Writing about financial reporting could easily mean writing about the lack of information on the financial status of the government. There is a general impression that, notwithstanding periodic pronouncements about transparency and the availability of information about the financial implications of proposed or ongoing policies, there is very little organized information. What is provided is frequently incomplete, incomprehensible, or out of date. The purpose of this chapter is not to authenticate this impression, but to accept as a starting point that, in most countries financial reporting originated in the enactment of the budget law a long time ago. Since then, the needs of the government and the public have become more varied and complex. While governments have made gradual efforts to meet some of the growing demands, they do not appear to have kept up, and not all demands have been adequately addressed.

Writing about financial reporting could easily mean writing about the lack of information on the financial status of the government. There is a general impression that, notwithstanding periodic pronouncements about transparency and the availability of information about the financial implications of proposed or ongoing policies, there is very little organized information. What is provided is frequently incomplete, incomprehensible, or out of date. The purpose of this chapter is not to authenticate this impression, but to accept as a starting point that, in most countries financial reporting originated in the enactment of the budget law a long time ago. Since then, the needs of the government and the public have become more varied and complex. While governments have made gradual efforts to meet some of the growing demands, they do not appear to have kept up, and not all demands have been adequately addressed.

Less than a decade ago, heads of the audit offices in two industrial countries noted: “In spite of the real interest in government financial reporting, there has been no consensus [emphasis added] on what information federal governments should record and report. Many hypotheses have been put forward but, until recently, there has been little organized effort to reconcile conflicting views and obtain a consensus. The time now seems most appropriate for such an effort.”1 Indeed, there seems to be greater agreement now on what is needed, when it is needed, and how it may be furnished.

Importance of Financial Information

Traditionally in countries where legislatures played an important role in considering and approving fiscal policies and controlling appropriations of money, the government was legally bound to report periodically on the progress achieved in budget implementation. Later, as a part of the concluding activity of the budget cycle, governments were also required to submit accounts to the legislature and an audit agency. This legal tradition, which prevails in many countries, also provided the framework for accounting practices. Accounts were submitted in terms of the original appropriations so that any variations and their sources could be examined.

This practice of legislative accountability was not a feature of the administrative systems of the former centrally planned economies, which had no formal procedure for reviewing the budget or the accounts for the previous year. The emphasis in these countries was on inspections rather than on post audits. Under central planning, accounting systems distinguished between the statistical record specified by the planning agencies and the financial record needed for financial management. Since every step of an activity was accounted for in the plan, progress had to be reported back to the central agencies. This tradition of reporting emphasized the internal management needs of the central and spending agencies and the government as a whole. These two elements, namely, legislative accountability and financial reporting for internal management, now form the twin parameters of financial information systems. The systems have acquired a new urgency in the context of recent political, social, and economic developments.

Politically, the most important development to affect reporting has been the increase in the number of democracies. As countries move from dictatorships to democracies, where the legislature plays a decisive role, there is also a growth in the demand for accountability, for transparent decision making, and for rule of law. These demands, when applied to financial management, translate into additional information that will shed light both on how decisions are reached by the executive and on how they are implemented. Furthermore, recent changes in established democracies—such as the United Kingdom—which have been seeking a greater role for citizen participation, have also contributed to additional demands for financial information.

Finally, the growth of satellite technology has narrowed the gap between the government and its citizens, and each is seeking to influence the other on social choices. It is now suggested that the state has moved from theater to television orientation and that a few minutes on television could have a greater impact than demonstrations by half a million people. The government for its part would prefer to provide more information about its strong point—that is, providing public services. The citizens seek both additional services as well as changes in the quality of the services provided. Each party seeks feedback from the other. Both positions emphasize the need for regular and unbiased information so that the debate can be both objective and informed.

Developments in the social sector represent changes in the composition of public expenditures. Since the late 1980s, a greater share of government expenditures has been devoted to social transfers, including pensions, safety nets, and poverty alleviation measures. In the process, governments have initiated several social welfare measures that have generated intense debates about the benefits of these expenditures and how the benefits may be improved. The information provided by governments is greatly influenced by the social and political context in which information is sought and provided. The key to greater public awareness and improved citizen participation is information. But information is a double-edged sword. It may favor the cause of the providers or, if the performance is less desirable than expected, it could and often does backfire on the provider of information. Despite such risks, the provider cannot suppress information that may portray it in a negative light. It is the obligation of governments to make information available to society.

Economic developments emphasize the contextual nature of some demands for financial information by the government. The traditional demand, which is embodied in the practices of most governments, is to provide accounts showing how public money is spent. This demand is now supplemented by other demands for periodic information on how economic policy instruments are being used and how successful they are. Many governments now have mandatory ceilings on the total level of expenditures, on the size of the deficit, and on outlays on specific programs, such as defense and entitlements. When the government exceeds these ceilings, procedures for sequestering funds may be invoked. The use of such instruments of control suggests that those both inside and outside government need regular information about government operations.

Public and Private Sectors Compared

The features described above suggest that governments have become, by accident, by design, or through an evolutionary process, veritable glass houses, with much of their decision making taking place in the public eye. This feature, among others, distinguishes it from the private sector, although the two sectors share several features in common, and it is useful to compare the two systems.

