Application of Modern Accounting Standards to Enhance Efficiency in the Public Sector - Essay Example

APPLICATION OF MODERN ACCOUNTING STANDARDS TO ENHANCE EFFICIENCY IN THE PUBLIC SECTOR of Date A significant number of governments in developing countries are implementing various public financial management reforms as they seek to conform to donor requirements. According to (Bietenhader and Bergmann, 2010, p. 52), governments ought to implement the required institutional arrangements that will enhance accountability and transparency in public sector financial management. A critical and integral part in enforcing these arrangements is the adoption of accrual-based accounting standards as are used in private sector (Bietenhader and Bergmann, 2010, p. 52). Conversion of governments to use International Public Sector Accounting Standards (IPSASs) which is based on the principles of accrual is being advocated by the donor community for adoption by the developing countries (Aggestam-Pontoppidan, 2011, p. 29). Proposers of the adoption of accrual based accounting standards in the public sector argue that the approach will increase accountability and transparency in addition to allowing for improved monitoring of the public debt and liabilities against their economic implications to the country (Chang, Chen and Chow, 2008, p. 483). Adoption of accounting standards seeks to serve various reasons; serving both internal and external functions. Accounting standards are used to track financial information which is in-turn used for presentation of financial statements (Hughes, 2007, p. 26). Moreover, accounting is used for taxation and budgeting. The best accounting standards should aim at recording transactions in a proper manner from which sorting out and interpreting of the results can be carried out in a systematic way for interruption by clients (Pina and Torres, 2003, p. 334). This paper seeks to assess the contentions that modern commercial accounting approaches are important as central governments seek to improve efficiency in service delivery based on the arguments advanced on the conversion to modern accounting standards. The main area of concern of donors in public sector accounting is that the majority of central governments adhere to the cash basis of accounting therefore offer little disclosure in relation to what is expected from commercial entities by investors, banks and public (IFAC, 2012, p. 3; Simpson, 2002, p. 46). Cash-based accounting standards are not good for decision makers where for instance cash based reporting system could lead to a misplaced decisions when the government is considering whether to raise the wages of workers or increase their retirement benefits. Since the cash based accounting does not require recording of the pension benefits it will be chosen by the politician (IFAC, 2012, p. 3). However, accrual based accounting approach would require analysis of the effects of increasing retirement benefits leading to better decision making. Adoption of accrual based approaches is likely to enhance the quality of financial information from public entities which will appeal to investors and taxpayers (Sanderson and Van Schaik, 2008, p. 21). Moreover, if they are adopted globally, it will ensure comparability of the accounting information on a global scale and assisting in making internal decision on allocation of resources (Timoshenko and Adhikari, 2010, p. 486). If applied uniformly, modern accounting approaches such as IPSAS would give detailed information on the systemic risks related to government liabilities (Tickell, 2010, p. 73). In general adoption of IPASs and other modern accounting approaches is a great step towards attaining financial transparency of central governments world over. Over the last decade, the greatest concern in public sector is the quality financial management. Most donors have placed pressure to governments in developing countries to institute public sector reforms and this has been taken up by many governments that are currently implementing reforms projects in areas of budgeting, accounting, treasury and financial statistics (Allen, 2008, p. 120). According to Bietenhader and Bergmann (2010, p. 55), an Independent Evaluation Group under World Bank found that Public Financial Management (PFM) is the common theme under the Public Sector Reforms (PSR) projects. They assert that these has been triggered by various activities such as the Paris Declaration on Aid Effectiveness, increased emphasis on country systems and enhanced reliance on budget support. Moreover, there have been increased calls for good governance and fight against corruption. In advocating for application of modern commercial accounting approaches, some donors have called for proper sequencing which forms the main basis in PFM. Proper sequencing is critical in implementing PSR in countries lacking sufficient capacity to implement radical changes at ones. Proper sequencing is critical to help understand the current financial management approaches applied in a particular country (Andrews, 2006, p. 147). Donors have come up with various standardized tools useful in assessing the country’s financial systems which include: Performance Measurement Framework, Public Expenditure Review (PER), Country Financial