Public Sector Accounting and Auditing Diagnostic Tools for ComparingCountry Standards to International Standards

PKSubramanian, Lead Financial Management SpecialistWorld Bank, South Asia RegionPsubramanian4@worldbank.org

Abstract

Theassessmentframeworkwasdevelopedin2006bytheWorldBankasadiagnostictooltoassistcountriesinassessing how well their public sector accounting and auditing practices accord with the public sector accounting and auditing standards of the International Federation of Accountants and the InternationalOrganization of Supreme Audit Institutions. The framework uses a set of self-assessment questionnairesfocusing on identifying the gaps in the local standards implemented in each country. It was specificallydevelopedforthecountriesofSouthAsia(Afghanistan,Bangladesh,Bhutan,India,Maldives,Nepal,Pakistanand Sri Lanka).The assessment is at a detailed level to support greater implementation of international standards. A set of sixquestionnaires was used in the survey conducted for this study to collect comparative information on country practices:1

The public sector accounting environment

¯ collecting basic information about financial laws and standards-settingarrangements, educational requirements fo

r accountants compared with International Education Standards (IES),ethical requirements compared with the IFAC Code of Ethics for Professional Accountants.

Public sector accounting practices for the general budget sector if using the cash basis of accounting

¯ comparedwith the requirements of the Cash Basis International Public Sector Accounting Standards ().

Public sector accounting practices for the general budget sector if using the accrual basis of accounting

¯compared with the requirement

s that govern accrual reporting for the public sector.

Public sector auditing environment

¯ compared with the provisions of the INTOSAI Code of Ethics and the

general standards in the INTOSAI Auditing Standards.

Public sector auditing practices

¯ com

pared to the requirements of the INTOSAI field standards and reportingstandards, and, as relevant, the IFAC International Standards on Auditing (ISA).6

Accounting and auditing practices for state-owned enterprises

¯ compared with the requirements of the

IFACInternational Financial Reporting Standards (IFRS) and the International Standards on Auditing.

The diagnostic questionnaires are available from The World Bank South Asia Region FinancialManagement Unit, 1818 H Street, NW, Washington DC 20433, USA through PK Subramanian(psubramanian4@worldbank.org).International Journal on Governmental Financial Management - 2008 1

Introduction

Convergence of international financial reporting and auditing standards has received enormous attention over the last decade and particularly over the past few years. The world has indeed become a much smaller place.Thereisnodoubtthatglobalizationoftheaccountingandauditingprofessionhasbeenenabledbytechnology,which allows us to reach millions of people around the world in a matter of seconds. Therefore, users of financial information will benefit from a common set of accounting and auditing standards characterized byconsistency, coherence and ease of implementation and understanding. In the long-term, global accountingmay transition to a single conceptual framework, however some standard setters believe that a distinctapproach should be retained for the public sector.CountriesareencouragedtoadoptanduseIPSAS,ifthegovernmenthasnopublicsectorreportingframework that produces consistently relevant and reliable financial information. The World Bank has directly supportedthedevelopmentofIPSASbyactivelyengaginginthetechnicalagendaandbyprovidingfundingtotheIPSASBoard. It should be noted that the IPSAS are intended to apply to general purpose financial reports and thatthey apply under two distinct bases of accounting: Cash Accounting and Accrual Accounting.Within this context, the countries of South Asia (Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal,Pakistan and Sri Lanka) have been actively involved with projects to improve the capacities of their nationalaccounting and auditing institutions with the objective of improving public financial management within their respective countries. The accounting and auditing framework and practices had been influenced by their colonialrulersinthelastcenturyand,wherethishasnotbeensignificantlyreformedalready,itneedsupdatingto reflect the international practices of the twenty-first century.The development of the Public Financial Management (public financial management)

PerformanceMeasurement Framework by the Public Expenditure and Financial Accountability Program2has opened theway for a more diagnostic tool to be developed that is referenced to the public sector accounting and auditingstandards of the International Federation of Accountants (IFAC) and the International Organization of SupremeAuditInstitutions(INTOSAI). Thisnewdiagnostictoolisavaluableadditiontothedetailsupportingthe public financial management indicators in a similar way to the separate procurement guidelines.3Thediagnostic tools adopt the methods used in the Report on Observance of Standards and Codes (ROSC) for Accounting and Auditing, modified for the public sector.The specific objectives of the diagnostic assessments are:(a) to provide each country and other interested stakeholders with a common well-based knowledge as towhere the countries stand against the international benchmarks;(b) to assess the prevailing variances; and(c) to chart paths for improved compliance with the international standards.Substantial work has been undertaken on assessing the state of play of public sector accounting and auditingstandards in the South Asian countries.2 International Journal on Governmental Financial Management - 2008

Public financial management includes all phases of the budget cycle, including the preparation of the budget, expenditure andrevenue management, internal control and audit, procurement, monitoring and reporting arrangements, and external audit.

