Chapter

chapter thirteen Government Accounting and Financial Information Systems

Author(s):
A. Premchand
Published Date:
March 1989
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Where is the wisdom we have lost in knowledge? Where is the knowledge we have lost in information?

T. S. ELIOT, Choruses from “The Rock”

Government accounting has a long history and was practiced even when there were no organized budgets. Until the nineteenth century, the efforts in this regard were primarily oriented to double-entry bookkeeping but lacked a coherent theory. Later there was a move from bookkeeping to accounting that involved the measurement and communication of financial information, in addition to recording transactions. During the twentieth century further refinements were made in cost and management accounting and the accounting system as a whole developed to meet purposes that were diverse but all related to the decision-making requirements of a commercial entity. These requirements include pricing, valuations pertaining to the operational activities of the firm and its inventories, and provision of information for prospective investors and the public. These approaches have also had their impact on government accounting. By and large, however, accounting in government is often considered to be more routine than dramatic, in view of its basic nature being a process of recording data on stocks, flows, claims, and other government operations. Its role was viewed as essentially limited to taxation and revenue control and to the recording of commitments and disbursements. However, in relation to the formulation of fiscal policies and their periodic evaluation, the infinite details of accounting, the rules and routines, the plan, form, and structure of accounts and the associated documents all acquire great meaning and interest and admittedly have a crucial role to perform. Notwithstanding the growth in the size and operations of the public sector, accounting systems in government do not appear to have received the attention they needed or deserved.1 As will be shown in the following sections, although many reforms have been introduced both in industrial and developing countries, their present status is such that, while they inspire confidence in recognizing problems and in efforts at solving them, there are still many issues that remain to be tackled.

Nature of Government Accounting

Many contend that there is no positive description of government accounting, although, from a negative point of view, there are several features that distinguish it from commercial accounting as well as from social accounting. Conceptually the differences between government and commercial accounting are at best marginal and some of the arguments seeking to distinguish them may appear to be lacking in logical validity. For example, the two main differences frequently pointed out are (a) the absence of a profit motive in government and (b) that managers in government primarily aim at complying with the legislature's wishes.2 The profit motive in government is applicable only to a few areas, while in the commercial sector profit is an expression of year-round activities. There is no (and there cannot be any) equivalent of profit in the government, although the concerns of government and the commercial world are the same in regard to the allocation and use of resources. The financial return in the commercial world may in some ways be considered to have a parallel in the social return in government, with the major difference that the former can be measured while the latter can only be imputed. Similarly, observance of spending limits or compliance to the wishes of a higher body are not the unique features of government: these features have counterparts in the private sector when they produce goods or services under cost-type contracts or when they have to meet some standards specified by governments.

Although the basic principles of accounting are the same in both commercial and government accounting, it is in the application of some of these principles, and the institutional framework in which it operates, that government accounting stands apart. The commercial firm draws its revenues from the sale of services; in government income is derived from the use of government's coercive power to impose taxes. In certain areas goods and services are offered for sale but their proceeds do not constitute a major part of government revenues. The firm is managed by a board of directors representing the shareholders. Government is managed by the community through its elected representatives. In business the purpose of information is primarily to serve internal needs, and the information given to the public is to meet the investors' requirements or accountability to the community. The shape of accounts is molded by the purposes of the organization that it is expected to serve. In the government the purpose that dominates the approaches is that of accountability. There are other systemic differences too. In the commercial world double-entry bookkeeping continues to be the major theme. It aims at preserving the balance between assets and liabilities. Each transaction has a dual effect on the assets or the liabilities of the owner's equity. In a number of governments, however (excluding the Western European countries that were oriented to the cameralist approaches to accounting), such double-entry bookkeeping is not considered essential and accounts are maintained on a single-entry basis.3 Another difference is in the calculation of depreciation. In the commercial world depreciation is calculated over the life of the asset and is charged as an operating expense. If the overall sale proceeds are not equal to depreciation and other expenditures, it implies that the investment in the asset has not been recovered. In government, however, both for philosophical and technical reasons, depreciation is not charged and the cost of services as reported is invariably less than the actual cost incurred.

Government accounting as it is today reflects the cumulative experience of several centuries and its components represent the growth of both accountability and management concerns. In the early stages, accounting was designed to show compliance with legal provisions and, together with budgeting, provided a system of financial management offering controls at various stages and delinéating the role of those entrusted with the collection, custody, and disbursement responsibilities of public monies. Later, with the growth of audit as a separate function, accounts were required to be maintained to provide a full disclosure of the financial activities of government and a basis for an independent audit covering all the transactions and properties of government. With the growth of industrialization and reflecting the demand for more sophisticated systems of accounting, additional features were introduced to reveal the costs of activities and organization. More recently, and particularly since the 1950s, the requirements of economic analysis and development planning have made additional demands on government accounting. They are now called on to play an important role in economic planning, budgeting, rendering accountability, and facilitating evaluation. These purposes and the role of the various organizations in terms of production and end-use of data are shown in Chart 6.

Chart 6.Government Accounting

Features of Accounting Systems

The system illustrated in Chart 6 may be considered ideal. The response to the tasks, however, varies. Broadly, following the analysis presented in Chapter 5, the accounting practices in many countries may be described in terms of those based on the British, French, and U.S. systems. Also important are the Latin American practices, which, as already noted, initially had a strong Spanish influence but which, in due course, developed their own hybrid systems.4 There are, however, several variations in individual practices of countries among these groups and the typology adopted here should be considered as a convenient shorthand for grouping some common features. It should be noted that the evolution of accounting systems in developing countries did not necessarily follow the patterns experienced by the older industrial countries; these systems have moved forward rapidly, thus compressing the various phases into a shorter, single span.

The accounting systems have admittedly evolved with reference to a corpus of funds through which government transactions are carried out. In the British system, these funds usually are (a) a consolidated fund through which all government transactions are channeled, (b) a contingency fund, primarily an accounting entity rather than an operational fund, utilized for meeting unforeseen expenditures pending legislative approval, and (c) a public account in which monies are held in trust. In the French system, the Treasury predominates and maintains a type of universal fund for all transactions. In U.S. practices, there is usually a general account forming the solid core of the accounting system and also a number of other special accounts and trust funds for meeting specific purposes. The Latin American experience is more diversified in that there are some countries with only a single fund, while others have a number of funds. A general feature of all these systems is the maintenance of a unified cash position, although in several Latin American countries, ministries and agencies maintain their own cash balances separately.

Expenditures incurred from these accounts and revenues collected by agencies are recorded in different ways in different systems. Revenues are generally recorded on a cash basis. In a few Latin American countries, however, they are recorded both with reference to the “due” basis and to the actual payments in the year. Expenditures are variously recorded. In the British and U.S. systems they are usually recorded on the basis of checks issued or paid and on actual cash disbursements. In the French system expenditures are recorded in two stages—by the spending agency and by the Treasury—the former based on the delivery of goods and services and the latter on the basis of actual payments. In Latin American countries various procedures are in vogue and are recorded with reference to obligations, payment orders, transfer of funds to spending agencies, delivery of goods, or checks issued. In the British and U.S. systems, a commitment or obligational system of accounting is also used for recording the placement of orders and future liabilities but this constitutes a separate administrative process and the final accounts reflect the payments.

