A growing number of governments are moving away from cash to accrual accounting. Private companies adopted accrual accounting more than a century ago because it was considered to be a better way of reporting their financial activities and results.
Under cash accounting, transactions are recognised only when the associated cash is received or paid and economic events are not reported if there is no immediate exchange of cash. A 2016 IMF report said that governments were tempted to exploit the system by differing cash disbursements or bringing forward cash receipts as a means of artificially inflating their financial balance.
Accrual accounting offers a number of benefits over traditional cash accounting in that it makes public financial management and reporting more transparent and accountable. It should also curb a government’s ability to window dress its financial management reporting.
The government’s announcement that it has signed an agreement with Grant Thornton to supply an accrual-based accounting system is good news for all taxpayers who contribute substantially to the government’s multi-million budget expenditure every year.
Past administrations have struggled to make accrual accounting a reality. However, the pressure to adopt this more transparent and accountable system of financial management has been eased by relatively recent developments.
A growing recognition of the limits of pure cash accounting as well as the development of accrual-based international accounting standards for the government’s fiscal and financial reporting have been prime motivators for change. Other important enablers were the improving professional qualifications of government accounting professionals and the availability of computerised financial management information systems that make the collection and collation of data that much easier.
Accrual accounting also enables pol-icymakers to plan more effectively the acquisition, disposal and management of government assets, liabilities and contingent burdens. It reduces the risk of surprises for the taxpaying public when ‘corrections’ to previous financial reports are announced – a not uncommon event in a cash accounting environment.
It is essential that once the political will exists to introduce accrual accounting, the consolidation not only of central government ministries and agencies but all units under government control is undertaken. Consolidation will provide a more complete picture of the financial position of the whole public sector.
Such a changeover requires good project management that should include thorough training of public officers in the use of the new accounting system. The 30 months’ timeframe envisaged for this project is reasonable and the cost of €11.6 million will be money well spent if the project delivers the required results.
Political support and technical leadership are important prerequisites for the success of the project. There will, undoubtedly, be technical obstacles as there are in every complex project. Senior government officials need to take on a hands-on approach to ensure that momentum is maintained and the technical obstacles are overcome during the transition phase.
The major risk that such a big project runs is that of cost overruns and failure to deliver the objectives set at this initial stage. A reform team made up of representatives of the Ministry of Finance, government accountants, line ministries, local government, public enterprises, Parliament, the National Audit Office as well as accounting standard setters need to take full ownership of this project for it to succeed.