issues in conversion of as in municipalities icai -09.06

8/8/2019 Issues in Conversion of as in Municipalities ICAI -09.06

http://slidepdf.com/reader/full/issues-in-conversion-of-as-in-municipalities-icai-0906 1/48

Issues in the Conversion ofIssues in the Conversion of Accounting System in Municipalities Accounting System in Municipalities

-- Role of Chartered AccountantsRole of Chartered Accountants

Issues in the Conversion ofIssues in the Conversion of Accounting System in Municipalities Accounting System in Municipalities

-- Role of Chartered AccountantsRole of Chartered Accountants

CA. R.S.MuraliManaging Director

NCR Consultants Limited

ICAIICAI State Level CPE ConferenceState Level CPE Conference

BangaloreBangalore

99thth June 2007June 2007



2

Presentation SchemaPresentation Schema

1. The Genesis2. Why Modern Accounting?

3. The Approach

4. The Actual Process

5. The Content6. Implementation Issues & Strategies

7. Lessons Learnt ± Models for CAs

The focus of this presentation is on Municipalitiesthough applicable to all Local Bodies (atnational level double entry has beenrecommended for ULB and not for PRIs)



1 - The Genesis1 - The Genesis



4

Nothing is Permanent in this World except Change.

Nothing is Permanent in this World except Change.

Govt Institutions have been following Cash based Accounting system focus on spending rather than raising money

Improved financial management necessitates a shift tomodern accounting system Accrual Accounting System

Being attempted in Government last two decades New Zealand, Ireland, Botswana«.have Country

Balance Sheets

International Federation of Accountants (IFAC) plays aleading role

Various countries use various approaches and methods(IFAC/GASB)



5

The Indian ScenarioThe Indian Scenario

Mission Mode Project Government of India (MoUD)incorporates Accrual Accounting System National

Accounting Manual Model Municipal Law ICAI brought out guidelines for Municipal Accounting,now set up Committee for formulating AccountingStandards for local bodies (CASLB)

Tamilnadu, Bangalore Corp & Karnataka, AP, Delhi,

Kolkatta, Brihan Mumbai Decision to move to AccrualSystem

Move to accrual accounting a major decision at Statelevel



6

Urban Institutional Set-Up

Minister

Secretary Municipal

Administration or Urban

Development

Commissioner or/&

Director of Municipal

Administration

Corporation Municipalities

ULB



2 ± Why Modern

Accounting & CAs?

2 ± Why Modern

Accounting & CAs?



8

Why Modern Accounting System?Why Modern Accounting System?

Needs of Changing macro economic conditions transparency/ accountability

Complete financial information currently absent

Enabling realistic financial information

Providing correct planning instrument

Providing better decision tools

Single data base for all purposes

Modern financial statements base for performancebased funding



9

Gap Analysis The Accrual Accounting SolutionGap Analysis The Accrual Accounting Solution

ULB does not know it owns (assets) & Owes(Liability)

No distinction between Capital & Revenue

No Summarized Statement to understand theULB finances

Required information cannot be generatedquickly Not Computerised

System not in line with any accountingstandards, GAAP



10

Role of CAsRole of CAs

Need to understand governmental accounting

Sensitize the Govt & local bodies consideringperspectives of Information, Control & Governance



3± The Approach

3± The Approach



12

Transition to Accrual Accounting: ApproachTransition to Accrual Accounting: Approach

Based on Bangalore Experiment

Considerations not just restricted to accounting alone

Accounting need to become core function and should not be treated as a stand alone system

Control, Technology and Human Resource are alsorelated

Involvement of stakeholders is key

Transparency and Accountability aspects need

recognition



13

Health

Education

Engineering

Revenue

SWM

Infrastructure

Markets

Horticulture

CITIZEN

STATE

GOVT

LENDERS

ELECTEDREPS

The DEPARTMENT AL Approach: Terminal Function

Finance&

Accounts

Finance&

Accounts

Finance&

Accounts

Finance&

Accounts

Finance&

Accounts



14

Health

Education

Engineerin

g Revenue

SWM

Infrastructu

re

MarketsHorticulture

Finance&

Accounts

CITIZEN

STATE

GOVTLENDERS

ELECTED

REPS

The ENTERPRISE Approach: Core Function



4± The Actual Process

4± The Actual Process



16

Key Processes & Issues for ImplementationKey Processes & Issues for Implementation

