CHAPTER ONE
INTRODUCTION
1.1. BACKGROUND TO THE STUDY
Over the years, countries of the world have defined and set the standards of financial reporting in their individual territories. However, globalization has brought about ever increasing collaboration, international trade and commerce among the countries of the world; hence, there is grave need for increased uniformity in the standards guiding financial statements so that such statement would remain comprehensible and convene the same information to users across the world. The need for the development of unified accounting standards has been the primary driver of international public sector Accounting Standards for public sector financial reporting. While the commercial entities across the world are moving toward international financial Reporting standards (IFRS), governments are harmonizing with International Public sector Accounting Standards (IPSAS). The international Public sector Accounting Standards govern the accounting by public sector entities, with the exception of Government Business Enterprises.
According to Hayfron Adoagye (2012), IPSAS are high quality global financial reporting standards for application by public sector entities other than government business enterprises and being issued by international public sector accounting standard board IPSAS B which is formerly known and called public sector committee. IPSASB’s a body of International Federation of Accounting (IFAC) with autonomy to develop and issue IPSAS. In a study conducted by John (2011) he revealed that IPSAS Board comprises of 18 members, out of which 15 are nominated by the member bodies of IFAC while the other three are appointed as public members whom may be appointed by any individual or organization.
Furthermore, the Nigerian society has been filled with stories of wrong practices such as stories of ghost workers on the pay roll of Ministries, Extra-ministerial Departments and Parastatals, frauds, embezzlements and setting ablaze of offices housing sensitive documents and corruption leading to none or poor accountability of individuals in public offices of the country.
One of the most researched and least understood variables in public sector accounting of the nation is how the accountability and stewardship of financial controls are conducted. Scholars have been speculating on how the funds generated are managed but now researchers through the International Public Sector Accounting Standards (IPSAS) have conducted systematic investigation of funds and leakages in Nigeria with direct reference to ministries, departments and agencies.
Even with this, there is still an increasing difficulty and doubts in establishing the fact that the generated revenues are put to good use by individuals in public offices. This work contains also an evaluation of the source of revenue and the impact of the financial control system in the ministries, departments and agencies particularly.
IPSAS are accounting standards for application by national governments, regional (e.g., state, provincial, territorial) governments, local (e.g., city, town) governments and related governmental entities (e.g., agencies, boards and commissions). IPSAS standards are widely used by intergovernmental organizations. IPSAS do not apply to government business enterprises.
International Public Sector Accounting Standards (IPSAS) is at present the focal point of global revolution in government accounting in response to calls for greater government financial accountability and transparency. The Public sector comprises entities or Organizations that implement public policy through the provision of services and the redistribution of income and wealth, with both activities supported mainly by Compulsory tax/levies on other sectors. This comprises governments and all publicly owned, controlled and or publicly funded agencies, enterprises, and other entities of government that deliver public programs, goods, or services. Public Sector Accounting is a system or process which gathers, records, classifies and summarizes as reports the financial events existing in the public or government sector as financial statements and interprets as required by accountability and financial transparency to provide information to information users associated to public institutions. It is interested in the receipts, custody, disbursement and rendering of stewardship of public funds entrusted.
International Public Sector Accounting Standards
International Public Sector Accounting Standards (IPSAS) are a full suite of standards, designed for the public sector set by an independent, international standard setter. IPSAS is held up as the best government accounting ideas that the global accounting profession has to offer. IPSAS therefore has become recognized benchmark for evaluating and improving government accounting in developing countries. IPSAS are primarily intended for adoption by developing countries. The World Bank for example has endorsed the use of IPSAS in accounting for its financial assistance to developing countries. IFAC believes that in order to change the paradigm for government reporting, governments should adopt the accrual-based IPSASs, set by the International Public Sector Accounting Standards Board (IPSASB).Over 40 Countries apply Accrual IPSAS (Kara, 2012).
In recent years, the IPSAS Board has addressed developing countries in two ways. First, it issued a set of comprehensive “cash basis IPSAS” in 2003 which were more closer to traditional Government Accounting practice and are less costly to implement. Secondly, the IPSAS board has issued the standard on the disclosure of external assistance under the cash basis of accounting. The cash basis standard excludes the recognition of grants receivable and loans payable, and other non-cash assets and liabilities (IFAC, 2005).
