Changing govt accounts

The transition of govt accounting system to a greater level of transparency and efficiency has begun with Indian Government Accounting Standards

The transition of the government accounting system to a greater level of transparency and efficiency has begun with the introduction of the Indian Government Accounting Standards. The first five of a series of protocols are scheduled to be notified in the coming days and will take effect from the next fiscal year. More sets of standards will be issued as the process gains momentum, culminating in the full implementation of an accrual-based accounting system in five years. To transform and harmonise the many disparate systems that are currently in place is no easy task, and there is widespread scepticism about the government’s ability to pull it off at all, let alone within the time indicated. However, the new system will prove to be an enormous boon in terms of the government’s ability to keep track of its revenues and expenditures and, consequently, on how effectively it is meeting its goals across the whole range of activities that it engages in. Effective accounting obviously cannot guarantee effective service delivery, but it will prove to be a handy instrument for those in pursuit of this goal, both outside and inside government.

 

Good intentions and high payoffs notwithstanding, harmonisation will be a hugely challenging task. There are currently four major accounting systems being used in government. The defence services, railways and postal services each have their own protocols, while an omnibus civil accounts system services other government ministries. Each is maintained by its own distinct cadre, in addition to which there is the Audits and Accounts service. Each follows its own conventions and standards, the result of legacy and the specific context of each activity. The common feature of all the systems is that they follow cash-based accounting, which means that revenue is recognised only when the cash comes in, and expenditure when the cash flows out. The several weaknesses of this approach are well known and it has been completely displaced by accrual-based accounting in Generally Accepted Accounting Principles (GAAPs) around the world, which are followed by corporate entities. A major drawback of the existing government systems is their treatment of physical assets, which are the bread-and-butter of any business activity. Accurate measurement of assets provides the basis for comparison of performance across the different activities performed by a company, for example and, importantly, across companies. It is nobody’s case that government should be measured by exactly the same yardsticks as business. But, with so much public money being spent on creating physical assets of various kinds, it is surely the citizen’s right to know how efficiently these are being used. This is precisely what an accrual-based system can do. Based on this knowledge, resources can be allocated more efficiently and the people operating the assets can be held to transparent standards of performance.

The previous UPA government’s introduction of an “outcomes” budget early in its term was an attempt to introduce greater accountability in government. In this exercise, done twice during the five-year term, each ministry was required to disclose its achievements vis-à-vis the physical targets that had formed the basis for its budgetary allocation. The shortcomings of this were quickly apparent; comparisons within and across ministries simply couldn't be made. An accrual-based system would have provided far more comparability. Given the state of public finances and public services, five years is far too long to wait. But, better late than never.