The focus of this short paper is the IPSASs which were developed by the International Public Sector Accounting Standard Board (IPSASb), previously known as the Public Sector Committee (PSC). IPSASb is a private, independent standard-setting institution working under the backing of the International Federation of Accountants (IFAC). IPSASs deal with issues related to the presentation of annual general-purpose financial statements. The standards also put forward a set of requirements regarding recognition, measurement, presentation, and disclosure for transactions and events, such as payment of government taxes (Ernst & Young and SAP, 2011).
IPSASb, to create IPSASs, has used the standards developed by the International Accounting Standard Board (IASB) such as the International Accounting Standards (IAS) and the International Financial Reporting Standards (IFRS) (Hughes and Minovski, 2004). Having said this, IPSASs were specifically adapted to the needs of the public sector. Regarding the reporting aspect, for example, some IPSASs are related to issues only encountered in the public sector and that do not have any equivalent in IFRS.
IPSASs are destined to be adopted by all public sector entities other than Government Business Enterprises (GBES). They also apply to multinational public organisations, e.g. the UN has adopted IPSASs for its own financial reporting. Governments are not compelled to adopt IPSASs, each individual government decides whether to adopt it for its public sector reporting or not (Ernst & Young and SAP, 2011).
This sovereignty of national states is, however, weakened by the intensification of the process of globalisation. Indeed, globalisation, by facilitating the interdependence of the main world economies, has favoured the incursion of the government sector in the world capital markets by issuing large debts and holding significant equity investments. This integration has forced national governments to prepare and present reliable and transparent accounting reports for sound decision making in order to reduce the widespread diversities and inconsistencies in accounting (Adhikari and Mellemvik, 2008).
In the context of developing countries, which do not have access to the global capital markets, the implementation of IPSASs is regarded as a mean to ensure external legitimacy and financial support. International financial institutions such as the world bank, the African Development Bank, and the Asian Development Bank, among others, which supply aid, grants, and loan to developing countries, have endorsed and promoted the use of IPSASs, as part of improvements in governance (Adhikari and Mellemvik, 2010).
In the coming sections, I will, first, highlight both the users of government financial reports and their needs and also, examine whether these needs are satisfied in the case of Kenya. Then, I will try to critically evaluate the reasons for adopting IPSASs. And finally, I will compare the differences between the public sector and the private limited company.
Government financial reports users and their needs
As mentioned above, financial reporting refers to the communication of financial information by an entity to interested parties. This includes all financial information reports that are based on data generally found in the financial accounting and reporting system. Financial reports cover those that provide compliance and performance information, departmental financial reports and general purpose financial statements (INTOSAI, 1995).
The main objective of financial reporting is to reveal how the government has handled its financial resources (i.e. revenues and expenditures, assets and liabilities). The users of financial reporting are those who do not belong to the government and who need its financial information, information that meets their needs. The principal users of government financial reporting are (IFAC PSC, 1991; IFAC PSC, 2000 and; INTOSAI, 1995):
- Legislative and other governing bodies: Their objective is to evaluate the government’s stewardship of resources, observance of legislation and other authorities, state of finances and performance.
- The public: They are interested in knowing how well the government has handled their financial affairs and resources, and also getting information on the overall economic impact of government activities.
- Lenders: They are concerned with a government’s ability to meet its commitments as they fall due. They are thus in search of information enabling them to evaluate that issue.
- Rating agencies: They seek information to assess a government’s creditworthiness. To that end, they look at its ability to service debt and repay that debt when it falls due.
- Other governments, international agencies and resource providers: They are interested in getting information about a government’s state of finances. They are also interested in its plans and priorities.
- Economists and financial analysts: They are interested in financial reports in order to review, analyse and disseminate information to other users and, to examine and evaluate financial and economic issues.
Even though, the user groups described above may differ in their information needs or, may place a higher or lower priority on certain types of information according to their interests; the user groups also have similar information needs. In broad terms, users seek information that enables them to make economic, social and political decisions and, to analyse a government’s use of the resources. They are particularly interested in both plans and the results of their implementation including, performance and the state of its finances. In general, users look to financial reports in order to assess a government’s (IFAC PSC, 1991; IFAC PSC, 2000):
- Stewardship and compliance:
- Were resources used according to budget authorisation and other legally mandated legislative and related authorities such as legal and contractual constraints and programme mandates?
