Financial management system : A critique

The problems of accounting in preparing budget

We recognise three major groupings of our government entities:

1) The government, including the ministries and all other entities included, and financed entirely by the national budget.

2) Decentralised entities, including independent agencies, government owned corporations, universities and "autonomous" entitles, which may be fully self-financed from operating revenues, but most frequently are partially or principally dependent on budgetary transfers from the national government to finance their operations.

3) Regional and local governments, which in many countries are financed fully, or largely through budgetary transfers from the national government.

Based on the above or a similar scheme, Bangladesh government seeks to provide annual financial information and on a combined, though usually not consolidated basis at each of the foregoing levels. Thus our centralising accounting measures became extremely complicated owing to the problems of achieving uniformity to permit reporting of all government entities.

Our financial management system has problems in enforcing timely reporting also. Our government has gaps in data owing to the failure of some entities to report. The traditional public accounts required by our constitution and/or law contemplate only government reporting. Bangladesh is yet to achieve timely reporting of combined information at all three of the above levels.

Lack of uniform accounting practices

There must be moves for effective annual reporting and evaluation plans so that availability of information could be improved to parliament and the public for both budgetary decision-making and for satisfying accountability requirements. In this regard our government has to overcome all the problems. For example, the absence of uniform accounting practices across all public sector reporting entities makes it difficult to make comparisons of financial performance. There are also problems in some of the traditional public sector accounting practices-such as the reliance on cash accounting in the budgeting system. Our government accounting system remained largely unresponsive to efforts to improve them.

Defect in budget presentation

Our budgetary format is not up to the expectation. It needs to be more methodical, classified and communicative. The classified future public expenditure heads should be shown headwise so as to give clear picture of future government outlays. Itemwise public expenditure budget must be projected in our budgetary format. Our budget should depict all the features and techniques of management, planning and economic controls for ensuring legislative accountability and reducing expenditures or other growth rates.

Inefficient asset management

A major emerging issue is that of promoting improved asset management. The proper treatment of assets is widely recognized problem of our government financial management. All departments and many budget-dependent agencies use cash-based accounting. Under this system the cash is taken into account when the money is spent (as a full charge in that year's budget). Assets registers are maintained, but for most noncommercial organizations of government only historical values are recorded. When assets are sold all revenues paid into consolidated revenue. This system means that managers have relatively poor information and very little incentive to use existing assets efficiently.

The following measures could be taken to overcome these problem:

1) Commercial and quasi-commercial agencies of government should be encouraged to prepare their financial accounts on an accrual basis and to use current costs for asset valuation;

2) Guidelines on departmental financial statements for inclusion in annual reports should require statement of assets and liabilities valued on a current cost basis; and

3) Sale of surplus assets should be encouraged in certain cases by allowing a share of the revenue to be applied to an agreed development plan.

The recording of fixed assets by our government is accorded low priority and assets are rarely compared physically with accounting records. Fixed asset records are usually incomplete, undervalued, or non existent. Obsolete and fully expended assets rarely are removed from records once recorded. Our government periodically attempt nationwide inventories of assets, the cost of which seems highly questionable in the light of the failure to establish adequate accounting records and control. Information reported on fixed assets by government is often dubious.

Lack of discipline in the environment

An underlying absence of discipline permeates our government. Proper accounting and sound financial management depend on a disciplined environment under the control of disciplined officials. Failure to observe the prerequisite of timeliness invalidates whatever other benefits accounting and financial management might offer. Discipline is demanded in the daily recording of financial transactions in such a way that they can be summarized and reported in a useful format. Because transactions data are not comprehensively captured and recorded adequately and promptly, our government accounting system collapse at the very beginning of the accounting process.

The historical absence of useful and timely financial information has led our public officials to learn to operate government without it or with a minimum of ad hoc data (often unreliable estimates) acquired through any means possible.

Absence of effective budgetary control

A proper system of accounting is essential for developing a satisfactory budget. The formation of the budget depends upon information largely collected from the cost accounting system. An important feature of the budgetary control is comparing actual performance with prior estimates or targets laid down in the budget to make sure that actual performance is steering in the right direction. Lack of understanding of budgetary control will misdirect the government for the subsequent years regarding its financial management. Through budgetary control the government will come to know the variance of the goals fixed in the budget and the results achieved. Variance will, ultimately, lead the national government to analyse the factors that contributed to the variance. Our government financial managers are yet to understand the implication of budgetary control. They do not possess the clear conception of budgetary accounting to account for budgetary activities and to prepare financial statements so as to reflect the status of government finances. So, our government financial managers are weak in analysing the developments in the execution of budget. As there is no well-defined budgetary control in government financial management there is no effective analysis of budgetary activities and no evaluation of results.

Uncertainty in the submission of budget

As a result of economic uncertainty and the lack of ability of systems to reckon with it, our budgets which are considered to be policy instruments and embodiments of programmes of action are submitted much too late in the fiscal year. Instead of promoting a coherent strategy, they are put together in hurry and more as a ritual, with more pray than reason.

Outmoded budget structure

Owing to lack of a periodic update and to rapid changes in government policies and activities budget structures, which are supposed to promote a management bias in government, have become outmoded.

Problems of Budget implementation

Due to midstream changes in allocations exacerbated the uncertainty and contributed to a rush of expenditures and to excess expenditures in several areas. That is why budget implementation suffered heavily.

