1
UNIVERSITY
OF
TECHNOLOGY,
MAURITIUS
School of Business, Management and Finance
Certified Course in
Programme Based Budgeting
And Strategic Management
Module Code: ACCF 1401(2)
Government Accounting and Reporting
Submitted to:
Mr Ramparsad
Date: 12/08/10
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GOVERNMENT OF MAURITIUS
ACCOUNTING SYSTEM
A CRITICAL ANALYSIS
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ACKNOWLEDGEMENTS
We wish to express our thanks to you,
Mr Ramparsad , for the handouts from which we
gathered most of the materials for this analysis.
Each member of the group namely, Messrs.
A.N.Jaudally, S.Choomka, H.Kurreeman and
A.Jhoomun have contributed equally to the
work.
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Table of contents
Page
1. Introduction
2. Accounting Systems
3. Government Accounting System
4. Government Accounting Stakeholders
5. Accounting Network
6. Drawbacks, Weaknesses and limitations
7. Transition to Accrual Based Accounting
8. Some Comparisons With South Africa
9. Conclusion
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INTRODUCTION
Government accounting has been viewed historically as a key element in the move
from “absolute power” (i.e, the government) to “relative Power” (i.e, shared model of
government). Accounting was used by parliament to limit the government’s power to: (1)
spend public money,
(2)
raise taxes to cover the expenditures, and
(3)
determine the purpose of the expenditure.
Thus government accounting requires the executive to: (1)
state the amount, nature and purpose of the planned expenditure and the
taxes needed to fund it,
(2)
ask for and obtain approval from the legislature, and
(3)
comply with the expenditure authority, i.e appropriation – granted by the
legislature and demonstrate such compliance.
Under government
accounting, the legislature is allowed to steer and control the behavior of
government.
Accounting is not only the recording of financial data, but includes also the classifying,
reporting and analyzing such data. The accounting cycle includes the recording of
business transactions, the postings to ledgers, the adjustment exercises, the closing of
accounts, and the preparation and presentation of financial statements.
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The public and the private sectors have different stakeholders, signed different
conventions and adhered to different standards. The choice of accounting systems
from the public sector to the private sector and from one entity of the private sector to
another ranges from the Cash Basis System to the Full Accrual System with concepts
ranging from prudence to duality.
The objective of the choice of an accounting system is to satisfy all stakeholders as to
their need for financial information by keeping a set of accounts showing data with due
regard to transparency and clarify for them to be facilitated in their decision – making.
The same concepts and conventions of accounting may apply to different systems of
accounting. For example the Consistency and Materiality concepts are applicable to
both the Cash Basis and Accrual Systems. The most known concepts and conventions
are: 1. Prudence
2. Consistency
3. Materiality
4. Cost Convention
5. Money Measurement
6. Sustance over farm
7. True and fair view
8. Dual aspect
The prudence concept is to avoid over or under estimation of assets/income and
liabilities/expenses respectively. It is a safe attitude towards the negative hazards of the
future as accounting is operated in a very dynamic environment.
Unless there is a change in the nature of operations or by the requirement of a new
accounting standard, the presentation and classification of items should be consistent.
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Thus variances of data over different fiscal years could be well disclosed and
comparisons well effected for explanations and remedial action.
The materiality of an item or amount refers to the relative importance of the item in the
overall context of the Financial Statements or the relative weight of the amount in the
overall revenue/expenditure item.
The cost-effective approach also supports the
materiality concept by asking, for example whether the cost of doing an exercise will
bring gain in the substance and presentation of financial statements.
The Cost Convention refers to the recording of assets at original cost. Thus assets are
not recorded at market value, exception made for land. Rather assets are recorded at
depreciated value.
The money measurement concept is that financial accounts can only recognize items
capable of being expressed in monetary terms.
However, for the public sector
measurement is mostly done for services delivered and achievements obtained.
Where it is legally possible, the legal form of a transaction should be ignored to take
into consideration the real effect of the transaction. This is the concept of substance
over form.
Financial accounts should give a true and fair view of the affairs of an organization and
to that end, they should be prepared with objectivity and neutrality. The dual aspect
concept refers to every transaction affecting two accounts.
ACCOUNTING SYSTEMS
Cash Basis Accounting recognizes transactions and events once cash is received or
paid.
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Modified Cash Accounting is the addition to the Cash Accounting of some journal
entries after year end.
Accrual Accounting is meant to recognize all income and expenses as they are earned
or incurred irrespective of the flow of cash.
Modified Accrual Accounting differs in that it recognizes expenses for physical assets at
the time of purchase.
GOVERNMENT ACCOUNTING SYSTEM
The accounting system of the Government of Mauritius is the traditional cash basis
accounting with modifications to cater for some journal entries, such modifications
being carried out during a short period between the close of the fiscal year and the
closing of accounts (Modified Cash Accounting).
From the three major international accounting systems, namely: (1)
