The need for change in accounting

In the present day countries either follow cash based accounting, accrual based accounting or are in a transition towards accrual based accounting.

Map of Countries Accounting Bases for Annual Financial Statements in 2015 1

Cash based accounting suffers from significant shortcomings and is also gamed by various entities. The method solely focuses on cash based flows as opposed to resource flows which must be considered for a complete picture. It thus does not measure impact of current consumption of stock of assets held by the government. The method also yields limited information regarding transactions that would result in cash flows outside the reporting period. A common way to game the method is to defer cash payments or bring forward cash receipts till the reporting period, to present a rosy picture2. The method however is simple to understand, collate and implement at a large scale at a lower cost.

The accrual based accounting method provides a comprehensive view of the whole apparatus in consideration. It will provide understanding of economic flows, recording of all assets and liabilities and enhanced monitoring of all liabilities and contingent liabilities3. It allows for measuring the full cost of implementing programs and provides a complete understanding of the financial position by accounting for all resources and obligations. The first step in solving the problem of inefficient governments is to provide the true cost of the program implementation and other obligations. The method will also yield various untapped resources which can be brought to bear by the government. The cons of this method are the high cost of implementation and requirement of continuous communication between all branches of the government.

With the advent of Big data and AI the problem of high implementation and coordination costs of accrual based accounting can be tackled. Big data and use of AI can accordingly provide insights into improving the efficiency of all government programs and expenditures. We will discuss in the next weekly how Big data and AI can help the public sector improve.

1 https://www.imf.org/external/pubs/ft/tnm/2016/tnm1606.pdf
2 https://www.imf.org/external/pubs/ft/wp/2002/wp02240.pdf
3 https://www.imf.org/external/pubs/ft/tnm/2016/tnm1606.pdf

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