Interview With Mario Abela Senior Policy Advisor, IFAC

The Accountant met with Mario Abela, a few months after his appointment as a Senior Policy Advisor with the International Federation of Accountants (IFAC), to enquire about his professional experiences and his present role at IFAC so as to gain valuable insights on standard setting, public sector accounting and financial reporting.

TA Can you give us a resume of your professional career?

MA Between 1985 and 1998 I held a range of finance positions in both the public and private sectors in Australia and the United Kingdom principally in accounting policy and standard setting. During this time, in 1997, I completed the CPA Program (Professional Accounting Qualification) with CPA Australia, in 1998 I joined the Department of Treasury and Finance (Victoria, Australia) as Director of Financial Policy and Compliance. This Branch is responsible for developing, maintaining and enforcing the State’s financial management and accountability architecture and providing policy advice to Government on a range of issues. In 2002 I worked with the Department of Education and Training (Victoria, Australia), as General Manager – Student Outcomes Division. The Victorian Education System has responsibility for the education of over 500,000 students in 1,630 schools. The Student Outcomes Division was responsible for improving the performance of all schools and promoting good governance.

In 2003 I joined the Department of Treasury and Finance of Tasmania as Director – Budget Management. This branch has responsibility for developing and monitoring the State Budget, providing policy advice to Government on key initiatives, reviewing the efficiency and effectiveness of Government Departments and driving and promoting management reforms across the Tasmanian Public Sector.

Having moved to the UK in 2005, I held Directorships in the public sector until 2008 when I moved into standard setting by joining the UK Accounting Standards Board as a Project Director with responsibility for leading on a number of Board’s projects including ‘considering the effects of accounting standards’ and ‘accounting for corporate income tax’. In 2009 I joined the European Financial Reporting Advisory Group (EFRAG) as a Research Director, where I was responsible for leading EFRAG’s research programme. In 2012, just before joining IFAC, I worked as a Director with Deloitte’s IFRS Global Office, which provides technical accounting leadership for the Deloitte worldwide network.

TA Your current role is that of Senior Policy Advisor, Public Policy & Regulation with the International Federation of Accountants (IFAC). Could you tell us briefly what this role entails?

MA I deal with a broad range of policy issues that affect the accounting profession globally. It involves working closely with our stakeholders to formulate IFAC’s position on various consultations such as those issued by the IASB along with developing thought leadership around IFAC’s priority areas. I have only been in the role for a few months so it is fair to say that I am still finding my way.

TA Given your experience in standard setting, what is the role that small countries can play in the global standard setting process and how can these small countries, such as Malta, influence the standard setting process?

MA I think it is a real challenge. From my experience at EFRAG, smaller countries often do not have dedicated resources to follow and provide input to the standard setting process. It typically falls to a handful of very dedicated volunteers who follow standard setting developments to help draft comment letters but even that can be difficult to achieve within the deadlines set by the standard setter. I think regional bodies such as EFRAG in Europe and the AASOG in Asia play a critical role for giving voice to the concerns of smaller countries. Those bodies typically have well-established processes that enable smaller countries to participate in the due process in formulating a regional view on issues.

The other point is that I think you have to pick your battles. It is often not possible to comment on every exposure draft but there may be specific ones that have a significant impact on businesses in Malta so it is worth commenting on those. And it is not always necessary to respond to every issue in a consultation – a country can be selective in what they chose to comment on.

My final point is to think about the power of the Maltese diaspora – there are accounting professionals with strong ties to Malta all over the world (and I would include myself in that group). So there are informal ways of influencing the standard setting process and being a small country does not necessarily mean that your global impact needs to also be small. New Zealand is a good example of a small country that punches well above its weight in global standard setting.

TA The public sector is coming increasingly into focus. Following the crises, many people are asking why government accounts failed to show the extent of the problem amid concerns that accrual-based accounting has not generally been adopted. The Maltese Government is contemplating implementation of International Public Sector Accounting Standards (IPSAS) across all Government departments. Given your public sector experience in Australia what do you think are some of the challenges involved?

MA It still amazes me that given the enormous resources governments manage, which often represent a significant proportion of a country’s GDP, that there are still some that question the need for preparing accrual-based financial statements statements – it is expected of companies so why should governments particularly in developed countries be any different? No one would dream of having the Bank of Valletta produce cash-based financial statements and its activities are much narrower than the Government of Malta. I suspect most citizens would be horrified to think that a national government does not have a complete understanding of its assets and liabilities.

I think every household has some concept of their balance sheet. But in my experience although the intellectual arguments are well-rehearsed, it is critical that there is strong political support for the adoption of IPSASs across the public sector because unless it ranks as a priority you end up with commitment on paper but patchy and slow implementation.

From my experience in Australia, there is no shortage of challenges in making the transition to accrual-based accounting standards for whole of government reporting. I think it is instructive to provide a little bit of context because in my view there has to be some strong external shock to really galvanize and sustain the drive to reform public sector financial management. In the State of Victoria where I worked in the reform team within the Department of Treasury and Finance we were facing financial ruin. It was the mid-1990s and the State had successive downgrades of its credit rating, public service costs were blowing out, there was significant industrial action that led to a shutdown of the transport system and the ballooning interest costs were diverting significant resources away from delivery of public services. There had been some feeble attempts to introduce various reforms (including accrual accounting) but they mostly faltered because there wasn’t the clear political will to take it forward.