Transactions recorded in the above manner are expected to be compiled and consolidated at specific intervals and reported at the end of the year. The year-end accounts, which are known as closed accounts, may not correspond exactly with the fiscal year of the budget. In the British and U.S. systems the annual accounts reflect the consolidated transactions of the year. Transactions are recorded on a chronological basis and those that occur after the cut-off date are included in the transactions of the following year. Some countries that are included in this group, however, adopt minor variations on the theme; for instance, a complementary period ranging from two weeks to a quarter of a year is permitted to complete the transactions. Although transactions are actually paid in the following year, the books of the previous year are kept open until most of these transactions are completed.5 In the French system, accounts are compiled on a calendar-year basis but are converted to a fiscal-year basis where this differs from the calendar year. In countries with systems modeled on French methods, three different practices are observed. First, there is a cash period system (règle de la gestion), under which all receipts and expenditures are recorded in the period in which they actually occur. These periods, which are coterminous with the fiscal year, do not permit any carry-overs to the following year. Second, there is a commitment system (règle de l'exercise), under which, in principle, revenues are recorded on the basis of collections and expenditures when incurred. However, at the end of the fiscal year, a further six months are allowed for the issue of pay orders and settlement of expenditures. Third, there is an extended cash period system (règle de la gestion prolongée), which is a modification of the cash period but incorporates a feature of the settlement of checks issued by restricting the complementary period to two months or less. The experience of Latin American countries generally reveals a variation of the extended complementary periods, which in some cases range up to a year or more after the close of the fiscal year. This implies that, at any given stage, agencies have to maintain different sets of accounts for various fiscal years.6

The form of closed accounts and the extent of detail incorporated in them differ from country to country. In some (particularly in Latin American countries) voluminous detail based on straight ledger accounts is provided. In the British, French, and U.S.-oriented systems, final closed accounts are restricted to major categories of expenditures and reflect the pattern set by the legislature for approval of appropriations. The purpose of closed accounts is to serve the requirements of appropriation audit and to provide information to the public on the status of the government finances.

In the British-type systems, a balance sheet of the government is also provided. This statement reflects the changes in the cash holdings between the beginning and end of the fiscal year and changes in assets and liabilities during the fiscal year. Together with closed accounts, these balance sheets provide information on the transactions during the year as well as on the consequent changes in the financial status (including debt) of the government.

Toward Modernization

The accounting systems described above have lasted a long time—a feature that may be considered both an asset and a liability. They are an asset in that they have provided a degree of stability and have served (and continue to serve) the accountability purposes well.7 They are a liability in that the progress achieved in meeting the new requirements is perhaps less than expected. The issues of government accounting need to be assessed in terms of what they are expected to do in the contemporary setting and what they have so far been able to do. It is in the process of contributing to the recognized purposes and end-uses illustrated in Chart 6 that a number of shortcomings of the systems have been recognized and improvements sought. The improvements aimed at making the systems more effective by meeting the accountability, management, and planning requirements and by covering the whole gamut of accounting approaches and procedures and institutional arrangements. Significant aspects of these improvements, their aims, and effectiveness are considered below.

Basis of Accounting

The basis of accounting traditionally has been cash. The choice of this basis was appropriate in view of the attitude toward loans by government and related increases in public debt. Prudent financial management was then equated with a balanced cash position. Over the years, reflecting the importance of fund control and the measurement of costs incurred in rendering government services, two other bases—obligation and accrual—were advocated and used in governments. The use of these terms and their actual implications were not free from some semantic confusion and it is appropriate that the nature of each is specified first before their relative advantages are considered.

The basis of accounting can best be illustrated by the actual phases of budget implementation shown in Chart 7. In the sequence of administrative steps, it will be observed that the first step of spending agencies toward the utilization of appropriated funds is to place orders for the goods and services needed during the year. Such orders, which result in incurring obligations, can be placed at any time during the fiscal year. Accounts when maintained with reference to this point in time are known as obligation basis and refer to a system where recorded transactions represent commitments to acquire materials or services or to make payments under specific conditions and include orders placed, contracts awarded, and related transactions requiring money disbursements, usually at a later date.8 The next stage in the administrative process is the acquisition of goods and services, which is also the accrual basis of accounting. Accrual accounting has, however, been variously defined and described. In certain instances, it refers to a system of accounts where revenues and expenditures are recorded as they are incurred or earned. It is also described as a system where there are long complementary periods to record the completion of earning revenues or incurring expenditures that were originally included in a budget or a related financial statement pertaining to the fiscal year. The term is also used to denote transactions that are of an obligational or administrative approval type. In a more precise manner, accrual accounting is seen to be a system in which revenues and expenditures are recognized as they are earned or incurred, regardless of when payment of expenses is made or when income is actually received. Specifically, this means recording receipts at the time they are due and expenditures at the time liabilities are incurred as a result of services rendered or, for mass-produced “shelf” items, when the goods are delivered. This therefore reflects the resources available to government and the actual receipt of goods and services.9 As integral parts of this system, two more concepts are used—accrual expenditures and program costs. The former refers to the monetary equivalents of goods received, services rendered, expenses incurred, and assets acquired regardless of when payment is made. The latter refers to the costs of goods and services actually used in the implementation of a program. The main distinction between the two is that one measures the resources acquired, while the other measures the resources used. The final step in the process is the payment for services and goods received and the cash system of accounting that relates to this phase refers to a system in which receipts and expenditures are recorded at the time cash is received or paid out.

Chart 7.Basis of Accounting

The features and the relative superiority of each system has been a source of debate over the years and there are several schools of thought, each one advocating a particular basis as an ideal one for governments. Obligational basis is viewed as a very useful tool for fund control and as providing a midway base between legislative appropriations and actual payments. Since at any given stage of budget execution it fully indicates the liabilities incurred and awaiting liquidation, it also better serves the requirements of financial management. Moreover, in terms of budgetary flexibility for managing aggregate demand during the fiscal year, the obligation system provides a better basis for control for either increasing or reducing expenditures. This purpose cannot be served by the accrual or cash systems, as they reveal a transaction after it has occurred. In a context where the need is to have a greater grip on the aggregate volume of government contracts and related obligations, this system has certain advantages over the others. Its main limitation, however, is that it lacks the capability for measuring the costs of programs or the performance of departments. In practice very few countries maintain accounting systems that are exclusively obligation-oriented, they are generally combined with cash accounting. The separation of organizational responsibilities in some countries is such that the full benefits of a combined system are not realized. Spending departments usually maintain accounts, in such cases, on an obligation basis, while the central payment offices compile accounts on a cash basis. More often than not, the former may be unaware of the latter's action, whose responsibility does not include a watch over obligations. In governments where both functions are combined in the spending agencies, the benefits are admittedly more.

