BRITS ONLINE SCHOLASTICUS SCHOOLS (BOSS): LECTURE NOTES ON PUBLIC SECTOR ACCOUNTING

PATRIOT ODUNARO BABATUNDE JIMOH (08038454008)

MODULE 1:

THE SCOPE OF PUBLIC SECTOR ACCOUNTING

INTRODUCTION

Public sector accounting is an accounting method applied to non-profit pursuing entities in the public sector - including central and local governments, and quasi-governmental special corporations - for which the size of profits does not provide an effective measurement for evaluating performance.

The simplest definition of ‘Public Sector is “all organisations which are not privately owned and operated, but which are established, run and financed by Government on behalf of the public.”

This definition conveys the idea that the Public Sector consists of organisations where control lies in the hand of the public, as opposed to private owners, and whose objectives involve the provision of services, where profit making is not a primary objective. Performance measurement in the public sector is hindered by the lack of profit motive, multiple objectives and presence of intangible services whose benefits are difficult to quantify.

Accounting generally is a scientific study in which records of expenditure and income of a company, individuals or Government are kept coupled with other useful information for planning, decision making and control.

Public Sector Accounting, on the other hand, is composite activities of analyzing, recording, summarizing, reporting and interpreting the financial transactions of Government Ministries, Departments and Agencies. It is clear from this description that the Government, like any business organisation, should give an account of its activities to the various stakeholders/shareholders.

R A Adams (2004) in his book “Public Sector Accounting and Finance Made Simple” defines Public Sector Accounting as “a process of recording, communicating, summarizing, analyzing and interpreting Government financial statements and statistics in aggregate and details; it is concerned with the receipts, custody and disbursement and rendering of stewardship on public funds entrusted”.

THE OBJECTIVES OF PUBLIC SECTOR ACCOUNTING

The main objectives of Public Sector Accounting are:

i. Ascertaining the legitimacy of transactions and their compliance with

the established norms, regulations and statutes.

ii. Providing evidence of stewardship.

iii. Assisting planning and control.

iv. Assisting objective and timely reporting.

v. Providing the basis for decision-making.

vii. Enhancing the appraisal of the efficiency of management.

viii. Highlighting the various sources of revenue receivable and the expenditure to be incurred.

viii. Identifying the sources of funding capital projects.

ix. Evaluating the economy, efficiency and effectiveness with which

Public Sector Organisations pursue their goals and objectives.

x. Ensuring that costs are matched by at least equivalent benefits accruing therefrom.

xi. Providing the details of outstanding long-term commitments and financial obligations.

xii. Providing the means by which actual performance may be compared with the target set.

xiii. Proffering solutions to the various bottlenecks and/or problems identified.

MODULE 2:

THE VARIOUS USERS OF PUBLIC SECTOR ACCOUNTING INFORMATION

The users of Public Sector Accounting information may be discussed under the following two categories:

(a) Internal Users

(b) External Users

(a) Internal Users

This group is made up of:

i. The Executive, such as the President of the Federal Republic of

Nigeria, the Governors of the States and Chairmen of the Local

Government Councils.

ii. The Federal Ministers and State Commissioners.

iii. Top Administrators of Government Departments, e.g. The

Permanent Secretaries and Directors.

iv. The Chief Executives of Government Business Entities/Parastatals such

as Power Holding Company of Nigeria (PHCN) and the Nigeria

Ports Authority (NPA) etc.

v. Subordinates who oil the administration wheels.

vi. The organised labour unions in the public service.

(b) External Users

This group comprises:

i. The National Assembly.

ii. The members of the public.

iii. Governments, apart from the one that is rendering the report.

iv. Foreign countries.

v. Foreign financial institutions such as International Monetary Fund

( IMF), World Bank, Department f or International Development

(DFID), United Nations Children’s Fund (UNICEF) etc.

vi. Creditors, both local and foreign.

vii. Researchers.

viii. Political parties, trade unions and Civil Liberty Organisations.

MODULE 3:

THE PUBLIC SECTOR ACCOUNTING BASIS.

In the previous chapter, you had studied the scope, objectives and Legal basis of Public Sector Accounting. In this chapter we shall learn about Public Sector Accounting Basis.

There are three bases under which the financial statements of a public sector enterprise are compiled. These are:

(a) The Cash basis.

(b) The Accrual basis.

THE CASH BASIS

It is the basis of accounting under which revenue is recorded only when cash is received, and expenditure recognised only when cash is paid, irrespective of the fact that the transactions might have occurred in the previous accounting period. Non-Accountants such as General Managers of Government Corporations and Police Superintendents are often called upon to perform some accounting duties or supervise bookkeeping work. Such people need a simple method, which can be operated easily.

ADVANTAGES OF CASH BASIS

The advantages of this basis include the following:

(a) It is simple to understand.

(b) It eliminates the existence of debtors and creditors.

(d) It allows for comparison between the amount provided in the budget and that actually spent.

(e) It saves time and is easy to operate.

(f) It permits the delegation of work in certain circumstances.

(g) The cost of fixed assets is written off in the year of purchase,

resulting in fewer accounting entries.

