGIEG

Table 9.1  Wage supplement according to the percentage drop in sales Percentage drop in sales 55% or greater 45% up to 54% 35% up to 44% 25% up to 34% 10% up to 24% Increase in revenue up to 9% drop in sales

Wage supplement monthly rate (gross) – full timers

Wage supplement monthly rate (gross) – part timers & casuals

€ 800 € 640 € 480 € 320 € 160 €0

€ 500 € 400 € 300 € 200 € 100 €0

Source: ME (2021a)

agencies, language schools, event organisers and air transport) and to provide tapering aid to other sectors (such as, personal services) (ME, 2020a). Furthermore, pensioners and students receiving a stipend, who were registered with JobsPlus3 as employed since 9 March 2020, became eligible (ME, 2020a). The last update of the wage supplement scheme announced in the 2021 Budget completely changed the eligibility criteria. In order to continue being eligible, the business had to show ME that its turnover had actually decreased from 2019 to 2020 (see Table 9.1). This new scheme allowed new employees who replaced those that had resigned voluntarily, to be eligible for the wage supplement, subject to a number of conditions, including the fact that the number of employees receiving the wage supplement should not exceed the number as of 29 May 2020. On 10 March 2021, to combat the new pandemic wave, some businesses were required to shut down. Those employers or self-employed who were not already benefiting from the wage supplement, could apply for the maximum assistance until the business was allowed to open again. Moreover, those businesses that were not ordered to close and were already benefiting from this scheme could continue benefiting according to the new criteria of the January 2021 scheme (ME, 2021b). This section has described the context within which the role of operational audit processes shall be explored. The following section provides a literature review about operational auditing and its relevance for accountability of public funds. 3

 JobsPlus is a Government authority that regulates employment.

9  VALUE FOR MONEY ASSESSMENT OF A WAGE SUPPLEMENT SCHEME… 

221

9.3  Operational Auditing: A Literature Review Public audit is important in a democratic society. Auditors assist public sector entities to attain accountability, improve performance, and give confidence to citizens and stakeholders (IIA Global, 2012). An important objective of public sector auditing is to inform the public about whether public resources are managed responsibly and effectively to attain the intended results. VFM auditing is sometimes called performance auditing or operational auditing. It is normal practice that a supreme audit institution (SAI) allocates the majority of its time to conduct operational auditing (Kells & Hodge, 2009). But operational auditing involves ambiguous concepts and there is no straightforward definition. For example, the International Organization of Supreme Audit Institutions (INTOSAI) (2019) defined operational auditing as an: independent, objective and reliable examination of whether government undertakings, systems, operations, programmes, activities or organisations are operating in accordance with the principles of economy, efficiency and effectiveness and whether there is room for improvement. (ISSAI 300, n.d.: par. 9)

Kells and Hodge (2009, p.  50) further elaborate that operational auditing is: an activity in which an outsider is authorised to discover, synthesise and publish information that would otherwise be confidential.

SAIs are external auditors, deemed to be ‘outsiders’. In the public sector, the SAIs provide parliament with an independent assurance and opinion regarding the economy, efficiency, and effectiveness (referred to as the 3E’s) of government activities. However, operational audit can also be carried out by Internal Auditors. In such a case, the results are not necessarily published, but the underlying objectives are still to improve the performance of the organisation (Barzelay, 1996; Marchi & Bertei, 2016) and achieve greater VFM (Dittenhofer, 2001). 9.3.1   Objectives of Operational Audits Operational auditing is a type of audit that is used to evaluate the 3E’s. It goes beyond the verification of financial controls and compliance with policies, since it looks for the existence of management measures.

222 

J. CARUANA AND M. J. BUTTIGIEG

Operational auditing requires flexibility, imagination, and analytical skills to provide entities with innovative recommendations (KPMG South Africa [not dated], n.d.). In an operational audit, two important questions must be answered. The first question is whether things are being done in the right way. This question is concerned with whether policy decisions have been carried out properly, that is, whether the executive has observed the relevant rules and requirements in its decisions and whether the executed activities are the most appropriate. Thus, it is concerned with the economy and efficiency of operations. The second question is whether the right things are being done, and this is concerned with the effectiveness of the operation. This question widens the scope of analysis as it focuses on “whether the adopted policies have been suitably implemented or whether adequate means have been employed” (INTOSAI, 2004: par 1.4). Operational audits also promote accountability and transparency. Accountability is advocated through analysing whether there have been any shortfalls in the laws or regulations, or in the implementation, that made it challenging to achieve the specified objectives. It assesses whether the taxpayer has received VFM and if the decisions taken have decreased the probability of the objectives from being attained. Transparency means providing the taxpayers, the media, and Parliament with an understanding of the results and implementation of different government activities (INTOSAI, 2019). Three aspects of performance that should be reviewed are economy, efficiency, and effectiveness. The 3Es are better evaluated with respect to the three phases of production and/or delivering process of public service/activity as illustrated in Fig. 9.2. 9.3.2  Economy According to the UK NAO (the National Audit Office of the United Kingdom) (n.d.), economy is about obtaining resources at the lowest cost possible, that is, spending less. Economy wholly depends on the inputs (resources) that are needed to offer a specific good or service. These resources can either be physical inputs or human inputs (Marchi & Bertei, 2016). Moreover, the resources must be available on time, while having the appropriate quantity and quality (INTOSAI, 2019). To determine if the right quantity was acquired, the auditor must analyse if management outlined its needs clearly and quantitatively. While doing so, the requirements to establish the alternative resources available

9  VALUE FOR MONEY ASSESSMENT OF A WAGE SUPPLEMENT SCHEME… 

Commissioner /Service Provider

223

Other influences

Objectives Processes Resources

Outputs

Inputs Economy

Minimising the cost of resources used while having regard to quality

Efficiency

Relationship between outputs, e.g. services, and the resources used to produce them

Outcomes

(intended and unintended)

Effectiveness

Extent to which objectives are achieved and the relationship between intended and actual impacts of a service

Cost-effectiveness The optimal use of resources to achieve the intended outcomes

Fig. 9.2  The relationship between the 3 E’s. (Source: Modified from UK NAO [the National Audit Office of the United Kingdom], n.d.)

at lower cost should be identified (Khan, 1988). Economy can also include the opportunity costs of such projects that, in some circumstances, must be evaluated by a VFM audit (Levin & Mcewan, 2001). To address economy with regards to the wage supplement scheme, one must make sure that the cost of implementation and the spending of funds were kept to a minimum, and that the opportunity costs of such scheme were taken into consideration. The findings in Sect. 9.5.2 of this chapter describe how the scheme was implemented, operated, and controlled. The interviewees were also asked to identify what could have been the costs incurred if the wage supplement scheme had not been implemented. 9.3.3  Efficiency Efficiency is defined as the relationship between the resources employed and the outputs produced in terms of timing, quality, and quantity. It is all about getting the most from the available resources, thus, spending well (Public Accountant, 2015). Efficiency can be achieved by producing the maximum number of outputs from the available resources or having the minimum input for any given quantity and quality of services or goods provided. Thus, the underlying management objective is to increase productivity and lower unit costs (KPMG South Africa, n.d.).

224 

J. CARUANA AND M. J. BUTTIGIEG

An entity is efficient when maximising productivity, which is achieved when additional outputs of superior quality are produced utilising the same quantity of resources or less (European Court of Auditors, 2017). Daujotaite and Mačerinskienė (2008) stated that efficiency is measured by comparing achieved productivity, output quantity, and quality with a preferred target, norm, or standard. However, predetermined standards are difficult to establish, especially in the public sector. Thus, the auditor must work with management and internal auditors of the audited entity in order to ascertain realistic and attainable standards (Flostoiu et al., 2012; Khan, 1988). According to Khan (1988), such standards can be developed by comparisons with past performance or with similar entities operating in the same environment. But the pandemic presents an unprecedented context on a global scale, making comparative targets quite impossible. This exacerbates the fact that the assessment of efficiency in the public sector is a challenging task (Curristine et al., 2007) because the public sector has several non-financial objectives and the output is not usually sold on the market. Information on pricing may not be available, and the output or results cannot be quantified (Mandl et al., 2008). It is important for a public authority to be cost-effective and to be able to attain certain results at a reasonable cost. This is the reason why efficiency has to do with economy and often it is difficult to distinguish between the two. The efficiency of the wage supplement can be assessed by analysing how efficient ME was with regards to its application; that is, whether the scheme was easy to apply for, and whether the wage supplement was provided sufficiently quickly. This basis of operationalizing efficiency may seem contradictory because an easy and quick application exposes the operating entity to a higher risk due to less oversight and controls, leading to misuse and waste of funds. However, the findings show that such rapid intervention was necessary. The operators of the scheme had recognised from the outset that a degree of economy and efficiency had to be sacrificed to achieve effectiveness. 9.3.4  Effectiveness Effectiveness is the most important part of a VFM audit, because it focuses on the attainment of the objectives of the entity (English et  al., 2010; INTOSAI, 2004); that is, it is concerned with the relationship between

9  VALUE FOR MONEY ASSESSMENT OF A WAGE SUPPLEMENT SCHEME… 

225

the expected and actual results. This concept links the inputs or outputs to the final objective, that is, the outcome. An entity may be obtaining resources economically and using them efficiently, however, it may fail to meet its objectives (Khan, 2005). This concept can be deemed complicated to assess since auditors must take into account the quality of the output, whilst also assessing whether the entity has achieved the goals and objectives for which the taxpayers’ money have been utilised (Alwardat et  al., 2015). The outcome is the result external to an organisation and not the result of the inputs within the organisation (Khan, 1988). According to INTOSAI (2004), an effectiveness audit involves two main questions, namely (a) whether the policy objectives were achieved, and (b) whether the effectiveness is a result of the policy pursued. For an assessment to be carried out on the extent to which the outcomes were achieved, the objectives must be developed in a way that makes it possible to carry out such an assessment. This can be a challenging task if an organisation’s objectives are contradictory or ambiguous. It is mostly the case with public activities, as policies may be related to other policies, and this makes it difficult to evaluate them (Grönlund et  al., 2011; Broadbent & Laughlin, 2003). Problems of jointness occur when policies are closely related, creating a challenging task for the auditor to establish which policy is responsible for meeting the outcomes (Khan, 1988). To analyse the extent to which a policy was responsible for achieving the outcomes, the auditor must do a comparison. Preferably, the auditor would compare the “before and after” the policy was implemented, while having a control group that is not influenced by the policy. In practice, this type of comparison is difficult to conduct since comparative information is not available, especially in the unique circumstances as presented by the pandemic. Instead, the auditor can analyse the reasonableness of the assumption on which the activity is based. Usually, the auditor would end up evaluating the extent of the objectives attained, the level of performance or the target groups reached (INTOSAI, 2004). The public sector is influenced by several external or environmental factors, such as institutional, political, and country-specific factors. Since most of the government activities arise from an electoral manifest, at times, efficiency and effectiveness may be compromised in order to stay in line with the political campaign promises. Moreover, in certain instances, political interference may cloud management’s judgement and may act as

226 

J. CARUANA AND M. J. BUTTIGIEG

an obstacle to develop VFM focused cultures (Prowle et  al., 2016). Another significant factor is the economic situation of the country, over which management has limited control. Moreover, it can prove too costly for an organisation to provide a service in the most effective manner (Khan, 1988). Furthermore, the auditor may also need to evaluate the impact that the organisation is having on society, thus s/he must also collect information on the stakeholders of the organisation, especially when their actions will have a direct impact on the organisation (INTOSAI, 2004). This can be performed by measuring the level of satisfaction that the stakeholders are getting. The effectiveness of the wages supplement scheme can be assessed by analysing whether the main objective was achieved, that is, to safeguard employment, and also by assessing the level of satisfaction of the beneficiaries of the scheme. The beneficiaries of the scheme are the Hotels. The effectiveness of the scheme shall be assessed by examining employment levels and labour costs of the hotels, in order to identify fluctuations. Furthermore, the scheme is effective if the Hotels are satisfied with it. Was it useful for them in order to continue operating? Would they have changed anything with regard to the scheme?

9.4  Research Methodology A preliminary interview was carried out with an official from the Maltese SAI in order to confirm the validity of this research. The Maltese SAI carries out a number of VFM audits each year, either on request from Parliament or on its own initiative. The official interviewed confirmed that, due to other commitments, the SAI had not yet considered carrying out a performance audit on the Wage Supplement Scheme. However, the official approved the research objectives and the proposed methodology for this study. Since the objectives of this study are of an exploratory nature, the research methodology is mostly qualitative (Creswell, 2014). This methodology has some limitations of bias and validity, reliability, and generalizability (Saunders et al., 2016). Therefore, to complement the qualitative aspect of this study, an element of quantitative research was used so that the study is supported by the participation of both the operators of the scheme and the beneficiaries, that is, the hotels. The mixed methodology employed consisted of a set of semi-structured interviews with the operators of the scheme and an online questionnaire with the hotels as beneficiaries.

