Thursday, 21 March 2013

IPSAS: An African odyssey

By: Sylva Okolieaboh

Compared to the West, African nations seem to be in a hurry when it comes to implementing International Public Sector Accounting Standards. We’ll know soon whose model works best

If you are an African, a friend of Africa, a public financial management practitioner of African descent or a good governance and public accountability crusader in Africa, this is your time to rejoice. Your homeland is on to something new, noble and bold, as a wave of awareness sweeps through our continent.

From the banks of the South Atlantic bordering the Cape of Good Hope through the rough hard tops of Zuma Rock to the wide, wild expanse of Tahir Square, change has met Africa in an unusual, unexpected but pleasant place. International Public Sector Accounting Standards (IPSAS) have made a triumphant entry into Africa. And Africa has, in turn, embraced IPSAS.

IPSAS are a collection of public sector accounting standards issued by the International Public Sector Accounting Standards Board (IPSASB). Fashioned after International Financial Reporting Standards (IFRS), their private sector predecessor, IPSAS seek uniformity and consistency in public sector financial reporting across jurisdictions.

In recognition of the immense challenges in adopting accrual-based IPSAS, the IPSASB issued a cash-based standard, ‘Financial Reporting Under the Cash Basis of Accounting’, first in 2003 and updated in 2006 and 2007. Countries and reporting entities are at liberty to adopt either the accrual- or cash-based IPSAS, although it’s easier and usually more practical to progress from the cash basis to accrual basis. Without question, the accrual-based IPSAS are the real thing and the ultimate goal of every IPSAS devotee.

There is a popular but false notion that IPSAS adoption is all about consolidation of financial statements at central, state and local government levels. The fact of the matter is that IPSAS apply as much to the publicly-owned cottage hospital in a rural area as they do to the central government of any country.

That is why, in designing a realistic and comprehensive implementation plan, a bottom-up approach, starting with individual budgetary units and public sector agencies, is recommended. It is only when the accounting processes and financial statements of the component units are IPSAS compliant that the resulting consolidated general purpose financial statements can be IPSAS compliant.

The objective of IPSAS is ‘to prescribe the manner in which general purpose financial statements should be presented to ensure comparability both with the entity’s financial statements of previous periods and with the financial statements of other entities’. This objective is achieved through setting out ‘overall considerations for the presentation of financial statements, guidance for their structure, and minimum requirements for the content of financial statements prepared under the accrual basis of accounting’.

The benefits of adopting IPSAS are legion, although they are exaggerated sometimes (like when IPSAS are seen as an anti-corruption tool). There is a consensus amongst the majority of PFM professionals that IPSAS adoption brings with it the prestige and respect that is associated with the world’s most recognised public sector financial reporting framework.

Related to that is the added benefit of cross-country and cross-entity financial statement comparability. This is very important in an ever-competitive world, where the flow of foreign (and local) investment is skewed in favour of those with a more transparent financial reporting framework.
The Greek government debt crisis in particular and the eurozone crisis in general are often linked, in part, to an incomplete and inefficient cash-based accounting system. This allowed liabilities and costs to be concealed that would have otherwise been disclosed if IPSAS were implemented effectively.
For the time being, we shall assume that there are no counteracting disadvantages except to mention the fairly obvious one: IPSAS adoption is expensive in all material respects; so expensive that some experts have contended that its much advertised benefits do not justify the cost of its implementation.
Which countries have adopted IPSAS? This is a tough question, a highly complicated question, whose answer depends on who you ask. To the average IPSAS salesman, whose daily bread comes from IPSAS marketing, the number of IPSAS compliant countries ranges between 30 and 100. If you seek confirmation, the number varies from zero to 30. To sidestep these potentially controversial statistics, we shall rely on the latest published data by the IPSASB, the most authoritative source for this information.

