The accounting system is key to the proper and effective functioning of a central bank. Sound and transparent accounting principles are crucial for providing credible and timely information that allows decision makers to formulate and assess macroeconomic policies. As sub-Saharan African countries rely increasingly on market signals and become more dynamic, access to timely and reliable accounting information becomes crucial to sound decision making. Furthermore, the expanding use of indirect monetary instruments (in particular, open market operations in government securities) puts some new demands on central banks' accounting systems (see Dalton, 1997). Given that many central banks are also issuing regulations for commercial banks' accounting (especially important for off-site banking supervision), it is important that the central banks themselves practice what they preach.
In addition to sound financial accounting, central bank management also requires information systems that identify operational weaknesses and improve the effectiveness and efficiency of central banks' use of resources. This places a special emphasis on the development of management and budgeting accounting systems. The operation of a sound accounting system also should be complemented by an independent and objective internal audit function that examines the appropriateness and effectiveness of both financial and operational internal controls. In sum, continuous improvement in central bank accounting and internal audit procedures will facilitate the accountability and thus the credibility of the central bank.
A survey conducted by the UN Centre on Transnational Corporations, the International Labor Office, and the World Bank in 1990 revealed that development of accounting and auditing standards in sub-Saharan African countries generally has not been given high priority (United Nations, Centre on Transnational Corporations, 1991). This was, in particular, a problem in the government sector, where accounting apparently was often considered a mere clerical function (United Nations, Department of Technical Cooperation for Development, 1991). However, several countries have since received substantial donor assistance to promote the education of professionally skilled independent accountants. MAE has provided technical assistance in central bank accounting and internal audit procedures to several of the sub-Saharan African countries, including Angola, Botswana, Malawi, Rwanda, Tanzania, and Zambia. Its goal has been to assess the overall accounting framework and create an action plan that is then supported by short-term resident experts. The action plans have highlighted such areas as improving accounting and financial reporting; ensuring impartial and independent audits; establishing a regulatory framework for sound financial reporting and monitoring; establishing national accounting boards; and improving public sector accounting. Central banks that have committed themselves to reform in these areas have witnessed substantial progress in their accounting and auditing standards.
National accounting boards have now been established in most of the countries, and in some, a class of independent auditors has also been created. For instance, in the region's anglophone countries, the majority of accounting bodies are recognized under a legislative act, which may also regulate the position of auditor. The national accounting boards also follow general accounting practices to reduce diversity and harmonize accounting practices in the context of the local institutional framework and other requirements, such as taxation. In Zimbabwe, for example, the Accounting and Practices Board, which is an independent body consisting of representatives from the accounting profession, government, and the business community, has adapted international accounting standards to the local environment. These standards are mandatory for parastatals and local authorities, as well as all businesses. The Accounting and Standards Committee in Mauritius, established by the government, also uses international accounting standards as a point of reference for national standards. In addition, several countries, including Malawi, South Africa, and Zimbabwe, have established special reviews of the accounting profession to guarantee the quality of external auditing.
While some countries have made progress, central bank accounting is often still considered a mere bookkeeping and recording function, and a good number of others pay inadequate attention to the information needs of a more market-oriented economy. As a result, sub-Saharan African countries continue to have problems with reporting timely and relevant financial information.
Typical Problems
Some accounting problems are common to all central banks, not just those in sub-Saharan Africa. They include accounting for operations in foreign exchange, in particular how to treat revaluation gains and losses, recognition and measurement of off-balance-sheet items often involving foreign exchange financial instruments, and proper accounting for and disclosure of quasi-fiscal activities. Quasi-fiscal activities could involve, for example, financing the development of such sectors as rural finance or possibly providing implicit subsidies through guarantees or incentive schemes.23 The motives not to publish separate information about these activities may vary, but they are often political. However, as noted above, it is crucial that the accounting framework provide decision makers with the best information available so that they will be able to identify the costs of quasi-fiscal activities. If these activities create losses for the central bank that in fact deplete its capital, the result is tantamount to providing the government with direct credit. Because the government should bear the consequences of these actions and should also ensure the solvency of the central bank, the central bank should have a strong motive to establish an accounting system that can identify these losses properly.
