March 9, 2009Doug Hadden
This is section 2.2 of a series of blog entries creating a Government IFMIS Technology Evaluation Guide. This includes information to assist in evaluating IFMIS options and the technology requirements for FreeBalance IFMIS implementations. These series will be combined with feedback to produce a comprehensive Technology Evaluation Guide to be published on our web site.
Note: this has been updated to add comments about IPSAS and the COA
It starts with the Chart of Accounts. Fiscal discipline, controls, reporting and performance are enabled through the proper creation and modernization of a government Chart of Accounts (COA). The COA describes government objectives. It can provide effective decision-making.
Technologists understand the the COA represents the metadata of government financial management. The COA provides a logical hierarchy of fiscal management. The government COA tends to be more complex than in the private sector because it can include all government entities and a broader set of considerations.
Elements of a COA
- The Chart of Accounts can include many important elements such as:
- Object, Accounting or Transaction Code that corresponds to standard accounting practice including codes for assets, liabilities, revenue and expenses.
- Organization Code that describes the organization hierarchy including ministries, agencies and divisions.
- Responsibility Centre that describes approval responsibilities. Sometimes the approval structure differs from the organizational hierarchy.
- Location Code that describes the physical location of the organizational unit.
- Tier that describes the organizational tier in unitary governments such as provinces or municipality.
- Fund Code that describes the source types of revenue. Many emerging countries have fund codes for donors. Most countries keep track of different revenue sources and treat expenditures differently based on revenue types.
- Economic Code that describes the purpose of any expenditure or program. For example, other ministries, other than the Ministry of Education, expend money for educational purposes.
- Programs that describes government programs that could be shared across multiple ministries. Programs often last more than one year and represents an important commitment on behalf of the government.
- Projects that describe important government projects.
- Activities that describe the functions being performed for any expenditure.
- Objectives that describes the objective of any expenditure.
- Performance that describes the measurement for any initiative.
- Support of International reporting standards such as Government Financial Statistics (GFS).
A Most Beautiful Chart of Accounts
The Accountant General of Sierra Leone,
- Identifying shared information in the COA to reduce the number of characters. For example, the “project” element could be part of the “program” element. The COA in Sierra Leone uses 27 characters yet provides full GFS reporting.
- Simple is always better. Government should err on making the COA as small and simple as possible. This reduces data entry errors.
- Inferring important reporting information. Users should not be expected to understand Government Financial Statistics. GFS can be inferred from normal accounting codes.
- Valid coding combinations. Programs and projects often fall under one or two ministries. The COA should be designed to prevent incorrect data entry in these situations.
- Adapt over time. The COA should be designed for current conditions. Adding complexity to the COA can result in errors. It is best to match updating the COA with capacity building.
- Simplify double-entry bookkeeping. Many data entry personnel are not fully familiar with debits and credits. The context of the data entry can define the debits and credits for users.
Performance Management Linkage
Government Performance Management is a critical subject in Public Financial Management. Governments want to improve development results. Sometimes these improvements are tied to international objectives like the Millennium Challenge. Performance characteristics need to be integrated within the Chart of Accounts to facilitate performance reporting and analysis.
The beautiful Sierra Leone Program segment is an excellent example of organizing objectives with other critical elements. The characteristics of the segment include:
- Objectives managed through pillars, and objectives linked to project components.
- Themes, priorities and Millennium Development Goals linked to objectives reducing the data entry complexity.
- Project hierarchy built on a number of tiers down to the activity level.
- GFS inferred from the project elements.
Other COA Considerations
Government organizations update the COA to meet new objectives. This may include adding of an additional segment or revising the economic codes. Governments are constantly modernizing the financial management system.
Details within the COA that are important to a government entity may not be material to the Ministry of Finance. For example, details coming from local governments may not be important. Country-wide COAs where every government entity shares the same complex coding structure can add complexity. Summarizing unimportant details and inferring parts of the COA can simplify the consolidation of financial information.
Implication of IPSAS
The Institute for International Public Sector Accounting Standards (IPSAS) published 26 standards. . This has many implications for public financial management in general. IPSAS provides guidance on COA objectives, reporting needs and supporting accrual accounting including creating classifications for:
- Calculating financial position and cash flow to enable the creation of financial statements
- Organization units or segments that can relate to geographic or service entity to enable comprehensive reporting for any organizational unit
- Depreciation and amortization
- Revenue and expense types to classify revenue streams and expense types
- Salary and benefits recognition
- Finance and borrowing costs
- Any long term contractual agreement like leases
- Contingent liabilities and assets
- Statistical reporting
- Inventories including costs and changing in value including write-downs
- Foreign exchange including accounting for realized and unrealized foreign exchange gains and losses
The Sierra Leone COA is attractive. There is no perfect COA for every government. It depends on the country context – particularly government objectives and human capacity.
There is important internal political capital that can be generated from an effective design of the Chart of Accounts. One Latin American civil servant complained that the President of his country could not tell people how much money had been spent on education in a province. That is because there was no element that covered the “economic purpose” of expenditures.