Last week, we began a discussion on accounting standards that governments around the world use in recording and reporting financial transactions. Historically, the cash basis of accounting has been used. However, given its limitations as highlighted in last week’s article, many countries as well as inter-governmental and international organisations have implemented the accrual basis of accounting consistent with the International Public Sector Accounting Standards (IPSAS). Several other countries are in the process of transitioning into IPSAS. There is also a cash basis IPSAS that can be used as the first stage towards full IPSAS implementation. A few countries have developed their own national standards based on the accrual system of accounting. These include the United States, Canada and France. The United Kingdom has adopted the International Financial Reporting Standards (IFRS); while New Zealand and Australia initially used IFRS but have since migrated to IPSAS.
In today’s article, we conclude our discussion on the subject.
Some more background information on accounting standards
Accounting standards are authoritative pronouncements developed by internationally recognized standard-setting bodies for accounting and financial reporting purposes. They specify how transactions and other events are to be recognized, measured, presented and disclosed in an organisation’s financial statements. The main purpose is to satisfy the needs of users of financial statements by providing the necessary information for ensuring proper accountability for stewardship responsibilities as well as for decision-making. IPSAS is closely aligned with IFRS with appropriate modifications to take into account the specific nature of the operations of the public sector. Both sets of standards are based on the accrual system of accounting.
IFRS have been developed to suit the needs of the private sector where the primary motivation is maximising shareholders’ wealth through increased profits. The public sector, on the other hand, renders essential and other services to the citizens of a country, and it is the quality of these services that is of paramount importance – hence the need for a separate set of accounting and financial reporting standards. It is in this regard that IPSAS must be viewed.
The implementation of IPSAS is likely to enhance the quality, consistency and transparency in public sector financial reporting, leading to better informed decisions as regards resource allocation. It also increases transparency and public accountability so vitally necessary since taxpayers’ funds are used to implement government programmes and activities. The main considerations are securing good value for money in terms of outputs, outcomes and impacts; and minimizing, if not eliminating, the extent of waste, extravagance, mismanagement, and corrupt behaviour. Public sector accountability is therefore far more rigorous than that which prevails in the private sector.
Accounting standards are not meant to be a set of rigid rules, and there may be situations where adherence to a particular standard will not result in the fair presentation of the financial statements. They also cannot cater for all possible situations that may exist from time to time. In the circumstances, the exercise of sound professional judgment is required in consultation with the appropriate standard-setting body, and there must be adequate disclosures to enable users to understand and appreciate the reason(s) for any deviation from a particular standard.
IPSAS Standard on financial reporting under the cash basis of accounting
This Standard, which was revised in November 2017, provides for a combination of mandatory and voluntary disclosure requirements. The mandatory aspects relate to the use of the cash basis of accounting in the preparation of financial statements such as cash receipts, payments and balances; accounting policies and explanatory notes; budget information.
The voluntary aspects provide for additional disclosures to enhance the usefulness of the financial statements for accountability and decision-making, and for supporting transition to full accrual accounting consistent with IPSAS. The financial statements must specifically state that they have been prepared in accordance with this Standard. Such a declaration can only be made if the financial statements comply with the mandatory aspects of the Standard.
There is also an IPSAS Board publication titled “Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities” which may also prove useful.
Guyana’s attempts to implement the IPSAS (cont’d)
Section 56 of the Fiscal Management and Accountability (FMA) Act 2003 requires the Minister of Finance to promulgate appropriate accounting standards to be employed by officials responsible for the maintenance of the accounts and records. However, it was not until around 2015 that a decision was taken to adopt the IPSAS to replace the cash-based system of accounting that has been in use since Guyana attained its Independence, with little or no modifications over the years.
In his 2013 and 2014 reports, the Auditor General noted that the Government continued to use the cash basis of accounting and suggested the adoption of IPSAS. There was no response from the Ministry of Finance. He raised the issue again in 2015 to which the Ministry of Finance responded that, although a decision was taken to adopt IPSAS, financial reporting continued using the cash basis of accounting. This was no doubt in recognition that IPSAS implementation takes time.