The system of accrual accounting gained increasing advocacy during the 1960s from national income accountants and managers. The former view it as the best measure of the impact of the budget as it indicates the time when the government actually incurs a liability or registers a claim.10 It is for this reason that the accrual basis is used in the compilation of national accounts. The conceptual offshoots of the accrual system—accrual expenditures and program costs—facilitate the identification and performance of the various work units and therefore could better serve the overall purposes of budget formulation and program management. This approach formed the basis for the advocacy of accrual systems as an integral part of performance budgeting approaches.11 Moreover, it will speed up the compilation of national accounts. The advantages of cost measurement and better links with national accounts are conceded by all, but as the “best measure” of economic impact, however, they are disputed. It is, for example, difficult to decide exactly when claims or liabilities can be said to have influenced the community's economic decisions.12 It could also be argued that the community anticipates the actions of government and may be prepared to provide goods and services from its stocks. Indeed, in matters of sophisticated technology, the availability of goods may induce demand from the government rather than the reverse. The accrual system, however, is capable of recognizing unpaid claims or liabilities to the government which other systems cannot.

The cash system has long been a favorite of economists and of some accountants. The case for the system was crisply stated by Seymour Harris: “Its strength lies in its comprehensiveness, in its tie-in with operating statistics, and its relevance for revealing economic effects of the budget.”13 It permits an easy identification of the impact of government operations on the economy as actual payments made by government tend to increase the money supply and activate the economy while each payment to government decreases the liquidity. A cash-based concept of budget deficit, as noted in Chapter 3, provides a meaningful assessment of the impact of government operations on demand management. It also facilitates the analysis of the impact on financial and credit markets. The government as a “banker” should know its own cash position and cash accounting permits this to be easily assessed. It is also more comprehensive than national accounts, as cash-based systems include loan transactions, which are excluded from the national accounts. Accountants and administrators have supported the cash system because of its administrative simplicity, convenience, and minimum expense, but the system has some limitations. First, as noted above, all noncash transactions, which sometimes are quite sizable, are excluded. Second, cash flows do not fully reflect management requirements, particularly in major projects. These flows contribute to an implementation illusion when physical progress is not congruent with financial progress. In those situations cash flows may overstate the project costs. Conversely, when large payments are made after a project has been completed, it understates the costs during the years preceding the completion of the project. Cash flows also have limited usefulness in the measurement of changes in inventory.

The different approaches should not be viewed as mutually exclusive but are better considered as essential elements that have a place of their own in the overall system. The distinction between some systems may not even be significant. For example, in some cases, such as services, there is unlikely to be any difference between the incurring of a liability (accrual) and its payment (cash). The differences would be sizable during periods when there is a rapid increase or decrease in outstanding government orders for procurement of items that have a long lead time. Whatever the nature of accounting basis, it would not be difficult to obtain other types of data. For example, in a cash system, disbursements minus increase in outstanding advances plus increase in accounts payable would equal accrued expenditures. In regard to obligations, the total of such commitments minus increase in undelivered orders and unperformed contracts would equal accrued expenditures. Accrual basis is also vital for the computation of costs and has a legitimate place for as long as budgeting involves the measurement of costs. It is, therefore, appropriate that the existing cash systems are supplemented with features of obligational and accrual accounting in selected areas.

The need for converting government accounting into accrual-based accounting received substantial stimulus in some industrial countries, specifically the United States in the early 1970s. This advocacy was only natural given the efforts to introduce performance budgeting in government over a prolonged period. Also, the long-standing experience of the Netherlands, which had had accrual accounting for several years, sparked a good deal of enthusiasm for the introduction of similar systems elsewhere. But progress in its introduction was slow. Implementation problems, cost of the systems, and the growing influence of demand management as a policy goal contributed to this. The accrual system also gave rise to some tricky conceptual issues. For example, for corporate income taxes, the accrual system could be more volatile and a time lag between accrual and payment of taxes could produce sharp differences between their actual and apparent impact. Also, in some cases, the recording of taxes when due generate a degree of false complacency and induce new expenditures. When actual payments of taxes fell short of the accrued estimates data, increased deficit financing was resorted to in order to balance the budget. The accrued basis had limited applicability for the bulk of transfers to other branches of government where services accrued to the grantees. Also, it posed a problem in the assessment of work done (in lieu of delivery) for which progress payments are made over a period. The approach suggested for this purpose is the technique of constructive delivery, under which expenditures are reported with reference to the work actually performed to government specifications. However, this implies resorting to imputations which, by their very nature, cannot be consistent and thus cannot be free from controversy. The introduction of the system also entailed significant additional cost and deployment of skilled manpower and it was not evident that the system needed to be given an overriding priority. More significantly, the whole effort seemed to have suffered a setback owing to the increased emphasis on the measurement of the budget impact and the advantages that cash system had for the purpose. In fact some countries, notably the Netherlands, switched to a cash system in 1976. The introduction of congressional budget procedures in the United States also emphasized the cash basis for purposes of determining budgetary ceilings. In the process, the selective application of accrual accounting in government reached a state of hiatus. Some believe this reflects the triumph of policy requirements over program management.

Fund Structure and Control

Another important area that has received a good deal of attention relates to the increasing proliferation of funds and the problems of their control. Although in previous years governments tended to transact through a consolidated fund or its equivalents, over time, with increasing resort to expedients, and a growing practice of providing autonomy to certain agencies, the corpus of funds widened. In addition, the prevalence of practices such as back-door spending, borrowing without legislative approval, and contract authority tended to encourage a greater spread of funds.14 The existing fund structures in some countries may broadly be classified into limited fund systems (5 or less), intermediate systems (5 to 20), and extensive systems (more than 20). Data on the fund structures of 19 selected Asian and African countries are given in Table 24. (The table does not include social security funds15 or such funds as are operated by autonomous agencies but essentially reflects those that are managed as a part of the budget.)

Table 24.Structure of Government Funds in Selected Countries in Asia and Africa1
CountryGeneral Fund AccountSpecial Fund Account2Revolving Fund Accounts3Debt, Retirement, Sinking Funds4Deposit and Trust FundsTotal Number of Funds
Limited Fund Systems
Bangladesh22
Ethiopia11
Ghana3115
India213
Pakistan22
Kuwait134
Malawi22
Mauritius3115
Yemen Arab Republic11
Intermediate Fund Systems
Botswana3317
Egypt7310
Indonesia9211
Kenya63110
Philippines31127
Singapore33118
Sri Lanka2518
Swaziland421119
Extensive Fund Systems
Korea232534
Thailand6212711137
Source: Compiled from Annual Accounts of the above countries.

Limited to central government.

Includes, in some countries, contingency funds maintained as accounting entities.

The data are not complete as trading accounts maintained by the agencies are not always centrally consolidated.

Separate sinking funds are maintained, in some cases, for each debt issue. For this purpose, however, they are considered as a single entity.

Includes extrabudgetary funds.

