Public Sector and Management Accounting - Essay Example

A Critical Evaluation of the International Public Sector Accounting Standards Board (IPSASB) and the Conceptual Framework of the International PublicSector Accounting Standards (IPSAS) as a Standard Setting Body in the Public Sector Introduction The public sector comes with a different system for measuring spendings and comparing it with revenue. This is because the public sector exists to help the members of the society and carry out governments policies. The idea is to improve the welfare of people and not to benefit from them. This is in contrast with the private sector which exists for the maximisation of profits to the owners of the entity. Most accounting standards organisations set standards for the running of companies. This is because such companies are in the majority in most nations. And such companies have stakeholders who demand timely and comprehensive financial statements. However, the public sector has distinct requirements and expectations. Due to this unique posture, the public sector requires different standards and frameworks for accounting. The International Public Sector Accounting Standards Board (IPSASB) sets standards for the public sector in the international community. And these standards are applicable to government agencies and other public sector entities as well as intergovernmental organisations. These standards are known as International Public Sector Accounting Standards (IPSAS). The aim of this paper is to examine the framework for such standards and how they operate. The paper would examine the important framework and systems for the creation and the operation of IPSASs. It would include a critical review of IPSASB and how they operate as well as their scope. The IPSAS The main objective of the IPSAS is to improve the quality of financial reporting by public sector entities (Jorge, 2008). This is to provide a framework for the provision of periodic reports by these entities that exhibit transparency and accountability (Muller-Marques, 2010). IPSAS is a major set of standards that tries to provide the rules and definitive guidance for the creation of financial statements for these public oriented companies around the world. The main reason why a different set of accounting reporting rules are needed for the public sector is that they have a welfare oriented system which is in contrast with the profit-orientation of the private sector. Hence, there is the need to create a system of rules for the public sector. The main scope of the IPSAS is to provide guidelines for central and decentralised government agencies and intergovernmental organisations (Tarantina, 2012). This means that the IPSAS is a major tool for guiding the accountants and other staff members about how to compile and give information and how to disclose their spendings and receipts in a way and manner that resonates with accounting convention. The main limitation of the IPSAS is that it does not cover government business enterprises and money making investments (Tarantina, 2012). This is because such investments and activities are carried out with the view of making profits. In that case, it would be inappropriate to use the principles designed predominantly for public sector entities and not-for-profit entities. Hence, the treatment of the investments and money-making activities of public sector and not-for-profit entities is to be recorded and disclosed under principles and standards that do not fall under the scope of the IPSAS. The International Public Sector Accounting Standards Board (IPSASB) is an independent entity that uses due process to bring together different stakeholders for the creation of accounting standards for the public sector (International Monetary Fund, 2008). The IPSASB is an account standard setting body like the International Accounting Standard Boards (IASBs) and they operate with a view of harmonising financial standards for public sector organisations and not-for-profit entities. The stakeholders of the IPSASB include finance minsters, intergovernmental organisation representatives and other practitioners in the public sector who are the setters of these standards. Other stakeholders like auditors in practice play various roles in evaluating and critiquing standards before they are presented for exposure. Proposed Framework of the IPSASB Fundamentally, the IPSAS sets the framework for due process for the creation of standards and rules for public sector accounting (Shah, 2009). This include the definition of the elements of public sector financial statements and the procedures that public sector accountants need to follow in disclosing their financial matters. The IPSAS adapt the International Financial Reporting Standards (IFRS) of the International Accounting Standards Board (IASB) to the public sector context (Shah, 2009). In other words, the IPSAS adjusts elements of IASBs financial reporting standards and make them suitable for various public sector entities. Thus, the IPSAS is responsible for evaluating areas of departure and differences between public sector accounting requirements and elements of mainstream accounting reporting. Standard Setting Procedure The IPSASB converges standards of the different financial accounting bodies and systems. They act as an oversight body and they ensure that there is a rightful and careful recognition of procedures and systems for the creation of a public sector accounting system. Before a standard is set, the IPSAS uses high quality control systems to ensure that all the stakeholders views are taken into account before they are