Accountability through Accountability through financial reportingfinancial reporting

Dr. Subhash Chandra Pandey, IAASDr. Subhash Chandra Pandey, IAAS

Director General (Strategic Management)Director General (Strategic Management)

O/o the Comptroller & Auditor General of IndiaO/o the Comptroller & Auditor General of India

National Academy of Audit & AccountsNational Academy of Audit & Accounts

88thth August 2014 August 2014

Accountability levelsAccountability levels

GovernmentGovernment– Own citizensOwn citizens– DonorsDonors– Currency UnionCurrency Union– Regional Trade GroupingRegional Trade Grouping– International Community in generalInternational Community in general

Sub-national governmentSub-national government– National governmentNational government– Own peopleOwn people

Parastatal(Parastatal(PSUs, Autonomous Bodies, SPVs-PSUs, Autonomous Bodies, SPVs-Societies/Trusts)Societies/Trusts)– Funding governmentFunding government– Statutory RegulatorStatutory Regulator

What we wish to explore, time permitting

• International norms on fiscal transparency and country practices: Moving Towards Greater Transparency and Accountability of national governments to international community

• Standardization of accounting framework, integration of national income accounting and government accounting

• Extension of commercial accounting ideas to government and extended public sector accounting (SNA-2008/GFS2001/IPSAS and IFRS)

• Fiscal responsibility legislation and fiscal transparency• Accrual accounting • Outstanding issues in public financial reporting• Mere financial reporting is insufficient. Need robust M&E

systems and reliable data to track financial and operational info in sync

• Monitoring of sub-national indebtedness•

Recurrent crises emphasize need for international oversight on

fiscal risks Fiscal transparency is part of fiscal discipline/

responsibility in mature economies [only Anglo-Saxon consensus?]

Is there adequate monitoring and disclosure of emerging “Fiscal Risks”?

Governments are often caught napping as crises erupt, degree of foreseeability varies

South East Asian currency crisis 1996, US Financial Crisis 2008 and European sovereign debt crisis that followed soon after

The Greek ‘tragedy’ Dr Rajan playing Cassandra again?

Transparency: General issuesTransparency: General issues

How much to disclose and to whom? A constant dilemma, a perennial issue in Public Administration

Analogy of disclosure responsibility to shareholders as part of good corporate governance

Legitimate concerns on creating avoidable confusion and panic, misuse by “who cannot understand or not willing to understand”, irresponsible and even misleading media coverage and resultant damage

Paternalistic view of blocking access to information in “public interest” often provides unintended cover to errors and omissions

Often there is both lack of transparency to general public as well as lack of proper internal monitoring of problem areas

Emerging consensus: Good governance calls for democratic polity in its truest sense, peoples’ empowerment and awareness, transparency, freedom of information except for a small negative list of national security to facilitate informed public debate, wider ownership of reforms and control on corruption

Fiscal transparency as an aid Fiscal transparency as an aid to good fiscal managementto good fiscal management

( Paint me, warts and all)( Paint me, warts and all)

Improved disclosure requirements help the top management in taking better informed decisions

Additional disclosures may bring out not only intentional wrong doing but also unintentional oversight, corruption and negligence

Being aware of a problem is the first step towards efforts to solve it and acknowledging the existence of problem speeds up the process

Bretton woods’ Bretton woods’ response to 1996 SE response to 1996 SE Asian crisisAsian crisis IMF code of good practices on fiscal

transparency (1999) revised in 2007 Fiscal Transparency assessments by

IMF teams for various countries ROSCs

2001 Revision of IMF’s 1986 Manual on Government Statistics (GSFM 2001)

Reference material on Fiscal Reference material on Fiscal Transparency and cognate issuesTransparency and cognate issues

IMF Code/Manual of Fiscal Transparency (1999) Report of the Committee on Fiscal Responsibility Legislation

(2000) OECD Best Practices For Budget Transparency (2001) Report of the Core Group on Voluntary Disclosure Norms for State

Governments (2001) Report of the Advisory Group on Fiscal Transparency (2001) Report of the Standing Committee on International Financial

Standards and Codes (2002) Fiscal Responsibility and Budget Management Act (2003) Fiscal Responsibility and Budget Management Rules (2004) Report of the Expert Group on Review of Classification System for

Government Transactions (2004) IMF Code/Manual of Fiscal Transparency (2007)

Code of Good Practices on Fiscal Transparency (2007)

Code of Good Practices on Fiscal Transparency (2007)

http://www.fiscalreform.net/index.php?option=com_content&task=view&id=654&Itemid=53International Monetary Fund has revised its Code of Good Practices on Fiscal Transparency, following a public consultation process. Nine new practices have been added to the Code and many existing practices have been broadened in scope.