For a fourth time in 2016, the Auditor General raised the matter using the exact text from the three previous reports. This time, the Ministry of Finance responded as follows:
The adoption of the IPSAS does not necessarily require immediate implementation;
There is provision for the use of modified cash basis of accounting as well as the modified accrual basis of accounting;
While the ultimate aim is to move towards full accrual accounting consistent with the IPSAS, a phased approach has to be undertaken; and
Sensitization as a first step, followed by training, will also have to be undertaken before IPSAS can become a reality.
For the next four years, i.e. 2017, 2018, 2019 and 2020, the comments of the Auditor General remained the same as those of the previous years, including the use of the exact wording. The Ministry provided the same response shown above for 2017, also using the exact wording. In 2018 and 2019, the Ministry responded as follows:
The Ministry of Finance continues to increasingly explore methods and systems to modernise and improve public financial management. Towards this end, the IFMAS was upgraded in 2018 to a current Version 7.0 and thereafter renamed the Integrated Financial Management and Information System (IFMIS). The upgrade is geared to support the public sector functions in order to increase the effectiveness and efficiency of state financial management and facilitate the adoption of modern public expenditure practices, in keeping with international standards and benchmarks.
Additionally, efforts have been directed towards strengthening Public Financial Management (PFM) Systems, including re-engineering of business processes and restructuring the government chart of account that would be more aligned with the reforms that are considered prerequisites towards the adoption of the International Public Sector Accounting Standards (IPSAS).
IFMAS is an IT-based budgeting, accounting and reporting system that manages spending, payment processing, budgeting and reporting for governments and other entities. It bundles many essential financial management functions into one software suite. IFMAS can be an off-the-shelf software or a custom-made one and can improve an organisation’s financial management through enhanced management of cash, debt and liabilities, and increased decision-making efficiency, among others. (See https://www.techopedia.com/definition/981/integrated-financial-management-system-ifms. For an elaboration of the subject, readers are referred to our article titled “Understanding Guyana’s Integrated Financial Management System” published on 16 June 2014.
The Government of Guyana had introduced IFMAS in 2004 with the roll out of three of the seven modules. In 2006, two additional modules were implemented. To date, the two other modules – the Purchasing Module, and the Assets and Inventory Module – remain unimplemented. This failure must be viewed against the background that public procurement as well as infrastructure development works and their related assets, consume as much as 70 percent of the national budget. Additionally, as new versions of the software are available, one expects that upgrades will be made to the system. However, IT systems (and any upgrade thereof) should in no way affect the implementation of IPSAS.
We finally come to the year 2020. Responding to the continued casual and innocuous comment of the Auditor General on the issue, the Ministry stated the non-implementation of IPSAS did not prevent the formation of an opinion for the assets and liabilities as at 31 December 2020. This is true, and the Auditor General should have revised his opinion for this and previous years. The Ministry also asserted that the preparation of the financial Statements is in compliance with Section 35 of the FMA Act Regulations which states that the consolidated financial statements are to be prepared on a cash basis. There was, however, no reference to this section in the notes to the accounts. We have also not been able to access the Regulations to ascertain the accuracy of this statement. However, this is not the issue. Having decided to adopt IPSAS several years ago, the question remains how long more will it take to begin the process of implementation.
Conclusion
This year marks nine years since the Auditor General raised the issue of the non-implementation of IPSAS. It also marks seven years since the Government decided to adopt IPSAS. The least that could have been done is to implement the cash based IPSAS as a starting point towards full implementation of all the IPSAS standards.
Next month-end, the Auditor General will issue his report of the public accounts for 2021. There is every likelihood that the subject will once again be treated lightly. Meanwhile, the misuse and abuse of the use of the cash basis of accounting will continue unabated. These include: delaying payments to avoid overrunning budgetary allocations; acceleration of transactions especially in the last quarter of the fiscal year to exhaust budgetary allocations; drawing cheques close to year-end to utilize the remaining balances although value has not been received at the time, resulting in an over-statement of expenditure; overpayments to contractors and suppliers for the provision of goods, services and the execution of works; and defective works performed.
The last report of the Public Accounts Committee (PAC), issued in July 2017 for the fiscal years 2012 -2014, made no mention of the status of implementation of IPSAS. Although the Committee’s examination was substantially completed up to 2018, it is unclear when the related report(s) will be issued. Meanwhile, the PAC appears very much content to examine the issues associated with the abuse and misuse of the use of the cash basis of accounting, without reflecting on what is needed to bring to an end all the malpractices, as highlighted in successive Auditor General’s reports. Where do we go from here?