released. Each standard is released only after a consultancy paper or proposal for oversight is released and critiqued by stakeholders (Berger, 2012). This is done to ensure that the confidence of governments and stakeholders are sought in all circumstances. In most cases, the public and other stakeholders are allowed to to comment on a consultancy paper or exposure draft. This is to entrench and assure that independent and comprehensive public sector accounting standards are released (Berger, 2012). In most cases, all interested stakeholders are allowed to make their inputs. However, in other cases, particularly cases of very technical matters, a specific set of stakeholders are allowed to critique the exposure document before it is accepted and brought to force (Berger, 2012). Thus, the basic model is that there is an exposure draft and this draft is critiqued by the different stakeholders through a consultation process (Ruppel, 2013). Through this, decisions are taken on what is right and what is wrong. This ensures that the final standard that is accepted is robust and technically robust enough to deal with the issues in reality (Ruppel, 2013). Specific Features of IPSAS The IPSAS includes 31 standards that are based on the accrual basis and 1 standard on the cash basis (Tarantina, 2012). The Accrual basis of accounting involves the recognition of economic events that have financial significance ahead of cash transactions only (Tarantina, 2012). The accruals basis is the fundamental method of disclosing accounting information in the corporate sector. Thus, it is apparent that the IPSAS uses elements of mainstream accounting to decide the method and systems for financial disclosure in the public sector. The accrual basis allows the effects of financially significant matters to be captured in a standardised form, as opposed to just capturing the cash worth of transactions. The cash basis was the traditional method of disclosing financial information in the public sector. However, these 31 standards allow financial matters to be captured in a more critical manner. It modifies the traditional accruals accounting system and puts it in a way that public sector entities can also use them as a guideline for the disclosure of their financial transactions. These standards for the basis of the conceptual framework within which the IPSAS are proposed by the board. The 31 standards of the IPSAS which the accrual method covers in the IPSAS are as follows: 1. Statement of financial position. 2. Statement of financial performance. 3. Cashflow statement. 4. Statement of changes in net assets. 5. Notes to financial statements These five elements are the main areas and aspects of financial accounting in the corporate sector and the profit-making world. Thus, it is apparent that the IPSAS uses these five pointers to guide the operation and recording of financial matters in a way that the various stakeholders need to be aware of. In the IPSAS, the only element that is to be presented on a cash basis is the Statement of Cash Receipts and Payments which is based on how much a public sector entity receives and pays. The rest are to be on an accruals basis like other private sector entities. Thus, the IPSAS seeks to phase out the traditional and simplistic method of just recording cash transaction. The accruals method provide a stronger picture of the transactions of a financial entity. This will obviously promote transparency and completeness in disclosure. The IPSASs financial disclosure method based on the accruals system enables the fighting of corruption in nations around the world. This is because it provides a compelling case for public sector entities to carry out their activities in a way and manner that would help them to show the clearest views of matters and situations. Critical Evaluation of the Proposed IPSASB Framework The main purpose of the IPSAS conceptual framework proposed by the IPSASB is to attain three main ends: 1. Set Standards: The IPSAS is to set standards for the public sector and show them how to carry out certain recording of financial information and how to disclose them. This provides the standards and guidelines for reporting and other related matters. The end is to create a system of standards that would be universally accepted in order to improve disclosure and set the right patterns for disclosure. 2. Recommended Practice Guidelines: Where there are issues with how to carry out certain activities the IPSAS provides guidelines on how to complete it. This allows practitioners to get their activities right and sets out the criteria for ideal behaviour and approach to specific issues. This promotes consistency and allows the users of financial information from public sector organisations to compare from entity to entity and from year to year. This removes doubts and other subjective elements and help to detect illegal reporting practices. 3. General Purpose Financial Reports: This include the identification of a common system for financial reporting for all entities in the public sector. The main essence is to harmonise public sector reporting with private sector reporting and reduce the gaps wherever possible. Guiding Principles for Financial Reporting under the IPSAS Framework There are four main ends that the IPSAS seeks to attain this include: 1. Transparency: The guidelines are meant to provide a method of disclosure for activities that occurred in a given entity over a period of time. This provides an avenue for the capture of the relevant financial transactions for entities. The transparency is guaranteed through the fact that the IPSAS always find ways of promoting greater transparency by identifying possible avenues for hiding details and making mandatory requirements for disclosure on such areas. This helps to fight against corruption and illegalities in the public sector. 