The four pillars of the original Code remain unchanged:  -clarity of roles and responsibilities-open budget processes-public availability of information-assurances of integrity. 

The revised Code will be used in IMF surveillance and in voluntary assessments of fiscal transparency in member countries under the standards and codes initiative.

Two associated documents - the Manual on Fiscal Transparency (2007) and the Guide on Resource Revenue Transparency (2007) - provide supporting in-depth coverage of good practices. 

Standing Committee on Standing Committee on International Financial Standards International Financial Standards

and Codesand Codes After the Asian crises, the need was felt to redesign international

financial architecture; identify indicators of financial vulnerability; develop sound international codes, standards and best practices; introduce pre-emptive measures and safety nets, and design a framework for crisis management.

Financial Stability Forum (FSF) established in 1999 to promote international financial stability through better supervision and surveillance of financial markets. FSF identified a set of 12 standards as as minimum requirements for sound financial systems for priority implementation.

In 1999, a Standing Committee on International Financial Standards & Codes was set up by RBI, which constituted Advisory Groups in ten core subject areas, broadly covering the 12 key areas prescribed by FSF pertaining to the financial system: Transparency in Monetary and Fiscal Policies, Fiscal Transparency, Insurance Regulation, Bankruptcy Laws, Corporate Governance, Data Dissemination, Payments and Settlement System, Banking Supervision, Securities Market Regulation and Accounting and Auditing.

IMF ROSC on India, IMF ROSC on India, 20012001

IMF had in February 2001 released a Report IMF had in February 2001 released a Report on the Observance of Standards and Codes on the Observance of Standards and Codes (ROSC) for India, benchmarking India's fiscal (ROSC) for India, benchmarking India's fiscal transparency against the IMF Code. transparency against the IMF Code.

It observed that India has achieved a It observed that India has achieved a reasonably high level of fiscal transparency, reasonably high level of fiscal transparency, especially as regards the amount of fiscal especially as regards the amount of fiscal information that is made available to the information that is made available to the public.public.

Government Finance Statistics Government Finance Statistics Manual 2001Manual 2001

The first edition of the Manual was published by IMF in 1986 with the The first edition of the Manual was published by IMF in 1986 with the title title A Manual on Government Finance Statistics. A Manual on Government Finance Statistics. The 2001 version The 2001 version updates the internationally recognized standards for a specialized updates the internationally recognized standards for a specialized macroeconomic statistical system required for fiscal analysis . The macroeconomic statistical system required for fiscal analysis . The revised standards have been harmonized with the corresponding revised standards have been harmonized with the corresponding standards of other internationally recognized macroeconomic statistical standards of other internationally recognized macroeconomic statistical systems to the extent consistent with the goal of supporting fiscal systems to the extent consistent with the goal of supporting fiscal analysis. analysis.

The manual draws heavily on the text of the The manual draws heavily on the text of the 1993 SNA 1993 SNA to avoid an to avoid an inference that a different meaning is intended . The GFS system inference that a different meaning is intended . The GFS system pertains to the general government and public sectors as defined in the pertains to the general government and public sectors as defined in the 1993 SNA1993 SNA. The other statistical systems are the overarching System of . The other statistical systems are the overarching System of National Accounts (hereafter referred to as the National Accounts (hereafter referred to as the 1993 SNA1993 SNA) and two ) and two specialized systems that are focused on the balance of payments and specialized systems that are focused on the balance of payments and monetary and financial statistics.monetary and financial statistics.

The primary purpose of the The primary purpose of the GFS Manual GFS Manual is to provide a comprehensive is to provide a comprehensive conceptual and accounting framework suitable for analyzing and conceptual and accounting framework suitable for analyzing and evaluating fiscal policy, especially the performance of the general evaluating fiscal policy, especially the performance of the general government sector and the broader public sector of any country.government sector and the broader public sector of any country.

Objectives of Fiscal TransparencyObjectives of Fiscal Transparency

(IMF Code of Good Practices on Fiscal Transparency) (IMF Code of Good Practices on Fiscal Transparency)

Fiscal transparency would make a major contribution to the cause of good governance.

It should lead to better-informed public debate about the design and results of fiscal policy, make governments more accountable for the implementation of fiscal policy, and thereby strengthen credibility and public understanding of macroeconomic policies and choices.

In a globalized environment, fiscal transparency is of considerable importance to achieving macroeconomic stability and high-quality growth.

