ADOPTION OF INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS IN FINANCIAL REP ORTING BY ACCOUNT OFFICERS IN TERTIARY INSTITUTION SOUTH-EAST NIGERIA

Background to the Study

The low level of accountability and transparency in financial reporting and management in the public sector in Nigeria engenders a high level of corruption. The public sector in Nigeria has suffered setbacks largely due to ineffective and inefficient management as most of the public enterprises have failed to deliver on the purposes for which they were established. Accountability in the midst of mistrust and dishonesty in handling public fund is a serious issue which will be deviling the Nigerian public sector. Transparency in public sector reporting is crucial in presenting the implications of the measures on the economic crisis, both in the financial statements and the notes (Cretu, Sirbu, Gheonea & Constandache, 2011). Most successive administrations at the Federal, State and Local Government levels always lay emphasis on the problem of corruption, misappropriation and non-accountability. Despite numerous laws and relevant institutions that exist in Nigeria, there has been significant increase in the number of reported cases of all kinds of misappropriation of public funds and properties.

Financial reporting involves reporting all statutory income and other internally generated revenue reported for the period in question. Formal

records of financial activities of public institution are expressed in the financial statements which quantify the financial strength, performance and liquidity of the institution. Financial statements are the core of accounting syntheses, being the most important part of the financial reporting process and the main source of financial accounting information (Berheci, 2010). The purpose of public institutions preparing financial statements is to obtain and supply useful information to substantiate decisions and to justify how financial resources are used. The four main types of financial statements are statement of financial position, statement of comprehensive income, statement of changes in equity and statement of cash flows. The financial position of an institution presents the financial position of the institution at a given date. It normally comprises assets, liabilities and equity. Users of financial statements are able to assess the financial soundness of an institution in terms of liquidity risk, financial risk and business risk. Heiling (2011) noted that there is a need for the public sector (tertiary institutions) to maintain quality accounting and reporting systems that are able to accurately reflect these risks.

The preparation of financial statement by public organizations is the only means of communicating an organization‟s financial information to its diverse parties or stakeholders. John (2011) noted that the manner in which

an entity, whether private or public, business or educational presents information in its financial statement is of paramount importance as financial statements remain a central feature of financial reporting, and a principal means of communicating financial information to those outside an entity. The incidents of fraudulent practices and the attendant unacceptable audited financial statements by public organizations (including tertiary institutions) have contributed to the loss of confidence by the financial statements users in the ability of accounting officers to come up with viable solutions to financial problems.

Most of the accounts presented in the public sector lack proper accountability. The reporting system adopted is restricted mainly to transactions that have been settled in cash only. Other income and expenditure which have been accrued as well as prepaid are left unaccounted for (Ofoegbu, 2014). Financial statements prepared under the cash basis provide readers with information about the sources of cash raised during the period, the purposes for which cash was used and the cash balances at the reporting date. If cash basis is recognized, the financial statement will not show the accrued income and prepaid income.

The cash basis of accounting system seems to limit the provision of critical information needed in the financial statements for development,

programme planning and appraisal of performance in physical and financial terms (Jones & Browrey, 2013). The cash basis is structured in such a way that it allows for flexibility which posed challenges due to lack of standardized international reporting practices. The method of financial reporting under cash accounting system focuses on reporting inputs rather than outputs and does not provide a true picture of government financial activities at the end of every financial period. Cash basis of accounting were inadequate as it fails to take into cognizance accurate costs and all assets and liabilities made by government institutions.

Cash accounting easily neglects asset management, accumulating arrears, future liabilities – pension and contingent liabilities, and so on. This traditional cash basis of accounting aids poor budget implementation and mismanagement of funds, lack of efficiency, lack of proper accountability and transparency, lack of international comparability of accounts, inadequate disclosure requirement as well as slow decision making process (Ibanichuka & Oyadonghan, 2014). This can be traced to the fact that while using the cash basis of accounting, there is no attempt to match an expense with the revenue it generates. It means that income statement and balance sheet are not good pictures of recent business conditions and expense written against specific revenue may not have been incurred for generating the revenue.