the System of National Accounts (SNA) (aggregating financial statistics for
an entire economy by combining together government and private
activities,
(2)
the IMF Government Finance Statistics (GFS) (specialized system intended
to support public sector analysis and designed to compose government
financial information across economies) and
(3)
the International Public Sector Accounting Standard (IPSAS) of the
International Federation of Accountants (IFAC),
the Government of Mauritius recently choose GFS.
The “Chart of
Accounts” (COA) tabulated in the Treasury Accounting System (TAS) is
aligned with the format of the Program Based Budgeting (PBB).
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The private and the public sectors used cash accounting until the 16 th Century when the
private sector developed generally accepted accounting principles (GAAP) in response
to economic pressures and new economical environment. However, both sectors are
to-day confronted with new challenges such as the fall in the sugar price, the erosion of
preferential markets, the effects of globalization, the financial and currency crisis, the
terrorism factor and the dismantlement of tariff barriers. Thus a growing need for the
government to shift from the Cash Basis Accounting to a Full Accrual System with a view
to produce more complex information to address the challenges mentioned above.
The modified Cash Basis Accounting System of the Government measures financial
results for a period as the difference between cash received and cash disbursed. It
provides readers with information about revenue sources, application of funds raised
and the balance. It produces only the cash financial position report, the financial
performance report is not produced. However, with the advent of the PBB, a certain
form of performance is established with the set-up of outputs, outcomes, targets and
performance indicators. The Cash Basis System is simple and easy to understand and
the government has not to invest heavily on accounting skills to operate the system and
prepare financial statements.
Due to the challenges mentioned above and to the facts that: (1)
the government fiscal activities intentionally impact the economy,
(2)
the objectives are broader than those of the private sector and
(3)
governments are accountable to a wider group of stakeholders,
the need to move towards Full Accrual Accounting is felt and the
government has embarked on pilot projects at the Ministry of Youth &
Sports and the Registrar General Department.
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GOVERNMENT ACCOUNTING STAKEHOLDERS
The Accountant General of the office of the Treasury operates among many
stateholders, some internal as well as external.
The internal ones are:
(i)
The Bank of Mauritius (BOM) where the cash either in local or foreign
currency is kept;
(ii)
The Mauritius Revenue Authority (MRA), being the major agency for
raising revenue through taxes and levies;
(iii)
The line ministries and departments, the para-statal bodies, the local
authorities and the Rodrigues Regional Assembly (RRA) for spending the
money.
(iv)
The Ministry of Finance and Economic Development (MOFED), being
responsible for financial policies, budget preparation and monitoring.
The external stakeholders are: (1)
Investors
(2)
Donators
(3)
Tax Payers
(4)
Beneficiaries
(5)
Parliamentarians
(6)
Medias
(7)
Trade-Unionists
(8)
Businessmen
(9)
Civil Servants
(10)
Financial Analysts
(11)
Economists
(12)
Public at large.
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For some purpose or another, all stakeholders want to have access to government
financial reports. The report on the status of debt is, for example important for donor
agencies to know the weight of debt servicing in the accounts, its percentage of GDP
and the solvability of the country.
THE ACCOUNTING NETWORK
Before the advent of the on-line T.A.S, accounts were prepared by the AccountantGeneral on the basis of information available at the Mechanisation Section (MS) of the
Treasury. The information for self-accounting departments was transmitted to the MS
via the Consolidated Statement of the Inter Departmental Clearance (IDC) system. The
IDC system was the first computerized system introduced.
The Treasury Accounting System is a computerized network system connecting all
ministries and departments whereby all financial transactions are recorded, using the
GFS chart of accounts.
Receipts collected at the level of Ministries and Departments are remitted to the
Accountant General’s account with the BOM either directly or through the State Bank of
Mauritius (SBM).
Expenses are vouched and sent to the Treasury for payment for non-self accounting
departments.
Regarding self-accounting departments, separate bank accounts are
kept by them at the SBM, where funds needed are remitted by the Accountant General
and surplus revenue is transferred to the BOM.
All transactions are recorded in the TAS through terminals located at each
Ministry/department. Transactions at the level of para-statal bodies, local authorities
and the RRA are not fed into the TAS. They have their own systems and accounting
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packages, only the amount of grants and/or contributions known as transfers and made
to them by the responsible ministries and departments are fed in the TAS.
Different reports of the TAS are obtainable at each ministry/department for
reconciliation, monitoring or other purpose.
THE PBB has adopted the same economic classification, codes and description of items
of expenditure and revenue as set by the GFS with only one difference. The PBB is
voted on a 5-digit basis whereas recording of transactions is made on 8-digit basis
followed in many cases by analysis codes.
Budgetary control and monitoring of revenue and expenditure are made on-line
through the TAS by the MOFED for macro-economic exercises. Likewise Ministries and
Departments cash flow are fed in the TAS for Cash Management at central level.
Recently the Public Sector Investment Programme (PSIP) is monitored on line.
