Accounting and the Budget Framework

Posted by Julie Cooper

For decades the debate has raged on about the applicability for government of what is often referred to as private sector accounting methodology.  Those who argue against its use in government offer up the differences in management focus between the private and public sectors to support their position. They argue that because the private sector is focused on profit generation the underlying concepts of accounting are not valid for government purposes. This argument is simplistic and fails to recognize the overarching purpose of all accounting systems.

Accounting is an information and measurement system that identifies, records, and communicates relevant, reliable, and comparable information about an organization’s activities. Providing information about how an organization performs is an important aim of accounting. This is true for both private and public sectors. Another similarity between the two sectors is that they both focus on the efficient allocation of resources to realize their goals. The difference between these two sectors lay in how that information is reported and used not the accounting per se.

One of the challenges with accounting and reporting in the public sector is that often the budget framework is not clearly defined, or at least not defined in a way that accounting for budget transactions is straight forward. To be able to properly account during budget execution it is necessary to know what to account for. The budget framework must be specific about who will be held accountable, why they will be held accountable (why the public funds will be spent i.e. deliverables to the public) and what funds will be spent. The accounting system needs the control and reporting criteria defined so the chart of accounts can be configured properly.[1]

In developing a simple but effective budget framework the following guidelines will be useful:

  1. Define the roles and responsibilities of government entities including states owned entities
  2. Establish a strategic plan and an activity plan by agencies in its simplest forms giving guidance to spending agencies on how to prioritize their needs (what to achieve) within spending limits
  3. Establish monthly rolling expenditure limits within the limits of the annual budget agreed between spending agencies and the Treasury (some countries the Budget Directorate may do this)
  4. Establish regular meetings between Ministry of Finance and spending agencies to match the cash flow forecasts of the Treasury and the cash needs of the spending agencies. This is important so spending agencies can rely on the availability of fund associated with their activity plan.

While capacity constraints need to be considered when implementing any budget framework, it is also important to consider that the framework itself will be a valuable and effective capacity building tool. Implementing a budget framework that is easy to understand and can be properly executed is an enormous boost to capacity building.

There needs to be a close relationship between budget preparation and budget execution to ensure the budget is prepared in a way that the accounting system can be used to identify and record, measure and communicate meaningful and reliable financial information about the activities of the government. In this way the age old methods of accounting become profoundly useful in the management of government operations.

[1] Cooper, Julie and Sailendra Pattanayak, 2011, Chart of Accounts: A Critical Element of the Public Financial Management Framework, TNM/11/03, Technical Notes and Manuals (Washington: International Monetary Fund.)

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