9  VALUE FOR MONEY ASSESSMENT OF A WAGE SUPPLEMENT SCHEME… 

227

9.4.1  Interviews During the period December 2020 and January 2021, interviews were carried out with the operators of the wage supplement scheme, namely, officers within ME, the Ministry for the Economy, Investment and Small Business (MEIB), and the Ministry for Energy, Enterprise, and Sustainable Development (MEESD). These three officers were all involved in the wage supplement scheme and thus, knowledgeable about it. Another interview was conducted with the Malta Hotels and Restaurants Association (MHRA), as the representative of the Hotel sector. The decision to interview these research participants was based on the aim to gather in-depth knowledge about the operation of the scheme. Table 9.4 in the appendix shows the design of the interview questions, and how these questions aimed to elicit data pertaining to the research questions. 9.4.2  Questionnaire Table 9.4 in the Appendix also includes a description of the questionnaire that was sent to the Hotels. Due to the bias that the scheme operators might possess, it was considered necessary to obtain the views of hoteliers regarding efficiency and effectiveness. A questionnaire was used to capture the participation of a large number of hotels. The target population consisted of 3-star, 4-star, and 5-star hotels. A list of registered hotels in Malta, including their contact details, is available from the Malta Tourism Authority (MTA) website. The questionnaire was sent to the whole population totalling 93 hotels (refer to Table 9.2). The questionnaire was web-based and uploaded via Survey Monkey®. It was distributed in January 2021 and the responses were collected by February 2021. The questionnaire was completed by 37 hoteliers (39.78%). Response rates varied across the different hotel categories as shown in Table 9.3. Assuming a 95% confidence level, there is a maximum margin of error of ±12.57%. 9.4.3   Research Limitations A limitation in the interviews is that the respondents were more conscious of what was being asked, hence, this could have introduced some bias in their answers in order to provide a nice picture. Ministry officials were also interviewed, and such persons may be biased in their answers for political

228 

J. CARUANA AND M. J. BUTTIGIEG

Table 9.2  The population Hotel stars

Population

5-star hotels 4-star hotels 3-star hotels Total

% of total population

15 40 38 93

16.13 43.01 40.86 100

Table 9.3  Response rate across hotel categories Hotel category 5-star hotels 4-star hotels 3-star hotels Total

Population

Responses

15 40 38 93

13 20 4 37

Response rate (%) 86.6 50 10.50 39.78

reasons. The inclusion of the hotels themselves, as research participants, was partially an attempt to mitigate this risk. The main limitation of the quantitative research is that some of the respondents may have misunderstood the questions and/or filled the questionnaire haphazardly. In order to reduce this risk, more than 50% of the population of hotels were contacted and asked whether they would be willing to fill in the questionnaire face-to-face. None of the hotels accepted, and no reasons were forthcoming.

9.5   Findings and Discussion The Hotels’ employment and turnover data collected from the questionnaire are presented in Figs. 9.3, 9.4, and 9.5. The hotels report a drastic decrease in occupancy during the months July to September, when comparing 2020 with 2019. The number of employees also decreased (Fig. 9.3), but was constant during the summer of 2020 (Fig. 9.4). Labour cost as a percentage of turnover also decreased from 2019 to 2020 (Fig. 9.5), highlighting the severe reduction in turnover experienced by hotels due to the pandemic. The Appendix provides further details underlying Figs. 9.3, 9.4, and 9.5. The overall aim of this study is to present a VFM analysis of the Covid-19 Wage supplement scheme for the Hotel Sector. To assess the

9  VALUE FOR MONEY ASSESSMENT OF A WAGE SUPPLEMENT SCHEME… 

Average Employees During Summer 2019 and 2020 45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00%

0 – 25

26 – 50

51 – 75 2019

76 – 100 101 – 125 126 – 150

150 +

2020

Fig. 9.3  Average number of employees during summer 2019 and 2020

Average Employees During Summer 2020 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00%

0 – 25

26 – 50

51 – 75 Jul-20

76 – 100 101 – 125 126 – 150 Aug-20

Sep-20

Fig. 9.4  Average number of employees during summer 2020

150 +

229

230 

J. CARUANA AND M. J. BUTTIGIEG

Mean of Labour Cost as a Percentage of Turnover for Summer 2019 and Summer 2020 70% 60% 50% 40% 30% 20% 10% 0%

July

Aug 2019

Sep 2020

Fig. 9.5  The mean of labour cost as a percentage of turnover during summer 2019 and 2020

economy, efficiency, and effectiveness of the scheme, one must first identify the objectives, application process and funding of such scheme. 9.5.1   Objectives, Application Process and Funding of the Wage Supplement Scheme The objective of the wage supplement is to safeguard jobs by providing the employees with a basic wage. This is in line with the findings since all the interviewees mentioned that the objective is to safeguard employment so businesses could remain functional, and the knowledge and skills of such employees would not be lost. Besides avoiding a sharp increase in unemployment benefits, the interviewees for this study also highlighted another objective that relates to the humanitarian and social aspect, for example, the negative psychological effects of becoming unemployed. The application process of the wage supplement is different from the other schemes that ME offers. This was ME’s biggest scheme offered to date. Furthermore, all of ME’s previous schemes were on a reimbursement basis, where the applicant would have to show proof of incurring the cost and then ME will reimburse the applicant; however, with the wage supplement, no proof was required as ME provided the funds every month.

9  VALUE FOR MONEY ASSESSMENT OF A WAGE SUPPLEMENT SCHEME… 

231

It appears that ME had adequate controls when considering the fact that the scheme was established very quickly. On a monthly basis, applicants were required to provide their NACE code and the details of their employees who were entitled to the supplement. The validity of these details was double-checked with the respective government authorities. However, there is always room for improvement. In fact, as from 2021, the ME was in a position to introduce additional controls to confirm eligibility for the wage supplement. The new eligibility criteria for the wage supplement take into consideration the loss in revenue when compared to previous years. This new control could only have been introduced in 2021 since the effect of the pandemic on the revenue of businesses could only be observed after 2020. As an additional control, this new criterion is also being operated with the support of the VAT department, that confirms the declaration of revenue by the applicants. As the wage supplement is a new scheme, a VFM audit has never been carried out. “One should check if, with the wage supplement, we retained the level of quality service, that we were accustomed to prior to the pandemic; and if it was retained then we would have achieved VFM” (MEESD official). The interviewees currently responsible for the wage supplement, that is the ME and MEESD officials, stated that for them it is still early to conduct a VFM audit. However, a VFM audit is an ongoing process and can be initiated so there would be assurance that the wage supplement is operating in an economic, efficient, and effective way. Hence, this will help identify if there are deficiencies and corrective actions that can be taken immediately. The wage supplement was partly financed by the European Union (EU) through SURE.4 Therefore, even EU authorities would have an interest to know whether the wage supplement was VFM. Up to the time of this research, ME had adhered to the monthly budget, showing that ME was operating the wage supplement economically. 9.5.2   Resources and Economy Economy is concerned with obtaining the resources at the lowest possible cost, in a timely manner and having the appropriate quantity and quality (Marchi & Bertei, 2016; INTOSAI, 2019). According to the UK NAO (n.d.) economy is concerned with spending less. Therefore, like any other 4  SURE is an EU instrument for temporary Support to mitigate Unemployment Risks in an Emergency.

232 

J. CARUANA AND M. J. BUTTIGIEG

scheme that the government offers, one must make sure that it involves responsible spending of funds and implementation costs. Furthermore, economy is secured by controls that reduce the risk of fraud and errors. According to the ME and MEESD officials interviewed, the ME acted responsibly with implementation costs because it did everything in-house and expenses were kept to a minimum. Even the spending of the funds was kept to a minimum since ME was checking the NACE codes to make sure that applicants were eligible. However, the interviewee from the MEIB feared that there might have been some that were supposed to get the wage supplement but did not get it and there may have been others that got more than they should have. This risk reduced the quality of the wage supplement. According to INTOSAI (2004, 2019), economy is achieved when the quality and quantity are optimal and appropriately coordinated, hence, the reduction in quality might have reduced the economy of the scheme. Khan (1988) stated that an assessment that is made regarding economy is whether the resources have been procured in the right amount, at the right time and at the right cost. The wage supplement was implemented quickly for it to be at the right time, to the detriment that ME had to limit its controls. According to the ME official, “it would not have been more economic had ME focused more on controls rather than hurriedly implementing the scheme, because, by then, most of the businesses would have closed down, and the wages scheme would have missed its objective right from the outset”. Now that the scheme has been established and operating for over one year, ME is in a better position to implement and operate controls over the system that reduce the risk of fraud and errors, and thus enhance the economy of the scheme. The fact that ME is involving a third party to assist in the audit of the scheme promises to be a positive move in this direction. Opportunity costs are also included in the evaluation of economy (Levin & Mcewan, 2001). The wage supplement had several opportunity costs that were identified by the interviewees. Firstly, the economy would have stagnated, as businesses would have been forced to close. Consequently, post-Covid, the Maltese economy would have a problem to recover and for businesses to get the knowledge and skills that they lost from their employees. Another problem that this would have created is that unemployment would have increased significantly, which means the government would have to pay more unemployment benefits and thus the government would be giving funds to the unemployed without helping

9  VALUE FOR MONEY ASSESSMENT OF A WAGE SUPPLEMENT SCHEME… 

233

the economy now or in the future. As already mentioned, the interviewees highlighted the humanitarian and social costs related to the psychological effects of unemployment—the wage supplement scheme aimed to avoid such costs as well. In order to keep the hotels in Malta operating and avoid closure, the wage supplement was needed. This can be seen from Fig.  9.5, which shows that labour costs as a percentage of turnover increased, in tandem with a decrease in percentage occupancy and hence a decrease in turnover. Hence, this scheme was needed for the economy not to stagnate and, post-Covid, the economy could recuperate more quickly. 9.5.3  Efficiency Efficiency is concerned with spending well, that is, getting the most from the available resources (Public Accountant, 2015). Efficiency is whether the outputs have been maximised with regards to quantity, quality, and timing of the resources. According to all the interviewees in this study, the wage supplement was provided sufficiently quickly to minimise as much as possible the negative impact on the hotel sector and on the economy overall. Moreover, the officer from MHRA believed that Malta acted much more quickly than other countries to help those sectors that were badly affected by the pandemic. Given the fact that ME had never administered such a huge scheme, it seemed an excellent idea to administer it online. This also helped with the efficiency of the scheme as stated by the MEESD officer, and it increased the quality of the scheme while maximising output. According to the hotels participating in the survey, ME was initially very efficient when handling their application and over time it became more efficient (Tables 9.5 and 9.6 in the Appendix). The hotels tended to agree that it was relatively easy to apply for the subsidy and that it was always received on time. The hotels had not encountered any complications when applying for the wage supplement and did not think that ME could have been more efficient. These results show that even the beneficiaries find that ME was efficient in the implementation of the wage supplement. Furthermore, there are no significant differences in the mean rating scores of the different hotel categories regarding efficiency (see Table 9.7 in the Appendix). Therefore, one can conclude that the different hotels shared a similar positive opinion on efficiency. The only exception noted

234 

J. CARUANA AND M. J. BUTTIGIEG

related to the efficiency in handling of applications. The 3-star hotels believed that ME could have been more efficient when handling their application, while the 4-star and 5-star hotels disagreed, meaning that they believed that ME was efficient enough. This result could be because hotels had to have available the information required by ME and, as a participant mentioned in the questionnaire, this was time consuming. Furthermore, it is expected that the more stars a hotel has, the more technologically organised it would be, and might have had most of the information required by ME at hand. This could be the reason why 5-star and 4-star hotels disagreed that the ME could have been more efficient when handling applications, while 3-star tended to agree. According to INTOSAI (2004), a factor to evaluate efficiency is cost effectiveness, that is, the relationship between the activity cost and the output. ME stated how everything was done in-house which means that it did not incur any extra costs as the system was done by the IT department of ME. ME did not hire any extra employees, which implies that the cost for ME remained stable. However, as stated by the MEIB official, “it is difficult to evaluate the efficiency of this scheme. It is fairly new and different from other schemes, therefore, there are no benchmarks to compare it with”. This is consistent with the views of Curristine et al. (2007) that the assessment of efficiency in the public sector is a challenging task. According to Mandl et al. (2008) this is because the public sector deals with many non-financial objectives that are difficult to measure, such as economic, social, and political objectives. Furthermore, the pandemic presented a unique context at a global level, making comparatives even more elusive. The hotels that participated in the questionnaire were overall satisfied.5 One must note that the hotels did not have any benchmarks to compare the efficiency of this scheme with either. However, the hotels seemed to appreciate that this scheme was implemented rather quickly and that ME had tried its best. On the other hand, most hotels believed that ME should have better communicated its plans with them, and discussed the rules of the wage supplement scheme. Time was of the essence because delays may have led some hotels to take the wrong long-term decisions. 5  Refer to the Part 2 of the Appendix, namely, Tables 9.5, 9.6, and 9.7, and Figs.  9.6 and 9.7.

9  VALUE FOR MONEY ASSESSMENT OF A WAGE SUPPLEMENT SCHEME… 

235

9.5.4  Effectiveness Effectiveness is concerned with certifying that the planned objectives, policies, and results have been achieved (UK NAO, n.d.). Effectiveness is perceived from the point of view of both the providers of the scheme and the beneficiaries, that is, the hotels. According to Khan (2005), the most important aspect of a VFM audit is effectiveness, as it is not sufficient to be economic and efficient, and then the scheme fails to meet its objectives. As noted by the interviewees, the wage supplement helped hotels to retain their employees, which was the main objective of the scheme. However, one must note that there still were some layoffs. It was also mentioned by the ME officer that “the wage supplement helped the businesses to continue operating and this was a secondary objective of the wage supplement scheme”. According to the hotels participating in the questionnaire (Table 9.8 in the Appendix), the subsidy has helped them to continue operating and to retain employees. Moreover, the participants tended to agree that it was given in the shortest period that allowed the hotels to suffer the least. The participants did not expect the subsidy to be greater (Table 9.9 in the Appendix). This result is expected because hoteliers did not have any prior subsidy to compare it with and thus, they would have been pleased with any amount given by the government. The effectiveness statements were also analysed according to the category of the hotels using the Kruskal Wallis Test (Table  9.10 in the Appendix), resulting in no significant difference in the mean rating score of the different hotel categories for such statements. One can conclude that the different hotels shared a similar opinion on these statements. The decrease in employment noted in Fig.  9.4, does not necessarily mean that the wage supplement was ineffective, but it could mean that in 2019 hotels had seasonal employees, that is, employees who are only employed for the summer (like students) when hotels are running at full occupancy. However, because of the pandemic, the hotels did not need such employees; or if they were needed, they could not pay their wages as at that time the scheme was not open for replacement of employees. Additionally, one must note that if there were a substantial number of employees that were made redundant, this had happened before July 2020, as from Fig. 9.4, one can see that employees in the hotel industry remained fairly stable during the summer months.