Both private and public sectors are accountable for their actions. Both are funded by the public, the former somewhat more selectively, and the latter with greater public participation. Both offer services to the public—the private sector at a price that includes remuneration for the capital employed. The government may or may not charge for the services it offers. Both raise capital, but the government has the coercive power to levy taxes to finance the provision of services. Both incur short- and medium-term liabilities. Both are accountable for funds raised and for charges levied.

In contrast, the two sectors traditionally use different accounting frameworks. The commercial organization submits to its board a budget, which, owing to competitive rivalry, may never be published and, at the end of the accounting period, submits a balance sheet and associated income and expenditure statements. In the private sector, the balance sheet has a bottom line, that is, profits or losses made. Moreover, its performance may be appraised more objectively and systematically because other enterprises exist that are engaged in similar activities.

In contrast, the government’s actions are more open. In most cases, the government budget is a public document that undergoes changes, usually between initial submission by the executive and final approval by the legislature. The government also submits its accounts at the end of the fiscal year. Government provides a vast array of services, some of which are not provided by any other organization. Its uniqueness makes comparison difficult, and performance appraisal has the potential of being contentious. Because, in government, the profit motive coexists with the provision of services for only a few activities, its accounts have not aimed at providing information on overall assets and liabilities, much less on future liabilities that need additional financing. Over the years, governments have sought to analyze these aspects through forward budgets, comprehensive national income accounts that provide data on stocks and flows, and other supplementary sources of information.

The dissimilarities between the public and private sectors have given rise to suggestions that commercial-type accounting formats be applied to governments. The rest of this chapter considers, among other issues, the traditional architecture of information in governments and how it addresses the users’ concerns. Two additional features of government operations should be noted. The unique features of government services are not fully captured in normal budgets or related accounts, which usually show the common inputs (manpower, money, and materials) and their use. For this reason, patterns in the use of inputs may not present comparable pictures of services provided. It may also be difficult to establish a precise relationship between the resources governments raise and the services they provide. Second, the design of government information systems, as will be illustrated throughout the chapter, may reflect more the exercise of internal controls than the needs of the users. Information tends to be viewed as a natural product of government financial management rather than as a product designed to meet the needs of outsiders. This latter feature, which is influenced by, among other things, shareholders’ rights for disclosure and concerns for investors’ protection, is common to the commercial world too.

Principles of Reporting

Reports prepared by the government for internal and external use are tacitly governed by eight principles, which are described below.


The term “financial statement” is generic and is likely to have different meanings for different groups. Reports should be appropriate for the intended users and prepared according to specific standards for their form and content. The specification of standards implies a mutual understanding between the user and the provider on the nature and content of financial information and does not necessarily require either a decree, an executive order, or legislation. Rather, convention may serve this function.


The broad purpose of financial reports is to provide accountability. To be “accountable,” according to the dictionary, is to be “obliged to explain one’s actions, to justify what one does.” Accordingly, the reports should be understandable to the user. But because there is no one typical user with defined and immutable characteristics, this principle should be primarily viewed as an exhortation to be clear and simple. The important question is: What changes are needed in the presentation of financial reports to be of service to the prospective user? In the process of making these changes, a determination needs to be made to avoid manipulating inherently complex information, because attempts to simplify it may rob it of its significance.2


Financial reports are expected to be objective. As noted earlier, organizations in the public and private sectors would like, indeed expect, the information to serve their needs. This can be considered a necessary ingredient of the organizational rationality. The characteristics of reliable information are somewhat difficult to enumerate and explain. But those that would nullify the intent of the reports are easier to identify. First, facts must be distinguished from estimates. Although, as a discipline, accounting necessarily implies the verification of facts, some reports may contain information derived from estimates. In the mind of the user, the degree of estimation determines the reliability of the data. The methodology of estimation should therefore be explained, and, as the methodology changes, the differences (and the different results likely to accrue) should also be explained. In some cases, the coverage of the data will determine the conclusions that may be drawn from the reports. Here again, the user would prefer to be informed at the outset of any changes made. Reliability does not mean consistency for its own sake. It is more important that users be fully informed about changes than that they be obliged to discover changes on their own, which can only breed cynicism.


Information is provided in response to an explicitly recognized need. Thus, the traditional role of providing accounts for the completed fiscal year was to inform the legislature about what had happened during that period. This feature implies the need to identify the users and their requirements. One common criticism of government financial information is that there is a surfeit, not a shortage. Many accounts are prepared and provided without taking into account the users’ needs. Indeed, some say that much information is produced routinely, on the basis of tradition rather than of need. Over time, some information may become irrelevant; meanwhile, the provision of information continues unchanged. Relevance cannot be assumed. Users must be purposefully identified and distinguished by type and by interest.