Process Mapping Hesitation of the staff to provide

complete information to the team Chart of Accounts Management considers only existingbudget heads

Architecture for Accounting Lack of clarity oninformation requirements

Process Re-engineering Need to have a responsibleperson ensuring flow from the respective departments Specification for software development Domain

requirements very special, difficult to translate totechnicians

Hardware & Software Definition/ Procurement- Hardwarehired temporarily, Procurement process is cumbersome,time consuming

Software testing & deployment lack of mix of talents Team in Place undue delays and frequent changes in

the implementation team



17


Need to plan on details of implementation based on theprocess map

They should be able to master issues related to internal

process of ULB management and technology for asmooth migration



5 ± The Content

5 ± The Content



19

Content - Migration to Modern AccountingContent - Migration to Modern Accounting

M1- Revenue Mapping revenue flow (several) M2 Expenditure Mapping expenditure flow (limited) M3- Assets/Liability Accounting Accounting for short

term & long term Assets & Liabilities, opening balancesheet

M4-Funds Tracking & Reconciliation M5 Budgeting Setting up of budgeting process M6 Works Coding of works based on selected criteria M7 Payroll Coding of employees M8 MIS Accounting enabled MIS

M9 Policy inputs Accounting Policy, AccountingRegulations, Budget Regulation, Banking relationship, Audit systems.

M10 - Training Commercial Accounting, FBAS,Computers & MIS



20


Accounting -The core competency of CAs

Key Challenge Switch to design, Setting up andimplementation of systems rather than auditing

Requirements Technology, Project Management andBehavioural inputs



6 ± Implementation

Issues & Strategies

6 ± Implementation

Issues & Strategies



22

Core Issues 3PTCore Issues 3PT

Technology

People Process

Policy

COREISSUES

Approaches

KeyIssues



23

1: Policy Issues1: Policy Issues

1.1: Decision at the Government level to move tothe new system

1.2: Why should we select the new system? 1.3: Technical aspects

DECISION: Suitability impact wherewithal political acceptance procedures

SUIT ABILITY: Cash/Accrual ? lack of technical expertise impact on existingGovernment Financial Reporting

TECHNICAL ASPECTS: Accounting Policy Accounting Standard (apart from State FinancialCode) Audit Process



24

White Paper on Accounting System to Government Detailed discussions at Principal Secretary Level Fund Based Accounting System (FBAS) based on Best

practices and accepted by GOK Bangalore Agenda Task Force (BATF) Constituted by Chief

Minister came in as Mentors for managing implementationprocess at Bangalore by funding Consultancy support (aPublic Private Partnership Initiative)

The State Accounts Department (the Auditors) weretaken in for discussions at various stages

GOK made an MOU with BMP for various time based

deliverables (relating to FBAS implementation and otheraspects) for a financial assistance by GOK

1: Approach1: Approach



25

2: Process Related2: Process Related

2.1: Mandate for/Review of the Process

2.2: Accounting System/Quality

2.3: Opening Balance Sheet

2.4: Management Information System

2.5: Functional areas (including technology)

2.6: Public participation



26

Issue 2.1:Mandate for/Review of the ProcessIssue 2.1:Mandate for/Review of the Process

Lack/inadequate understanding of the need forthe new system by Management

Need for official decision for change (Government decision/Council decision)

Lack of ownership : Need to get the buy-in of various stakeholders

Mandate to change agents (employees andconsultants)

Budget and payment procedures

Timeline, milestones for/and deliverables bystakeholders



27

Approach 2.1:Mandate/Review of the Process Approach 2.1:Mandate/Review of the Process

Communicating the benefits of the system to BMPby BATF presentations and discussions

New system confirmed official - the BMP Accounting Regulations, 2001 passed by theCorporation Council

Stakeholders (with in the system) involvementthrough MIS (structured financial information)provided by the new system

Strict weekly reviews, (which continues even after

30 months) set up by BATF for immediate follow-up bysenior officials like Special Commissioner/Joint

Commissioner - Finance



28

Issue 2.2 Accounting System/QualityIssue 2.2 Accounting System/Quality

Cash basis of accounting with out major checks or balances Delays in flow of information/Lack of completeinformation

