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									                   ACCOUNTING AND REPORTING PRACTICES

                                    David C. Jones
                         Chartered Public Finance Accountant
                         Chartered Certified Accountant (UK)

David C. Jones, CPFA, FCCA (UK)
International Financial & Management Consultant
4936 Andrea Avenue,
Annandale. Virginia. 22003. USA.
Tel: 703-978-8564
Fax: 703-978-8014
                           Table of Contents

Introduction                                                           1
Financial Powers                                                       2
Internal Financial Organization                                         2
Sources of Finance                                                     3
Planning and budgeting                                                 3
Accounting                                                             4
Audit                                                                   5
Asset Maintenance                                                      7
Financial Reporting Systems                                            7
Starting                                                               8
Training                                                               8
Professional Development                                               9
           ANNEX 1                                                    10
           Draft Financial Code of Practice
           for Accounting and Budgetary Control of Public Urban Institutions

           Introduction                                               10
           Objectives                                                 12
           Features of Urban Institutions                             12
           Accounting Systems                                         13
           The Accrual System                                         13
           Enterprise Accounts                                        16
           Fund Accounts                                              16
           Management of Trust Funds                                  22
           Renewals Funds                                             22
           Pension Funds                                              22
           Debt Service                                               23
           Administrative Overheads and Common Services               24
           Budget Classification                                      25
           Budgetary Control                                          27
           Costing Systems                                            28
           Conclusions                                               29
Recurrent Budget (Solid Waste Collection)   31
Recurrent Budget (Solid Waste Management)   32
Recurrent Budget (Education)                33
Recurrent Budget Summary                    34
Cash Flow Forecast                          35
                            ACCOUNTING AND REPORTING PRACTICES
                               PUBLIC SECTOR URBAN INSTITUTIONS


1.      This paper is concerned with an understanding of detailed procedures and practices,
especially as they relate to accounting, financial reporting and budgetary control. Broader issues
of urban financial management are covered in the paper "Outline of Issues in Urban Financial
Management Policy May 1983. Reference should also be made to the paper "Substantive
Upgrading of Municipal Responsibilities".

2.       The financial management of public sector urban institutions1 differs markedly in
objectives, emphasis and practices, from that of commercial enterprises. To a much greater
degree than in the private sector, public institutions are concerned with accountability and public
trust relating to funds which are not, in turn, normally susceptible to the commercial disciplines
associated with profit-seeking. Furthermore, political decisions, to which public sector
institutions are subject, are frequently not motivated by commercial incentives. This is
emphasized because it is often asserted that the so-called "business practices" were applied to the
public sector, many of their financial management problems would be solved. Without question,
financial management of public sector institutions, especially in developing countries, is often
poor. However, the remedies to be applied should be those appropriate to the special needs of the
public sector. Where commercial practices can be useful, of course, they should be applied or
adapted. This document sets out a number of important principles and constraints relating to the
management of public sector entities such as municipalities and urban development authorities.
Attached as Annex I is a more detailed code of financial practice which could be adopted (wholly
or partly) by such institutions. It can also be used by financial managers and consultants in
designing new systems. The different objectives of public and private sector institutions are
emphasized below under "Financial Reporting Systems" (para. 27). The code of financial
practice makes specific reference to the "Features of Urban Institutions" (para. 8).

Financial Powers

3.       The different objectives of development authorities and municipalities are reflected in
their financial powers and duties. Typically, a development authority will be in receipt of grants,
loans and other assigned revenues for purposes of capital development. This may be, for
example, in urban infrastructure, shelter-based site development or slum upgrading. Costs may
be wholly or partly recovered from beneficiaries - or may be borne from taxes. Public
infrastructure may be handed over to municipal authorities for operation and maintenance -
sometimes including debt service obligations, sometimes not.