Rendering accountability means that an organization is willing to submit itself to evaluation—a complex process that involves several steps, one of which is to compare like activities. The data reported should provide a frame of reference for comparing organizations with similar functions so that the costs of providing similar services can be estimated. This process assumes major political and economic significance at the subnational level within a country and when a country is a member of a regional organization. The devolution of common resources can involve assessing the relative efforts made to ensure economy and efficiency in expenditure. The provision of comparable data can also involve rearranging data to conform with the classification selected. Thus, annual accounts, which are generally arranged in terms of appropriation categories, would need to be reclassified. Providing comparable data is yet another manifestation of being responsive to user needs.


The processes of the judiciary and the information provision machinery have a common feature. For both, delay can invalidate their existence. If information is supplied long after the event for which it is intended, the message to users is that compliance is perfunctory. In most governments, however (and also sometimes in the commercial world), accounting data are not released until they are approved or cleared by the audit agency (or in the case of a company, by the board of directors). Delays that represent organizational slippages may occur even when information is intended for internal government use. Sometimes, information is delayed because it is not made available until it has been found to comply fully with the law. In other cases, delays may result from undue efforts to be precise. Although a lack of precision may affect reliability, there is an inevitable trade-off between precision and timeliness. For the sake of timeliness, some precision may have to be sacrificed.


The reports should be consistent over time in terms of coverage (nature of the entity reporting), classification, and the accounting basis. Consistency does not mean rejection of needed and feasible improvements as long as the rationale for the changes is clear. Consistency facilitates the preparation and use of data and leads to a mutually acceptable framework.


The final criterion for financial reporting is usefulness. To be useful both inside and outside an agency, reports should contribute to an understanding of the current and future activities of the agency’s sources and uses of funds and the diligence shown in the use of funds.

The above principles, which are unexceptional and universal, are applicable to both financial and nonfinancial data, such as performance measures. If the principles are considered universal, why then does practice diverge from precept? The answer is found in the fact that information is an instrument of management. Like other instruments, it can be both used and abused.

Existing Information Systems

Notwithstanding the limitations of generalizations and variations in country practices, some broad statements may be made about the financial information produced by government. First, governments generate vast amounts of financial information. A list of illustrative documents and the type of information generated is shown in Table 11. Second, to a large extent, the origins of the documents and their availability to the public are governed by relevant laws, specific rules, or convention. For example, reports on a country’s macroeconomic situation are published by the central bank as a service to the community to facilitate informed debate about the content of proposed policies. Annual accounts are generally required by law to be submitted to the legislature. Several government economic organizations have, over time, undertaken the preparation of reports on specific aspects of public finances. For example, revenue services publish data on sources of revenue, while others compile data on foreign debt for management purposes. A natural consequence of this process is that the information generated reflects the territorial interests of that organization. This in turn leads to differences in the orientation and disaggregation of the data generated.

Table 11.

A Typical Reporting System

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The third generalization is that the information generated is intended primarily for internal use, partly because data are confidential but also because government information systems were originally designed for internal use. Finally, the reporting system has evolved over the years. Increasingly, as budgets have developed, in some countries, a vast amount of information on the status of government finances is provided to the legislature and the public. Moreover, the frequency of budgets has increased (particularly in high-inflation countries) and, in some countries, mid-term budgetary reviews have become obligatory and are required to be submitted to the legislature.

Search for User Needs

Despite its availability, information needs to be made more purposeful to enhance its usefulness. This need is perceived differently by the providers of information on the one hand, and by the users on the other hand. The former suggest that the reports remain, for the most part, unread. Likierman (1989) states that minimal response and low sales of the reports justify this view. He adds that “it is often difficult for compilers to understand that few people even know that their reports exist” at all (p. 29). The users, on the other hand, appear to feel that the data need to be better organized in explicit recognition of their needs. But then, who are the users and what are their needs? Admittedly, users and their purposes in seeking financial information differ from time to time, from place to place, and according to context. To identify users, audit agencies in Canada and the United States conducted a survey in 1986,3 yielding revealing results. The survey divided users into six broad categories—legislators and citizens; media and special interest groups; government planners and managers; economists; corporate users; and lenders and securities dealers.4 The results of the survey are summarized in Table 12. The responses suggest that except for specific items, such as reporting on pension liabilities, gold holdings of the government, accrual of tax revenues, asset valuation, and performance indicators, there is considerable commonality of interests. If the study were to be repeated, different priorities would undoubtedly emerge. Responses could also differ in countries with less stable governments, where, consequently, there is greater apprehension about the status of government finances. The response of the users and the conclusions of the above survey suggest the architecture of financial information in the current context.

Information Pyramid

Quintessentially, much of the information that users need comes from the basic budgetary accounts maintained within the government and associated economic data, as well as statistical data on the performance aspects of every organization. These data are homogeneous in that information for certain categories is provided for the government as a whole. But the needs of the users are heterogeneous in that they represent a variety of interests. For example, a member of the legislature may be interested, given the pork-barrel considerations associated with the appropriation of funds, in the amounts spent in his or her constituency. This may be of little interest to domestic investors. Despite this divergence, a core of information is needed for informed decision making about government finances. This core information is basically derived from government accounts and then rearranged or supplemented by other data.

