New report reveals the ideal accounting practices for governments to deliver transparency for their citizens

By Team BitBol, 

Pensioners without pensions. Schools without students. Wells without water.

A report issued jointly by ACCA (the Association of Chartered Certified Accountants) and IFAC (the International Federation of Accountants), Is cash still king? Maximising the benefits of accrual information in the public sector not only confirms that a complete public sector transition to accrual accounting will serve the public interest, but also contains 30 specific recommendations to improve accrual implementation. 

Good decision-making requires the right information. Given that most government decisions have financial implications, understanding the economic reality of a government’s activities improves the quality of decisions made. The report predicts that by 2023, the number of countries reporting their financial position on an accruals basis is expected to increase from 37 to 98, jumping from 25% to 65% among 150 countries surveyed.

These are human consequences that can result – and do result – when governments don’t have the financial information necessary to make the best long-term decisions for their citizens. Cash accounting, which 75 per cent of governments around the world use in some form, does not present the most accurate picture of a government’s financial health, nor does it enable adequately planning for the development, delivery, and maintenance of the services, programmes, and infrastructure on which people rely.  And that, in turn, leads to a breakdown of trust in governments.

The report’s author, ACCA’s Head of Public Sector Policy, Alex Metcalfe, said: ‘Moving to accruals needs to be more than a compliance exercise, it should be about making the best use of financial information.  The range of benefits highlight in this report demonstrates the clear upside to implementing accruals in the public sector.  We need to ask whether cash is still king, when it comes to financial reporting and budgeting.’

‘The accounting profession’s public interest mandate is nowhere more apparent than in the public sector, where high-quality reporting and budgeting is a prerequisite for government transparency and effective delivery of public services,’ said Kevin Dancey, CEO of the International Federation of Accountants (IFAC). ‘To the finance professionals and public sector decision makers who are leading the transition from cash to accrual accounting, we commend you and support you.’

The benefits and complexity arising from accruals varies by types of adoption. The report notes that:

  • Cash accounting and budgeting is the simplest basis but provides the least decision-useful information.
  • Accrual accounting combined with cash budgeting is the most complex basis, but it generates information that helps achieve value for money, facilitates public scrutiny, and supports sustainable decision-making.
  • Accrual accounting and accrual budgeting creates a ‘medium level of complexity’ and creates consistency. In addition to realising the benefits from implementing accrual accounting, this environment also puts finance right at the heart of decision making and allows governments to embed effective performance management.
  • New, decision-useful information generated by accrual implementation promotes the achievement of value for money and facilitates effective public scrutiny.
  • To produce decision-useful information, governments must set objectives; plan; engage stakeholders; create effective systems; and develop the right skills, including internal training beyond preparers.

This report recommends that governments implementing accruals should be:

  • Directing independent fiscal policy institutions to assess contingent liabilities and produce recurring fiscal risk reports.
  • Implementing accrual budgeting to put finance at the heart of decision-making, while embedding performance management across government.
  • Planning to produce a fully consolidated balance sheet that provides a full financial picture of the resources and risks for the public sector. This must include State-owned Enterprises at the whole-of-government level.
  • Building political challenges into the implementation roadmap from the beginning (e.g., through a sunset clause requiring the eventual recognition of employee pension liabilities).
  • Including groups that provide a constructive challenge function to the reform, such as auditors and legislative committees (e.g. the UK’s Public Accounts Committee).
  • Deploying experts centrally to control consulting costs and support implementation across government.

Kevin Dancey, CEO IFAC, concluded: ‘IFAC and ACCA are committed to supporting the adoption and implementation of International Public Sector Accounting Standards (IPSAS), which underpin public sector accrual accounting, and to developing a robust profession that implements and manages such systems. With 65 per cent of governments globally set to implement accrual accounting by 2023, we’re encouraged by the positive trend, and strongly support further adoption of accruals and IPSAS.’

About Ali Raza

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