 In this paper, the expression 'urban institutions' refers to public sector organizations operating at local, rather than at
national level. Depending upon their status and role in a federal system, much of what is discussed may apply to state
or provincial governments. However, the operations of these entities may be somewhat more analogous to central
4.      Municipalities will typically be in receipt of designated taxes, fees, charges, government
grants and assigned revenues, directed towards the provision of public services. Capital
investments may be made by these municipalities, financed by loans, grants and allocations from
recurrent revenues. Alternatively, capital development may be carried out by a separate entity,
such as a higher level of government or (as indicated above) by a development authority. A
municipality responsible for its own capital development would typically have borrowing powers
– though the exercise of these, in practice, is often severely constrained by a lack of available
funds. Usually, also, control over borrowing will be exercised by a higher level of government.

Internal Financial Organization

5.      In some municipalities and other urban institutions, there is often too much fragmentation
of financial direction, under several different senior financial officials who each report to the
chief executive. In many others, there seems little concern for financial management at all, with
no established financial policies and practices. Such financial functions as do exist may be given
a low priority by technical and operating officers, with mayors or chairmen preferring to remain
unenlightened as to the financial effects of their policy decisions. Financial activity should be
made the responsibility of a single chief financial officer, controlling sections within a single
department, who would be responsible for expenditure, income, accountancy and cash
management. Sometimes, also, the chief financial officer is the proper person to be in charge of
budgetary control and internal audit functions.

6.      In larger institutions, decentralization is undoubtedly necessary. However, the financial
procedures and practices should be determined and controlled by the chief financial officer, who
should have the power to ensure their observance.

7.      The true internal audit function, that of examining and reporting upon the efficiency and
effectiveness of internal financial control, should be carried out by a chief internal auditor
reporting directly to the chief executive or (under certain conditions), the chief financial officer.

8.       There can sometimes be considerable lack of clarity over the respective roles of
politicians and officials in the financial management process. Clearly it is the responsibility of
elected or appointed decision makers to direct and control the work of an urban institution.
Sometimes, however, responsibility for policy decisions is overshadowed by a deeper than
necessary involvement in the financial management process. For example, considerable powers
to approve payment vouchers and to deal with other routine financial matters are sometimes
exercised by chairmen of councils or communities. These would often be better withdrawn or
curtailed. The task of a mayor or chairman is to take a leadership role in financial policy, related
to the efficient provision of municipal services. It should not normally be his job to sign checks
and vouchers, for example, nor to become involved in the day-to-day running of a finance
department. To the extent that this does occur, it creates at least two problems. First, the time-
consuming nature of the routine tasks will encroach upon time more properly directed at broader
financial management. Second, perhaps worse, control over these important but routine functions
will be mistakenly perceived of as the financial management process itself.
Sources of Finance

9.       Municipalities of major cities will not be able to fully exercise the responsibilities
expected of them without enhanced revenue sources. The property tax should normally be
regarded as revenue exclusively for the municipalities, even if centrally assessed and/or collected.
Higher levels of government should recognize the need to provide a grant structure that gives
increasing emphasis to the operation and maintenance of existing services, rather than capital
works. A system of loan financing should be established to enable municipalities to borrow, with
reasonable safeguards, for capital works, including infrastructure improvements. The use of grant
transfers for capital development will, no doubt, continue in many situations. However, this
method of capital financing does not adequately challenge urban institutions to maximize their
current operational efficiencies.

Planning and Budgeting

10.     The planning and budgeting process should direct attention to the medium-term and long-
term goals of institutions, rather than just to immediate needs. However, these goals should be
seen as directed toward the adequate operation and maintenance of existing services, rather than
just toward the development of new projects. The budget preparation process should involve
financial staff and service managers in mutually useful relationships, leading to multi-year capital
programs, forward-looking capital and recurrent budgets, budgetary control over funds, and the
development of efficiency-based costing systems. To the extent possible, the planning and
budgetary process should reflect the plans and programs of other urban management entities
operating in the same urban area, preferably by the establishing of a working relationship and a
continuous exchange of information.

