Posted by Anila Çili (Director, Central Harmonization Department on Financial Management & Control
Ministry of Finance, Albania) and Deanna Aubrey (Budget, Treasury and Internal Audit Community Facilitator, PEM PAL CEF Secretariat, Center of Excellence in Finance, Slovenia)
From 18-22 April 2011, 41 participants from Ministries of Finance and Treasuries from 15 European and Central Asian countries met in Ljubljana, Slovenia to discuss public sector accounting and reporting reforms as part of the ongoing network activities under the Public Expenditure Management Peer Assisted Learning Program (PEM PAL) program. This program has 21 member countries from across the Europe and Central Asia (ECA) region who regularly meet in ‘communities of practice' to discuss reform issues in the areas of budget, treasury and internal audit (www.pempal.org). The event was also linked to a conference on international trends in public sector accounting reforms organized by the Center of Excellence in Finance, Ljubljana Slovenia held on 20-22 April. The conference involved discussions on the increased role of accounting in the public sector, especially in the post financial crisis era, its evolution in the recent years and the lessons learned.
The PEM PAL Treasury Community of Practice has identified several themes of priority interest for its members. One such theme is public sector accounting and reporting reforms which is particularly important as many PEM PAL member countries are either already reforming their public sector accounting and financial reporting systems or planning to. The scope of reforms being implemented or considered varies across countries, but in many instances the reforms involve transition to a broader use of the elements of accrual accounting and the introduction of national public sector accounting standards aligned to various degrees with IPSAS.
During the discussions, there were a range of views on whether moving to full accrual accounting should be the end goal. In particular, all countries noted the difficulties of how to reconcile a budget that is cash based and an accounting system that is accrual based as required under IPSAS 24. Many countries saw the implementation of full accrual accounting within the ECA region as not feasible in the short to medium term. There was some discussion on the need for intermediate goals on the path to full accrual, e.g. modified cash or simplified accrual standards.
Although IPSAS and statistical reporting have different objectives, it was noted that to a considerable extent they use common financial information, though sometimes with different measurement concepts, e.g. the treatment of assets and depreciation. In countries that are in the process of adopting the accrual IPSAS it was acknowledged that the resulting financial reports will differ from reports on budget outturns which reports will be cash based, i.e. the same basis as the budget. In turn these reports will be different from the statistical reports based upon GFS 2001 and ESA 95, which are accrual based. Considerable care is therefore required in ensuring that the different reports give consistent messages. This points towards a key role for the Supreme Audit Institution.
It was noted that, as far as is known, Governments in only 10 out of 180 countries worldwide have implemented full accrual accounting. Further, the conceptual framework behind IPSAS standards is still under development which adds to the problems of application. Some PEM PAL member countries would like to see a transitional arrangement which describes the requirements of financial reporting by steps from cash to modified accrual and furthermore to accrual accounting. This would mean selecting out those IPSAS that would have the most impact and applying them first.
However, it was acknowledged that IPSAS is relatively new and the level of awareness is still developing. Therefore it is important for a country to determine what the desired benefits of applying the IPSAS are, and how the improved information may be used to help address the country’s most pressing issues, e.g. comprehensive recording of public expenditure and public debt, assets and their values, efficiency of expenditures, and financial reporting. This should guide the approach and sequencing of accounting and reporting reforms.
It was also acknowledged that whilst an accrual system provides more transparent, comprehensive information, it also requires more subjective judgments thereby increasing the risk of distortion in the presentation of financial information. Therefore institutional arrangements need to be put in place to ensure that the risks of such deliberate distortion are minimized. The Supreme Audit Institution has a key role in ensuring that financial information is presented without deliberate distortion.
The following key points were made by PEM PAL member participants:
- Accounting is part of an overall PFM system, so it needs an environment where it can function effectively. Different reforms within the overall PFM system, e.g. strategic planning, results based budgeting, should be harmonized and sequenced. Furthermore, the benefits of reforms should clearly outweigh the costs.
- It was noted that the benefits of the implementation of IPSAS would be significantly reduced if countries did not also implement reforms in managerial accountability. It was acknowledged that the role of the accountant would change with such reforms. In the future the role would expand from the provision of information about expenditure against the budget and acting as a financial controller, to include the analysis of costs and financial trends, preparing strategic forecasts and presenting policy recommendations to managers.
- It was noted that IPSAS are reporting standards and as such imply the publication of Financial Statements containing detailed information in accordance with IPSAS and that such statements should be audited by the SAI with the objective of achieving a ‘true and fair’ opinion.
- Reform challenges identified by PEM PAL member countries included the following: lack of appropriate IT and software programs; significant training requirements given lack of specialist capacity;IPSAS standards do not exist in national languages in some cases. It was noted that Kazakhstan has translated the IPSAS standards to Russian and it is available on its Government website for use by other Russian speaking member countries; and the challenge of how to define what entities should be included within the published financial statements. Further, the IPSAS require that the financial report should include all controlled entities, which presents a challenge as to how to consolidate the financial information (including budget information) for all these controlled entities.
- Some countries have committed to publishing consolidated reports, as required under IPSAS, despite the difficulties. Others have not yet taken the decision. Difficulties include different accounting standards and accounting bases for government business enterprises and non-market public organizations and the overall costs involved. Members agreed that this is an area that requires more discussion.
- It was noted that many former socialist countries did use accrual accounting (albeit with different standards from the IPSAS) before transition and therefore have some information about assets and liabilities. However, such information was fundamentally used for different purposes i.e. planning and control purposes rather than for financial management and external reporting.
- In summary, it was acknowledged that there are many benefits to the full implementation of IPSAS but such reforms will take time, can be costly, and need to be fully planned and executed with full political commitment and resourcing. Bringing together practitioners from across the ECA region was seen as a very valuable approach to discuss these reform challenges and to share approaches and resources. In addition involving the SAI in the discussions about a change to accrual accounting is very important.
Links to the event are below:
You can also watch a video clip capturing the Meeting's highlights.
 Countries represented included Albania, Azerbaijan, Armenia, Croatia, Georgia, Kazakhstan, Kyrgyz Republic, Macedonia, Moldova, Russian Federation, Serbia, Tajikistan, Turkey, Ukraine and Uzbekistan
 The event was supported by representatives from the World Bank and OECD/Sigma and the authors would like to thank these representatives for their comments and suggestions during the preparation of this article.
Links to the Conference materials are available in four languages at the following links: Conference Materials English Konferenčni materijali_Slovensko Materijali konferencije_Srbski Материалы конференции_Россию
 Many of the countries represented had no delegation of authority and no delegation of budgets to individual line managers, which is still held at the highest level, e.g. with the Minister.
 Further, the lack of an appropriate glossary of accounting terminology in Russian and Serb-Croat, the official languages of PEM PAL along with English, was raised as an impediment in earlier PEM PAL events. Therefore a draft glossary was prepared for the event and translations circulated for comment to ensure technical concepts are presented and understood effectively in local language. See http://www.pempal.org/data/upload/files/2011/04/pem-pal-glossary_en.pdf
Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.