International Public Sector Accounting Standards (IPSAS)

International Public Sector Accounting Standards (IPSAS)
The Best Way for Public Institutions

Public sector, including government units, departments, inter-governmental agencies, non-profit organizations, and other public service agencies have always relied on the use of the cash basis accounting as opposed to the accrual basis accounting. Even entities that chose to move to the accrual basis have done so at a cautious pace and sometimes ending up with a two-dimensional basis; a mix of the “old school” one based on cash accounting, and a modern one based on accrual accounting picking pieces of each. The cash based system for a long time has been considered more appropriate in the public sector, because there is a lot of emphasis on compliance with rules and regulations. However, the modern trend is tending more and more towards efficiency in public resource management, which the accrual based accounting processes enable. Arising out of the increased need to present a true and fair view of financial statements, well-meaning agencies are shifting to accrual based accounting; through the implementation of the IPSAS based framework.
The International Public Sector Accounting Standards (IPSAS) are a set of accounting standards issued by the International Public Sector Accounting Standards Board (IPSASB) for preparation of financial statements by public sector entities around the world. These standards are based on International Financial Reporting Standards.
Public agencies and especially governments all over the world find implementing accrual accounting based on IPSAS or other accounting frameworks challenging. It is true first-time adoption of IPSAS (accrual-basis) is a challenging task that often requires comprehensive guidance. However, the IPSASB has issued IPSAS 33 First-time Adoption of Accrual Basis IPSAS to help agencies navigate the transition challenges.
IPSAS 33 addresses the transition to accrual basis from either a cash basis, or an accrual basis under another reporting framework, or a modified version of either the cash or accrual basis of accounting. IPSAS 33 grants transitional exemptions to entities adopting accrual basis IPSASs for the first time, providing a major tool to help entities along their journey to implement IPSASs. It allows first-time adopters three years to recognize specified assets and liabilities. This provision allows sufficient time to develop reliable models for recognizing and measuring assets and liabilities during the transition period.
This Standard is applied from the date on which a first-time adopter adopts accrual basis IPSASs and during the period of transition. This Standard permits a first-time adopter to apply transitional exemptions and provisions that may affect fair presentation. Where these transitional exemptions and provisions are applied, a first-time adopter is required to disclose information about the transitional exemptions and provisions adopted, and progress towards fair presentation and compliance with accrual basis IPSASs. At the end of the transitional period, a first-time adopter must comply with the recognition, measurement, presentation and disclosure requirements in the other accrual basis IPSAS in order to assert compliance with accrual basis IPSASs as required in IPSAS 1, Presentation of Financial Statements.
Accrual-Based Accounting
IPSAS requires the capture and presentation of more details of the assets, liabilities, revenue, and expenses of an organization. To this end, IPSAS requires the presentation in the financial statements of all assets acquired, including property, equipment and intangible assets, and their gradual depreciation or amortization over their period of use; such detailed requirements necessitate improved stewardship of the organizations’ assets. IPSAS adoption also leads to a more accurate recognition of liabilities resulting from past transactions and events, including a comprehensive recognition of all employee benefit liabilities. These changes always require improvements in a public entity’s control framework, which allows for enhanced management of resources, and improved decision-making. Keeping an account of comprehensive information about revenue and expenses supports better strategic planning and enhances objectives results‐based management.
Financial statements of an organization prepared under the detailed requirements of IPSAS allows for improved comparability over financial periods as well as with the financial statements of other peer organisations  applying IPSAS. Overall, the application of independent, internationally accepted accounting standards certainly lends increased credibility of the financial statements of user entities.
