Improvement Directions of Romanian Public Accounting and Budgeting

 

Assistant Rodica Gabriela Blidisel, PhD

Lecturer Daniela Harangus, PhD

Tibiscus University, Timisoara, Romania

Abstract

The economical developments determine the nations to try more and more to draw together their accounting systems. On the basis of these changes, Romania had to implement a new public accounting system able to face a more realistic reflection of the elements generated by several transformations. The public accounting reform aims at transferring the private sector accounting and managerial principles and techniques to the public sector. The accrual budgeting and accounting system has many advantages in improving decision-making process, proper control and management of public expenditure, entailing the use of performance indicators and the incorporation of department objectives in budgets.

 

Keywords: accrual accounting, accrual budgeting, public institutions.

 

Introduction

The status of accrual accounting and budgeting in many countries reveals that they have introduced aspects of accrual accounting and more are intent to do so in the future. Although there is a wide acceptance of the application of the accrual systems for the production of accounting statements, there is no consensus with regard to the production of the budgetary statements. The tendency of most countries is to produce budgets according to the accrual criterion, producing a forecast statement of revenues and expenses, cash flows and the financial situation (Brusca and Condor, 2002).

European Union member countries are required to prepare government forecast and financial statements in accordance with the European System of Accounts (ESA 95). It appears that all the European countries have adapted or are intending to adapt ESA 95.

In the European Union the free circulation of information is essential. An important item is the converging and the harmonization between the public accounting system in different countries.

The use of alternative criteria in public accounting systems leads to different results concerning the financial statements, the income and expenditure statements and the balance sheet. In spite of these, public accounting harmonisation is taking its first steps through the efforts of INTOSAI (International Organisation of Supreme Audit Institutions) and IFAC (International Federation of Accountants) at global level.

The standards of INTOSAI have mainly focused on the elaboration of a conceptual framework for public accounting information. The IFAC standards entered into more detailed recommendations on accounting practices adapting the International Accounting Standards for public entities under the influence of the Anglo-Saxon Model and passing over the importance of the budget from the Continental European Model or of the features of public sector accounting (Athukorala and Reid, 2003, p. 19).

Although some international organisations (OCDE and European Union Institutions) have adopted the International Public Sector Accounting Standards (IPSAS), different countries, especially from the Continental European area, are not very interested in adopting them because of the difference to the continental accounting tradition (Athukorala and Reid, 2003, p. 22).

In the international context, several researchers have studied the implementation of the accrual accounting, some of them questioning the usefulness of business-like accounting techniques in public organisations (e.g. Bromwich and Lapsley, 1997; Guthrie, 1998; Monsen, 2002). Many researchers (e.g. Mellet, 1997; Barton, 1999) have criticised the alleged superiority of accrual accounting over cash accounting in the public sector. 

There are a lot of opinions regarding the idea that the accrual accounting is inadequate from the point of view of the economical representation of a public institution.

Some experts prefer the security and the reality of the cash accounting system in order to know exactly the moment at which the payments and receipts are made.

 The contemporary economy is very influenced by the credits. The phenomena generated by the credits are distinguished with the help of accrual accounting.

The accrual accounting system is the only one which could provide information referring to the funds inputs and outputs in the monetary flows at the valuation moment. Customers and suppliers, debtors and creditors are structures which inform about the funds inputs and outputs. As such monetary flows can be valued; the accrual accounting is based on the funds movement. Knowing that the operations which affect the treasury are presented especially at the generation moment rather than in the payment and receipt moment, certain monetary flows forecasts could be exactly established.

Despite the rapidly growing literature in these areas (e.g. accrual-based accounting), there is a shortage of empirical literature in the views of practicing accountants in public sector departments on the applicability of accrual accounting to the public sector. Besides, these studies have been conducted mainly in the United States or in the Western part of Europe and, thus, their findings may not be readily generalised to other environments such as developing countries where the culture differences and environmental practices may be of particular importance.