However, it is only one aspect of good fiscal management, and attention has to be paid also to increasing the efficiency of government activity and establishing sound public finances.

Declaration of Basic Declaration of Basic PrinciplesPrinciples (IMF Code of Good Practices on Fiscal (IMF Code of Good Practices on Fiscal

Transparency)Transparency) I.  Clarity of Roles and Responsibilities

II.  Public Availability of Information

III.  Open Budget Preparation, Execution, and Reporting

IV.  Independent Assurances of Integrity

I.  Clarity of Roles and ResponsibilitiesI.  Clarity of Roles and Responsibilities

Clearly defined boundary between the general government and the rest of the economy. “General Government” includes both central government and lower levels of government and their extra-budgetary activities.

Government involvement in the rest of the economy through regulation, equity ownership etc should be conducted in an open manner on the basis of clear, nondiscriminatory rules.

Clear demarcation of responsibilities between different levels of government, and between the executive, the legislature, and the judiciary

Clear mechanisms for the coordination and management of budgetary and extra-budgetary activities, and well-defined arrangements vis-à-vis other government entities (e.g., the central bank and state-controlled financial and nonfinancial enterprises)

I.  Clarity of Roles and Responsibilities I.  Clarity of Roles and Responsibilities (Contd)(Contd)

Clear legal and administrative framework for fiscal management.

Fiscal management should be governed by comprehensive laws and administrative rules applying to budgetary and extra-budgetary activities. Any commitment or expenditure of government funds should have a legal authority.

Taxes, duties, fees, and charges should have an explicit legal basis. Tax laws and regulations should be easily accessible and understandable, and clear criteria should guide any administrative discretion in their application.

Ethical standards of behavior for public servants should be clear and well publicized.

II.  Public Availability of II.  Public Availability of InformationInformation

The public should be provided with full information on the past, current, and projected fiscal activity of government.

1. The annual budget should cover all central government operations in detail including government’s extra-budgetary activities.

2. Provide sufficient information on the revenue and expenditure of lower levels of government to allow a consolidated financial position for the general government to be presented.

3. Provide information comparable to that in the annual budget for two preceding fiscal years, together with forecasts of key budget aggregates for the two years following the budget.

4. Publish Statements with the annual budget giving a description of the nature and fiscal significance of contingent liabilities, tax expenditures, and quasi-fiscal activities.

5. Regularly publish information on the level and composition of government debt and financial assets.

II.  Public Availability of II.  Public Availability of InformationInformation

A public commitment should be made to the timely publication of fiscal information.

Specific commitments should be made to the publication of fiscal information

Advance release date calendars for fiscal reporting to the public should be announced.

III.  Open Budget Preparation, Execution, and III.  Open Budget Preparation, Execution, and ReportingReporting Budget documentation should specify fiscal policy objectives, the macroeconomic

framework, the policy basis for the budget, and identifiable major fiscal risks.

1. A statement of fiscal policy objectives and an assessment of sustainable fiscal policy should provide the framework for the annual budget.

2. Any fiscal rules adopted for lower levels of government (e.g., a balanced budget requirement or borrowing limits) should be clearly specified.

3. The annual budget should be presented within a comprehensive and consistent quantitative macroeconomic framework, and the economic assumptions and key parameters (e.g., effective tax rates) underlying budget estimates should be provided.

4. Existing commitments should be distinguished from new policies included in the annual budget.

5. Major risks to the annual budget should be identified and quantified where possible, including variations in economic assumptions and the uncertain costs of specific expenditure commitments (e.g., financial restructuring).

III.  Open Budget Preparation, Execution, and Reporting III.  Open Budget Preparation, Execution, and Reporting (Contd.)(Contd.)

Budget data should be classified and presented in a way that facilitates policy analysis and promotes accountability.

Government transactions should be reported on a gross basis, distinguishing revenue, expenditure and financing, and expenditure should be classified by economic, functional, and administrative category. Data on extra-budgetary activities should be similarly classified. Budget data should be presented in a way that allows international comparisons.

A statement of objectives to be achieved by major budget programs (e.g., improvement in relevant social indicators) should be provided.

The overall balance of the general government should be a standard summary indicator of the government’s financial position. It should be supplemented by other fiscal indicators (e.g., operational balance, structural balance, or primary balance) when economic circumstances make it inappropriate to base judgments about fiscal policy stance on the overall balance alone.

The annual budget and final accounts should include a statement of the accounting basis (i.e., cash or accrual) and standards used in the preparation and presentation of budget data.

