Posted by Renaud Duplay
Accountants—especially at parties—may sometimes feel like no one is paying attention to what they have to say. A recent research paper by Jens Heiling, a Technical Manager with the International Public Sector Accounting Standards Board (IPSAS), and James Chan, Professor Emeritus of Accounting at the University of Illinois, should reassure them.
Based on individual experiences from different countries, the authors draw a pattern of the evolving relationship between accounting and budgeting in the public sector. Their findings describe a five-stage process of development during which accountants exert an increasingly strong influence on the budgeting process in addition to their traditional responsibilities for government accounting systems and financial reporting.
In stage 1, budgeting and accounting live in separate worlds. The authors assume that in this stage accounting information would generally be poor, inaccurate or take too long to produce. In stage 2, accounting supplements budgeting by providing up-to-date information on revenues and spending that allows internal budgetary control within the fiscal year. However, complete data on budget execution that can be matched to the original budget are often still lacking. This is provided at stage 3, where financial reporting appears but still follows the rules and standards, essentially cash-based, on which the budget is prepared. It is only at stage 4 that accounting starts to develop the own accrual-based standards that provide a broader picture of public finances, but the budget continues to be prepared and presented on a cash basis. At this point, accountants (and the external auditor) may start criticizing the methods used to prepare the budget, and press the government to provide a reconciliation of cash-based budget execution data and accrual-based financial reports. This process is extended in stage 5 where both the budget and financial reports are prepared on an accrual basis, and the budget includes comprehensive information on the government’s operating statement and cash flow, as well as its assets and liabilities.
While praising the completeness of projected financial information provided at stage 5, the authors note that only a few countries have moved to it (Australia, New Zealand, Switzerland, and the UK) and that, for example, the US declined such a reform after studying experiences of those countries. Many more countries have been moving to stage 4 in recent years.
The stylized account of the historic dynamic between accounting and budgeting is interesting, but does not fully satisfy. Especially the rationale for the change of budgeting to a form of projected financial accounting in stage 5 seems rather tenuous. The authors seem content primarily to describe a set of observed relationships, and do not attempt to identify the drivers and influencing factors that will determine whether and why a country decides to move from one stage to another. The existence of a logical evolution from stages 1 to 5 is assumed by the authors rather than proven by their analysis. Indeed, the authors fairly acknowledge that “there are too few data points to predict a trend”.
A weakness of the analysis is further that, whereas the development of accounting standards is detailed on four levels—from scarce data, to regular and complete accrual-based financial statements—budgeting standards are assumed to exist at only two available levels: cash-based and accrual-based budgets. The assumption of an unchanged budget process does not seem reasonable and undermines the value of the analysis presented in the paper. It would be more realistic to assume that, like accounting, the budget process has evolved continuously over time.
Some countries in continental Europe, for example, have adopted an approach to cash-budgeting that incorporates enhanced features compared to the basic cash-based budget presented by the authors. France’s system, for instance, includes such enhancements:
- revenues and expenditure flows are strictly separated from financing flows (debt proceeds and reimbursements, with debt service obviously considered as an expenditure);
- expenditure is measured at the point of payment (cash-based) but also at the commitment stage;
- from FY2014, every budget and supplementary budget will show a forecast of the government’s overall deficit in accrual terms alongside detailed cash-based figures.
The existence of at least three stages of budgeting raises the question of whether there might be more than five stages in the relationship between accounting and budgeting. It also calls into question the assumption that seems to be implicit in the paper, namely that stage 5 represents the logical goal of the evolutionary process.
The paper focuses on the technical issues of accounting and budgeting, without giving sufficient weight to political and institutional factors. Such factors, however, are crucial in understanding why so few advanced countries have adopted accrual-based budgeting. Budgeting is not just a matter of forecasting of financial reports and the technical analysis of expenditure efficiency and effectiveness; it’s more important function is as decision and authorization mechanisms in the political and administrative process of countries. For example, when contemplating a reform of the budget framework, issues such as the balance of power between the various branches of government immediately arise. This factor was clearly recognized by the US General Accounting Office when they investigated the possibility of the US budget being moved to an accrual basis: “In analyzing the benefits cited by other countries and the potential for similar benefits in the United States, it is important to consider that the legislative bodies in a parliamentary system of government and the Congress of the United States differ, especially in the role each plays in the budget process. The U.S. Congress is an independent and separate branch of government that takes a more active role in resource allocation decisions than the parliaments in GAO’s case study countries [New Zealand, Australia, Iceland, and the United Kingdom].” 
By presenting a broader analysis of the evolution of budgeting practices and standards, Heiling and Chan’s promising approach would become more interesting. They advocate addressing some of these issues in further research, but already give an answer to the controversial question stated at the beginning of the paper: will accountants take over the budget process? The authors obviously do not support such an idea and fairly acknowledge that “on account of its control by “politicians” and its role as a policy instrument, budgeting will remain as the “master” in directing public resources, with accounting playing an advisory role at best”. Indeed, accountants are probably best advised to stay focused on maintaining the professional independence that is necessary to report truthfully on the state of the public finances rather than becoming involved in the cut-and-thrust and political compromises of the budget process.
 Renaud Duplay has recently joined the Fiscal Affairs Department of the IMF. Prior to that appointment, he worked five years in the Budget Directorate of the French Ministry for finances. His last assignment was as head of the Budget Law Unit.
 This proceeds from the new Loi organique n° 2012-1403 du 17 décembre 2012 relative à la programmation et à la gouvernance des finances publiques, which has been recently passed in order to implement the European Treaty on Stability Coordination and Governance.
 US General Accounting Office (2000). Accrual Budgeting, Experiences of Other Nations and Implications for the United States, Washington D.C.
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