Modern government accounting and reporting as an enabler
By Patrice Schumesch
Government finances are a significant component of national economies, giving governments a huge influence on economic growth through their fiscal policies. For the success of national economies, upon which the well-being of citizens so largely depends, it is critical that all governments catch up with modern accounting. They need to do so to ensure decision-making is fully informed, public resources are optimally managed, and that there is effective evaluation and ultimately democratic accountability.
Governments around the world have undertaken swift, wide-ranging and substantial actions in response to the social and economic challenges stemming from the COVID-19 pandemic. Such actions include drastic increases in the levels of public sector spending, much of it to support the private sector. Combined with reductions in receipts from taxation, this amplifies the pressure on public sector budgets, but also brings some new challenges. For example, how to ensure that the funds spent have been properly used and how to assess the effectiveness of the measures taken.
More than ever, high-quality information is needed for effective policymaking and financial planning. Greater transparency and comparability are also needed to underpin informed debate on the use of public money. This is a key feature of democratic accountability.
By introducing accrual accounting, governments demonstrate their desire to achieve greater transparency and accountability and to produce better information for decision making. Accrual accounting records transactions and economic events when they occur, regardless of when cash is received or paid.
Applying financial reporting standards, such as the International Public Sector Accounting Standards (IPSAS), further improves the quality of financial information and facilitates comparison across governments and organisations.
As seen by the example of many successful economies in the region (such as Poland, Estonia and Slovakia), the introduction of international financial reporting standards and modern, transparent accounting led to more suitable planning frameworks, strengthened internal controls, developed internal audit and improved fiscal policy.
Transitioning to accrual accounting is not an end in itself; it is an enabler.
The comprehensive and transparent reports that come from accrual-based financial statements reflect the true long-term implication of political decisions. This helps governments to demonstrate, and users to evaluate, accountability for the use of public funds. Adoption of high-quality accrual accounting also lays the basis for developing better management information systems, which should in turn contribute to better decision making and better use of public money. Performance management should help governments to measure the achievement of their service delivery objectives and in doing so add value for citizens.
The end goal is to deliver a better public service and to achieve sustainable public finances, therefore creating a positive legacy for the next generation.
Examples of benefits include:
Implementing accrual accounting based on IPSAS or similar standards and moving along the maturity spectrum of the government’s finance function is a journey, and governments need to adequately address the associated challenges. This task is not easy, but it is doable. Governments can benefit from experiences of successful reforms and leverage best implementation practices. There is no room for inaction; the cost of not reforming would be much higher than the cost of reform.
So what does this approach look like?
The objective of a gap analysis (comparison of the situation ‘as is’ with the situation ‘to be’) is to gain a detailed understanding of the impact of IPSAS on the organisation, highlight key accounting and reporting issues that need to be addressed, understand which business processes may be impacted by IPSAS, and take an informed decision on how to proceed with the IPSAS conversion. The roadmap allows the organisation to develop a detailed project plan, define its needs and estimate the cost of the entire conversion process, including from an information system point of view, therefore informing investment decisions that need to be made.
The conversion methodology involves project set-up, component evaluation (i.e. analysis of the impact of the application of the new reporting requirements for each accounting area) and issue resolution, plus the initial conversion. The project set-up is designed to enable the organisation to successfully manage the IPSAS conversion project while continuing to effectively run its normal activities. For this purpose, the project management structure is set down, conversion tools are tailored, and the project strategy is communicated throughout the entity. The initial conversion helps prepare the entity’s first IPSAS compliant financial statements and means that an informed decision can be made on the ongoing conversion strategy. For this, IPSAS reporting processes and systems need to be designed, built and tested, IPSAS adjustments need to be calculated, reporting packs completed for required disclosures, and IPSAS results consolidated and analysed.
The implementation of IPSAS is not a one-off exercise.
The embedding phase is designed to enable the organisation to move smoothly to a new ‘business-as-usual’ operation, using its ‘new language’ comfortably and authoritatively. Embedding the change involves continuing:
IPSAS training throughout the entity,
finalising the accounting manual and chart of accounts,
completing systems design, build and testing,
designing and rolling out new business processes and procedures including internal control and risk management,
and modifying budgeting processes.
The aim of embedding is to produce IPSAS-compliant data on a recurring basis in the most efficient way. Ideally, embedded solutions are implemented as early as possible in the process, to enable a smooth and efficient preparation of the IPSAS opening balance sheet and first IPSAS financial statements. In practice, depending on the needs and time constraints of the project, portions of the work relating to phases two and three may be carried out simultaneously.
Once implementation is completed, IPSAS rules are embedded across the organisation, with modified systems, updated controls and procedural documentation, and fully trained staff.
Accession to the EU by many of the CEE countries meant compliance with new regulations and introduction of many reforms that will help gain credibility and improve investment climate.
Consequently, financial reporting reform was high on the list of priorities in order to bring assurance to international businesses and investors. As seen by the example of many successful economies in the region (such as Poland, Estonia and Slovakia), the introduction of international financial reporting standards and modern, transparent accounting led to more suitable planning frameworks, strengthened internal controls, developed internal audit and improved fiscal policy.
The attention however should be given to the territories that are less economically integrated. Some CEE countries still lag behind their EU counterparts due to the lack of EU membership, an fully-advanced business environment and/or transparent public financial management infrastructure.
Faced with a global pandemic, it is easy to push public finances to the side. But I believe improving public financial management should be a top priority, even during crisis recovery. When you look at the scale of governments’ interventions, there is an urgent need to understand the full impacts they have on public finances. And this is where accrual based accounting comes into play.
Without complete understanding of a government’s current and future finances, planning will be based on inadequate information. Politicians and other decision-makers in CEE need high-quality financial information in order to make decisions that will lead to a sustainable future for our region.
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Partner, Assurance Services, PwC Serbia