Budget Execution CourseFiscal Reporting And Transparency David Shand OPCFM 5 November , 2003
The Importance of Budget Execution Reporting • An important aspect of accountability to the legislature and to the public, and in some cases for use by financial markets. Impact of fiscal rules/targets • CFAA and IMF fiscal ROSC emphasize this importance but often a weak feature of PFM systems • In some countries (unaudited) budget results are published regularly throughout the year—quarterly or even monthly • But fiscal reporting should be more than reporting on budget execution—also cover overall financial results and position beyond the budget
Budget Reporting (Cont’d) • Scope of budget is important • Extent and nature of extra-budgetary transactions – funds, public enterprises etc • How should budget reporting relate to whole of government - what is the reporting entity, or - what layers of reporting are required
Extending Financial Reporting • In addition to reporting on financial flows (both operating and financing transactions) what information should be reported on government assets and liabilities and thus some concept of “net equity” of government. • Are subsets of this more appropriate?—for example reporting only on “financial” assets and liabilities. • Reporting is needed both at the responsibility center(agency, ministry) level and the aggregate level—for both management and accountability purposes. • Individual ministries/agencies may prepare their own financial statements, perhaps audited, reflecting greater responsibility for their own financial management. Usually cover more than just budget execution—perhaps also a statement of assets and liabilities.
External Reporting Generally • Good external transparency builds on internal transparency or information flows – which is important for the government’s management of its finances. • Poor external reporting may not reflect a government being secretive about its finances – it may not know • External reporting is one potential form of social control – but who may use these statements and with what effect ? • Fiscal transparency legislation may govern some reporting – medium term fiscal frameworks and targets, economic assumptions, fiscal risks, regular and pre-election updating of data
The Budget Documents • forward looking but some past information – actual versus budget. • The information is not audited. • Should these be regarded as general purpose financial statements – subject to standards and audit. • Standard used is usually some form of GFS (?) • May be voluminous and hard to follow. • Are the responsibility of Budget Office
The Public Accounts • The aggregate financial statements—prepared by accounting division of MOF, or equivalent • Historical information. Format and coverage may be different from the budget • The information is audited. • May reflect legal “fund” concepts—e.g. consolidated fund, loan fund etc. • In any case, information reported in the budget documents and public accounts should be reconciled.
Public Accounts (cont’d) • In many countries the aggregate financial statements - May not be timely, reliable or not audited - May be unintelligible due to their format and length - May reflect legal rather than management concepts (e.g. fund accounting) - May be only loosely linked with the budget • What basis of reporting should be used—cash, obligations, modified accrual, full accrual. To what extent should this follow the budget basis?
Reporting Standards -- GFS • Need for international standards in fiscal reporting—who should set them? economists, accountants, statisticians? GFS, IPSAS, ESA95. International moves to harmonize these approaches • GFS has been a commonly accepted standard, used with variations by many governments for reporting in budget documents—but not public accounts • Most recent GFS manual issued in 2001 is accrual based • GFS reports in three parts—general government(central/state/local), non-public financial corporations and public financial corporations. These reporting layers can be consolidated. • Some discretion in GFS application
Reporting Standards – IPSAS • Accounting profession appears to regard GFS as a statistical tool for macro-economic analysis, (PSBR) rather than as a measure of fiscal performance • International public sector accounting standards (IPSAS) being developed by International Federation of Accountants (IFAC) Public Sector Committee. They do not cover budget reporting—specific project project being developed • The 25 standards issued to date, are based largely on international accounting standards for the private sector and assume accrual based reporting • But there is standard for cash accounting and guidance on transition to accrual accounting. The cash accounting standard requires disclosure of all receipts and payments “controlled” by the government and encourages additional disclosure in notes of assets, liabilities, etc.
Reporting Standards - IPSAS The definition of the entity is wider than GFS general government – concept of “control” would consolidate all government enterprises. But can report at more than one level. Both GFS and IPSAS are based on similar concepts (accrual) and a common data base. Some differences - military “assets” - bad debt provision - market values
European System of Accounts 1995 (ESA95) • Promulgated by Eurostat, a part of the EU • It is the requirement for members of the EU • Both GFS and ESA95 are consistent with 1993 System of National Accounts as regards definitions, accounting rules and classifications • ESA95 differs in the presentation of its publication, and its concepts are more specific and precise • ESA95 is more rules based than 1993 SNA • GFS is harmonized with 1993 SNA but presentations and classifications are different • The 2002 GFS yearbook maps the ESA95 results to GFS
Accruals basis (?) Given accrual basis of IPSAS and accruals basis of GFS, at what rate can countries move to the accruals basis. A pragmatic and gradual approach needed. - political and management commitment (why are we doing this ?) - technical capacity - resources (human and financial) Modified accrual first ? Pilots ? Accounting first, budgeting later ? Note Draft FM Guidance Note – a pragmatic approach
Accruals Basis (cont’d) In the absence of • managing finances (i.e. budgeting) on an accrual basis, managing the balance sheet • managing on an accruals basis, I.e managers are accountable for cost, asset and liability management • moves to accrual may be perceived as an exercise by accountants for accountants ?
New Zealand’s “Crown Financial Statements”(see www.treasury.govt.nz) • Prepared in accordance with generally accepted accounting practice in New Zealand • Statement of Financial Performance (operating balance before revaluations) • Statement of Financial Position (Crown balance) • Statement of Movements in Crown Equity • Cash flow statement (operating and financing transactions) • Statement of Contingent Liabilities • Statement of Commitments, etc. etc.