For purposes of analysis, it is useful to reiterate the distinction between government users and all others. Within the government, the central and spending agencies and the audit (which is frequently an independent institution) are distinguished. Outside the executive branch of government, the legislature is viewed as one group—a separate entity with its own legal and judicial powers—and other groups are the securities dealers (or investors), the media, special interest groups, and the public. These groups do not have formal legal powers, but their views have a substantial impact on the functions of a government. Finally, because governments now operate in an economically integrated world, aid donors have an important role in the fiscal life of some countries and therefore need to be recognized as a separate category. Similarly, given the network of relations with international organizations, governments are also obliged to furnish a good deal of financial information on their activities.

Table 12.

Users’ Needs

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Source: United States, General Accounting Office, and Canada, Office of the Auditor General (1986).Note: X indicates the needs of the user group.

User groups are illustrated in Diagram 4, and their requirements are shown in Table 13. In terms of their role in, and impact on, decision making, these users may be regrouped into two categories—those that are involved in day-to-day decision making about the macroeconomic management of the country, and those whose views and actions could significantly influence, usually with a lag, a country’s finances. The former group comprises the government, the legislature, and the donors, and the latter includes the media, special interest groups, and the public. The requirements of the former are directly related to their role as decision makers and they thus need information on a more regular basis. The latter group is more varied, and each subgroup is likely to have a specific concern rather than an interest in the full picture. The choice of analytical framework to meet their needs is therefore a key issue.

Analytical Framework of Financial Reporting

The first step in delineating the analytical framework of financial reporting is to determine the basic level of information to be collected and then aggregated so as to assess a government’s overall operations. The basic, or reporting, entity can be based on several perspectives. From the point of view of macroeconomic management, the framework would include all units that are funded by public moneys and whose transactions result in the provision of goods and services or otherwise have an impact on the economy. Inherent in this approach are three levels of government: central government, comprising ministries, departments, agencies, and bureaus, which function as instruments of policy management; general government, comprising the central government and the regional and local governments, each of which has financial sovereignty and related autonomy; and the public sector, comprising general government and public enterprises that are either owned or controlled by governments at different levels. Economic analysts both inside and outside the government prefer to have aggregate data in terms of these levels.

Diagram 4.
Diagram 4.

Architecture of Government Financial information

The accounting point of view brings a different dimension to the discussion. The Governmental Accounting Standards Advisory Board (United States, 1993c, pp. 107 and 108) suggests that the entity should be defined with reference to the accountability perspective, arguing that “financial reporting based on accountability should enable the financial statement reader to focus on the body of organizations that are related by a common thread of accountability to the constituent citizenry.” According to the Accounting Standards Board, these organizations are those whose elected officials are accountable for their actions and that are legally separate and fiscally independent. But the application of these criteria is complicated by the inherent ambiguity of determining legally separate identification and fiscal independence. At a practical level, the entity is one that is a primary government (the term “primary” could have many meanings and may include a school district, a local government, or a central government) and its organizations for which the primary government is financially accountable.

Table 13.

Financial Information Users and Their Broad Needs

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A strict application of this rule could, however, mean that some extrabudgetary funds may not be consolidated with the operations conducted through the budget because each fund has its own law and, in some cases, financial independence. In anticipation of these issues, the Accounting Standards Board (1993c, p. 109) added that the primary government should also include “other organizations for which the nature and significance of their relationship with the primary government are such that exclusions would cause the reporting entity’s financial statements to be misleading or incomplete.” This provision provides flexibility and is equal, in its intent, to the perspective of macroeconomic managers, which comprise all agencies that are effectively used as instruments of government policy.

Two other perspectives need to be considered: the organizational perspective, or that of the spending agencies; and the perspective of budgetary accounting—that is, of the central agencies in the government. Spending agencies focus primarily on their own activities, programs, and projects. Their view is conditioned by the organizational responsibility to procure and manage resources in their policy sphere. It is for this reason that the head of an agency in the British-type administrative system is designated the chief accounting officer as well as its civilian head with integrated responsibilities for policies and finances. Such agencies naturally concentrate on areas of vital importance for their financial management. Although one of the reasons that the spending agencies furnish financial information is “to assist in making comparisons among alternative ways of providing similar services,”5 in practice, this function becomes the responsibility of the central agencies.

The central agencies need financial information, first, to be fully congruent with the budget, and second, at a disaggregated level, to be anchored in responsibility or cost centers and in projects and programs. Budgetary accounts are distinct from treasury accounts. The former are rooted in the budget categories, while the latter are the accounts of the budgetary transactions and can include deposit accounts.

These different perspectives are rooted in the organizational responsibility of the agency seeking information. Inevitably, there may be some overlap and lack of consistency. This would imply that the same accounting information may have to be expanded beyond the core elements to meet the special requirements of the agencies. In operational terms, disaggregated information must then be aggregated or rearranged to conform with the needs of each user group. Experience in a number of countries shows that, because of the legal ambiguity about the entity or primary level of government, certain important elements of government activities may be overlooked. One such major exception is the reporting on extrabudgetary funds. In the economies in transition, as well as in many developing countries, financial reports often exclude the transactions of these funds. But this exclusion could well mean that frequently more than one-fourth of public outlays remain unreported. Similarly, the exclusion of the treasury account as, for example, in Italy, of the investment funds maintained by oil producing countries in the Middle Eastern region, or of Fiscal Government Loan Program operations in Japan, could well create a misleading picture of overall finances. As a result, concepts like budgetary surplus or deficit computed with reference to narrow bases tend to be robbed of their intrinsic utility. For this purpose, these funds should be added on, and it should be explicitly stated that they are being covered.

