The Accounting Needs of Sub-national Governments

Andrew Dobson

This article was summarized by the author from his comprehensive paper on this subject. Readers may obtain a copy of the full paper may be obtained, in English or Russian, by request from ICAR or from the ICAR website.

The accounting needs of Sub-national governments differ in some respects from those of either central government or of commercial corporations. In many countries, this has led to a de facto hybrid regime, somewhere between what is used for central government, (often Governmental Financial Standards (GFS) related), and established commercial standards.

The direction of change in many places is for sub-national government increasingly to adopt commercial conventions, most of which are based on or influenced by the contents of International Public Sector Accounting Standard (IPSAS) which IFAC have recently began to promulgate and which have a substantial IAS basis or IAS themselves.

This is logical, since sub-national government often has a proportionately greater role in the delivery of services (and is thus closer to a commercial service operation), while central government is more focussed on the functions of governing, setting of laws and regulations and ensuring uniform standards. Paradoxically, in some of the countries which have made most progress towards installing full commercial-style accounting disciplines in regional government, the role of those regional governments is changing away from the direct commercial-style provision of services, towards a more «governance» oriented specification of service standards, setting regulations and procuring where necessary on taxpayers behalf from private sources.

Current and proposed budgetary changes in Russia are likely to bring similar circumstances here too (including tax and revenue changes to bring more genuine control to regional government over the funding and delivery of services locally, within a federally determined standard based on output measures rather than the traditional input cost norms). Proper transparency in regional government (for voters, taxpayers, central government, creditors and employees), and systematically well-informed management decisions in this changing role, will require a structure and presentation of information that is suited to this purpose.

This means that it is unlikely that a single budget code or chart of accounts will simultaneously be able to provide optimum format for both central and regional governments.

In a country as diverse and rapidly changing as Russia, it is inconceivable that a single standard could simultaneously be attainable by the poorer or slower reforming regions, and useful as a guideline for the richer or more advanced. Hence it makes sense to consider a «twin track» structure, in which a universal legal minimum would apply to all, attainable and backed by legal penalty sanctions; while a more demanding extra-legal Code of Good Practice would offer guidance to the more advanced regions, backed by formal and informal incentives. All would have to prepare the basic legal accounts; but those capable of doing so would be encouraged to move ahead with Good Practice. Good Practice might signal likely future directions of future legal requirements, and give standards both for disclosure to voters, taxpayers, central government, creditors and employees, and for the nature and structure of management information to support internal decision-making.

The result should be both greater transparency (so the interested parties can understand what is going on, and vote, lend etc accordingly); and greater accountability (so that it is easier to see who is responsible for an activity or an event, and to provoke corrective action where necessary). These are deep changes, and will take time. But the reform of the information platform is one of the necessary step to that end.

The areas of accounting likely to be affected by this reform (and, it is hoped, a concurrent movement towards IAS) include:

• Inclusivity and Consolidation: getting all relevant assets / obligations, revenues and expenses, into the accounts – both «downstream» (junior layers of government) and «peripheral» (not reporting service activities just on a net basis), where these genuinely or contractually affect the reporting entity.
• Chart of Accounts: GFS may not be the answer for regional accounting (national statistics are a different function) – eventually some form of relational data base providing analysis on several axes is desirable (subject, object, management responsibility, etc).
• Cash versus Accrual: Accrual accounting may be out of reach of the less advanced regions, and hence unavailable as a legal requirement; but it is necessary to proper cost recognition and resource allocation in managing services. It should be part of Good Practice, with reconciliation between cash flow and accrual revenue / expense reports.
• Treatment of debt: Recognition of debt cost on an accrual basis (discount amortisation, foreign currency gains / losses), and clarification of the status of debt principal movements as cash flow and not revenue / expense, is necessary. Borrowing authorities might become related to a demonstrated capacity to manage the risks and repayment (over and above disciplines of the market, which proved quite unimpressive in 1998)
• Balance sheet: Full balance sheets are probably out of reach for most Russian sub-national administrations currently, and it would be be unrealistic to require them as a legal standard. But many of the ingredients are available in some places, and enough information exists to start the Good Practice process of developing a balance sheet for reconciliation of flows and changes in stocks over an accounting period.
• Current vs Fixed assets: Fixed asset registers, depreciation, capitalisation of investment expenditures are all valuable tools in managing service infrastructure; they should be part of Good Practice from the start, and become a legal requirement as competence allows.

Many of these issues have been the subject of local initiatives by some sub-national administrations, supported by technical assistance which has often been rather fragmented. Current initiatives from the Ministry of Finance, and the World Bank, in context of their Regional Finance Technical Assistance Project and proposed follow-on loan, are intended to assist with this in a more systematic way, both in sorting out the formal legal requirements of accounting, and in developing a Code of Good Practice. The closer these initiatives and Code of Good Practice are to the relevant elements of IAS, the better they will serve the needs of sub-national governments.

Andrew Dobson is consultant engaged by the UK Department for International Development, for work with the Russian Ministry of Finance in connection with their IBRD funded Regional Finance Technical Assistance programme, and for work with the Administration of the City of St Petersburg. The views expressed in this paper are his own, and do not necessarily reflect those either of DFID, or of any of the Russian or international partners in this work. He can be contacted by e – mail ACDobson@aol.com or by tel. + 44 ( 179) 881 3205, + 7 ( 095) 299 5097, + 7 ( 812) 314 9705.