Source: Compiled from Annual Accounts of the above countries.

Limited to central government.

Includes, in some countries, contingency funds maintained as accounting entities.

The data are not complete as trading accounts maintained by the agencies are not always centrally consolidated.

Separate sinking funds are maintained, in some cases, for each debt issue. For this purpose, however, they are considered as a single entity.

Includes extrabudgetary funds.

Experience of certain countries indicates that there is an inverse relationship between the number of funds and the exercise of financial controls. In theory it could be argued that extensive fund control systems imply an undue fragmentation of maintenance of accounts and consequent increase in the span of controls. Further, when funds are extensive, difficulties can be and are experienced in the consolidation of accounts, particularly because of (a) problems in the identification of relevant accounts and elimination of double counting, (b) absence of uniformity in classification practices in the funds, and of (c) different practices for fiscal years and complementary periods. Book adjustments, reconciliation of accounts, and clearance of suspense accounts (techniques that are followed in government when more than one account is operated) appear to contribute to long delays in the compilation of accounts. Creation of these extensive funds appear to have yielded only minimal benefits in terms of managerial autonomy and, as these funds proliferated, the loss of control overshadowed the benefits and some countries have had recourse to consolidation and recentralization of accounts. This effort is by no means uniform and paradoxically there are countries where the fund structures widened because of political factors and difficulties in obtaining legislative approval of budgets.l6

Classification

The policy and program requirements of budget management necessitate that accounts also follow the same structure as in the budget. The various aspects of budget structures have already been discussed in Chapter 10 and the progress made has been noted. It is to be expected, therefore, that there has been similar progress in the organization and presentation of accounts. The experience of several developing countries in Asia and Africa reveals some snags, however. First, in some countries where program classification has been introduced, appropriation structures (reflecting the items for which funds have been provided) continue to be oriented to objects. As the orientation of accounts is primarily toward legal accountability, this followed the object classification and contributed to a data gap that is structural in nature and cannot be bridged in the interim periods. As an extension of this, it is observed that even in countries that have not had any similar problems, accounts continue to provide only major aggregates and have not, therefore, been useful in making data a functioning tool in the formulation and assessment of policies. This lack of progress in accounts has contributed to a situation where the traditional feeling was confirmed that accounts represent a culture alien to the administrator.

Related aspects are the identification and classification of trading activities in government accounts. Government activities include several areas where the approach is more commercial in nature. Most departmental activities include the sale of goods and services and examples of this range from the sale of liquor or food to the provision of water for irrigation purposes and the operation of airports. The application of conventional accounting approaches does not reveal the commercial nature of these activities.17 In order that the true financial status and the prospects for viability could be revealed, commercial accounting would be necessary and would involve the preparation of pro forma commercial accounts. However, this continues to be an area where more progress should be made.18

Policy Accounts

The overall purposes of government accounts have increased considerably with the addition of responsibilities relating to economic planning. The broad requirements of economic planning can be divided into two groups—those relating to planning per se and those connected with more specific aspects of budget and fiscal management, such as coordination with monetary aggregates in the pursuit of debt policies and the measurement of budget impact. The latter aspect is discussed in the concluding section of this chapter.

The requirements of economic planning include data for the preparation of project, sectoral, and national plans and, in each case, the efforts are devoted to a systematic and quantitative description and analysis of the structure and activities of an entity, a region, or an economy during a certain specified period. Over the years social accounting has been developed to meet these diverse purposes. Social or national accounts are different from government accounts in approach, scope, and structure. For instance: (1) Government accounts are limited to the entities reflected in the government budget, while national accounts aim at providing a coherent overall framework for presenting the main stocks and flows relating to national production, consumption, accumulation, and external transactions of the country. (2) Government accounts represent the starting point for the compilation of national accounts insofar as the government is concerned. Thus, government accounts represent the primary data. (3) National accounts aim at measuring the country's production and its utilization by sector and category of goods. Government accounts are relatively narrow in scope and are primarily intended for planning, control, and accountability of government operations. (4) In their operational framework, national income accounts involve a wide variety of imputations, while government accounts aim at hard facts. Both systems deal with stocks and flows but in government accounts the emphasis is more on the flows. Notwithstanding these differences, congruence between the two is essential.

The patterns of use of government accounts, as well as those of national accounts, are clearly different in industrial and developing countries. In industrial countries, the development of national accounting took precedence in the 1950s and 1960s. As demand management became a major policy goal, efforts were made to improve government accounts—in structure and classification, to harmonize better with national aggregates, and to better serve the requirements of policy formulation. Differences still arise between the two systems in areas where imputations are made and in cases where accounting systems are on a cash basis.

The basic framework for economic policy in industrial countries is generally that of national accounts.19 In developing countries the development of national accounts was a matter that involved a sustained effort over a long period. Specifically, in the context of meeting the requirements of economic planning, three types of views were advanced for data priorities.20 A typical view of the statistical offices was that, as macroeconomic estimates can only be as good as the basic data used, the priority should be to strengthen the basic statistical series. The second view (that of the planning agency) recognized that planning could not be postponed until all the aggregate series designed by statistical offices became available. For immediate purposes, greater priority should be given to the development of national accounting. The third view was that of the decision maker, according to whom there was a divergence between the actual needs of data and the ambitious proposals of statisticians and planners. The systems of planning were not complex and for day-to-day purposes emphasis could be on using the existing statistical sources. It is not surprising that the views of the last category prevailed and reliance was placed on statistics that ranged from organized guesses to randomly collected facts. To some this may appear as a heroic act of faith, while to others it was simply being reconciled to the inevitable.

Even within the above framework, greater attention to the improvement of government accounts was expected but did not materialize during the 1950s and through the major part of the 1960s. Accounts continued to serve traditional functions in the usual way. To the extent that the requirements of planning revealed the true nature and significance of government activities, it can be asserted that this was not so during this period. It was only in the late 1960s that reforms for modernizing the budget, and thus accounting structures, were begun in developing countries. Measurement and evaluaton of costs was, however, another matter.

Program Management

Management considerations in government vary with operations and the levels in the administrative hierarchy. The requirements and responsibilities of a project leader are obviously different from those concerned with the management of some revolving funds and from those at the top who are responsible for a broader range of activities. Despite these differences, an accounting system has to function in a manner that reflects the changing nuances. The broad objectives of accounting systems in the current context may be stated as primarily a concern with costs. At the middle level, managers are concerned with the measurement of costs and are responsible for reducing them. At the top-level management, the same concern is manifested in a slightly different way; their need is for reliable accounting data related to the performance and cost of such performance in regard to responsibilities entrusted to agencies. At the national level, the imperatives of fiscal policy transcend the economy and efficiency of programs and projects and are oriented toward the overall pattern of the use of resources and their costs and benefits.