236 

J. CARUANA AND M. J. BUTTIGIEG

The findings show that the government and ME focused more on the effectiveness of the scheme rather than the economy part, because they did not focus much on controls that would aid in spending less. If they had, then most businesses would have closed by the time the wage supplement would have been received.

9.6  Conclusion The subject of this study was the Covid-19 wage supplement scheme. The overall aim was to assess the VFM of the scheme within the hotel industry. The wage supplement scheme is an initiative taken by the Government of Malta, with the aim to retain employment and aid business during the difficult time of the Covid-19 pandemic. Secondary objectives relate to the humanitarian and social aspect. The hotel industry is very important for the Maltese economy, and was the worst hit by the pandemic. This study found that both the hotel occupancy and the average number of employees decreased from summer 2019 to summer 2020. The decrease in turnover was so bad that, in spite of having less employees, the hotels still experienced an increase in the labour costs as a percentage of turnover. The wage supplement scheme is operated by ME and partly financed by the EU. The employer had to apply for the supplement on behalf of the employees. ME had controls in place to cross check what was being claimed in the applications. From this study, it was concluded that the wage supplement is being operated economically and this was especially the case in the implementation phase. Significant effort has been made with the new scheme to also spend less in terms of wage supplement. It is difficult to assess efficiency as this is a unique scheme and thus, no benchmarks exist. In spite of this, the hotels have a good impression about the overall efficiency of the scheme. It seems that the higher-category hotels are better equipped to satisfy the administrative requirements than the other hotels. However, there is some room to improve efficiency since there was a lack of communication, especially at the beginning of the scheme. Lastly, it was concluded that the wage supplement is effective as it is achieving its main objective of retaining employment and thus, support business continuity. This is not just the perspective of the ME as the provider of the scheme. Even the hoteliers expressed their opinion that they

9  VALUE FOR MONEY ASSESSMENT OF A WAGE SUPPLEMENT SCHEME… 

237

would have floundered without it. The average number of employees still decreased from summer 2019 to summer 2020. But this could be due to seasonal employees, and it does not mean that the scheme was not effective. This study was concerned with examining the VFM of the wage supplement scheme within the hotel industry. This type of study contributes to enhanced transparency and accountability by ensuring that the taxpayers’ money is being used in an economic, efficient, and effective way. The overall limitation of the study is that the novelty of the wage supplement scheme makes assessment of efficiency quite difficult due to the lack of any existing benchmarks. This study concluded that the most important VFM principle of the wage supplement scheme is effectiveness, as the objectives of the wage supplement leaves a positive ripple effect on the economy. Hence, it was concluded that the wage supplement is VFM since it is meeting its objectives. However, this does not mean that nothing can be done to improve such a scheme, thereby, giving a higher level of VFM. Based on the findings of this study, it can be recommended that better communication between the providers of the scheme and the beneficiaries would enhance its effectiveness. Perhaps ME could create a formal platform where the beneficiaries can provide their feedback. Over time, the provider of the scheme would be in a better position to implement controls to reduce the risk of fraud and errors which would in turn enhance the economy of the scheme. The imposition of penalties could also act as a deterrent of fraud and abuse. Future research could investigate the compliance issue regarding whether the funds acquired by the employers were correctly passed on to the employees. Finally, it is deemed necessary for Government authorities, namely the SAI, to consider carrying out a VFM audit on such a scheme in all sectors of the economy. Deficiencies of the scheme would be identified and avoided should the scheme be needed again. The Government would be in a better position to design an improved wage supplement scheme which will in turn increase its VFM.

Appendix This Appendix is divided in two parts. The first part relates to Sect. 9.4 Research Methodology. The second part provides the statistical analysis underlying Sect. 9.5 Findings and Discussion.

2

1

RQ

Section A aimed at getting a better understanding of the wage supplement. All interview schedules included a question related to the objective of the scheme. The ME and the Ministry schedule contained questions relating to the funding of the scheme and VFM. Questions relating to the process of the wage supplement were included in the ME and MHRA interview schedule. The interview schedule of ME also included a question relating to the eligibility of hotels for the wage supplement Economy: Were the Section B relates to the economy of the wage costs of supplement. In this section, questions related to implementing the the implementation costs and controls were scheme controlled included in the ME and the Ministry interview and kept to a schedule. A common question in the interview minimum? Were schedules was about fraud. A question regarding opportunity costs of human resources required and the opportunity the scheme taken cost of such a scheme was included in the into consideration? interview schedule of ME and the Ministry, respectively

What are the objectives of the covid-19 wage supplement scheme? What was the context in which the scheme was provided?

Interview schedule (Interviews were carried out with the operators of the scheme, Government authorities, and the Association representing the Hotel sector)

Table 9.4  Operationalizing the 3E’s Analysis

N/A

Content analysis

Section A contained six multiple Content analysis choice questions regarding the Descriptive performance measurements of the statistics hotels of 2019 and 2020. These performance measurements included the percentage occupancy rate, average number of employees and labour costs as a percentage of turnover

Questionnaire (The questionnaire was sent to 93 Hotels, being the whole population)

Part 1: Relating to Sect. 9.4 Research Methodology

238  J. CARUANA AND M. J. BUTTIGIEG

4

3

Efficiency: Was the scheme implemented sufficiently quickly? Was it easily accessible? Effectiveness: Were the objectives of the scheme achieved? Did the beneficiaries find the scheme satisfactory?

Section C aimed to assess the efficiency aspect of VFM. All interview schedules had the same two questions, namely, (a) if such a scheme was provided sufficiently quickly and (b) if efficiency could have been improved The final section aimed to assess the effectiveness of the wage supplement. All interview schedules included a question on whether they believed it helped the hotel sector. The MHRA interview schedule included an additional question relating to any suggestion to improve such a scheme

Section B contained one five-point Likert-scaled question which presented a set of statements that were aimed at assessing the efficiency and effectiveness of the scheme The last section of the questionnaire consisted of an open-ended question which asked the respondent for further comments on how the scheme could have been improved and how ME could have been more efficient

Two non-­ parametric tests were conducted. The Friedman test was used to compare mean rating scores provided to several related statements. The Kruskal Wallis Test was used to compare mean rating scores between the three categories of hotels Content analysis

9  VALUE FOR MONEY ASSESSMENT OF A WAGE SUPPLEMENT SCHEME… 

239

240 

J. CARUANA AND M. J. BUTTIGIEG

Part 2: Relating to Sect. 9.5 Findings and Discussion  urther details underlying Figs. 9.3, 9.4 and 9.5 – concerning F occupancy, labour and turnover The percentage of hotel occupancy from the summer of 2019 to the summer of 2020 fell drastically. In 2019, the overall mean of hotel occupancies was above 90% (July  =  93%, August  =  94%, September  =  92%) while in 2020, the hotel overall occupancy mean was below 45% (July = 42%, August = 51%, September = 41%). This means that for July and August the hotel occupancy fell by more than half (51%) and for August it fell by 43%. This indicates that there was a drastic fall in revenue in 2020 when compared to the previous year. The average number of employees decreased from 2019 to 2020 (Fig.  9.3). This implies that hotels employed fewer employees during 2020 and therefore unemployment may have increased. However, when comparing the monthly employment levels as in Fig. 9.4, it can be observed that the employees in the summer of 2020 remained stable. This indicates that those who were employed were not made redundant, even though hotel occupancy had decreased relative to the previous year. Figure 9.5 depicts how the mean of labour costs as a percentage of turnover increased from the summer of 2019 to 2020, by approximately 15%. One may think that this is not such a drastic increase considering that hotel occupancy fell by an average of approximately 50%, which indicates that turnover might have fallen by a similar or a higher percentage. However, since the average number of employees from summer 2019 to summer 2020 also decreased, labour cost should be less than previous years. This fact accentuates the fall in turnover experienced by the hotels. Contrasting the Mean Rating Scores of the Various Efficiency Statements The Friedman test was used to analyse the efficiency statements. The statements were categorised into two. These are positively worded statements and negatively worded statements and thus, two Friedman tests were done. The analysis of this test included the extent to which the statements relate to each other and their mean rating scores which are shown in Tables 9.5 and 9.6. The p-value of both positively and negatively worded statements are above the 0.05 level of significance (0.215 and 0.655 respectively) showing that the statements are related, and the mean rating scores do not vary significantly. This can also be seen in the Error Bar Graphs, shown

241

9  VALUE FOR MONEY ASSESSMENT OF A WAGE SUPPLEMENT SCHEME… 

in Figs.  9.6 and 9.7. These graphs show what the actual mean rating scores of the statements would have been if all hoteliers had participated in this research, given a 95% confidence level. One can note that the error bars overlap. Table 9.5  Friedman test—positively worded efficiency statements Q

Statement

Mean

11a 11c 11d 11g

It was relatively easy to apply for the subsidy ME was very efficient when handling the application Over time, ME became more efficient when processing the application The subsidy was always received on time

4.11 4.32 4.27 4.08

p-value = 0.215 Range: 1 = Strongly disagree to 5 = Strongly agree

Table 9.6  Friedman test—negatively worded efficiency statements Q

Statement

Mean

11b There were complications when applying for the subsidy 11e ME could have been more efficient when handling the application

2.46 2.54

p-value = 0.655 Range: 1 = Strongly disagree to 5 = Strongly agree

The subsidy was always received on time

4.08

Malta Enterprise become more efficient when processing application

4.27

Malta Enterprise was very efficient when handling the application

4.32

It was relatively easy to apply for the subsidy

4.11

0 Error Bars: 95% CI

1

2

3

Mean Rating Score

Fig. 9.6  Positively worded efficiency statements error bar graph

4

5

242 

J. CARUANA AND M. J. BUTTIGIEG

Malta Enterprise could have been more efficient when handling the application

There were complications when applying for the subsidy

2.54

2.46

Mean Rating Score Error Bars: 95% CI

Fig. 9.7  Negatively worded efficiency statements error bar graph

Analysing the Efficiency Statements by Hotel Stars The efficiency statements, namely, Q11 a, b, c, d, e, g, were analysed by how many stars the hotels have using the Kruskal Wallis Test. Table 9.7 depicts the mean rating score of each hotel star and the p-value of all the efficiency statements. Except for Q11(e), the p-value of the statements have a value of more than 0.05. Hence, there are no significant disparities in the mean rating scores of the different hotel stars for such statements; thereby, one can conclude that the different hotels share a similar opinion on these statements.  ontrasting the Mean Rating Scores of the Various C Effectiveness Statements The positively worded statements were analysed through the Friedman test. The extent to which the statements relate to each other and their mean rating scores are shown in Table 9.8. All the statements in Table 9.8 exceed a mean rating score of 4; thus, the participants strongly agree with those statements.

9  VALUE FOR MONEY ASSESSMENT OF A WAGE SUPPLEMENT SCHEME… 

243

Table 9.7  Kruskal Wallis Test—efficiency statements mean rating score and p-value Q

Statements

11a It was relatively easy to apply for the subsidy

11b There were complications when applying for the subsidy

11c ME was very efficient when handling the application

11d Over time, ME became more efficient when processing the application

11e ME could have been more efficient when handling the application

11g The subsidy was always received on time

Hotel star

Mean Standard deviation

p-value

3-star 4-star 5-star Total 3-star 4-star 5-star Total 3-star 4-star 5-star Total 3-star 4-star 5-star Total 3-star 4-star 5-star Total 3-star 4-star 5-star Total

3.75 4.15 4.15 4.11 3.25 2.15 2.69 2.46 4.25 4.20 4.54 4.32 4.25 4.05 4.62 4.27 4.00 2.50 2.15 2.54 4.00 4.00 4.23 4.08

0.469

0.500 0.813 0.689 0.737 0.957 0.988 1.032 1.043 0.957 0.834 0.660 0.784 0.957 1.050 0.650 0.932 0.816 0.889 0.889 1.016 0.816 1.026 0.599 0.862

0.100

0.511

0.229

0.011

0.849

Table 9.8  Friedman test—effectiveness statements mean rating score Q

Statement

11f

The subsidy was given in the shortest period, which allowed the hotel to suffer the least possible 11h All the subsidy that the hotel applied for was received 11j The subsidy that was received helped the hotel to continue operating 11k Due to the subsidy, the hotel did not make any employees redundant p-value = 0.17 Range: 1 = Strongly disagree to 5 = Strongly agree

Mean 4.08 4.05 4.46 4.19

244 

J. CARUANA AND M. J. BUTTIGIEG

Table 9.9  Negatively worded effectiveness statement mean rating score Q

Statement

Mean

11i

The hotel expected more subsidy

2.54

Range: 1 = Strongly disagree to 5 = Strongly agree

Due to the subsidy, the hotel did not make any employees redundant

4.19

The subsidy that was received helped the hotel to continue operating

4.46

All the subsidy that the hotel applied for was received

4.05

The subsidy was given in the shortest period, which allowed the hotel to suffer the least possible

4.08

0 Error Bars: 95% CI

1

2 3 4 Mean Rating Score

5

Fig. 9.8  Positively worded effectiveness statements error bar graph

The Friedman test of these statements have a p-value of 0.17, hence, the statements are not related, and the mean rating scores vary significantly. This can also be seen in the Error Bar Graph, shown in Fig. 9.8. The last two error-bars overlap. Consequently, one can generalise across these two statements, that is, all the subsidies applied for were received and the subsidies were given over a short period of time, minimising hardship for the hotels.

