Pensioners without Pensions. Schools without Students. Wells without Water.
These are just a few human consequences that can result – and do result – when governments don’t have the financial information necessary to make the best long-term decisions for their citizens.
Cash accounting, which 75 percent of governments around the world use in some form, is of course useful. But ultimately, cash accounting doesn’t present the most accurate picture of a government’s financial health, nor does it enable decision makers in the public sector to adequately plan for the development, delivery, and maintenance of the services, programs, and infrastructure on which people rely. And that, in turn, leads to a breakdown of trust in governments.
Accrual accounting creates the ability to recognize, value and manage public sector assets and liabilities. A government using accrual accounting has, for example, the mechanism to record where its wells are and assign them value based on their working condition – crucial in assessing whether they are delivering lifesaving water for people. In cash accounting, conversely, the construction costs are recognized in year one, but after that visibility is lost. There are essentially no records to help track the utility of the well, whether it needs maintenance, whether there are funds for more wells. This is an actual example discussed in this report, and one that reminds us of the very tangible impacts that accrual accounting systems can have on human lives.
While wells might be the order of the day in some jurisdictions, other economies would benefit from public sector accrual accounting that enables the effective management of liabilities. For example, this would be crucial to the health of a pension system or the development of a carbon offset program. Regardless of the application, accrual accounting and budgeting is a game changer. It’s why we, as IFAC and ACCA, are so committed to the support, adoption, and implementation of International Public Sector Accounting Standards (IPSAS) that underpin public sector accrual accounting, and to the development of a robust profession with the capacity to understand, implement and manage such systems.
We are very encouraged that the 2018 International Public Sector Financial Accountability Index found that 65 percent of governments surveyed have implemented accrual accounting, or plan to implement it by 2023.
The report, “Is Cash Still King? Maximising the Benefits of Accrual Information in the Public Sector”, not only confirms that a complete public sector transition to accrual accounting will serve the public interest, but also contains 30 specific recommendations to improve accrual implementation.
To the finance professionals and public sector decision makers who are leading this important transition, we commend you and support you.
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