11.     The whole process of budgeting is very challenging - since most authorities face
enormous demands for development activity whilst simultaneously operating in an environment
of extreme uncertainty and paucity of financial resources.


12.      Accounting and financial reporting for urban institutions has usually been by cash-based
systems. These are simple to operate and, indeed, meet some basic requirements. Yet they are
relatively unhelpful to any attempt at urban financial management which goes beyond the
mundane. For example, they do not provide an adequate basis for costing and pricing of services,
especially when little regard is taken of the implications, over time, of capital costs.

 13.    Thus, cash-accounting systems need to be supplemented by additional adjustment
accounts, and they usually totally ignore any accounting for the relatively large quantities of fixed
assets used in urban management, both in terms of community infrastructure and of plant and
equipment used in operations. Taken as a whole, urban management represents one of the larger
industries of a town, yet the accounting procedures are often entirely inadequate for the task.
There are several reasons why they may have survived for so long:

  A detailed exposition of accounting and budgeting systems relating to urban entities may be found in "Municipal
Accounting for Developing Countries" - D.C. Jones (1984) - a joint publication of the Chartered Institute of Public
Finance and Accountancy (UK) and the World Bank.
                    (a)    they are regarded as mere extensions of central or state government

                    (b)    government civil services which control urban management (such as in
                           ministries of finance or local government) lack the time and/or skills to
                           provide leadership for meaningful change; and

                    (c)    there is misunderstanding and over-simplification regarding different
                           accounting systems.

14.      Financial systems of governments, especially central governments, are open-ended, in
that governmental activity is linked to national economic activity through budgetary deficits,
national accounts, public borrowing, etc. Also, government activities, taken as a whole, are
usually large enough to ensure that financial management can be subject to the statistical "law of
inertia of large numbers."

15.     By contrast, the financial systems of urban institutions are bounded and relatively small.
Thus, they are much more constrained to keep within tightly defined limits and to make adequate
provision for contingencies.

16.      It is sometimes asserted that so-called "double-entry" accounts apply to commerce and
that so-called "single-entry" applies to governments. These are misnomers. Governmental
accounting is usually a very basic form of "double-entry" system that can easily be upgraded and
expanded. The suggested code or financial practice shows how this may be done for urban

17.      The code of practice suggests the necessity for urban institutions to take control, through
more comprehensive accounting systems, of all assets, liabilities, and fund balances, including
long-term debts and fixed assets. It does not propose, at present, specific accounting recognition
of depreciation on fixed assets or of changing money values. This is mainly because there is no
definitive agreement internationally on these matters,/-

18.      However, depreciation is a fact of life. So is inflation. They apply as much to public
enterprises as to those of commerce and industry. If anything, they affect the public sector most,
because of their effect upon fixed assets, found in abundance in public sector activity. Therefore,
merely because they are not accounted for, they cannot be ignored. The problem is that, for
political and administrative reasons, it has been difficult to standardize on budgetary and
accounting procedures which adequately reflect these concerns for public sector organizations.
Furthermore, simple cash accounting practices cannot incorporate such procedures. One way of
overcoming the problem is by the use of renewals funds, especially for assets of relatively short
life, such as plant and equipment3.

    These matters are addressed in Chapter 21 of "Municipal Accounting for Developing Countries" - op. cit.

19.        The objectives of auditing vary. Among the most important are:

           (a)    reporting the fairness of the content and presentation of financial statements;

           (b)    reporting upon the strengths and weaknesses of systems of financial control;

           (c)    reporting upon adherence to legal and/or administrative requirements;

           (d)    reporting upon whether value is being fully received for money spent; and

            (e)    detection and prevention of error, fraud, and misuse of resources.

20.      In governmental systems, the expression "pre-audit" is sometimes used. This usually
relates to examination of documents supporting expenditure, prior to payment. In the strict sense,
this is not audit at all, but a routine function which should be carried out in any finance
department. It may, of course, be carried out in an internal audit section, but this is not the ideal
place. In some urban 
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