The role of public-sector accounting in controlling corruption

Every country has a public accounting system (PAS), a system that manages and provides information on the government’s financial transactions, assets, and records. Accounting, book-keeping, recording, and reporting is necessary for effective decision-making, control, and transparency. Timely, accurate, and adequate information on income and expenditure flows strengthens the capacity of government to decide and control budget totals. It also helps in the management of long-term fiscal sustainability and affordability of policies. A proper public accounting system ensures that the government can meet payments.

However, the level of accuracy, timeliness and transparency varies. Some public accounting systems are very sophisticated, comprehensive, digitalised, and hard to manipulate. Others can be controlled by a few officials at the top of the state apparatus and are rudimentary, cash-based and based on a money-in money-out principle.

‘Creative accounting’ and pure fraud is possible in most systems. However, the simpler the system is, the more manipulation and interference is possible and can be driven by political interests. But even sophisticated systems are not immune to fraud and skilled fraudsters can siphon off substantial amounts of money.

Public-sector accounting systems are getting more technically advanced, with composite computerised systems rolled in. The effect of bureaucratic reforms and technical improvements depends on the political will to implement them, as is the case of any part of a country’s public financial management system (PFM). Administrative reforms and technical solutions to corruption and leakages is that they require political backing. The World Bank summed up their experiences of 25-years of supporting Financial Management Information Systems in one lesson: 'political commitment and ownership […] matter' (Dener et al. 2011. Financial Management Information Systems: 25 years of World Bank experience on what works and what doesn't: 67).

Transparency is a core issue of PAS. The government must decide to what extent it will be open and whether they will publish financial reports and make the government finances transparent. Access to accounting information not only provides the government with an opportunity for more informed financial and managerial decision making, it also reduces the chances of corruption. Without good fiscal information, governments can’t understand the fiscal risks they face or make good budget decisions. Fiscal transparency is therefore the foundation of effective fiscal management.

Accounting standards

Accounting standards seek to make financial information transparent, mitigating the risk that those with political or bureaucratic power act in ways that are unethical, illegal, self-serving and inappropriate. One widely applied international standard for public accounting is the so-called Integrated Financial Management Systems (IFMIS). In Kenya, for instance, all departments and ministries under the national and county governments are required by law to make all transactions involving public funds through this system. IFMIS establishes four basic quality criteria in public accounting; timeliness and regularity of accounts reconciliation and reporting, availability of information on resources received by service delivery units, quality of in-year budget reports, and quality and timeliness of annual financial statements (Reference: World Bank Group 2019: 25 (PDF)).

The single treasury account (STA) is another important principle. STA enables the government to be more effective in maintaining financial discipline. In most countries, cash is managed in the form of STA in the Central Bank. This system helps transition to proper book-keeping and accounting through standard operating procedures and standards like the International Public Sector Accounting Standards (IPSAS).

The IPSAS are accounting standards for national governments, regional governments (state, provincial, territorial), and local governments (city, town, municipalities), and for related governmental entities (various agencies, boards and commissions). IPSAS standards are also widely used by intergovernmental organisations, but the IPSAS do not apply to government business enterprises. The standards are issued by the International Public Sector Accounting Standards Board (IPSASB), an independent organ of the International Federation of Accountants (IFAC). Multilateral development banks (World Bank, ADB, and others) provide a substantial amount of funding for the work of IPSASB.

Many governments say they are introducing IPSAS because it is considered to be good practice, but very few governments have actually adopted the standards (see here for a list of adoption by country). The IPSAS Handbook contains the complete International Public Sector Accounting Standards (38+ standards as of January 2019).

Risk areas

Although accounting and reporting do not offer many opportunities for corruption, the management of funds is always risky. Public entities can commit fraudulent financial reporting to secure budget allocations, to obtain bank loans, and to increase salaries, and top political executives can reap tremendous monetary benefits when a government-owned entity is sold to private hands. Governments can also be defrauded by private companies submitting false or inflated claims.

The authorisation for distribution of financial means (money) is the first corruption risk area. Some Ministries of Finance provide weekly or monthly budget releases while others make the whole budget available at the beginning of the year, and distribution to the spending units can be done at a detailed or aggregate level. In either case, it should be based on a specific authorisation. However, the distribution can be done without the proper authorisation or based on some official’s discretionary powers, which can lead to misallocations and embezzlement.

Second, fraud can occur at the stage of funds transfers from the central accounting office to the executing levels, to the spending units in ministries, public entities, and local governments. From the single treasury account (STA) in the central bank (or some other centrally operated government ‘coffers’), money is transferred to the many different spending units that will each have a cashier’s office or some other unit managing the funds. At this stage, several fraudulent schemes can be organised due to the officers’ discretionary powers. For instance, as payment of salaries and wages are often not subjected to the standard expenditure process, the cashier’s office may pay salaries to ghost employees (fictive or deceased), and as the treasury may run out of money or be in arrears, the prioritisation of payments can be used to favour certain beneficiaries and to extract bribes from others.

Related to this problem of disbursements is the issue of commitment control. Resources for purchasing goods and services should be committed only up to the budgeted amounts, but weaknesses in the transferring process can lead to overspending and misspending. Internally, kickbacks can also be solicited from line ministries and government agencies in the transfer process.

International expertise

The International Monetary Fund (IMF) has been a leading source of fiscal policy and management expertise worldwide. The IMF monitors and analyses public accounting systems globally and advises IMF member countries directly on accounting principles and procedures as well as fiscal issues. See for instance the IMF International Standards Related to Fiscal Transparency and the Standards and Codes: The Role of the IMF.

The World Bank (WB) provides lending for the development of sound accounting systems in developing countries, and the WB websites Development of Public Sector Accounting provides information on WB projects and operations in the field of public-sector accounting.

Auditing

Finally, the level of corruption in public accounting will not only depend on political abuse and mismanagement, but also on auditing quality. Forensic or investigative auditors can to some extent reveal fraud, embezzlement and corruption in public accounting, but broader institutional controls (horizontal accountability), media scrutiny and civil society oversight and control may also be required (vertical accountability).