DISADVANTAGES OF THE CASH BASIS.

(a) It takes unrealistic view of financial transactions as only the settlement of liabilities is recognised. For example, there are four stages through which a spending decision passes. These are:

(i) Issue of order or contract for the supply of goods or services.

(ii) Supply of goods or services - acknowledgment of liability.

(iii) Settlement of the amount of the good or service received.

(iv) Consumption of value.

The cash basis of accounting records only stage (iii) while the accrual basis takes care of stages (ii), (iii) and (iv). The commitment basis records stages (i) to (iv).

(b) It does not provide for depreciation since assets are written off in the year of purchase.

(d) The cash basis cannot be used for economic decisions as it tends to hide basic information. For example, some of the missing information relate to fixed assets, debtors and creditors.

(e) It does not accord with the ‘matching concept.’

ACCRUAL BASIS

Under this basis, revenue is recorded when earned and expenditure acknowledged as liabilities when known or benefits received, notwithstanding the fact that the receipts or payments of cash have taken place wholly or partly in other accounting periods. Accrual basis is practised in the private sector and all parastatals such as Power Holding Company of Nigeria (PHCN) and Customs Services. The reason for this is that private sector concerns are profit-oriented. It is therefore necessary to estimate how much profit has been earned in each period, with a view to keeping invested assets intact and making periodic distributions to shareholders by way of dividends. In the public sector, the main consideration is the enhancement of the standard of living of the people.

ADVANTAGES OF ACCRUAL BASIS

The advantages of this basis can be summarised as follows:

(a) It takes a realistic view of financial transactions.

(b) It reveals an accurate picture of the state of financial affairs at the end of the period.

(c) It could be used for both economic and investment decision-making as all parameters for performance appraisal are available.

(d) It aligns with the ‘matching concept.’

(e) It makes allowances for the diminution in the value of assets used to generate the revenue of the enterprise.

DISADVANTAGES OF ACCRUAL BASIS

(a) It is very difficult to understand, especially by Non- Accountants.

(b) It does not permit easy delegation of work in certain circumstances.

COMMITMENT BAS IS

It is a basis that records anticipated expenditure evidenced by a contract or a purchase order. In public sector financing, budgetary and accounting systems are closely related to the commitment basis.

ADVANTAGES OF COMMITMENT BASIS

Commitment accounts kept on a memorandum basis have several advantages. These include:

(a) A separate payment tabulation is available when required.

(b) Adjustments occurring when actual expenditure has been obtained does not affect the final accounts.

(d) It takes a realistic view of financial transactions.

(e) It reveals an accurate picture of the state of financial affairs at the end of the period.

(f) It is used for both economic and investment decision- making, as all parameters for performance appraisals are available.

(g) It aligns with the ‘matching concept.’

(h) It makes allowance for the diminution in the value of assets employed to generate the revenue of the enterprise.

DISADVANTAGES OF COMMITMENT BASIS

The system of Commitment Basis of Accounting has the following disadvantages:

(a) The system involves extra work. Actual figures have to be substituted for the commitment provisions to finally determine the running balances under the sub-heads of expenditure.

(b) Over-expenditure is more under commitment basis in the expectation that Government may finally release fund to settle the legal obligations.

(c) At the year end, all commitments that are the subject of unfulfilled orders will have to be written back to reflect the exact picture of the transactions which took place during the year.

(d) Balances which ought to have lapsed in the Vote Book at the end of the year may be spent by issuing local purchase orders to exhaust the votes.

MODULE 4:

THE CONSTITUTIONAL AND REGULATORY FRAMEWORK AS WELL AS THE CONCEPTS, PRINCIPLES AND BASES OF PUBLIC SECTOR ACCOUNTING.

T HE C O N S TI T U TI O NA L A N D R E GU L ATO R Y F R A M E WO R K O F

P U B L I C SECTO R ACCOUNTING

Public Sector Accounting is governed by the following regulatory frameworks:

(a) Nigerian Constitution: The 1999 Constitution of the Federal Republic of Nigeria is one of the legal frameworks that regulate the receipts and disbursements of public funds.

The sections of the Constitution quoted above authorise the receipts and payments of Government, the allocation of revenue, the audit of public accounts and other financial matters. For ease of reference, some specific sections of the 1999 Constitution and their provisions are listed below: Section 80 - Establishment of the Consolidated Revenue Fund

(CRF).

Section 81 - Authorisation of expenditure from the CRF.

Section 82 - A uthorisation of expend it ure in default of

appropriations.

Section 83 - Establishment of the Contingencies Fund. Section 84 - Remuneration of Statutory Officers.

Section 84(4) - Comprehensive list of Statutory Officers.

Section 85 - Audit of public accounts.

Section 86 - Appointment of the Auditor- General for the

Federation.

Section 87 - Tenure of office of the Auditor-General for the

Federation.

Section 88 - Power to conduct investigation by the National

Assembly.

Section 89 - Power as to matters of evidence.

Section 149 - Declaration of assets and liabilities and oaths of office.

Section 153 - List of Statutory Commissions.

