BUSINESS

Be cautious on new accounting system: CGA

The Controller General of Accounts has asked the government to be careful in adopting the accrual method of accounting considering the costs involved as only a few of its departments can benefit.

“We should tread this subject in a careful manner. There is no such thing as a big-bang approach. And even if you've heard of some advanced countries that have made this transition, like Australia, New Zealand, South Africa, UK, you must understand that the background to the introduction of accrual accounting was not that it was an end by itself.

“It was a means to an end, the end being reforms in public financial management and therefore greater accountability and a greater need for operations of the government to be on commercial lines,” Controller General of Accounts M.J. Joseph told The Hindu in an interview.

The Fourteenth Finance Commission had strongly recommended the adoption of the accrual system of accounting.Accrual method is the standard accounting procedure for most medium and large companies. The method, according to experts, provides a more accurate picture of the company's current financial position. However, it is a more complex accounting system than cash accounting, which the government uses currently and so is more expensive and time-consuming to implement.

While cash accounting recognises a transaction only when money changes hands, accrual accounting recognises the transaction at the time it is made, thereby providing a more current snapshot.

“Its relevance to certain departments becomes crucial but most government departments and ministries are policy-oriented ministries. So what if you knew about their assets and liabilities? Accounting information must have relevance. ” he said.

Accrual accounting, however, can be useful in some specific cases such as comparing the cost of public hospitals with private hospitals, for example and in ascertaining why the government is so uncompetitive and why the private players are in a better position, Mr. Joseph said.

“ In India, our focus isn't so much to run fiscal surpluses, which may be the focus, say, in Australia but because of our other social sector priorities and heavy subsidy element; our focus is on balancing the budget somehow or the other and remaining within fiscally prudent levels of deficit,” he said.

Another issue with adopting accrual accounting is the cost and time involved. “There are heavy costs involved. Also, experience shows the timeframe for implementation is around 10-15 years for a government of our size. And then there is the issue of the states. If the Centre moves to the accrual system, what happens to the states? Do you have a dual set of statements? Or will you get all the states on board,” the CGA asked.The Twelfth Finance Commission had pointed out several problems with the current cash-based accounting system followed by the union and state governments and made clear the importance of shifting to accrual accounting, something reiterated by the Fourteenth Finance Commission.

“We endorse the view that the transition to accrual based accounting by both the union and state governments is desirable. We also recognise that this transition can only be made in stages as it requires considerable preparatory work and capacity building of accounting personnel,” the Fourteenth Finance Commission report said.

The CGA also pointed towards inadequacies in the way the budget heads of accounts are currently classified, saying that they need to be modernised.

“The present classification system goes back to around 1974. It has undergone some minor changes, nothing major.

What's happened is that with the greater complexities of the government's fiscal operations, the need for greater transparency of information and its correct depiction has also become very, very important,” he said.

A report by the Comptroller and Auditor General of India had found that the archaic classification system had resulted in 11 heads of government spending where more than 50 per cent of the expenditure had no details of how and where the money had been spent.

They had simply been classified as ‘other expenditure’.

This classification system, called the Chart of Accounts, is like the DNA of the budgetary system, Mr. Joseph said.

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