III.  Open Budget Preparation, Execution, and III.  Open Budget Preparation, Execution, and Reporting (Contd.)Reporting (Contd.)

Procedures for the execution and monitoring of approved expenditures should be clearly specified.

A comprehensive, integrated accounting system should be established. It should provide a reliable basis for assessing payment arrears.

Procedures for procurement and employment should be standardized and accessible to all interested parties.

Budget execution should be internally audited, and audit procedures should be open to review.

III.  Open Budget Preparation, Execution, and III.  Open Budget Preparation, Execution, and Reporting (Contd.)Reporting (Contd.)

Fiscal reporting should be timely, comprehensive, and reliable, and should identify deviations from the budget.

1. During the year, there should be regular, timely reporting of budget and extrabudgetary outturns, which should be compared with original estimates. In the absence of detailed information on lower levels of government, available indicators of their financial position (e.g., bank borrowing and bond issues) should be provided.

2. Timely, comprehensive, and audited final budget accounts, together with full information on extrabudgetary activities, should be presented to the legislature.

3. Results achieved relative to the objectives of major budget programs should be reported to the legislature

IV.  Independent Assurances of IntegrityIV.  Independent Assurances of Integrity

The integrity of fiscal information should be subject to public and independent scrutiny.

1. A national audit body, or equivalent organization, should be appointed by the legislature, with the responsibility to provide timely reports to the legislature and public on the financial integrity of government accounts.

2. Macroeconomic forecasts (including underlying assumptions) should be available for scrutiny by independent experts.

3. The integrity of fiscal statistics should be enhanced by providing the national statistics office with institutional independence.

Where do we stand in meeting these Where do we stand in meeting these norms?norms?

We publish a large volume of information connected with fiscal management: Main Budget documents, Detailed Demands, Annual and 5-Year Plan documents, Performance Budgets, Annual Reports, Appropriation and Finance Accounts, Audit Reports and reports of Working Groups, Task Forces and Committees/Commissions.

Often, an overdose of fine print disclosures may actually defeats their purpose if there is no highlighted attention to problem areas

Report of the Advisory Group on Fiscal Transparency (2001) made a self-evaluation of how far we in India have been able to meet the transparency requirements built into the IMF Code, which are open to voluntary adoption by all member countries.

Where do we stand in meeting these Where do we stand in meeting these norms?norms?

The Advisory Group Noted:- The overall assessment that emerges from our review is that current fiscal practices at the central government level satisfy the minimum requirements of the Code on Fiscal Transparency in many areas, though there are deficiencies in some important areas which need to be addressed. The position at the state government level is much less satisfactory with most states being well behind the standards achieved by the central government. However, since at present the Code is expected to be applied only at the national government level, non-compliance at the state level does not amount to non-compliance with the Code.

Sarma Committee recommendationsSarma Committee recommendations

Recommended improvements in fiscal reporting in order to take care of the quasi-fiscal operations and ensuring better fiscal transparency.

The Government should place before Parliament a statement of current accounting standards, principles and practices. Thereafter, significant changes in the accounting standards, principles and practices, especially the affecting the reckoning of debt, deficit or other fiscal indicators prescribed under the proposed FRA, should be clearly disclosed in the Union Budget.

The Union Budget should progressively move towards greater disclosure on accrual basis of all outstanding contractual liabilities, explicit contingent liabilities, revenue demands raised but not realised, committed liability in respect of major works and supply contracts in progress and hidden subsidies by way of below cost supply of goods and services etc.

Sarma CommitteeSarma Committee recommendations recommendations (Contd.)(Contd.)

The existing cash-based Government accounting system does not bring out accrual aspects of accounting such as liabilities arising from unpaid bills, unrealized revenues, depreciation etc.). As most external loans have a long repayment period, considerable distortions arise if we overlook the valuation of these liabilities at current rates of exchange.

It was felt by some that the cash accounting system should be progressively supplemented by accrual accounting and wherever necessary, general accounting norms should be aligned with internationally accepted best practices.

No consensus could emerge on the need to introduce accrual accounting immediately as part of fiscal responsibility legislation. The Committee said while introduction of accrual system of accounting may be separately examined, greater disclosure of accrual-based information in the budget documents should be meanwhile set as a target in the proposed FRA. The information may be extracted from departmental management information systems (MIS) and gradually integrated into the main accounts.

Requirements under FRBM ActRequirements under FRBM Act

1. The Central Government shall take suitable measures to ensure greater transparency in its fiscal operations in public interest and minimize, as far as practicable, secrecy in the preparation of the AFS and Demands for Grants.

