affective Government Accounting ©International Monetary Fund. Not for Redistribution Also by A. Premchand Control of Public Expenditure in India (1966) Performance Budgeting (1969) *Government Budgeting and Expenditure Controls (1983) Comparative International Budgeting and Finance (1984) (editor, with Jesse Burkhead) *Aspectos del Presupuesto Publico (1988) (editor, with A.L. Antonaya) *Government Financial Management (1990) (editor) *Public Expenditure Management (1993) (also in Russian) *Published by the International Monetary Fund ©International Monetary Fund. Not for Redistribution A. Premchand Effective Government Accounting International Monetary Fund Washington, D.C. 1995 ©International Monetary Fund. Not for Redistribution © 1995 International Monetary Fund This book was designed and produced by the IMF Graphics Section Library of Congress Cataloging-in-Publication Data Premchand, A., 1933- Effective government accounting / A. Premchand. p. cm. Includes bibliographical references. ISBN 1-55775-485-3 1. Finance, Public—Accounting. I. Title. HJ9733.P73 1995 350.72'31—dc20 95-17823 CIP Price: US$21.00 Please send orders to: International Monetary Fund, Publication Services 700 19th Street, N.W., Washington, D.C. 20431 U.S.A. Tel.: (202) 623-7430 Telefax: (202) 623-7201 Internet: [email protected] ©International Monetary Fund. Not for Redistribution For Nikhil, Neeraj, and Indu ©International Monetary Fund. Not for Redistribution This page intentionally left blank ©International Monetary Fund. Not for Redistribution Preface Although government accounting has existed for more than two millen- nia, it has not received its due. In fact, accounting has been looked down upoUPOn and viewed by nonusers as a set of archaic rules that have long since ceased to be relevant or effective. Yet, in addition to governments, ordinary citizens and democratic institutions charged with legislative oversight must contend with government financial accounts and related systems of accounting. There is recognition that these systems stand to be improved, and, from time to time, commissions are appointed to look into improving them. They conduct a debate on the subject, recommend changes, and go through the motions of implementing the changes, with no visible impact on the perceptions of the public or on the operations of those involved in the enormous and growing amounts of paperwork that constitute government accounting. More recently, owing to the fiscal stress that many governments have experienced, the content, form, and organization of government ac- counting have received renewed attention. This time, there is hope that the focused attention and the public debate may have a more enduring impact on the future course of government accounting. This book attempts to shed light on the processes and problems of government accounting and on how the discipline may be revitalized. It recognizes that this reform is too important to be left to government ac- countants alone but requires the concerted efforts of administrators, com- mercial accountants, economists, and, most important, the public. In a way, the book represents the author's views, knowledge, and memories acquired as participant-observer in more than three decades of national and international civil service. The experience gained in the pro- cess was refined through regular exchanges with academics, accountants, and administrators in a number of countries. In an earlier form, the book was discussed in detail at a seminar spon- sored by the IMF, the European Union, and the United Nations Develop- ment Program and held in Accra, Ghana in November-December 1994 for senior officials of 17 African countries. The views of these officials have been taken into account in the preparation of the book for publica- tion. An earlier draft of the book was read by Adolf Enthoven, Richard Bird, Richard Goode, Andrew Likierman, and Y.V. Reddy, and their com- ments and criticisms have proved invaluable. It was also read by several vii ©International Monetary Fund. Not for Redistribution viii • Preface of the author's colleagues in the Fiscal Affairs Department of the IMF and was reviewed, in detail, by a team of senior officials from the U.S. Gen- eral Accounting Office. Their comments have helped in refining the con- tent. As always, the author alone is responsible for any errors that may remain. The preparation and publication of a book are occasions for incurring more debts of gratitude. The author is grateful to all the individuals named above, who unstintingly gave him the benefit of their views, and to David Driscoll and Jagdish Narang, who were supportive through the book's preparation and publication. He is also grateful to Hildi Wicker, who typed the different versions of the