- Checking how is the government’ stewardship over the custody and maintenance of resources.
- State of finances:
- What are the resources and types of revenues available to government?
- How are the resources used and allocated?
- Looking whether government revenues were sufficient to cover costs of operations,
- What are the timing and volume of cash flows and future cash and borrowing requirements?
- What is the ability of government to meet financial obligations, both short and long term?
- What is the overall financial condition of government?
- Is the government performing well in its use of resources?
- Economic impact:
- What is the government’s economic impact on the economy?
- What are the options and priorities of government spending?
These user requirements are not always met. In the case of Kenya, government financial reporting is largely seen to be inadequate. The country has adopted an Integrated Financial Management Information System (ifmis} which most central ministries have to use in the presentation of in year budget. Central ministries’ consolidated reports, however, need to combine data from the Vote-Book system and the ifmis (Hedvall and others, 2009) For the Districts, the current status is to first capture District Data from the Vote-Book system then, place it into the Ledger Management system. And then, transfer the copied data into the ifmis system which has to be used as the reporting tool.
Because of this, the consolidated central government’s quarterly reports are generally presented later than due, around six weeks after end of quarter. There is also a concern, related to the District’s reporting method, about the quality of the information presented even though, the reports are deemed to be useful and the concerns would not compromise their basic usefulness (Hedvall and others, 2009).
Regarding the annual financial statements, they are prepared through a process where each line ministry presents its final accounts to the Controller and Auditor General (CAG). The accounts have to be presented to cag within three months before the end of each year. But in reality, they are presented with all requested information around mid November. The CAG then prepares the final consolidated accounts in: “The report of the Controller and Auditor General to Parliament on the appropriations accounts, other public accounts and the accounts of the funds of the Republic of Kenya”. In general, this publication is presented to the Parliament around 10 months after the end of the financial year.
The CAG prepares the central government’s financial statements on the base of formats devised by the Office of the Accountant General (Hedvall and others, 2009). And, the government employs a cash based model and a national accounting standard which differs from IPSASs practices.
Having said this, Kenya has made some progress towards the implementation of IPSASs. Financial reporting of donor funded projects is, since 2009, required to be prepared on the basis of IPSASs (laban gathunge, 2009).
Evaluation of IPSASs adoption
Around the World, 83 countries have either adopted, are in the process of adopting, or have used IPSASs as a basis for developing national public sector accounting standards (Treasury Board of Canada Secretariat, 2011).This adoption process is advocated by the IPSASb. This Board which claims to be a private, independent standard-setting institution stated that by adopting IPSASs, governments will improve both the quality and comparability of financial information reported by public sector entities around the World (IPSASb, 2006).
First of all, the assertion of independence is contested. Indeed, one may consider the Board as reflecting the interests of its parent organisation, the IFAC. The interests of other various global bodies such as the world bank and the IMF are also considered to have been reflected. These institutions which have promoted the application of business-style accounting to governments around the world have supported the physical production of the IPSASs by providing us$1 million of the us$1.3 million required (Robb and Newberry, 2007; Rowan Jones, 2000).
Some authors also argue that New Zealand is the place where the initial concepts of IPSASs were developed, a country which is the first to have applied business-style accounting practices to all government activities. It appears that those involved in the New Zealand government accounting standards transformation such as Ian ball and April Mckenzie have also been key players in the preparation of IPSASs. In 1996, ball was appointed chair of the IAC’s Public Sector Committee (PAC which will be renamed IPSASb) and, Mckenzie became the PSC’s technical advisor while remaining director of the NZICA.
At that time, the PSC’s main initiative was its standards project and, ball chaired the PSC’s sub-committee dealing with the project while Mckenzie oversaw the general management of the project. The NZICA was heavily involved in the preparation of the project. The technical expertise of its staff was used and, some of them were even moved to the New York office of IFAC (Robb and Newberry, 2007).
Secondly, the application of business-style accounting standards to governments worldwide is also contested. It is argued that IPSASs has emphasized financial accounting and external reporting to the neglect of budgeting and cost analysis (i.e. managerial accounting); a neglect that is considered unjustifiable. (James l. Chan, 2000). The PSC argued that developing specific accounting standards for the public sector was very expensive and would end up duplicating the work done in the private sector.