While cash accounting is a simpler way to keeps track of financial resources in the books of accounts, accrual accounting allows organisations to recognize revenue and expenses as they are incurred. Rather than waiting for a cash transaction to occur, accrual accounting can easily tell an entity how well it is performing. The choice of accounting method (cash-basis or accrual-basis) determines when and how to report income and expenses in the books: Under the cash method the income is not counted until cash is actually received, neither are expenses recognized until cash is actually paid. The ease of managing this has always proved a luring trap for agencies to remain stuck in a cash basis accounting method, thereby missing the benefits of accrual based accounting.
In East Africa, the adaptation of IPSAS has not taken firm root and nations are at different levels of implementation. The heads of state of the East African countries (Kenya, Uganda, Tanzania, Rwanda, Burundi), signed the East African Monetary Protocol on 30 November 2013, which meant that there was need to harmonize financial reporting across the region.
The Partner States in principle adopted the use of International Public Sector Accounting Standards (IPSAS), accrual basis for central and local governments and non-trading State Owned Enterprises and regulatory bodies. However, implementation across partner states is at varying levels.
In Tanzania beginning effectively with Fiscal Year 2014/15, all general government agencies are required to apply accrual basis of accounting.
The Government of Rwanda has put in place a road map aiming at achieving full compliance to accrual based IPSAS by 30 June 2020.
In Uganda, a legal framework adopting IPSAS as the financial reporting framework has not yet been adopted. However, the Public Finance Management Act 2015 gives the Accountant General the powers to decide the accounting framework to be used in the meantime. The country is, however, in the process of developing a road map aiming at achieving full compliance to accrual based IPSAS..
In 2006, the Institute of Certified Public Accountants of Uganda (ICPAU), the country’s Professional Accountancy Organisation (PAO) adopted IPSAS as the accounting framework suitable for public sector in order to streamline financial reporting in that sector. This however depends on the implementing agency for the government – the Accountant General and Ministry of Finance. 
In Kenya In July 2014, the board adopted IPSAS cash basis of accounting as the financial reporting framework for National Government (Ministries, Departments, and Agencies) and County Governments.
The situation in East Africa therefore shows that full time adoption of IPSAS is still a long way but the intention is made.
Notable Benefits of Reporting through the IPSAS Framework   
•    IPSAS due to alignment to the International Financial Reporting Standards (IFRS) enables entities to adhere to the highest international standards of financing reporting, which are duly aligned to global best practices; thereby providing room for greater consistency and comparability.
•    Preparation of financial statements through IPSAS,„ Improves prediction especially of future cash-flow  and asset needs of an entity;
•    A lot of improvement can be achieved in providing accountability to organisational stakeholders, by way of providing a complete and accurate view of the entity’s business and performance. This in a way leads to better overall management and planning.
•    Organisations that care for results-based management  find the application of IPSAS fitting since it provides more comprehensive information on revenues and costs; „IPSAS provides more precise estimates of income and expenditure
•    Provides a better appreciation and understanding  of revenues and expenses and enables improved management of commitments, risks and uncertainties; „
•    Greater transparency and credibility over the use of resources given to donor funded agencies by donors and ascertains a correct reflection of outstanding liabilities
IPSASB believes that adoption of IPSASs by governments will improve both the quality and comparability of financial information reported by public sector entities around the world. However, the IPSASB also recognizes the right of governments and national standard-setters to establish accounting standards and guidelines for financial reporting in their jurisdictions. The IPSASB encourages the adoption of IPSASs and the harmonization of national requirements with IPSASs. Financial statements should be described as complying with IPSASs only if they comply with all the requirements of each applicable IPSAS.
Based on the implementation of IPSAS 25 (Employee Benefits), the United Nations Programme on HIV/AIDS (UNAIDS) has reported a significant change in the recording of the value of future staff-related liabilities (i.e. accumulated annual leave, termination repatriation grants, after-service health insurance, etc.) that UNAIDS staff have accrued over the period of their service and have not been paid out. In previous financial statements, these types of benefits were shown as an expense only when paid, and the liabilities were only disclosed in the notes. This treatment was noted to understate employee benefit liabilities. Having adopted IPSAS, this has significantly changed and demonstrates an improvement in accuracy in reporting outstanding liabilities

