New accounting plan to end pending bills menace, misuse in government

President William Ruto chaired a Cabinet meeting at State House, Nairobi on Thursday, March 7, 2024.[PCS] The Cabinet on Thursday approved a phased three-year transition to a full Accrual Based Accounting system for the country. Effectively, the financial statements prepared by the government in the fiscal year 2026/27 must be in the accrual format. To understand the significance of this transition, we must look at the two fundamental differences between accrual and cash accounting. Accrual-based accounting is premised on the double-entry system of recording transactions/events of the accounting entity as soon as the economic impact of the transaction is concluded. Thus, economic transactions/events are correctly recorded and identified in the financial year in which they happen, regardless of whether cash has been paid or not. Thus, the double impact of the transaction is captured in the books of the original entry of the accounting entity. On the other hand, the cash-based accounting system utilizes a single-entry system of recording transactions, only when cash has exchanged hands. To demonstrate the implication of the two approaches, let us look at a simple transaction such as a ministry buying a motor vehicle for Sh10 million. We assume the ministry and the seller sign a selling agreement on June 30, 2024. Both parties agree that cash would be paid in 45 days. The government fiscal year ends on June 30 each year. Genesis of pending bills Under the accrual accounting double entry system, the ministry will record in its books an asset called a motor vehicle valued at Sh10 million and an Account Payable (creditor) in the name of the seller on June 30, 2024, when the sell agreement is signed. Effectively, the financial reports of the ministry for 2023/24 will capture and correctly show the value of this transaction. In the cash accounting system that is currently in use in government ministries, the transaction is treated completely differently. Because cash has not exchanged hands, the best effort the ministry can do to ensure the seller will be paid within the 45 days agreed upon is to commit the funds in the system for the 2023/24 fiscal year. Its end-year financial reports for 2023/24 will not show any record of this transaction until the payment is completed in mid-August 2024. Even then, the ministry will only record the cash paid out, and add the motor vehicle into its list of assets at cost. That means this vehicle will only appear, not in the main financial reports of the ministry, but in its register of assets in the fiscal year 2024/25. This record will not show the details of the seller nor correctly track depreciation, current valuation or status of the motor vehicle. This, ladies and gentlemen, is the genesis of the complicated web of government pending bills. It also explains why it is extremely difficult to authenticate the identities of the suppliers and the status of their payments. Under the current reporting standards, any transaction not paid by the end of the fiscal year and not cleared within 30 days allowable for end-year reconciliations automatically becomes a pending bill for it is no longer supported by any budget. Benefits of transition On a silver lining, the government has made significant strides in financial reporting in the last two decades in compliance with Chapter 12 of the Constitution and the enabling legislation, the Public Finance Management Act 2012. Specifically, Article 201 (1)(a) and (e) demands openness, accountability and public participation; and responsible financial management and clear fiscal reporting as among the basic principles of Public Financial Management. Further, Sections 72, 75, 76, 80, 81, 82 and 83 of the PFM Act obligates the National Treasury and accounting officers of all national government entities to keep proper records and prepare annual and quarterly financial reports, assets and liabilities, and revenue statements by standards and format prescribed by the Public Sector Accounting Standards Board (PSASB). The Board is a semi-autonomous agency of the National Treasury mandated to oversee and facilitate the adoption of International Public Sector Accounting Standards (IPSAS), International Auditing Standards (IAS) and best practices globally. Notable achievements so far have been a full transition into IPSAS Accounting for the entire government effective from the fiscal year 2015/16, the provision of standardized financial reporting templates (annual and quarterly) for all public entities with public schools being the latest entrants, and standardization of Internal Auditing guidelines and instruments. Semi-Autonomous Government Agencies (SAGAs) fully transitioned to IPSAS Accrual while only national and county governments have remained on IPSAS cash. The IPSAS adoption framework in 2011 had envisioned a transition to Accrual and governmentwide Consolidation of Financial Statements effective from this fiscal year 2023/24. However, the lack of proper documentation of government assets and liabilities for the national and county governments has been the main hindrance to this transition. The National Assets and Liabilities Management Policy of 2020 identifies the lack of adequate legal frameworks, inconsistent laws, uncoordinated institutional framework and different bases of accounting as major limitations on the ability of the government to maintain accurate records of its assets and liabilities. There would be six major benefits if we actualize the proposed transition to a governmentwide accrual-based accounting. One, it will be feasible to have accurate documentation and valuation of government assets and liabilities. Adopting the double entry mechanism of accrual accounting means each government asset will be properly recorded and identified in the fiscal year in which it is acquired or incurred, and the identities of contracting parties regardless of whether cash has exchanged hands or not. Two, a true record and outstanding obligations of all public debts must be determined if they will have to be reflected in the Statement of Financial Position (Balance Sheet) of the government. Interest obligations will be recognized and recorded as soon as they are due and not when the cash is released to the lenders. Thus, it will be possible to determine accurately the principal balance, amounts paid, interest due and any penalties incurred each year. Unspent allocation Three, the accrual system will cure the end-of-year spending spree and misappropriation that agencies incur to avoid returning unspent budget allocations to the Treasury. For those familiar with the insider operations of the government, most fraud happens around this end-year window when everybody is in a rush to close the books. Henceforth, end-year transactions will become a cut-off date, not an end of the financial cycle, as it happens in the private sector reporting. Fourth, the accrual system is the only sustainable panacea to the pending bills menace in the country. A double entry system will require a more sophisticated form of fraud than simply record entries to create ghost suppliers, double payment and siphoning of funds from public coffers. Fifth, a double entry system will demand a corresponding record entry of any money spent under Consolidated Fund Services. For instance, details of each pensioner will be demanded as a corresponding entry for cash outs under pension payments. Similarly, each debt and interest repayment and salaries of State officers that draw salaries from the exchequer will have to leave a corresponding entry record of the cash paid. Finally, the accrual accounting will actualise the dream of a single set of consolidated financial statements for the Republic of Kenya. Similar to Group Accounts for Multinational Corporations and Companies with multiple subsidiaries, it will be possible to see the entire record of government finances in a single set of accounts. More fundamentally, the accrual system of accounting aligns government reporting with modern accounting theory and literature. All teaching, training and professional qualifications of accounting are predicated on the doctrine of Accrual and the Double-Entry System!

New accounting plan to end pending bills menace, misuse in government

Get Full Access for Ksh299/Week.

Related Topics

Popular this week

Latest Stories

The Standard Insider

Digger Classified

GET OUR NEWSLETTER

CONNECT WITH US

FOR THE LATEST JOB ADVERTS

DIGGER JOBS

Digger Motors

Digger Real Estate

New accounting plan to end pending bills menace, misuse in government

Get Full Access for Ksh299/Week.

Related Topics

Popular this week

Latest Stories

The Standard Insider

Digger Classified

GET OUR NEWSLETTER

CONNECT WITH US

FOR THE LATEST JOB ADVERTS