Finally, though the IPSASb has no power to compel countries to adopt IPSASs, it has used a partnership strategy with the world bank in order to facilitate its adoption and implementation. The world bank, which has endorsed IPSASs, requires public sector institutions to adopt them as a condition to loan approvals. IPSASs are thus a requirement for accounting and financial reporting by recipients, significantly increasing its use and perceived relevance (Treasury Board of Canada Secretariat, 2011).
Differences between public sector and private limited company
The application of the same reporting standard to these two sectors is criticised on the ground that governments differ from the private sector in both their objectives and financing. The major differences are highlighted below:
- Organisational purpose: The private limited company’s main objective is profit maximisation and its resources are prioritised to that end. In order to achieve their aim of financial return on investment, business enterprises target a market segment within the society. For this reason, they have usually focussed on earnings and its components when it came to financial reporting, giving no visible focus on non-financial measures of performance. (GASB, 2006).
In contrast, the welfare of their citizens is the main concern of governments. To this end, they provide them public services (i.e. health, education, defence and, transportation) in accordance with public policy goals. Governments undertake these functions because return on investment is not their priority. For this reason, they develop indicators such as efficiency, effectiveness, economy and, sustainability in order to assess their performance (IFAC PSC, 2000). Their financial reporting should thus provide information on the accomplishment of governments objectives in order to allow users to make evaluations and decisions relevant to their interests (GASB, 2000).
- Sources of revenues: Governments revenues emanate from taxation and non-reciprocal transactions. Taxpayers are legally mandated to provide the resources their governments need, making it an involuntary transaction. Furthermore, paying taxes does not entail an entitlement to any specific form of public service or benefit (IFAC PSC, 1991). The private limited company, however, generates its revenues principally through voluntary exchange transactions between willing parties (i.e. buyers and sellers).
- Role of the budget: The spending prioritisation of public resources is legally mentioned on government budgets. The government which holds the responsibility of managing the financial resources of the state is accountable to the legislator for its handling and use of the resources entrusted to it (IFAC PSC, 2000). For the business enterprises, the budget is used by the management as a financial management tool for internal control purposes (GASB, 2006).
- Potential for longevity: Governments rarely liquidate on the ground that they have the power to raise tax and responsibility to provide public services. Private sector companies, on the contrary, will survive as long as they are able to sell their products and services at a higher price than their production cost. Business enterprises financial statements, thus, places an emphasis on the recoverability of assets and on the fair values of certain assets and liabilities (GASB, 2006).
- Relationship with stakeholders: The taxes paid to governments constrain them to meet a broader standard of accountability than for private limited companies. Moreover, citizen’s interest on fairness obliges governments to include in their financial reporting systematic and rational cost-of-service information. In contrast, equity changes are indicated in business enterprises financial reports (GASB, 2006).
This small examination has shown that IPSASs are mostly based on IAS and IFRS and, were first conceptualised in New Zealand. These International Accounting Standards for the public sector were endorsed and promoted by the international financial institutions, mainly the World Bank and the IMF. The World Bank, for example, requires governments to adopt them as a condition to loan approvals. In countries that do not need financial support from those kinds of institutions, the adoption rate remains very low. In Europe, for example, only three local and four central authorities have admitted using IPSASs as a starting point for new government accounting (Treasury Board of Canada Secretariat, 2011).
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 IAS and IFRS are concerned with financial reporting of private sector companies
 GBEs include both trading enterprises such as utilities, and financial enterprises, such as financial institutions. GBEs are expected to comply with the IAS and IFRS.
 It connects ministries/departments and enables them to access information and feed data into the system. The rolled out system currently includes the General Ledger, accounts payable/commitment control and purchasing. The system generates regular reports on expenditure returns and answers specific queries.
 The Vote-Book system is used to enter and process expenditure data at Treasury, ministries and Districts. Data from the Vote-Book system is transferred to the Ledger Management System for production of periodic in-year and end of year summery reports.
 See Hedvall and others, 2009
 The then leader of the treasury’s Financial Management Support Service responsible for introducing and implementing the country’s financial management reform.
 The then Director of New Zealand Institute of Chartered Accountants (nzica)