1.2. STATEMENT OF PROBLEM
Looking at the previous years, cash basis of accounting is observed to be the commonly used basis in the public sector which has some limitations and setbacks that affects financial transactions such as poor budget implementation, mismanagement of public fund etc. This can be traced to the fact that while using the cash basis of accounting, there is no attempt to match an expense with the revenue it generates. This means that income statement and balance sheet are not good pictures of recent business conditions and an expense written against specific revenue may not have been incurred for generating the revenue. This creates the issue of poor budget implementation, making it necessary to consider the relationship between public sector budgeting and cash basis of accounting.
The preparation and presentation of financial statement at each level of government have pose series of problems worldwide. Over the years, government accounting has been anchored on cash basis of accounting while private sector accounting has been predicated on accrual basis. Whereas the accrual basis has been working perfectly well in the private sector, the continued application of the cash basis in the public sector appears to have thrown up a number of challenges relating to under-utilization of scarce resources, high degree of vulnerability to manipulation, lack of proper accountability and transparency, inadequate disclosure requirement due to the fact that the cash basis of accounting does not offer a realistic view of financial transaction.
IPSAS adoption is expensive in all material respect, so expensive that some experts have contended that it’s much advertised benefits do not justify the cost of the implementation predominantly accounting or financial reporting places emphasis on accountability and transparency. Revolution is not only accorded to government functional activities, instead revolution also exists in Government Accounting.
It is of necessity to note that a complete budget protocol entails effective planning, monitoring and implementation of recurrent and capital proposals. But regrettably, the budgeting culture in Nigeria mostly begins and ends with planning alone. Oversight functions carried out by the legislative arm of government in the past as it concerns budget monitoring have been nothing but mere window dressing. This fact has helped to condemn budgets as mere annual rituals. Poor budget implementation in Nigeria is a huge indictment on both the executive and legislative arms of government at the local, state and federal level which can be traced to the implication of cash basis of accounting as a technique for recording financial transactions in the public sector, (Gberegbe and Micah 2013).
It is against this backdrop that this study seeks to investigate the challenges encountered in the implementation of IPSAS by government ministries, agencies and government.
1.3. OBJECTIVES OF THE STUDY
Interestingly, a sound government accounting standard such as IPSAS is a critical part of a nation’s institutional infrastructure. It has now become a recognised benchmark for evaluating and improving government accounting in most developing countries like Nigeria. As a result of this the objectives if this study includes the following:
1. Examines the effect of adopting International Public Sector Accounting Standards (IPSAS) in Government agencies and ministries.
- Identify the challenges of migrating to Accrual Basis IPSAS in public sector.
- Examine the constraint encountered in the implementation of International Public Sector Accounting Standards (IPSAS) in government mistries and agencies.
- Determine how IPSAS improve the quality of general purpose financial reporting by public sector entities.
- Investigate the effect of (IPSAS) in terms of how public office holders in ministries, departments and agencies give accountability report of their stewardship.
- Assess the impact of the adoption of the IPSASs on the financial reporting in public sector.
1.4. RESEARCH QUESTIONS
The following research questions are formulated for the purpose of this research work:
- What are the effect of adopting International Public Sector Accounting Standards (IPSAS) in Government agencies and ministries?
- Challenges of migrating to Accrual Basis IPSAS in public sector?
- Are there any constraint encountered in the implementation of International Public Sector Accounting Standards (IPSAS) in government ministries and agencies?
- How has IPSAS improve the quality of general purpose financial reporting by public sector entities?
- What are the effect of (IPSAS) in terms of how public office holders in ministries, departments and agencies give accountability report of their stewardship?
- Impact of adopting IPSASs on the financial reporting in public sector?
1.5. STATEMENT OF HYPOTHESIS
The following hypotheses are formulated for the purpose of this research work and are stated in null form:
Hypothesis 1
H0: The adoption of IPSAS will not increase the level of Accountability and Transparency in the public sector of Nigeria.
Hypothesis 2
H0: The adoption of IPSAS has negative effect on revenue generation of the government.
