INTRODUCTION TO PUBLIC FINANCE MANAGEMENT
Module 4.3: Accounting and Reporting
Module map
• Role of accounting and of reporting
• Differences between private sector and public sector financial reporting.
• Issues of cash versus accrual based accounting
• IPSAS & the status of accounting standards
Module outline
3
• Role of accounting and of reporting
• Differences between private sector and public sector financial reporting.
• Issues of cash versus accrual based accounting
• IPSAS & the status of accounting standards
Module outline
4
“Taxpayers and ratepayers, members of the legislature, creditors, suppliers, the media and employees”
Who uses the accounts? - 1
5
Cash Basis IPSAS – 1.1.2
• Parliament
• Media
• Civil society and trade unions
• Citizens and voters
• Others
• World Bank, IMF and aid agencies
Who uses the accounts? - 2
6
Structure of government accounts
7
DevelopmentFund
Budget out-turn report
Ministry of Health Budget Actual Variance
wages & salaries 225 220 5
books 75 70 5
stationary 13 12 1
telephone 5 3 2
travel 12 8 4
rent 12 10 2
other goods & services
8 10 (2)
financing costs 10 15 (5)
TOTAL 360 348 128
• Nigeria
• Kenya
Examples of public accounts
9
• Three main statements:
• Statement 1: Statement of Assets and Liabilities
• Statement 2: Statement of Consolidated Revenue Fund
• Statement 3: Statement of Capital Development Fund
• Appropriation Accounts for each ministry etc
Nigeria
10
• Exchequer Account- recurrent- development
• Statement of Public Debt
• Summary of Investments, Outstanding Loans & Obligations Guaranteed
• Summary of Appropriation Accounts – Recurrent
– Development
- Statement of assets & liabilities
Kenya – 2,387 pages
11
• Role of accounting and of reporting
• Differences between private sector and public sector financial reporting.
• Issues of cash versus accrual based accounting
• IPSAS & the status of accounting standards
Module outline
12
• Boards accountable to shareholders – financial accountability
• Financial statements measure profit
• Audit opinion on whether the accounts show a true and fair view
Private sector accountability
13
• Accountability to the electorate – political accountability
• Accounts traditionally show budgetary compliance – appropriation accounts
• Audit of regularity and probity of public sector financial management
Public sector accountability
14
• Assets - debtors
• Liabilities - creditors
• Payments/expenditure
• Receipts/revenue
• Contingent liabilities
• Suspense accounts
• Appropriation accounts
Some accounting terms
15
• Role of accounting and of reporting
• Differences between private sector and public sector financial reporting.
• Issues of cash versus accrual based accounting
• IPSAS & the status of accounting standards
Module outline
16
• Cash basis - traditional approach in public sector
• Accounts = budget out-turn reports
• Modified cash records:• debtors & creditors• financial balance sheet – debt & bank balances etc
• Francophone Africa – basis of accounting is the payment order (may also have additional month[s])
• Account for all money spent or received in-year
Cash accounting
17
• Accrual accounting = private sector style accounts
• Show the ‘profit’ (surplus or deficit) for year
• Main differences with cash accounting:• physical assets valued in balance sheet• depreciation included in P&L account
• But many different approaches (Australia, US, UK, former Soviet Union etc)
Accrual accounting 1
18
Accrual accounting – 2• Cash accounting – assets charged in year paid for
• Accrual accounting – cost of assets spread over their ‘useful lives’
• So managers ‘charged’ for use of assets – will they manage them better?
• But with cash accounting:• often financed by loans – so costs each year• capital programme each year – so cost not lumpy
19
Profit & Loss Account
20
Financial reports prepared on an accrual basis allow users to:
• Assess the accountability for all resources the entity controls and the deployment of those resources
• Assess the performance, financial position and cash flows of the entity
• Make decisions about providing resources to, or doing business with the entity
International Public Sector Accounting Standards Board (2002)
Advantages of accrual accounting?
21
• Over the past 30 years move in many countries to adopt “Accruals” accounting similar to commercial accounting and a move away from cash accounting as part of PFM reforms.
