Accrual accounting pathway to fiscal transparency in Kenya

In recent times, discussions have been rife in the public sector on the merits of shifting from cash to accrual basis of accounting for purposes of enhancing fiscal reporting. Accrual basis of accounting is an accounting method that requires revenues and expenditures to be recorded in the financial statements when they are earned and incurred respectively, while cash basis of accounting is an accounting method that requires transactions to be recorded only when a cash flow has occurred. The main difference between accrual and cash basis of accounting lies in the timing of when revenue and expenses are recognised.

The current reporting framework under cash-basis of accounting is quite simple since records are maintained on a single entry. However, it is prone to errors and omission.

In 2012, the enactment of Public Finance Management Act led to the setting up of the Public Sector Accounting Standards Board (PSASB) that would formulate accepted standards for the development and management of accounting and financial systems by all State organs and public entities.

The Institute acknowledges the most recent development brought forth by the Public Finance Management (Amendment) Bill, 2022 which seeks to amend Section 194(1) of the Public Finance Management Act, 2012 to increase the scope of the functions of the PSASB to include prescribing a framework for implementation of accrual accounting in government.

In addition, the National Treasury commenced initiatives to adopt and implement the International Public Sector Accounting Standards (IPSAS). 

It is crucial for the country to expedite the transition from cash basis to accrual accounting in the public sector. This is hinged on several scenarios.

For instance, the verification of actual public debt position and the exact amount of pending bills accumulated by Ministries, Departments and Agencies (MDAs) and county governments in each year is a quagmire that requires an adept think-solution. This is because the amounts maintained in excel work sheets, keep changing daily and one wonders what happened to the cut-off concept which is partly blamed on the cash-basis of accounting.

A case in point is when the Office of the Auditor General conducted a comprehensive assessment of Kenya’s public debt last year. The Auditor General noted that there were no lenders’ ledgers that were maintained on double entry and therefore, had to simply match the source documents against data available in Excel sheets which presents a risk in financial management.

When it comes to reporting and recording of public debt, omissions translate to direct misrepresentation of the financial position and can lead to a financial crisis. Other jurisdictions that faced similar challenges in the reporting framework under cash-based accounting were able to avert such incidental inefficiencies and losses after adopting accrual-based accounting. In Mozambique, a loan of over $1.3 billion procured between 2012 and 2016 to finance few maritime projects, went unreported for over seven years at the Mozambican Ministry of Economics and Finance.

It was later uncovered after an audit by Kroll - audit and risk firm- that over $500 million were kickbacks and paybacks to the facilitating bank and government officials. Probably, if there was a corresponding double entry reporting, the scandal would have been avoided.

The government of New Zealand and Australia have been instrumental in driving the move to accrual-based accounting. This has inspired the governments of Sweden, the United Kingdom, Tanzania and Nigeria to adopt and embrace the accrual basis of accounting.

However, most developing countries have been hesitant to adopt the accrual-based accounting citing costs. The massive financial outlay requires goodwill and support from the top to pull through.

The International Monetary Fund and the World Bank have recommended the adoption of the accrual-based system. We therefore, propose a phased transition as follows:

Firstly, beginning FY 2023/24, revamp the IFMIS to accommodate double entry system of accounting and invest in training of key personnel.

Secondly, all the national and county government entities should be on phase one, where all payables and receivables are recognised on the balance sheet. This can be done towards the tail end of FY 2023/24.

Thirdly, in FY 2024/25, all the national and county government entities should be on phase two where all liabilities and assets including public debt, pension liabilities, leases et cetera are recognised on the balance sheet.

Fourth, beginning FY 2025/26 all the all the national and county government entities should be on phase three where all fixed assets and inventories including financial instruments and fixed income instruments are recognised in the balance sheet.

It will be the delight of the accountancy professionals to see the migration and implementation of the accrual-based accounting. Attainment of this will be a mark of professionalism in the public sector as it will reinforce transparency, accountability and disclosure.

It is time for Kenya to take the first step in this journey of embracing the best accounting practice.

The Standard
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