In recent years, development of cost data in government has become quite sophisticated. In the current context, two approaches are utilized in government: (a) responsibility accounting and (b) cost finding and cost analysis. In the former approach, all outlays are charged to a responsible organizational unit as applied costs for its uses. The responsibility cost indicates the costs and results of operations by organizational units. The latter work within the framework of responsibility centers and provide the means by which the underlying responsibility and costs are summarized, rearranged, and analyzed. Both measure costs and together provide a perspective of a program and an organizational level. Measurement of costs is expected to include not only the use of materials acquired in an accounting period but also the use of assets that were acquired in a previous period. In an ideal setting this task would require the adoption of accrual accounting. In practice, however, some progress was made through ad hoc techniques to measure costs or their proxies even when there is no organized accrual system.

In industrial countries considerable advances were made in the measurement and control of costs for defense, education, and health. Major progress was also made in establishing cost controls on large projects. In developing countries progress has been limited to major projects and much remains to be done in terms of accrued costs. Thus, the very role that accounting should play in program management remains to be fully utilized. The task of accounting is to move in the direction of certainty and measurement.

Inflation Accounting

The emergence of inflation as a worldwide phenomenon has contributed to efforts on both sides of the Atlantic to promote appropriate revisions in the accounting framework to reflect changing prices. Specifically, in the commercial world inflation revealed the wide gap between accounting profit measured in terms of the difference between changes in assets and changes in liabilities at historical cost, on the one hand, and business profit measured as the difference between changes in current value of assets and in current value of liabilities, on the other. The recognition of these factors and the extensive debate that followed on the manner in which they should be treated contributed to two major accounting approaches—Current Purchasing Power (CPP) and Current Cost Accounting (CCA). The features of these approaches may be noted before considering their applicability to government. Under the CPP method, published company accounts are adjusted with reference to an appropriate index that would measure the decline in the purchasing power of the monetary unit and enable comparisons to be made with the historical cost figures used in the statutory accounts of the company. The CCA, as envisaged by the Sandilands Committee,21 adopted the concept of revaluing at their business value physical assets such as plant and machinery. The CCA approach was partly modified in some cases and emphasis was placed on the current replacement cost of specified items as substitutes for historical costs.22 Both approaches have limitations: one did not take into account the changing value of money, while the other was simply an updated version of the historical costs in which the changing values of different assets were not given proper recognition. The approaches had focused largely on adjustments to physical assets and ignored the effects of inflation on monetary assets and liabilities. A new approach that had more limited aims but was still known as current cost accounting was adopted in the United Kingdom.23 In this approach, three adjustments are made to the financial statements computed on historical cost basis: (a) depreciation, (b) cost of sales, and (c) gearing. The first two adjustments aim at raising the historical costs to current costs, while the third adjustment is to account for loss of purchasing power or gain in net monetary assets and liabilities. The depreciation adjustment allows for the impact of price changes or, more simply stated, for the difference between depreciation based on the current cost of fixed assets and the depreciation charged in historical cost computation. The cost of sales adjustment allows for the impact of price changes when determining the charge against revenue for stock consumed in the period. In practice, this implies the use of a specific index factor to revise the historical costs of opening and closing stocks of the year to compute the cost of sales. Gearing adjustment is concerned not with operational results, as is true for the other adjustments, but with the pattern of financing the operations. Company operations are financed by equity and borrowing. In a context of price increases, the value of assets exceeds the borrowing that has financed them. During an inflationary period the existence of such borrowing benefits shareholders (when the assets are used or sold) and offsets the cost of servicing the borrowing. Where the assets of the company are completely financed by equity, all inflation-related cost is charged to the profit and loss account of the company. These principles are now applicable to companies in the private sector and to enterprises managed by government, except that gearing adjustments are not considered necessary for nationalized industries in the United Kingdom in view of the special nature of their capital structure.

The relevance of the above approaches to government has not received much attention, except in Sweden, because of the widely held belief that in government there are no profits that are overstated, dividends declared, or taxes paid. Such a view, however, is admittedly narrow. The operations in government are more diversified and the need for the introduction of appropriate adjustments for inflation can be argued on several fronts. First, there is a need for symmetry in the approaches used for resource allocation, as well as for resource use. It has been suggested earlier that if budgetary forecasts and related demand management are to be purposeful, the rate of inflation should be forecast and relevant price indices should be used to formulate expenditure estimates for government programs. A logical extension of this is that the use of the resources should also reflect their current value in relation to the overall claims on the community's resources. Sensible drivers cannot afford to spend all their time gazing into the rearview mirror of historical costs. A well-informed budgeteer needs to know the current position and not just the obsolescent data contained in conventional government accounts. Second, cost consciousness in government requires that costs be stated in current terms. Stated in historical terms, they will not indicate the type of effort needed for containing costs. As long as program controls are oriented to cost-based estimates, it cannot be expected that historical-cost schedules will provide the requisite road map. Third, governments have been acquiring, over the years, a vast range of assets that range from huge agricultural machinery to sophisticated equipment in various areas. Traditionally, these assets were not taken into account in the computation of costs. Although this conceptual gap has been overcome in some industrial countries (notably in the United States and Sweden), in developing countries very few governments have a comprehensive inventory of these assets or compile data on their valuation, longevity, or the cost of their replacement. In addition, there is a clear need to develop and apply asset accounting where assets are acquired to provide common services to other government agencies (e.g., printing) or where capital has to be maintained intact to maintain the credit standings of a government. Such asset accounting should reflect the current costs if the overall cost consciousness in government is to be improved. As the report of the Swedish Budget Commission noted, all appraisable assets should be recorded by the agencies and should be appraised on the basis of the replacement value adjusted for depreciation.24 Such explicit recognition and supporting accounting procedures would go a long way in the acquisition, maintenance, valuation, and replacement of assets and should contribute to economies in public expenditure. Fourth, the basis of government accounting for services that attempt to recover their costs should be changed if the tariff is to reflect the current costs.

There are other views that have traditionally been advanced against asset accounting in government. As recognized earlier in the context of the discussion on current and capital budgets, one view is that asset accounting with its attendant features of financing and depreciation can make complete sense only in a commercial context and not in government. It would certainly be inappropriate to require the capitalization of every government asset and the costing of its use through the application of current cost accounting, by depreciation, or by any other method. There are several types of assets in government which clearly rule out the application of the above principles. However, there are many assets dedicated to productive activities in government where management cost data are incomplete and their usefulness seriously impaired without the inclusion of depreciation in accounts and reports. The argument for current cost accounting is relevant for these productive or trading activities and should not be considered as having governmentwide applicability. It is also suggested that the application of the above principles assumes the existence of an already well-established system and that, even then, the revised system would make further demands on personnel. On balance, a selective application, implemented over time, appears to be more feasible. If governments are serious about cost economies, there seems little alternative but a long-term commitment to revise their accounting systems.