Allocation of expenditures

The viability of any budget depends on the information available on competing demands, costs of projects and programmes, and macroeconomic linkages and implications. Although political decisions may really be made that are contrary to economic and financial indicators, the budgetary process should be organized to generate the data needed. Though government is supposed to decide allocation issues between public and private sectors, but our government has yet to achieve a balance among and within programmes. The allocative balance appears to have been further skewed in the context of crisis budgeting as a result of arbitrary limits imposed on budgetary inputs. Our budgetary process is also not generating data on the future implications of current policies, or on the operations and expenditures needed to maintain completed projects. Decisions are therefore piecemeal, some as part of the formal budget. Also, the revenue and expenditure budget lacks congruence, which frequently contributes to situations in which outlays are determined without reference to resources available.

Lack of computerisation

Computers are already playing important role in shaping the national government financial management structure in the developed world. During the 1960s and 1970s computer technology carried the developed nations into an era of large powerful mainframe systems that were capable of handling volumes of data and numbers of transactions far beyond previous capability. Without computers many parts of the government could not function. In this regard at that time our government was lagging far behind.. We have missed that period. The 1990s offered new opportunities through computer technology to change the financial management structure of the government. But, due to callousness of our bureaucrats we remained unresponsive to improve our financial management system through computerization in the 1990s. Our government receipts and payment system are yet to be computerized completely. The 2000s is opening for us more expanded horizon of opportunities for using new generation of computers with wide spread extensions of their uses and capacities. This time let us not fail to take the help of computers in restructuring our outmoded financial management structure.

Financial reporting

If financial managers are to fulfill their responsibilities, they must have the information and resources necessary to function and to manage the affairs of the government. In addition they must demonstrate through the financial reporting process their financial responsibilities. But our government financial managers generally lack the following type of information that is used for analysis and decision-making purposes.

Cost information;

Periodic summary performance reports of budgeted versus actual expenditures;

So in order to improve our financial manager's performance they need to be provided with the aforementioned information for good decision-making purposes.

Inflation Accounting

Our economy has been subject to inflation at varying degrees. As a result financial data from any two years are rarely comparable without adjustment. Most countries publish official indices that are used for adjusting historical values by private sector enterprises and by public enterprises as well. As our government financial reporting is not well developed our government rarely use these indices in their accounting system; although they may be used to adjust columns of comparative historical in some financial reports.

Management, cost and public works accounting

Our government is yet to explore this area. Till now our government has not made any attempt to design and put into practice a cost and management system for our financial structure. Internationally financed development projects require establishment of a special project administrative and accounting unit to handle all project accounting and financial management outside the regular entity financial management in the ministries or other large government agencies. There is poor public works accounting in Bangladesh.

Austerity Management and Accounting

High inflation, increasing unemployment, and decreasing economic growth rates are the general symptoms of fiscal stress in every country, and they call for effective austerity management. The core agencies are supposed to distinguish the components of the spending department's programs in line with government's priorities and to re-examine the revenue, and internal and external borrowing projections during budget formulation and execution. Our financial agencies' performance is not satisfactory at all in this regard.

Weak institutions

The financial system is inextricably bound with the economic activity of the state. And, several government institutions are responsible for maintaining soundness of the system.

Our budgetary system and financial planning are developed within a comprehensive legal framework. The main roles of the central agencies are as follows:

1) Ministry of finance : As the main executive arm of the government, it is responsible for the following tasks in the area of financial management : prepares and submits a draft of the budget to parliament; defines rules of budgetary resources utilization; and generally supervises budget administration. It manages budget administration; organizes supervision over local budget performance; submits periodic reports on budgetary performance to parliament; formulates tax system rules and standardizes financial planning and financial policy through the issuance of norms.

2) National board of revenue : Ministry of finance supervises national board of revenue. It deals with assessment and collection of taxes and other budgetary receipts, tax control and penal cases.

3) Office of the Accountant general : This organization is responsible for the audit of government transactions and reports on budgetary management to parliament.

4) Bangladesh Bank : Treasury functions of the government are managed by the Central Bank. All government accounts are kept with Bangladesh Bank.

The professionals working in these organizations that support the financial management of the country are weak. Lack of adequate expertise, on the part of these professionals, has caused have on our economy. Many of them have no rudimentary concept of modern financial management. Our government has no development scheme for the bright young stars working in the core agencies. There are few established criteria or standards for government accounting, budgeting, cash and debit management, internal control, financial reporting, or auditing. Our accounting professionals, primarily concerned with private sector, public sector financial management, are not skilled enough to discharge their duties effectively.

It is a sad reality that at this dawn of twenty-first century our financial management remains largely in the hands of weak professionals.

Conclusion

We do not have yet a rational financial management system framework. Antiquated legalistic provisions and practices continue to prevail in Bangladesh's financial management system, obviating the possibility of utilizing modern techniques and technology. Our financial management system is fragmented and uncoordinated. The different units responsible for budgeting, accounting, cash management, debt management, and auditing rarely communicate and coordinate their activities or share information. The modern managerial concepts of entity wide responsibility through the organizational framework, accountability for resources and results, sound internal control structures, and the system approach to planning, recording processing, and auditing financial transactions cannot function within limitations impose by law, tradition, and irrational political decision making our financial management data lack reliability and credibility.

There have been few real initiatives to improve government accounting and financial management in Bangladesh on the part of our government and on the part of international donor organizations since our inception in 1971. The present chaotic economic situation that demands many severe austerity measures of our government makes it highly unlikely that Bangladesh government will be in a position to improve the quality of its financial system without massive external assistance directed to that end.

Time has changed. In order to survive in a rapidly changing world we have to change ourselves. Let us not forget only timely reform in any area of governance could help us cope up with time.

The author is a financial analyst.