9  VALUE FOR MONEY ASSESSMENT OF A WAGE SUPPLEMENT SCHEME… 

245

Analysing the Effectiveness Statements by Hotel Stars Table 9.10  Kruskal Wallis Test—effectiveness statements mean rating score and p-value Q

Statements

Hotel star

11f

The subsidy was given in the shortest period, which allowed the hotel to suffer the least possible

3-star 4-star 5-star Total 11h All the subsidy that the hotel applied for was 3-star received 4-star 5-star Total 11i The hotel expected more subsidy 3-star 4-star 5-star Total 11j The subsidy that was received helped the 3-star hotel to continue operating 4-star 5-star Total 11k Due to the subsidy, the hotel did not make 3-star any employees redundant 4-star 5-star Total

Mean Standard deviation

p-value

4.25 3.90 4.31 4.08 3.25 4.20 4.08 4.05 3.00 2.63 2.15 2.50 4.75 4.30 4.62 4.46 4.75 4.25 3.92 4.19

0.488

0.500 1.021 0.751 0.894 1.500 0.768 1.038 0.970 0.816 0.955 0.801 0.910 0.500 0.865 0.870 0.836 0.500 0.910 0.954 0.908

0.300

0.184

0.280

0.228

References Alexander, J. (2020–last update). Financial first aid: Inside the coronavirus job retention scheme [Public finance]. Available: https://www.publicfinance.co. uk/opinion/2020/11/financial-­first-­aid-­inside-­coronavirus-­job-­r etention­scheme Alwardat, Y. A., Benamraoui, A., & Rieple, A. (2015). Value for money and audit practice in the UK public sector. International Journal of Auditing, 19(3), 206–217. Barzelay, M. (1996). Performance auditing and the new public management: Changing roles and strategies of central audit institutions in performance auditing and the modernization of government. In D.  Shand (Ed.), Performance auditing and the modernisation of government (pp. 15–56). OECD.

246 

J. CARUANA AND M. J. BUTTIGIEG

Broadbent, J., & Laughlin, R. C. (2003). Control and legitimation in government accountability processes: The private finance initiative in the UK. Critical Perspectives on Accounting, 14(1–2), 23–48. Creswell, J. (2014). Research design: Qualitative, quantitative and mixed methods (4th ed.). SAGE Publications. Curristine, T., Lonti, Z., & Joumard, I. (2007). Improving public sector efficiency: Challenges and opportunities. OECD Journal on Budgeting, 7(1), 1–41. Daujotaite, D., & Mačerinskienė, I. (2008). Development of performance audit in public sector. 5th International Scientific Conference Business and Management, 177–185. Diacono, T. (2021, March 9). Malta’s most bruised businesses will keep wage supplement until end of year at least. Lovin Malta. Available: https://lovinmalta.com/lifestyle/health/covid-­19/maltas-­most-­bruised-­businesses-­will­keep-­wage-­supplement-­until-­end-­of-­year-­at-­least/ Dittenhofer, M. (2001). Performance auditing in governments. Managerial Auditing Journal, 16(8), 438–442. English, L. M., Guthrie, J., Broadbent, J., & Laughlin, R. (2010). Performance audit of the operational stage of long-term partnerships for the private sector provision of public services. Australian Accounting Review, 20(1), 64–75. European Court of Auditors. (2017). Performance audit manual. Available: https://www.eca.europa.eu/Lists/ECADocuments/PERF_AUDIT_ MANUAL/PERF_AUDIT_MANUAL_EN.PDF Flostoiu, S., Rus, M., & Radu, I. (2012). Monitoring the performance of transport maintenance service through the 3E’s internal public auditing method. Quality – Access to Success, 13(3), 608–616. Gopinath, G. (2020, April 14). The great lockdown: Worst economic downturn since the great depression. IMF Blog. Available: https://blogs.imf. org/2020/04/14/the-­g reat-­l ockdown-­w orst-­e conomic-­d ownturn­since-­the-­great-­depression/ Government of Malta. (2020). Pjan ta’ Riġenerazzjoni Ekonomika [Ministry of Finance]. Available: https://finance.gov.mt/en/Library/Documents/ AHJAR_INSIDE_PAGES.pdf Grönlund, A., Svärdsten, F., & Öhman, P. (2011). Value for money and the rule of law: The (new) performance audit in Sweden. International Journal of Public Sector Management, 24(2), 107–121. IIA Global. (2012). Supplemental guidance: The role of auditing in public sector governance (2nd ed.). Florida. Available: https://na.theiia.org/standards-­ guidance/Public%20Documents/Public_Sector_Governance1_1_.pdf INTOSAI. (2004). ISSAI 3000: Standards and guidelines for performance auditing based on INTOSAI’s Auditing Standards and Practical experience. Vienna. Available: https://www.auditorgeneral.gov.tt/sites/default/files/ Performance%20Audit%20Guidelines.pdf

9  VALUE FOR MONEY ASSESSMENT OF A WAGE SUPPLEMENT SCHEME… 

247

INTOSAI. (2019). ISSAI 300: Performance audit principles. Vienna. Available: https://www.issai.org/pronouncements/issai-­3 00-­p erformance-­a udit­principles/ ISSAI 300. (n.d.). The International Standards of Supreme Audit Institutions – Fundamental Principles of Performance Auditing. Kells, S., & Hodge, G. (2009). Performance auditing in the public sector: Reconceptualising the task. The Journal of Contemporary Issues in Business and Government, 15(2), 36–60. Khan, M.  A. (1988). Performance auditing  – The three E’s. Asian Journal of Government Audit, 4(1). Khan, M. (2005). A practitioner’s guide to performance auditing. Pleier Corporation. KPMG South Africa. (n.d.–last update). Performance auditing. Available: https:// assets.kpmg/content/dam/kpmg/pdf/2016/05/Performance-­Auditing.pdf Levin, H.  M., & Mcewan, P.  J. (2001). Cost effectiveness analysis: Methods and applications (2nd ed.). Sage Publication. Mandl, U., Dierx, A., & Ilzkovitz, F. (2008). The effectiveness and efficiency of public spending (Economic papers 301). European Commission. Marchi, L., & Bertei, M. (2016). Performance audit in the public sector. What is the contribution to the performance management? Management Control, 2016(3), 49–63. ME. (2020a–last update). Wage supplement – Current scheme. Available: https:// covid19.maltaenterprise.com/wage-­supplement-­july-­september/ ME. (2020b–last update). Wage supplement – March – June. Available: https:// covid19.maltaenterprise.com/employee-­w age-­s uppor t/?application­form-­added ME. (2021a–last update). Inkomplu Nħarsu l-Impjiegi: Wage supplement scheme. Available: https://covid19.maltaenterprise.com/wp-­content/uploads/2021/ 01/WAGE-­SUPP-­PRESENTATION-­V1-­pdf.pdf ME. (2021b–last update). Wage supplement details after 10th March announcement. Available: https://covid19.maltaenterprise.com/wage-­supplement­details-­after-­10th-­march-­announcement/ NAO UK. (n.d.–last update). Assessing value for money. Available: https://www. nao.org.uk/successful-­commissioning/general-­principles/value-­for-­money/ assessing-­value-­for-­money/ Prowle, M., Kalar, M., & Barrow, L. (2016). New development: Value for money (VFM) in public services-the importance of organizational culture. Public Money & Management, 36(7), 547–552. Public Accountant. (2015–last update). Auditing and the three Es. Available: https://www.publicaccountant.com.au/features/auditing-­and-­the-­three-­es PWC. (2020a–last update). COVID-19: Fiscal support measures for businesses. Available: https://www.pwc.com/mt/en/publications/tax-­legal/covid-­19-­ fiscal-­support-­measures-­for-­businesses.html

248 

J. CARUANA AND M. J. BUTTIGIEG

PWC. (2020b–last update). Financial aid package and measures introduced in light of COVID-19. Available: https://www.pwc.com/mt/en/publications/ tax-­legal/covid-­19-­financial-­aid-­package.html Rutter, C. (2021, October 11). Australia paid out $27bn of pandemic stimulus to businesses that did not meet criteria. Available: https://www.publicfinancefocus.org/type/pfm-­news Saunders, M., Lewis, P., & Thornhill, A. (2016). Research methods for business students (7th ed.). Pearson Education.

CHAPTER 10

The Role of Public Audit: Challenges and Opportunities for the European Court of Auditors to Contribute to a Sustainable Crisis Response Katharina Bryan

10.1   Introduction The outbreak of the COVID-19 pandemic caused an unprecedented global public health crisis, which, in turn, led to a severe decline in economic activity. The EU and its Member States reacted with a swift and large-scale policy response. According to the European Commission (EC),

The author works as Head of Cabinet at the European Court of Auditors, Luxembourg. This article expresses the personal opinion of the author and not that of the European Court of Auditors.

K. Bryan (*) European Court of Auditors, Luxembourg City, Luxembourg © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 G. Dabbicco et al. (eds.), Public Sector Accounting, Financial Accountability and Viability in Times of Crisis, Public Sector Financial Management, https://doi.org/10.1007/978-3-031-04745-9_10

249

250 

K. BRYAN

total fiscal support by Member States in response to the crisis was about 8% of the EU’s Gross Domestic Product (GDP) in 2020, considerably more than that provided in 2008–2009 as a response to the financial crisis. While these measures have softened the economic impact, the economic downturn and emergency fiscal support has led to significantly increased public deficits and debt (EC, 2021). Previous crises and emergencies have shown that there is a tendency for accountability, transparency and the principles of sound financial management being left aside, leading to unauthorised or wasted spending, corruption and fraud. In auditing a country’s response to the COVID-crisis, SAIs can help ensure that governments are held accountable for their use of public resources and that money is spent in an economic, efficient and effective way. They thereby contribute to a sustainable recovery. The objective of this chapter is to examine the different ways SAIs can do this and explore the challenges and opportunities they are likely to face based on an in-depth case study of the European Court of Auditors (ECA). The chapter will reveal that not all the prerequisites are in place for the EU’s external audit to fulfil the expectations placed upon it. While the pandemic presents opportunities for public auditors, it will be a challenge for the ECA to fulfil its ambition to “enhance citizens’ trust and respond effectively to current and future challenges facing the EU” and “contribute to a more resilient and sustainable European Union” (ECA, 2021b). The Chapter is structured in five sections. The next section outlines the methodology and describes the ECA in detail. Section 10.3 develops the theoretical framework on the ECA’s role as public auditor and prepares its analysis. Section 10.4 presents the findings of the ECA case study. It analyses how the organisation can use its audit and non-audit work on the pandemic response, the challenges and opportunities stemming from the specific design of the EU’s response and how the organisation has reacted so far. Section 10.5 discusses implications for accountability and transparency at EU level, highlights future trends that are likely to influence ECA’s response and provides a conclusion.

10  THE ROLE OF PUBLIC AUDIT: CHALLENGES AND OPPORTUNITIES… 

251

10.2   Methodology and Introduction to ECA as an Institution The objective of this chapter is to examine the different ways SAIs can contribute to a sustainable recovery from the Covid-19 pandemic and to explore the challenges and opportunities they are likely to face. So far, only a handful of works on SAIs potential crisis role has been published (exceptions are the International Organization of Supreme Audit Institutions (INTOSAI) Development Initiative [IDI] [2020a, 2020b]). A case-study approach was therefore chosen, allowing to look at issues in-­ depth and answer the “how?” and “why?” questions (Yin, 1994). In view of the unparalleled financial response of the EU and the related audit need, the ECA as EU-level SAI was selected as case-study object. This enabled both an in-depth examination of this audit institution’s role as a response to the Covid-19 pandemic and, since the ECA carries out similar work like other SAIs, an exploration how SAIs in general can contribute to a sustainable recovery. A review of existing literature was used to establish the theoretical framework for the case study. While the insight and professional experience gained through the author’s work in the ECA will have shaped the ideas, the case-study analysis bases itself on publicly available documents. This approach should support reproducibility of the research and limit the risks of a “lack of critical distance” or “role conflict” when analysing one’s own institution (Karra & Phillips, 2008). Analysis of European SAIs’ publications was used to compare and contrast the case-study findings. The following paragraphs will briefly outline the ECA’s role, its work as a SAI at EU level and its relations with other SAIs. The ECA’s mission is to “assess the economy, effectiveness, efficiency, legality and regularity of EU action to improve accountability, transparency and financial management” (ECA, 2021b). The ECA examines the accounts of all revenue and expenditure of the Union and of all bodies, offices or agencies set up by the Union, as long as their establishing legal acts do not preclude this (Article 287 of the Treaty of the Functioning of the EU [TFEU]). It acts as the “external auditor” of the EU as it is placed outside the audited organisations and is independent from the organisations’ internal audit departments. Each year, the ECA provides the European Parliament and the Council with a statement of assurance as to the reliability of the accounts and the legality and regularity of the underlying transactions. In addition, it examines whether the financial

252 

K. BRYAN

management has been sound and issues its observations mainly in “Special Reports”. The EC is the ECA’s main auditee as it carries the ultimate responsibility for sound financial management of the EU budget (Article 317 TFEU). In addition, the ECA audits EU Member States when they implement or receive EU support. According to the TFEU, the ECA has to cooperate with national SAIs “in the spirit of trust while maintaining their independence”. This means, for example, that it will inform national SAIs of its intended audits in Member States. Contrary to some SAIs with supervisory or advisory function for public auditors (see, e.g. Ferry & Ahrens, 2021), the ECA has no authority over any SAI. Instead, the ECA and the SAIs of EU Member States (together referred to as EU SAIs) cooperate on matters of common interest within the framework of the “Contact Committee of the Supreme Audit Institutions of the European Union” (Contact Committee, 2021b). The ECA is set up following the SAI “collegiate model”, with a board of 27 Members appointed by the Council. Despite its name, the European Court of Auditors does not possess any judicial powers to start legal proceedings and to enforce its findings (ECA, 2020d). While this is one distinction compared to some national SAIs (such as the Court model of the French SAI), recent comprehensive research by Cordery and Hay (2021a) shows that the traditionally neatly separated SAI models are much more fluid (OECD, 2011; Santiso, 2009). In fact, both the ECA and SAIs in EU Member States are quite similar as they use all types of audits that are available under international standards (ECA, 2020d), although they might classify, call or combine these types differently (Cordery & Hay, 2021a). As a result, and considering that at least in Europe, SAIs are faced with a similar “audit universe” in and for which they perform their work in response to the crisis (NAO, 2021a, p. 7), the Chapter’s findings can be relevant for SAIs other than the ECA.