Yet another aspect of the accounting framework relates to the operations of public enterprises. It is contended, particularly by special interest groups and the media, that in economies with large public enterprises the distinction between government and enterprises is often arbitrary. In some countries, enterprises are used to pursue noncommercial objectives and to provide social services that would otherwise not receive government funding. If limits are set on the government budget deficit as part of stabilization-oriented fiscal policies, enterprises may continue to be used to provide services. Moreover, the balances of the government budget are often adversely affected by enterprise finances. This strong relationship between government and enterprises should therefore be recognized and information provided on the consolidated picture of enterprises.

A consolidation of finances and related reporting of the government and enterprises could, however, obscure the reality of both. The surpluses of enterprises could compensate for shortfalls in government budgets and vice versa. It is therefore appropriate that separate data for each enterprise be consolidated at a sectoral level for the profit and loss accounts and balance sheets as illustrated in Tables 14 and 15. This information would facilitate the appraisal of the financial health of each enterprise but would not divulge the more complex relationships between government and enterprises, particularly those relating to the tasks discreetly assumed by enterprises on behalf of governments.6 These circumstances require a more organized response to the changing needs of user groups.

Purpose, Form, and Frequency

The content and form of financial reports are dependent, to a large extent, on the specific purposes of the user. In this context, users may be grouped into two broad categories: (1) legislative oversight bodies, and (2) agencies within the government. The former group may also be considered to represent the public, the media, and associated special interest lobbies. The latter group includes the central and spending agencies within the executive branch of the government. To meet the requirements of both groups, major changes have been made in the form and content of reports.

Legislative oversight bodies will differ depending on how a legislature functions. Some legislatures can only discuss the financial proposals of the government but cannot alter them in any way (for example, Egypt). In France, the legislature can make changes at the program level but cannot reduce revenues or increase expenditures beyond the aggregates proposed by the Government. Other types of legislature (such as those largely modeled on the British parliamentary tradition) have the right to appropriate moneys, but any major change that deviates from the proposals made by the executive is viewed as an expression of lack of confidence, obliging the government, in most cases, to resign. Some legislatures have the power to revise any element of the budget proposed by the executive branch. Although, in the final analysis, the budget in such cases is subject to approval by the country’s chief executive, the legislature plays a dominant role.

Table 14.

Public Enterprises: Operating, Profit, and Loss Account

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The changes referred to earlier have mainly taken place in the legislative systems modeled on the British Parliament. The changes are in two reas—the material submitted to “departmental select committees” and the content of the financial statements submitted at the end of the fiscal year.

Table 15.

Public Enterprises: Balance Sheet

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One vexatious question long associated with parliamentary control has been the role of the legislature in the approval of the budget. It has been held that when the budget arrives at the legislature, it is in a completed form and that it is too late for the legislature to make a major contribution or play a constructive role. Consequently, the passage of the budget and associated financial legislation is considered a formality, more symbolic than substantive. In some countries (for example, India), the bulk of recent financial legislation has been enacted by voice vote in the “guillotine hour”—that is, before the scheduled closure of the parliamentary debate.

With a view to assigning a more constructive role to the legislature, “estimates committees” (special committees comprising members of the legislature) were created to review departments’ current policies. Because this response did not deliver the hoped-for result, the committees were replaced, in the United Kingdom, by select committees on expenditure. These suffered the same fate as the estimates committees and have yielded place to departmental select committees. These committees (which have their counterparts in other similar parliamentary bodies) review selected aspects of the activities of each department, which are generally chosen with reference to three criteria—to seek explanations of unusual changes in expenditures, to review issues previously examined but unresolved, and to examine areas where changes in policy or other conditions require a reassessment of budgeted amounts.7

Departmental Report

With a view to meeting the needs of these committees, departments are obliged to submit, along with their budget, a “departmental report” outlining their goals and activities.8 Although these departmental reports can be structured in various ways, their purpose is to provide detailed descriptions of aims, objectives, priorities, expenditure plans for future years, an enumeration of major policy developments in each area, and detailed data on performance and the use of resources.9

Table 16.

Performance Data: U.K. Hospital Activity Statistics

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Source: United Kingdom, Department of Health and Office of Population Censuses and Surveys (1994c, p. 42).

The reports are intended to provide a basis for informed discussion both by the committee and, when appropriations are taken up for voting, by the full legislature. These reports have been, and are being, refined every year in response to comments from the public. Inasmuch as they describe the efforts the agencies are making to ensure economical use of resources, the reports represent a window of opportunity for agencies to explain themselves to the public. In particular, the recent emphasis on providing consistent performance data (see Table 16) appears to have whetted, at least in part, the public’s appetite for increased accountability. The reports provide an empirical foundation for informed appraisal, careful scrutiny, and comment. Their effectiveness in terms of changes in government policies and programs is more problematic, because it depends partly on the use made of the material by the committee and partly on the broad working relationship between the committee and the government. Although these committee reports are rarely “accepted” or “rejected” explicitly, there are cases in which the recommendations have been accepted “in principle.” Moreover, what is not accepted may also contribute to departmental policy changes over time.

