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Key Text Managing Government Expenditure - Accounting

Author: S Schiavo-Campo and D Tommasi
Date: 1999
Size: 38 pages (111 KB)

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Summary

What are the strengths and weaknesses of accrual accounting and reporting systems for managing government expenditure? How appropriate is the introduction of these systems in developed and developing countries?

This Asian Development Bank chapter explains and defines the key terms in cash and accrual accounting and budgeting systems, and how the accrual system accounts and reports revenues, expenses, liabilities, assets, operating deficits and budgets. It provides a guide to the key issues and areas of analysis required when undertaking reform of existing accounting systems and gives attention to weaknesses and special issues in the organisation of accounting, budgetary controls and cash management.

Accrual accounting is the basis for the UN System of National Accounts and is increasingly gaining importance in OECD countries. This system of accounting and financial reporting states the full financial position for assets (stock and use) and liabilities (present and future) for a given spending agency. Implementation of accrual account and budgeting methods can be beneficial to the management of government expenditure. However, the advantages are primarily relevant for developed countries. Even there, the introduction of full accrual accounting has taken much longer and cost more than had been envisaged. The costs of introducing and maintaining the system would be especially heavy for developing countries. In these countries, therefore, full accrual accounting is not recommended. It could be desirable to gradually introduce modified accrual accounting, which recognises all liabilities and all financial (but not physical) assets. In general, the accounting and budgeting system should be altered only if demonstrably justified on the basis of a careful assessment of benefits and costs (including transaction costs).

The accrual system recognises all accounting events in the period they occur, regardless of the timing of receipts or disbursements. It is similar to the accounting systems of private companies.
Both cash and accrual systems need to utilise a simple, transparent and systematic approach in operation, maintenance, reporting and development.
Computer-based management systems can improve linkages between different financial ledgers - assisting managing, reporting and budgetary planning in cash and accrual accounting systems.
Reform of an accounting system should pay consideration to: existing weaknesses; minimum requirements; budgetary accounting; disclosure of liabilities; the level of accrual accounting implementation; and administrative organisation.
Accounting systems should be simple in operation and well monitored to ensure that accurate information can be easily obtained at local, middle and central government level.

Accrual accounting requires comprehensive registering of assets and a sound cost measurement system, which take time. Developing countries may not have sufficient procedures and reporting at each accounting level to implement accrual accounting.

Adequate instruments for assessing full costs and recording assets should be in place at the agency level.
Accrual accounting requires highly skilled accountants both inside and outside government.
Transparency can only be improved if the public are well-informed and knowledgeable about the foregoing issues - far from evident in developed countries and less so in developing countries.
Developing countries should adopt a selective introduction of accrual methods as their accounting infrastructure develops.
Donors often request accrual accounting systems for their projects.

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Source: Schiavo-Campo, S and Tommasi, D. 1999, 'Accounting', in Managing Government Expenditure, Asian Development Bank, Manila.
Author: Daniel Tommasi , dtommasi@easynet.fr
Asian Development Bank (ADB), http://www.adb.org/