2. In particular, and without prejudice to the generality of the foregoing provision, the Central Government shall, at the time of presentation of AFS and Demands for Grants, make such disclosures and in such form, as may be prescribed.

Disclosure Requirements under FRBM Disclosure Requirements under FRBM RulesRules

6. Disclosures .– (1) In order to ensure greater transparency in its fiscal operation in the public interest, the Central Government shall, at the time of presenting the annual financial statement and demands for grants, make disclosures of the following:-

(a) any significant change in accounting standards, policies and practices affecting or likely to affect the computation of prescribed fiscal indicators.

(b) statements of receivables and guarantees in Forms D-1 to D-3.

(c) a statement of assets in Form D-4.

(2) The provisions of sub-rule (1) shall be complied with not later than with the presentation of the annual financial statement and demands for grants for the financial year 2006-2007.

FRBM marks move towards greater fiscal transparency

Any change in accounting standards, policies and practices, to be disclosed at the time of Budget

Mandatory Disclosure in the Budget 1. Tax revenue raised but not realized2. Arrears of non-tax revenue3. Guarantees given by Government4. Asset Register

Additional disclosures addedAdditional disclosures added

Tax expenditures (revenue foregone on account of tax Tax expenditures (revenue foregone on account of tax exemptions/concessions)exemptions/concessions)

Beneficiary orientation of Budget Beneficiary orientation of Budget – Gender Budgeting Statement of budget provisions for the benefit of Gender Budgeting Statement of budget provisions for the benefit of

women and childrenwomen and children– Budget provisions for the benefit of SC/ST/OBCBudget provisions for the benefit of SC/ST/OBC

Asset Register

Status as on 31st March, 2005 to be included in Budget 2006-07. It covers, at present, only the assets directly owned by the Central

Government. ( exclude the assets of autonomous bodies and public sector undertakings even though funded from Govt. grants).

Financial assets ( loans and equity) included. The information included based on the book value. No assessment

of current market value without adjustment for depreciation The Departmental Estates Officers may provide the information in

respect of government lands and buildings under their charge. For others, the information to be centrally collected from CPWD.

Better to have an exhaustive inventory of assets with full reconciliation of physical balances with the financial accounts. Pending this, financial opening balances, as on 1st April, 2004 or before may be taken and subsequent acquisition/disposals fully accounted for both physically and financially.

Asset Register

Maintenance of stock register and stock verification in the administrative responsibility of Head of offices. Hence, the Finance Wings should collect information from administrative units.

In respect of assets acquired out of capital expenditure, loans & advances, the Pay & Accounts offices can provide accounts data to the Finance Wings for matching with the reports from administration.

The Finance Wings should collect the information from the PAOs and the administrative authorities; test check and consolidate for Department as a whole for furnishing to Ministry of Finance.

Why is fiscal transparency important for a Why is fiscal transparency important for a credible FRBM legislation? Window credible FRBM legislation? Window dressing non-compliancedressing non-compliance

Without fiscal transparency, it is possible for the government to meet the FRBM targets without actually going through fiscal consolidation.

Without an obligation for the government to disclose level of tax refunds, it may be easier for the government to resort to advance collection of taxes to show FRBM compliance

Without an obligation disclose the liabilities incurred by the government, it may be easier for the government to pile up unpaid bills

Postponement of payment and advance tax collection can defeat the basic objective of FRBM in the absence of observance of norms of fiscal transparency.

Similarly, the present requirement to disclose significant changes in accounting policies and procedures and future requirements of disclosure on “Non-Performing Assets” may deter the government from resorting to routine substitution of grants with loans, knowing fully well that the loans are not going to be repaid.

Why is fiscal transparency important for a Why is fiscal transparency important for a credible FRBM legislation? Fiscal risks and credible FRBM legislation? Fiscal risks and

pre-emption of future budgetspre-emption of future budgets

Concerns on possible window dressing of non-compliance is just one aspect of fiscal transparency. Another more substantive reason is public information of fiscal risks affecting the actual budgetary outcomes and pre-emption of future budgets

Tracking of commitments on on-going works, contingent liabilities, unpaid bills and bringing them into open will highlight the pressures on future year’s budgets.

Transparency about arrears of revenue is just the other side of this to complement the fiscal risks with potential gains in the pipeline.

Expert Group on Review of the Expert Group on Review of the Classification System for Government Classification System for Government

TransactionsTransactions Regarding improvements in the current system for

harmonizing budgetary, accounting and economic classification, the Group has recommended adoption of a multidimensional classification structure with linkages between the accounting classification and standard international classification systems such as Government Finance Statistics (GFS) and System of National Accounts (SNA).

