Accountability through financial reporting

1. Accountability through financial reporting Dr. Subhash Chandra Pandey, IAAS Director General (Strategic Management) O/o the Comptroller & Auditor General of India National Academy of Audit & Accounts 8th August 2014

2. Accountability levels • Government • Own citizens • Donors • Currency Union • Regional Trade Grouping • International Community in general • Sub-national government • National government • Own people • Parastatal(PSUs, Autonomous Bodies, SPVs-Societies/Trusts) • Funding government • Statutory Regulator

3. What we wish to explore, time permitting International norms on fiscal transparency and country practices: Moving Towards Greater Transparency and Accountability of national governments to international community Standardization of accounting framework, integration of national income accounting and government accounting Extension of commercial accounting ideas to government and extended public sector accounting (SNA-2008/GFS2001/IPSAS and IFRS) Fiscal responsibility legislation and fiscal transparency Accrual accounting Outstanding issues in public financial reporting Mere financial reporting is insufficient. Need robust M&E systems and reliable data to track financial and operational info in sync Monitoring of sub-national indebtedness

4. Recurrent crises emphasize need for international oversight on fiscal risks • Fiscal transparency is part of fiscal discipline/ responsibility in mature economies [only Anglo-Saxon consensus?] • Is there adequate monitoring and disclosure of emerging “Fiscal Risks”? • Governments are often caught napping as crises erupt, degree of foreseeability varies • South East Asian currency crisis 1996, US Financial Crisis 2008 and European sovereign debt crisis that followed soon after • The Greek ‘tragedy’ • Dr Rajan playing Cassandra again?

5. Transparency: General issues • How much to disclose and to whom? A constant dilemma, a perennial issue in Public Administration • Analogy of disclosure responsibility to shareholders as part of good corporate governance • Legitimate concerns on creating avoidable confusion and panic, misuse by “who cannot understand or not willing to understand”, irresponsible and even misleading media coverage and resultant damage • Paternalistic view of blocking access to information in “public interest” often provides unintended cover to errors and omissions • Often there is both lack of transparency to general public as well as lack of proper internal monitoring of problem areas • Emerging consensus: Good governance calls for democratic polity in its truest sense, peoples’ empowerment and awareness, transparency, freedom of information except for a small negative list of national security to facilitate informed public debate, wider ownership of reforms and control on corruption

6. Fiscal transparency as an aid to good fiscal management( Paint me, warts and all) • Improved disclosure requirements help the top management in taking better informed decisions • Additional disclosures may bring out not only intentional wrong doing but also unintentional oversight, corruption and negligence • Being aware of a problem is the first step towards efforts to solve it and acknowledging the existence of problem speeds up the process

7. Bretton woods’ response to 1996 SE Asian crisis • IMF code of good practices on fiscal transparency (1999) revised in 2007 • Fiscal Transparency assessments by IMF teams for various countries ROSCs • 2001 Revision of IMF’s 1986 Manual on Government Statistics (GSFM 2001)

8. Reference material on Fiscal Transparency and cognate issues • IMF Code/Manual of Fiscal Transparency (1999) • Report of the Committee on Fiscal Responsibility Legislation (2000) • OECD Best Practices For Budget Transparency (2001) • Report of the Core Group on Voluntary Disclosure Norms for State Governments (2001) • Report of the Advisory Group on Fiscal Transparency (2001) • Report of the Standing Committee on International Financial Standards and Codes (2002) • Fiscal Responsibility and Budget Management Act (2003) • Fiscal Responsibility and Budget Management Rules (2004) • Report of the Expert Group on Review of Classification System for Government Transactions (2004) • IMF Code/Manual of Fiscal Transparency (2007)

9. Code of Good Practices on Fiscal Transparency (2007)

10. Standing Committee on International Financial Standards and Codes • After the Asian crises, the need was felt to redesign international financial architecture; identify indicators of financial vulnerability; develop sound international codes, standards and best practices; introduce pre-emptive measures and safety nets, and design a framework for crisis management. • Financial Stability Forum (FSF) established in 1999 to promote international financial stability through better supervision and surveillance of financial markets. FSF identified a set of 12 standards as as minimum requirements for sound financial systems for priority implementation. • In 1999, a Standing Committee on International Financial Standards & Codes was set up by RBI, which constituted Advisory Groups in ten core subject areas, broadly covering the 12 key areas prescribed by FSF pertaining to the financial system: Transparency in Monetary and Fiscal Policies, Fiscal Transparency, Insurance Regulation, Bankruptcy Laws, Corporate Governance, Data Dissemination, Payments and Settlement System, Banking Supervision, Securities Market Regulation and Accounting and Auditing.

