February 4, 2019
By: Steven Cain, Technical Manager, Policy and Technical Team, CIPFA
In early November 2018 the Chartered Institute of Public Finance and Accountancy and IFAC launched a joint report on developments in the International Public Sector Financial Accountability Index, tracking progress in the adoption of accrual accounting by national and federal governments around the world. The Accountability Index includes data from 150 jurisdictions, 25% of which currently report using accrual accounting. Looking ahead, the number of governments using accrual is set to more than double by the end of 2023.
The report also highlights the key actions required to successfully implement accrual reforms, explaining that:
– Implementation of accruals must be based on a firm foundation of strong financial and other controls, well understood financial processes, and accurate timely reporting.
– Accounting reform needs to be managed as a major project with a formal change management program and capacity building that reaches out beyond the accountancy function. This will need to encompass not only accountants but also the key decision makers and users of financial information who may not be accountants.
– Investing sufficient time and resources in planning and design will increase the likelihood of successfully delivering the project to budget, scope, quality, and deadline.
Continuing to increase the level of accrual-based accounting is important for citizens across the world, because unlike most private sector companies that report using accrual-basis standards, the majority of governments worldwide are still using cash basis reporting. The European sovereign debt crisis and other financial crises across the world made all too clear the risks that arise when governments don’t have good information on their liabilities and commitments. And even when things run smoothly, cash-basis reporting is of limited use for governments that manage significant assets over long periods and enter into long-term contracts to deliver public service infrastructure. The information needed to manage their operations, assets or debt can’t be found in any cash-based report.
Against this background, the 2018 Index report notes those areas where progress is already being made. With a prediction that 65% of governments will be using accrual by the end of 2023, it is positive to see that more than half of the accrual-basis reporting is already using International Public Sector Accounting Standards, a proportion that is set to rise. The report also shows the greatest prospects for accrual adoption are in Africa, Asia, Latin America and the Caribbean.
So what is CIPFA doing to support countries around the world? We actively promote accrual-based accounting by helping governments implement IPSAS. For example, we are boosting the capacity of public sector financial managers in Zimbabwe to ensure the government has the right knowledge and skills in place to adopt IPSAS. In Ghana, we helped develop an IPSAS Implementation Strategy and Plan to help secure World Bank funding for IPSAS implementation across the Government of Ghana.
One area where the Accountability Index report shows less progress is in accrual budgeting. Only 15 governments reported that they currently prepare budgets on accrual, and the majority are not currently planning to introduce accrual budgeting. This is unfortunate, because while the technical requirements and other challenges around implementing accrual budgeting should not be underestimated, the benefits and importance of adoption are very significant.
Governments know that they need to carefully plan and control their capital expenditure and their borrowing, and most try to do this, but the assets and liabilities they need to manage are most naturally measured using accrual information. There is no standardized or well understood way to manage these effectively by applying budgetary control on a cash basis. Accrual budgeting has the potential to be both cheaper and more effective, using information that is transparent and aligned with best accounting practice.
Overall, the plans for greater use of accrual reporting over the next five years are a promising sign for citizens across the globe. Accruals-based accounting and auditable financial statements linked to comprehensive budgeting are a key part of improving public financial management worldwide, which is essential if governments are to promote trust and transparency, identify and fight corruption, and above all deliver efficient public services that their citizens expect and deserve.
IFAC and CIPFA are keen to expand the Index to report on even more countries as sufficiently reliable information becomes available. It will be interesting to see how things have moved when the next status report is produced.