Section 162 - Establishment of the Federation Accounts. Section 163 - Allocation of other revenue.

Section 164 - Federal grants-in-aid of State revenue. Section 168 Provision with regard to payments

(b) Audit Ordinance of 1956 or Act of 1956: Section 13, sub- sections

1 - 3 mandate the Accountant-General of the Federation to furnish the Auditor- General for the Federation with the country ’s financial statements.

This governs the management and operation of government funds. It regulates the accounting system, the books of accounts to be kept and the procedures to be followed in the preparation of accounts and financial statements.

(d) Financial Regulations: These are the accounting manual of Government Ministries / Extra-Ministerial Departments which deals with financial and accounting matters. They set out the procedures and steps to be followed in treating most of Government transactions.

According to FR 105, The Minister of Finance shall issue from time to time financial regulations which shall be in accordance with existing laws and policies of government. The financial regulations so issued shall generally apply to the Federal Public Service which term means ministries, extra-ministerial offices and other arms of government.

(e) Finance/Treasury Circulars: These are administration tools which are used to amend the existing provisions of Financial Regulations, Public Service rules and the introduction of new policy guidelines.

(f) Public Procurement Act, 2007: This is an Act which establishes the National Council on Public Procurement (NCPP) and the Bureau of Public Procurement (BPP) as the regulatory authorities responsible for the monitoring and oversight of public procurement, harmonising the existing government policies by regulating, setting standards and developing the legal framework and professional capacity for public procurement in Nigeria. The Act sets standards for organising procurements, methods of procurement of works, goods, consultancy and non-consultancy services as well as the procurement approval thresholds for the Bureau of Public Procurement, Tenders Boards and Accounting Officers for all Ministries, Departments and agencies.

(g) Fiscal Responsibility Act, 2007: This Act provides for the prudent management of the Nation’s resources, ensures long-term macro-economic stability of the national economy, secures greater accountability and transparency in fiscal operations within a medium-term fiscal policy framework, and the establishment of the Fiscal Responsibility Commission to ensure the promotion and enforcement of the Nation’s economic objectives. The Act emphasises the preparation of Medium-Term Expenditure Framework, Annual Budget, Budgetary Execution and Achievement Targets, Collection of Public Revenue, Public Expenditure, Debt and Indebtedness, Borrowing, Transparency and Accountability.

(h) Other laws guiding Public Sector Accounting and Finance Other laws guiding Public Sector Accounting and Finance include the Pension Reform Act of 2004 as amended in the Pension Reform Act of

2014, The Independent Corrupt Practices and Other Related Offences Commission (ICPC) Act of 2000, Economic and Financial Crimes Commission (Establishment) Act, 2002, Nigeria Extractive Industries Transparency Initiative (NEITI) Act 2007 Appropriation Acts, Code of Conduct Bureau and Tribunal Act, 1991 and Money Laundering Act, 1995.

(i) The Financial Regulations (2009 Edition): The Financial Regulations are powerful control tools used in the public sector fund management. They are the accounting manuals of the three tiers of Government designed to guide the management of public funds. The rules spell out the system concerning the receipts and disbursements of funds and the procedures to ensure good accountability, prevention and early detection of frauds and errors and other financial malpractices.

THE CONCEPTS, PRINCIPLES OF PUBLIC SECTOR ACCOUNTING.

Concepts have been defined as broad basic assumptions which underline the preparation of financial statements of an enterprise.

Public Sector Accounting is an integral but separate branch of Financial Accounting, sharing in common many concepts and principles applicable in the private sector.

These concepts include:

a. Consistency,

b. Materiality,

c. Periodicity,

d. Duality,

e.Entity,

f. Historical Cost and

g. Going Concern etc.

MODULE 5

C O M PA RI S O N BE TW E E N GO V E RN ME NT A CC O U NT I N G A N D PR I VAT

SECTO R ACCOUNTING

(a) The main objective of a commercial enterprise is to maximize profit while that of Government is to provide adequate welfare to the people at reasonable costs.

(b) Government revenue is derived from the public in the form of taxation, fines, fees etc., whereas business concerns obtain their income principally from the sales of goods and services.

(c) In Government, financial transactions are recorded on ‘cash basis’ while in commercial organizations, it is on accrual basis.

(d) In Public Sector Accounting, tangible fixed assets such as land and building, plant and machinery are not shown in the balance sheet, whereas in private sector accounting these are reflected, showing the historical cost, accumulated depreciation and the net book value of each.

(e) In Public Sector Accounting, current assets such as stocks and debtors are not shown in the balance sheet. Debtors and creditors are not reckoned with until money is received or paid. The current assets and current liabilities are shown in private sector accounting system.

(f) In Government there is no Annual General Meeting of stakeholders/ shareholders, unlike the situation with commercial enterprises. What Government does is to hold public briefing on specific issues.

(g) In Public Sector Accounting, what operates substantially is fund accounting. However, in private sector accounting, the proprietary approach is adopted.

(h) Public Sector Accounting thrives rigidly on the budgetary approach, whereas in private sector accounting budgeting is embraced as a very potent control instrument.