The multidimensional structure may be tested on a pilot-cum-parallel-run basis in the Ministries of Education and Health in the Union Government for its suitability to Government information requirement.

Sundermurti Committee report on comprehensive revision of List of Major/minor heads of accounts under consideration

Way forward Way forward

Present system is not fully ready for disclosure of all aspects expected now and future expectations

Use of Information Technology to evolve a comprehensive fiscal management system

Integration of expanded MIS and accounts

Multidimensional classification structure

Integration of MIS and accountsIntegration of MIS and accounts

A receipt challan, a supply order, a payment sanction / voucher contains or may easily include more standardized, coded information.

Presently, the accounts staff only picks the document ID, head of account and the amount

But the same data entry operator handling the same source document may capture additional information such as the office code, commodity code, payee code etc and expand accounts reports with other useful reports.

Some of these additional reports are generated by re-processing the same documents elsewhere – parallel processing and duplicate processing

Problem AreasProblem Areas

Technical issues Evolving standard coding patterns, an extended Multi-

modal Chart of Accounts

Organizational issues Who will do integrated processing of data? Stage of data capture? At source? Consolidation of

compiled data Administrative Boundary, Control, Ownership and

accountability issues

Looking beyond present FRBM RulesLooking beyond present FRBM Rules

The FRBM Act adopts a gradual approach. It gives a direction and leaves actual pace of implementation to Government. As required under the Act, greater disclosures were expected to follow.

Beginning has been made by introducing disclosure on revenue arrears, guarantees and Book Value based Asset Register. Eventually, as the system gears itself, we may move towards proper accounting of assets and liabilities to judge whether the liabilities are adequately covered by good quality assets.

Future refinements may include disclosure on aspects like committed liability on ongoing works/projects, tracking of unpaid bills, unsettled book claims, “Non-Performing Financial Assets”, transactions awaiting accountal, liability on account of pensions accrued over the service span of government employees and other disclosures keeping pace with the best international practices in vogue.

Disclosures on ‘TA EXPENDITURES’ have been added even without amending the FRBM Rules.

Implications of the recent crisis for fiscal transparency?

In a recent paper on fiscal transparency, accountability, and risk, the IMF reviewed the state of fiscal transparency in light of the experience of the crisis. While considerable progress has been made in enhancing the coverage, quality, and timeliness of public fiscal reporting since the late 1990s, the review found continued weaknesses in governments’ understanding of their underlying financial positions.

These shortcomings in transparency are due to a combination of gaps and inconsistencies in existing fiscal reporting standards, delays and discrepancies in countries’ adherence to those standards, and a lack of effective multilateral monitoring of compliance with those standards.

2012 review by IMF calls for2012 review by IMF calls for  Improvements in fiscal reporting standards, including the

IMF Code, to broaden the institutional coverage of fiscal reports; recognize a wider range of flows, assets, and liabilities; and incorporate new standards for fiscal forecasting and risk management;

 A more concerted effort to promote implementation of those standards. This requires action at the national level to strengthen support for transparency via legislatures, supreme audit institutions, and fiscal councils. At the international level, the IMF and other multilateral institutions need to provide more practical guidance on issues such as the implementation of accrual accounting and fiscal oversight of public corporations; and

 Enhanced international monitoring of country compliance with those standards. In particular, the IMF needs to replace the existing fiscal transparency Report on Observance of Standards and Codes with a more analytical, modular, and graduated approach to evaluating countries’ fiscal reporting practices and outputs.

2012 Paper on “Fiscal Transparency, Accountability, and Risk” Factsheet

The Code of Good PracticesThe Code of Good Practices The Code of Good Practices on Fiscal Transparency helps The Code of Good Practices on Fiscal Transparency helps

governments provide a clear picture of the structure and governments provide a clear picture of the structure and finances of government. finances of government. 

The Manual on Fiscal TransparencyThe Manual on Fiscal Transparency The Manual on Fiscal Transparency provides guidance on The Manual on Fiscal Transparency provides guidance on

implementing the Code, by detailing good practices and implementing the Code, by detailing good practices and drawing on experience in a range of countries. drawing on experience in a range of countries. 

The Guide on Resource Revenue TransparencyThe Guide on Resource Revenue Transparency The Guide on Resource Revenue Transparency applies the The Guide on Resource Revenue Transparency applies the

Code’s principles to the unique set of issues faced by countries Code’s principles to the unique set of issues faced by countries with substantial oil and mineral resources. with substantial oil and mineral resources. 

