EFFECT OF ACCRUAL BASIS OF IPSAS ADOPTION ON FINANCIAL REPORTING QUALITY OF THE FEDERAL MINISTRY OF DEFENSE

Abstract

This study examined the effect of accrual basis of international public sector accounting standard (IPSAS) adoption on the financial reporting quality of the federal ministry of defense in Nigeria. The objectives of this study are determining the impact of adoption of IPSAS on the Level of Accountability and Transparency in the Public Sector of Nigeria and to ascertain the contribution of adoption of IPSAS in enhancing comparability and international best practices. Primary source of data was employed to generate the data of interest. The statistical tools employed were the Chi-square test, simple percentage and descriptive analysis. From the findings of the study, it was observed that adoption of IPSAS is expected to increase the level of accountability and transparency in public sector of Nigeria. It was found that the adoption of IPSAS will enhance comparability and international best practices.

CHAPTER ONE

INTRODUCTION

• Background of the study

Accounting for governments and government agencies has been always known on a cash basis. It was not until the early 1980‘s when governments started to move to accounting principles that are similar to the ones used in the private sector. This movement is a part of New Public Management (NPM) where accounting holds a crucial role as an instrument to support public sectors in order to improve their performances (Hood, 1991, 1995). The movement to accrual accounting was pioneered by developed countries namely Australia and New Zealand. The migration to full accrual accounting by these countries is a part of the public sector reform brought by the NPM ideology (Hood, 1995). Following the steps of developed countries, developing and emerging countries are also in the process of either adopting, already implemented, or still constructing their own accrual-based governmental accounting standards. However, while changes were brought by internal pressures in developed countries, in developing countries, changes were induced by external factors such as the role of the International Monetary Fund, the World Bank and the Asian Development Bank (James and Manning, 1996). Moreover, these multinational organizations worked conjointly with international accountancy professional bodies such as International Federation of Accountants (IFAC) to facilitate changes in the system of government accounting in developing countries (Hepworth, 2003; Sutcliffe, 2003).

The need for the development of unified accounting standards has been the primary driver of international public sector Accounting Standards for public sector financial reporting. While the commercial entities across the world are moving toward international financial Reporting standards (IFRS), governments are harmonizing with International Public sector Accounting Standards (IPSAS). The international Public sector Accounting Standards govern the accounting by public sector entities, with the exception of Government Business Enterprises (GBE), noted that International Public Sector Accounting Standards (IPSAS) is at present the focal point of global revolution in government accounting in response to calls for greater government financial accountability and transparency. The Public sector comprises entities or organizations that implement public policy through the provision of services and the redistribution of income and wealth, with both activities supported mainly by compulsory tax or levies on other sectors. This comprises governments and all publicly owned, controlled and or publicly funded agencies, enterprises, and other entities of government that deliver public programs, goods, or services. Public sector accounting is a system or process which gathers, records, classifies and summarizes as reports the financial events existing in the public or government sector as financial statements and interprets as required by accountability and financial transparency to provide information to information users associated to public institutions. It is interested in the receipts, custody, disbursement and rendering of stewardship of public funds entrusted. Nigeria, a leading African nation with the population of over 150 million people and a foremost Organization of the Petroleum Exporting Countries (OPEC) member, with a public sector dominated economy, has identified the need to consider the value proposition of the IPSAS and implement same in order to remain relevant. However, government interventions following the global financial crisis in the private sector have increased many governments’ exposures and debt levels. Hence, decision-making is getting harder, especially if the view of what is “sustainable” is difficult to see. It is not out of context to argue the knowledge that weak public sector accounting, auditing and financial management can, and likely will, lead to economic crises. However, there is nothing new in these statements, especially to those that work in the private sector both in most developing nations. The focus on the private sector is huge when failure occurs and therefore accounting, audit and reporting standards are set at a high level and rigorously enforced. One reason that makes high quality public sector reporting necessary in many countries is that Government issued financial instruments are very important part of their financial markets. There exist various crises in many developing countries especially in Africa; with government debt levels sitting at very precarious levels; and it is no news that government finances need to be managed very carefully in any nation. Achieving this requires high quality information on which to base decisions. Timely, clear and open annual financial statements play a significant role in the accountability of governments to their citizens and their elected representatives. These financial statements are prepared on a cash basis or some variation of an accrual basis of accounting. However, most of these financial statements are not prepared on a consistent or comparable basis in developing countries. The benefits of achieving consistent and comparable financial information across jurisdictions are very important and a set of International Public Sector Accounting Standards (IPSAS) have been established by the IPSAS Board to assist in that endeavor.