11. IMF ROSC on India, 2001 • IMF had in February 2001 released a Report on the Observance of Standards and Codes (ROSC) for India, benchmarking India's fiscal transparency against the IMF Code. • It observed that India has achieved a reasonably high level of fiscal transparency, especially as regards the amount of fiscal information that is made available to the public.

12. Government Finance Statistics Manual 2001 • The first edition of the Manual was published by IMF in 1986 with the title A Manual on Government Finance Statistics. The 2001 version updates the internationally recognized standards for a specialized macroeconomic statistical system required for fiscal analysis . The revised standards have been harmonized with the corresponding standards of other internationally recognized macroeconomic statistical systems to the extent consistent with the goal of supporting fiscal analysis. • The manual draws heavily on the text of the 1993 SNA to avoid an inference that a different meaning is intended . The GFS system pertains to the general government and public sectors as defined in the 1993 SNA. The other statistical systems are the overarching System of National Accounts (hereafter referred to as the 1993 SNA) and two specialized systems that are focused on the balance of payments and monetary and financial statistics. • The primary purpose of the GFS Manual is to provide a comprehensive conceptual and accounting framework suitable for analyzing and evaluating fiscal policy, especially the performance of the general government sector and the broader public sector of any country.

13. Objectives of Fiscal Transparency (IMF Code of Good Practices on Fiscal Transparency) • Fiscal transparency would make a major contribution to the cause of good governance. • It should lead to better-informed public debate about the design and results of fiscal policy, make governments more accountable for the implementation of fiscal policy, and thereby strengthen credibility and public understanding of macroeconomic policies and choices. • In a globalized environment, fiscal transparency is of considerable importance to achieving macroeconomic stability and high-quality growth. • However, it is only one aspect of good fiscal management, and attention has to be paid also to increasing the efficiency of government activity and establishing sound public finances.

14. Declaration of Basic Principles(IMF Code of Good Practices on Fiscal Transparency) • I.  Clarity of Roles and Responsibilities • II.  Public Availability of Information • III.  Open Budget Preparation, Execution, and Reporting • IV.  Independent Assurances of Integrity

15. I.  Clarity of Roles and Responsibilities • Clearly defined boundary between the general government and the rest of the economy. “General Government” includes both central government and lower levels of government and their extra-budgetary activities. • Government involvement in the rest of the economy through regulation, equity ownership etc should be conducted in an open manner on the basis of clear, nondiscriminatory rules. • Clear demarcation of responsibilities between different levels of government, and between the executive, the legislature, and the judiciary • Clear mechanisms for the coordination and management of budgetary and extra-budgetary activities, and well-defined arrangements vis-à-vis other government entities (e.g., the central bank and state-controlled financial and nonfinancial enterprises)

16. I.  Clarity of Roles and Responsibilities (Contd) • Clear legal and administrative framework for fiscal management. • Fiscal management should be governed by comprehensive laws and administrative rules applying to budgetary and extra-budgetary activities. Any commitment or expenditure of government funds should have a legal authority. • Taxes, duties, fees, and charges should have an explicit legal basis. Tax laws and regulations should be easily accessible and understandable, and clear criteria should guide any administrative discretion in their application. • Ethical standards of behavior for public servants should be clear and well publicized.