Another example is the African Union that recently adopted accrual based IPSASs in its continued effort to modernise its accounting and financial management policies, operational systems and processes.

It is of note that many public agencies especially in East Africa demonstrate profligate tendencies. In acknowledgement of the existence of these tendencies, President Kenyatta declared corruption a major threat to the country’s security and directed all security agencies, the Ethics and Anti- Corruption Commission (EACC), the Asset Recovery Agency and the Financial Reporting Centre to take cognizance of this and rally around the path of transformation.

President Museveni of Uganda while speaking during a function in Rwanda in 2011 said Uganda had “so many thieves” who have frustrated government programmes that should have benefitted its citizens. In addition, President Magufuli of Tanzania has been hounding off bureaucrats for corruption. I believe full IPSAS Adaption by public agencies; will go a long way in reducing opportunities for these tendencies,
CPA Apollo Ekelot
Project Control Officer
The United Nations High Commissioner for Refugees
Nairobi Kenya

Random news

Small and Medium Practices (SMP) still a long way to the top of the class

Small and Medium Practices (SMP) still a long way to the top of the class

The commercial banks will soon start publishing their abridged audited accounts for the year ended 31 December 2015; in the New Vision and Daily Monitor. What will be evident is that the external auditors will be one of the Top 5 firms (PwC, KPMG, EY, Deloitte and PKF). For purposes of this article, the author has restricted himself to just 2014 and 2015 but a more expensive research will be extended to 20 years back.

In December 2013, the Bank of Uganda (BOU) published a list of 56  auditing firms that had passed the test and were thus considered suitable to audit the financial statements of commercial banks, credit institutions and microfinance deposit taking institutions (Tier 1,2 and 3). The list was compiled by BOU after the auditing firms have submitted their pre-qualifications documents by the due date. The author had not yet established the total number of auditing firms that had submitted their pre-qualifications documents to BOU.

Suffice to know that those 56 firms were all duly authorised firms approved by the Institute of Certified Public Accountants of Uganda (ICPAU). By that time, the total number of auditing firms approved by ICPAU was close to 190, meaning that about one-third had been pre-qualified by BOU.

However, the number of Tier 1-2 financial institutions is limited and not all the firms will get an audit. The table below shows that out of 27 Tier 1-3 financial institutions, only five of the 56 firms got an audit for the year ended 31 December 2014. The top three of PwC, KPMG and EY had the lion’s share auditing 22 of those financial institutions which constituted 97% of the total assets of that population – which stood at UGX 18 trillion (US$ 5,300 million). Compare this to assets of about 90 members of the Association of Microfinance Institutions of Uganda (AMFIU) which added up to between US$300-400million.

Source: Author’s own compilation from published accounts in newspapers
The story of dominance by the top firms may not be very different come 2015.

Of particular interest are the following statistics:

•    Out of the 56 auditing firms that were on the pre-qualification list in 2014, a total of 18 were unsuccessful in their bids for 2015. The author will attempt to find out why that was the case. It could be that the audit firm did not pass the BOU requirements or they did not meet the deadline or did not submit a bid altogether; these facts will be established;

•    For the year 2015, BOU pre-qualified a total of 64  audit firms. Notably, a total of 26 new audit firms were added onto the list which was a welcome boost to those firms. The author will in due course engage the BOU to find out the criteria for inclusion or exclusion of an audit firm from the pre-qualification list; and

•    Out of the 64 audit firms pre-qualified for 2015, a total of 22 of them were sole proprietorships. Originally, there was a view that only audit firms with at least two partners would be eligible for BOU pre-qualification, but that assertion has now been proven incorrect.

Is the situation in Kenya, Tanzania and Rwanda any different?  

Kenya has over 500 auditing firms registered with the Institute of Certified Public Accountants of Kenya, but with 56  commercial banks, mortgage financial institutions and microfinance banks. On the other hand, Tanzania has close to 150 auditing firms registered with the National Board for Accountants and Auditors of Tanzania, but with 44  commercial banks, finance leasing companies and other financial institutions. Last but not least, Rwanda has close to 35 auditing firms registered with the Institute of Certified Public Accountants of Rwanda, but with 17  commercial banks.