Organizational Aspects

A vexatious question that has perennially haunted those responsible for designing government accounting systems is the location of the agency responsible for the collection, consolidation, and maintenance of accounts. Experience indicates that there is no single system and that there have been at least three approaches. One was to combine the accounts and audit function into a single agency located preferably outside the normal departmental framework of government. The second was to have a central accounts department within the government and make it responsible for the maintenance of accounts. In this system, some minimal accounts would also be maintained by spending agencies. The third approach was to disburse accounting responsibilities to the spending agencies but to maintain a small central department for coordination and consolidation purposes. The first approach is basically found in Bangladesh, India (until 1974), Pakistan, Colombia, Chile, Ecuador, Peru, and Venezuela. Bolivia had a similar system until it moved to the second system during the mid-1960s. In several ways the first system is more a historical legacy, but its continuation or abandonment has always been fiercely debated and there have been many emotional overtones to the argument. Some consider it an irrelevant practice. Some view it as a practice that, however questionable, has gained a legitimacy of its own by the sheer virtue of existence. These aspects may be considered in detail here.

In India a feature of colonial rule was that the responsibility for accounts and audit was combined in a single office. Although it was recognized that the audit should generally be independent of the executive and accounts, a feature that was enshrined in the 1866 Exchequer and Audit Act in the United Kingdom, it was felt that the existence of an independent audit would undermine the effectiveness of government in a colony. Many efforts were made during the years 1880 to 1974 to separate accounts from audit, and selective experiments were also made in central departments and in some states with a separate accounts organization.25 The final separation was only achieved in 1974. Bangladesh and Pakistan, which shared the same administrative legacy, continue to have combined audit and accounts agencies, while Sri Lanka, which was a part of the same colonial rule, always had a separate audit department and accounts were maintained by a department within government.

The Latin American tradition appears to be primarily based on the considerable role assigned to preaudit in the Spanish system. Accountancy and audit were both encompassed in the accountancy profession and great emphasis was laid on the accountability for the obligation, receipts, and expenditure of funds as a significant part of this tradition.26 It became a more formal entity in the 1920s and 1930s, as a consequence of the recommendations of groups of experts under the leadership of Professor Kemerrer of Princeton University.27 Under this system, both accounting and auditing functions are carried out by a Comptroller General (Contraloría), whose office preaudits all expenditures, maintains central accounts for the government, and postaudits the transactions.

The key element in the above type of systems is the combination of accounting and auditing responsibilities in the same agency, which is located outside the executive. While there is no definitive school of thought that advocates the combination of these functions, several arguments that have the same purpose in view can be gleaned from experience.28 First, the combination of duties does not necessarily prevent the performance of functions that are legitimately a part of the responsibility of spending agencies. The agencies are responsible for watching expenditures and ensuring corrective action in time; while the function of the accounting and auditing agency is primarily to check the legal and financial requirements of expenditure. Second, the independent agency's audit does not necessarily imply that it is auditing its own accounts as much as it is auditing the use of resources by the spending agencies. Third, the accounts, if prepared by the spending agency, may not be reliable as the latter is an interested party. A detached agency can have more objectivity in compiling accounts. Fourth, accounting and auditing are interrelated functions and, when combined, provide unique access to data that an independent agency may not have. Finally, the question is raised whether there is much to be gained by disrupting a practice that is well understood by the participants.

The need for the separation of accounting from audit can be argued in terms of the managerial requirements of agencies, as well as the nature of the audit responsibility itself. Financial management is no longer viewed as a process concerned primarily with the authorizations for spending but includes the wider functions of financial planning and the effective use of allocated resources. This function cannot be fulfilled if accounting is divorced from program management. Indeed, when it is separated, administrators merely become custodians of various pockets of money and the policy and program functions of the budget would not in any way be well served. Acceptance of the argument of maintenance of tradition would require a substantial amount of faith in a static society. Such belief is, of course, a negation of the concept of progress. Viewed from the audit point of view, a cardinal principle in the commercial world is that business transactions should be subjected to the scrutiny of an independent agency. Moreover, an audit agency that is free from the work of routine accounts can bring to bear a more detailed view and will have opportunities to concentrate on matters of greater importance.

There are other important operational effects that merit recognition. As a result of centralizing accounting and combining it with audit, the procedures relating to payments to the public appear to have suffered. Payment of taxes have been made easier, over the years, with a growing reliance on the banking system. But refunds of tax payments and pension payments have been rendered difficult because of the centralization of these responsibilities in the accounting and auditing offices. It would be normal to expect that, in dealing with the public, greater care would be taken of this phase. Experience belies these expectations. Moreover, even in dealings with government agencies, centralized systems of preaudit and related payments appear to have contributed to procedural delays and associated inconveniences. Once accounting is separated from the purpose that it is expected to subserve, it appears to have become an end in itself. Many financial checks are applied mechanically and adherence to formalistic procedures gains precedence over other matters. This is not, however, to suggest that such controls should not be applied at all. What is stressed is that the application of these controls should not imply a triumph of technique over purpose. Yet another area where difficulty is experienced is in regard to the administration of civil service rules and in the maintenance of provident fund accounts of government employees, which traditionally were entrusted to the accounts offices in British Commonwealth countries. Here again dilatory procedures, duplication of work, and excessive paperwork have all contributed to avoidable inconvenience. To sum up, the combined systems do not appear to have served well any part of their clientele. Government departments, the public, and civil servants are all adversely affected by these arrangements. The unsuitability of the system is recognized and, while some countries have successfully reversed the situation, it continues in a few countries and is partly ascribable to human inertia and partly to entrenched vested interests.

The second approach of a central maintenance of accounts is an antithesis of the combined arrangements but represents a halfway house to full decentralization. Under this system, accounts are centrally maintained by an accounts department that is usually located in the Ministry of Finance. It works through a series of outposts attached to different ministries and regions and is responsible for the preaudit, payment, and compilation of government accounts. The structure of accounts adopted and the general controls exercised in all these processes is the same as in combined accounting and audited offices, with the major difference that accounting is located within the executive branch.

The third approach recognizes that the centralized maintenance of accounts is an anathema to the increased competence of financial management in the spending agencies. The premise of this approach is that, if accounting is to serve as a policy instrument, it must be handed over to the agencies. While the broad design and content of the accounting agency would be subject to central approval to ensure observance of the needed financial controls, variations are permitted to reflect the specific requirements of each agency. It is an effort in the direction of making accounts an integral part of administrative management. In some cases, however, payments are made by the central agency through disbursing officers attached to the spending units.29 The role of the central agency in this set-up is limited to the oversight on the adequacy of accounting systems, to the reconciliation of accounts with monetary agencies, and to the final consolidation of accounts.

Given the imperatives of financial management, it seems appropriate to extend decentralization in accounting responsibilities to be in accord with the distribution of functions in government, to reduce the gap between accounting and policy management, to minimize delays in accounting, and to reduce the inconvenience to the public.

Computerization of Accounts

The introduction of electronic data processing (EDP) machines has had a significant impact on the accounting systems in industrial and in some developing countries. The process has been further facilitated by the adoption of similar approaches in the banking industry. The main attraction of computer systems is their capability for handling a greater volume of work, quickness in compilation, ready retrieval procedures, and, more recently, lower costs of operation. The systems are particularly useful in maintaining central payrolls, pension payments, grants to state and local governments, and grants or transfers that are administered on a centralized basis. The introduction of EDP systems generally require well-organized payment procedures (whether on a centralized or a decentralized model), standardized bookkeeping practices, and an efficient postal system. Common classification or codification would also be needed as part of these procedures.