Cash-based accounting systems previously adopted by the public sector do not give insight into the actual state of assets, finances and revenues (true and fair view) hence the need to have a clear financial reporting framework for the public sector. Governments all over the world in the quest for proper accountability opted for the adoption of International Public Sector Accounting Standards (IPSASs). The development of the IPSASs has its origin in the accounting profession as a way to improve the transparency and accountability of governments and their agencies by improving and standardizing financial reporting (Deloitte, 2015).The IPSASs accrual accounting basis is hinged on the mode of reporting which takes into account all received income and receivable income and all paid and payables for a given accounting period. Adoption is the process of starting to use a new method, system, law, among others. The adoption of IPSASs by public sector entities is driven by the need to strengthen efficiency, accountability and professionalism in the management of public resources (Nkwagu, Okoye & Nkwagu, 2016).

IPSASs are set of accounting standards issued by the International Public Sector Accounting Standard Board (IPSASB) for use by public sector entities around the world in the preparation of financial statements (International Federation of Accountants (IFAC), 2015). Public sector

entities are entities that implement public policies through the provision of primarily non-market services and the redistribution of income and wealth, with both activities supported mainly by compulsory levies on other sectors (Tatjana, 2015). The public sector consists of governments and all publicly controlled or publicly funded agencies and enterprises and other entities that deliver public programmes, goods and services. The IPSASs is based on International Financial Reporting Standards (IFRS) issued by the International Accounting Standard Board (IASB) where the requirements of those standards are applicable to the public sector. They also deal with public sector specific financial reporting issues that are not dealt with in IFRS. The Federal Executive Council (FEC) in Nigeria approved the roadmap for the adoption of IFRS and IPSASs for both private and public sectors respectively in July, 2010.

The primary aim of this adoption is to enhance and strengthen the country‟s financial reporting standards in line with international best practice (Otunla, 2012). A sub-committee was set up in June, 2013 by Federal Account Allocation Committee (FAAC) to work out a blueprint for the implementation of IPSASs in the three tiers of government. Price Waterhouse Coopers (2014) posited that the objective of IPSASs adoption is to ensure that public interest is served and protected by developing high quality public sector financial reporting standards and by ensuring the convergence of both national and international standards, thereby enhancing the quality and transparency of financial reporting throughout the world. All public entities are expected to fully adopt the accrual IPSASs.

In this system of accounting, the financial decisions are not seen merely from the point of view of cash inflow or outflow but also from their impact on the asset and liability position of the government, future funding requirements of assets enabling planning of their timely maintenance and replacement (FAAC, 2015). The adoption of accrual accounting by government entities will help in the assessment of financial performance as the financial statements will reflect all expenses whether paid or not and all incomes whether received or not. One of the financial reporting desires of the public sector has been to be able to consolidate its financial statements from various Government departments in a single line. This dream may only be achievable by the adoption of IPSASs which would facilitate the adoption of a uniform and detailed chart of accounts for the elements of the accounting equation (Tom, 2015).

In this modern technology era, the financial activities of tertiary institutions have increased to the extent that no institution has enough funds to take care of all its needs. As a result, most tertiary institutions have to

resort to the adoption of accrual basis of accounting for their general- purpose financial statements so as to ensure uniformity and comparability of financial reporting across institutions. According to the Federal Government of Nigeria (2013), tertiary institutions include universities, polytechnics and colleges of education, monotechnics and research institutions. They are established to meet the nation‟s need for socio-economic development through knowledge sharing, research and development. The financial reporting activities of tertiary institutions include: collection, keeping and disbursement of various funds, preparation of budget, putting in place adequate internal control system, records of financial transactions (that is record of assets and liabilities), complying strictly with government financial policies and regulations in the day-to-day financial administrations of the institution and preparation of financial statements (Osadugba, 2018).

An account officer manages the account of an institution, and this involves monitoring the performance of the account and advising the institution on investments to undertake. Accounts officers in tertiary institutions include Bursars and Directors, Senior Accountants & Auditors, Accounts and Store officers and Cashiers and Clerks (Nwaigburu & Mark, 2014). In tertiary institutions, Account officers make sure that the following financial records are kept for smooth running of the institution and accountability purposes. Some of the records are student record, curricular record, evaluation records and financial records which relate to income and expenditure and include receipt for purchase, vouchers, retirement, contracts, donations and budgets. All these are recorded in the appropriate financial record for smooth running of an institution. This study focused on the adoption of IPSASs in reporting assets and liabilities, cash flow management, capturing revenues and expenses, presentation of budget information and internal control system in tertiary institutions.

