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September 06, 2011

Lao PDR: Better Accounting to Help Growth

Posted by Suhas Joshi

The desire to sustain its recently achieved strong growth performance[1] by developing confidence in investors and making Lao a more attractive investment destination has motivated the government’s intention to move towards an international accounting standard that is recognized and accepted worldwide.

Recently, at the government’s request, I, working along with the World Bank, conducted a workshop in Vientiane on "Accounting Reform: International Experience and Implications for Laos”. The workshop, aimed at fostering the acceptance of IPSAS-based accounting standards[2] as a basis for developing Laos accounting standards. The move towards modern accounting standards had been initiated sometime back in Lao PDR and received a new impetus with the conduct of this workshop which was attended by nearly 50 decision-makers in the government, public, and private sectors. The workshop was inaugurated by Dr. Viengthong Siphandone, Vice Minister for Finance, and was closed by the Director General of the Accounting Department. At the close of the workshop the Director General announced that the government has decided to move towards IPSAS cash basis of accounting, as a first step.

The workshop comprised four sessions, the first was on the implications of adopting international accounting standards in the public sector and the second on the ongoing accounting and auditing reforms in Laos. These were followed by a session on cash basis IPSAS and drew upon international experiences in this area. Lastly the workshop discussed the Laos road map to accounting reform.

The IMF presentation explained the requirements of the cash IPSAS standard in detail and described the presentation and disclosure requirements of part 1 of the standard. It explained how financial statements should be presented under IPSAS cash basis accounting to achieve suitable comprehensiveness and transparency in financial reporting of cash receipts, payments, and balances. It discussed the mandatory definitions, presentation and disclosure requirements, the explanations required on specific accounting issues and details of financial statements. The presentation also discussed administrative and agency transactions and the qualitative characteristics of statements. The IMF also presented a possible path towards IPSAS cash basis of accounting leading, in the fullness of time, to full accrual accounting under IPSAS. This was followed by a discussion on the international experience in implementing IPSAS by several countries and some international organizations, the strategies employed by them, and the lessons learnt from their experiences.

Laos faces severe constraints in terms of available accounting personnel. It enacted an accounting law in 2007 to ensure accounting becomes more relevant and help meet the challenges of globalization and trade liberalization. It also modernized its audit law in the same year to foster transparency and help promote local and foreign investments. Yet the lack of qualified accountants in Laos meant that most financial statements were not audited. In addition, the Ministry of Finance, which sets accounting and auditing standards in Laos, did not have the technical expertise to completely fulfill all its responsibilities in this area.

Laos is now working with donors to improve availability of qualified accountants and set standards aimed at strengthening the quality of financial reporting in the country. Under a World Bank grant to strengthen the accountability of public and private financial reporting it has embarked upon a project to improve its legal framework and develop accounting courses. The country is trying to set the direction for the accounting and independent audit reform with an aim to improve financial reporting quality in compliance with the international standards to ensure accuracy and transparency of the data so that it can be tool for the micro- and macro-financial management, and to contribute to its poverty reduction effort. As part of this effort, it plans to elaborate upon the accounting law and develop further legal instruments necessary for the adoption of periodic financial reporting standards in compliance with the international standards and the local socio-economic growth. It also plans to set financial reporting standards for different enterprise types, defining a transition period so that each enterprise has sufficient time to plan a gradual improvement to its accounting system to fully comply with the financial reporting standards. Simultaneously, it also plans to facilitate the adoption of international standards on audit and accounting and is working on two decrees to bring that to fruition. Finally it also plans courses for accountants at the University level so that capacity constraints do not hamper their long term plans to improve accounting and auditing in Laos.

The recent workshop in Vientiane was another attempt to fulfill these ambitions. It brought together different leaders in the accounting filed in Laos and enabled the formation of a consensus that Laos needs to adopt IPSAS standards. Given existing capacity constraints it will first move towards compliance with IPSAS cash standards and gradually, as capacity both human and technical improves, move to full accrual accounting. 

[1] Lao PDR is the most heavily bombed country in history. Vietnam War-era bombings from 1964-1973 left nearly half of Laos contaminated with vast quantities of unexploded ordnance. It is a tribute to the resilience of its people that its economy has grown at an average rate of 7 percent over the last decade, and the incidence of poverty has fallen from 27.7 percent in 2003 to 20.4 percent by 2010.

[2] International Public Sector Accounting Standards (IPSAS) are a set of accounting standards issued by the IPSAS Board for use by public sector entities around the world in the preparation of financial statements. These standards are based on International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).

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The article is appreciated as it gives an update of Laos PFM reforms. The move to strengthen the implementation of international accounting standards by the public sector through the passage of appropriate laws and upgrading the accounting profession is in the right direction as these will later serve as the backbone of the plan implementation. Adoption of the IPSAS cash basis meantime is a quick win solution. Another suggestion to have a smooth transition to full accrual is to introduce modified cash basis. The modified cash basis approach will start recording some accrual accounts that can be easily tracked and documented. During the transition period, the system of establishing full accruals should be developed. On the lack of accounting professionals, what the government can do meantime is to give training for non-accountants in the public sector. Upgrading of the accounting education is a good medium-term strategy. Promotion of the accounting profession by increasing the level of salaries can also encourage students to enroll in accounting courses. Gradually then, qualification standards in recruitment for accountant and auditor positions should be changed, requiring an accounting degree as a minimum requirement.

where can we get a copy of the presentation for the conducted workshop in Vientiane on "Accounting Reform: International Experience and Implications for Laos"

Iris, you can email Mr. Suhas Joshi at sjoshi@imf.org

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