According to the Fact Sheet published by IPSASB: ‘National governments…that have adopted or have plans to adopt IPSAS are: Austria, Brazil, Cambodia, Costa Rica, Kenya, Peru, South Africa, Spain, Switzerland and Vietnam’. This translates to 10 countries, that have either adopted or are in the process of adopting IPSAS.

In addition to these national governments, a number of sub-national governments (eg, states, regions, local and county governments), government agencies, international governmental and non-governmental organisations have also adopted or are in the process of adopting IPSAS. Relying on the Fact Sheet, examples of international organisations that have adopted IPSAS are: The European Commission (for its own financial statements), The North Atlantic Treaty Organisation and The Organisation for Economic Co-operation and Development (OECD).

If at this point you are still wondering why Africa’s romance with IPSAS is worthy of celebration, let’s break it down for you. African countries are swinging where the world’s most advanced countries dread to tread. They are walking on water, literally.

In a May, 2012 submission to the Eurostat’s consultation on whether IPSAS are suitable for adoption across the European Union, the Institute of Chartered Accountants in England and Wales observed that EU member countries lack the skill and capabilities to implement IPSAS. We know that the Republic of Georgia plans to adopt IPSAS in 2021, starting from 2008, while Unicef has a five and a half year IPSAS implementation plan starting from 2008 and ending in June, 2013.

Every government, agency or entity that has ever implemented or planned to implement IPSAS has a roadmap, an implementation plan detailing a sequence of activities spanning a longer period of time that progressively and systematically leads to full accrual IPSAS adoption.

The Georgian implementation plan consists of six phases spread over the ten-year transition period. Each of the actions is further broken down into detailed time based activities spread within the allotted target implementation timelines.

It is hard to deduce from the information on the IPSASB Fact Sheet whether South Africa and Kenya have already adopted IPSAS or are in the process of adopting IPSAS. Whatever may be the true position, there is hardly any doubt that South Africa has the skill and depth to carry out an orderly implementation.

Nigeria and Zimbabwe announced in mid-2012 that they will be adopting IPSAS in 2013. This translates to less than one year of preparation. Nigeria has already shifted its IPSAS adoption target date to 2014 for cash basis and 2016 for accrual basis IPSAS. Again, this translates to roughly two and four years for cash basis and accrual basis respectively; dwarfing Georgia’s ten-year transition by half.

There is no publicly available IPSAS implementation strategy for Zimbabwe. Nigeria, on the other hand, has constituted a high-powered implementation team, officially known as the ‘FAAC Sub-Committee on the Roadmap for Adoption of IPSAS’. This has a mandate covering virtually everything that is required not only to implement IPSAS but also to ensure long-term sustenance including IT needs.

The sub-committee has already conducted sensitisation of political leaders across the country; exposed all stakeholders to IPSAS; collated IPSAS gap analysis for all tiers of government; collaborated with the World Bank and other development partners; conducted sensitisation workshop for all stakeholders country-wide; adopted a common Chart of Accounts; and procured and distributed ‘IPSAS Explained’ by Thomas Muller. A training manual and timetable are also said to be ready.

It is tempting to hail Nigeria and Zimbabwe for choosing a shorter transition plan than other countries. In a similar vein, it is preposterous to dismiss Nigeria and Zimbabwe as lacking a full appreciation of what it takes to implement IPSAS. Ultimately, the end will justify the means. South Africa and Kenya had already made the official IPSASB list.

While the West appears more measured and painstaking, Africa seems to be in a hurry when it comes to international standards. Between the West and Africa, whose model works best? That’s the question that will be answered in the next few years as the results begin to emerge.

But whichever way you look at it, Africa must be appreciated for recognising the importance of IPSAS and for pressing on with them against all odds

In a continent where bad news is a daily staple, the sheer symbolism of embracing IPSAS and taking steps to implement them at a time when more advanced countries are peering doubtfully at it through the window must be celebrated for whatever it is worth.

Sylva Okolieaboh is assistant director and GIFMIS PFM team leader at Nigeria’s Office of the Accountant General of the Federation

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