Most public sector entities in Nigeria are still preparing their financial reports using the cash basis. This shouldn’t come as a surprise. Around the world, 75% of governments use cash accounting in some form.
However, change is under way. According to the 2018 International Public Sector Financial Accountability Index, 65% of governments surveyed have implemented accrual accounting or plan to do so by 2023.
In Africa, Nigeria is attempting to follow in the footsteps of Tanzania, which is often cited as the poster child for IPSAS implementation, having adopted the standards in 2004. Following the federal government’s adoption of International Public Sector Accounting Standards (IPSAS) in 2010, a sub-committee was set up to raise awareness and provide a roadmap for implementation in Nigeria. In 2013, a National Treasury Circular mandated all public sector entities in the three tiers of government – federal, state and local – to start implementing accrual accounting under International Public Sector Accounting Standards (IPSAS) by 2016.
The federal government and a few states are now preparing their financial reports under the IPSAS accruals basis – but all public sector entities have been directed to do so by their 2020 year-end. The clock is ticking.
Challenging move
There are substantial challenges to be overcome in moving from cash to accruals accounting, not least a lack of competency in accruals accounting. To assist with this and other challenges, ACCA Nigeria organised three days of training for core management staff within the Office of the Accountant General (Akwa Ibom state government), led by Dr Adebimpe Umoren, senior lecturer in the department of accounting at the University of Uyo. The sessions followed on from an earlier meeting at which the state’s accountant general recognised ACCA as a key partner in capacity building.
Among the challenges identified by Dr Umoren is the initial identification and verification of all assets and liabilities. ‘Many public sector entities have poor record-keeping,’ she says. ‘They don’t have records of all their assets and liabilities.’
In the public sector context, transparency and accountability can be quite a politically challenging addition to someone’s work
Even once all assets and liabilities have been identified and recorded, accountants face the challenge of estimating and capturing all receivables, payables and accruals. Dr Umoren refers to tax receivables as an example, noting that government records of trading companies are poor.
‘It is hard to measure receivables if you don’t know the companies that are supposed to pay you tax,’ she points out. ‘If you have a poor database, tracking receivables is difficult.’
Infrastructure and knowledge gap
A further challenge is that IT infrastructure across ministries, departments and agencies is often inadequate.
For a start, public sector bodies may not have accounting software that supports IPSAS accruals accounting.
Implementing IPSAS accruals accounting is challenging not only due to the new concepts involved but also because of the enhanced disclosure requirements.
‘The disclosures are more comprehensive,’ says Dr Umoren. ‘Are the preparers competent to meet all the disclosure requirements? It is a concern.’
The right IT systems can help to support IPSAS implementation where there are skills deficits. This was one of the insights highlighted in the report Is cash still king? Maximising the benefits of accrual information in the public sector, issued by ACCA and the International Federation of Accountants (IFAC) in February this year.
Alex Metcalfe, ACCA’s global head of public sector, says that appropriate enterprise resource planning systems can support technician-level accountants in taking more of a lead in preparing for transition within line ministries – helping to ensure that they capture the good-quality information needed for accruals accounting.
‘That balance between the skills available and the systems that can be brought in to support them is really important,’ Metcalfe says.
Embrace the new
One final challenge to the successful adoption of accruals accounting stems from human nature: resistance to the change. ‘People prefer the old ways of doing things,’ says Dr Umoren.
Metcalfe also acknowledges this human challenge. ‘In the public sector context, transparency and accountability can be quite a politically challenging addition to public sector financial reporting,’ he says. ‘Sometimes the information is uncomfortable. It can show there are large liabilities that had not previously been publicly discussed.’
One response is to turn the spotlight on public sector accounting and reporting in a way that helps citizens and other stakeholders to monitor progress. The Institute of Chartered Accountants of Nigeria (ICAN) has developed an Accountability Index (ICAN-AI) – endorsed by IFAC – to improve the process of assessing public finance management and public governance practices across the federal, state and local governments.
Launched in May 2019, the ICAN-AI takes into account factors such as budget reliability, management of assets and liabilities, accounting and reporting, and external audit and scrutiny, making specific reference to IPSAS adoption.
Clear benefits
Once achieved, implementing IPSAS accruals accounting should bring many benefits. ‘IPSAS encourages full disclosure, which beams the light of transparency, integrity and accountability,’ says Dr Umoren. ‘Comparable information assists stakeholders in assessing how well their resources have been utilised.’
IPSAS accruals accounting should also improve Nigeria’s ability to access funds from donor agencies and international financial institutions, as well as helping to create a competitive economy and increase cross-border and foreign direct investment.
It’s worth making sure the move to accruals accounting is done properly, even if it takes time.
‘It’s important that the transition from cash to accruals is not just a compliance exercise, but instead maximises the value of this new accrual information that becomes available to decision-makers in the public sector,’ says Metcalfe.
‘It’s a journey of continuous improvement.’
