Public sector accounting for better transparency and accountability

Interest in International Public Sector Accounting Standards (IPSAS) and its adoption has increased sharply in recent years, following the attention focused on government’s management of public finances in the wake of the sovereign debt crisis, and this interest is expected to continue in to the future.

A new Ernst & Young report launched titled ‘Toward transparency: A comparative study on the challenges of reporting for governments and public bodies around the world’, aims to identify trends and developments i n public sector accounting including making an assessment of the global transition from cash basis accounting towards accrual accounting, and onto the ultimate goal of IPSAS.

Global financial regulatory convergence is something that the G20 and many other countries have called for to create stability for capital markets and investors.

The study found out that national financial reporting standards are still mostly unique, making true financial comparisons between governments very difficult. The large majority of the countries in the survey each use their own accounting and financial reporting system which means that most are unable to compare their level of efficiency with other governments.

Clear trend towards IPSAS

Encouragingly, a clear trend towards IPSAS or standards that use IPSAS as a reference was observable in the study. The majority of the entities surveyed had already converted to (modified) accrual accounting (52 percent) and identified clear benefits in doing so, including that it facilitates decision making, improves asset and cash management, and improves cost awareness and efficiency.

Thomas Mueller-Marqués Berger, Global Public Accounting Leader at Ernst & Young, says, “Public finance thinkers and policymakers increasingly believe that the complex financial challenges their countries face have been made more difficult to resolve because of their continued reliance on antiquated, cash-based accounting systems.

“It is encouraging to see therefore the modernization of public sector accounting being driven from within governments and that the financial crisis does not appear to have shaken resolve. The private sector has had to incorporate measures that address transparency and usability of financial statements – the public sector urgently needs to do the same.”

Sri Lanka’s compliance

Manil Jayesinghe Head of Assurance at Ernst & Young Sri Lanka shared her views of an acceptable framework for financial reporting in the public sector in Sri Lanka.

“IPSASs are a set of high quality global financial reporting standards for application by Public sector entities other than government business enterprises. These standards are based on International Financial Reporting standards (IFRS) but adopted to the Public sector context when appropriate. Sri Lanka has taken positive steps in this regard and has issued 10 Accounting Standards out of 32 IPSAS that are currently in issue globally. However, adoption of these 10 Sri Lanka Public sector Accounting Standards (SLPSAS) equivalent to IPSAS, are not mandatory at present. As a result, most Public Sector financial statements do not fully comply with SLPSAS as a result of this.”

T h e requirement for Financial Statements of an organization, whether Public, Private or not for profit is to meet specific i nformation needs of users that are unable to demand for such financial information. In a country, such are, citizens, voters, their representatives and other members of the public.

“Adoption of SLPSAS will bring about more transparency and comparability to t he financial statements of t he Government. This will also bring about accountability and empower public officials to think more strategically and economically,” added Jayesinghe.

Benefits of adopting IPSAS

Recognition and valuation of government’s assets and liabilities Financial reporting dimension in public sector accounting is strengthened Thrive for uniformity of public sector accounting. Positive influence on the government’s cost of refinancing Enhance accountability and oversight Improved government financial statistic for better decision making Influence on behavior of politicians, public officials, citizens, media, tax payers etc.

Based on accrual accounting

SLPSAS are fundamentally based on the concept of accrual accounting. Under accrual accounting transactions and other events are recognized in financial statements when they occur (and not only when cash or its equivalent is received or paid). So when financial statements are prepared under the accrual basis of accounting, they inform users of those statements, of past transactions involving the payment and receipt of cash during the reporting period, obligations to pay cash or sacrifice other resources of the entity in the future, the resources of the entity of the reporting period and changes of those resources and obligations of the entity during the reporting period. Therefore, they provide information about past transactions and other events that is more useful to users for accountability purposes and as input for decision making than information provided by cash basis.

“The sovereign debt crisis has focused the need for transparency on government finances within Europe in particular, but it is important for governments around the world to ensure their financial statements are as accurate as possible by using modern accounting methods that give a more complete picture of government,” concluded Jayesinghe.