1.6. SIGNIFICANCE OF THE STUDY
One reason that makes high quality public sector reporting necessary in many countries is to make issuance of Government financial instruments attractive in the international financial markets. Further, there exist various financial crises in many developing countries especially in Africa, with government debt levels sitting at very precarious levels; and it is no news that government finances need to be managed very carefully thus adoption of IPSAS would increase credibility and assurances of these financial statements.
This study would increased level of confidence and improved decision-making and in government financial reporting by emphasising on disclosures and presentations of information relevant to the key stakeholders in Government financial reporting.
The study would develop a framework for reporting satisfaction of key stakeholders in Government accounting, it would also go a long way in harmonization of public sector reporting would go a long way in improving the Public Finance Management principles and reporting guidelines of public resources by critically examining the generally accepted accounting and financial standards for maintenance of proper books of account for government and prescribe quality control procedures.
In addition, this study would improve the public financial management and decision-making of the government by making Government accounting more transparent and improving its governance framework.
The study would provide chronological history of the adoption path of IPSAS in Nigeria, thus providing the historical perspective of IPSAS adoption in Nigeria.
This research work will help the entire nation in modifying the methods and approaches used by different ministries, parastatals and other inter-ministerial departments in the implementation of IPSAS for government financial transactions and also it will help them in improving revenue generations and minimizes expenditures since public sector is differentiate able from private sector or bodies.
Lastly, this research work will as well be of benefit to students and researchers because it will widen their scope from the information contained in this research work.
1.7. SCOPE OF THE STUDY
This research work on the investigation into the challenges on the implementation of IPSAS adoption by government ministries, agency and parastatals shall focus on ministry and agencies of Kwara state government as case study, due to the schedule and location of the researcher.
1.8. LIMITATIONS OF THE STUDY
This research would have been generalized to all state government in Nigeria but due to some numerous factors, I have decided to limit my study to a particular state.
The following are the constraints encountered in this research:
1. FINANCIAL CONSTRAINT: Finance is the key to the success of every research work and the said finance was readily unavailable on my part as at the time I was carrying out this research and as such, proper research will not be carried out if I go about all state governement in Nigeria.
2. TIME CONSTRAINT: The time stipulated for the submission of this work was obviously too short and as such was unable to visit and carried out my findings as planned for all state government in Nigeria.
3. LACK OF KNOWLEDGEABLE AND SINCERE PERSONNEL: some of the officials employed or appointed in the ministry of finance, kwara state including some of their agencies has no knowledge of what international public sector accounting standard is and they are also not approachable because they placed themselves on a very high esteem and even when one is opportune to interview them, there is sure to be shortcomings arising from the basis such as, misinformation, and deliberate distortion of facts and these is as a result of not letting one know where revenue comes from and how it is been utilized.
4. LACK OF RESERCH FACILITIES: Research facilities such as transportation makes research work easier and interesting but it is noted that Nigeria has a poor transportation system especially in the area were agencies and ministries are situated and this restricted me from going to all as planned.
1.9. DEFINITION OF TERMS
1. IPSAS means International Public Sector Accounting Standard
2. International Public Sector Accounting Standards (IPSAS) are a full suite of standards, designed for the public sector set by an independent, international standard setter. IPSAS is held up as the best government accounting ideas that the global accounting profession has to offer.
3. Public sector accounting
Public sector accounting (PSA) is defined as a process of recording, summarizing, analyzing, communicating and interpreting financial transactions of government units and agencies. It reflects all levels of transactions, involving the receipt, custody and disbursement of government funds.
4. Accountability: accountability is defined as the obligation to demonstrate that work has been conducted in accordance with agreed rules and standards and the officer reports fairly and accurately on performance results vis-à-vis mandated roles and plans.
5. Cash basis of accounting
Cash basis of accounting is the system of recording receipt or income when actual cash is received and record expenditure when actual payment is made irrespective of the accounting period in which the services are rendered or benefit received.
6. Accrual basis of accounting
Accrual basis of accounting states that revenue/ income should be recorded and recognized in the accounts when earned and not when money is received, similarly expenses should be recorded and recognized in the accounts when incurred and not when money is paid.