It can be said that the cash basis accounting of the government is embedded in
Budgetary Accounting.
DRAWBACKS, WEKNESSES AND LIMITATIONS.
The Cash Basis Accounting is not representative of the economic reality of the country.
Assets and liabilities shown in the financial position report are only of cash nature. The
financial performance report is not produced. Prepayments and accruals are not taken
into consideration. Revaluation and depreciation of assets are not accounted for.
Year to year comparability of performance and financial stability cannot be made and
auditing can only disclose wastages, cost overruns, inefficiencies and ineffectiveness.
Assets like roads, lands, buildings, machinery, plant and equipment are neither shown
in the financial position nor depreciated. Liabilities like pension benefits, passage
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benefits, gratuities, outstanding payments on contracts already entered are not
accounted for.
In the absence of the financial performance report, the full cost of providing
government services and the details on how much of the cost is borne by taxpayers and
by specific users of the service are not known.
The net expense over revenue of each individual function or program operated by the
government is not known. Is not known also to what extent each program consumes
government revenues or is financed by fees or contributions. Debtors are disclosed in
the financial statements as “Arrears of revenue” However collections of huge amounts
of the arrears have not been fed in the system whereas bad debts which are irrevocable
and need writ-off are not up-dated, thus producing inflated, and not real amount of
arrears. This is detrimental to the request of the government for funds from donor
agencies. Ministries and Departments have no debtors’ accounts as such and debts are
not fed in the TAS. Rather the debtors or “arrears of revenue” are submitted to the
Treasury by way of returns which are shown in a separate statement and not in the
Balance Sheet.
Cash losses arising out of fraud or thefts are not properly shown in the financial position
report.
Store losses written off are treated as books adjustments in store ledgers. The accounts
do not show them as a charge to financial performance.
Investments shown in the statement of Assets and Liabilities is only around 7% of the
total investments shown in the Statement of Investments. For example the investments
of the National Pension Fund are shown in the Fund’s financial statements, and not in
the National Accounts.
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Public debt is not shown as a liability when servicing of the debt represents nearly 60%
of the total recurrent expenditure. The debt is shown in a separate statement.
The deficits of the Consolidated Fund is shown as an asset instead of being shown as a
charge to financial performance. The deficits include investments financed out of the
fund.
Acquisition of fixed assets is not shown, even in a separate statement.
The financial statements do not reveal resources outturns, operating costs of Ministries
and Departments and tax-payers equity.
Exception made for self –accounting departments, the dual aspect of accounting is
inexistent in individual accounting systems of ministries and departments. The reason
is that cash flows are recorded at the treasury while accounts are debited at
department level, thus establishing only a budgetary accounting at that level. In the
process, the following considerations among others are ignored:
-To what extent processes, procedures and systems are efficient.
-To what extent building, warehousing and storage capacity are optimized.
-To what extent human resources are utilized.
-To what extent reviews, monitoring and evaluations of activities are made by
managers over and above audit inspections.
It can be observed that some drawbacks, weaknesses and limitations are inherent to
the cash basis accounting while others are specifically to the government accounting
system.
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TRANSITION TO ACCRUAL BASED ACCOUNTING
The drawbacks, weaknesses and limitations of the Government Accounting System
added to the growing demands of users of financial reports and the dynamic state of
affairs in a globalised world have created a consciousness to move to accrual based
accounting, with a view to provide more information, to promote transparency and
good governance, to avoid manipulation of accounting results, to evaluate the
government’s performance in terms of inputs, outputs, value for money and
accomplishment.
Several transition paths have been recommended by the Director of Audit is its annual
report ending 30.06.2002, namely the application of transition to types of entities,
whole of government reporting and step by step/phased implementation.
The
government choosed the “type of entities” approach, the Registrar General
Department for revenue and the Ministry of Youth & Sports for expenditure, as a pilot
project. The Director of Audit proposes also different stages in the implementing
change from cash to accrual, ignoring capitalization and depreciation of tangible assets
in a first instance. The initial stage is for each department to present a set of accounts
and financial statements on a cash basis and the last stage is for the Treasury to
consolidate the accounts via full accrual and full capitalization and depreciation of all
assets and disclosure of all liabilities, all accompanied with a financial performance
report.
The accrual accounting has become a strategic imperative for government to avoid
isolation from other countries and to become more financially credible in front of donor
agencies.
However some disadvantages of accrual based accounting have to be considered in
any pilot project, for examples the cost involved and the complexity of the financial
statements produced. The cost are summarized in the following categories :
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
Identifying and valuing existing assets.