 

Research Objectives and Methods

The purpose of this paper is to present experiences from the use of accrual accounting and budgetary information in the public sector in Romania, to identify some dysfunctions (if they exist) and, thus, to contribute to some improvement directions of accounting and budgeting in public sector organisations.

Therefore, for this purpose, we try to emphasize the current position of Romanian public institutions accounting and budgeting both from theoretical and practical point of view. 

In Romania, accrual accounting was put into practice both in the local government and in the central government starting with the 1st of January 2006, after three years of empirical application parallel with the existing stipulations (cash accounting) by a certain number of public institutions. The introduction of accrual accounting in all of the public sector was part of a wider reform agenda. According to the European Union objectives, the Romanian mission was to orientate the whole government accounts system to an accrual accounting system by the adoption of some General Accepted Accounting Principles (GAAP) which had to be in concordance with the present European rules, but which had to be, at the same time, adequate to the country’s circumstances and to its public sector (Hurduzeu and Morariu, 2002). Therefore, all the organisation standards were worked out according to International Public Sector Accounting Standards (IPSAS).

 

Results

The Romanian development in public sector accounting and budgeting is related, as in many other countries, to other reforms that have occurred within the public sector.

To ensure an effective financial management and to avoid the uncertainty or the waste of financial resources, budgets and budgeting are vital. The budgeting involves the preparation of an itemized financial statement showing what the expenditure is going to be over a given period, usually a year, and also show what income the institution is likely to generate during the same period.

In Romania the institutions’ budgets are linked with the State Income and Expenditure Budget and also controlled by the public authorities. For this reason the budgetary process is shared between the preparation of the budget and the execution of the budget.

The stages of public sector institutions’ income and expenditure budget are covered throughout the budgetary process at the Romanian public authorities’ level. These stages are shared in:

1.                 elaboration of the draft budget;

2.                 approval of the budget;

3.                 execution of the budget;

4.                 end of the budgetary execution;

5.                 control of the budgetary execution;

6.                 approval of the budgetary execution.

On the basis of both the budget projects received from the Ministry of Education and Research and of their own budget project, the Ministry of Public Finance prepare the State Budget Project, the Social Security Budget Project and the Special Funds Budget Project which have to be submitted to the Government by the 25th of September of each year, accompanied by the Budgetary Law Projects.

After the debate of the above mentioned budget projects, The Government submits to Parliament for approval by the 10th of October of each year, accompanied by a report concerning the financial-economical position of the country and the social security, as well as the budgetary law projects.

The final budgetary allocations from the State Budget granted to the higher education institutions are established monthly, according to budgetary credits approved through the yearly Budgetary Law.

The budgetary execution is running on the whole budgetary year, which corresponds to the calendar year (the 1st of January – the 31st of December).

The budgetary execution takes place after the final approval of the Income and Expenditure Budget.

The stipulations of the approved Income and Expenditure Budget for the “Income” part constitute minimum limits and for the “Expenditure” part constitute maximum limits on the current budgetary year.

In the Romanian budgetary system most of the appropriations are on a cash basis. Therefore, the Romanian budgetary system is a cash-based one. In the cash-based budget appropriations define limits for payment and annual commitment, fulfilling the need for compliance and expenditures control (Campo and Tommasi, 1999, p.4).

The approved Income and Expenditure Budget is submitted to the State Treasury where the higher education institutions accounts are held, which verify the cash and the payments operations.

During the budgetary execution of the higher education expenditures there are some procedures concerning the four phases of the budget execution process (Ministry of Public Finance, 2005):

§                    commitment -- the legal obligation of funds;

§                    verification  -- the ascertaining of a commitment and the confirmation that the goods or services have been received;

§                    authorization -- the authorization for credit holders to commit or make payments within given periods and within the limits of the approved budget; and

§                    payment --  the final act in the process in which a public institution discharges its obligations to third parties.

