Moving to accrual accounting: how to make your efforts count

17 Oct 18

Although most countries are united in the desire to shift to accrual accounting, many fail in their aim. But there are some simple ways to keep the process on track, says international public finances expert Manj Kalar.

 

Following the sovereign debt crisis, there has been steady progress towards enhancing transparency and greater accountability in public finances through the implementation of more robust accounting practices.

This is where accrual accounting is far better than cash – it provides information on not just the cash spent but what has already been committed through previous policy decisions and actions.

In this way, policymakers can make more informed decisions and, by analysing how well government funds have been spent, they can ensure better value for (public) money.

According to PwC research, by 2025 over 70% of countries aim to have implemented accrual accounting.

Unfortunately, many struggle and don’t fulfil these ambitions.

There are numerous reasons why.

Here are 10 top tips to ensure success.

1. Secure political support

Accrual accounting is a fundamental transformation in the way governments manage their public finances. Achieving success will need full support and buy-in from everyone involved, including political and senior government leaders, not just the finance community.

Buy-in is needed across the political spectrum.

Typically, implementation timescales vary from short (1-3 years) to medium (4-6 years) and long (>6 years), during which time governments may change. Therefore, getting continued political commitment for life of the programme is essential.

2. Stay disciplined

There is no doubt: implementing accrual accounting is a huge, resource-intensive undertaking, needing careful coordination and management. Follow proper programme and project management discipline so that the right people are involved at the right time to take the key decisions, ensure that risks and issues are managed quickly and effectively and realise benefits throughout the process.

As costs mount, some countries consider project management as a ‘nice to have’ and reduce capacity. This is a mistake. Without central coordination, costs can increase and risks are not spotted or managed quickly, threatening overall implementation.

3. Keep communicating

People often think implementing accrual accounting is ‘for accountants, by accountants’. This is not so. Everyone needs to understand and buy into the wide-ranging benefits: better information enables better management of public finances, allowing governments to build trust and provide accountability to the citizen for public funds.

“It’s good to talk,” as the slogan tells us, and so it is important to update stakeholders about what is happening and why. Provide regular progress updates and show how new initiatives will make a difference.

4. Develop capacity and capability

External support can countries develop the processes and systems for accruals. However, it is important to ensure long-term sustainability by building internal capacity. Staff need to be able to understand the accounting standards in order to implement them and deal with any updates.

Professional accounting organisations develop clear career paths for finance professionals so that they are attracted to and remain in public services. Training should also be given to non-finance staff to make sure they understand what information is needed and why, and to make sure the correct data is collected.

5. Start with the big things

It is easy to get lost in the minutiae of accounting standards and try to do everything at once. Prioritise. Think about the material balances and transactions and start with these. For example, identifying, valuing and recognising government buildings and other infrastructure will add more to the government balance sheet more quickly than assets of lower value, like vehicles and office equipment.

Once you have that information, politicians and leaders can have a more informed debate on the best use of the government estate. This will be the greatest motivator.

6. Be realistic

Healthy competition is good, and the desire to be the fastest (and the best) is human nature. This is often seen as optimism bias in many countries wanting to implement accrual accounting quicker than everyone else. In other places, there is a realisation that it will take longer but it is not politic to say so, hence unrealistic timescales are set.

But if transition takes longer than originally promised, it risks damaging morale and credibility. Develop realistic timescales at the outset and deliver some quick wins in the implementation phase. Under-promise and over-deliver.

7. Use others’ experience

Many countries have implemented accrual accounting and will have experienced challenges similar to those you face. Reach out to them for practical insights to you avoid the pitfalls they experienced. Professional accountancy organisations and supreme audit institutions may be able to provide support while they learn with you and develop their own capability. You are not alone.

8. Fail fast and adapt

In some cases, the biggest block to progress is inertia. One cause is perfectionism: the search for better solutions may delay the process getting off the ground. Get the team to accept a less-than-perfect model – you can always refine it later. Fail fast, learn, adapt and move on. Fear of failure can also result in inertia. Accept that mistakes will be made and are necessary to learn. As Thomas Edison said: “I have not failed. I’ve just found 10,000 ways that won’t work.”

9. Choose the ‘vanilla’ option

A major cost of implementing accruals is the IT system. Resist the urge to tailor the system so it has the look and feel of existing processes and reports. It becomes costly when upgrades are required and governments will get locked in a cycle of expensive customisation. Instead:

-  Standardise the chart of accounts

-  Review processes – can they be streamlined?

-  Review and integrate other functions, such as HR, finance, procurement and estates.

Any system implemented should be as ‘off the shelf’ as possible or ‘vanilla’.

10. Celebrate successes      

The going will get tough, so celebrate each milestone. Build in time to learn from things that did not go well and mark concrete achievements such as the approval of accounting policies or completing the fixed asset register.

While these top tips will not negate all challenges in implementing accrual accounting, keeping them in mind will make the task easier. Good luck!

  • Manj Kalar

    has over 20 years’ experience, implementing accrual accounting across UK government, consolidating Whole of Government Accounts and advising other jurisdictions.

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