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The ‘accounting model’ underlying the financial management system plays an important role in governance.

An accounting model as a set of accounting policy, principles and procedures may appear to be just a mechanical phenomenon. But behind the façade of account figures lies a societal behaviour which deciphers the contours of governance, good or bad.

Simply stated, a good accounting model is sine qua non for good governance and accounting based on ‘accrual’ principles is the state of the art these days. More and more countries are switching over to accrual based accounting (and more lately to accrual based budgeting as well).

An example from our daily lives will amply demonstrate the relationship between the accounting model and good governance. It is well known that there is a mad rush towards the end of a financial year in every government department to fully consume the budget. If looked at more minutely, it turns out that this phenomenon has far wider implications for governance than simply the question of avoidance of budgetary lapse.

The pressure to consume budget in a short period of time reveals itself in distortion of priorities, deviation from budgetary targets, unnecessary and uncalled for purchases, sub-standard quality of materials and services, higher prices, circumvention of rules and regulations and promotion of corruption in both executive and accounts offices (and possibly in the State Bank) and last but not least, in adverse bunched up cash flows implying avoidable interest expenses. All these factors entail a huge social cost inimical to good governance.

The methods generally adopted by the government to tackle the situation further confound the issues. The solutions enforced by ‘drawing room’ accountants and auditors of the government have invariably been unprofessional, irrational and illegal like an earlier cut-off date for submission of claims and restricting encashment of cheques to June 30 which further aggravate the issues.

Nobody really understands that at the back of all these problems is the cash based accounting model and nobody appreciates that some simple elements of accrual accounting and budgeting can eliminate the year-end problems.

Cash based system makes time scarce and accrual basis makes it abundant. Presently the physical work gets bunched up in the last quarter of the year because of discontinuities which are also rooted in the cash based system.

Budgeting on accrual basis can ensure continuity in work without disruption from one year to another and accounting on accrual basis can ensure completion of all required processes prior to disbursement- inspection of works as well as supplies to certify quality and quantity and detailed scrutiny of claims to detect irregularities and frauds. Rush in offices and hence corruption can disappear or get minimised. .

The government lost one golden opportunity to switch over to an accounting model based on accrual principles and reap its multifarious benefits. About 20 years ago, the World Bank got a diagnostic study carried out on accounting and financial system and based on its findings, which were appalling, a Project for Improvement of Financial Reporting and Auditing (PIFRA) was launched. This project, among other things, claimed a move towards accrual accounting but actually offered too little in the form of a ‘modified cash’ system with a few memorandum entries here and there which would never have taken root in isolation in our culture. These did not constitute even a complete single step forward and could at best be termed as maintenance of the status quo.

The project envisaged separation of audit and accounting functions which was a rational and logical objective. Keeping accounts and audit by the same institution is a basic contradiction in terms and the accounting function as part of the ‘internal control’ mechanism rightfully belongs to the Executive.

There was a structural flaw in the project. The ministry of finance should have seized the opportunity to control the design and implementation of the accounting and financial reporting part of the project in the context of country’s overall financial management needs instead of leaving it with the Audit Office.

This was a big mistake and the ministry in spite of being the biggest stake-holder of country’s financial management preferred to take the back seat in the whole show. The new accounting model and financial reporting system should have laid the foundation for integrated financial management and provided the necessary fillip to good governance. The maintenance of the status quo has many pitfalls.

The project as conceived and executed lacked the vision to see beyond the very limited functions of various accounts offices erstwhile under the control of the Auditor General. An opportunity was thus lost costing more than $40 million in cash and 20 years in time.

The way out now is for the ministry of finance which has been quite passive, reluctant and even resistant in the execution of PIFRA to take up a more proactive role and to ‘create’ another opportunity to rectify the situation by recognizing and catering for its own pivotal position in the entire scenario. Adoption of accrual basis for accounting and budgeting should be considered crucial.

In the emerging new accounting model it is time for all ‘enterprises’ in the public sector to move on to ‘full’ accrual basis of accounting while rest of the government could have a ‘modified’ accrual system. The modification, to begin with, could be a happy mix of institutional absorption capacity and the dictates of good governance.

The accounting function of the federal government should be integrated under the Controller General of Accounts by also bringing in its fold accounting of revenues in the Federal Board of Revenue and that of debt in the Economic Affairs Division. This would do away duplication and waste of resources and effort. Integrating the accounting process, inter alia, would require budgetary process also to conform to the new accounting model.

The entire effort to bring up the financial management in line with the dictates of good governance underlines the paramount need of carrying the separation of audit and accounts to its logical end. The ministry should fully ‘own’ the position of Controller General of Accounts by separating the cadres for audit and accounts and ending the era of compromises.

The training function for both audit and accounts cadres, particularly at the probation level, calls for a totally fresh, unbiased and objective look; the basic premise being to distinguish a finance manager from an auditor.

A critical evaluation may also require a fresh look into the merger of erstwhile civil, military and railway accounts services into the Accounts Group in the wake of administrative reforms of the seventies. The state of Railways’ financial condition and its financial management over the years, for example, certainly cries out for that need.

The urgency for completion of the separation process is also underscored by the desirability of making the audit function more independent in order to reinforce the much needed accountability. The institution of the Auditor General can function truly independently and more effectively if it draws its strength from the Parliament instead of being part of the Executive and a toothless ‘attached’ department of the ministry of finance.

In ultimate analysis, good governance is dependent on the adequacy and effectiveness of what is termed as ‘internal control’ mechanism in the hands of the executive authorities. The accounting model as an integral part of this mechanism provides the strongest arm to the body of the executive towards that end.

It is vital that the strongest arm should stay attached to the body to which it belongs. The institution of the Accountants General must belong to the provinces and should only seek guidance from the Controller General of Accounts in the centre on technical issues in order to ensure country-wide uniformity, harmony and compatibility in accounting policy, principles and procedures.

This arrangement will provide the desirable element of autonomy and can be instrumental in infusing a greater sense of financial responsibility in the provinces. Necessary checks and balances towards accountability can be provided by a truly independent audit function.
This article was published in Dawn in January 2009 but its author was someone other than that posted on the Forum. Does the Forum allow this to happen? Article should have been posted with the name of the real author.
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