The commitments are recorded by the accountancy department and the person who practices the preventive financial control will supervise the arrangement and the daily recording, actualization and the reporting of the commitments.

The purpose of budgetary commitments recording is to supply information every moment and for each under division of the approved budget for the current budgetary exercise concerning the consumed budgetary credits through commitment. By comparison between the approved budgetary credits and the committed and consumed ones there are established the available budgetary credits which might be redistributed and prospective committed. This system of tracking the uses of appropriations at each stage of the expenditure cycle (commitment, verification and payment) represents the budgetary accounting (Campo and Tommasi, 1999, p.28).

The budgetary expenditures single entry book-keeping procedure supplies information’s concerning:

a)                 the available budgetary credits;

b)                the legal commitments;

c)                 the payments performed in the legal commitments basis at a certain moment;

d)                the commitments balance account which have to be paid at the year end;

e)                 the necessary data for the preparation of the “Statement of the Committed Budgetary Expenditures Execution Process at the Quarter End”. This statement is a part of the quarterly and annual “Financial Statements” structure of public institutions and it is accompanied by an explanatory report concerning the commitments done during the budgetary exercise.

The year end balanced accounts left from the budget execution process anticipated in the institutional agreement as well as the balance of the accounts belonging to the academic research and the extra budgetary income remain at the disposal of the higher education institution and are included in the institution’s Income and Expenditure Budget, without discharging to the State Budget and without affecting the next year’s State Budget allocations.

The public institution accounting assures the recording of the cash payments and of the effective expenditures on the budgetary classification under-divisions, according to the approved budget (Government Ordinance no. 61/2001).

Now in Romania the public institutions accounting is based on the “accrual principle” (a different principle - cash - stays at the basis of their budgetary construction).

The Romanian public sector accounting is setting up a distinct chart of accounts basis with characteristic features concerning both the accounts structure and their operation.

The public higher education accounting has some regulations and standards like:

ü                 the use of some accountancy book models and forms concerning the financial and accountancy activity;

ü                 the balance sheets models as well as the general chart of accounts for public institutions are established by the Ministry of Public Finance (chart of accounts, balance sheet and other specific forms);

ü                 the accounting has a double entry book-keeping system;

ü                 the chronological and systematic recording of all simultaneous  operations in a debit of some accounts and in the credit of other accounts;

ü                 the establishing of the total debit and the total credit amounts, as well as the final balance of each account;

ü                 the book-keeping, at least monthly, of the trial balance which reflects the equality between total debit and total credit and the total final debit and credit balance accounts;

ü                 the presentation of the final execution of the income received and the actual monthly payments, quarterly and yearly, as well as any surplus or deficit.

The responsibility for the accountancy organization and the book-keeping according to the legal stipulations in the public entities is the credit holder’s.

The public institutions sector chart of accounts is common for all the public institutions presented by the Consolidated General Budget components. Between the accounts which reflect the funding system of public institutions there are important differences especially concerning the book-keeping of the public resources constitution as well as the conditions which have to be fulfilled concerning the limit till the cash payments are made.

In public institutions the financial statements are composed of balance sheet, patrimonial outcome account, treasury flow statements, statement of changes in net assets/equity, appendixes to the financial statements, explanatory notes and budgetary execution account.

The financial statements represent the official documents of public higher education institutions assets and liabilities as well as of income and expenditure budget execution process.

The public higher education institution has to present the balance sheet and the budgetary execution account to the Treasury where it had opened its accounts in order to get the endorsement of the accountancy concerning the cash payments and account balances, which has to coincide with the balances of the corresponding accounts opened at the Treasury.

The preparation and the reporting of the execution account are made according to the approved budgetary structure.  The budgetary execution account represents the achievement grade of the institution proposal. The general equation is:

EXPENDITURES  ± OUTCOME = REVENUES

When the expenditures equal the revenues, the outcome is nil, so, the execution was balanced and the allocated budgetary credits were not exceeded, in the case in which the expenditure exceeds the revenue there is a deficit and when the revenue exceeds the expenditure there is a surplus.