17. II.  Public Availability of Information • The public should be provided with full information on the past, current, and projected fiscal activity of government. • The annual budget should cover all central government operations in detail including government’s extra-budgetary activities. • Provide sufficient information on the revenue and expenditure of lower levels of government to allow a consolidated financial position for the general government to be presented. • Provide information comparable to that in the annual budget for two preceding fiscal years, together with forecasts of key budget aggregates for the two years following the budget. • Publish Statements with the annual budget giving a description of the nature and fiscal significance of contingent liabilities, tax expenditures, and quasi-fiscal activities. • Regularly publish information on the level and composition of government debt and financial assets.

18. II.  Public Availability of Information • A public commitment should be made to the timely publication of fiscal information. • Specific commitments should be made to the publication of fiscal information • Advance release date calendars for fiscal reporting to the public should be announced.

19. III.  Open Budget Preparation, Execution, and Reporting • Budget documentation should specify fiscal policy objectives, the macroeconomic framework, the policy basis for the budget, and identifiable major fiscal risks. • A statement of fiscal policy objectives and an assessment of sustainable fiscal policy should provide the framework for the annual budget. • Any fiscal rules adopted for lower levels of government (e.g., a balanced budget requirement or borrowing limits) should be clearly specified. • The annual budget should be presented within a comprehensive and consistent quantitative macroeconomic framework, and the economic assumptions and key parameters (e.g., effective tax rates) underlying budget estimates should be provided. • Existing commitments should be distinguished from new policies included in the annual budget. • Major risks to the annual budget should be identified and quantified where possible, including variations in economic assumptions and the uncertain costs of specific expenditure commitments (e.g., financial restructuring).

20. III.  Open Budget Preparation, Execution, and Reporting (Contd.) • Budget data should be classified and presented in a way that facilitates policy analysis and promotes accountability. • Government transactions should be reported on a gross basis, distinguishing revenue, expenditure and financing, and expenditure should be classified by economic, functional, and administrative category. Data on extra-budgetary activities should be similarly classified. Budget data should be presented in a way that allows international comparisons. • A statement of objectives to be achieved by major budget programs (e.g., improvement in relevant social indicators) should be provided. • The overall balance of the general government should be a standard summary indicator of the government’s financial position. It should be supplemented by other fiscal indicators (e.g., operational balance, structural balance, or primary balance) when economic circumstances make it inappropriate to base judgments about fiscal policy stance on the overall balance alone. • The annual budget and final accounts should include a statement of the accounting basis (i.e., cash or accrual) and standards used in the preparation and presentation of budget data.

21. III.  Open Budget Preparation, Execution, and Reporting (Contd.) • Procedures for the execution and monitoring of approved expenditures should be clearly specified. • A comprehensive, integrated accounting system should be established. It should provide a reliable basis for assessing payment arrears. • Procedures for procurement and employment should be standardized and accessible to all interested parties. • Budget execution should be internally audited, and audit procedures should be open to review.

22. III.  Open Budget Preparation, Execution, and Reporting (Contd.) • Fiscal reporting should be timely, comprehensive, and reliable, and should identify deviations from the budget. • During the year, there should be regular, timely reporting of budget and extrabudgetary outturns, which should be compared with original estimates. In the absence of detailed information on lower levels of government, available indicators of their financial position (e.g., bank borrowing and bond issues) should be provided. • Timely, comprehensive, and audited final budget accounts, together with full information on extrabudgetary activities, should be presented to the legislature. • Results achieved relative to the objectives of major budget programs should be reported to the legislature

23. IV.  Independent Assurances of Integrity • The integrity of fiscal information should be subject to public and independent scrutiny. • A national audit body, or equivalent organization, should be appointed by the legislature, with the responsibility to provide timely reports to the legislature and public on the financial integrity of government accounts. • Macroeconomic forecasts (including underlying assumptions) should be available for scrutiny by independent experts. • The integrity of fiscal statistics should be enhanced by providing the national statistics office with institutional independence.

24. Where do we stand in meeting these norms? • We publish a large volume of information connected with fiscal management: Main Budget documents, Detailed Demands, Annual and 5-Year Plan documents, Performance Budgets, Annual Reports, Appropriation and Finance Accounts, Audit Reports and reports of Working Groups, Task Forces and Committees/Commissions. • Often, an overdose of fine print disclosures may actually defeats their purpose if there is no highlighted attention to problem areas • Report of the Advisory Group on Fiscal Transparency (2001) made a self-evaluation of how far we in India have been able to meet the transparency requirements built into the IMF Code, which are open to voluntary adoption by all member countries.

