Since the introduction of New Public Management (NPM), there has been increasing emphasis within the public sector on working more like a business. Those who consult Osborne and Gaebler's 'Reinventing Government, are confronted on almost every page with the agenda for more business-like government. It is not surprising that the countries that have attempted to introduce the ideas of NPM in the public sector sooner or later also confront the issue of how the budgetary system, that in many countries is a cash-based budgeting and accounting system, can also accommodate these more business-like goals.
Budgeting and accounting are at the heart of the administrative process of a government and this administrative process is also the basis of the power of the purse in representative democracies. The type of budgeting and accounting system may influence the way in which administrations and parliament decide about policy that has budgetary consequences and almost each policy decision has budgetary consequences.
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The two main systems of budgeting and accounting are the cash-based and the accrual system, which is common in the market sector. It is not possible to say that one system is better than the other. However, if more entrepreneurial elements are to be introduced in the public sector, a cash system creates many problems and a business-line system will fit much better.
A government accounting and financial system not only determines the content of the financial report but also establishes the nature of financial and statistical information compiled for international institutions such as Eurostat, the International Monetary Fund (IMF) and the World Bank.
In a cash-based accounting system the expenditures and receipts are calculated in the accounts at the moment that the cash is deducted or received. Though simple, this provides little information about financial position, assets and liabilities, financial performance, revenues less expenses and no interaction possible between financial position and performance. Consequently users and other interested parties are unable to have a bird's eye view of the use of scarce taxpayer resources by government.
One of the chief advantages of cash accounting is that it takes little more than common sense to understand and interpret. Due to its simplicity it also costs much less in terms of administration and accounting expertise. A fundamental shortage of the cash based system is its short-sightedness because it encapsulates government's transactions for a time period of one year only. The greatest limitation of cash accounting is that no financial measure of the stock of physical assets, including significant infrastructure assets, is made and no estimate of the financial cost of consumption of service potential of assets resulting from their use can be determined.
Accrual accounting is superior to cash accounting in that it records transactions when they occur irrespective of when cash changes hands. Money borrowed is recognized simultaneously as an inflow and a liability and the liability removed when actually paid. The recognition of assets and liabilities keeps track of what government is owed and owes. As assets deteriorate or approach obsolescence accrual accounting will inform users before cash is paid to buy the asset or settle the liability. Thus accrual accounting succeeds in representing the amount of resource usage since under cash accounting the purchase of a large fixed asset will register a significant increase in expenditure in the year of purchase and fail to recognize usage in the useful years of the asset. Accrual accounting thus redirects the attention of department managers from cash payments made to purchase the asset to periodically review the condition of the asset.
Countries that have adopted accruals have been the pioneers of public management reforms e.g. Canada, New Zealand, the United States of America and the United Kingdom. In these countries, the implementation of accrual accounting has implied several costs necessary to implement and operate an accrual accounting system particularly as regards the reshuffling of human resource skills necessary and IT costs. A traditional cash-based system can be operated by minimal input of a few skilled accountants supported by a considerable number of clerical staff. The introduction of accrual accounting will necessitate training for civil servants to acquire new skills.
The Maltese Government has committed itself to ensure better financial management of public finance by implementing accrual accounting in all the Ministries and their respective Departments. In order to spearhead this initiative, a Special Projects Office within the Ministry of Finance, in collaboration with the Treasury Department, Malta Information Technology Agency (MITA - previously MITTS), Staff Development Organisation (SDO) and previously the Management Efficiency Unit (MEU) was entrusted with overseeing the implementation process. A Task Force, headed by the Director General (Special Projects) in the Ministry of Finance was established to transform Government's commitment into reality with its main objective being to oversee the implementation process of accrual accounting and ensure a smooth transition to the new accounting methodology.
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Malta has developed its own Malta Government Accounting Standards (MGAS) by modifying International Public Sector Accounting Standards (IPSAS). These Standards will be applicable to all Departments and other relevant Government entities and encompass the reporting treatments of items such as the effects of changes in foreign exchange rates, borrowing costs, construction contracts, leases and employee benefits.
In 2001, Debtors and Creditors Management Procedures were introduced aimed at enabling Government to maximise the collection of revenue due in the shortest time possible and optimise its payments within acceptable timeframes. Information on debtors and creditors will give government a basis for analyzing receivables and payables that the cash accounting system lacked.
Asset Management Procedures were implemented in Departments with effect from 2005. Inventory Records containing tangible fixed assets itemising the Government's resources and respective values facilitate asset replacement planning within the Departments. By selecting depreciation policies and managing the risks of theft, losses and damages, government would be expected to be in a better position to know where it stands as regards its fixed assets replacement policy.
With the introduction of assets and liabilities in the financial statements, proper management of fixed assets, liquidity, debtors and creditors, should be achieved. If the proper records are in place, accrual accounting should improve fixed assets management in general.
The revision of the Financial Administration and Audit Act 1962 by drafting the Public Finance Management Act is projected towards ensuring the effective and efficient management of all assets and liabilities, cash flow, revenue and expenditure of Government and the new Act reflects accrual accounting principles and practices. In 2004 the Accounting Methodology and Compliance Unit was set up to monitor adherence by Departments to standards and regulations and the submission of accrual accounting returns in compliance with accrual accounting circulars issued by Ministry of Finance and the Treasury.
Accrual accounting, though not free from obstacles, is rightly the way forward for improved financial management and accounting in government. A restructuring of the accounting staff is necessary to incorporate the new and more complex accounting standards and concepts. Over 450 government employees currently or in the future working within the accounting function have followed courses at 'A' level accounting Adopting accrual accounting might lure more skilled trained accountants within government. Specialist support from outside the civil service may be temporarily needed, such as the employment of external accountants. This new team of professionals should also assist government parliamentarians to interpret the new figures and help in explaining the difference between the future system and the current one.
The availability of computer software packages accessible to the private sector can now be used by the public sector. The unique characteristics of cash accounting systems have stifled the development of cash accounting software packages, with governments developing their own accounting information systems.
Implementing accrual accounting necessitates a 'culture change' by all involved in the project especially policy makers and senior officials. Adequate communication with the National Audit Office, with parliamentarians and politicians, as well as the media is essential for the successful implementation of accrual project within a government.
It is not possible to state that one system is better than the other; it depends on the purpose a government has with its budget. The adoption of accrual accounting removes a barrier preventing access of private sector trained financial managers to many public sector financial management jobs. It also provides better understanding of overall financial health of Government and acts as the basis for long-term financial planning. This is important for creating sources of innovation and for removing the monopoly on the knowledge of public agencies' financial conditions from those with limited general financial skills but who have institutional knowledge.