Unsurprisingly, a new government was elected and as was common in those days an independent audit commission was established to assess how bad the financial situation was. The report highlighted that the government’s finances were in a perilous state and that really provided the impetus for wholesale reform across the public sector.

There are several lessons I would like to draw from that experience that may be relevant to Malta as you consider adopting IPSAS:

  • It should be seen as more than just an accounting exercise of producing a set of financial statements. Introducing IPSAS should be seen as an opportunity for modernising and embedding financial management across the public sector. In Australia it resulted from a shift from management and politicians focusing on how to spend their annual cash budget to a greater emphasis on managing the government’s balance sheet, focusing attention on longer term decision making for asset replacement, and developing strategies to reduce liabilities. In the Australian context, at least in the State of Victoria where I was, it changed to focus from managing inputs to thinking about outputs and how much they cost to produce. And then the more difficult question or test about what sort of outcome or impact that output was having. All of that demands a lot of effort in getting the numbers right but it is incredibly worthwhile especially in shifting resources to where they are most needed in meeting the community’s needs. I remember many difficult conversations with government departments about the cost of their outputs: “it really costs you X to produce Y?”

    It was useful in providing an understanding about why we were in certain businesses and whether it made sense to continue – and we really had one of everything from printing outfits to hotels. And to be fair when people explained why we had come to own and operate some of these businesses there was a certain logic at the time but the issue was that there were no longer good grounds to keep them given that many of them were loss making and really were a distraction from the main business of government. I remember we had a situation where a national airline had failed and the government was contemplating bailing it out until we described the impact it would have on the State’s balance sheet.

    The result was that the government decided not to buy the airline because whilst it may have been popular in the short-term as it would have saved a number of jobs, the long-term consequences would have meant that resources would be diverted from vital public services.

  • The process requires careful planning because implementation requires managing many moving parts and central government agencies, such as the Ministry for Finance have some power but many issues need to be negotiated and agreed with other government agencies which may have slightly different priorities.

    Considerable effort and research is required to get IT systems upgraded, training staff (and not just those in finance functions) and updating accounting manuals and policies, pulling together the opening balance sheet and valuations of fixed assets – and often all of that needs to be achieved without much additional resources. It takes time to work out the perimeter of the government reporting entity and what entities to include.

    Collecting accrual data, especially from smaller agencies, can be a challenge and data quality can take time to improve. In Victoria I think it took about five years to really get from start to finish although improving financial management is something that really does not have an end date as it is a process of continuous improvement.

  • The importance of a building a close and constructive relationship with the Auditor-General and their staff. In my experience it is a steep learning curve for all of those involved so it is critical there is strong and effective dialogue with the audit personnel. It is one thing to be an IFRS or IPSAS technical expert but it is a whole different ball game to address some of the complex accounting policy issues that come from accounting for a government’s operations. Should you value land under roads? Are universities controlled (and therefore consolidated) given they typically have a degree of autonomy from the state? What about public/private partnerships should they be on the government’s balance sheet? What about radio spectrum – does it qualify as an asset for the government? And they are probably some of the more simple issues!
  • Ministers and the Parliament (especially the public accounts committee) need to be briefed so that they understand the impact of the changes. It is a new way of working because the longer term implications of government policy decisions start to become apparent in terms of balance sheet effects – something that is typically not considered when on cash or modified cash accounting.

    It is also important to help politicians understand how to read financial statements and become conversant in the language of finance. Understanding line items such as the pension obligation for civil servants and the annual fluctuations that hit the income statement take some effort to explain. It also takes time for ministers to come to terms with having the rules about how they report set by an external and independent standard setting body. I recall several conversations with ministers that started with them asking me “so just explain to me why we can’t simply change the standard…”

TA Given your experience as Research Director at EFRAG what do you think are some of the key challenges for financial reporting in Europe?

MA The key challenge is to remain relevant. Several recent studies, such as that undertaken by the ACCA Global, have highlighted that users are losing interest in published financial statements and increasingly depending on other sources of information, such as earning announcements and other information to understand how a company is performing. Initiatives, such as Integrated Reporting, are underscoring the interdependence between the financial story and other aspects of a company’s performance. Against that backdrop, financial statements and accounting standards are becoming increasingly more detailed and complex.

I think it fair to say that IFRSs are now well embedded in the EU. Even though there are some big changes coming in terms of new standards on revenue recognition, financial instruments, insurance and perhaps leases, the IFRS community in Europe is quite sophisticated and will be able to implement those standards (and I am not trying to understate the enormous effort that will be required to do that) but financial reporting is not limited to large listed companies.

Personally, I think the main challenge is for Europe to continue to be heard in the debate and that requires being proactive around developing financial reporting issues. It is important that Europe, as one the largest jurisdictions that applies IFRS, remains a policy maker and not a policy taker when it comes to IFRS.

