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Financial Reporting Developing Accrual Accounting in South Africa

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Title: Financial Reporting Developing Accrual Accounting in South Africa


1
Financial Reporting Developing Accrual
Accounting in South Africa
  • Noel Hepworth
  • Chartered Institute of Public Finance and
    Accountancy
  • IPFA Conference, South Africa, 2002

2
Issues
  • International developments
  • Benefits of accrual accounting
  • A culture change
  • Risks
  • Control and supervision
  • Accounting standards
  • Preconditions for success

3
International developments
  • Encouragement by World Bank IMF
  • Few countries already changed to accruals. (Only
    UK of G7 countries has fully switched to
    accruals.)
  • Some countries considering the switch
  • Some claim to be accounting on accruals but not
    clear if they are
  • Majority remain on cash
  • An ability to complete GFS does not mean that a
    country accounts on accruals basis

4
Benefits
  • Improved resource allocation
  • Better quality policy making
  • Better control of capital
  • Better identification of liabilities
  • Opportunity for private/public comparison
  • Financial management becomes a central concern
  • Better quality management of cash flow and
    current assets/liabilities

5
A culture change
  • Accrual accounting is about much more than
    financial reporting it is about the whole
    process of financial management
  • Provides a better understanding of the nature of
    costs, and
  • A better understanding of what the costs mean for
    financial management and outcomes
  • However only if accrual accounts are properly
    used.

6
A culture change
  • Main criticism of cash accounts is that they can
    be manipulated, but then
  • Accrual accounts can be manipulated to an even
    greater degree, both
  • In the keeping of the accounts and in the way
    standards are set

7
A culture change
  • Financial reporting is about what has happened.
  • Politicians and stakeholders are interested in
    what will happen.
  • Therefore, there is an immediate question about a
    need for accrual budgeting and the more advanced
    countries have all adopted accrual budgeting, but
    only UK of G7.

8
A culture change
  • Creates difficult issues for managers political
    and official (1)
  • Defines costs in a new way
  • Requires assets to be listed and valued
  • Raises questions about efficiency in the use of
    assets and whether or not to be kept
  • Raises questions about the cost of capital it
    is not a free good

9
A culture change
  • Creates difficult issues for managers political
    and official (2)
  • Requires liabilities to be identified and valued
  • Raises questions about the comparability of
    public/private costs
  • Asks whether capital costs should be substituted
    for revenue costs
  • Asks questions about the transfer of risk

10
A culture change
  • Treatment of capital - a contentious issue
  • Mixed range of decisions
  • Some countries use historic costs
  • Some use current/fair values
  • Which is correct?
  • Assets should be valued on current basis (as are
    all other costs) and depreciated! Under
    maintenance high depreciation

11
A culture change
  • Introduction of accrual accounting should
    therefore force the issue of generational costs
    of activities i.e. who is to pay, this
    generation or future generations?

12
A cultural change
  • Conclusion introduction of accrual accounting
    should be part of the process of public sector
    reform.
  • If the country does not have a parallel policy of
    responding to the accrual information or have the
    managerial capacity, including political willwhy
    bother?
  • To switch is time consuming, expensive and risky.

13
Risks (1)
  • Introduction of accruals is not risk free main
    areas of risk are
  • Inadequate technical capacity within the public
    sector
  • Inadequate computer systems
  • Inadequate preparation
  • Failure to recognise long run costs and
    investment needed

14
Risks (2)
  • A failure to technically manage and maintain the
    process not once for all
  • Failure to link with other reforms financial
    reporting is not an end in itself
  • Inadequate monitoring of change process and of
    subsequent management
  • Corruption of standard setting process

15
Risks (3)
  • Loss of control because
  • Budget and accounts not on same basis
  • Emphasis of control is shifted from cash
  • Interpretation of information is difficult
    without skilled financial managers
  • Different scope for manipulation from cash

16
Control and supervision
  • Parliamentary supervision
  • External audit supervision
  • Supervisors need to be part of the change
    process. Therefore they need to understand
  • How their interests will be safeguarded
  • That there is no scope for them to be manipulated
    through the operational process

17
Accounting standards
  • Critical area International standards not
    comprehensive and difficult areas not yet
    defined
  • employee obligations (pensions)
  • social policy obligations (state pensions,
    universal education health care, transfer
    payments)
  • taxation
  • heritage assets and infrastructure
  • costs of environmental protection

18
Accounting standards
  • Wide scope for interpretation, e.g.
  • Entity boundary
  • Who carries risk (public/private partnerships)
  • Valuation principles (assets, stock, plant and
    equipment)
  • Impairment
  • (IAS 36 difficult to translate for public sector)
  • How to define the public sector
  • .

19
Accounting standards
  • To what does the financial report apply?
  • To central government , or
  • To general government
  • If latter consistent with GFS, but consolidation
    of whole of government accounts extremely
    difficult.
  • These problems of definition, interpretation and
    coverage make international comparison (and debt
    rating) difficult

20
Accounting standards
  • Who is to set them?
  • The Ministry of Finance?
  • An independent board?
  • Some joint arrangement?
  • Essential condition that the Ministry of Finance
    does not have unfettered discretion and has to
    account to Parliament for decisions.
  • Remember process is dynamic, not static.

21
Preconditions for success (1)
  • A cultural willingness to accept reform
  • A recognition that accrual accounting is not an
    end in itself
  • Consultation and acceptance
  • Accountancy profession has capacity to assist and
    is willing to do so
  • An acceptance of the changed role and position of
    the financial manager

22
Preconditions for success (2)
  • Support and involvement of Govt. external auditor
  • An appreciation by ext. auditor of the changed
    role and new skills required
  • Adequately trained departmental managers
  • A public sector cultural ethic that accepts
    authority of MoF
  • No systemic corruption and no informal parallel
    budget processes

23
Preconditions for success (3)
  • Recognition that time to introduce will be
    substantial no rush and widespread political
    support
  • An IT capacity capable on handling new
    requirements
  • System of incentives and penalties to encourage
    efficiency in use of resources

24
UK Experience
  • Changeover to accrual accounting and budgeting in
    c.g. took 8 years
  • Parliament needed to be convinced and requires
    cash and accrual information
  • 3 years on about 20 of accounts still qualified
  • PAC criticises late publication of accounts
  • Whole of government accounts not yet available
  • UK is committed and sophisticated technically

25
Is the exercise worthwhile?
  • Yes, for the benefits are considerable
  • However, our experience is that
  • The change is not simple
  • It cannot be rushed
  • Training, training, training
  • Ensure the cash system works well first
  • Link with management reform, because not an end
    in itself.
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