Friday 29 Mar 2024
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This article first appeared in Corporate, The Edge Malaysia Weekly, on May 30 - June 5, 2016.

MALAYSIA’S move to accrual accounting for the public sector has been on the wish list of many since the government embarked on this journey four years ago. However, the transition from cash accounting to accruals is still in the works and has fallen behind the government’s targeted implementation date of early 2016.  

“We need more time. It will be done on a staggered basis. We will try to do it as soon as everyone is ready. We need perfection of systems at the ministry, agency and department levels,” Deputy Finance Minister Datuk Johari Abdul Ghani tells The Edge. 

Perhaps the government was a little too ambitious on the transition timeframe. According to Ross Campbell, the director of public sector at the Institute of Chartered Accountants for England and Wales, most countries that have made the transition from cash to accrual accounting took five to eight years for full implementation to take place.  

Campbell is the former accounting policy lead and financial reporting standard setter for the UK central government at HM Treasury. He also served as the group chief accountant at the Ministry of Defence and the director at the National Audit Office in the UK. 

“Malaysia benefits at least from having quite a strong accountancy profession compared with many countries. It is a relatively sophisticated country with a relatively good understanding of information systems. So, it would be, in theory, possible to do it in five to six years. Very few countries can do it much faster, it is just the scale of what is required,” Campbell tells The Edge in an interview. 

The accrual method of accounting is known to give a more accurate picture of public finances, especially when it comes to the government’s balance sheet. In recent years, there has been increasing awareness for governments to shift to the accrual method as people demand more accountability in the way public funds are utilised during tough economic times. 

“Everybody is feeling the squeeze and that is throwing the spotlight on how we could manage public money better, and with that, generally comes positive feedback. It is improving the information, making it more transparent, more usable to policymakers. But you also need to create that feedback loop of public accountability because it is only really through accountability that you have the pressure to reform,” says Campbell.  

Malaysia is no different. The government has embarked on the switch to accrual accounting in order to strengthen fiscal discipline and improve financial management to ensure the stability and sustainability of public funds, Treasury secretary-general Tan Sri Dr Mohd Irwan Serigar Abdullah said in his speech at the Public Sector Forum 2016 earlier this month.  

“The transformational switch from cash to accrual accounting will provide a more comprehensive reporting of the government’s financial position, its financial performance and cash flow for the periods under review. With this, decision-making will improve and eventually lead to more optimum usage of public resources,” he said. 

Irwan added that accrual accounting will meet the growing demand from the various stakeholders for more transparency and provide more meaningful benchmarking of financial performance and the position of Malaysian and foreign public-sector entities. 

Given the transparency and more reflective disclosure, the adoption of accrual accounting should, theoretically, reduce the number of accounting scandals. Campbell opines that the numbers displayed in the accounts would offer an added dimension in the way the balance sheet is managed — including its growth, assets and liabilities and the changes that take place.   

“No major corporation would try to run its business without this sort of information. The government is not really any different in that sense. It has income and expenses, it employs people and it incurs liability associated with that. It owns things and it borrows money. There is not that much difference in the nuts and bolts of financial management. The difference is in the purpose. 

“Invariably, when you start to shine a light on places that a light has never been shone before, you find things, and not all the things you find are pleasant surprises … In the long run, what gets measured, gets managed. If the numbers are there and are visible, politicians will feel that they need to do something about them,” Campbell says. 

The switch to accrual accounting inevitably has its challenges. Besides tangible problems, like the changing of the entire information system and the painstaking process of accounting for government assets, the bigger challenge, according to Campbell, is embedding the culture and fostering a different way of thinking about the numbers.  

“That is a journey and that does not happen overnight. People have to change their mindset. We have been doing this (accrual accounting) in the UK for 20 years, but only now do we have people who are coming up to the senior jobs in government to whom this has always been normal and it is the way things work,” says Campbell. 

 

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