Developing accounting policies.

Establishing accounting systems.

Developing the necessary skills and providing training for both the preparers
and users of financial information.
The risk should not be ignored and the case for accrual system should not be over
stated.
From Chile in the mid- 1970’s to Malaysia and Tanzania in 2000, there is a history of
hesitations, apprehensions, long-term implementations and implementations at local
authorities/provincial governments only, which should not be overlooked. The UK
experience suggests that realization of the benefits may take more than the 8 to 10 yrs
implementation cycle of the accrual system. In July 2003 the European Federation of
Accountants issued a paper outlining the risks to European governments of moving to
the accrual basis for their accounts by showing the following status of implementation
of accrual based accounting and adoption of IPSAS in some countries:

Australia (state, Federal and local governments)

Canada (state, Federal and local governments)

Finland (Government agencies and whole of government)

France (Local Governments)

Germany (some government Organizations)

Ireland (Pilot projects For selected Government Departments)

Italy (Local Governments)

Malaysia (local Governments)

Netherlands (Government agencies and local Governments)

New Zealand (National and local Governments)

Sweden (Central Government agencies and Local Governments)

Switzerland (Local Governments)

Tanzania( Local Governments)
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
USA (Federal Government)

Nepal (Government agencies)

Sri Lanka (government agencies)
SOME COMPARISONS WITH SOUTH AFRICA
The report by the Accounting Officer to the Executive Authority and
Parliament/Provincial Legislature of South Africa includes among others the following
disclosures:

General Review of the state of financial affairs




Important policy decisions and strategic issues facing the department
Significant events that have taken place during the year
Major projects undertaken or completed during the year
Spending trends
Reasons for under/over spending.
The impact on programs and service delivery.
Actions taken or planned to avoid recurrence