Reports on the Observance of Standards and Codes Reports on the Observance of Standards and Codes (ROSCs)(ROSCs)

A Country Report on Fiscal Transparency (Report on A Country Report on Fiscal Transparency (Report on Observance of Standards and Codes) assesses a country’s Observance of Standards and Codes) assesses a country’s current practices relative to the Code and suggests a schedule current practices relative to the Code and suggests a schedule of reforms. of reforms. 

Key resources from IMF website

What to look forward from What to look forward from IMF?IMF?

IMF encourages all member countries to undertake an assessment of fiscal transparency (called a fiscal transparency module of the Reports on the Observance of Standards and Codes, or fiscal transparency ROSC)

As of March 2013, 93 countries from all regions and levels of economic development had posted their fiscal ROSCs on the IMF's Standards and Codes web page. Updates can be undertaken at any time at the request of the authorities. Countries can also opt for a full ROSC reassessment. As of March 2013, 29 countries had undertaken updates or complete reassessments.

Based on a round of public consultations, IMF is preparing a revised draft of the Code of Good Practices and Manual on Fiscal Transparency. The drafts will be subjected to another round of public consultations and final versions submitted to its Executive Board for approval and publication by late 2013.

Measures of indebtedness and other imbalances in government accounts

Total outstanding liabilities is the simplest measure of indebtedness. Then Debt/ GDP ratio indicates size of debt relative to the size of economy. But measuring just size is not enough. We have to look at structural composition, maturity profile, cost of borrowing profile of debt.

No single measure is sufficient for all purposes of analysis of the general government sector. In GFS 1986, emphasis was placed on the overall deficit/surplus, which essentially measured cash deficit/surplus in the bank account requiring overdraft from the banker.

Since then new deficit measures have come into practice, viz. revenue, fiscal and primary deficits, of which the first two have dominated public discourse. “Monetised Deficit” was also used for some time but given up. It indicated Central bank financing of government deficit, which in popular perception meant ‘printing money’ to meet the deficit.

Finance Act 2012 has introduced a new concept “Effective Revenue Deficit”

Definitions of key Definitions of key deficit indicatorsdeficit indicators ‘Gross Fiscal Deficit’, commonly referred simply as

‘Fiscal Deficit’, measures net borrowing required to finance all expenditures excluding debt repayment. [Debt repayments netted against debt receipts). It should be equal to net increase in liabilities minus accretion to cash balances.

‘Revenue Deficit’ is the gap between revenue receipts and Revenue Expenditure.

‘Effective Revenue Deficit’ is the Revenue Deficit minus grants-in-aid to finance capital expenditure of grantee entities.

‘Primary Deficit’ is the ‘Gross Fiscal Deficit’ minus Interest Payment.

Government Borrowing is deferred taxation How does an individual householder repays debts?

– Paying some installments of principal/interest every month out of regular income

– Using some windfall receipts, say from asset sale or lottery, to retire debts

– Seldom, seeking debt waiver.

Governments behave differently. General trend is for governments to keep accumulating debt stocks by refinancing/rolling over their liabilities – repayments made out of fresh borrowings from the same or some other lender. – If there is no dearth of gullible lenders, this game can go on

endlessly.

Even if they have some windfall receipts, governments splurge on expenses rather than repaying debts as if they would never be called upon to pay debts.

Risks in endless rollover of debt Governments seldom go bankrupt but their continued

debt addiction can make all other economic agents within their country bankrupt! Let us see how.

If the government is indebted to its own citizens, banks and companies, it can legally meet debt repayment obligations by printing money or by extortionate taxation.

Postponing debt repayments by constant rollover, governments keep shifting the liability to repay debts to future governments/ generations while themselves enjoying the benefits of borrowed funds.

Let us review linkages of government borrowings with key macro-economic variables of inflation, foreign currency exchange rates and interest rates.

