Cover Story: Accrual accounting for higher transparency

This article first appeared in The Edge Malaysia Weekly, on September 3, 2018 - September 09, 2018.
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IF the RM19 billion in Goods and Services Tax (GST) refunds that went “missing” did not shock Malaysians, the RM16.04 billion in outstanding income tax refunds, some going back six years, would have. The total refunds is no small amount, coming up to about RM35 billion.

Perhaps many are wondering how such a substantial sum owed to taxpayers could have been kept from public scrutiny for so many years. More interestingly, who should take responsibility for the debacle?

Since the disclosure of the “missing” GST refunds, there has been more clarity on how the government’s revenue flows. Former Treasury secretary-general Tan Sri Mohd Irwan Serigar was quoted by the media as saying that all money collected by the Customs Department goes into the federal government’s consolidated fund first.

It is later transferred to the refund trust, based on the amount decided at the monthly federal government cash management committee meeting chaired by the Treasury secretary-general and attended by the director-general of Customs and several others.

During the meeting, the Customs DG will ask for the amount required for refunds and the committee will decide based on the requirements of the department and the cash flow of the government.

It is understood that income tax collected by the Inland Revenue Board also goes through the same process and the CEO of the IRB attends the monthly meeting.

“For as long as I can remember, money going into the consolidated fund has been the process. I think what went wrong is probably on the administration side,” says a person familiar with the matter.

Customs DG Datuk Seri Subromaniam Tholasy has said that the department asked the committee for RM82.9 billion between April 1, 2015 and May 31, 2018, but only RM63.5 billion was paid into the trust fund during the period.

Meanwhile, IRB CEO Datuk Seri Sabin Samitah issued a statement saying that applications for additional allocation into the trust fund for income tax refunds were also submitted during the monthly meetings but the shortage was not addressed, resulting in a shortfall of RM16.04 billion.

With the Customs Department and the IRB merely acting as “agents” in the entire process, does this imply that the buck stops with the Treasury secretary-general as he chairs the monthly meetings or does his authority come from the Minister of Finance?

Now that these matters have been brought to light, many have said that the most crucial issue now is to take a thorough look and reform the entire system so that there are proper checks and balances.

Sunway University Business School economics professor Dr Yeah Kim Leng concurs that it is important to establish the correct processes and procedures. “I believe the tax refunds shouldn’t be in the consolidated fund and only the net amount should be placed in there. By allocating all the money into the consolidated fund, even the amounts due for refunds, it would not present the true financial picture of the federal government’s revenue,” Yeah explains.

He adds that the challenge for the incumbent government is to strengthen the processes, instil check-and-balance mechanisms and continuously monitor the process.

“I believe it is similar to running a company. Having political will is very important in this respect and it has to be prioritised because this is the first principle of governance,” he says.

There are some who believe that had the government implemented accrual accounting, the issues would have been brought to light earlier.

Currently, the Malaysian public accounting system is in the midst of transitioning from a cash modified basis to accrual accounting. The move had been on the previous government’s agenda for five or six years but the progress is unknown at this juncture.

Admittedly, transitioning from one accounting method to another does take time. Most countries took five to eight years to do it.

Accrual accounting will provide more transparency as it will give a more comprehensive reporting of the government’s financial position and its cash flow.

That said, Baker Tilly Malaysia audit partner Datuk Lock Peng Kuan believes the crux of the issue is cash flow management rather than the accounting method as the obligation to repay is known by all departments.

“It is not that money outstanding was unknown. If it is unknown, then it’s important to emphasise accrual accounting as cash accounting would be insufficient.

Nevertheless, accrual accounting is seen by many as the right way forward for public sector accounting because it looks into the actual total obligation. It gives you a picture of the state of affairs and it helps with checks and balances and prudent cash management policies,” Lock explains.

He thinks the problem will not be solved just by changing the system. “One should look at the root cause. In the case of any control lapses, reform should focus on improving ethics and professional skills in the public sector. This is where the tone should be set for better governance structure and accountability behaviour.

As any new system put in place would rely on human interface to ensure it works towards achieving the desired governance improvement, training in ethics and professional skills is critical in driving behavioural improvement. Improving professional skills is where accountability really comes into play,” says Lock.

 

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