Experiences of Accounting Reforms in Selected SEE Countries

1
Experiences of Accounting Reforms in Selected SEE
Countries

• Urka Fon Satler
• Center of Excellence in Finance

2
Overview

• 1. Introduction
• Purpose of public sector accounting
• Objectives of accounting reforms
• Different accounting systems
• PIFC framework
• 2. Accounting reforms and practices in selected
  SEE countries
• Croatia
• Romania
• Slovenia
• 3. Challenges in the implementation of accounting
  reforms
• 4. Training of public sector accountants and
  internal auditors

3
Introduction

• The Purpose of accounting in public sector is
• To provide information on public sector spending
  to the public and other stakeholders,
• To provide information for decision making (for
  politicians/parliament to choose objectives and
  for managers to design strategies to achieve
  these objectives).
• The main reasons for the reforms are
• Need for better information to enable more
  efficient management of public resources (public
  is no longer interested only in who spent for
  what but more and more how the government is
  spending - effectiveness and efficiency)
• Requirements of international organizations (IMF,
  EU)
• Different accounting systems
• Cash accounting
• Accrual accounting
• Modified cash/accrual accounting

4
PIFC framework and External Audit

• Three pillars of PIFC
• Managerial accountability financial management
  and control (FMC) establishing and maintaining
  adequate financial management and control systems
  to carry out the tasks of planning, programming,
  budgeting, accounting, controlling, reporting,
  archiving and monitoring
• Functionally independent internal audit provides
  support to management through the provision of
  objective assessment of internal controls in
  place
• Central Harmonization Unit (CHU) manages the
  development of PIFC, monitors the functioning of
  PIFC, reports to the Government and the public.
• The Role of Supreme Audit Institution
• Provides opinion on Financial Statements of the
  budget and budget users,
• Provides opinion on the effectiveness, efficiency
  and economy of the use of public funds,
• Provides opinion on the function of PIFC system,
• Advisory role.

5
Accounting reforms and practices in selected
SEE countries - Croatia

• Reasons for reforms in government accounting and
  budgeting in 2001/2002 were
• Harmonization of budget classifications with the
  internationally recognized classifications
  (organizational, functional, program),
• Internal need for better information about the
  efficiency and effectiveness of public spending
  in individual public sector organizations as well
  as the entire government.
• Developments in line with global trends and
  international GFS standards (transition to
  accrual accounting).
• Reforms included
• New chart of accounts,
• Transition to modified accrual accounting,
• Changes in the financial reporting (different
  types, forms and content of financial reports in
  line with the principles of modified accrual
  accounting).
• Coverage central government (state budget, state
  budget users, extra- budgetary funds), local
  governments (local government budgets and budget
  users)

6
Accounting reforms and practices in selected SEE
countries Croatia cont.

• Chart of accounts includes 10 classes
• 0,1,2 and 9 are the balance sheet classes in
  which changes and the balances in assets,
  liabilities and equity are tracked
• The accounts classes 3 to 8 track current and
  capital activities of the budget and spending
  agencies, and their contents corresponds to the
  contents of the economic classification, which is
  the base for budget planning and execution.
• For accounting purposes classes 0,1,2,3,6 and 9
  are enough, classes 4,5,7 and 8 are needed for
  budget execution.

7
Accounting reforms and practices in selected SEE
countries Croatia cont.

• Modified accrual accounting general principles
• Depreciation of non-financial assets is not an
  expense,
• Revenues are recognized when cash is received
  (cash principle),
• Expenses are recognized when spending is made
  (accrual principle),
• Changes in value of non-financial assets are not
  considered as expenses or revenues,
• Short term assets used for daily activities are
  considered as expense at the moment of purchases.
  Inventories are included in the balance sheet.
• Donations of non-financial assets are classified
  as revenues or expenses.

8
Accounting reforms and practices in selected SEE
countries Croatia cont.

• Accrual financial reporting was adopted in the
  same year as accrual accounting (2002) and with
  the same coverage.
• Financial reporting is based on the GFS model and
  does not follow the requirements of IPSAS
  standards.
• Required financial statements
• Balance sheet (Statement of Financial Position) -
  yearly
• Statement of Revenues and Expenditures (Statement
  of Financial Performance) - quarterly
• Cash flow Statement - quarterly
• Statement of changes in Assets and Liabilities
  quarterly
• Statement of liabilities - monthly
• Statement of revenues and expenditures from own
  activities quarterly
• Consolidation
• Third level
• General government
• Second level
• Central government
• Local government
• First level

9
Accounting reforms and practices in selected SEE
countries Croatia cont.

• PIFC in Croatia
• Started to develop in 2003 with the adoption of
  the New Organic Budget Law
• Central Harmonization Unit created in 2004 has
  two separate departments Internal Audit
  Department and Financial Management and Internal
  Control Department
• Current situation
• Users that employ more then 100 employees at
  state level and 50 employees at local level or
  those of which annual expenditures are greater
  then 4 mio EUR are required to established the
  internal audit unit
• 137 certified internal auditors
• In 2006
• 60 internal auditors performed 73 audits
• Internal Audit unit was established in
• 94 of direct state budget users (33 of 35)
• none of 500 indirect state budget users
• 7 of the local and regional self-government
  units (6 of 83)
• Of 476 recomendations 44 were implemented fully
  and 8 partially
• 50 of state budget users reported that they had
  established ex-ante internal controls in business
  processes taking the most significant risks in
  consideration.