25. Where do we stand in meeting these norms? • The Advisory Group Noted:- The overall assessment that emerges from our review is that current fiscal practices at the central government level satisfy the minimum requirements of the Code on Fiscal Transparency in many areas, though there are deficiencies in some important areas which need to be addressed. The position at the state government level is much less satisfactory with most states being well behind the standards achieved by the central government. However, since at present the Code is expected to be applied only at the national government level, non-compliance at the state level does not amount to non-compliance with the Code.

26. Sarma Committee recommendations • Recommended improvements in fiscal reporting in order to take care of the quasi-fiscal operations and ensuring better fiscal transparency. • The Government should place before Parliament a statement of current accounting standards, principles and practices. Thereafter, significant changes in the accounting standards, principles and practices, especially the affecting the reckoning of debt, deficit or other fiscal indicators prescribed under the proposed FRA, should be clearly disclosed in the Union Budget. • The Union Budget should progressively move towards greater disclosure on accrual basis of all outstanding contractual liabilities, explicit contingent liabilities, revenue demands raised but not realised, committed liability in respect of major works and supply contracts in progress and hidden subsidies by way of below cost supply of goods and services etc.

27. Sarma Committeerecommendations (Contd.) • The existing cash-based Government accounting system does not bring out accrual aspects of accounting such as liabilities arising from unpaid bills, unrealized revenues, depreciation etc.). As most external loans have a long repayment period, considerable distortions arise if we overlook the valuation of these liabilities at current rates of exchange. • It was felt by some that the cash accounting system should be progressively supplemented by accrual accounting and wherever necessary, general accounting norms should be aligned with internationally accepted best practices. • No consensus could emerge on the need to introduce accrual accounting immediately as part of fiscal responsibility legislation. The Committee said while introduction of accrual system of accounting may be separately examined, greater disclosure of accrual-based information in the budget documents should be meanwhile set as a target in the proposed FRA. The information may be extracted from departmental management information systems (MIS) and gradually integrated into the main accounts.

28. Requirements under FRBM Act • The Central Government shall take suitable measures to ensure greater transparency in its fiscal operations in public interest and minimize, as far as practicable, secrecy in the preparation of the AFS and Demands for Grants. • In particular, and without prejudice to the generality of the foregoing provision, the Central Government shall, at the time of presentation of AFS and Demands for Grants, make such disclosures and in such form, as may be prescribed.

29. Disclosure Requirements under FRBM Rules • 6. Disclosures .– (1) In order to ensure greater transparency in its fiscal operation in the public interest, the Central Government shall, at the time of presenting the annual financial statement and demands for grants, make disclosures of the following:- • (a) any significant change in accounting standards, policies and practices affecting or likely to affect the computation of prescribed fiscal indicators. • (b) statements of receivables and guarantees in Forms D-1 to D-3. • (c) a statement of assets in Form D-4. • (2) The provisions of sub-rule (1) shall be complied with not later than with the presentation of the annual financial statement and demands for grants for the financial year 2006-2007.

30. FRBM marks move towards greater fiscal transparency • Any change in accounting standards, policies and practices, to be disclosed at the time of Budget • Mandatory Disclosure in the Budget • Tax revenue raised but not realized • Arrears of non-tax revenue • Guarantees given by Government • Asset Register

35. Additional disclosures added • Tax expenditures (revenue foregone on account of tax exemptions/concessions) • Beneficiary orientation of Budget • Gender Budgeting Statement of budget provisions for the benefit of women and children • Budget provisions for the benefit of SC/ST/OBC

36. Asset Register • Status as on 31st March, 2005 to be included in Budget 2006-07. • It covers, at present, only the assets directly owned by the Central Government. ( exclude the assets of autonomous bodies and public sector undertakings even though funded from Govt. grants). • Financial assets ( loans and equity) included. • The information included based on the book value. No assessment of current market value without adjustment for depreciation • The Departmental Estates Officers may provide the information in respect of government lands and buildings under their charge. For others, the information to be centrally collected from CPWD. • Better to have an exhaustive inventory of assets with full reconciliation of physical balances with the financial accounts. Pending this, financial opening balances, as on 1st April, 2004 or before may be taken and subsequent acquisition/disposals fully accounted for both physically and financially.