10.3  The Role of ECA to Ensure Accountability at EU-Level The aim of SAIs is to ensure that government and public entities “are held accountable for their stewardship over, and use of, public resources”. SAIs are “essential components” of democratic systems and “play an important role in enhancing public-sector administration by emphasising the principles of transparency, accountability, governance and performance”. They

10  THE ROLE OF PUBLIC AUDIT: CHALLENGES AND OPPORTUNITIES… 

253

are independent public institutions and hence referred to as “external auditors” (INTOSAI, 2019a). Research uses generally six theories to explain the role and value of SAIs: agency, signalling, insurance, management control, governance and confirmation theories. Of these, the agency theory seems to be the one that is most supported by SAIs themselves, including the ECA. According to this theory, the need for audit arises within the principal-agent relationship where the “principal” (or “forum” if they are several) has delegated a task to an “agent” or “actor”. Due to information asymmetries and different, possibly conflicting, motives for action between the agent and principal, the principal employs auditors. Applied to public audit, the auditor provides independent, effective and credible scrutiny of the agent’s management of public funds and thereby helps holding governments to account (Cordery & Hay, 2021b; INTOSAI, 2019a). As described by Scott and Maher (2017), the ECA views itself as the EU’s auditor who provides the information for accountability to work at EU level. It does so by supporting the forum, that is the European Parliament and Council, to hold the auditee, that is, principally the Commission, to account (ECA, 2014a). Applying the principal-agent theory of Streim (1994), there are at least two additional principal-agent relationships which the ECA serves: (a) between EU voters and citizens as principal and Parliament and Council (legislature) as agent, and (b) between Commission/Commissioners as principal and EU bureaucracy as agent. Where EU expenditure is implemented by Member States authorities, the picture becomes even more complex as additional layers of relationships emerge, with the EU as principal (fund provider) and the Member State as agent (fund receiver). Across these relationships, the ECA is “delivering accountability by overseeing and controlling executive actors” in the implementation of their tasks. It can deliver both “horizontal” (EU-level) as well as “vertical” (national-level) accountability and does so by “providing reports independent of those scrutinized” (Wille & Bovens, 2020). Public audit research has highlighted the expansion of the reporting scope, moving from purely financial statement audit to performance and value for money audits. As highlighted by Ferry and Ahrens (2021), “this extension of scope has been one of the most contentious issues for public audit”. Suffice it here to state that the ECA has followed this extension with an increase in performance audits and a more proactive approach to its role (Wille & Bovens, 2020).

254 

K. BRYAN

Increased pressures on accountability of management of public resources, together with lessons learnt from previous crisis, underline the importance of public audit at the current moment. At the start of the pandemic, international (audit) organisations were quick to point out that independent and strong SAIs can play a key role in ensuring proper accountability and transparency. This was based on previous experience with crises and emergencies showing that there is a tendency for accountability, transparency and the principles of sound financial management to be left aside, leading to irregularities, corruption and fraud (World Bank, 2020; IDI, 2020a; OECD, 2020b). Early evidence indicates that this experience is indeed applicable to the Covid-pandemic response. For example, fraud and corruption have occurred at higher than usual levels in procurements (OECD, 2020b) or in national employment schemes (Davies, 2021). As a result, SAIs audit rights need to be ensured to be ensured when governments design their financial support packages (IMF, 2020). In addition, citizens will expect independent audit of such support packages (Cordery & Hay, 2021b). While generally supportive to the SAIs role, these expectations also carry the risk of widening the “expectation gap”. The expectation gap is described as the gap between what the public expects and (financial) audits deliver (Kingman, 2018). In the ECA’s case, a gap in the expectations regarding its role on detecting fraud had been raised already before the pandemic (Parts, 2019). While the ECA carries out some work on fraud prevention and reports suspected cases, it is not the EU institution focusing on fraud and corruption. A similar differentiated view is warranted with regard to a SAI’s ability to increase transparency and trust—both explicit ECA aims. Differentiating between different types of transparencies, Heald (2018) points out that not all of these types will generate trust and that generating trust should not be an end in itself for public auditors. In order to fulfil the expectations and to support accountability, the independence of the ECA has been referred to as the “precondition for [its] success” (Vogiatzis, 2019, p.  669). The consensus is that without independence from the audited entity (the government) and without protection from outside influence, a SAI cannot be effective (UN General Assembly, 2014). Independence is a “key audit quality requirement” without which the SAI’s audit opinion lacks “credibility” (Clark et al., 2007, p.  43). Similarly, independence is necessary for SAIs to reach their full potential of building trust with citizens on how money is being spent (INTOSAI, 2019b).

10  THE ROLE OF PUBLIC AUDIT: CHALLENGES AND OPPORTUNITIES… 

255

What “SAI independence” means in practice has been set out by the International Organization of Supreme Audit Institutions (INTOSAI) in the Mexico Declaration. In a nutshell, the eight “core principles of independence” are: (1) appropriate/effective legal framework ensuring independence; (2) independent head(s) of SAIs; (3) sufficiently broad mandate; (4) unrestricted access to information; (5) right/obligation to report their work; (6) freedom to decide content, timing, publication of reports; (7) their effective follow-up; and (8) financial/administrative autonomy with appropriate resources. This chapter analyses a case study using the above principles to examine whether the preconditions for the ECA’s contribution to a sustainable recovery are in place and to identify key challenges and opportunities for its work. The case study does not aim to analyse the ECA’s existing legal framework, which previous literature (i.e. Vogiatzis, 2019) has already analysed regarding independence.

10.4  The Contribution of ECA to a Sustainable Recovery 10.4.1   Expectations on ECA’s Audit Work on the EU’s Response The EU and its institutions have reacted swiftly with a number of unparalleled responses, ranging from the first time activation of the general escape clause of the Stability and Growth Pact, to adopting the biggest package ever financed by the EU. The measures not only pose an immense administrative challenge for the EU and its Member States, but the significant amount of additional resources to be spent in a short time increases the risk of irregularities and fraud (ECA, 2020c). In addition, the impact of the EU’s Recovery and Resilience Facility (RRF) on growth and national public debt depends on whether it will be spent well (Arnold & Nguyen, 2020; Commission, 2021). In this environment, high expectations are placed upon the ECA as the EU’s external auditor. Using the different principal-agency relationships identified earlier, several “principals” are requesting audit work to hold their agents to account. For example, the European Parliament and (for the first time) a number of Council delegations proposed several pandemic-related audit topics (Weber, 2021). The Commission has also emphasised the ECA’s role in relation to accountability in the COVID-crisis. As Commission Vice-President Maroš

256 

K. BRYAN

Šefčovič (2021, p. 37) put it: “external public auditors have a key role to play not only in crisis response but also in the longer-term recovery” at both EU and Member State level. Finally, and based upon the experience of the previous financial crisis, pressure on budgets leads to increased citizens’ expectations on accountability, distrust in EU institutions and pressure to spend EU money well (ECA, 2014a; Sanchez-Barrueco, 2015). Cordery and Hay (2021b) predict that this will be the case after the pandemic and, writing on the ECA, Cipriani (2021) argues, that “the demand for accountability and protection of taxpayers’ money will increase proportionally, as well as the risk of frustrated expectations betraying the public trust”. Whether the ECA will be able to fulfil these strong expectations and fully assume its role, will depend on whether it has the audit mandate, takes the necessary strategic decisions, possesses appropriate resources and overcomes the challenges inherent in the EU’s response. 10.4.2   A Large But Still Limited ECA Mandate to Audit in Times of Crises The key prerequisite for being able to audit the EU’s crisis and recovery reaction is that it falls within the ECA’s mandate. The EU’s initial crisis response consisted of measures taken within the existing rules and policy frameworks; as the crisis progressed it shifted to more medium-term and recovery-oriented measures. The Commission mobilised additional funds within the EU budget and took several economic and (more limited) health coordinating policy decisions. The European Investment Bank (EIB) and the European Stability Mechanism (ESM) also decided to put in place some immediate measures. In April 2020, an all-inclusive package was announced worth € 540 billion in lending from the ESM, the EIB as well as a temporary financial support scheme managed by the EC on unemployment (ECA, 2020e). The European Central Bank’s (ECB) response was to use the monetary policy stimuli of asset purchase programmes (APP) and, in its banking role, offering refinancing, at generous conditions, to the euro area banking sector (Benigno et al., 2021). Lack of audit rights for the ECA and hence, a gap in accountability arise with regard to the ESM, EIB and ECB. The ESM was set up as an intergovernmental organisation in the aftermath of the last financial crisis. This means that the ESM’s revenue and expenditure are outside of the EU budget and, as such, are not covered by the accountability and audit

10  THE ROLE OF PUBLIC AUDIT: CHALLENGES AND OPPORTUNITIES… 

257

provisions of the EU’s financial regulation. As a result, and failing any provisions in the ESM founding act to explicitly authorise the ECA to audit, the ECA has currently no audit rights regarding the ESM. Similarly, most of the EIB’s activity is outside the ECA’s mandate. While the EIB is an EU body, its accountability arrangements do not foresee external audits by the ECA. Instead, it is audited by private auditors. The ECA can only audit when the EIB or its subsidiary, the European Investment Fund (EIF), are managing EU expenditure or loans guaranteed by the EU budget—which is not the case for the EIB group’s Covid-related loans. Over the years, the ECA has highlighted the public audit and accountability gap with regard to the EIB and ESM (ECA, 2014a, 2018). Since both are substantially involved in the emergency and recovery response, it is even more relevant that these audit gaps are closed. In fact, the ECA’s new strategy underlines that the ECA should be mandated to audit all EU institutions and bodies and all intergovernmental structures. The other limitation the ECA faces concerns the ECB. Both the monetary policy stimuli (basically, the APP), as well as its refinancing for banks, are outside the ECA’s mandate. This is in line with the high degree of independence attributed to the ECB and similar to audit arrangements of other central banks (Arda et al., 2018). The ECB is audited by the ECA under a “limited mandate” insofar as its mandate is restricted to an examination of the operational efficiency of the ECB management (Alix & Bruun, 2021, p. 184) and to an audit of the ECB supervisory activity. This would mean that the Covid-crisis related relief measures regarding asset quality deterioration and non-performing loans (ECB, 2021) could be audited. However, the ECA and other SAIs have previously pointed towards an audit gap in this specific area (banking supervision) (Contact Committee, 2017, p.  7). It remains to be seen whether the new ECBECA Memorandum of Understanding will bring better scrutiny to this area. What falls squarely within the ECA’s mandate are the immediate Commission measures of March and April 2020. These measures provided additional funds to Member States by budget reallocations and the creation of two new financial initiatives. One of them was the Coronavirus Response Investment Initiative (CRII), channelling money from the European Structural and Investment Funds to health care expenditure, SMEs and short-term work measures. The second initiative, the European instrument for temporary Support to mitigate Unemployment Risks in an Emergency (SURE), is a lending scheme providing € 100 billion in loans

258 

K. BRYAN

to finance Member States’ spending on short-time work and similar schemes. Both the CRII and SURE initiatives are within the ECA’s audit mandate. The financially most relevant audit object for ECA for the years to come is the EU Next Generation instrument (NGEU), amounting to € 750 billion, and its RRF. The latter accounts for 90% of the NGEU; the rest supports existing EU programmes. The RRF’s € 672.5 billion for Member States are divided into € 360 billion in loans and € 312.5 billion in grants (Council of the European Union, 2020). Together with the new Multiannual Financial Framework (MFF) Budget (€ 1 074.3 billion for 7 years), the NGEU will allow the EU to provide an unparalleled € 1.8 trillion of funding to support recovery from the COVID-19 pandemic and the EU’s strategic priorities. Across the world, governments have used extra-budgetary measures in response to the COVID-crisis, which do not automatically fall into SAI’s mandate (Rahim et al., 2020). Obtaining a firm ECA audit mandate for the RRF was therefore high on the agenda. The RRF legislative proposal did not explicitly state the ECA’s audit rights. As a result, the ECA (2020b) recommended that, “for reasons of clarity”, such a specific provision should be inserted. The final Regulation (EU) 2021/241 explicitly provides for full ECA audit rights (Art 22 [2] [e]); that is, the ECA has the mandate to provide a statement of assurance on the revenue and expenditure, and to carry out all types of audits (financial, compliance and performance audits) on both loans and grants offered to Member States. To summarise, the ECA’s Covid-crisis mandate could be characterised as both “large and limited”. While emergency and recovery measures taken by the EIB and ESM remain outside its mandate, the ECA has full audit rights for the EU’s financial support package under the new MFF and the RRF. As a result, the ECA’s mandate was significantly expanded in financial terms. 10.4.3   From ECA Financial and Performance Audit and Non-audit Work: What Challenges arise from the Pandemic? The COVID-pandemic coincided with the ECA’s efforts to establish a new strategy for the years 2021–2025. Perhaps fortuitously, this meant that the new strategy was able to take into account the emerging EU crisis and recovery measures. According to Goal 2, the ECA (2021a) commits to “ensure a good coverage of new initiatives such as the management of

10  THE ROLE OF PUBLIC AUDIT: CHALLENGES AND OPPORTUNITIES… 

259

the NGEU”. Goal 3 recognises that the changes from the new MFF and NGEU “will be far-reaching and affect the financing and use of the EU budget, including new forms of own resources and a potential shift from eligibility rules to performance-based aspects”. The strategy also announced that the ECA will deliver a statement of assurance for the NGEU and that this will provide an opportunity to develop its assurance audit approach. While these strategic goals provide the ECA with a general direction to aim for, the key strategic challenges ahead will be to decide which type of audit should be used to audit which area and when. The freedom to decide content, timing and publication of reports is one of the pillars of SAI independence. In fact, the ECA enjoys a “large discretion” how it carries out its mandate (Cipriani, 2021). Notwithstanding its independence, the ECA is obliged to perform annually certain financial and compliance audit work as part of its statement of assurance on the EU Budget and the EU’s agencies and bodies (“annual reports”). In its financial audit work the ECA verifies whether an entity’s (e.g. the Commission’s) financial statements present a true and fair financial position and are in line with accepted accounting standards and principles (ECA, 2020d). Based on this, the ECA issues an opinion as to whether the financial information is free from material misstatement due to fraud or error. As long as the EU’s crisis response is part of these accounts, the ECA will audit it. Any audits will also need to take into account the impact the crisis has had on the audited entity. This could be, for example, a worsened control environment on oversight and/or the (increased) potential for fraud and error, due to the impact of remote working (National Audit Office [NAO], 2020). If financial statements do not adequately reflect the crisis’ impact, auditors can use “emphasis of matter” or “other matters” paragraphs. For example, the ECA pointed to a lack of disclosures related to the crisis’ impact in its report on the annual accounts of two agencies (ECA, 2020a). The financial audit on the Commission’s accounts (in 2019 and 2020) did not result in such findings (ECA, 2020b). Compared to this, other SAIs appear to have had more crisis-related issues in their financial audits. For example, the UK NAO had to include “emphasis of matter” paragraphs in 84 of its audit reports relating to, for example, the impact of the pandemic on year-end asset valuations (Davies, 2021; NAO, 2021c). When SAIs cannot obtain sufficient and appropriate evidence, they have to either qualify the audit opinion or issue a “disclaimer of opinion” (IDI, 2020c).