2. Standardisation and consistency: The IPSAS creates a set of universally accepted criteria that defines the way things should be done in the public sector. Standardisation allows different people to know how to do things and if this is applied according to the objective rules, there will be a consistent way of disclosing relevant information from institution to institution and from one period to another. Transparency eliminates subjectivity which has the potential for illegality and opportunistic reporting which could harm and entitys disclosure levels. 3. Comparability: The IPSAS allows different institutions in the public sector to come up with results that can be compared on two bases. This is because IPSAS are a set of universally accepted and applicable standards. Thus, these two basis allows consistency on a year on year basis and on a company to company basis. The first basis is the comparability of results from one entity to another entity. This allows for the comparison of like with like. The second element is the comparison of financial results on a year-on-year basis. 4. Set Scope: The IPSAS defines the boundaries of public sector financial reporting. It defines what is relevant and what is not relevant. This allows a public sector entity to know what is relevant and what is not relevant. This is because it defines the elements of financial statements. These elements are important because they define what can be measured and what cannot be measured. They define how these elements should be measured and how they should be disclosed. This gives an essence to financial statements in general and helps the public sector entities to find ways of disclosing financial events in a given period of time. Scope of Application The IPSAS Framework that has been proposed is applicable to government and its agencies. This include the agencies of the central government like ministries, public corporations and Central Banks. Also, other decentralised entities like government agencies like the HM Revenue Commission and other entities that work in different parts of the country need to apply these principles of the IPSAS. The IPSAS is also to be applied to other public sector entities. This include administrative entities that work under the auspices of government or outside the scope of government. The elements include independent and allied institutions that have a public outlook. The third class of entities that apply the IPSAS standards are intergovernmental organisations. This encompasses not-for-profit entities and similar entities with a primary view of improving the welfare of people in the wider community. The main motive is to create a universal system for the disclosure of financial transactions within a given entity that is not profit oriented. Types of Deliverables Required by the IPSAS There are the general purpose financial reports which are meant to achieve certain universal standards. There are also the special purpose financial reports which can be ordered for special circumstances. The general purpose financial systems include those required by law and are to be disclosed at the end of the year to promote various stakeholders like the board of these public sectors and other users of financial statements to understand the operations of the financial statements in a year. Special financial statements are demanded by special interest groups and they are covered by the disclosure requirements of the IPSAS. Conceptual Elements of the IPSAS The main end that the proposed IPSASB standard seeks to attain is to provide a general purpose framework for the preparation of financial reports amongst public sector entities. The main idea is to create a broad framework for the identification of rules for public sector entities (IPSASB, 2013). Pallot (2006) identifies that the main theoretical framework is meant to promote accountability and enhance democratic control amongst public sector administrators. Government and society relationships are enhanced by these reports. Hence, the standards for public sector entities need to be conceptually viable to enhance the rightful framework for reporting in these sectors. There are some core concepts that are defined in the fundamental elements and aspects of the framework. First of all, the display ought to be concise and must promote understandability. Secondly, disclosure bases must be stated in the financial statements. It includes the methods for characterisation of the different elements of the financial statements and methods of disaggregation. Also, the criteria for principles must be stated in the financial statements of a public entity under the aegis of the IPSAS. The presentation decision must be agreed by the various authorities and this must be made known in the financial statements. The main principles and elements that IPSAS financial statements seek are: 1. Relevance 2. Faithful Representation 3. Comparability and 4. Understandability Accruals accounting is a core concept that must be embraced by the proposed parties of the financial statements. Information of financial position in stock of wealth, performance and changes in stock needs to be done on the basis of accruals (Rowles, 2012). This will provide a more objective and a stronger basis for htethe promotion of “value for money” which includes the promotion of efficiency, effectiveness and economy in the operations of a given public sector entity (Rowles, 2012). The accruals accounting method is to promote productivity and efficiency. Although a commentator like Hodges (2010) staes that cash accounting is the best approach and the best method for accounting in the public sector, he concedes that efficiency and improved resource allocation is associated with accruals accounting. This accruals system helps public sector administrators to run the entity in question “like a business”. Objectives of IPSAS The objectives of the IPSAS include: 1. Setting the general framework and preamble for public sector accounting. 