In recent times, discussions have been rife on the merits of shifting from cash basis to accrual basis of accounting for enhancing fiscal reporting. Accrual accounting requires revenues and expenditures to be recorded in the financial statements when they are earned and incurred respectively, while Cash accounting is a method that requires transactions to be recorded only when a cash flow has occurred.
The main difference between them lies in the timing of when revenue and expenses are recognised. The cash method is a more immediate recognition of revenue and expenses, while the accrual method focuses on anticipated revenues and expenditures.
Although accrual accounting has been the norm among private corporations for over a century, a majority of the public sector continue to prepare their budgets and accounts on a cash basis. Under Cash-basis, records are maintained on a single entry. This, in contrast, has been proven as a porous accounting model that is prone to errors and omission.
The source documents and excel sheets can be manipulated and changed when the situation feels suitable at the close of each audit cycle.
Informed by these weaknesses, Kenya started steps towards reforming the fiscal reporting space.
In 2012, the country realised a major milestone with the enactment of Public Finance Management Act. Section 192 to 195 of the Act sets up the Public Sector Accounting Standards Board with the main objective of providing frameworks and setting generally accepted standards for the development and management of accounting and financial systems by all State organs and public entities.
In addition, the Treasury started initiatives towards reforming the fiscal space, including the adoption and implementation of International Public Sector Accounting Standards (IPSAS).
Despite these important milestones, it is crucial for the country to expedite the transition from cash basis to accrual accounting in the public sector. This is hinged on several scenarios. For instance, the verification of actual public debt position of our country and the exact amount of pending bills in each year is a quagmire that requires an adept think-solution.
This is because the amounts maintained in excel worksheets, keep on changing daily and one wonders what happened to the cut-off concept, which is partly blamed on the Cash-basis of accounting. It is not possible to implement a cut-off in an excel worksheet.
A case in point is when the Auditor General conducted an assessment of Kenya’s public debt in 2021. The Auditor noted there were no lenders’ ledgers that were maintained on double entry and, therefore, had to simply match the source documents against data available in Excel sheets which presents a risk in financial management.
When it comes to reporting and recording of public debt, omissions translate to direct misrepresentation of the financial position of a country and can lead to a financial crisis. It is worth noting that other jurisdictions that faced similar challenges in the reporting framework under cash-based accounting were able to avert such incidental inefficiencies and losses after adopting accrual-based accounting.
Australia adopted accrual-based accounting at a time it was experiencing an increase in the levels of debt and fiscal deficit. This provided legitimacy to the Australian government. In Mozambique, a loan of over $1.3 billion procured between 2012 and 2016 to finance few maritime projects, went unreported for more than seven years at the Ministry of Economics and Finance.
It was later uncovered after Kroll audit that more than $500 million were kickbacks and paybacks to the facilitating bank and the government officials. Probably, if there was a corresponding double entry reporting, the scandal would have been avoided.
It is interesting to observe that such “known” errors are unlikely to happen within a stringent corporate environment, particularly where data is maintained in conformity with the double-entry principles on accrual basis in compliance with the International Financial Reporting Standards.
New Zealand and Australia have been instrumental in driving the move to accrual-based accounting.
However, most developing countries have been hesitant in facilitating the move to accrual-based accounting for reason among others that is an expensive venture.
In this case, it is essential for the Treasury through the Public Sector Accounting Standards Board to craft a clear roadmap for the implementation of the Accrual based accounting in the Public Sector following the IMF and WB propositions and considering the stock of what has been done. We therefore propose a phased transition as follows:
Firstly, beginning FY 2023/24, revamp the IFMIS to accommodate double entry system of accounting and invest in training of key personnel.
Secondly, all the National Government and County Governments entities should be on Phase one, where all payables and receivables are recognized on the Balance sheet.
Thirdly, in FY 2024/25, all the national and county governments entities should be on Phase two where all liabilities and assets including public Debt, Pension liabilities, leases et cetera are recognized on the Balance sheet.
Fourth, beginning FY 2025/26 all the national and county government entities should be on phase three where all fixed assets and inventories, including financial instruments and fixed income instruments, are recognized in the Balance sheet.
The writer is chairman, Institute of Certified Public Accountants of Kenya
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