Annual Appropriation Accounts

The second major change refers to the submission of the government’s financial statements. As noted earlier, in some systems, these annual accounts, which basically follow the structure of budgetary appropriations, must be reviewed and approved, along with audit reports, by public accounts committees. There has been a growing feeling over the years, however, that the appropriation accounts have not revealed the government’s financial situation. As discussed in previous chapters, these accounts were mostly done on a cash basis and were not designed to reveal the government’s asset and liability position, much less contingent liabilities that may need to be redeemed sooner rather than later. Overall, the accounts were not considered completely transparent and accurate. For these and associated reasons, the demand has grown for an annual financial report that goes beyond the appropriation accounts and provides a broad and complete picture of the government’s varied and complex activities and resulting overall financial position. Such a report would also serve as the basis (and not a substitute) for the more detailed information the government now provides in a number of different financial documents. The annual report represents an attempt to provide comprehensiveness, cohesiveness, and, it is hoped, clarity.

The annual financial report generally includes several statements on a government’s operations (Table 17), financial position (Table 18), cash flows (Table 19), borrowings (Table 20), commitments (Table 21), and contingent liabilities (Table 22). In New Zealand, for example, these statements are submitted to the legislature twice a year—for the first six months (these statements are not audited) and at the end of the fiscal year.

Users Within the Government

The users within the government are the central and spending agencies, which have a reciprocal relationship: their actions reinforce each other in their respective spheres of activity. The central agencies are primarily responsible for formulating and overseeing the implementation of macroeconomic policies. The spending agencies are responsible for implementing sectoral policies and managing the funds assigned to them. This traditional relationship has acquired a new dimension in the context of economic stabilization. Stabilization policies involve compliance with quantitative ceilings on expenditures, debt, and the budget deficit. Compliance has imposed additional tasks on the central agencies: pursuit of stabilization requires a regular monitoring system that covers the various aspects of the spending agencies’ activities.

Table 17.

New Zealand: Operating Statement

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Source: New Zealand (1993).

As users, the central agencies use four types of data: (1) budgetary data, (2) data on financial position, (3) data unique to the context or environment of each agency, and (4) performance data. It has been noted in previous chapters that several checks and balances operate between the central and spending agencies in regard to the release of budgetary authority and associated funds. Reports are needed on how the released funds have actually been used, whether they have been within the specified ceilings, and, if not, the reasons. This type of data emanates directly from the journal and ledger entries of each agency, which are rearranged in an analytical way for use by the central agencies. The central agencies also receive information from the financial institutions about the overall status of government finances. These reports enable the central agencies to anticipate developments, including cash needs, and to be prepared to deal with them. The information so collected is not limited to the budget but may include reports on public enterprise finances depending on their role in the economy. This traditional task has been facilitated during recent years by access to computerized systems of data maintenance.

Table 18.

New Zealand: Statement of Financial Position

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Source: New Zealand (1993).
Table 19.

New Zealand: Statement of Cash Flows

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Source: New Zealand (1993).

The reports on budgetary compliance do not necessarily fully reveal an agency’s financial status. The principle of stewardship, which is a guiding force for financial disclosure, requires that agencies also submit statements aimed at indicating their financial position. This information would show how the agencies’ financial conditions have changed and how further changes may be anticipated. This task is partly achieved through the balance sheets and income and expenditure statement referred to earlier. However, these statements need additional details about assets and liabilities.

In the United States, measures have been taken to make the necessary information available. Each agency is required to prepare three statements: a statement of financial position (Table 23), a statement of operations and changes in net position (Table 24), and a statement of cash flows (Table 25). These must be furnished at the end of each fiscal year. The full impact of these statements on the agencies’ ability to manage their finances and on the capacity of the public and other outside users has not yet been assessed. There is, however, a demand for future reports to provide more than an indication of the financial position—that is, present a broader, more forward-looking document that examines “financial condition.”10 This expanded concept will involve additional information about the likely impact of such variables as environmental degradation, relative competitiveness, productivity of the economy, and expected changes in demographic patterns.

Table 20.

New Zealand: Statement of Borrowings

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Source: New Zealand (1993).Note: Information is also provided about the intra-year movements in the above categories. In addition, data are provided on the maturity profiles of debt.

This concept has since been given a more concrete form in terms of a statement or statements on investment in other physical capital and intellectual capital,11 including a statement on selected future claims on resources. Although laudable in its effort to provide a more comprehensive picture of government finances, the concept may be considered to exceed the conventional realm of government accounting. The concerns of government central agencies, which are narrower and more specific, are likely to revolve around movements in cash and other monetary assets, balances with the treasury, investments, receivables, physical assets, payables, and the net position. Similarly, obligations incurred, unobligated balances, unpaid obligations, and excess of expenditures over revenues and other financing resources are likely to receive special attention.12

Table 21.

