Monday 24 April 2017
Successful IPSAS implementation is not just a matter of an in-depth understanding of the accounting principles of the standards. Nor is it only about the ability of the chief financial officer and supporting finance department to produce an IPSAS-compliant set of financial statements at the end of the financial year.
The completeness, validity and accuracy of those financial statements depend on the underlying accounting records. Accounting records take varying forms, such as physical and electronic, documents, communication, calculations and accounting entries. These records are mainly generated, maintained and processed by non-financial employees and systems. The ultimate test of the successful implementation of IPSAS will lie in the external audit opinion on the fair presentation of those financial statements. An unmodified or unqualified audit opinion, maintained over a number of accounting periods, will indicate the successful design, implementation and maintenance of sustainable policies, procedures and systems of internal control over both financial and non-financial processes that generate the supporting information.
In many cases, the audit opinions expressed in initial periods of implementation are modified. These modifications, whether they are qualifications, adverse opinions or disclaimers, indicate that the systems of internal control have failed to deliver the smooth transition to, and implementation of, IPSAS. Of the possible reasons for this, three are pervasive and merit discussion here.
The first case is where the accounting principles and requirements of the IPSAS standards were not understood clearly by management and those charged with governance. As a result, the requirements of IPSAS were not properly converted into policy change and the related procedures, controls and system requirements.
The second scenario is where policy change is limited to financial information, and not extended to non-financial information. Take the case of a government-owned electricity supplier. Some of its customers prepay for their supply: to determine revenue recognised under IPSAS from them in a reporting period, systems must exist to track and measure usage by these customers. These are not direct financial records.
The third pervasive cause is the failure of non-financial management and employees to understand the requirements of the accounting records needed to apply IPSAS accounting. When this happens, the collection of underlying data is incomplete. This will restrict the application of the accounting principles and the result will be a misstatement of the financial position and result. An example of this would be accounting for infrastructure assets (property, plant and equipment) say a network for delivering water or electricity. Technical services (those departments responsible for the provision of water and electricity services, for example), are often managed by engineers. They are specialists in terms of the assets in their custody. If these non-financial managers do not understand the technical accounting requirements, this materially limits the ability of an entity to determine an IPSAS-compliant carrying amount for infrastructure assets. Examples of these technical accounting aspects include determining residual values, estimating useful lives, componentisation of assets and identifying impairment indicators and measuring impairment.
Successful IPSAS implementation must include an understanding of the standards and the systems and controls required to generate the information. It is critical that non-financial management and staff are trained and have fully committed to the process. Furthermore, they should be able to develop systems and controls for collating and maintaining records that will support and enable the generation of fairly presented IPSAS financial statements.