Accountability Assessment and the Observance of Standards and Codes (ROSC) (Andrews, 2006, p. 147). Moreover, the World Bank has advocated for the use of Report on the Enhancement of Public Sector Financial Reporting otherwise referred to as Gap Analysis to assess financial management systems of a particular country. However, there have been contentions where some donors feel that the diagnostic tools developed are important in laying the basis for the reform programs given that they help in evaluating the present level of achievement and act as a platform for negotiations with donors. Nevertheless, Lye, Perera, and Rahman (2005, p. 784) note that experts interviewed on the use of those approaches argued that they do not provide detailed guidance as relates to sequencing. Moreover, Bietenhader and Bergmann (2010, p. 55) assert that public financial management literature contest that the instruments are not adequate in prioritizing the PFM reforms. Consequently, to enhance sequencing of PSR, there have emerged three basic concepts; platform approach, basics first and the evolutionary approach. The concept of the basics first holds that countries having low capacity ought to focus on the basics which will form the basis for the reforms and not the techniques. Torres (2004, p. 447) identifies various components in budget system considered as the basics and ought to be implemented first rather than copying a new public management approach adopted in another high capacity country such as New Zealand. Basics first concept argues that governments in developing countries ought to promote an environment which supports and demands performance before they introduce performance or outcome budgeting. They should also seek to control inputs before going ahead to control outputs. Basics first holds that governments need to account for cash before accruals are accounted and advocate for the establishment of external controls even before internal controls are enforced. Basics first also propose that reliable accounting systems ought to adopted before going further to implement financial management. In the basics first approach, donors advocate that budgets for the work to be done should come before budgeting for results and introduction of financial auditing before performance contracting. In the basics first model, countries should implement predictable budgets before calling on managers to use resources entrusted to them effectively (Andrews, 2006, p. 152). The basics first approach has been successfully been implemented in countries such as Guatemala and Bulgaria (Andrews, 2006, p. 147). Moreover, weak economies such as Sierra Leone are implementing PFM reforms based on Basics first approach where the government is working to improve on transparency in procurement and ensuring accountability in budgeting. Application of basics first has been contested based on the results of seven case studies (Bietenhader and Bergmann, 2010, p. 55). He argued that there is no evidence that dealing with the basics in the budget processes first leads to more strategic approaches such as the performance based reforms. Bietenhader and Bergmann (2010, p. 57) concluded that performance based reforms can be implemented without necessarily having to adopt the basics particularly whenever there is political and managerial will. Moreover Andrews (2006, p. 147) concurred with the argument that efficient financial management approaches are not a precondition in implementing result oriented approaches following an assessment of seven developing countries in Africa. Nevertheless, result-based budgeting is only possible when there are informalities and instability in the developing countries. The platform based concept in public financial management reforms postulates that reforms ought to be adopted as a combination of measures rather than focusing to complete individual short-term measures (Feltenstein and Nsouli, 2003, p. 460). He argued that PFM reforms should be implemented in a sequence of reasonable steps changes referred to as platforms. Each step is usually described based on improved areas and forms the basis for implementing the next stage. The approach was first applied in Cambodian (Bietenhader and Bergmann, 2010, p. 59). They give some measures that could be fit within the initial platform which include budget planning followed by budget formulation where the strategies for capturing public resources and their deployment is outlined. This is followed by budget execution where a plan is developed to manage budget risks and improvements of the controls are made within the key the major areas of processing transactions. Following the execution of the budget, accounting is done followed by scrutinizing and accountability stage where the flow of funds is tracked and joint reviews of sample procurements and transactions is conducted. Implementation of the platform approach was necessitated by a study that showed that the approaches used previously lead to fragmented PFM and this approach was advocated since it is comprehensive thereby leading to sustained financial management systems. Platform approach incorporates accounting, performance management and internal controls (Talierico, 2009, p. 111). In Cambodian where the approach has been used, it has ensured that