New Zealand: Statement of Commitments

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Source: New Zealand (1993).

The financial position of an agency is routinely affected by changes in policy and related legislation, on the one hand, and, on the other hand, by specific developments in the availability of items commonly consumed by agencies. For example, a scarcity of building materials affects the activities of the construction agency. These changes may have a greater impact on future budgets and thus need to be reported so that the central agencies have a widened perspective on the future needs of the agency.

Table 22.

New Zealand: Statement of Contingent Liabilities

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Source: New Zealand (1993).Note: A list of nonquantifiable contingent liabilities is also provided. In addition, two other statements on unappropriated expenditure and expenses (expenditure in excess of or without appropriation by Parliament) and trust money are provided.

Finally, as has been repeatedly noted, accountability now requires that performance be reported both to the central agencies and to the public to assist them in their respective evaluations. Performance data include costs, measures of accomplishment, outputs, and outcomes.

All the above types of data are generated by the spending agencies, whose interests are identical to those of the central agencies. But the spending agencies are responsible for implementing projects and thus require more detail at every level, for example, at every stage of a construction project. In this regard, spending agencies usually have schedule reporting—a system that specifies the different stages of construction in terms of physical landmarks. The reports specify the progress made, slippage in construction schedules, new dates for completion, and the impact of such changes on cost. In addition, the spending agencies are involved in reconciling physical and financial aspects. Their policy goals depend on the physical progress made and its impact on the allotted finances.

While the central agencies also have an interest in the physical results, their major concern is financial. It is for this reason that major spending agencies in some governments have endeavored to set up their own management information systems that will be congruent with the larger financial information systems and, at the same time, generate additional detail in conformity with the requirements of each spending agency. The existence of management information systems (which was key to the financial management initiative organized in the United Kingdom) goes a long way in buttressing the purposes of financial management and in inspiring greater confidence in the adequacy of management and control systems in government agencies.

Table 23.

United States: Statement of Financial Position

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Source: United States, Office of Management and Budget (1992).Note: Unless otherwise indicated, the statements are as of September 30 of each year. These statements are to be furnished by each department or agency and are then consolidated.
Table 24.

United States: Statement of Operations and Changes in Net Position

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Source: United States, Office of Management and Budget (1992).

Issues in Transforming Financial Information

The discussion so far testifies to the growing interest in financial information produced by governments. The number and variety of users have expanded, as have their interests, partly because of the increasing complexity of economic management in the modern world. Indeed, some users have asserted their “right” to be informed.13 In the years to come, as this right becomes more prominent and consolidated, governments will be obliged to take into account the users’ changing information requirements. Governments and their accounting machinery must recognize this task explicitly and not merely provide information but also make the information more comprehensive and timely. Concomitantly, accounting agencies must reflect on the situation and evaluate their own ability to respond to users’ rights. The design of existing information systems is a key issue in this process.

Table 25.

United States: Statement of Cash Flows (Direct Method)

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Source: United States, Office of Management and Budget (1992).

Design Issues

The architecture of any system reflects the needs and the ethos of the age in which it is established. The information system is no exception. Inevitably, then, these systems, when viewed at a later date, might appear obsolete and dysfunctional. In addition, they may be characterized by design flaws.

First, applying commercial formats to government accounting is a recurring issue. Now, however, there is greater agreement that commercial formats, albeit with adjustments, can be applied to government organizations. The anchoring of a set of theories in one field imparts authority to a set elsewhere if it can be anchored in the same procedures. Thus, the application of these formats should increase over time and acquire additional strengths and legitimacy. Will these formats supplant the existing appropriation accounts used by the legislature, or the established classification of government functions and publication of government finance data, or the details of public debt data published by central banks? Each of these presentations has its purpose and clientele. Through the application of commercial formats, the same facts would be further reinforced for some users. For some, commercial accounting approaches could provide additional clarity and an improved basis for comparison with the private sector. In the process, the traditional chasm between the accounting approaches of the public and private sectors may be substantially reduced.

Preparing accounts according to commercial formats would require changes in the orientation as well as in the organization of data.14 Numbers would need to be compiled on both a cash and an accrual basis, and agencies would be obliged to compile data on their liabilities. During the transition, efforts may be geared toward arranging the blocks of information in commercial formats; the more important task will be to internalize the implications of these formats for purposes of financial management within government agencies. Provision of information would then be a natural by-product of the process, rather than the result of an independent effort. Fortunately, much of the transformation has been simplified by technology. The design of the information system should therefore be seen as an integral part of the larger design of the coverage, basis, classification, and cost computation tasks of the overall accounting machinery in government.

Second, experience shows that, far too often, central agencies and donors request detailed information that is not always directly related to their needs. In a survey conducted by the World Bank, it was concluded that in many countries where monitoring systems are operating, their main utility is not to the project manager but to the central and planning and finance ministries.15 The study added that the highly centralized nature of the systems means “that they are seen primarily as an instrument for ‘central agencies’ to control managers—not a management tool to improve poor performance.” According to the study, the information system responded more to the needs of donor agencies than to the needs of management. While the needs of central agencies are clearly established, the needs must be tempered by a recognition that the agencies can have little positive motivation to provide information that is not related to their own immediate and substantive concerns. The same factor could contribute to extensive doctoring of the data, which would effectively render them useless. As a principle, therefore, central agencies should seek information that is useful to the provider, and then, as an extension, to themselves. This underlines the need for a continuing dialogue between providers and users about the purposes of data.