37. Asset Register • Maintenance of stock register and stock verification in the administrative responsibility of Head of offices. Hence, the Finance Wings should collect information from administrative units. • In respect of assets acquired out of capital expenditure, loans & advances, the Pay & Accounts offices can provide accounts data to the Finance Wings for matching with the reports from administration. • The Finance Wings should collect the information from the PAOs and the administrative authorities; test check and consolidate for Department as a whole for furnishing to Ministry of Finance.

38. Why is fiscal transparency important for a credible FRBM legislation? Window dressing non-compliance • Without fiscal transparency, it is possible for the government to meet the FRBM targets without actually going through fiscal consolidation. • Without an obligation for the government to disclose level of tax refunds, it may be easier for the government to resort to advance collection of taxes to show FRBM compliance • Without an obligation disclose the liabilities incurred by the government, it may be easier for the government to pile up unpaid bills • Postponement of payment and advance tax collection can defeat the basic objective of FRBM in the absence of observance of norms of fiscal transparency. • Similarly, the present requirement to disclose significant changes in accounting policies and procedures and future requirements of disclosure on “Non-Performing Assets” may deter the government from resorting to routine substitution of grants with loans, knowing fully well that the loans are not going to be repaid.

39. Why is fiscal transparency important for a credible FRBM legislation? Fiscal risks and pre-emption of future budgets • Concerns on possible window dressing of non-compliance is just one aspect of fiscal transparency. Another more substantive reason is public information of fiscal risks affecting the actual budgetary outcomes and pre-emption of future budgets • Tracking of commitments on on-going works, contingent liabilities, unpaid bills and bringing them into open will highlight the pressures on future year’s budgets. • Transparency about arrears of revenue is just the other side of this to complement the fiscal risks with potential gains in the pipeline.

40. Expert Group on Review of the Classification System for Government Transactions • Regarding improvements in the current system for harmonizing budgetary, accounting and economic classification, the Group has recommended adoption of a multidimensional classification structure with linkages between the accounting classification and standard international classification systems such as Government Finance Statistics (GFS) and System of National Accounts (SNA). • The multidimensional structure may be tested on a pilot-cum-parallel-run basis in the Ministries of Education and Health in the Union Government for its suitability to Government information requirement. • Sundermurti Committee report on comprehensive revision of List of Major/minor heads of accounts under consideration

41. Way forward • Present system is not fully ready for disclosure of all aspects expected now and future expectations • Use of Information Technology to evolve a comprehensive fiscal management system • Integration of expanded MIS and accounts • Multidimensional classification structure

42. Integration of MIS and accounts • A receipt challan, a supply order, a payment sanction / voucher contains or may easily include more standardized, coded information. • Presently, the accounts staff only picks the document ID, head of account and the amount • But the same data entry operator handling the same source document may capture additional information such as the office code, commodity code, payee code etc and expand accounts reports with other useful reports. • Some of these additional reports are generated by re-processing the same documents elsewhere – parallel processing and duplicate processing

43. Problem Areas Technical issues • Evolving standard coding patterns, an extended Multi-modal Chart of Accounts Organizational issues • Who will do integrated processing of data? • Stage of data capture? At source? Consolidation of compiled data • Administrative Boundary, Control, Ownership and accountability issues

44. Looking beyond present FRBM Rules • The FRBM Act adopts a gradual approach. It gives a direction and leaves actual pace of implementation to Government. As required under the Act, greater disclosures were expected to follow. • Beginning has been made by introducing disclosure on revenue arrears, guarantees and Book Value based Asset Register. Eventually, as the system gears itself, we may move towards proper accounting of assets and liabilities to judge whether the liabilities are adequately covered by good quality assets. • Future refinements may include disclosure on aspects like committed liability on ongoing works/projects, tracking of unpaid bills, unsettled book claims, “Non-Performing Financial Assets”, transactions awaiting accountal, liability on account of pensions accrued over the service span of government employees and other disclosures keeping pace with the best international practices in vogue. • Disclosures on ‘TA EXPENDITURES’ have been added even without amending the FRBM Rules.