10
Accounting reforms and practices in selected SEE
countries Romania

• The objective of the reform which started in 2002
  was supplementing of cash accounting with accrual
  accounting
• The reform was implemented in several steps
• 2003
• - Introduction of the four stages of
  expenditures (commitment, validation,
  authorization and payment)
• - Accounting record of general consolidated
  budget claims (entitlements)
• - Revaluation of tangible fixed assets and
  assets in progress.
• 2004
• - Introduction of amortization of tangible and
  intangible fixed assets
• 2005
• - Introduction of a new Chart of Accounts for
  public institutions
• 2006
• - Introduction of adjustments for the impairment
  of fixed assets and for decreasing of the
  financial assets value
• - Revenues are recognized on accrual principle
  (based on statement (declaration) for taxes
• - Expenses and revenue accounts are linked with
  budgetary classification cross reference tables
• Coverage- all public sector institutions

11
Accounting reforms and practices in selected SEE
countries Romania cont.

• Chart of accounts
• Accounts 1-5 are balance sheet accounts
• Accounts 6 and 7 are revenues and expenses
  accounts

12
Accounting reforms and practices in selected SEE
countries Romania cont.

• Financial reporting is in line with the selected
  IPSAS standards and ESA 95
• IPSAS 1 Presentation of financial statements,
• IPSAS 2 Cash flow statement,
• IPSAS 17 Property, plant and equipment,
• IPSAS 12 Inventories,
• IPSAS 19 Provisions, contingent liabilities and
  contingent assets
• Financial statements prepared by all public
  sector institutions are
• The Balance Sheet (Statement of Financial
  Position),
• The Profit and Loss Account (Statement of
  Financial Performance)
• The Cash Flow Statement
• The Statement of Changes in the Structure of net
  assets/equity
• Notes to the financial statements, which include
  accounting policies and other explanatory notes
• The Budgetary Execution Account
• Consolidation

13
Accounting reforms and practices in selected SEE
countries Romania cont.

• Plans
• 2007
• - recording the state public debt (loans
  capital and interest) on accrual bases
• - revaluation of fixed assets buildings, lands,
  by the professional evaluators (deadline 2010)
• 2008-2009
• - introduction of cost accounting for programs
  approved through the budget
• - improvement of the presentation of the
  Financial Consolidated Statements and
  Consolidated Reports on Budget Implementation.

14
Accounting reforms and practices in selected SEE
countries Romania cont.

• PIFC in Romania
• Internal control framework started to develop in
  1999, internal audit in 2003
• Two Central Harmonization Units, CHU for Internal
  Audit and CHU for financial management and
  internal controls,
• Current situation
• 80 of entities at the central public
  administration level and 34 at the local level
  have established internal audit services,
• Different types of training for internal auditors
  as well as continuous professional development,
• Very formalized system of internal controls (ex
  ante and ex post controls established in 1999),
• Lack of awareness of managerial accountability.

15
Accounting reforms and practices in selected SEE
countries Slovenia

• Public sector accounting is regulated by the
  Public Finance Act, Accounting Act and subsidiary
  Accounting regulations and Slovenian Accounting
  Standards
• Public Finance Act differentiates between
• Direct budget users
• Indirect budget users
• Accounting Act differentiates between
• Other users of the unified chart of accounts
  (Direct budget users, Public funds, Pension and
  disability fund, Health fund)
• transactions are recorded on the cash basis
• Defined users of the unified chart of accounts
  (Indirect budget users except Pension and
  disability fund)
• transactions are recorded on the accrual basis,

16
Accounting reforms and practices in selected SEE
countries Slovenia cont.

• Chart of accounts
• Class 8 is used for recognition of result by
  recording transferred amounts of expenses,
  entered on accounts in class 4 (on debit side),
  and for recording transferred amounts of
  revenues, entered on accounts in class 7 (on
  credit side).
• Class 9 represents the second part of the balance
  sheet

17
Accounting reforms and practices in selected SEE
countries Slovenia cont.

• Financial Reporting
• Financial Statements
• Balance Sheet
• Statement of Revenues and Expenses
• Different for defined users of the chart of
  accounts and other users of the chart of accounts
  due to different accounting principles
• To properly record public finance revenues and
  expenses the defined users of the unified chart
  of accounts have to present
• Statement of revenues and expenditures also on
  cash basis,
• Separate recordings of revenues and expenses from
  public services and revenues and expenses from
  commercial activities
• Notes to financial statements
• Annual Report
• Report on achievement of goals and objectives
  (efficiency and effectiveness)
• Consolidation
• Coverage (direct and indirect state budget users,
  direct and indirect users of local-government
  budgets, Pension and disability Fund, Health
  insurance fund, state, local-governments)
• To enable elimination of transactions between the
  organizations that are included in the
  consolidation these transactions are recorded on
  separate accounts.
• Three levels of consolidation