The introduction and experience with computer technology reveals different experiences in industrial and in developing countries. While initial teething problems are common to both groups of countries, it appears that improved classification of transactions, decentralization of accounting responsibilities, and modern communication systems have been of great assistance to the industrial countries in realizing the benefits of computerized accounting systems. Annual audit reports in these countries, however, point up what could eventually become a major problem. It appears that no adequate machinery has been developed to detect fraud by the subtle manipulation of accounts and computer software.

The experience of developing countries is more diversified. There are countries that have invested vast sums and computerized their accounting systems. On the whole it seems that their experience with computerized systems has been successful. There are also countries where the introduction of such systems has been followed by considerable problems. In some of these countries, accounting procedures were not streamlined prior to the introduction of the EDP systems and as results proved disappointing some countries quickly reverted to manual procedures. These experiences suggest that solutions to procedural and institutional problems illustrated in the earlier sections should be accorded greater priority; clearing the thickets and swamps in accounting systems is a necessity that becomes more urgent in the context of computerization.

Financial Information Systems

The basic purposes of government accounting systems and information systems (discussed in the previous chapter) are basically the same, as both are intended to provide policymakers with a quantified view of the extent to which current developments are deviating from the original plans and expectations. There is, however, a major difference between the systems. Appropriation accounts and related reports are designed to meet the requirements of the policymaker, as well as to comply with the constitutional, statutory, and other legal requirements of the country. Information systems have more limited aims and are primarily intended to provide managerial accounts developed in a manner that will permit the effective internal control of funds, program management, and evaluation. Information systems are primarily statistical reports that cover both physical and financial aspects and provide data by type, location of responsibility, and program, and are assessed in relation to specified targets. The data so produced are essentially intended for internal use and often may not be published. Accounting reports, on the other hand, are more formal and are always published. An information system is an offshoot of an accounts system and cannot exist without it. The concern here is with the reports prepared and published by the accounting agencies in government.

Two types of reports (distinguished by periodicity and the extent of detail) are prepared. Although the nomenclature of these reports differs from country to country, the reports are essentially a monthly one and an annual one. The monthly report is a summary of the receipts and outlays and the means of financing the public debt. It seeks to disclose the relevant fiscal transactions of the previous period and is not intended to disclose each and every government transaction. The annual statement represents a detailed and comprehensive list of transactions (classified by type) and presents an analysis of budgetary results and other information relating to a fiscal year. The latter category includes additional data on supplementary appropriations and their use, contingent liabilities, and nature and type of debt contracted. The annual statement is intended to reflect the stocktaking for the year and thus serves as a window on government to the legislature and the public. For purposes of policy formulation, however, it is obsolete in the sense that fiscal and monetary policies would have already been determined by the use of monthly statements. The usefulness of the annual statements should not be minimized, however, for they serve as the only authentic statement of the budgetary results for the year.

The usefulness of these reports appears to have been reduced in practice owing to structural limitations and technical snags in their preparation. Both these features are common to industrial and developing countries, although they tend to be particularly aggravating in the latter. Ideally, the policy purposes would be well served only when the scope of monthly and annual reports is the same as that covered by policy. As government accounting systems typically follow the same coverage as the budget, they exclude those autonomous agencies and funds. Also excluded are public enterprises because of their separate form and organization. During recent years most fiscal stresses on governments have arisen from the spillover of financial difficulties from autonomous agencies and enterprises and these remain outside the scope of accounting reports, both in the formal (which is to be expected) and in the analytical sense. Central governments are generally responsible for the fiscal policy of the government and the budgetary functions are shared with a multitude of state and local governments. The impact of the operations of the latter on the economy is as important as that of the central government. It is generally true that, in developing countries with federal systems, the compilation of timely accounts of other entities has been difficult and difficulties have been experienced in obtaining an overall view of “government” activities. Even within the limited sphere of the central government, it is observed that information requirements are not homogeneous and the hetereogeneity of users may not facilitate the overview needed for economic and financial management. The aggregation of departmental records does not necessarily meet the information requirements of central policymaking. More important is the fact that financial information is presented in such a way that its significance is not self-evident. In many developing countries, monthly reports routinely provide information on receipts, expenditure, and, to some extent, debt, but are not analytically presented to reveal the size (and the changes therein) of surplus or deficit.

The usefulness of the reports depend on the timeliness with which data are submitted. It is a common occurrence, however, that these are frequently delayed. Several factors contribute to this situation. Some arise from the nature of accounting transactions, such as settlement accounts or the large number of bank transcripts, but these are peripheral in relation to the human factors.30 These include lack of understanding of the importance of accurate and timely reporting and its impact on fiscal policy formulation, disregard for established deadlines, delay in reconciliation efforts, lack of communication between the accounting and the budgeting offices, and lack of understanding of the relationship between monthly reports and year end reports. In several developing countries, annual accounts reports are published after a lag of about four to five years, and are thus not even of historical interest. To ease this situation a concerted effort is required to solve the structural, technical, and human problems; as this involves considerable effort and extra costs, it appears more a job for long distance runners than for sprinters.

Balance Sheet for Government

Suggestions have been made in recent years about the need for the compilation of an annual balance sheet for the government as a whole. This balance sheet differs from those that are routinely attached as a part of the annual appropriation accounts in the British Commonwealth system and is intended to provide a “bottom line”—an indication of the performance of the organization. The approach is inspired by the lengthy experience of the commercial world and the objective is to assist the average citizen (the counterpart of the investor) or financial expert to judge the effectiveness of past spending decisions and to ascertain the government's ability to raise revenues and acquire the resources necessary for future years. A beginning was made in this direction by constructing prototypes of accounts of the Government of United States.

The balance sheets prepared in the United States31 include details of assets and liabilities of the federal governments and are compiled by using a wide variety of sources. The assets include cash and monetary assets, receivables, inventories (including military stockpiles), and the value of property and equipment less accumulated depreciation. The liabilities comprise federal debt, payables, retirement and other benefits, and accrued social security. The coverage of the balance sheets, as well as the proposed treatment of some items, lends itself to debate and disagreement. For example, assets do not distinguish between public and financial sectors and the assets and liabilities of the central banking system are included. Land and buildings owned by government are included and, in a clear departure from the national accounting precepts and practices, military properties are also included. Liabilities exclude guaranteed liabilities and depreciation is envisaged as being calculated on a straight-line method and on the assumption of an average life span of 50 years for government buildings.