46. Implications of the recent crisis for fiscal transparency? • In a recent paper on fiscal transparency, accountability, and risk, the IMF reviewed the state of fiscal transparency in light of the experience of the crisis. While considerable progress has been made in enhancing the coverage, quality, and timeliness of public fiscal reporting since the late 1990s, the review found continued weaknesses in governments’ understanding of their underlying financial positions. • These shortcomings in transparency are due to a combination of gaps and inconsistencies in existing fiscal reporting standards, delays and discrepancies in countries’ adherence to those standards, and a lack of effective multilateral monitoring of compliance with those standards.

47. 2012 review by IMF calls for • Improvements in fiscal reporting standards, including the IMF Code, to broaden the institutional coverage of fiscal reports; recognize a wider range of flows, assets, and liabilities; and incorporate new standards for fiscal forecasting and risk management; • A more concerted effort to promote implementation of those standards. This requires action at the national level to strengthen support for transparency via legislatures, supreme audit institutions, and fiscal councils. At the international level, the IMF and other multilateral institutions need to provide more practical guidance on issues such as the implementation of accrual accounting and fiscal oversight of public corporations; and • Enhanced international monitoring of country compliance with those standards. In particular, the IMF needs to replace the existing fiscal transparency Report on Observance of Standards and Codes with a more analytical, modular, and graduated approach to evaluating countries’ fiscal reporting practices and outputs.

48. Key resources from IMF website • 2012 Paper on “Fiscal Transparency, Accountability, and Risk” • Factsheet The Code of Good Practices • The Code of Good Practices on Fiscal Transparency helps governments provide a clear picture of the structure and finances of government.  The Manual on Fiscal Transparency • The Manual on Fiscal Transparency provides guidance on implementing the Code, by detailing good practices and drawing on experience in a range of countries.  The Guide on Resource Revenue Transparency • The Guide on Resource Revenue Transparency applies the Code’s principles to the unique set of issues faced by countries with substantial oil and mineral resources.  Reports on the Observance of Standards and Codes (ROSCs) • A Country Report on Fiscal Transparency (Report on Observance of Standards and Codes) assesses a country’s current practices relative to the Code and suggests a schedule of reforms. 

49. What to look forward from IMF? • IMF encourages all member countries to undertake an assessment of fiscal transparency (called a fiscal transparency module of the Reports on the Observance of Standards and Codes, or fiscal transparency ROSC) • As of March 2013, 93 countries from all regions and levels of economic development had posted their fiscal ROSCs on the IMF's Standards and Codes web page. Updates can be undertaken at any time at the request of the authorities. Countries can also opt for a full ROSC reassessment. As of March 2013, 29 countries had undertaken updates or complete reassessments. • Based on a round of public consultations, IMF is preparing a revised draft of the Code of Good Practices and Manual on Fiscal Transparency. The drafts will be subjected to another round of public consultations and final versions submitted to its Executive Board for approval and publication by late 2013.

50. Measures of indebtedness and other imbalances in government accounts • Total outstanding liabilities is the simplest measure of indebtedness. Then Debt/ GDP ratio indicates size of debt relative to the size of economy. But measuring just size is not enough. We have to look at structural composition, maturity profile, cost of borrowing profile of debt. • No single measure is sufficient for all purposes of analysis of the general government sector. In GFS 1986, emphasis was placed on the overall deficit/surplus, which essentially measured cash deficit/surplus in the bank account requiring overdraft from the banker. • Since then new deficit measures have come into practice, viz. revenue, fiscal and primary deficits, of which the first two have dominated public discourse. “Monetised Deficit” was also used for some time but given up. It indicated Central bank financing of government deficit, which in popular perception meant ‘printing money’ to meet the deficit. • Finance Act 2012 has introduced a new concept “Effective Revenue Deficit”