In Q2 2016, the author will have established whether the financial institutions in Tanzania, Kenya and Rwanda primarily also use appoint the top firms of PwC, KPMG, EY and Deloitte as their external auditors or is it a good mixture of the top firms and SMPs.

Do SMP have a chance on the Tier 1-3 cake?

The author thinks the SMPs have a good chance but one would need to dig deep into the critical success factors why the Tier 1-3 financial institutions continue to prefer PwC, KPMG, EY and Deloitte as their external auditors. In the meantime, the SMP have to be contented with auditing forex bureau which number over 200; non-deposit taking microfinance and SACCOs which could be approaching 2000 in number across Uganda. Should BOU consider regulating these Tier 4 institutions in the future, then the auditor’s pre-qualification list will end up being the same as the ICPAU list in its entirety.



Cycle time refers to the period required to complete one cycle of an operation; or to complete a function, job, or task from start to finish. Cycle time is used in differentiating total duration of a process from its run time.

It is the average time between successive deliveries. In other words:
Cycle Time = Operating Hours per day / Quantity per day
For example, assume that the plant operates for 10 hours per day and need to produce 60 computers each day. The Cycle Time is 10 / 60 = 1/6th of an hour,which is 10 minutes. In other words, on average every 10 minutes a computer rolls off the assembly line.
“Quantity per day” is the same as Throughput for a day, in the example 60 computers per day.
As the old saying goes that time is money, critical business processes are subject to the rule of thumb that time is money. Such processes are usually carried out through resources that often result as bottlenecks. Unfortunately, the products derived from these processes are usually the ones that matter most to customers; therefore, the products need to be delivered as fast as possible. This cuts across both to the internal and external clients, manufacturing and service industries.

    Competitive Advantage:Business and service delivery has changed over recent years, and competitors threaten in almost every market. Reducing product cycle times increases the potential to develop and deliver innovative products and be first to market with them. This is especially true if you compete against multiple providers that offer similar products or close substitutes. Every day you reduce your cycle time is a day you gain in meeting or beating competitor product launch dates.
If company A cannot supply the desired product at the desired time, a competitor will.Inthisnew environment, cycle time reduction provides a key competitive advantage.

    Customer satisfaction: Reduced cycle time can translate into increased customer satisfaction. Quick response companies can launch new products earlier, penetrate
New markets faster, meet changing demand, and can deliver rapidly and on time. They can also offer their customers lower costs because quick response companies have streamlined processes with low inventory and less obsolete stock. According to empirical studies, halving the cycle time (and doubling the work-in-process inventory tums can increase productivity20% to 70%. Moreover, quartering the time for one step typically reduces costs by 20.05%.

    Improves quality: With reduced cycle times, quality improves too. Faster processes allow lower inventories which, in turn, expose weaknesses and increase the rate of improvement. After eliminating non-value added transactions (as opposed to value added transformations), there are fewer opportunities for defects. Fast cycle time organizations experience more rapid feedback throughout the supply chain as downstream customers receive goods closer and closer to the time they were manufactured.

    Cost savings: Cycle time reduction saves costs.

Typically, optimizing efficiency in production processes helps you cut down on cycle time, which saves you money. This often results from thorough analysis of every step of the development and production process, refinement of inefficient steps and removal of steps unnecessary to the process. Each hour or day cut from the product cycle time saves money spent on labor, equipment and utilities used in production.
For example, if manufacturing cannot respond quickly and if a high service level isdesired, then the organization must either keep high inventory or lengthen the promisedlead time. Also consider a service industry: Suppose the central store spends less time on internal clients, they will save on deterioration, pilferage and insurance if some of the inventory is insured. 

    Distribution Channel Benefits
Within a traditional distribution channel, manufacturers produce and then sell products to distributors or retailers, which eventually sell goods to consumers. Maintaining close relationships in your distribution channel is important to manufacturers, and reducing product cycle times helps you meet the needs and requirements of distribution channel partners. This strengthens your position and makes you more attractive for other resellers looking for efficient producers.
Cycle time reduction results in simplified processes with fewer steps. In most cases, a process that has fewer steps will yield fewer mistakes. Simpler processes produce fewer errors.