The Program is a partnership among the World Bank, the European Commission, the UK’s Department for InternationalDevelopment, the Swiss State Secretariat for Economic Affairs, the French Ministry of Foreign Affairs, the Royal NorwegianMinistry of Foreign Affairs, the International Monetary Fund and the Strategic Partnership with Africa.

The OECD-DAC Baseline Indicators for Procurement Performance is an internationally developed tool designed to assess thesoundness of a country’s procurement system.

Standards Are Important For Poverty Alleviation

Standards support effective public financial management

Good public financial management is crucial inensuring that budget allocations are efficiently directed to government priorities especially those related to povertyreduction. A well-functioning public financial management system usually needs an elaborate framework of technological and human resource deployments. The international standards for accounting and auditing provide thesound basis for this technology and HR framework. They cover such things as ethical behaviors, education and trainingstandards, as well as, accounting and auditing methods and rules. Around the world, a standardized approach is beingdeveloped through the development of, training in, and adoption of, international accounting and auditing standards.Practices in accounting and auditing are under frequent refinement and the standard setting boards are continuallyadopting new standards to support these refinements.

Standards support results frameworks

Many countries are directing substantial parts of their annual budget to poverty related areas and sometimes special reporting frameworks have been necessary to meet reporting requirements,usually because in-country systems do not meets international standards. The special reporting arrangements have been put in place by donors because financial reporting has often been insufficient to provide enough information about theuse of funds directed to poverty reduction efforts (although the IPSASB is currently finalizing its accountingrequirements in this area

). The government and donors have a special interest in the impact of government spending inreducing poverty and reliable financial reporting helps to provide better information. But these special ring fencedarrangements are less reliable than standards-based systems operating in-country, and are generally non-sustainable.Hence, there is a need for a reliable public financial management system within each country, supported by acceptablestandards to govern a suitable measurement and reporting framework that provides the results information that donorsand governments want.

Reporting requirements need a reliable accounting system

Governments and donors providing financial supportfor government programs need to report back to citizens in host and donor countries about how funds have been utilized.For them to be able to provide credible reports on fund utilization, the reporting systems on which the reports are basedneedtobereliable. Useofinternationalaccountingstandardscansignificantlyincreasethecredibilityofthesereports.

Further standards can be developed of direct relevance to developing countries

The issue is sometimes raised by developing countries that the international standards are too difficult to implement or are not appropriate for their environments. To the extent that existing standards do not meet the needs of developing countries the public financialmanagement authorities in those countries can be assisted to play a larger role in the IFAC and INTOSAI committeesystems so that the standard setting bodies provide standards of more direct relevance to developing countries. Both bodies have been doing a lot more in the public sector and have been re-orienting their corporate planning processes toinvolve their developing country members more extensively and directly.

Standards Can Support Transparency And Governance Improvement

Timely and reliable accounts need IT systems and these depend on applying international standards

Manycountries find it difficult to produce reliable accounts in a timely fashion. With the use of IT systems based oninternational accounting standards governments should be able to produce their accounts within six months of year-end.The use of international standards enhances the credibility of these accounts. Computer software accounting packagesare available to support the IT systems that will do this. Accounts for each ministry and each regional level of governmentcanalsobesuppliedwithintheperiodbythesameintegratedsystem. Transparencyandgovernancecannot be adequate without the use of globally accepted and understood standards implemented via automated systems.

Reliableinternalcontrolsshouldbebasedonstandards

Evasionofcontrolsandmisuseofgovernmentmoneysisa constant theme of audit reports in many countries. It is easy to adopt a set of internal controls but their managementneeds constant and reliable enforcement. Cultures of impunity occur within some government administrations and public money is often not well monitored. Use of international standards and appropriate internal controls practicesmake such evasions more difficult.