Accrual accounting is a basis of accounting where revenue is recorded when earned and expenditures recorded when incurred. This basis of accounting is practiced in the private sector but introduction of the New Public Management (NPM) initiative has made it part of financial management improvement program in the public sector (Shaw, 1999). New Public Management (NPM) is the application of private sector management approaches and techniques to public sector management. In recent years, some governments all over the world embraced the NPM and engaged in various reforms including financial management reforms which are gradually and steadily shifting them from traditional cash basis accounting practice to accrual accounting basis (Iyika, 2011). These financial reforms were triggered off by the desire to eliminate waste, inefficiency, poor service delivery, overspending, lack of accountability, transparency and improve quality of service delivery in the public service. The New Public Management (NPM) initiative was founded in the UK in 1979 and by the year 1991, it become a major reform strategy which was adopted by many countries all around the world and practiced by most member states of the Organization for Economic Cooperation and Development (OECD) (Shaw, 1999). The aim of the New Public Management initiative is to measure efficiency, and to facilitate competition with the private sector (Wynne, 20I1). The initiative is supported by the issuance of IPSAS accrual accounting standards by the IPSASB.

• STATEMENT OF THE PROBLEM

The decision to move to accrual accounting might seem without problem since accrual accounting constitutes as the proven method in the private sector. However, the different nature of public sector compared to private sector creates certain difficulties and limitations to which extent should these changes be implemented. The concern of generalizing accounting standards across sectors has always been a long-debated issue since the early NPM movement until recently. It is in view of this that the researcher intends to investigate the effect of accrual Basis of IPSAS adoption on financial reporting quality of the federal ministry of defense.

• OBJECTIVE OF THE STUDY

The main objective of this study is to ascertain the effect of accrual basis of IPSAS adoption on financial reporting quality of the federal ministry of defense. But to aid the completion of the study the researcher intends to achieve the following sub-objectives;

1. To investigate the effect of accrual basis on IPSAS adoption on financial reporting
2. To assess the role of government on the adoption and implementation of IPSAS in public sector

• To assess the impact of accrual basis of accounting on the credibility and quality of the financial statement of the federal ministry of defense.

1. To proffer possible solution to the challenges of IPSAS adoption in public sectors
   • RESEARCH QUESTION

For the successful completion of the study, the following research question were formulated by the researcher;

1. Is the any effect of IPSAS adoption on the quality of financial reporting?

1. Does government plays any role in the adoption and implementation of IPSAS in the federal ministry of defense?

• Does accrual basis of accounting have any effect on the credibility and quality of financial reporting in the federal ministry of defense?

1. Do professional bodies play any role in the adoption and implementation of IPSAS in the public sector?

• RESEARCH HYPOTHESES

To aid the completion of the study, the following hypotheses were formulated by the researcher;

H₀: accrual basis of IPSAS adoption on financial reporting does not have any significant effect on the quality of the financial statement.

H₁: accrual basis of IPSAS adoption on financial reporting does have a significant effect on the quality of the financial statement.

H₀²: government does not play any significant role in the adoption and implementation of IPSAS in federal ministry of defense

H₂: government does play a significant role in the adoption and implementation of IPSAS in the federal ministry of defense.

• SIGNIFICANCE OF THE STUDY

It is believed that at the completion of the study, it is believed that the finding of the study will be of great importance to the finance department of the federal ministry of defense, as the findings of the study will help improved on the quality of financial reporting in the ministry; the study will also be of great importance to the accounting profession as the study seek to enumerate the benefit of IPSAS adoption in the financial reporting of the public sector. The study will also be of great importance to researchers who intend to embark on a study in a similar topic as the study will serve as a reference point. Finally the study will be of great importance to lecturers, teachers, student and the general public as the findings will add to the pool of knowledge available.

• SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers the effect of accrual basis of IPSAS adoption on financial reporting quality of the federal ministry of defense. The researcher encounters some limitation in the course of the study;

1. a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
2. b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
3. c) Organizational privacy: Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities.

1.8 DEFINITION OF TERMS

IPSAS

International Public Sector Accounting Standards (IPSAS) are a set of accounting standards issued by the IPSAS Board for use by public sector entities around the world in the preparation of financial statements.

IFRS

International Financial Reporting Standards (IFRS) is a set of accounting standards developed by an independent, not-for-profit organization called the International Accounting Standards Board (IASB). A single standard will also provide investors and auditors with a cohesive view of finances

Accrual basis

Under the accrual basis of accounting, expenses are matched with the related revenues and/or are reported when the expense occurs, not when the cash is paid. The result of accrual accounting is an income statement that better measures the profitability of a company during a specific time period.

Cash basis

Cash basis refers to a major accounting method that recognizes revenues and expenses at the time physical cash is actually received or paid out.

Government accounting

Various governmental accounting systems are used by various public sector entities. In the United States, for instance, there are two levels of government which follow different accounting standards set forth by independent, private sector board

1.8 ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study.

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