There are some real challenges for SME financial reporting. In many European capital markets SMEs are struggling to get access to finance. I think there is a real need to re-think financial reporting by SMEs so that it better meets the real needs of those entities and their ability to access capital. Perhaps the result won’t be radically different from what we have today but I think we still need to ask the question.

I think the other critical issue is that many SMEs just do not have the resources to comply with complex financial reporting requirements and so it is important that the expectations of them are realistic.

TA This year the European Parliament and the Council have adopted the new accounting directive which replaces the current fourth and seventh directives. There are relatively minor hair-line differences between the small entity accounting regime and IFRS for SMEs, e.g. whether to recognise unpaid called-up share capital as a separate asset which although could be academically interesting it might largely be a non-issue in the real world. What do you think is the significance of this European stand to move away from IFRS for SMEs?

MA As I mentioned before – I think we should be asking ourselves a different question: rather than which set of rules should be followed, how do we make financial reporting by SMEs more relevant? The other point is that the case for SMEs to adopt IFRS for SMEs is less compelling than for large companies because many don’t access global capital markets so there may be a case for sticking with local GAAP. The only caveat I would add is that if there are differences from the IFRS for SMEs can they be justified? How do they result in more transparent financial reporting or are there cost/benefit considerations so apparent to support a difference?

TA One of the biggest threats to the Accountancy profession is the increase in complexity of regulation and disclosures. There is a risk that disclosures do not serve their purpose and this affects the value that users perceive about the annual report and financial statements. Given your extensive experience in financial reporting matters, how do you think that the Integrated Reporting initiative will alleviate this concern?

MA I do not believe that Integrated Reporting will alleviate that concern as it provides a framework for what sits outside of the financial statements. It is more likely that the disclosure overload issue will be addressed by the IASB’s Conceptual Framework project which is expected to develop some principles around disclosures. When I was at EFRAG I led the disclosure framework project and we worked closely with the staff of the Financial Accounting Standards Board in the United States and we had lots of discussion and debate about what to take out (and bring in) in terms of existing disclosures under IFRS. There were quite a number of disclosures where there were just as many convincing arguments to leave something in as to take it out. Non-adjusting post-balance date events are a good example. Do they need to be included and wouldn’t that information usually be communicated to the market through a company press release which is more timely than a note buried in the financial statements?

It is a tough problem to solve because unless you can target the specific information needs of a defined group of users, ‘general purpose’ financial reporting means that preparers are faced with the near impossible challenge of making their financial statements be ‘all things, to all people’ and complying with requirements whilst also being clear and explaining the financial performance and position of a company is a considerable challenge. To some extent it also a false hope to think that you can develop simple and streamlined disclosures to reflect complex financial transactions. The reality is that some aspects of business today are very complex and the related risks and uncertainties are pervasive which demands a level of sophistication in financial reporting.

It also not just a matter of taking a red pen and crossing out existing disclosure requirements, it a matter of changing the behaviour of all of those who play a role in the financial reporting supply chain. Integrated Reporting has stressed the importance of what they call ‘integrated thinking’ which is about breaking down the silos within an organisation and for reporting to have a more holistic perspective.

The same is true for financial statements. More effort is required in joining up parts of the story so that users do not have to piece together information from across a number of different notes to understand a single transaction such as an acquisition of another entity. It’s a nice idea but there are real challenges to achieving it in practice. Personally, I think we have lost sight of what financial reporting is for: it is primarily a means of communication with capital providers and yet very little attention in our financial reporting requirements is given to the importance of that primary purpose. It’s where the accountant’s professional judgement comes into play and whilst reporting requirements can help guide those judgements the responsibility for communicating relevant information falls to them.

Having said all that I am hopeful that we will see some major improvements in the next few years – Integrated Reporting has been a great catalyst in getting people to re-think how companies report and how they tell their story to their stakeholders. As professional accountants we all have a part to play in shaping that and making it happen and it would be a shame to sit on the sidelines complaining and hoping that someone else manages to fix the problem.

TA You were born in Australia to Maltese parents. You have worked in Australia, UK, Belgium and now New York. What nationality do you consider yourself? Is there any particular experience that you treasure the most?

MA That’s an easy question – I have always seen myself as Maltese even though I was born in Australia. I have been brought up with Maltese culture at home and so it’s an integral part of my identity. I always feel like I am at ‘home’ when I visit Malta. I guess the reality is that I have picked up elements of the cultures in the countries I have lived in.

I am not sure I have one stand out experience but I particularly enjoyed working at EFRAG because it is such an International and diverse team and the nature of the work means that you need to understand and integrate so many different perspectives. The staff at EFRAG are incredibly talented and there is a huge amount of energy in the team. Starting up the proactive work at EFRAG was particularly exciting because I think in a very short period of time it had a global impact with National Standard Setters from around the world interested in what we were doing and saying.

Author’s comments:
The views expressed in this article are purely the interviewee’s own views and do not in any way reflect any opinion or position taken by the International Federation of Accountants.

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