Accounting for operations in foreign exchange is particularly difficult, and practices vary.24 The generally accepted accounting principles require that income and expenditure accounts related to foreign exchange transactions fairly present the results for the operations of the period covered. The accounting principles represent a prudent and conservative position on income and gains and require that they not be recognized until realized in cash or in other assets, whereas risks and losses must be reflected in the income statement. For instance, some of the recent currency crises have not been addressed in time because of imperfect information about future obligations (forward contracts). Some countries prefer to transfer all unrealized foreign exchange losses and gains to a separate revaluation account, while others prefer to show the effect through the profit and loss statement. As a related matter, most of the central bank laws also recommend that only realized foreign exchange gains be distributed as profit to the government. This serves to avoid monetization of central bank profits that may not have involved an actual flow of resources to the central bank.
Another relevant issue for central banks is choosing the appropriate basis for valuing major assets. It is always difficult to assess the current value of a financial asset, such as a government security, without deep and liquid markets. Accordingly, when markets are not well developed, there is a general agreement to translate monetary assets using their historical prices. If market prices are available, and the values of central bank assets fall, the central bank should immediately make provisions when such losses are identified even though they are not yet realized. Several central banks in sub-Saharan African countries have experienced such losses and have, in general, been able to make the necessary provisions.
In addition to these problems, many central banks in sub-Saharan African countries have experienced a range of operational problems resulting in delayed and incomplete accounting. Delays can be caused by an insufficient flow of information between central bank branches or even between departments. For example, in 1993, although the Zanzibar branch of the Bank of Tanzania produced a daily balance sheet, the branch transmitted only a weekly balance sheet because greater frequency was not requested. In some countries, it may be necessary to improve communication links, which also are important for the development of the payments system. Delays can also occur if transactions are not duly entered at the time they take place. The objective should be for the accounting department to produce a daily balance sheet with a lag of no more than 24 hours (if necessary for clearing and settlement balances). The system should also allow for flexibility in creating additional reports and making relevant queries in the database on an ad hoc basis. For instance, the Central Bank of Lesotho, besides producing a daily balance sheet, also prints a profit and loss statement.
There may be various reasons for incomplete reporting. In some countries, unclear classification, complicated verification procedures, and unclear co-ordination among different central bank departments may generate problems. If each department enters its own transactions into the system, the responsibilities of the accounting department and other departments within the bank must be clearly defined. The lack of thorough accounting manuals may also result in incorrect recording, in particular, if the staff has no training in accounting. Those central banks that lack skilled accountants can correct the problem by offering intensive training in accounting.
Computerization will often reduce delays and the risk of manual mistakes. Some level of computerization can be found in all the selected central banks, including off-the-shelf programs. Generally, an integrated accounting system proves to be the best strategy for addressing such problems.
The inability of central banks to address weaknesses in accounting and operating procedures has also been compounded by relatively underdeveloped internal auditing systems and procedures. The absence of a well-functioning and independent internal audit function not only increases the risk that failures in existing central systems may go undetected, but also increases the likelihood that senior management is unaware of the real risks confronting the bank. The development of internal audit systems should initially focus on establishing a work plan for important and high-risk areas of central bank operations, such as foreign exchange operations, domestic market operations, currency distribution, banking and payment services, and accounting and information systems. Initial work should concentrate on developing skills for assessing the adequacy and effectiveness of internal controls. As audit skills are developed, attention can also be focused on assisting management to assess the efficiency of central bank resource utilization.
Information Technology
The term information technology refers to the technical resources—hardware, software, and support staff—that are available to an organization's professional and management personnel and that support the organization's performance of its functions.