book, and Elisa Diehl of the Ex- ternal Relations Department, who edited the book with care and craft. ©International Monetary Fund. Not for Redistribution Contens Preface vii Introduction 1 Evolution 1 Recent Changes 4 Objectives of Control 6 Range of Process Controls 7 From Fund Controls to Global Budgets 7 From Cash Limits to Cash Management 8 Policy Reviews 9 Evaluation 9 From Financial to Efficiency Audit 10 Involvement of the Users 11 Institutional Development 12 1 Payments Systems 15 Payment Stages 16 Release of Funds and Organizing Payments 17 Commitment Stage 20 Types of Payments Systems 21 Method of Payment 24 Security of Payments 31 Relations with the Banking System 32 Commercial Banking 37 Financial Reporting 41 Interenterprise Arrears 42 2 Morphology of Government Accounting 45 Commercial and Government Accounting 47 Single- and Double-Entry Bookkeeping 50 Cash and Accrual 52 Terms and Definitions 53 Why Accrual Now? 54 Budget and Accounts 56 Dimensions of the Issue 58 ix ©International Monetary Fund. Not for Redistribution x • Contents General Ledger System 58 Government Accounts and National Income Accounts 64 Generational Accounts 70 3 Cost Measurement, Accounting Standards, and Other Issues 74 Commercial Practices 75 Government Approaches 79 Relevance of Commercial Practices 84 Capital Charge 88 Foreign Aid Accounts 90 Accounting Aspects of Privatization 96 Accounting and Performance Indicators 98 Other Issues 99 Accounting Standards 102 4 Liability Managem 088 Payables 108 Other Funded Liabilities 112 Contingent Liabilities 113 Unfunded Liabilities 115 Legislated Guarantees 115 Liabilities from Legislative Changes 116 Hidden Liabilities 116 Termination of Contracts 117 Environmental Liabilities 118 Market Failure Liabilities 118 Debt Management 120 Developments 120 Continuing Objectives 122 Organization 124 Role of Accounting 125 7 5 Architecture of Government Financial Information .... 1128 Importance of Financial Information 128 Public and Private Sectors Compared 130 Principles of Reporting 132 Legitimacy 132 Understandability 132 Reliability 133 ©International Monetary Fund. Not for Redistribution Contents • xi Relevance 133 Comparability 134 Timeliness 134 Consistency 135 Usefulness 135 Existing Information Systems 135 Search for User Needs 138 Information Pyramid 139 Analytical Framework of Financial Reporting 142 Purpose, Form, and Frequency 150 Changes 151 Departmental Report 153 Annual Appropriation Accounts 155 Users Within the Government 155 Issues in Transforming Financial Information 164 Design Issues 166 Operational Issues 168 6 Investing in Development: Implementation 170 Design of Development 173 Implementation Lessons and Dilemmas 177 Political Support 178 Integrated or Specific Reform 178 Public Sector Reform or Financial Management Reform 179 Imperatives of Technology or High-Tech Dependency 180 "Big Bang" or Gradualism 180 External Assistance or Internal Resources 181 Operational Issues 182 Steps Toward Improvement 185 Bibliography 186 Tables 1. Payment Methods (Excluding Foreign Aid) 25 2. Foreign Aid Transactions 26 3. Range of Payment Instruments Used in the United States. 27 4. Volume of Noncash Payments Handled by Type of Instrument, 1992 29 5. Central Bank and Government Transactions: Practices in Selected Industrial Countries 33 ©International Monetary Fund. Not for Redistribution xii • Contents 6. Relations with the Banking System 38 7. Cash- and Accrual-Based Budgets 60 8. Budgets, Accounts, and National Income Accounts 66 9. Application of Cost Management syyuSystem............................ 87 10. Government Accounting Standards 105 11. A Typical Reporting System 136 12. Users' Needs 140 13. Financial Information Users and Their Broad Needs 144 14. Public Enterprises: Operating, Profit, and Loss Account... 151 15. Public Enterprises: Balance Sheet 152 16. Performance Data: U.K. Hospital Activity Statistics 154 17. New Zealand: Operating Statement 156 18. New Zealand: Statement of Financial Position 157 19. New Zealand: Statement of Cash Flows 158 20. New Zealand: Statement of Borrowings 160 21. New Zealand: Statement of Commitments 161 22. New Zealand: Statement of Contingent Liabilities 162 23. United States: Statement of Financial Position 163 24. United States: Statement of Operations and Changes in Net Position 164 25. United States: Statement of Cash Flows (Direct Method) . 165 26. Likely Impact of Effective Accounting Systems 175 Diagrams 1. Core Application . 59 2. Overall Financial Management System 62 3. Time and Costs in Government Operations 85 4. Architecture of Government Financial Information 143 ©International Monetary Fund. Not for Redistribution Introduction 1 his study is an attempt to delineate the role of accounting in the fiscal management