Demand and supply of funds

Demand Supply

General GovernmentHouseholdCorporate sector

Commercial banksNon-bank financial marketCentral bankRest of the world

Implications of deficit financing options

Financing of deficit: External debt Balance of Payments scenario, Exchange rate,

Level of forex reserves, Exports, imports, trade balance, Invisibles, Trade and Investment links with the rest of the world

Financing of deficit Central bank financing Inflation risk from deficit monetization, Reduces

the financial strength of the Central bank – cost of financing, Increases money supply

Financing of deficit : Pre-emption of investible funds Investment controls – Banks, FIs, CPSUs,

Parastatal, SLR/CRR, Insurance, Long term contractual savings - pension and provident funds

Implications of deficit financing options

Financing of deficit: Market borrowings Crowding out effect Impact on interest rates Availability of bank finance

Financing of deficit: Treasury banking Financial sector distortions Tax benefits and returns offered

Overall impact of fiscal deficit Different ways of financing fiscal deficit seem to affect

the economy differently but ultimate impact is the same:

reducing cost competitiveness and growth prospects of the economy

International International Standards of Standards of Public Financial Public Financial ReportingReporting Lack of universal standardization of public financial reporting Inadequate coverage of all Entities in the public financial

system Fair international comparison of ‘General Government’ or

‘Extended Public Sector’ - aggregated fiscal statements for “Central Government + All State Governments + non-commercial government business enterprises + substantially financed autonomous bodies”.

Trend to extend ideas applicable to business entities to General Government, with appropriate adaptation. Also, to improve surveillance on ‘quasi-fiscal activities’

Evolution of SNA-93, GFS-2001 and IPSAS and emerging trend to harmonize standards and converge to the IFRS inspired IPSAS

Worldwide trend toward greater Worldwide trend toward greater accountability and transparency in accountability and transparency in government financesgovernment finances

1993 SNA/ ESA 95 is the umbrella standard for macroeconomic statistics, of which Government Finance Statistics 2001 (GFSM 2001). Statistical standards are being updated.

As there are no authoritative accounting sector for the public sector,

the International Federation of Accountants Public Sector Committee (IFAC PSC) has issued as of September 2003 21 standards for public accounting.

In response to rising concerns by users who are experiencing difficulties in understanding and reconciling the macro (statistical) and micro (public accounting), an international project was launched in 2003 for the greater harmonization between statistical and public accounting systems at this critical juncture of both systems being under review.

Accounting FrameworkAccounting Framework

Constitution mandates that the form of accounts of the Union and State Governments shall be prescribed by the President of India on the advice of the C&AG.

The Budget [or more appropriately ‘Annual Financial Statement’] has historically evolved from the accounting framework so prescribed.

There is an elaborate Chart of Accounts developed on function-cum-programme basis way back in early 70s, replacing a line-item budgeting/accounting based on the recommendation of the 1st Administrative Reforms Commission.

To tone up the mechanism of setting accounting standards, a Government Accounting Standards Board has been established under the aegis of the C&AG of India

– series of Standards have been formally notified by the Government on the Board’s recommendation.

PFRS Issues in Indian PFRS Issues in Indian contextcontext

Budget templates have historically evolved from the accounting framework, as value addition around ‘Annual Financial Statement’, the statement of ‘major head-wise’ budgeted receipts and expenditures. Supposed to be based on IMF’s GFS-2001.

Form of Accounts historically evolved – Art 150 of the Constitution Appropriation / Finance Accounts are rule/legacy based, not fully

complaint to any declared Standards, no formal gap analysis. Supposedly based on SNA-93. Statutory notifications based on GASAB recommendations cover a few areas.

Need of standardizing parastatal accounting formats and framework in line with the framework applicable for Central Autonomous Bodies.

International Financial Reporting Standards (IFRS)

In Budget Speech 2014-15, the FM said– There is an urgent need to converge the current Indian

accounting standards with the International Financial Reporting Standards (IFRS).

– We have called upon the Indian companies to voluntarily adopt the new Indian Accounting Standards (Ind AS) from the financial year 2015-16.

– From the financial year 2016-17 this would be mandatory. – Based on the international consensus, the regulators will

separately notify the date of implementation of AS Ind for the Banks, Insurance companies etc.

– Standards for the computation of tax would be notified separately.

Outstanding issues in PFRSOutstanding issues in PFRS

Lack of standardization across government and parastatal and inadequate coverage of Entities is the central issue in Public Financial Reporting.

Existing Major/Minor Heads have deviated from the original function-cum-programme basis

Standardization below Minor head level across States prevents meaningful aggregation and inter-State comparison. At least at object head levels there could be uniformity across the Centre and the States.

Standard setting exercise should extend beyond the Central and State governments toa parastatal and even to PPP operators/concessionaire

The Accounting and Reporting Standards for parastatal, especially State and District level societies, should be as close to the Standards adopted for Central Autonomous Bodies as possible.

Existing classification of expenditure between Revenue and Capital should be comprehensively reviewed/standardised across States.

Tracking commitments and liabilities of various orders – pre-emption of future budgets

Hidden liabilities under PPP contracts

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