Infrastructures
The infrastructure includes computers, the connecting equipment, and the basic software environment that are required for the various information systems to operate. The three most common types are (1) the traditional, batch-oriented, totally centralized, mainframe-based environment; (2) a mix of departmental networks and some centralized applications; and (3) a totally decentralized, modern client-server environment.25
The information technology found in African central banks spans the whole range of possible alternatives. The traditional centralized type, typically found in central banks with a longer history of automation, has become less common, although some countries (Kenya, Malawi, Ethiopia) still have a strong preference for such environments. Most African central banks are currently moving toward more decentralized infrastructures composed of departmental networks and many stand-alone personal computers. Except for South Africa, none of the countries sampled has a true client-server environment, but many—like Uganda, Zambia, and Zimbabwe—have plans and/or strategies in place.
Uses
The accounting system is the heart of a central bank information system, and all central banks have automated accounting to some degree. The accounting systems can range from traditional, batch-oriented, mainframe-based, general ledger posting programs to modern, fully integrated, online, multi-user, multifunction packages.
Most sub-Saharan African central banks have been slow to migrate to newer client-server versions because the older systems, although more limited, are stable and reliable, while the benefits of the newer ones are not well understood. Nevertheless, the need to modernize and the unfavorable economics of maintaining obsolete software and hardware are driving most banks to convert to the newer technologies. Those that have included conversion to a new accounting system in their overall information technology strategy have tended to favor the larger and more expensive integrated financial packages. This preference for the most sophisticated and expensive accounting systems ignores the fact that most of the banks are relatively small institutions that handle a relatively low volume of accounting transactions. Their needs can be met quite satisfactorily by commercial off-the-shelf accounting software, although these programs can also cause problems if they are not compatible with the other systems used by the central bank.
Some sub-Saharan African central banks have used information technology to develop computer-based systems of commercial bank reports for analysis and research as well as for off-site surveillance in bank supervision. In the Bank of Zambia, for example, the authorities have been developing, under a technical assistance program jointly run by the IMF and the United Nations Development Program, an automated early-warning system for the supervision department.
Although central banks in sub-Saharan Africa have attempted to provide general office automation, in most, automation ranges from a few stand-alone personal computers, used mostly for word processing, to departmental networks and limited use of E-mail. Nevertheless, as part of their overall information technology strategy, some banks are pursuing the installation of fully networked client-server environments with the objective of providing up-to-date office technology, including internal and external Internet E-mail to most professionals.
Main Recommendations on Central Bank Accounting and Auditing
National accounting board. A national accounting board should be established to define, adopt, and implement national accounting standards, in consultation with regulators, accounting professionals, and industry generally. Ideally, the standards should follow generally accepted accounting principles and be consistent with international accounting standards as promulgated by the International Accounting Standards Committee. Adoption of fundamental principles, such as the accrual principle (revenues and expenditures are recognized when they occur and not as they are received or paid) and the going-concern principle (where financial statements are prepared on the assumption that an entity will continue in operation for the foreseeable future), are essential. Achieving transparency, through adoption of substance over form, prudence, and faithful representation principles, is also essential. The board should also promote adherence to standards of professional qualifications, ethics, and continuing professional development.
The central bank should seek to be involved in the work of the national accounting board, particularly in areas of relevance to its statutory responsibilities, and have regard to standards in the preparation and presentation of its own financial statements.
External auditors. Fully independent and objective external auditors are essential to verify that financial statements comply with national accounting standards and present a true and fair view of the financial position and performance of an entity. Within the framework of the national accounting board, there should also be a set of auditing standards for application in the audit of financial statements. National auditing standards should be consistent with international standards on auditing as promulgated by the International Federation of Accountants. External auditors must be qualified to practice as such and should be subject to special certification or recognition procedures, by either the national accounting board or another appropriately qualified agency.
Central bank accounting. The central bank should have formal accounting policies that are approved by the national accounting board and that provide the basis for the accounting procedures and controls used in daily operations. There should be a central area of the bank that is responsible for developing accounting policies and coordinating procedures. Accounting can be performed on a centralized or decentralized basis, but the central area should be responsible for supervising on a daily basis the operation and balancing of the accounting system.
Accounting policies should support maintenance of the financial soundness and policy responsibilities of the central bank. Adequate reserves or provisions should be maintained to cover the bank for losses that may arise, and profit distributions should not include amounts that have not been realized by a flow of resources to the central bank.