Consolidated information /No detailed information

Basis of accounting/accounting treatments not very

scientific Extent of information available - person dependent

Multiple sources of financial information

No periodic, scientific reconciliations

No structured and regular information from Banks

Bank balance not very clear Huge arrears in audit

Accounting considered a terminal function

Lack of financial analysis /intelligent functional reviews



29

Approach 2.2: Accounting System/Quality Approach 2.2: Accounting System/Quality

Process Mapping Process Reengineering Formatrevisions Test information f low mechanism scaling up by Consultants

Defaulters Analysis/Follow-up on daily basis Mechanism for daily/periodic confirmation of entries The Accounting entries simplified through Accounting Entry

Matrix Simplified procedures - Workflow Manual - Accounting

Regulations Weekly reviews focus on gaps in operation and

immediately attended to A system of bank reconciliation set up and sample

reconciliations done by Consultants to ensure complete andcorrect accounting

Most important was the approach adopted to shift accountingfrom terminal function to core function



30

Issue 2.3:Opening Balance Sheet Issue 2.3:Opening Balance Sheet

No Balance Sheet in the old system Subsidiary records not available or were incomplete

Most of the asset/liability information not readilyavailable

Most of the employees not aware of Balance Sheet



31

Approach 2.3:Opening Balance Sheet Approach 2.3:Opening Balance Sheet

Asset inventory - verification/valuation by Consultants Updating /rebuilding registers with regard to Revenuereceivables (DCB), loans and advances

Identification of bank accounts sample bankreconciliation for arriving at opening balance

Loan account reconciliations Payables reconciliation /confirmation : Contractors/Suppliers

Training to BMP employees Policy and process for delayed identification/accounting

of assets and liabilities, taken care in accountingpolicy



32

Issue 2.4:Management Information SystemIssue 2.4:Management Information System

Lack of MIS concept and structured MIS

Information generated not from single source

Reports not authentic or reliable

Department Heads not having structured review based

on authentic reports

Lack of standardized formats

Generally - lack of informed decision making



33

Approach 2.4:Management Information System Approach 2.4:Management Information System

Understanding of MIS requirements with clarity Sensitization of Departmental Heads about MIS requirements /

usefulness

Designing department specific MIS

Providing control reports during transition

Finance related functional MIS to various departments MIS for operational levels to enable day to day dependency onMIS

MIS to all possible stakeholders including electedrepresentatives (works status)

Single data base for official use

Reviews using MIS from a single official database



34

Issue 2.5: Functional areas (including Technology)Issue 2.5: Functional areas (including Technology)

Budgeting process: not scientific and based onguesstimates Budget not realistic

Works: Inadequate information / control on engineeringworks with no direct links to financial accounting

Payroll: Deployment of a large manpower with noeffective information on payroll related matters

Assets: No complete information and management of assets

Banking: No proper and timely information from Banks Technology: Lack of physical/human infrastructure for

appreciating and absorbing technology



35

Approach 2.5: Functional areas (including Technology) Approach 2.5: Functional areas (including Technology)

Budgeting: Budget information data sheet (BIDS) from alldepartments, Budget regulation is in draft stage

Works: All works were coded, work monitoring systemcomputerized, no payment without work code, worksliability established and linked to Accounting

Payroll: Electronic payroll database (13,500 employees)

created, links to loans and advances, statutory dues Asset accounting: Asset inventory made, verification

measurement valuation under process, complete individualasset file created with electronic DIGI map for locatingassets of BMP

Banking relationships: MOU with Bankers - one currently

capable of providing computerized information as per BMPrequirements Technology: BATF provided the required technical support

through Consultancy support BMP built up its internalcapacity to handle related issues



36

Issue 2.6:Public participationIssue 2.6:Public participation

No information to citizens on financial performance /status

No citizen involvement for providing inputs forbudget

No public debate on various city related issues

No sharing of information on ward works

No Scrutiny of ward works and work supervision bycitizens

Lack of joint planning at ward level with citizens

All the above resulting in no pressure for providing information to public on servic ed eliv ery



37

Approach 2.6:Public Participation Approach 2.6:Public Participation

There has been a strong citizens involvement withcampaigns like Janaagraha and PROOF

Janaagraha NGO promoting citizens awareness / ability onissues related to city governance: citizens responsibilities andrights, planning and supervision of ward works, etc

PROOF: Public Record of Operational Finance a campaignpromoted by four NGOs in the City: The BMP was the first institution to place its quarterly results since (Q1 02-03) to thePublic and a public debate is held in this regard.