The debate centers around both the treatment and the need for such balance sheets. The issues that have not been satisfactorily resolved relate to the determination of the market value of assets, the treatment of defense, and the rate of depreciation. Equally significant is the issue of how for purposes of policy formulation, the balance sheet is superior. It could be argued that the relevant information needed by the average citizen is available in the budget documents, annual accounts, and assorted analytical tables. The balance sheet does not appear to have any additional use for program management or for the maintenance of accounts. To the extent that the balance sheet is perceived as back-door attempts to bring accrual systems, it appears that the purpose could be better served by less controversial devices.

Nearly three decades ago, the United Nations observed in one of its studies that “In spite of the importance of government accounting … relatively little attention has been devoted to this subject in most countries in recent years.” It added, “Even in developed countries, there have been surprisingly few up-to-date surveys of procedures for accounting, and budget control.” These statements have a good deal of validity even in the current context. See United Nations, Government Accounting and Budget Execution (1952), p. 1.

See Robert N. Anthony (1980), pp. 83–93. Anthony contends that the existence of the two worlds of accounting is unnecessary and suggests that the financial statements of a government could also be constructed according to the principles that operate in the commercial world. Anthony was making a case primarily with reference to municipal governments.

Credit and debit entries are, however, maintained.

The literature is rather scanty in this regard. For a detailed description of the British system, see Sir H. Brittain (1960). For studies on similar systems, see J. R. Hicks and U. K. Hicks (1955); A. R. Prest (1957); W. R. C. Jay and R. L. Mathews (1968); and A. Premchand (1966b). For the French and American systems, see United Nations, Government Accounting and Budget Execution (1952), and P. J. Van de Ven and D. J. Wolfson (1969), pp. 140–58. For Latin America and experience of some parts of Africa, see United Nations, Latin America's Experience in the Use of the Public Sector Budget as an Instrument of Development Planning (1965a).

The general validity of a government check is from three to six months and it is expected that most transactions are completed before three months.

Cash outlays in a year do not necessarily reflect the liquidation of the liabilities incurred during that year.

The effectiveness of accounting reports in this regard should not necessarily be judged in terms of the use made by the legislators for judging the government's performance. Indeed, if that were to be the criteria, conclusions may have to be different. The reports are put to greater use, however, where there is a legislative committee such as the Public Accounts Committee in the British system that formally considers the reports and submits its report to the legislature. It is fair to say that legislative enthusiasm tends to be more in the context of the proposed allocation of resources than in the review of their utilization.

Often, obligation basis is confused with accrual accounting in that the former also aims at recording the liabilities incurred. There are, however, two major differences. First, obligation basis is usually restricted to outlays, while accrual includes both receipts and outlays. Second, accrual basis refers to the receipt of funds, property, or services within a given period of time, usually the fiscal year. Obligations refer to the orders placed and contracts awarded that will result in the disbursement of money at a later stage.

The actual use of accrual in the compilation of national accounts is different and various bases are used for different transactions. For example, the European Economic Community, European System of Integrated Economic Accounts (Brussels, mimeograph, 1971) specifies nearly 40 transactions indicating the bases such as delivery, due, availability to the producer (pp. 190–95). In the United Nations' System of National Accounts (1968) taxes are to be recorded when they are “due” to be paid. It was recognized that the “due” basis of recording certain transactions such as indirect taxes and subsidies, the obligation or the point of time at which it is earned or incurred may arise at a different point of time than when it is due. It was, however, hoped that the discrepancy involved would not be large (p. 123). Unrequited current transfers are recorded when they are made, while other expenditures are recorded as of the date the goods enter government stocks. In the compilation of U.S. national accounts, transfer payments, subsidies, and grants are recorded on a checks-issued basis, construction on a put-in-place basis, and goods involving long lead times on a physical-deliveries basis. Similar adjusted practices are found in other countries.

The President's Commission on Budget Concepts concluded “that accrued expenditures are the best measure, since the accrual is the point of final commitment which has the largest and most direct economic impact on the private sector,” United States, Report (1967a), p. 38.

For a discussion of these aspects, see United Nations (1952) and (1965).

For a more detailed discussion of this aspect, see International Monetary Fund International Financial Statistics, Vol. 13 (May 1960) pp. ii–iii.

See Harris (1963), “Introduction,” p. 322.

Back-door spending refers to congressional authorizations to spend from debt receipts, while contract authority refers to powers delegated to certain agencies to incur obligations without prior enactment of enabling laws by the legislature. Variations of these practices are found in a number of industrial and developing countries.

In most industrial and Latin American countries, social security funds are numerous and there is a separate fund for each type of benefit (unemployment, sickness) and for each group (adult, children).

The experiences of Mexico, Bolivia, and Costa Rica illustrate this aspect. For a more detailed discussion of these countries' experiences, see James W. Wilkie (1974).

This is by no means a new problem. J. R. Hicks observed in 1948 “We have reached a point when it is hardly too much to say that this traditional structure (accounting principles evolved primarily as a solution to the problem of control of finances) is in a state of ruin. The ruin is partly a result of the war—it has always been difficult to enforce the traditional principles in war-time—but to a large extent, the causes lie deeper. The main reason for the collapse is the development of trading services which will not fit into the traditional categories.” He added “to apply the conventions of the traditional Exchequer accounting to these trading services makes nonsense.”

The General Accounting Plan evolved and implemented in France since the late 1950s was a step in this direction. Its application was restricted to publicly owned enterprises and to firms receiving government subsidies. It was less applicable to trading activities covered in the budget. General Accounting Plans of the French type were later introduced in other European countries and, during recent years, efforts were being made by the joint organization of African, Malagasy, and Mauritian States to introduce similar accounting plans. See Common African and Mauritanian Organization (OCAM), General Accounting Plan (1973).

During the 1960s when national accounts were frequently revised to take into account wider coverage and improved classifications, it was likely that economic data might not have fully served the policy purposes. For a study of these aspects and their impact during 1955–69 in the United Kingdom, see P. D. Balacs (1972), pp. 35–50.

See Richard M. Barkay (1975), pp. 349–63.

United Kingdom, Report of the Inflation Accounting Committee (1975c).

For an illustrative application of these concepts, see Sidney Davidson, Clyde P. Stickney, Roman L. Weil (1976).

See The Institute of Chartered Accountants in England and Wales, SSAP: Current Cost Accounting (1980) and The Accounting Standards Committee, Guidance Notes on SSAP 16: Current Cost Accounting, (1980).

Sweden (1974), pp. 107–108.

For a more detailed account of these aspects, see A. Premchand (1966b), pp. 349–66.

Various terms such as control previo, control preventatio, control a priori, fiscalization previa are used to denote preaudit.

See Albert Waterston (1965), pp. 266–67.

For a historical survey of these arguments in India, see A. Premchand (1966b), pp. 365–67.

Such an arrangement is also necessitated by the computerization of accounts.

For an interesting account of the factors contributing to delays in the United States, see James J. Lucas (1979), pp. 8–18.

See United States, Consolidated Financial Statements (1976) and Consolidated Financial Statements of the United States Government, Fiscal Year 1978 (1980), both published by the U.S. Department of the Treasury. For similar approaches, see also Arthur W. Andersen and Co. (1975).

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