18
Accounting reforms and practices in selected SEE
countries Slovenia cont.

• Reforming of public sector accounting (plans)
• Major challenges
• Transition to the accrual accounting is a
  long-term goal
• Preparation of complete balance sheet (statement
  of state assets and liabilities) and establishing
  a net value
• Improving skills and capacities of accountants
• Defining the role of the licensed public sector
  accountant
• Adapting current IT system
• Reform strategy
• Accrual accounting implemented for all budget
  users, except for (state budget, local budgets,
  Pension and disability fund and Health fund)
• Current activities
• Training and certification of public sector
  accountants
• Strengthening supervision, financial control and
  internal audit
• Results oriented budget
• Keeping cash accounting for budget execution
  until budget will be ready to move to accrual
  system assure comparable reporting

19
Accounting reforms and practices in selected SEE
countries Slovenia cont.

• PIFC system in Slovenia
• Started to develop in 1999 with the new Public
  Finance Act,
• Budget Supervision Services took over the role of
  the CHU and has the following structure
• Internal audit department,
• Budget inspection department,
• Two departments for the audit of EU funds
  (separate departments for cohesion funds and
  common agricultural policy funds).
• Budget users with the budget over 2 mio EUR are
  required to ensure internal audit each year,
  other every three years.
• Current status
• In 2006 the CHU received reports on internal
  audits from
• 76 of direct budget users,
• 38 of local government untis, and
• 18 of indirect budget users.
• 301 internal auditors are certified,
• budget users are obliged to report on the risks
  and controles as part of the annual report from
  2007.

20
Major Challenges in the Implementation of
Accounting Reforms

• Accounting reforms are not technical reforms
  which concern only accountants
• To be successful the accounting reforms should be
  implemented in the context of wider management
  reforms,
• There is no benefit if no use is made of the
  information accounting provides.
• Countries should be cautious when introducing
  accrual accounting.
• Risks
• Public sector accounting standards are not yet
  complete and are changing,
• The implementation of accounting standards
  requires interpretation and application through
  detailed accounting policies (risk of
  manipulation),
• The accrual accounting provides better
  information on the costs of public services
  however these benefits are limited if information
  is not used for managerial decisions,
• Accrual accounting requires changes in internal
  audit and financial control practices as well as
  external audit.
• Accrual accounting in systems where budget is
  still prepared on the cash principle.

21
Major Challenges in the Implementation of
Accounting Reforms cont.

• Introduction of accrual accounting will not
• solve problems related to inadequate cash
  accounting systems,
• improve control or management where there is poor
  control,
• improve external audit or the legislatures
  control over the executive.
• Preconditions for successful introduction of
  accrual accounting
• There should be broad agreement and understanding
  of the need for reforms,
• The accountancy profession must have the capacity
  to implement the reforms,
• Reforms require increased number of financial
  managers who should be properly qualified,
• Accountancy profession should be involved in the
  preparation/interpretation/application of public
  sector accounting standards,
• External auditors should be involved in the
  process of reforms since begining,
• Management training program for line managers in
  how to use an accrual accounting system is
  essential,
• Well-understood and accepted system of budgetary
  control over departments is required and a
  willingness to promote line ministry control and
  the management flexibility,
• Comprehensive, annual independent audit of the
  accounts of each government ministry or
  department is essential,
• The prevailing culture should ensure that rules
  specified about the introduction of accrual
  accounting will be followed,
• IT capacity needs to be developed in paralel.

22
Major Challenges in the Implementation of
Accounting Reforms cont.

• Countries have different approaches to the public
  sector accounting reforms
• Gradual reforms (Slovenia),
• Reforms driven by the requirements of statistics
  reporting (Croatia),
• Extensive reforms that lead to the transition to
  accrual accounting (Romania).
• Country should follow necessary steps in the
  preparation of major accounting reforms
• Planning of the process - clear definition of the
  objectives of reforms and the expected benefits,
• Estimation of costs (very difficult to
  establish),
• Broad political consent (government, parliament,
  auditors),
• Reorganization of staff (greater attention to
  financial management),
• Extensive education and training programs (for
  accountants, financial managers, line managers,
  auditors,)
• Accounting reforms take time and are costly
  therefore they should be carefully planned and
  implemented in stages over several years.

23
Training of public sector accountants and
internal auditors

• CEF developed a training and certification
  programs for public sector accountants and
  internal auditors in cooperation with the
  Chartered Institute of Public Finance and
  Accountancy (CIPFA)
• Training of accountants
• Two-year distance learning program in line with
  international standards of public sector
  accounting and auditing and best international
  practice in financial management
• Six international modules and two national
  modules (different in each participating
  countries)
• Project co-financed by the World Bank and
  implemented in Slovenia, Croatia and Albania
  (from 2007 also Macedonia, Moldova, Romania)
• Training of internal auditors
• Two-year distance learning program covering
  internal audit standards, principles of value for
  money audit, IPSAS standards, management and
  governance and control
• Six international modules and one national module
• Project co-financed by EU and implemented in
  Slovenia (plans for the extension to other CEF
  members in 2008)