260 

K. BRYAN

Despite travel restrictions and no on-the-spot audit missions, this risk has not materialised for ECA’s financial audit work. The ECA combines financial audits with compliance audit work. Compliance audits assess whether activities, programmes or financial transactions are in compliance with rules. This means that when carrying out its statement of assurance work, the ECA will also audit the compliance with legislation of crisis-related transactions when such transactions are selected by its sampling approach. Compliance audits have been suggested to be particularly valuable for crisis and emergency measures (International Budget Partnership & IDI, 2020; World Bank, 2020). However, the ECA does not usually carry out such self-standing compliance audits but sometimes includes compliance aspects in its performance work (e.g. ECA, 2014b). When it comes to the ECA’s performance audits, output has increased over the years. Also referred to as “value for money” audits, these audits focus on whether programmes and/or institutions are performing in accordance with the principles of economy, efficiency and effectiveness (the three “Es”); and they identify room for improvement. With this broad objective, it is perhaps not surprising that performance audits are much more flexible and varied compared to financial audits (Cordery & Hay, 2021a). Their flexibility also means that they can be adapted well to auditing the different stages and areas of the pandemic. For example, governments might decide to take higher risks and prioritise swift responses outside the normal control frameworks. While a compliance audit would look at whether rules have been followed, performance audits can approach government’s work in a more “holistic way”, looking, for example, at whether an adequate balance was struck between a rapid response and the risk of irregularities occurring (Davies, 2021; World Bank, 2020). The ECA can also use non-audit work, in particular “reviews” and “opinions”, to work on the EU’s emergency and recovery response. Modelled on the UK NAO’s “investigations” (Summerfield, 2017), the ECA uses “reviews” for quick(er), non-audit work to highlight risk and challenges on a particular subject. ECA “opinions” examine legislative proposals related to financial rules or fraud (ECA, 2020c) and thereby have the potential to raise issues relating to sound financial management of emergency and recovery measures early on. The above has shown that the ECA can use financial, compliance and performance audits as well as non-audit work to cover the EU’s

10  THE ROLE OF PUBLIC AUDIT: CHALLENGES AND OPPORTUNITIES… 

261

emergency and recovery response. The strategic choices for the detailed work to be undertaken take place within its work programming. With one and a half years into the pandemic, the analysis conducted for this case study shows that the ECA reacted flexibly to this new strategic challenge and used a variety of audit and non-audit work. Soon after the onset of the crisis, the ECA revised its 2020 annual work programme to reprioritise resources to cover the crisis response. In a first step, it decided to carry out two reviews: one on the EU’s economic policy response (published in December 2020) and one on the Commission’s and EU agencies’ public health response (published in January 2021). Instead of immediately starting audits, the more rapid and flexible review work type was chosen. The UK NAO took a similar approach and, to June 2021, had published seven investigations related to COVID-19 preparedness, emergency and recovery measures. In 2020, the ECA also issued several opinions on the Commission’s proposals regarding financial emergency and recovery measures (ECA, 2021a). The first ECA Covid-related audit was published in June 2021 and concerned passenger rights. Given the important role compliance audits could take, it is notable that, compared to other EU SAIs (see, e.g. Contact Committee, 2021a), the ECA has not yet published a crisis-related compliance audit. The ECA’s 2020 work programme also had to be adapted following delays caused by the practical challenges encountered due to remote working and home-schooling. In spite of the new way of working, including a drastic reduction in audit work in Member States, the ECA was able to issue its annual reports on time and publish a significant number of special reports, as well as other products. Similar to other SAIs, “on-the-spot” audit work was largely replaced by video-conferencing and the electronic exchange of documents to obtain sufficient audit evidence (Cour des comptes & Chambres regionals & territoriales des comptes (CC), 2021a; Davies, 2021; ECA, 2021a). The subsequent (multi-annual) work programme announced that one in four new audits in 2021 would deal with the EU’s response to the COVID-19 pandemic and the NGEU package (ECA, 2021a). Most notably, the ECA started an audit of the Commission’s assessment of the Member States’ plans for the RRF and of the NGEU’s financing. Another approach which SAIs could apply, but which has so far been absent from ECA’s practice, are evaluations. INTOSAI Guidelines distinguish evaluations from performance audits in that the former are oriented towards assessing longer-term socio-economic consequences. While

262 

K. BRYAN

performance audits premise upon “the contested assumption that policy can be separated from implementation”, evaluations can question policy; a function which is usually seen outside the remit of what public audit should do (Heald, 2018). The most prominent SAI carrying out such work is the French SAI, for which “evaluation” is one of its four “missions” (CC, 2021b). As the next section will highlight, the design of the RRF could increase demand for ECA evaluations in the future. 10.4.4   The Innovative Set Up of the RRF: A Challenge for Audit? The RRF aims to deal with the effects of economic and social impact of the COVID-pandemic and promote sustainable growth. According to Article 4 of Regulation (EU) 2021/241, its general (and broad) objective is “to promote the Union’s economic, social and territorial cohesion by improving the resilience, crisis preparedness, adjustment capacity and growth potential of the Member States, by mitigating the social and economic impact of that crisis, in particular on women […]”. The twin transitions of green and digital are key priorities, with Member States plans having to allocate at least 37% of total expenditure to climate action and a minimum of 20% to foster the digital transition. In addition, the “do no significant harm principle” specifies that no RRF measure should lead to significant harm to environmental objectives such as climate change mitigation, adaptation and biodiversity. Member States have had to prepare National Recovery and Resilience Plans (NRRPs) setting out a “coherent package” of reforms and investments. As at October 2021, most of the plans had been assessed by the Commission and approved by the Council. The RRF’s uniqueness in design and volume will have significant impact on ECA’s audit approach. As of October 2021, the ECA RRF audit approach was still under development. This chapter therefore focuses on the possible challenges and important elements which such an approach will have to consider. As a start, the ECA’s audit approach will have to take into account that the logic of the RRF payments is not focused on costs, as has been traditionally the case for EU funding instruments. The RRF has a “performance-based nature”, and Member States will get paid by the Commission upon the achievement of milestones and targets set out in their plans. This also means that the achievement of the milestones and targets would be the “conditions for payment” which the ECA would audit for its statement of assurance (rather than auditing underlying costs).

10  THE ROLE OF PUBLIC AUDIT: CHALLENGES AND OPPORTUNITIES… 

263

The quality of these milestones and targets will not only determine whether the RRF is actually based on results and performance, but also represents a key risk for this type of audit work. An insight into the challenges posed by such audits can be gleaned from ECA’s audits of budget support in development countries where the difficulty of judging whether targets have been achieved has become apparent (ECA, 2014a, 2019). As pointed out by Pomieński et al. (2021, p. 100), “if [milestones and targets] are only vaguely defined” in the RRF, the ECA “could face a situation where they are not fully auditable”. This represents the main risk for the feasibility of the ECA’s assurance audit. Other questions related to the future statement of assurance audit approach are what kind of assurance can be provided (“limited” or “reasonable”) or whether the audit criteria will include the compliance with EU legislation, such as, public procurement law. In addition, it is questionable whether and to what extent the concept of the “error rate” could be applied and appropriately explained due to the performance-oriented nature of the RRF. In its statement of assurance on the EU Budget, the ECA uses the “error rate” to quantify the amounts of money that should not have been paid out because they did not respect the rules. Another audit challenge stems from the RRF’s management and control framework. Member States have to explain in their plans the system they have devised to prevent, detect and correct corruption, fraud and conflicts of interest. They might use structures of other EU funds, or rely on their national systems of control. In any case, the management and control systems do not have to follow a harmonised set of rules, as is the case for other EU Funds. Audits will be faced with differences in systems and risks between Member States. If the ECA wants to apply a risk-based approach to its audit work and provide more country-­specific information as stated in its new strategy, this design means that system audits of both the Commission and individual Member States control systems will be important. While the above challenges are most relevant for the ECA’s financial and compliance audits, the RRF’s design has also consequences for performance audits. Most of the investment areas the RRF will support are similar to the ones that are audited under the MFF.  One exception is the expected investments in the health sector. Due to limited EU competence and budget, the ECA has audited this area less frequently and hence lacks experience. What will prove an even more significant challenge for

264 

K. BRYAN

performance audits is the inclusion of reforms in the RRF and the fact that their achievement is linked to financial support. Member States are expected to include, in their national plans, reforms which address the relevant country-­specific recommendations (CSR). Conceived within the “European Semester” to coordinate economic and fiscal policy, CSR contain policy guidance for Member States on a wide range of issues such as fiscal policy, macro-economic imbalances and structural reforms related to long-term growth, as well as employment and other social issues. The inclusion of these reforms in the RRF is therefore seen as key for the RRF’s effectiveness. According to the Commission (2021), the RRF will boost demand during its implementation and increase growth potential over the medium term especially if the expenditure is “accompanied by significant structural reforms” (p.  94). With the ECA’s audit approach traditionally focused on spending programmes, the work involving reforms has been very limited. It has carried out one performance audit on the European Semester, focusing on the Commission’s work rather than assessing Member States and their reforms. For the ECA, work on this audit has also shown the significant difficulty of measuring the effectiveness of policy interventions and linking their connection to CSRs (ECA, 2020f). Analysing the effects and impacts of policies is typically the subject of evaluations which are currently not carried out by the ECA. Finally, the temporary and front-loaded nature of the RRF is likely to present a further challenge to the ECA. Up to 70% of the RRF grant support will have to be committed in 2021–2022; reforms and investments are to be completed by the end of August 2026. This short time period (and with the MFF running in parallel) not only represents a significant challenge for the absorption and implementation capacity of Member States (ECA, 2020c) but also for audit. The challenge is to respond to this with well-timed audits, considering whether and when financial, compliance or performance audits will have the most impact and added value. Programming and sequencing of audit becomes thus a key ingredient of the effectiveness of audits and underlines the conclusion of the previous section, namely that the audit of a sustainable recovery poses the ECA with a significant strategic challenge.

10  THE ROLE OF PUBLIC AUDIT: CHALLENGES AND OPPORTUNITIES… 

265

10.4.5   Implications for Resources and Future ECA-SAI Cooperation The unparalleled scale and front-loaded nature of the financial response poses a particular resources and organisational challenge for ECA. Particularly high amounts of payments to be audited are forecast in 2023 and 2024 (ECA, 2020c). Faced with this situation, and for “the first time in more than ten years”, the ECA has asked for an increase in resources in its draft budget for 2022 (Weber, 2021, p.  112). Securing resources can be a particular challenge in a climate where public finances are already strained (IDI, 2020b). Given this risk, the OECD (2020b) has therefore explicitly, and early on in the crisis, highlighted the need to ensure that internal and external auditors have appropriate resources available to them in order to ensure accountability, control and oversight. In the case of ECA, the request of 40 additional auditor posts had to be addressed to the Commission, the institution charged with preparing a draft budget for the Parliament and Council negotiations. The Commission did not include the full resource request in its draft. From an accountability perspective, this is a delicate situation since the auditee has a significant say upon the resources but so does the forum (i.e. Parliament and Council) which the auditor serves. As analysed above, the key principles of independence highlight that SAIs should have sufficient and appropriate resources to perform their work. However, what constitutes sufficient and appropriate resources can be hard to specify. The global analysis of Cordery and Hay (2021a) as well as information on Member States’ SAIs (ECA, 2020d) show that significant differences exist between the resources of SAIs, in terms of overall budget, available staff and budget per staff. The SAI budget is in almost all cases below 0.1% of the respective government’s budget. This holds also true for the ECA, with a budget of € 153 million in 2020 (ECA, 2021a). Interestingly, the important role of ECA, as well as the lack of sufficient resources at the ECA, were already pointed out during the last financial crisis (Sanchez-Barrueco, 2015). Supported by the ECA’s key stakeholder in the European Parliament (the Budgetary Control Committee; see European Parliament, 2021), the 2022 budget granted 20 new auditor posts. Time will tell whether this increase will be sufficient. In any case, attention can now turn to recruiting the appropriate resources in terms of skills and competences. This will be another challenge. The audit of reforms included in the national plans will require macro-economic, social science and evaluation skills. In addition,

266 

K. BRYAN

a heavy focus on green recovery and digitalisation or the relatively increased importance of health policy could also require new competences, because the latter two have so far received little (audit) attention due to limited EU competence and spending in these areas. The existing difficulties of ECA and EU institutions in terms of recruiting experts for (temporary) reinforcements (Kolias, 2021) could make this resource challenge even more difficult to overcome. Finally, the question of resources is intertwined with the strategic challenges on work programming discussed earlier. As a former ECA director Cipriani (2021) pointed out that, “requests for additional staff to cope with the expansion of EU activities and finances cannot be dissociated from a review of the current auditors’ allocation”. Both challenges could also require efficiency gains and/or reorganisation. For example, after the last financial crisis, the ECA decided to set up a dedicated team focusing specifically on performance within the EU’s financial and economic governance (McQuade & Sciberras, 2021). Similar considerations could apply to the RRF. Regardless of organisational change, it is likely that the RRF’s cross-cutting nature stemming from its coverage of many EU policies and spending areas, as well as the parallel implementation of similar MFF funding, will require an increased cooperation between and across the current department structure. While the size, design and nature of the EU’s crisis and recovery measures come with their challenges for the ECA, they also create opportunities. For example, from a strategic perspective, producing audits on the EU’s reaction to the COVID-crisis could raise the ECA’s profile among a variety of stakeholders, including citizens, and thereby increase the reach of other work. The design of the RRF could facilitate a more risk-based approach in audit and the delivery of more country-specific information, for example, by focussing on Member States where funds are particularly at risk of fraud and corruption. Another opportunity arising from the RRF design is increased cooperation between ECA and European SAIs. The RRF includes elements of shared management between Commission and Members States, but provides more freedom to Member States on implementation, as well as management and control systems. As such it is a new contribution to the EU multi-layered structure of governance; a system which requires “commensurate cooperation between parliaments and public auditors at all levels to achieve comprehensive scrutiny of public financial resources, ranging from assurance of financial accounts, compliance audits and assessments of economy, efficiency and effectiveness”

10  THE ROLE OF PUBLIC AUDIT: CHALLENGES AND OPPORTUNITIES… 

267

(ECA, 2014a, p. 15). In more simple terms, the ECA cannot carry out a detailed, comprehensive audit in every Member State, so national SAIs can and will have to play an important role. Cooperation has already started with the exchange of information about auditing emergency and recovery responses and is actively supported by ECA (see e.g. Contact Committee, 2021a; NAO, 2021b).