BMP Balance Sheet published in Newspapers



38

3: People related Issues3: People related Issues

Lack of Ownership/responsibility for/during transition Frequent changes in officials Gaps in Organisation structure/in Finance and Accounts Lack of required quality (suitability) of people Lack of required quantity of people at appropriate

places

Attitude towards change lack of incentive for change Helplessness in the system towards non-performers

accountability issues Limitations in getting/placing professionals Limitations in making persons do allotted work

Problems in hiring personnel Non matching of person to post Lack of up skill gradation mechanism Lack of HR policy No training/skill up-gradation practice



39

Approach/Strategy Approach/Strategy

Bangalore Corporation and BATF put in a lot of continuous

efforts Irrespective of 5 Commissioners in 2 ½ years, all the

Commissioners made their positive contribution Certain key posts were created specifically and

professionals brought in: in the first phase JCF andrecently Special Commissioner

Decentralization of Accounting work with creation of three Assistant Controllers of Finance created and deployed inthree zones

Initial training of Accounts / Audit staff in Computers andModern Accounting provided

Software and FBAS training commenced Business Process Manual + Job Descriptions made to

enable clarity in operations Close monitoring for post implementation capacity building

going on presently.



40

4. Technology Related4. Technology Related

Lack of understanding of hardware and softwareaspects

No internal ability to handle issues relating toHardware:

Appropriate technology configurations nos Location usage

Networking

Power quality/UPS

Trouble shooting / maintenance AMC

No Software for Accounting/MIS



41

Approach/Strategy Approach/Strategy

BATF provided required technical inputs

The Corporation brought in persons to handlehardware issues on contract basis

Entire software aspects handled by Consultants Tailor made Software functionality

Integration between modules Software documentation Software User Manual Training to Users on software

Audit trail in software Software suppliers + warranty Software maintenance post implementation Data base administration

The Corporation built up its own computer centre



42


Develop multi disciplinary approach

Need to undertake implementation projects

Tackle difficulties through innovative approaches inundertaking change management



7 ± Lessons Learnt &

Models for CAs

7 ± Lessons Learnt &

Models for CAs



45

Audit

Certification as per standards and disclosure norms Control Systems/IT Audit (SOX) Outcome measurement? Delivery of public services certification (stakeholders) Transparency aspects publication

MIS Linking to accounting (MTFP) Detailed/Summary/Analytical aspects Review mechanisms and administration Technology considerations - Architecture Web-enablement Stakeholder participation

Standards Accounting/Audit Record maintenance Data standards KPI/Outcome identification

Lessons learnt & Issues - 2Lessons learnt & Issues - 2



46

IFAC/IPSAS considerations Clarity on Process Issues

Team in place for handling implementation

Stable team to handle entire migration process

Infrastructure in place for the change process

Right mix of internal/external team Capacity building plan that is relevant to implementation

Involvement of audit/technology teams from the beginning

Realistic time targets based on work breakdown

Strong review mechanism during implementation

Stakeholders participation in a realistic manner Not loosing track of the objectivity of the exercise the outcome

(and not just a news!)

Key Considerations for Successful ImplementationKey Considerations for Successful Implementation



47

CAs Role In Nation BuildingCAs Role In Nation Building

Migrating the local bodies from traditional to Accrual Accountingis a massive task and has a long term impact

Three models in the exercise:

#1: Turnkey Support- Complete solution provider.Requirements-multiple skills, Project management set up

#2: Core competency support- Mentor ULB to implement accounting & Control related aspects.

#3: Providing support services Training, compilation,preparation of opening balance sheets, reconciliation of bank accounts, ensuring adherence to AccountingStandards etc

Need to embrace technology, management tools, project management skills, change management approach, strengthenthe Core competency of Accounting & Auditing.



48

Thank you

issues in conversion of as in municipalities icai -09.06

Documents