IPSASs provide for high quality, robust, and full disclosure of all assets, liabilities and contingent liabilities which are very essential for assessing the true economic implication of public sector financial management. Accrual accounting provides information on an entity‟s overall financial position and current stock of assets and liabilities. Tertiary institutions need this information to make decisions about the feasibility of financing the services they may wish to provide and demonstrate accountability to the institution for their management of assets and liabilities recognized in the financial statements (Monari, 2015)

According to International Public Sector Accounting Standard Board handbook (2017), cash flow statements present the importance and providing manner of information about the historical changes of cash and

cash equivalents of an entity by means of a cash flow statement which classifies cash flows during the period from operating, investing and financing activities. This information allows the users to determine how the public institution raised the necessary cash to finance its activity and how the cash was used (Cenar, 2011). The cash flow statement identifies the sources of cash inflows, the items on which cash was expended during the reporting period, and the cash balance as at the reporting date. Information about the cash flows of an entity is useful in providing users of financial statements with information for both accountability and decision making purposes.

Revenue is the gross inflow of economic benefits or service potential during the reporting period when those inflows result in an increase in net assets/equity, other than increases relating to contributions from owners. Expenses are decreases in economic benefits or service potential during the reporting period in the form of outflows or consumption of assets or incurrence of liabilities that result in decreases in net assets/equity, other than those relating to distributions to owners (IPSASs handbook, 2017). The IPSASs accrual method of accounting records revenues and expenses when they are recognized, not when cash is actually transferred. Revenues are recorded when the sale has been completed, and expenses are recorded when

 

the goods and services that generate the expenses are matched to the revenue. Matching of revenues to expenses is a fundamental principle in accounting, and proper matching ensures earnings to reliably capture a firm‟s profitability (He & Shan, 2014). The income statement reports the revenues and expenses of an institution and shows the profitability of that institution for a stated period of time.

Budget is a plan of financial operation embodying an estimate in proposed revenue and expenditure as well as the proposed means of financing them for a given period, usually a year. It is an instrument of economic and social policy which must ensure that policies are translated into concrete and feasible objectives. According to FAAC (2015), the presentation of budget information in financial statements requires a comparison of (original and final) budget amounts and actual amounts to be disclosed in the financial statements of entities. All comparisons of budget and actual amounts must be presented on comparable basis to the budget. According to Ball and Plugrath (2012), consistent and appropriate use of IPSA standards provide high quality of financial reports for enhanced comparability and analysis.

The internal control system is about such measures put in place by an organization in order to ensure the achievement of its objectives. It is a set of

policies and procedures adopted by an entity in ensuring that an organization‟s transactions are processed in the appropriate manner to avoid waste, theft, and misuse of organization resources. Tertiary institutions strive for efficiency and transparency in their services, operations and finances. There is also a growing interest among these institutions to enhance risk management through their processes and procedures so as to promote efficient services among professionals within the institution. The most common measure over these processes and/or procedures is the system of internal control (Ndifon & Patrick, 2014).

The influencing factor in the adoption of international public sector accounting standard in financial reporting in tertiary institutions could be type of institution and years of experience. These variables are likely to affect accounting officers‟ mean ratings on the adoption of IPSASs. Type of institution in this research study means all conventional federal universities, polytechnics and colleges of education. Federal tertiary institutions are likely to adopt IPSASs first before the State follows. Odimmega (2015) reported that there was a significant difference in the views of accounting officers in the universities, polytechnics and colleges of education on the use of accounting techniques and standards. The knowledge, experience and expertise of accounting officers may determine the extent the adoption of IPSAS enhances financial reporting in tertiary institutions. According to Boger in Ile and Odimmega (2018), Nigerian tertiary institutions do not attract grants from international agencies because of lack of internal transparency and accountability. Boger further stated that experienced accounting professionals can carefully adopt generally accepted principles in preparation of financial statements in order to ensure transparency and accountability of accounting information.

Considering the above views, it seems that the adoption of Accrual Basis International Public Sector Accounting Standards in tertiary educational institutions plays a significant role in improving the capacity of institutions to provide the institutional bodies, citizens, media and other stakeholders with understandable, relevant, reliable, and comparable financial statements. The adoption is aimed at improving the tertiary educational institutions accounting and financial reporting system in consonance with global standards.