Analysis of the reasons why the accounting reform in Malta has been long-winded

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  1. General Overview

Accounting is an information system expressed in money terms. It is best defined as ‘the process of identifying, measuring and communicating financial information about an entity to permit informed judgments and decisions by users of the information.’[1]

There are two bases of accounting by which financial information could be prepared and presented, namely the cash basis and the accrual basis. The difference between these two methods has to do with the timing in which transactions and other events are recognized in the books of accounts.

In cash based accounting, income and expenses are recognized and recorded when funds are received or disbursed. On the other hand, in accrual based accounting, income or expenses are recognized and recorded at the time and in the period of performance and delivery, even if no cash inflows or outflows are incurred.

  1. The Maltese Public Sector Accounting System

Presently, Malta’s central government financial reports are based on the cash method of accounting, whilst the local government, public corporations, authorities, entities, agencies and parastatal organizations issue private sector style financial statements.

For the past couple of years, the central government of Malta has embarked on a process to reform the current central government accounting system. The aim of this reform is to move from the traditional cash-based accounting system to the accrual-based system.

1.3Accounting Reform at Malta Central Government

This sub-section provides a historical account of the main events related to the accounting reform in Malta.

In 1998, during a seminar on effective government management systems, Dr. Alfred Sant, the prime minister of Malta at that time, said that it was high time that a modern and a more informative accounting system would be adopted for all government financial statements and budgets[2].

An Accrual Accounting Task Force was set up in 1999 to plan and coordinate the implementation of the new accounting methodology. The members of this task force included representatives from the Treasury Department, Internal Audit and Investigations Department (IAID), Major Ministries, Malta Information Technology Agency (MITA), Malta Institute of Accountants (MIA) and the National Audit Office (NAO) (as observers).

The Malta Government Accounting Standards (MGASs), which were based on the International Accounting Standards (IASs), had concurrently been drafted. Eventually, these (the MGASs) were superseded, and now the official accounting standards for the government of Malta are the International Public Sector Accounting Standards (IPSASs).

Various circulars on accrual accounting were from time to time issued by the Ministry of Finance and the Treasury Department. Extensive training programmes have also been provided to staff within the ministries and departments. In turn, since 2002, the ministries and departments have been providing trial ‘modified accrual-based financial statements’ on a quarterly basis. These are being drawn up by collecting accrual data and integrate it with the cash-based data from the Departmental Accounting System (DAS), the accounting software. The collected accrual data relates to fixed assets, inventories, accounts receivables, prepayments, deferred income, accounts payables, accuals and other credit transactions. These (modified accrual-based financial statements) are not published, and are only used for internal purposes. Yet, these are often used to answer parliamentary questions, such as questions on the amount of account receivables/payables.

An Accounting Methodology and Compliance Unit was also set up in 2004 within the Treasury Department. This unit is responsible to assist and ensure that each and every ministry and government department is adhering to the circulars issued on accrual accounting. The main objective is ‘to obtain a true and fair picture of the financial situation of each Department when compiling the yearly financial statements under the accrual accounting methodology’. [3]

In addition, the Management Efficiency Unit (MEU) is being instrumental in solving any difficulties that occur during the transitory period.

1.4Need for the Study

The process to reform the Maltese accounting system was formally initiated way back in 1999. Fifteen years has passed since then and for some impressive reason this process is not yet finalized and is still on going.

The accrual accounting reform is from time to time mentioned in the annual budget speeches. It has had been assigned different timeframes for its completion, none of which have been met.

Almost all the preparatory work for the transition has been conducted. Only the issuing of the tender to replace the current cash accounting software remains to be done.

The aim of this study is to analyse the main obstacles obscuring such transition. All accounting stakeholders seem to be in favour of the accrual accounting reform. There also appears to be a consensus between the two major political parties. So, why are different administrations reluctant to implement such policy? Why are the authorities constantly postponing the actual reform? Is this an example of a policy suffering from inertia, bureaucracy or a lack of political willingness and interest in reforming the public accounting system?

1.5Research Aim and Objectives

The aim of this study is to analyse the reasons why the road to the accounting reform in Malta has been so long-winded.

The objectives of this study are:

  • Firstly, to identify the primary changes that the transition (from the current cash-based accounting treatment to the proposed accrual-based accounting) would bring about.
  • Secondly, to analyse whether or not the change to accrual accounting enhances governance, transparency and accountability, and whether it better meets the users’ information needs.
  • Thirdly, to examine the reason/s why such a long-winded transition seems so difficult to implement.
  • Fourthly, to establish whether it is still crucial for Malta to shift to accrual accounting, considering that such transition involves a substantial cost of implementation, and that the anticipated benefits would take long to achieve.
  • Fifthly, to analyse the case of other countries: the issues they had to face during the transition process, the benefits achieved and how the additional information that is being generated is being used. The experience of other countries serves to enhance Malta’s risk management purposes.
  • Finally, to make recommendations which are deemed to be relevant to the implementation of accrual accounting after considering the above objectives.

1.6Limitations of Scope

There are certain limitations to this study. First of all, the main perspective of this research is that of civil servants and other elites, rather than that of politicians. This has been decided in an attempt to avoid political bias and partisan politics.

In addition, I am focusing on what has happened till 2013.

1.6Dissertation Overview

This dissertation is divided into five chapters.

As an introductory chapter, Chapter 1 provides a general overview of the topic. It also outlines the need of the study as well as the aims and objectives to be reached.

Chapter 2 provides the reader with a literary review on the main points that distinguish cash from accrual accounting and government financial reporting from the business financial reporting. It explains the notion of New Public Management, describes the manner in which government financial statistics are compiled by international institutions and gives details on the way the Maltese government records and controls public spending.

Chapter 3 describes the research methodology adopted for the purpose of collecting sufficient data to evaluate the variables underlying the government accounting reform in Malta.

Chapter 4 presents the findings of this study and a thorough analysis of such findings.

Chapter 5 summaries the study and presents recommendations derived from the research.

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[1] AAA (1966), A Statement of Basic Accounting Theory, American Accounting Association, p. 1.