1. INTRODUCTION TO PUBLIC FINANCE MANAGEMENT Module 4.3: Accounting and Reporting

2. 2.2 & 2.3 Planning and budgeting 3.1 The Budget Execution Cycle 5.2 Decentralisation 1.1 Introduction 2.1 Macroeconomics of the Budget 4.1 Revenue Administration 3.2 Payroll, Procurement & IT 1.3 Budget Classification 4.3 Accounting & Reporting 4.2 Treasury Management 1.2 The Budget 5.3 Assessing & Recapitulation 3.3 Internal Control & Audit 5.1 External Scrutiny & Oversight Module map

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 3

4. 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

5. “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

6. Parliament Media Civil society and trade unions Citizens and voters Others World Bank, IMF and aid agencies Who uses the accounts? - 2 6

7. Ministry of Health salaries medicines travel Ministry of Education salaries books travel Ministry of Agriculture salaries fertiliser subsidies Structure of government accounts 7 Development Fund

8. Budget out-turn report Ministry of HealthBudgetActualVariance wages & salaries2252205 books75705 stationary13121 telephone532 travel1284 rent12102 other goods & services 810(2) financing costs1015(5) TOTAL36034812 8

9. Nigeria Kenya Examples of public accounts 9

10. 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

11. 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

12. 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

13. 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

14. 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

15. Assets - debtors Liabilities - creditors Payments/expenditure Receipts/revenue Contingent liabilities Suspense accounts Appropriation accounts Some accounting terms 15

16. 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

17. 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

18. 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

19. 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

20. Profit & Loss Account 20

21. 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

22. 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

23. Part of the Budget Support Criteria Significant costs involved Moving to accrual accounting ? 23

24. “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

25. “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

26. 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

27. 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

28. When are transactions recognised? 28 Budget approved In gov’t legal authority for expenditure Funds warranted Authority to spend delegated to specified official Order For goods or services under delegated authority Invoice received Point at which legal liability to pay arises Cash payment To supplier for goods or services Gov’t financial management must track budget changes, e.g. transfers between budget heads Delegation of authority to spend key budget management stage for gov’t financial management Commitment to spend important in gov’t budget management to monitor expenditure against budget ceilings Recognition of transaction under accrual accounting Recognition of transaction under cash accounting Transaction stages over time Michael Parry, ‘Accrual Accounting for National Governments’ in Public Fund Digest, Vol 5 Nr 2, 2005 p 63

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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