10.5  Discussion and Conclusions While the above has perhaps painted a picture of neatly identified challenges and opportunities, the COVID-pandemic has accelerated and accentuated trends which have an impact on the areas examined. Digitalisation and the increasing importance of sustainability are two mega-trends which, before the COVID-pandemic, had already been shaping the risk and opportunities for the audit profession (Cordery & Hay, 2021a). Early evidence shows that the COVID-pandemic has given a boost to digitalisation, even in the private audit sector (Arnold, 2020), and increased the salience of sustainable development (Bouchon & Toumi, 2020). For the ECA, the successful shift to remote working could present an opportunity to speed up the digitalisation of ECA’s audit work in line with its strategy. Sustainability is the other mega-trend and the ECA’s strategy recognises that the topic will impact all areas of its work. The orientation of the recovery as something “sustainable” means that there is a high expectation that audits will relate to environmental, social and economic sustainability (OECD, 2020a). Moreover, the pressure on SAIs to contribute to sustainable development and audit the implementation of the sustainable development goals is likely to increase further (Cordery & Hay, 2021b). Both trends could accentuate the need to recruit staff, such as data scientists, climate researchers or evaluators (Nerantzidis et  al., 2020). Finally, the wider change of public management culture towards what Radelli (2021, p. 2) describes as an “evaluative attitude” or “asking the right evidence-based questions about risk, foresight and impacts”, could also require changes of a profession which has been traditionally described as backward-looking (Burnett, 2021). For example, the sudden and unprecedented pandemic has naturally underlined how important future-­ oriented scenario analyses will be for audit and non-audit organisations (Sanford, 2021).

268 

K. BRYAN

Summing up, the outbreak of the COVID-19 pandemic caused a public health and economic crisis globally. Previous crises and emergencies have shown that there is a tendency for accountability, transparency and the principles of sound financial management being left aside, leading to irregularities, corruption and fraud. The role of strong and independent SAIs to ensure proper accountability and transparency is, therefore, more important than ever. High expectations are being placed upon the ECA to audit the unparalleled response of the EU and its institutions. However, this chapter has shown that not all the prerequisites are currently in place for the ECA to fulfil these expectations. The ECA’s “large but limited” audit mandate covers the EU’s financial support package, but excludes EIB and ESM measures. In addition, the near doubling in size of its mandate has not been met with requested resource increases, and recruitment could be a challenge. Although the ECA has so far managed to adapt and (re)prioritise its work to cover the crisis response by audit and non-audit work, in the longer term, both the restricted mandate and a lack of adequate resources could significantly limit the ECA’s contribution and lead to deficiencies in accountability and transparency at EU level. The lack of prerequisites and the identified challenges will make it difficult for the ECA to fulfil its ambition to “enhance citizens’ trust and respond effectively to current and future challenges facing the EU” and “contribute to a more resilient and sustainable European Union” (ECA, 2021b). The identified challenges and opportunities are not unique to the ECA, as SAIs across Europe are faced with a similar audit universe. This chapter could serve for further research on how SAIs at a national level can contribute to a sustainable recovery. Increased cooperation between the ECA and SAIs has been identified as one of the opportunities presented by the crisis and could ensure a more comprehensive audit coverage. However, it is also clear that national SAIs cannot fill any audit gaps at EU level caused by the ECA’s limited mandate and audit scope. Any change to this will be up to the EU’s legislature. Whether there is enough political appetite to even start such a debate remains to be seen.

References Alix, P., & Bruun, L. (2021). Clarifying misconceptions about the role of banks in creating money is of strategic importance for accountability and audit. ECA Journal, 1, 183–187. Arda, A., Gororo, M., Grochalska, J. & Mohlala, M. (2018), External audit arrangements at central banks, IMF working paper, WP/18/199.

10  THE ROLE OF PUBLIC AUDIT: CHALLENGES AND OPPORTUNITIES… 

269

Arnold, C. (2020, June 3). Summary of COVID-19 audit considerations. International Federation of Accountants (IFAC). https://www.ifac.org/ knowledge-­g ateway/supporting-­i nternational-­s tandards/discussion/ summary-­covid-­19-­audit-­considerations Arnold, N., & Nguyen, V. (2020). Five charts on the euro area’s post-COVID-19 recovery and growth. IMF. Benigno, P., Canofari, P., Di Bartolomeo, G., & Messori, M. (2021). The ECB’s measures in support of the COVID-19 crisis. Publication for the Committee on Economic and Monetary Affairs, Policy Department for Economic, Scientific and Quality of Life Policies, European Parliament. Bouchon, S., & Toumi, M. (2020, July). Post COVID-19 market trends, market analysis. https://www.luxinnovation.lu/wp-­content/uploads/ sites/3/2020/07/post-­covid-­19-­market-­trends.pdf Burnett, M. (2021). Redefining public sector audit scrutinyin a post-COVID 19 environment, ECA Journal 1/2021, pp. 165–169. Cipriani, G. (2021). Improving the accountability of the EU budget’s multi-level implementation: Strengthening the contribution of the European Court of Auditors. German Law Journal, 22(3), 466–489. Clark, C., De Martinis, M., & Krambia-Kapardis, M. (2007). Audit quality attributes of European Union supreme audit institutions. European Business Review 19(1) 40–71. https://doi.org/10.1108/09555340710714144 Contact Committee. (2017, December). Contact Committee report on prudential supervision of medium-sized and small (“less significant”) institutions in the European Union after the introduction of the Single Supervisory Mechanism. Contact Committee. (2021a, July). Audit Compendium, Response to COVID-19, Audit reports published between June and December 2020. Contact Committee. (2021b). Contact Committee of the Supreme Audit Institutions of the European Union, About. https://www.eca.europa.eu/ sites/cc/en/Pages/About.aspx. Last visited 9 Oct 2021. Cordery, C., & Hay, D. (2021a). Public sector audit. Routledge. Cordery C., & Hay, D. (2021b). Public sector audit in uncertain times. Financial Accountability & Management, early view, 1–20. Council of the European Union. (2020). Multiannual financial framework for 2021–2027 adopted, Press Release 17 December 2020. Cour des comptes & Chambres regionals & territoriales des comptes (CC). (2021a). Le rapport public annuel 2021, Tome 1. Cour des comptes & Chambres regionals & territoriales des comptes (CC). (2021b). Rôle et activités. https://www.ccomptes.fr/fr/cour-­des-­comptes/ role-­et-­activites. Last visited 24 May 2021. Davies, G. (2021, April 22). Auditing government’s pandemic response. NAO blog. https://www.nao.org.uk/naoblog/auditing-­governments-­pandemic-­response/

270 

K. BRYAN

EC. (2021). Communication from the Commission to the Council, One year since the outbreak of COVID-19: Fiscal policy response, COM(2021) 105 final, Brussels. ECA. (2014a). Landscape review: Gaps, overlaps and challenges: A landscape review of EU accountability and public audit arrangements. ECA. (2014b). Special Report No 15/2014: The External Borders Fund has fostered financial solidarity but requires better measurement of results and needs to provide further EU added value. ECA. (2018). Opinion No 2/2018: The audit and accountability considerations concerning the proposal of 6 December 2017 for the establishment of a European Monetary Fund within the Union legal framework. ECA Special Report No 25/2019: Data quality in budget support: weaknesses in some indicators and in the verification of the payment for variable tranches ECA. (2020a). Annual report on EU agencies for the financial year 2019. ECA. (2020b). Annual reports for the 2019 financial year. ECA. (2020c). Opinion No 6/2020 concerning the proposal for a regulation of the European Parliament and of the Council establishing a Recovery and Resilience Facility. ECA. (2020d). Public Audit in the European Union. https://op.europa.eu/webpub/eca/book-­state-­audit/en/. Last viewed 20 June 2021. ECA. (2020e). Review No 06/2020: Risks, challenges and opportunities in the EU’s economic policy response to the COVID-19 crisis. ECA. (2020f). Special Report 16/2020: The European Semester – Country Specific Recommendations address important issues but need better implementation. ECA. (2021a, May). Our activities in 2020, Annual Activity Report of the European Court of Auditors. ECA. (2021b, January). The 2021–25 strategy of the European Court of Auditors. European Central Bank. (2021, February 1). FAQs on ECB supervisory measures in reaction to the coronavirus. European Central Bank. Retrieved June, 6, 2021, from https://www.bankingsupervision.europa.eu/press/publications/html/ ssm.faq_ECB_supervisory_measures_in_reaction_to_the_coronavirus~8a63 1697a4.en.html European Parliament. (2021). Letter of the Chair, Opinion of the Committee on Budgetary Control for the Committee on Budgets on the draft general budget of the European Union for the financial year 2022 (2021/0227(BUD)). https://www.europarl.europa.eu/doceo/document/CONT-­AL-­697655_ EN.pdf. Last viewed 16 Oct 2021. Ferry, L., & Ahrens, T. (2021). The future of the regulatory space in local government audit: A comparative study of the four countries of the United Kingdom. Financial Accounting and Management, early view, 1–18. Heald, D. (2018). Transparency-generated trust: The problematic theorization of public audit. Financial Accountability and Management, 34(4), 317–335.

10  THE ROLE OF PUBLIC AUDIT: CHALLENGES AND OPPORTUNITIES… 

271

IMF. (2020). Keeping the receipts: Transparency, accountability, and legitimacy in emergency responses. Special series on fiscal policies to respond to COVID-19. International Budget Partnership & IDI. (2020, November). All hands on deck: Harnessing accountability through external public audits, An assessment of national oversight systems. INTOSAI. (2019a). INTOSAI-P 1, The Lima Declaration. INTOSAI. (2019b). INTOSAI-P 12, The Value and Benefits of Supreme Audit Institutions– Making a difference to the lives of citizens. INTOSAI Development Initiative (IDI). (2020a). Accountability in times of crisis. INTOSAI Development Initiative (IDI). (2020b, May). COVID-19 implications for SAI strategic management, Guidance Note for Supreme Audit Institutions. INTOSAI Development Initiative (IDI). (2020c, December). Financial Audit ISSAI Implementation Handbook, Version 1. Karra, N., & Phillips, N. (2008). Researching “back home”: International management research as autoethnography. Organizational Research Methods, 11(3), 541–561. Kingman, J. (2018, December 18). Independent review of the Financial Reporting Council. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/767387/frc-­i ndependent-­r eview-­ final-­report.pdf Kolias, Z. (2021). A strategy and organisation that engages people to deliver, Interview by Moonen, G. ECA Journal, 1, 72–78. McQuade, J., & Sciberras, J. (2021). Audit gaps and accountability challenges – ECA actions in the past. ECA Journal, 1, 92–97. NAO. (2020, November 26). Investigation into government procurement during the COVID-19 pandemic. NAO. (2021a, June 11). National audit office annual report and accounts 2020–21, Report by the Comptroller and Auditor General. NAO. (2021b). EUROSAI Project Group on Auditing the response to the COVID-19 pandemic: Year One progress report. NAO. (2021c, May 16). Initial learning from the government’s response to the COVID-19 pandemic cross-government, Report by the Comptroller and Auditor General. Nerantzidis, M., Pazarkis, M., Drogalas, G., & Galanis, S. (2020). Internal auditing in the public sector: A systematic literature review and future research agenda. Journal of Public Budgeting, Accounting & Financial Management, Advance online publication. https://doi.org/10.1108/JPBAFM-­02-­2020-­0015 OECD. (2011, September 1). Good practices in supporting supreme audit institutions. OECD. (2020a, May 26). Policy measures to avoid corruption and bribery in the COVID-19 response and recovery.

