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The push for more transparency in Indian accounting

17 August: ICAEW joined a recent ICAI webinar on the transition towards accruals accounting covering, amongst other things, lessons it can learn from the UK.

The Indian Railway company was the first entity to adopt accruals accounting, Atul Kumar Gupta, President of ICAI (Indian Chartered Accounting Institute), explained at the start of ICAI’s recent webinar, Accrual Accounting: Towards More Transparency and Empowerment. He outlined the benefits of accruals accounting. Further reforms are required for the rest of the public sector to follow suit, something that is very strongly supported by India's Supreme Audit Institution.

The COVID-19 pandemic has highlighted the importance of knowing all your assets and liabilities to have a full picture of the economy and urged the government to turn the crisis into an opportunity, he said.

The benefits of accruals accounting

Dr Rajiv Kumar – Vice-Chair of NITI Aayog, said that he was viewing the cash to accruals transition through the lens of an economist as he is not an accountant.

He noted that there is a definite move towards accruals accounting in the public sector – using OECD as a reference. He said the benefits speak for themselves, but in particular, he highlighted the visibility of all liabilities leading to greater transparency.

He questioned what was preventing the Indian government from adopting accruals and that there was an urgent need to identify the constraints. He stated that the Indian economic activity would increase due to higher liquidity. He attributed this to accruals adoption but did not elaborate further.

Finally, he mused what the best way of adopting accruals accounting is – whether you include accruals budgeting from the outset or not and whether it is best to go for all government entities at once or build from the bottom up.

Indian Railways' transition to accruals accounting

Naresh Salecha, a board member of Indian Railways, talked about his experience of adopting accruals accounting for the Indian Railway, stating that it was a successful joint-project with ICAI.

He provided some fascinating statistics of the Indian railway, which clearly shows that this organisation is massive but also profitable. For example, there are 13,000 daily passenger trains and 8,000 freight trains running every day!

He outlined some of the key challenges they faced over the five/six-year journey to adopt accruals accounting. One of the biggest challenges was identifying all the assets, the sheer volume; rolling stock accounts for over half of all their assets. They also found componentisation of the assets challenging, that is to identify the useful lives of various components to depreciate them over an appropriate period.

One of the critical early benefits was the visibility of lease liabilities which allows for better decision making.

He rounded off by saying that knowledge sharing is essential, and they are working with other parts of the public sector to share the lessons learnt.

Lessons from the UK

Ian Carruthers, chair IPSASB, CIPFA standards shared his experiences of working for the Treasury in the early stages of his career when the UK public sector first adopted accruals accounting – back in 1994.

He noted the UK took five/six years to adopt accruals accounting and did so at entity level, starting with public corporations, then local government, NHS and finally central government. They also took accrual budgeting at the same time but acknowledged some early challenges around depreciation and provisions.

He also talked about UK's Whole of Government Accounts which is an amalgamation of all public sector entities and the challenges they faced. He said that, apart from Estonia, it remains the only consolidated public sector account that includes all entities. 

He outlined the benefits that were achieved when they aligned the estimates, budgets and accounts – called Clear Line of Sight. Before, accountability was affected since Parliament was not able to track the estimates and budgets that were agreed to the final output in the financial statements. It is now possible, and outturn (financial results) is now compared with budgets, and any deviations explained.

He finished his presentation by talking about the need for professional accountants and noted that the UK was quite slow in building up the profession within the government. The first qualified CFO was only in place some six years after accruals accounts had been adopted.

Henning Diederichs – Technical Manager, ICAEW

Henning Diederichs, technical manager from ICAEW, talked about the cash to accruals transition for the public sector from the perspective of Professional Accountancy Organisations (PAOs) – what role they play.

He started by outlining two core objectives of PAOs, which is to provide the necessary infrastructure to train and develop professional accountants and the role they play to act in the public interest. Underpinning these core objectives is professionalism – to uphold standards, especially concerning ethics and governance – and relevance. Relevance in the sense that the public sector will equally value the critical qualities of professional accountants as they are in the private sector.

Henning also commented that PAOs have a significant role to play to ensure trust in the profession. Without trust, accountants will lose their relevance.

He went on to outline some key differences between the public and private sectors, stating that these were sufficient to warrant bespoke public sector guidance. It has relevance to PAOs since acknowledging public sector-specific requirements will influence the resources allocated to this sector.

Henning outlined three key roles PAOs play to support accruals adoption by the public sector:

1. The PAO as nurturer of professional accountants.

Increased complexity of accruals vs cash accounting requires expertise; up-skilling of staff is essential to ensure reform is successful.

2. The PAO as an enabler

PAOs should be neutral operators. They should bring stakeholders together to collaborate for the common good. They should maintain and foster critical relationships with the Supreme Audit Institutions and key government departments such as the Ministry of Finance. They should provide the government with crucial information, such as how other countries have approached the adoption of accruals accounting.

3. The PAO as educator

A cultural shift is required; PAOs should offer training to a wide range of stakeholders, including users of accruals data. Re-emphasise the benefits of accruals data and provide examples of how the data can be used to convince sceptics.

A recording of this webinar is available online.