Accrual accounting: Inside President William Ruto’s new financial plan
Cabinet Secretary for National Treasury and Economic Planning Prof Njuguna Ndung’u
A former Nation Media Group Managing Editor for Business and Economic Affairs.
What you need to know:
- The government is planning to migrate from a cash-based system to accrual accounting.
- This will be a giant leap in the practice and standards of accounting in the public sector.
The Cabinet has approved the adoption of a new accounting standard that will lead to migration from the current cash-based system to what is known in accounting jargon as ‘accrual accounting’.
Although the actual date of the migration is yet to be announced, what is contemplated here is total regime change in the public financial management space.
If the administration of President William Ruto can deliver the migration, it will have delivered a quantum leap in the practice and standards of accounting in the public sector.
Wondered why the government does not produce financial statements regularly? It is because it uses an antiquated system where income is only recognised when cash is received and expenses are only recorded when cash is paid out. They cannot accrue expenses, hence the perennial shady pending bills.
Under the cash-based system, you cannot prepare or produce a fixed asset register for the government better than the manual inventory lists taped on the doors of government offices.
Today, the priority of priorities in fighting corruption is migration to accrual accounting because modern and transparent accounting is where the anti-corruption war should start.
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Indeed, accounting systems are about preventing loss of public resources, primarily through accurate and complete recording of transactions.
Even a junior accountant will tell you that this is not possible in a system that does not observe and practise double entry book-keeping anchored in what accountants call a ‘general ledger’.
Ask government accountants to show you a general ledger from where you can extract trial balances for all government ministries and from which we can produce financial statements not only for individual ministries, but also for the whole government, and the response will be blank.
But perhaps the best illustration of the fact that the current system is flawed are the financial irregularities highlighted by the Auditor-General’s report in one financial year will be similar to what you will have read in previous reports.
It is always about persistent and disturbing problems in collection and accounting for revenue resulting in most statements of revenue having qualified opinions. It is always about a litany of cases of unsupported expenditure, non-surrender of imprest, spending without parliamentary approval and lack of adequate disclosure.
Which begs the question: If you are unable to do something as basic as keeping proper records of the revenues which you have collected, if you are unable to reconcile the records in the cash book with bank statements on a monthly basis, how can you, really, claim to be an accountant?
The speed at which the new system will be implemented remains to be seen because the bureaucracy will definitely resist. Greedy elites thrive in systems where transactions are not recorded or reconciled properly.
Resistance by bureaucracy is why the migration has dragged since it was first floated in 2014. In February 2020, the National Treasury-based Public Sector Accounting Standards Board even came up with a road map with an effective date of July 2021. A new date was set for July 1, 2023. The road ahead will be rocky. New financial reporting templates have to be developed and accountants will have to train in requisite skills.
Because of the far-reaching consequences of the migration, the process will need a high profile champion operating outside the National Treasury. Until now, the migration process has been in the hand of the PSAB and the Directorate of Accounting Services at the National Treasury. It has also been proposed that a national steering committee chaired by the principal secretary at the National Treasury and comprised by representatives of stakeholders including, Icpak, the Auditor-General and Parliament be charged with the responsibility of steering the migration process.
Observers have argued that with such a momentous task, and with the anticipated bureaucratic resistance, the migration process would have a better chance of success if the task is spearheaded by an outsider with unprejudiced eyes and without links to the status quo. Perhaps the biggest challenge to the whole transition will be anticipated reconfiguration of IFMIS, the core information management system adopted by the government.
Today, IFMIS does not offer the Treasury Secretary a centralised cash account embedded in a general ledger, from where he can have a single consolidated view of all government cash balances across the nation, or to enable him to simply track his overdraft limit at the Central Bank of Kenya.
Each year, the Auditor-General laments that revenues received cannot be reconciled from source documents to the IFMIS system to bank statements. If you want evidence to show that IFMIS is a vessel of corruption, read the affidavit of former Devolution Secretary Anne Waiguru on the NYS saga.