• Many implications and often controversial
Moving to accrual accounting ?
22
• Part of the Budget Support Criteria
• Significant costs involved
Moving to accrual accounting ?
23
“There was no evidence that the perceived benefits from the introduction of... accruals accounting... were being realised”
Mellett, Macniven & Marriott, 2008 (funded by ICAS)
Accrual accounting – the evidence?
24
Accrual accounting in NHS from 1991
“Departments have made significant progress in using accruals-based accounting and budgeting systems since our previous study. This has allowed departments to better understand how they are using their financial resources, for example by offering more detailed information to manage their assets and liabilities. Departments have used this information to help identify under-utilised assets and to dispose of those no longer required.”
UK National Audit Office, 2008
Accrual accounting – the evidence?
25
Auditor General, Cayman Islands, April 2010: “the state of financial accountability reporting has gotten worse
in the two years since I last reported on this matter” “I believe this situation has become a national crisis that could
lead to tremendous consequences for the Cayman Islands Government if not addressed immediately”
The real risks of moving to accrual accounting
UK Governement Accounts, Published Nov 2011: (20 months late) NAO press release – accounts have 3 pages of qualifications• "The publication of the first audited Whole of Government
Accounts is a landmark event, which has substantially furthered the cause of transparency and accountability in public spending.
• "The accounts need to be significantly improved, though, if they are to play a full part in comprehensive and meaningful analysis of the government’s financial position. I am particularly concerned that large organisations which in my view are clearly owned and controlled by the government, have been excluded
Even problems in developed countries
When are transactions recognised?
28
Budget approvedIn gov’t legalauthority for expenditure
Funds warrantedAuthority to spenddelegated to specified official
OrderFor goods or services underdelegated authority
Invoice receivedPoint at which legal liability to pay arises
Cash paymentTo supplier forgoods or services
Gov’t financialmanagement musttrack budgetchanges, e.g.transfers betweenbudget heads
Delegation ofauthority to spendkey budgetmanagement stagefor gov’t financialmanagement
Commitment to spend important in gov’t budget management to monitorexpenditure againstbudget ceilings
Recognition oftransaction underaccrual accounting
Recognition oftransaction undercash accounting
Transaction stages over time
Michael Parry, ‘Accrual Accounting for National Governments’ in Public Fund Digest, Vol 5 Nr 2, 2005 p 63
• Role of accounting and of reporting
• Differences between private sector and public sector financial reporting.
• Issues of cash versus accrual based accounting
• IPSAS & the status of accounting standards
Module outline
29
• A consolidated government statement (but only general government – not state owned enterprises)
• Submitted for audit within 6 months
• International Public Sector Accounting Standards (IPSAS) or corresponding national standards used
• Budget reported by administrative, economic and sub-functional classification (PI-5)
PEFA – PI-25
30
• Comparisons with the government’s budget required
• Classification is to be “appropriate to the entity’s operations”
• Accounting policies and additional notes necessary for a fair presentation
Cash Basis IPSAS - 2
31
Key objectives:
• Government roles and responsibilities clear
• Information on government activities provided to the public
• Budget preparation, execution & reporting open; and
• Fiscal information follows standards of data quality & independence on integrity
IMF Code of Fiscal Transparency - 1
32
On financial statements:
• Publication of fiscal information by law
• Budget information helps policy analysis & accountability
• Comprehensive, integrated accounting system to assess payment arrears
• Final accounts presented to parliament within a year
• Programme results compared to major budget objectives of program
IMF Code of Fiscal Transparency - 2
33
• Guidance for statistical reporting to IMF
• Accrual based approach (from 2001)
• Rules for reporting & details provided
• Classification by economic & function
IMF Government Financial Statistics
34
• Accounting and reporting systems are crucial for accountability
• Attention should first focus on: • Establishing key link in accountability to parliament &
public (with audit report)• Timeliness, clarity and simplicity of financial reporting.
• Assets registers should be maintained, but moving towards full accrual accounting is not a priority.
Key messages
35