272 

K. BRYAN

OECD. (2020b). Policy responses to Coronavirus (COVID-19), Public integrity for an effective COVID-19 response and recovery. https://www.oecd.org/ coronavirus/policy-­r esponses/public-­i ntegrity-­f or-­a n-­e ffective-­c ovid-­1 9-­ response-­and-­recovery-­a5c35d8c/. Last updated 19 Apr 2020. Parts, J. (2019). Calling for strategic fraud management, Interview with Juhan Parts, ECA Member, by Derek Meijers and Gaston Moonen. ECA Journal, 2, 17–22. Pomieński, M., Oroszki, J., & Sime, P. (2021). Auditing the legality and regularity of the NGEU – A strategic challenge for the ECA in the years to come. ECA Journal, 1, 98–102. Radelli, M. (2021, March). Sound policy-making in the ecology of sustainable development: Eight guidance notes in search of practice. Policy Points, Issue 2021/05. Rahim, F., Allen, R., Barroy, H., Gores, L., & Kutzin, J. (2020). COVID-19 funds in response to the pandemic (IMF special series on COVID-19). Sanchez-Barrueco, M. (2015). The contribution of the European Court of Auditors to EU financial accountability in times of crisis: its involvement in the new architecture of economic governance. Romanian Journal of European Affairs, 1. Sanford, S. (2021). Stimulating resilience and agility in government: Foresight and strategic planning as proactive tools for public auditors. ECA Journal, 1, 134–137. Santiso, C. (2009). Political economy of government auditing: Financial governance and rule of law in Latin America and beyond. Routledge. Scott, C., & Maher, I. (2017). Four meta-doctrines of regulatory accountability in the European Union. In C. Harlow, P. Leino, & G. Cananea (Eds.), Research handbook on EU administrative law (pp. 263–291). Edward Elgar. Šefčovič, M. (2021). Embedding strategic foresight in EU policymaking: Charting the course towards more pro-active and anticipatory policies, Interview by Moonen, G. ECA Journal, 1, 33–38. Streim, H. (1994). Agency problems in the legal political system and supreme auditing institutions. European Journal of Law and Economics, 1(3), 177–191. Summerfield, L. (2017, July 7). NAO investigates. NAO blog. https://www.nao. org.uk/naoblog/nao-­investigates/ UN General Assembly. (2014). Promoting and fostering the efficiency, accountability, effectiveness and transparency of public administration by strengthening supreme audit institutions. Resolution adopted by the General Assembly on 19 December 2014. No 69/228. Vogiatzis, N. (2019). The independence of the European Court of Auditors. Common Market Law Review, 56, 667–702.

10  THE ROLE OF PUBLIC AUDIT: CHALLENGES AND OPPORTUNITIES… 

273

Weber. (2021). A strategy focusing on both the what and how, vested on a firm set of values, Interview by Meijers, D. and Moonen, G., ECA Journal 1/2021, pp. 107–113. Wille, A., & Bovens, M. (2020). Watching EU watchdogs assessing the accountability powers of the European Court of Auditors and the European Ombudsman. Journal of European Integration, Advance online publication. https://doi.org/10.1080/07036337.2020.1852229 World Bank. (2020, June). Role of Supreme Audit Institutions (SAIs) in governments’ response to COVID-19: Emergency and post emergency phases. Yin, R. K. (1994). Case study research: Design and methods. Sage.

Index1

A Accountability, v–vii, 2, 4–12, 27, 29, 38, 45, 46, 51, 59, 63, 81, 82, 95, 103, 104, 109, 114, 129–155, 160–164, 168, 174–178, 197–210, 220–222, 237, 250–257, 265, 268 Accountability mechanisms, 3 Accounting standards, 29, 31, 62, 162, 259 Accrual basis, 29, 47 Agency theory, 5, 161, 253 Allocation of resources, vi, 81 Assets, 8, 29, 44, 46, 48–51, 53–55, 57–59, 61, 62, 69, 70, 77, 83, 104, 120, 121, 164, 165, 170, 172–174, 176, 177, 201n1, 256, 257, 259

Audit, 3, 4, 9, 21, 28–31, 86, 87, 140, 141, 218, 220–226, 231, 232, 235, 237, 249–268 Australia, 3, 7, 85, 164, 166, 168, 170, 172, 174–179, 216 B Balance sheet, 2, 3, 6, 11, 43, 49, 163–165, 170, 172, 173, 187, 190–194 Balance sheet approach, 6, 44–49, 52, 59–62 Budget process, 17–38, 104 Budget structure, 17–38 Budget theory, 5 Bureaucracy, 9, 253

 Note: Page numbers followed by ‘n’ refer to notes.

1

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 G. Dabbicco et al. (eds.), Public Sector Accounting, Financial Accountability and Viability in Times of Crisis, Public Sector Financial Management, https://doi.org/10.1007/978-3-031-04745-9

275

276 

INDEX

C Capacity, v–vii, 2, 34, 47, 80, 81, 108, 134, 141, 166, 207, 262, 264 Case studies, 5, 9, 17, 20, 250, 251, 255, 261 Classification of the Functions of Government (COFOG), 60, 67 Comment letter, 76, 79, 83, 85–96 Conceptual framework, 46, 47, 92, 103, 112, 160–163, 209 Consolidated financial statements, 86, 174, 178 Contingent liabilities, 6, 11, 47, 48, 51, 52, 59, 61–63, 77, 84, 93–95 Cost-benefit analysis, 3 COVID-19, 1, 7, 8, 10–12, 17–38, 43, 75–80, 94, 101–123, 129–155, 159–161, 163–168, 170, 172, 175–183, 199, 204–207, 206n4, 209, 215, 217, 219–220, 236, 249, 251, 258, 261, 268 COVID-19 pandemic, 1, 10, 11, 17–38, 43, 75–77, 79, 94, 101–123, 129, 130, 148, 151, 159–161, 163–168, 170, 172, 175, 176, 178–183, 199, 215, 219, 236, 249, 251, 258, 261, 268 D Digitalization/digitalisation, 104, 266, 267 Disclosure management, 8 Disclosure quality, 203 Disclosure theory, 5, 8, 197–210 Documentary analysis, 5

E Economic environment, 2 Economy, 3, 4, 6, 8–12, 18, 24, 29, 32, 43, 44, 50, 59, 62, 101, 130, 134, 141, 149, 153, 155, 160, 166–168, 216–219, 221–224, 230–233, 236, 237, 251, 260, 266 Effectiveness, 4, 8, 11, 28, 49, 63, 81, 110, 113, 134, 136, 154, 217, 218, 221, 222, 224–227, 230, 234–237, 242–245, 251, 260, 264, 266 Efficiency, 4, 8, 9, 17, 20, 27, 28, 31, 35–37, 81, 103, 105, 108, 109, 112, 217, 221–225, 227, 230, 233–234, 236, 237, 240–243, 251, 257, 260, 266 Emergency relief, 6, 75–96, 163 European Court of Auditors (ECA), 3, 4, 9, 223, 249–268 Eurostat, 53, 56, 56n4, 58 Excessive Deficit Procedure (EDP), 54, 56, 56n4 F Financial Instruments, 11 Financial measures, 153 Financial performance, 8, 47, 51, 77, 84, 162–165, 168, 170–172, 174, 175, 177, 178, 184–185, 198 Financial position, 8, 29, 44–46, 49, 51–53, 56, 57, 59, 77, 162, 165, 168, 170, 172–174, 177, 178, 188–189, 259 Financial report, 4, 6, 8, 12, 31, 46, 47, 60, 63, 76–82, 87, 95, 106, 121, 160, 161, 163, 210 Financial statements, 7, 8, 29, 31, 46, 47, 50, 51, 62, 76–80, 83, 85, 89, 94, 95, 102, 120, 160–165, 168–179, 176n1, 201n1, 253, 259

 INDEX 

Financial sustainability, 2, 50 Fiscal policy, 24, 44, 45, 48, 48n1, 50, 61, 160, 168, 264 Funds, 4, 6, 9–12, 27, 28, 36, 54, 57, 60, 63, 66, 81, 160, 170, 176, 177, 216, 217, 219, 220, 223, 224, 230, 232, 237, 253, 256, 257, 263, 266 G Generally accepted accounting practice (GAAP), 169 Generally accepted accounting principles (GAAP), 169 General Purpose Financial Reports (GPFRs), 161, 162 Germany, 3, 7, 48, 56, 57, 154, 164–168, 171–179 Governance, 5–7, 81, 82, 95, 109, 129–155, 160, 198, 199, 252, 253, 266 Governance theory, 5 Government, v, 1, 17, 43, 77–80, 102, 129, 148–151, 159–179, 197–210, 215, 250 Government Finance Statistics (GFS), 4, 44, 49, 53–55, 58, 60, 62, 64–67 H Historical cost, 169 Hotel sector, 216–218, 227, 228, 233 I Indonesia, 3, 6, 9, 17–38, 48 Information technology (IT), 102, 104, 106, 110, 113, 200, 205

277

Integrated Financial Management Information System (IFMIS), 7, 101–123 International Monetary Fund (IMF), 3, 6, 10, 31, 32, 45, 50, 58, 160, 167, 254 International Public Sector Accounting Standards Board (IPSASB), 6, 7, 50, 76, 78, 79, 83–88, 90–92, 94, 95, 160–163, 202 International Public Sector Accounting Standards Board (IPSASB) ED 67, 6, 7, 76, 79, 82–84, 86–95 Interviews, 5, 7, 21, 96, 103, 110–113, 141, 148, 226, 227 L Liabilities, 6, 11, 44, 47, 48, 50–55, 57–59, 61–63, 69, 70, 77, 84, 93–95, 103, 108, 139, 164, 170, 173, 174, 200 M Malta, 3, 56, 216–218, 219n2, 227, 233, 236 Market value, 169 Modified cash basis, 164, 165, 168, 173, 175, 178 N National accounts, 49, 58, 62, 63 Net assets, 51, 172–174, 177 Netherlands, 3, 129–155 New Zealand (NZ), 3, 7, 8, 48, 48n1, 92, 93, 164–168, 170, 172–179, 184–185, 188–189

278 

INDEX

P Pandemic, v, vi, 2–11, 17–20, 22, 25, 29, 31, 35–38, 43–45, 47, 51, 52, 54, 56, 59–61, 63, 75–96, 112, 130, 131, 133, 134, 136–139, 143, 146, 149, 151–154, 159, 160, 162–167, 171–173, 175–179, 197–210, 216–220, 224, 225, 228, 231, 233–236, 250, 254, 256, 258–262, 267 Parliament, 2, 9, 23, 130, 131, 133, 135, 145, 148–153, 155, 168, 221, 222, 226, 253, 265, 266 Performance management, 49 Performance management frameworks, 3 Policy, v, 4, 5, 8, 10, 23, 24, 31, 32, 37, 44, 45, 48–51, 48n1, 59, 61, 76, 84, 92, 93, 95, 105, 130, 135, 148, 159–161, 165–168, 176, 177, 203, 221, 222, 225, 235, 249, 256, 257, 261, 262, 264, 266 Principles-based, 60, 61, 63 Public budgeting, 17, 20, 38 Public debts, 51, 61, 160, 255 Public deficits, 6, 250 Public oversight, 4 Public sector accounting (PSA), vi, 1–12, 46, 47, 79, 94, 209 Public sector financial reporting, 76 Q Questionnaires, 5, 110, 226–228, 234, 235 R Recovery, 2, 3, 6, 8, 9, 19, 34, 37, 45, 50, 61, 82, 94, 137, 138, 140,

141, 167, 204, 216, 250, 251, 255–268 Recovery, long-term, 4 Relief, 10, 51, 81, 82, 84, 94, 95, 167, 257 Research, 3, 5, 10, 11, 20, 21, 36, 53, 61, 85–88, 90, 96, 103, 109–113, 123, 130, 131, 153, 154, 160, 163–165, 197, 198, 202, 208, 209, 219, 226–228, 231, 237, 241, 251–253, 268 methods, 77, 86–88, 96 qualitative, 5, 110 quantitative, 226, 228 Resilience, vi, 2, 11, 49, 52, 59, 155, 209, 262 Revenues, 26, 28, 29, 31–34, 37, 43, 44, 46, 48, 51, 53, 54, 56, 68, 77, 139, 162, 163, 167, 170–172, 176, 177, 216, 231, 240, 251, 256, 258 Risk, v, vi, 6, 9, 27, 38, 47, 51, 52, 59, 63, 79, 82, 93, 95, 102, 105, 110, 111, 113, 114, 116–120, 122, 135, 137, 140, 146, 150, 153, 166, 224, 228, 232, 237, 251, 254–256, 260, 263, 265–267 Rules-based, 60, 63 S Shocks, v, vi, 3 Social benefits, 10, 50, 53, 56, 60, 78, 79, 86, 91 Social environment, 2 Sovereign debt crisis, 5 Special Purpose Vehicles (SPVs), 170, 173, 176, 176n1 Stability and Growth Pact (SGP), 6, 11, 44, 45, 52, 54, 59–63, 255

 INDEX 

279

Subsidies, 10, 34, 44, 51, 56, 57, 60, 138, 143–146, 148, 150, 152, 154, 168, 170, 218, 219, 233, 235, 244 Supreme Audit Institutions (SAIs), 9, 221, 226, 237, 250–255, 257, 259, 261, 262, 265, 267, 268 Sustainable recovery, 250, 251, 255–268

U Uncertainty, vi, 1, 2, 5, 10, 26, 29, 48, 52, 93, 134, 138 Unemployment, 7, 10, 51, 78, 79, 130, 150–155, 216, 230, 232, 233, 240, 256 United States of America (USA), 36, 48, 48n1, 62, 81, 166–168, 171–174, 176

T Taxes, 10, 34, 44, 47, 49–51, 53, 56, 78, 120, 121, 130, 133, 139, 151, 167, 171, 172, 177, 216 Training, 7, 106, 108, 111, 113, 114, 122, 123, 138 Transparency, 2–5, 7, 8, 10–12, 29, 45, 63, 77, 86, 90, 103, 104, 160, 197–210, 222, 237, 250–252, 254, 268 Turbulence, 1, 7, 10, 43, 129–155 Turkey, 3, 7, 48, 48n1, 101–123

V Value for money (VFM), 2–4, 8, 9, 49, 178, 215–245, 253, 260 Vermögensrechnung, 164, 170, 173, 174 W Wage supplement, 8, 215–245 Whole of government, 31 World Bank, 6, 47, 104, 254, 260