FINANCIAL REPORTING & ANALYSIS

THE ACCOUNTING SYSTEM-----An accounting system consists of the personnel, procedures, devices, and records used by an organization to develop accounting information and to communicate this information to decision makers. The design and capabilities of the accounting systems vary greatly. The basic purpose of the accounting system remains the same i.e. to meet the internal and external user’s needs for accounting information as efficiently as possible.


FUNCTIONS OF ACCOUNTING SYSTEM-----The Primary functions of an Accounting System are:
to make financial records;
to reveal the Financial conditions of the organization in all its branches or purposes at any time;
to protect those handling funds;
to facilitate necessary adjustments in rate of expenditure;
to give information to those in responsible positions on the basis of which plans for future financial and operating programs can rest; and
to aid in the making of an audit.


OBJECTIVES OF ACCOUNTING SYSTEM: Accuracy: the information in the accounts and the supporting subsidiary records shall be accurate, representing the actual substance of past events, without undue errors or omission. This shall include correct and consistent classification of transactions and the recognition of revenues and expenditures classification of transactions and the recognition of revenues and expenditures in the correct time period.
Completeness: the information in the accounts and the supporting subsidiary records shall be a complete representation of all past transactions that have occurred during the reporting period.
Existence/ Validity: all transactions accounted for must be genuine transactions.
Economy: the accounting system shall include controls to ensure the prudent allocation of government resources.
Effectiveness: the accounting system shall include controls to ensure the effective performance of government responsibilities.
Efficiency: in practice there will often be a trade off between economy and effectiveness. The accounting system should seek to operate as efficiently as possible by optimizing the relationship between these two variables.
Minimize risk of fraud and corruption: the accounting system shall include controls to minimize the risk of fraud and corruption.



PRIVATE versus PUBLIC SECTOR ACCOUNTING ENVIRONMENTS

Private sector accounting records are maintained to assess levels of profitability.


Public sector accounting records are maintained to ensure that public servants (politicians, bureaucrats, officials) have been properly accountable of the funds they have used. Greater emphasis on accountability and sewardship in public sector.


PRIVATE VS. PUBLIC ACCOUNTING

Private sector accounting based on matching revenue and expense in order to measure profit.
This leads to using accrual accounting which recognizes both revenues and expenses when they occur: bottom line is profitability, not cash position.
What accruals presents is an overall assessment of the financial condition of the organization.

Public sector focus on accountability for funds at hand has led to using a cash basis as it is more easily understood and more sensitive to annual budgetary approvals of government entity.
Significant gaps in the cash approach have created a growing trend of public sector entities to adopt the accrual approach to both accounting and budgeting.


In Accrual Accounting…
Capital assets are reported on the financial statements
Non cash transactions – depreciation, amortization, provisions, accruals, receivables are recorded Recognition of (retirement and pension benefits, accumulated leave) employee benefits in the financial statements
Financial and reporting practices are similar to
private sector

The adoption of accrual basis represents an effort to bring into both accounting and budgeting a totally inclusive approach to identifying costs and revenues, thereby providing a fuller picture Accrual budgeting represents a major challenge to the concept of annualized budgets approved by legislatures, although it in no way reduces the authority of those legislatures Accrual accounting forces a better integration of finance, operations and strategic direction because of its inclusive nature.

PAKISTAN- THE ACCOUNTING FRAMEWORK


a)CONSTITUTIONAL REQUIREMENTS

FINANCIAL PROCEDURES (Federal):

ARTICLE REFERENCES

78. Federal Consolidated Fund and Public Account;
79. Custody, etc. of Federal Consolidated Fund and Public A/C;
80. Annual Budget Statement;
81. Expenditure charged upon Federal Consolidated Fund;
82. Procedure relating to Annual Budget Statement;
83. Authentication of schedule of authorized expenditure;
84. Supplementary and excess grants;
85. Votes on account;
86. Power to authorize expenditure when Assembly stands dissolved;
88. Finance Committees.




FINANCIAL PROCEDURES (Provincial):

ARTICLE REFERENCES

118. Provincial Consolidated Fund and Public Account;
119. Custody, etc. of Provincial Consolidated Fund and Public A/C;
120. Annual Budget Statement;
121. Expenditure charged upon Federal Consolidated Fund;
122. Procedure relating to Annual Budget Statement;
123. Authentication of schedule of authorized expenditure;
124. Supplementary and excess grants;
125. Votes on account;
126. Power to authorize expenditure when Assembly stands dissolved;


Miscellaneous Financial Provisions:

ARTICLE REFERENCES

160. National Finance Commission;
164. Grants out of Consolidated Fund;
166. Borrowing by Federal Government;
167. Borrowing by Provincial Government;
Audit and Accounts:
168. Auditor-General of Pakistan;
169. Functions and powers of Auditor-General;
170. Power of Auditor-General to give directions as to accounts;
171. Reports of Auditor-General;
278. Accounts not audited before commencing day.



