Deciding on annual financial reporting standards is a challenge for governments of the Global South, but one that their extensive experience of public financial management will have prepared many for
Timely, clear and open annual financial statements play an essential role in the accountability of governments to parliament and their citizens. However, there are no widely adopted international standards which reflect existing good practice. All the developing countries across the Global South use the modified cash basis rather than the accrual basis for their annual accounts. But there is no internationally accepted guidance which details the standards and good practices which should be adopted for this approach.
The only available standard is the Cash Basis International Public Sector Accounting Standard (IPSAS). This was first issued in January 2003, but although it has been widely promoted by the donor community, PEFA and IFAC, not a single government in the world has actually been able to adopt this standard. This is not from want of trying. Many governments have looked at the standard, but recognised that it is not practical to implement its key requirements. It is estimated that at least 31 governments in Africa have tried to adopt it and one international consultant estimates that he alone has worked in around 30 countries to adopt the standard, but without success.
The two main reasons for the failure to adopt the Cash Basis IPSAS are: firstly, the core requirement for full consolidation of all controlled entities; and secondly, the requirement to disclose support received in kind from donors.
This was recently confirmed by three experienced international consultants at the recent ICGFM conference (www.icgfm.org/conferences.htm). And in a presentation in 2010, Nino Tchelishvili, deputy head of the Treasury Service in Georgia, said that fully implementing the cash basis IPSAS at national government level is not feasible for any country. This is because it is not feasible to consolidate accrual government business enterprises, and because of data requirements on transactions with donors.
Full consolidation of all controlled entities would require the consolidation - and elimination of all transactions between - central government ministries, departments and agencies; but also all government business enterprises (state owned companies or para-statal organisations) and probably local governments. No government in the world actually achieves this, due to the complex nature and multiple entities which would be involved.
The UK government is said to have produced the most comprehensive consolidation with its Whole of Government Accounts which were issued last year. Despite consolidating approximately 1,500 bodies at a cost of around £1.5 million, this exercise omitted a further 1,800 bodies including the nationalised banks, rail infrastructure and public universities.
The key challenge for developing countries would be the consolidation of government business enterprises (GBEs or nationalised industries). This is because at least some of these produce accounts on the accrual basis and so these would have to be converted back to the cash basis before consolidation. This explains why South Africa, for example, produces separate 'Consolidated Financial Information' for its public entities. These statements are not consolidated with information from its national departments.
Similarly Uganda produces consolidated financial statements for its central ministries, departments and agencies, but its GBEs are excluded as the benefits are not considered to be worth the effort. The Government Accounting Standards Board of India goes further,. It said, in 2008, that, 'Though this is a fundamental requirement of Cash IPSAS, it is likely to cause more distortion than bringing clarity in the financial statements of government… Further, consolidating government companies accounts with those of government will result in artificial inflation of cash inflows and outflows and is not likely to result in any improved presentation of financial statements.'
Government financial statements are primarily the way in which accounting officers of individual ministries, departments and agencies are held to account by parliament for their management of the financial affairs of their organisations. Thus consolidating these financial statements is likely to upset this fundamental accountability relationship.
The other major problem with implementing the Cash Basis IPSAS is the requirement for governments to disclose aid received in kind from donors; for example, where donors fund a project directly rather than through the government’s financial systems. The challenge here is that governments are dependent on donors supplying the relevant information and few donors actually do this. PEFA performance indicator D2(ii) requires donors to provide information for at least 50% of the projects that they fund, in order to score ‘C’. The most recent scores for Burkina Faso, Ethiopia, Ghana, Mali, Mozambique, Rwanda and Tanzania show that even this is not always achieved.
In contrast, although the Cash Basis IPSAS only requires that aid received from ‘significant classes of providers of assistance should be disclosed separately’, in a recent survey, aid received from individual donors was often found to be reported, as is the case for example, with Burkina Faso, Ghana, Mauritius, Rwanda and Tanzania.
The IPSAS Board has recognised that there are significant problems with their Cash Basis IPSAS and in November 2008 a Task Force was established to review the standard, with the primary objective to ‘identify any major difficulties that public sector entities in developing countries have encountered in implementing the Cash Basis IPSAS and determine whether it should be modified in the light of these difficulties”.
The Task Force reported to the IPSAS Board meeting in June 2010 and made a number of recommendations, including that the requirements for consolidation reflected in the Cash Basis IPSAS should be revisited - and that the IPSASB should join with other international and national organisations to develop guidance on what may be encompassed under the modified cash and the modified accrual bases of financial reporting. However, these recommendations are not being implemented and no further progress has been made on revising the standard. This is because the IPSAS Board does not have the necessary staff or resources.
An alternative approach would be to identify existing good practices which could be replicated in other countries. A study funded by the African Capacity Building Foundation reviewed the annual financial statements of 12 governments from sub-Saharan Africa and identified attributes of good practice ( http://tinyurl.com/esaag2012). Guidance is now being developed based on this study in co-operation with officials from a number of countries in sub-Saharan Africa.
Donors and consultants from industrialised countries should perhaps approach such issues with a degree of humility. Governments of the Global South are not necessarily waiting for ‘global best practices’ to be brought to them carved in tablets of stone. They already have extensive experience of managing public finance systems and implementing reforms. It is this experience with its many successes and existing good practices which should form the basis for future reforms of public financial management across the Global South, including developing appropriate standards for financial reporting.
Andy Wynne is editor of the International Journal of Governmental Financial Management and has been a consultant for the Federation of Accountants and Auditors General of West Africa, the Commonwealth Secretariat and the International Budget Project
