Public Sector Governance and Accountability Series: Budgeting and ...

100 A. Premchand
affecting construction and operation. To minimize such variations, techniques
such as the Critical Path Method (CPM) and the Project Evaluation
and Review Technique (PERT) are applied. Their effects, however, may not
be sufficient to overcome inherent problems in project design. Amounts
unspent at year-end reflect, in a way, leaks in the financial control system.
Some countries endeavor to permit carryovers to following years, an
approach that illustrates a way of living with the problem rather than avoiding
it. If these procedural aspects are not recognized and addressed, they can
affect outcomes and contribute to major differences between budgetary
intent and outcome.
Resource Use Accounting and Financial Reporting
The traditional basis of government accounting has been the cash basis, which
does not permit the preparation of a balance sheet showing government assets
and liabilities. As such, it does not illustrate the net worth of government—
one of the principal bases of capital budgets. The alternative approach,
accrual accounting, has been advocated to resolve this problem. Accrual
accounting involves three features and the possibility of an additional one.
The three features relate to the following:
1. The shifting of the recording basis from cash to commitment, regardless
of when the payment is made
2. The separation of financial activities into current expenditures and capital
ones, with full depreciation allowances that permit the allocation of
costs over the life of an asset rather than recording expenses when they
are incurred
3. The preparation of financial statements that are in conformity with generally
accepted accounting principles (GAAP).
The statements include a balance sheet, an operating statement, a statement
of cash flows, a statement of borrowings, a statement of commitments, and
a statement of contingent liabilities. These statements illustrate net worth
and provide the basis for the decision of the investing public.
The possible additional feature relates to the application of activitybased
costing, which enables management to identify factors that contribute
to cost increases and possible ways to address such increases. Experience
shows that accrual accounting remains for many governments a goal that has
yet to be achieved.