Until very recently the doctrine of accounting has largely been ignored in the discussion of economic development, or at least scoffed at as mere bean-counting with little or no connectivity with the achievement of the government policy agenda. However, with the increased understanding that transparency and accountability are at the core of good governance, the interest in government accounting has surged in recent years. Ten years ago the Fiscal Affairs Department (FAD) had very few if any professional accountants amongst its staff. The situation in many budget and treasury offices around the world was not much different. Now the tide is turning: in FAD and many Ministries of Finance the number of accountants has grown substantially. But is change happening too fast, perhaps?
For example, the pressure is on for developing nations to adopt and implement accrual accounting. There is no doubt that, when properly implemented, accrual accounting is a vast improvement on cash accounting. It provides better information to managers about the use of resources, not just cash. It also promotes accountability and transparency through the adoption of strict accounting standards that reduce or eliminate the ability for “creative” accounting.
However, too often developing nations lack the capacity (or commitment) to implement accrual accounting in accordance with internationally recognized standards of best practice. This leads to the adoption of selective accrual accounting practices most commonly termed modified accrual accounting or modified cash accounting. The problem with this is that there are no internationally accepted accounting practices or standards that support either modified accrual or modified cash accounting. This means that instead of enhancing the integrity and usefulness of the financial data it lessens it. This may in fact decrease accountability and transparency – the very essence of good governance. As espoused by Dr. Chan there is a strong link between government accounting and the success of implementing government policy objectives.
To enjoy the full benefits of accrual accounting which provides greater transparency, accountability and improved data integrity, changes are necessary to public sector managerial arrangements. Accrual accounting is a management tool and not an end in itself. It is a tool for decision makers that provide information which is important in helping managers improve their decisions. Under accrual accounting systems there is a shift away from traditional performance measurement where accountability is focused on managers’ stewardship of public cash resources and on compliance within strict detailed appropriations. Accrual accounting systems require managers to be held accountable for assets and liabilities and to report on their financial position, balance sheet and cash flows. Managers will be required to report on commitments, contingencies, and accounting practices. As such governments need to discuss what the new accountability requirements for public sector managers will be before moving to full accrual accounting. These requirements have quite fundamental consequences for traditional PFM systems and takes time to develop and implement.
However, during the transitional period from cash to full accrual accounting, governments can benefit from incremental changes to strict cash accounting such as the recognition of financial assets and liabilities on an accrual basis. These incremental changes can be very helpful to achieving the fundamental institutional changes of management. The problem is current international accrual accounting standards, such as IPSAS, do not provide any guidance to cover the transitional period, which can easily be a period of decades given the complexities of moving to full accruals. This begs the question, could there be intermediate, internationally accepted accrual accounting standards to cover the transitional period and what would these include? Should there be several stages or degrees of accrual accounting as suggested in Dr. Chan’s paper (see below)?
Degree | Assets Recognized | Liabilities Recognized |
Mild accrual | Current financial resources | Current liabilities |
Moderate accrual | Long-term financial resources in addition to current financial resources | Long-term liabilities in addition to current liabilities |
Strong accrual | Capital resources in addition to current and long-term financial resource | Contingent liabilities in addition to current and long-term liabilities |
The issues that arise from a lack of transparency, accountability and data integrity that comes about with the adoption of unregulated modified accrual or modified cash accounting need to be addressed by the accounting profession. There is an urgent need to explore the options to provide accounting standards that are useful to developing nations in achieving their development goals which also better assists them in their transition from cash to accrual accounting.
1James L. Chan, "IPSAS and Government Accounting Reform in Developing Countries," in Accounting Reform in the Public Sector: Mimicry, Fad or Necessity, edited by Evelyne Lande and Jean-Claude Scheid (France: Expert Comptable Media, 2006), pp. 31-42.
