Certification of the Financial Statements of Central Government: The French Case

Posted by Franck Bessette.

The 25th of May, 2009 the French Cour des comptes (Court of Auditors) certified that, with regard to the applicable accounting rules and principles, the Central Government’s general account as of December 31, 2008 is regular, truthful and gives a fair view of the financial position and assets of the Central Government, subject to 12 qualifications, the first nine being of substantial nature (accompanied by the report on the audits conducted” in accordance with the Constitutional Bylaw on Budget Acts (referred to as its French acronym “LOLF”) which took full effect on January 1st, 2006. This is therefore the third such certification ever conducted in France.

By aligning the accounting standards for the Central Government with those applicable to the private sector, and by assigning to the Court the role of certifying the Central Government Financial Statements, France has become part of an international movement to modernize the presentation of public accounts. The ultimate purpose of the accounting reform is to use the new financial reporting framework provided by accrual accounting, based on an exact and exhaustive patrimonial approach regarding the rights and obligations of Central Government and which will enable it to forecast future liabilities, optimize the management of its assets and measure the full cost of the policies it implements alone or in cooperation with other public administrations. The external audit opinion given on the accounts aims at ensuring their reliability.

This audit opinion is subject to collegiate decision. It also follows adversarial proceedings, meaning that in determining its opinion, the Court takes note of the Administration’s responses to its audit observations, either providing useful explanations or giving rise to corrections in the accounting records. Only the remaining disagreements become qualifications.

In term of scope, the Central Government’s general account includes the trial balance, the income statement (made up of the schedule of net expenses, the schedule of net sovereign revenues and the balance on transactions for the fiscal year) and its notes, including in particular a valuation of the Government’s off-balance sheet commitments, as well as the cash flow statement. As an accounting entity, Central Government includes all Government services, establishments or institutions that do not have the status of a corporate entity, whether or not they receive appropriations from the national budget. All of their operations must be included in the Central Government Financial Statements whereas entities representing legal persons are only integrated by means of a fixed amount corresponding to the State’s interest therein.

8 years after the vote of the LOLF and 3 years after its full effect, the Court, “the old lady” as some in France like to call her (http://blog-pfm.imf.org/pfmblog/2007/11/french-national.html), expresses boldly its disappointment to see that the accounts are still not fully compliant with the norms, wonders if the Administration is drawing any conclusion from the findings of its audit reports and warns that further delays in the completion of the reform of public accounts could harm the confidence of the citizens, international organizations and investors towards French government’s signature. The Court also notes that the current economic and financial crisis, which obliges governments to rely more on financial markets, reinforces the need for transparency in public accounts.

One qualification is about the fragmentation of IT systems for financial information and accounting with induces a risk of accounting errors and has an impact on the auditability of the accounts. Others are about the weakness of internal controls and internal audit; the evaluation of the assets of the ministry of Defense and the exhaustivity of the perimeter of this evaluation; weaknesses in the production of accounts reflecting revenue collection; the methodology used to evaluate real estate assets among other things.

A simplified and a complete version of the financial statements can be found here: http://www.budget.gouv.fr/discours-presse/discours-communiques_budget.php?type=communique&id=2947&rub=2