Momentum growing for better public accounting

PwC surveys central governments in 100 countries

Worldwide, governments are increasingly taking steps to improve their accounting and achieve greater transparency – amidst growing recognition that the accounting framework traditionally used by the public sector isn't fit for the 21st century.

A PwC survey covering 100 countries discloses that while only 24% of governments currently use 'accrual accounting', 37% plan to move to this form of accounting in the next five years, bringing the total adoption rate to 63% of governments surveyed and representing an increase of 142%.

The research shows that the biggest shift to accrual accounting is expected in the developing countries. Among the non-OECD countries surveyed, 50% plan to transition to this form of accounting in the next five years, with Africa leading the way (11 shifting countries), followed by Asia (10 countries) and Latin America (8 countries).

Stanley Subramoney, Strategy Leader of PwC's Africa South Market, says: "It is important that governments, which regulate accounting in the private sector, lead by example and have a high standard in their accounting system. This is not the situation today, but we see great interest in seeking improvement."

South Africa took a decision as far back as 2003 to move from the outdated, cash-accounting system to the accrual-based system developed by the Accounting Standards Board in terms of the Public Finance Management Act. The new Standards are intended to give the Government a view of its assets and liabilities under the custodianship of national and provincial public entities and local government. The benefits of the new system include improved processes and internal controls, as well as information systems to record all transactions.

The new standards, which are based on International Public Sector Accounting Standards (IPSAS), are known as Standards of Generally Recognised Accounting Practice (GRAP). They are the equivalent of the Generally Accepted Accounting Practice applied in the private sector, but include public sector-specific issues. Currently, parastatals, or government business enterprises are required to apply IFRS/SA GAAP, and national and provincial departments must apply a "modified-cash" basis of accounting. The intention, however, is that the "whole of Government" move to accrual accounting in the future, on the same basis, with some exceptions.

100 countries were targeted to participate in the PwC survey covering all geographic regions and levels of development. The survey focused exclusively on central governments and did not take into consideration the accounting and financial reporting practices of local governments.

The public sector tends to make use of the cash accounting model where transactions are recorded in the books when payments are made or cash is received. Cash accounting systems fail to capture information on public sector assets and liabilities and present a short-term view of public finances in the financial reports, says Subramoney.

In accrual accounting, transactions and economic events are recorded and reported when they happen, regardless of when cash transactions occur –resulting in a comprehensive view of a government's assets and liabilities, and of its financial performance and cashflows. IPSAS are often taken as a reference point.

Subramoney adds further: "There is a real need for more solidity and transparency in government reporting. Public sector financial statements should reflect the full economic impact of political decisions and this can only be fully achieved by applying accrual accounting.

"By doing this, governments demonstrate their commitment to achieving greater transparency and accountability, and also to producing better information for decision-making, which in turn should lead to the better use of public resources."

When asked to state the main beneficiaries of accounting reforms, the governments surveyed primarily listed citizens (77%) and politicians (69%). The governments surveyed also indicated a desire to improve their finance function, reporting the following key areas for improvement: fixed asset management, cost accounting, performance management, and long-term planning and forecasting.

Concludes Subramoney:

"When we talk about accounting and management of public finance, we always come back to the same questions, do we create legacy for the next generation or do we consume their legacy and put the prosperity of their future in danger? These are fundamental questions and I think we need to take the long-term view. An efficient and cost effective finance function is essential for the sound management of public finances."

Other key findings of the survey include:

  • There is great diversity in accounting practices but the trend towards accrual accounting is clear.
  • A major shift in accrual accounting is expected in developing countries, with IPSAS serving as a common reference point.
  • More than three years is required on average to transition to accrual-based IPSAS (or similar).
  • The lack of trained staff and IT system requirements are the main challenges.
  • Governments indicate a desire to improve their finance function.
  • Cost accounting, performance management, fixed assets management and long-term planning and forecasting are the key areas for improvement.