Accounting information systems should be capable of providing financial information for both external reporting and management purposes. Important management systems include, but are not limited to, budget and planning systems, cost control systems, and asset management systems.
Internal audit unit. The central bank should establish an internal audit unit that reports directly to the governor and whose prime functions include examining, evaluating, and monitoring the adequacy and effectiveness of the accounting and internal control systems. Other important functions will include a broader-based analysis of control systems to keep risks within acceptable levels and a focus on assessing the efficiency of central bank resource utilization. These functions in turn require an increasing focus on information from management accounting and budgeting systems, and informing and educating managers about potential improvements in efficiency, including the potential benefits of computerization.
Reasons for Slow Development
The majority of sub-Saharan African central banks are facing a great deal of difficulty in achieving a complete transition to a fully developed and well-functioning information technology environment because they do not have (1) a well thoughtout development strategy, (2) adequate budgetary resources, or (3) enough competent technical and management staff.
The lack of qualified technical personnel is wide-spread throughout the region and is the greatest obstacle to the effective deployment of information technology and to an orderly transition to newer client-server environments. Although some of the region's central banks are actively pursuing technical training for their staff, the need for very aggressive recruiting and continuous training of internal and external technical support resources is not clearly understood.
The lack of adequate information technology skills represents a critical vulnerability that the banks must address as they pursue modernization. In fact, it is probably the most important prerequisite as African central banks begin to deploy modern systems, such as automated large-value transfer systems, real-time gross settlement systems, check processing systems, securities book-entry systems, and international trading desks.
In conclusion, most sub-Saharan African central banks are at some stage of transition toward more desirable information technology environments. While some, like Zimbabwe, have developed a more formal strategy and have recruited outside consultants to guide them through the process, most others are attempting the transition with their own internal technical resources. Considering that, on the whole, the internal technical and management resources are insufficient at best, most African central banks face a much more difficult, slow, and expensive modernization process than would be possible if the proper technical staff were available.
The Year 2000 Problem
The Year 2000 problem (also known as the Y2K problem or the millennium bug) refers to the possibibility that some computerized systems will fail when dealing with dates beyond December 31, 1999. All types of computerized applications may be affected, from financial information systems to personal computers and from networks to the circuitry that controls industrial machinery and consumer appliances. Financial and accounting systems worldwide are at very high risk. Because many of the systems are older and are based on obsolete technology, they have more problems that are difficult, if not impossible, to repair. This matter is of fundamental importance to central banks in general and to central banks in sub-Saharan Africa in particular because of their greater reliance on outdated, often obsolete, hardware and software.
Sub-Saharan African central banks will face the additional difficulty that, as awareness of the consequences of this problem grows worldwide, they will be competing for scarce and expensive resources. In many cases, the only solution may be wholesale replacement of existing equipment and software; in some cases, expensive reconditioning projects may be possible, but in all cases some kind of disruption to normal operations is very likely.
Clearly, given that the deadline is immovable and the technical resources available to sub-Saharan African central banks for corrective action are limited, there is a high risk of disruption to those countries' financial systems unless urgent remedial action is taken.
Areas for Further Reform
The implementation of central bank accounting reforms or, for that matter, national accounting reforms reflecting internationally acceptable accounting principles and standards has proceeded very slowly in sub-Saharan African countries. This was one of the early areas in which technical assistance was provided by MAE and continues to be provided by other institutions. Although a few good examples of accounting education and practice can be identified, for the vast majority of countries the pace of progress has been slow. The former Portuguese-speaking countries and the former centrally planned countries, for example, are faced with inventing new accounting systems. The main reason for this slow progress is that most countries still consider accounting a bookkeeping and recording function and do not give it high priority. These countries do not appear to fully recognize the link between the increasing reliance on market forces and access to timely and reliable information for sound decision making. Accordingly, education should be a major area of emphasis for countries attempting to modernize their accounting systems. Additional measures to be implemented are detailed in Box 7, page 44.