Third, it needs to be reiterated that providing information involves costs (economists tend to consider them capital costs).16 Potential improvements in the design of information systems need to be weighed against their affordability. In some cases, partial recovery of costs may be possible (through the sale of information, as some central statistical organizations of governments have done in recent years). However, to a large extent, changes are likely to be a burden on the taxpayer, leading inevitably to a phasing of improvements, if not to their abandonment. Cost constraints must be explicitly taken into account in determining the future organization of information.17 Fourth, the timing of the release of information and the extent of information released (owing to confidentiality) are conditioned by the government’s perception of the anticipatory actions by the economic agents.

Operational Issues

One of the major criticisms leveled against the financial information provided by government is that it becomes available only after a long delay, thereby reducing its usefulness for policymakers as well as for the public. Some countries have resolved this problem by instituting “flash reporting systems,” under which the aggregates or the control totals are reported quickly to the policymakers. Unfortunately, these efforts represent a “band-aid” approach. A viable alternative is to review the accounting framework, with a view to eliminating systemic problems, and to install electronic processing machinery to accelerate compilation. This approach is actually being implemented in a number of countries.

An associated criticism of governments is that they manipulate data in a self-serving way. This can be avoided only if the users examine available information and publicize their results whenever the quality of information is found to be wanting. However well the system may have been designed, operational lapses and abuses are likely to reduce the usefulness of the product—in this case, information. In such circumstances, modern democracies provide opportunities for the public to express their views and to pursue follow-up action. It is to be explicitly recognized that disclosure provides accountability to some while making available information to all interested. Government’s interface with other economic agents may limit the information released.


See United States, General Accounting Office and Canada, Office of the Auditor General (1986), pp. 3-4.


Suggestions have been made from time to time about how financial information reports should be made user friendly. Likierman suggests, for example, that the report should “(a) minimize jargon and acronyms and not be patronizing, (b) have a logical structure and layout, (c) have a summary of key points, (d) not have an overwhelming amount of detail, (e) not be unduly distorted by public relations considerations, (f) be clear about the nature, cost, and progress of major projects, and (g) be clear about the impact of changing price levels,” He adds that there should be a good balance between figures, text, and charts and clear textual explanation of figures. See Likierman (1989), p. 29.


See United States, General Accounting Office, and Canada, Office of the Auditor General (1986).


In a report entitled Objectives of Financial Reporting, published a year after the above survey, the Governmental Accounting Standards Advisory Board (1987) identified the three primary users: the public, legislative and oversight bodies, and investors and creditors. In this process, the Accounting Standards Board has excluded the needs of the users within the government (United States, Federal Accounting Standards Advisory Board, 1993c).


In most cases, enterprises are required by law to submit financial reports. But these are often disparate in quality and timeliness. Sometimes (for example, in Bangladesh, India, Pakistan, and Sri Lanka), consolidated reports are produced for the public enterprise sector. When consolidated reports are prepared, they permit an appraisal of the public sector as a whole.


See Likierman (1988, p. 150 and following pages) for a detailed description of the tasks and procedures of these committees.


These departmental reports had their origins in the United Kingdom in Public Expenditure White Papers.


In India, performance budgets of each ministry are submitted to the parliament as supplemental information.


Separate budgetary accounting and related reporting may not he required where the budget categories are structured (as in Chile) on the lines of a balance sheet.


In a report issued in 197.1 ttie American Institute tif Certified Public Accountants noted that it was “fundamental and pervasive” that “the basic objective of financial statements is to provide information useful for making economic decisions,” implying some user rights. Cited in Likierman (1989), p. 15.


It is not productive to engage in a discussion of which one is superior. The traditional flow statements have their strengths as balance sheets aimed at the determination of the net worth of governments. The assets and liabilities may not fully capture the transactions that imply future tax obligations or those that imply future expenditures. The inclusion of items in assets of the government does not necessarily mean that they are capable of generating revenues. While the balance sheet is an indicator of the financial performance of public authorities, it does not serve, nor does it claim to serve, as a basis for determining whether governments are achieving their goals. It is necessary to recognize that accounting of deficits is only one important aspect, while the other important issue is the interpretation of deficits. Balance sheets offer another vantage point for analyzing the financial results of public policies; the analysis provided by Ijalance sheets, however, is by no means the conclusive one.


Arrow, for example, observes that a “characteristic of information costs is that they are in part capital costs; more specifically, they typically represent an irreversible investment.” See Arrow (1983), p. 170.


Until recently, the specification of accounting standards has not taken into account die cost aspects. In its most recent report (Exposure Draft, 1994c, p. 3), the U.S. Federal Accounting Standards Advisory Board suggested that the entity should ensure that all the relevant financial information is provided, subject to the constraints of cost

Author: A. Premchand
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