Virement
Any other material matter (including a description of the reason for
unauthorized, fruitless and wasteful expenditure and the amount involved
as well as steps taken to address and prevent a recurrence)
 Service rendered by the Department
(1)
(2)
(3)
Tariff Policy:
Details of determinations of tariffs charged by the department.
Free Services:
Nature of free services rendered by the department that would have yielded
significant revenue had a tariff been charged.
Inventories
Total inventories on hand at year end.
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 Capacity Constraints
Description of capacity constraints facing the department and what actions
have been taken to reduce or remove the impact of these constraints. The
impact of such constraints on plan programs and service delivery
 Utilization of donor funds
Description of donor fund utilization including an analysis of factors
contributing to the effective/ineffective utilization there of (if any).
 Trading entities and public entities
Brief summary of the activities in the trading and public entities
 Organizations to whom transfer payments have been made
All entities to which transfer payments have been made in accordance with
approved transfers in the relevant Appropriation Act. Reason for transfer
payments. Accounting arrangements in place in each entity.
 Public Private partnership
Brief Summary of progress on the PPP’s reported in the previous year, as well as
new PPP’s entered into.
 Corporate governance arrangements
Description of the risk management approach; fraud preventions policies; effectiveness
of internal adult and audit committees; and other governance structures, including
management processes to minimize conflict of interest, implementation of a code of
conduct, and safety, health and environment issues facing the organization.
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 Discontinued activities/activities to be discontinued
Activities discontinued/to be discontinued
Reasons for discontinuance
Effects of the operations of, and service delivery by the department
Financial implications of each discontinued activity
 Asset management
Progress with regard to capturing assets in the register
Establishment of asset management units and asset management teams
Indication of the extent of compliance with the minimum requirements
 New/Proposed activities
New /proposed activities
Reasons for new activities
Effect on the operations of the department
Financial implications of each new activity
 Events after the reporting date
The nature of any event, favourable and infavourable that occurred after the reporting
date and the date of approval of the Annual Financial Statements
 Perfomance information
Processes in place to deliver performance information.
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Conclusion
In the UK the HM Treasury view was that accrual accounting involving allocating cost
between years on the basis of the resource use rather that cash funding was
incompatible with Parliamentary sovereignty and therefore unacceptable. Parliament
voted cash funding year-on-year, so therefore the main control accounts, reports and
accountability must be on an annual cash basis.
Noel Hepworth, formerly Chair of the Federation of European Accountants Public
Sector Committee concluded from his experience of the introduction of accrual based
accounting in Eastern Europe that:
To introduce accrual accounting is costly, time consuming and requires a
diversion of resources from other activities. It requires a great deal of co-operation
from key actors and will need significant changes of substance to the organization,
procedures and responsibilities of managers. As Parliament is also affected because of
the changes that will be needed to the cash allocation and budgetary control processes
it too will need to be consulted. What is more, accrual accounting provides wide scope
for the exercise of judgement and this requires technical knowledge, a disciplined
approach and an audit system capable of monitoring how judgement is exercised.
Unless the budget is also switched to an accrual basis a further problem will be how to
ensure that accrual accounting information available on a monthly or quarterly basis
(and it ought to be monthly at the least) is reconcile to the equivalent cash budget
figures. For these figures the introduction of accrual accounting also carries
considerable risk. A premature decision to migrate from cash to accrual accounting
also risks increasing the timescale for its eventual adoption.
Reform of public sector financial accounting can bring many benefits in terms of the
quantity and the quality of services that are provided to the citizens of many countries
across the world. However, these reforms should be considered carefully. Aspects such
as the basis of accounting to be adopted should be decided in the context of the overall
priorities of the reform process and not just of the basis of the perceived superiority of
one basis of accounting over another. Accrual based accounting may facilitate New
Public Management reforms but it is not an end in itself.
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The drawbacks, weaknesses and limitations of the Government of Mauritius accounting
system can also be addressed within the cash basis accounting system itself with certain
disclosures in the financial position regarding non-cash assets and liabilities.