Common methods to reduce cycle time
There are several efforts suitable for reducing cycle times. Streamlining multiple efforts, however, can yield a much more efficient process resulting in cost and time savings and customer satisfaction. When reducing process cycle time, consider a combination of the following ideas.
Perform activities in parallel. Most of the steps in a business process are often performed in sequence. A serial approach results in the cycle time for the entire process being the sum of the individual steps, not to mention transport and waiting time between steps. When using a parallel approach, the cycle time can be reduced by as much as 80% and produces a better result.
A classic example is product development, where the current trend is toward concurrent engineering. Instead of forming a concept, making drawings, creating a bill of materials, and mapping processes, all activities take place in parallel by integrated teams. In doing so, the development time is reduced dramatically, and the needs of all those involved are addressed during the development process.
Change the sequence of activities. Documents and products are often transported back and forth between machines, departments, buildings, and so forth. For instance, a document might be transferred between two offices a number of times for inspection and signing. If the sequence of some of these activities can be altered, it may be possible to perform much of the document's processing when it comes to a building the first time.
Reduce interruptions. Any issue that causes long delays and increases the cycle time for a critical business process is an interruption. The production of an important order can, for example, be stopped by an order from a far less valuable customer request--one that must be rushed because it has been delayed. Similarly, anyone working amidst a critical business process can be interrupted by a phone call that could have been handled by someone else. The main principle is that everything should be done to allow uninterrupted operation of the critical business processes and let others handle interruptions.
Improve timing. Many processes are performed with relatively large time intervals between each activity. For example, a purchasing order may only be issued every other day. Individuals using such reports should be aware of deadlines to avoid missing them, as improved timing in these processes can save many days of cycle time.
A case study in streamlining
Consider an electronics manufacturer receiving customer complaints about long order processing times--a cycle time of 29 days. An assessment of the order processing system revealed 12 instances where managers had to approve employees' work.
It was determined that the first 10 approval instances did not yield detailed reviews because managers felt the activity was an interruption when there were other activities that needed to be addressed. Those initiating the orders, therefore, were given authority to approve their own work. This saved an average of seven to eight days in the order processing activity.
Many subsystems had interfered with the process--each performing the same or similar tasks. The logical step was to perform redundancy elimination, and a detailed flowchart of the process was created. At closer inspection, 16 steps proved very similar to one another. By changing the sequence of activities and creating one companywide order document, 13 of these steps were removed.
Over a period of four months, the order system was totally redesigned to allow information to be entered once and become available to the entire organization. Due to this adjustment, activities could be handled in a parallel manner. After a value-added analysis, the manufacturer was able to reduce cycle time from 29 days to 9 days, save cost and employee time per standard order, and increase customer satisfaction.
The good news is that almost every company is a good candidate for cycle time reduction.


Why you can’t assess auditing software just the same way as accounting software.

Why you can’t assess auditing software just the same way as accounting software.

As a representative of a popular audit software product, I often get asked by audit practitioners whether I could avail them with a demo copy of the software so that we can ‘play around with it’.

Since financial audit and accounting are related, how different can the respective software be? The self-check procedures accountants use to decide whether an accounting system is working are quite simple and straightforward in their design: You put in a piece of data at one end and check to see if the information that has been crunched through the system and that comes out at the other end meets your expectations. A simple example of such a procedure would be taking a pocket calculator and adding up the column of numbers your assistant gave you to see if it agrees with the total at the bottom of his schedule.

However procedures like these only tell you whether the accounting softwareis able to properly process information that has been fed into it according to the rules that you specify. It’s the sort of procedure where because you know in advance, what the results should be, you can test it quite easily using that input vs. output model.

The real job of an accountant however, is not merely entering a transaction in the records but rather of knowing how to classify transactions. For example, which engineering items are repairs and which ones should be treated as new fixed assets instead? Is the value of the motor car as shown in the accounts still valid or does it need to be marked down – or even up? The accountant is also responsible for summarising the transactions in the way that most suits the people who need the information and presenting it in a way that makes sense. Seen in this light, it is not possible to create “accounting” software as these accounting judgement roles cannot be played by a computer program. What we refer to as accounting software should really be referred to as bookkeeping software.

