Accounting in Public Sector

8/9/2019 Accounting in Public Sector

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%bjectives of accounting

&n the public sector ,traditional-'To provide a financial summary)

To enable detailed comparisons of spending tobe made with the budget)To allow the identification of spending to ensureit complies with the law and other legalauthorities ,Parliamentary approvals-)To provide the basis for the ne.t budget*


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%bjectives of accounting

&n the public sector ,modern-'To inform the sta(eholders about thefinancial situation of the government)To provide possible investors withinformation about creditworthiness)

To aid management decision ma(ing)To identify assets and liabilities)To facilitate democratic transparency*


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ritical differences betweenprivate and public sectors

&n the public sector'o test of performance such as profit or rate of

return)on financial measures needed)Problem of lin(ing inputs to outputs)Decisions made for political reasons" not

financial)Test of management competence is political" notfinancial*

All this affects the management approach*


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%verall aim of financial control in thegovernment is to ensure'

That the 4overnment obtainsParliamentary authority for what it wishesto spend ,no ta.ation withoutrepresentation-" and'That the 4overnment only spends moneyon objectives approved by the Parliament*


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%verall aim of a political party is to gain power andto stay in power*

ivil service should be independent of the4overnment* Therefore it can serve any politicalparty* &ts role is to advise and to carry out theinstructions of government within the law and

within the authorised budget* ivil serviceshould be the protector of the constitution*


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&n the public sector there is no mar(et* Therefore acritical difference between the private and

public sectors is that'&n the private sector you have a choice aboutwhether to spend and on what to spend)&n the public sector through ta.ation" you haveno choice 7 you are forced to spend" usuallydepending upon your level of income*


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orms of accounting in the publicsector

9ost common is the cash basis)Some governments still account usingsingle entry)9odern trend is to adopt accrualaccounting

:owever" this trend can be both dangerousand flawed*


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!hy is cash accounting socommon#

Parliamentary approvals are granted on a cashbasis)

Ta. revenue and Parliamentary approval to raiseta.es are essentially about cash revenues)Therefore" the budget is drawn up on a cashbasis)

The budget deficit is funded by ta. revenue orby borrowing 7 again a cash transaction)Reporting to Parliament about what hashappened has to be on the same basis 7 cash*


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The problems with the use ofcash accounting ,2-

Does not facilitate comparison with theprivate sector)

Does not separately identify revenue andcapital e.penditure" so borrowing can beused to finance revenue spending)Does not allow an audit of the financialstatements and therefore encourages lawand transaction based audit*


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ash accounting

Advantages are'Simplicity)

ash can be tightly controlled);asy comparison of spending with ta.revenues)

;asily understood by Parliamentarians);asy for Parliament to grant cashappropriations*


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The pressures for change to

accrualsew management style" with delegated power)Privatisation and contracting out)eed to improve value for money)o cash accounting standards and real concernabout the


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The dangers with a change toaccruals

4reat fle.ibility in interpretation of standards)Pressure from politicians to state results in a

manner that suits them)=nwillingness to accept the managementimplications of the information produced)o real understanding by management or

9inistry of inance of the meaning of accrualaccounting or accounting standards)o lin( between accrual accounts and a cashbased budget*


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Results of these dangers

&ncrease in corruption):igher costs of accounting with no realbenefit)>oss of financial control)Disillusion by politicians with the system*


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!hat can be done to minimisethese ris(s#

Prepare carefully and ensure a culture ofobedience to and enforcement of rules applies)&nvest in training of management);mploy more accountants in more senior roles);stablish an independent standard setterreporting directly to Parliament) (ey roles forthe profession)hange the budget to an accruals basis)&nvest in &T);nsure that the auditor is fully prepared*


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9easuring performance ingovernment ,2-

9anagement accounting systems need to bedeveloped)

Performance information should be based onoutcomes not on outputs or inputs)@ualitative performance measures essential)Performance measures should be independent

of management*4uard against managing to the measure 7 whatcan be measured gets managed*B


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Audit

Traditional public sector audit approach' Audit focus is on compliance and regularity)

Audit often transaction" not systems based)?asis of audit can be the law rather thanfinance and accounting)

Audit certificate does not relate to the financialstatements)9ateriality has a politicalB meaning)

Auditor reports to 4overnment*


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ontacts

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Accounting in Public Sector