2. Creating a framework for accountability. 3. Providing information for decision makers and 4. Providing information for users of financial statements. The users of financial statements identified by the IPSASB include the following: 1. Sources of public funding: donors, lenders and taxpayers. 2. Service recipients and resource providers. 3. Citizens 4. Other government agencies. 5. Budget information and legislation enforcers. Qualitative Characteristics of the IPSAS There are various qualitative characteristics that the IPSAS seeks to attain. These pointers are essential for the proper disclosure of financial information in documents. They are: 1. Relevance: Information must be captured in the financial statements of public sector entities if they either have confirmatory value or predictive value or both. If an item has none of such values, it should not be recorded. 2. Faithful representation: This refers to the fact that the person capturing information for a public sector entity must do so in uttermost good faith. Information captured must be complete. The one capturing it must be neutral and not seek to influence or induce any ends by presenting the figures in a given way or manner. Also, it should be free of material error. 3. Understandability: Information presented in financial statements under the rules of the IPSAS should be understandable. It should enable comprehension and must make meaning to a reasonable person. 4. Timeliness: It should be presented at the right time to enable the relevant stakeholders or users of the financial statement to put the information tot he use for which they seek. 5. Comparability: Financial information must promote comparability and allow comparison to be conducted on an entity to entity level. It should also promote comparison on time to time basis. These characteristics are induced by the use of similar or universal standards, consistent application and uniformity. 6. Verifiability: Information must be represented faithfully. Also, it should be supported by relevant facts and figures to back the prepares of the financial statements. Constraints to Financial Statements Set out by the IPSAS There are some constraints that are placed upon the people who prepare financial statements. These constraints ensure that the prepares of these financial statements meet the obligations and standards set out by these standards. They include: 1. Materiality: There should be no omission or overstatement of information and figures that would affect or influence accountability significantly. 2. Cost-Benefit: The cost of preparing financial statements must not exceed the benefit to be derived from them. If they do, then the financial statements are not necessary. 3. Balance between Qualitative Characteristics: If there are different qualitative characteristics in a given situation, the preparers must balance it. 4. Substance over Form: The substance of a transaction must be put ahead of the physical form. 5. Prudence: The preparers must understand gains not attained and be more cautious about losses that will be incurred. Conclusion The IPSAS system provides a framework for the improvement of financial and other operational reports for public sector entities. This include the formulation of standards and principles for the disclosure of financial information by public sector entities. The IPSAS standards produce guidance for the promotion of standardisation, efficient reporting and consistent reporting. This involves the adaptation of financial information requirements for universal entities for the public sector. This is based on the modification of IFRS and other financial standards for use in the public sector. The IPSASB is in charge of formulating these standards. They create the necessary standards and ensure that all stakeholders play their part in formally accepting these standards. References Berger, T. M. M. (2012) IPSAS Explained London: Wiley. Hodges, R. and Mettett, H. (2010) “Reporting Public Sector Financial Results” Public Management Review pp99 – 113 International Monetary Fund (2008) Manual on Fiscal Transparency – 2007 New York: International Monetary Fund. International Public Sector Accounting Standards Board (2013) Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities IPSASB Jorge, S. (2008) Implementing Reforms in Public Sector Accounting London: Polity Press. Muller-Marques, Berger Thomas (2010) IPSAS Explained: A Summary of International Public Sector Accounting Standards Hoboken, NJ: John Wiley & Sons. Pallot, J. (2006) “Elements of a Theoretical Framework for Public Sector Accounting” Accounting, Auditing and Accountability Journal 5(1) Rowles, T. (2012) Accrual Accounting in the Public Sector: Its Usefulness in Economic Decision Wellbeing Melbourne: University of Melbourne Ruppel, W. (2013) Wiley GAAP for Governments London: Wiley Shah, A. (2009) Local Public Financial Management New York: World Bank Publication. Tarantina, A. (2012) Governance, Risk and Compliance Handbook Hoboken, NJ: John Wiley and Sons. Read More