Federal Consolidated Fund

All revenues received and all loans raised by the Federal Government in repayment of any loan, shall form part of a consolidated fund to be know as the Federal Consolidated Fund.

Consolidated Fund represents those moneys for which the Government is at liberty to appropriate for the operations of Government.
(Article 78 of the Constitution)


Public Account 
All other moneys received by or on behalf of Federal Government or received by or deposited with the Supreme Court or any other Court established under the authority of the Federation should be credited into the Public Account of the Federation.

The Public Account consists of those moneys received by the Government for which it has a fiduciary duty, but is not at liberty to appropriate for the general services of Government unless provided for under an Act of Parliament or Presidential order.
(Article 78 of the Constitution)

Annual Budget Statement

The Federal Government shall , in respect of every financial year, cause to be laid before the National Assembly a statement of the estimated receipts and expenditure of the Federal Government for that year, in this part refereed to as the annual Budget Statement
The Annual Budget Statement shall show separately_
the sums required to meet expenditure described by the constitution as expenditure charged upon the Federal Consolidated Fund; and
the sums required to meet the other expenditure proposed to be made from the Federal Consolidated Fund; and shall distinguish expenditure on revenue account from other expenditure.
(Article (80 of the Constitution)

ESSENTIAL CONDITIONS GOVERNING EXPENDITURE FROM PUBLIC FUNDS:
Schedule of authorized expenditure:
The Prime Minister shall authenticate by his signature a schedule specifying:
the grants made or deemed to have been made by the National Assembly under Article 82; and
the several sums required to meet the expenditure charged upon the Federal Consolidated Fund but not exceeding, in the case of any sum, the sum shown in the statement previously laid before the National Assembly.

As a general rule no authority may incur any expenditure or enter into any liability involving expenditure from public funds until the expenditure has been sanctioned by general or special orders of the President or by an authority to which power has been duly delegated in this behalf and the expenditure has been provided for in the authorized grants and appropriations for the year.


DISTRICT GOVERNMENT ACCOUNTS

Under Section 107(1) of the Local Government Ordinance, 2001, every District Government, Tehsil Municipal Administration and Town Municipal Administration shall establish the following:
1. Local Fund for every District Government, Tehsil Municipal Administration, Town Municipal Administration, and Union Administration;

2. A District provincial Account for every District Government, a Tehsil Provincial Account for every Tehsil Municipal Administration, and a Town Provincial Account for every Town Municipal Administration.


ACCOUNTABILITY REQUIREMENTS



PUBLIC ACCOUNTS COMMITTEE

Rule 172 of the Rules of Procedure and conduct of Business in National Assembly, 1973 lays down the function of the Standing Committee of Public Accounts.


FUNCTIONS OF PAC:
The Committee shall examine the accounts showing the appropriation of sums granted by the assembly for the expenditure of the government and the report of the Auditor General of Pakistan and such other matters as the minister for finance may refer to it.
In scrutinizing the appropriation accounts of the government and the reports of the Auditor General of Pakistan thereon, it shall be duty of the committee to satisfy itself,
(a) that the moneys shown in the accounts as having been disbursed were legally available for, and applicable to, the service or purpose to which they have applied or charged.
(b) that the expenditure conforms to the authority which governs it; and
(c) that every re-appropriation has been made in accordance with the provisions made in this behalf under rules framed by the Ministry of Finance.
It shall also be the duty of the committee:
1. to examine the statements of accounts showing the income and expenditure of state corporations, trading and manufacturing schemes, concerns and projects together with the balance sheets and statements of profits and loss accounts which the President may have required to be prepared or are prepared under the provisions of the statutory rules regulating the financing of a particular corporation, trading or manufacturing scheme or concern or project and the report of the Auditor General of Pakistan thereon;

2. to examine the statement of accounts showing the income and expenditure of autonomous and semi-autonomous bodies, the audit of which may be conducted by the Auditor General of Pakistan either under the directions of the President or under an act of the parliament; and
3. to consider the report of the Auditor General of Pakistan in cases where the President may have required him to conduct the audit of any receipts or to examine the accounts of stores and stocks.
4.If any money has been spent on any service during a financial year in excess of the amount granted by the assembly for the purpose, the Committee shall examine with reference to the facts of each case the circumstances leading to such an excess and make such recommendation as it may deem fit.