the Ministry of Economics and Finance maintains focus on the set priorities and as a result the staff was able to deal with tasks that are manageable to them and within their capacity (Talierico, 2009, p. 111). Additionally, since the approach was focused on manageable activities, this lead to gaining momentum for change and allowed enough time for the changes to be internalized by the staff and management. The approach also provided a useful tool to motivate and guide change process by mapping it graphically and showing the future milestones. Despite its benefits, the platform approach has been criticized with the main problem pointed being that there was difficulty in getting to an agreement on the definition of the stages. Another approach used in the sequencing public sector reforms is the evolutionary approach as was applied in the Decentralization Support Activity (DSA) project undertaken in Ethiopia. DSA project offers assistance to the Ethiopian’s government in implementing Civil Service reforms in accounts, budget and planning (Peterson, 2001, p. 131). According to DSA, sequencing begins with creation of a transaction platform which comprises the budget system, disbursement systems, accounting and the information system as a strategy for ensuring financial controls. This is followed by the performance/ policy platform which comprise of the macro-economic structure, managing information system, and development of the multi year budgeting. The third activity in the series is the legislative oversight platform where policy, appropriation and expenditure will be evaluated (Peterson, 2001, p. 131). The advantage of evolutionary sequencing is that it ensures sustainability and eventually develops to become complex reforms which focus on results and performance. It is not enough to only be focus on technical standards when implementing reforms in the public sector but consideration should be given to the political will of the leaders. Moreover, (Peterson, 2001, p. 131) outlines four factors that should be taken into account for successful public financial management reforms including capacity, process, motivational and institutional development. In capacity development; societies, people and institutions are empowered to discharge various functions, solve problems and achieve set goals. Motivational development assesses how the people can be made to flow with thee changes such as even after implementation of a credible budget, the staff must be motivated not to hold back any money entrusted to them. On the other hand, process development looks into the organizational structure and the way through which organizational change can be implemented as the institutional development is concerned with laws and policies, such as implementation of internal control system to enhance accountability of the local institutions (White, 2011, p. 605). Moreover, institutional development plays a role in enforcing the institutional culture regulating behaviors. Commercial accounting standards allows for efficient auditing of the government operations. Despite their applicability, conversion to modern accounting requires to be implemented progressively as governments seek to ensure reforms in the public sector. According to Rayegan, et al. (2012, p. 521), sequencing reforms require country ownership as was described in the Paris Declaration for Aid Effectiveness and was echoed in the Accra Agenda for Actions where it was noted to be a key aspect required in accelerating PFM reforms. Implementing of the PFM reforms should be gradual allowing countries to grow rather than the big bang approach. This is because step by step approach is usually realistic based on resource requirements and the capacity of the country involved. Furthermore, progressive implementation of PFM reforms is more appealing to governments and donors given that it helps reduce complexities associated with change and allows for self evaluation. Phased implementation of PFM reforms is especially crucial in implementation of complex accounting approaches such as International Public Sector Accounting Standards (IPSAS), Integrated Financial Management Information System (IFMS) or the Government Financial Statistics Manual GFSM2001 (Tudor, 2010, p. 422). Phased implementation of IPASs Accrual implies that only that the critical standards are implemented in the first step while the lower priorities are implemented in subsequent stages. Accrual elements are mostly used in asset accounting where for instance assets are depreciated over the useful life of the product. From the evaluation, it is evident that adoption of IPSAS and other modern commercial stands by central governments will increase accountability and transparency in public sector thereby helping to ensure public sector reforms. Moreover, their adoption will appeal to investors and the public and enhance the process of decision making within the government. However, this transformation is not a one off event but it requires careful consideration and sequencing. Bibliography AGGESTAM-PONTOPPIDAN, C., 2011. Selecting International Standards for Accrual-Based Accounting in the Public Sector: IPSAS or IFRS? The Journal of Government Financial Management, 60(3), pp. 28-32. 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