The outcome of the exercise is included both in the balance sheet and in the budgetary execution account; the difference is that the execution account explains the outcome, for this reason the execution account appears as an annex to the balance sheet.

An important objective of the balance sheet analysis is the maintaining of the proposed destination as well as the payments encompassed in the annual credit limits opened for current expenditures and capital expenditures.

 

Summary

The introduction of accrual accounting and budgeting in the whole Romanian public accounting sector is not complete yet, the technical change was achieved but it is too early to say whether or not the change is successful. The transition to the accrual accounting and budgeting takes time.

The focus of financial control in the Romanian system is to ensure that cash expended in the period (or income collected) is neither greater nor less than forecasts in the budget. The emphasis is therefore about “inputs” into the activity rather than what the activity achieved (outputs). The main forms of Romanian public institutions management control is on “time”, e.g. when an invoice is to be paid, and it is possible for the manager to manipulate timing in order to ensure that budgets are met.

In Romanian public institutions the purpose of the budgetary appropriations registration is to provide information at every stage and for every subdivision of the approved budget concerning the consumed budgetary credits. For this reason, at every level, credit holders who are responsible for the accountancy organization and the book-keeping are designated according to the legal stipulations.

The commitments and payments are controlled on the basis of the authorisation of the Parliament. The cash deficit is directly linked to the appropriations. For this reason there is set a budgetary execution system through a budgetary accounting method which records the budgetary expenditures with a single-entry book-keeping procedure through some accounts which are not included in the balance-sheet, like “Budgetary Approved Credits”, “Budgetary Commitments”. These accounts record on their debit the opening balance at the beginning of the year, and every entry during the year, of the credits and commitments and on their credit the exits during the year and the close at the end of the year.

The Romanian budgetary system can be exercised at a detailed level registering and controlling the income and expenditure without providing managerial information.

Therefore, in order to improve its efficiency, the Romanian public institutions system should improve its budgeting and accounting system through accruals, taking also into account that:

1. - Accrual accounting and budgeting must be integrated

Accrual accounting and budgeting should go together. The same basis of accounting and budgeting would provide a better management and financial control because the information about previous years’ activities remains, for most operations, the basis of future budgets.

2. – The tendency of developing entrepreneurial activities

The limited resources allocated to public institutions lead to institution reorganisation, stimulating more and more the public entities to an entrepreneurial activity. The whole public sector is affected by a structure change, adopting the private sector techniques.

3. – Outputs over inputs, performance over control

The methods of control and the distribution of responsibility should suffer significant changes in order to achieve the full benefits of accrual accounting and budgeting. The tendency is to control outputs rather than inputs providing managers with the opportunity to manage outputs having a relative freedom over inputs. In turn, managers should exercise a more rigorous discipline regarding the performance.

4. - The training of managers and responsible officials

In order to implement the accrual accounting and budgeting, all the people implicated in the transitional process starting with the politicians, managers and responsible officials should understand the effective use of the system and accept the rules because of the complexity of the system. The cultural change requires investment in the training of managers and even the employees.

5. – The reorganisation of the arrangements

In order to realise the benefits of accrual accounting and budgeting there are required some difficult decisions regarding closing or reorganising operations, removing staff, introducing competitive and regulatory arrangements.

6. – Information technology capability

The implementation of accrual accounting and budgeting requires a more complex information technology (IT) system than those associated with the cash system in order to provide the information necessary for an efficient management of operations.

Accrual accounting and budgeting is not the solution of the problems of the cash system, nor accrual accounting should be supported just because it is the current international fashion (OECD, 2002, p. 146).

The introduction of resource accounting and budgeting in Romania is a part of                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          a long process of reform. All the signs are that in Romania the reform will be successful because of the structures that will overcome all the difficulties.

 

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