School of Business, Management and Finance

UNIVERSITY

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:

MrRamparsad

Date:12/08/10

GOVERNMENT OF MAURITIUS ACCOUNTING SYSTEM

A CRITICAL ANALYSIS

ACKNOWLEDGEMENTS

We wish to express our thanks to you, MrRamparsad ,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.

Table of contents

Page

Introduction 5
Accounting Systems 7
Government Accounting System 8
Government Accounting Stakeholders10
Accounting Network11
Drawbacks, Weaknesses and limitations12
Transition to Accrual Based Accounting15
Some Comparisons With South Africa17
Conclusion20

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.

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: -

Prudence
Consistency
Materiality
Cost Convention
Money Measurement
Sustance over farm
True and fair view
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.

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.

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).

The private and the public sectors used cash accounting until the 16th 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.

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.

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 Accountant-General 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 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 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.

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.

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 :

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)
USA (Federal Government)
Nepal (Government agencies)
Sri Lanka (government agencies)

SOME COMPARISONS WITH SOUTH AFRICA