Question

Many studies reported that accrual accounting is a better basis of accounting as compared to cash accounting. In your point of view, do you think accrual accounting would help in
reducing corruption and risk of fraud in the public sector? Discuss.

Answer 1

Advantages of Accrual Based Accounting Passing to accrual accounting system is not a purpose in itself but rather a change of mentality regarding the budgetary process, by passing from a rigid situation of cashed incomes and paid expenses to a situation where the emphasis is on achievements and forecasts. Financial Position. Accrual accounting provides information on an entity’s financial position and current assets and liabilities, based on the balance sheet. Public entities need this information to: make decisions about the feasibility of financing the provided services; plan the future funding requirements of asset maintenance and replacement; plan the repayment of existing liabilities and, thus, manage their cash position and financing requirements. Accrual accounting highlights the impact of financing decisions on net assets/equity, leading entities to take a longer term view when making financing decisions. Financial Performance. Accrual accounting provides information on revenues and expenses, including the impact of transactions where cash has not yet been received/paid. Knowing revenues is essential for assessing the impact of taxation on the government’s fiscal position and the need for borrowing in the long term. Knowing expenses is necessary to assess revenue requirements, the sustainability of existing programs, and the likely cost of proposed activities and services. The income statement helps governments to focus on management by results as well as management of resources, which become more useful because performance can be measured more reliably when full costs for a period are taken into account. Cash Flows. Moving to an accrual basis of accounting does not mean the abandonment of cash accounting, cash management being an integral element of accrual-based financial management framework. It is required the production of a full statement of cash flows in order to separately identify cash receipts and payments associated with operating, investing, and financing activities. Modern accrual-based systems have functionalities to support cash-based accounting and reporting. Accrual accounting provides comprehensive information on current and certain projected cashflows, including those associated with accounts and receivables, leading to better cash management and assisting in preparation of more accurate cash budgets. Reporting and Budgeting. Any reform is considered successful only when it brings about changes in the behaviour of the people the reform is targeted toward. Accrual reporting objective is to provide understandable, relevant, reliable and comparable information, useful to a wide range of users in making economic decisions. It incorporates non-cash information, such as revaluations, write-offs, consumption of assets through depreciation, pension liabilities. Financial reports have to rely on the budget and show any differences between the actual results and the budget, as well as any changes during the term. Sometimes the budget is financially much more important than the financial statements.

Introducing accrual based accounting in public sector in Romania The reform of the Romanian accounting system circumscribes to the reform as a whole of the national economy, and, particularly, of the public entities management. Improving public accounting aimed to become a reference tool for decision making by managers, to ensure the preparation of financial statements that disclosure the true financial position and performance of the government business enterprise, and to reflect the financial credibility of the public sector in its economic relation with investors, in order to support sustainable development of the country. As a result of the commitment assumed by the Romanian Government in 2001 to move to accrual accounting, the reform process began in 2002. Ministry of Public Finance has developed the Strategic Development Plan for Public Finance Management Reform, one of its components being Accrual Accounting and Financial Reporting. During the transitional stage, for ISPA and SAPARD funds based on the principle of accruals; for PHARE funds the accounting methodology was , the initial methodology was based on cash accounting, later replaced with the accrual accounting methodology. In 2003, it was undertaken for the first time in public sector, a revaluation of fixed assets , with the objective of recognition their true fair value, followed by a complete revaluation of all assets Tax claims by 2007. (e.g. taxes, fees, contributions) began to be recorded in accounting from 1st of January 2003, and from 1st of January 2004 the amortization of fixed assets began to be calculated and recorded applying straight line method, excepting national assets and other exceptional items. In 2005 revenues were recorded only in the moment of collection and expenses when they were made, but without applying the principle of independence of accounting year. Implementation of new accounting rules was experienced in a number of public institutions; in the same time intensive

Public accounts provide information on budget management and proper and appropriate use of public funds, ensuring for users the possibility of making the best economic decisions. In achieving this requirement is necessary to move from the traditional cash inputs approach, towards outputs and outcomes, respectively accrual based accounting. Arguments are the multiple advantages provided by the financial statements, transparency and accuracy, improved assets and liabilities management and budgeting process, reliable source for decision making, better assessment of programs and related services costs. In Romania, introducing accrual accounting for public sector was part of a wider reform agenda. According to the EU requirements, the whole government accounts passed to accrual accounting system, by adopting new general accepted accounting principles. These principles had to be in compliance with the European rules, and adequate to our country’s circumstances and to its public sector