Auditing, on the other hand, is the checking process. Confirming that data going in at one end of the system comes out the way it should at the other end, is just one audit objective and frankly, it isn’t even the most important one. The most important objectives of audit are to determine whether the financial statements (a) contain all the information they should contain, (b) contain only the information they should contain and (c) are reported in a way that conforms to a pre-agreed standard.

It does involve the arithmetical accuracy checking that most accountants do in the first place. However it also involves checking that the basis of classifying and summarising information was properly done – a test of judgement(because so-called accounting programs will execute incorrect instructionsto summarise or classify information just as faithfully as they will correct ones.)It also involves checking that there is no information missing  - another judgement test.It also involves checking that the information is not overstated – also a matter of judgement. That’s not all however. International Standards on Auditing now actually pay attention to the process that was used to evaluate the accountant and it requires certain mandatory steps to be taken and documented, no matter how certain the auditor may be of the correct situation.

This leads to an interesting question then; is it possible to create software that can meet all of these requirements of the audit? Data interrogation and sample selection software could go through the accounting information and try to extract information that makes sense but could it tell if the classification method used by the accountant was wrong? How would it decide if the evidence provided was acceptable? This is a trickier proposition and indeed, nobody has yet been able to design software that actually “audits”, much in the same way that nobody has been able to design software that does “accounting.”

What does this mean for a practitioner thinking about buying audit software? Audit software doesn’t have transactions that you can insert at one end and click to see if they have been properly classified at the other end. Instead it provides what amounts to very a long and sophisticated checklist (or series of checklists) of the all the procedures an auditor needs to carry out to determine the three objectives and comply with the mandatory procedures mentioned above. These are extensive and run, at present to nearly 800 separate mandatory procedures in the International Standards on Auditing. And that’s not counting the steps in the audit programmes in each section of the audit file. There is only one way to tell if this collection of checklistsworks properly; carry out an audit with it and submit the results of the audit to an independent quality reviewer to determine if the work was done properly.

People who aren’t skilled enough to know how to use the checklist will not be able to gauge whether they failed or passed the quality review due to an inadequacy of their checklist or due to their failure to use it properly.

Also, although the ISAs prescribe the approach to the audit to which all auditors should conform and in some instances even stipulate the exact tests to be carried out, they are not precise enough about how to do it. For example, there are more than a dozen ways to develop a sampling frame that produces a truly random sample. Which one is most appropriate? What’s a reasonable maximum or minimum sample size? If your sample contains an error, by how much should you extend your tests if at all? What’s the best way to calculate materiality? How many levels of review should there be in a particular assignment? The ISAs just don’t say.

Audit software helps by providing handy computation tools for sample design and selection and guidance on developing materiality. They even provide specific program steps for various areas of the audit. They also nudge you, (by blocking access to particular file areas and questionnaires), into using the work flow sequence that is most efficient or effective. These features, in the aggregate, comprise the methodology of particular audit software.

Without training by a person with proper experience on the specific methodology of a particular piece of audit software, it could be difficult to understand how all the questionnaires, computing tools and checklists work together to achieve efficient compliance with the ISAs.

For these reasons, taking a demo copy of audit software to try it out is unlikely to be helpful unless you are also willing to undergo not just “demo” training in the methodology but also a “demo” quality review – all lengthy and costly steps.

I would suggest that a more reassuring route would be to work through a presentation with an experienced user and ask to be shown all the features that you consider to be key in your existing methodology to ensure that they are present. Another, perhaps more important source of reassurance would be to look at the number of other practitioners relying on the same software to carry out their work successfully. The more there are, the more likely that it is the right product for you.

 Joe Gichuki

Joe, a member of ICPAU, is the CEO of Kawai Consulting, a firm that specialises in providing technical and capacity building services to financial auditors. Email: This email address is being protected from spambots. You need JavaScript enabled to view it.


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