2 PUBLIC SECTOR ACCOUNTING

A. Institutional Framework for Public Sector Accounting

7. The institutional framework for public sector accounting should include adherence to international
accounting standards and use of qualified accounting staff to provide timely, relevant, and reliable financial
information that is needed to support all fiscal and budget management, decision-making, and reporting
processes. The diagnostic questionnaires, which were used in this assessment, have collected information on
the current arrangements and the apparent gaps in Pakistan for accounting laws and regulations; education
and training of public sector accountants; application of a code of conduct; and numbers and characteristics of
public sector accountants.

(1) Accounting Laws and Regulations

8. The Constitution of Pakistan delineates the authority of the Auditor General of Pakistan
for prescribing the form, principles, and methods of accounts of the Federation and of the
Provinces with the approval of the President. Under these conferred powers, the Auditor General has
endorsed the Accounts Codes (Volume I to IV) and a New Accounting Model (NAM) for implementation
10
when practicable. The PIFRA project is computerizing the accounting functions to enable the New
Accounting Model to be implemented. Accounting functions are the responsibility of the Controller General
of Accounts.

9. A committee should be setup to review and steer the process of implementation of IPSAS
on a progressive basis. The committee should have oversight of the financial reporting specialists in
11
steering the adoption of IPSAS towards the accrual basis of accounting. The NAM development in 1998
used the IFAC-issued Guidelines for Governmental Financial Reporting and best practice from other
12
countries. There is now an opportunity to apply the IPSAS, that have been developed since 1998, in the
10
The New Accounting Model is a set of 7 books: Accounting Principles Manual, Accounting Policies and Procedures Manual, Chart
of Accounts, Accounting Guidelines, Accounting Procedures for Self-Accounting Entities, Book of Forms, and Financial Reporting
Manual.
11
Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities, International Federation of
Accountants Public Sector Committee Study 14, December 2003.
12
The New Accounting Model sets the national standards of accounting and financial reporting. Pricewaterhouse Coopers analyzed
differences between IPSAS and the New Accounting Model in 2004. The New Accounting Model is being implemented using the
cash basis of accounting and will gradually move towards the accrual basis. Formal adoption of IPSAS would enable the
customization of the NAM financial reporting formats in compliance with relevant IPSAS requirements.

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New Accounting Model and review the accounting model during its implementation. The Auditor General
of Pakistan and Controller General of Accounts have already been engaged in deliberations to move towards
adopting IPSAS. The adoption of IPSAS II cash flow formats is a step in this direction.13 The NAM Financial
14
Reporting Manual provides for such reporting, which generally complies with Cash Basis IPSAS. This
reporting also includes the optional disclosure requirements that are required to accord with IPSAS, such as
third party payments and receipts that need to be identified and shown in a separate column. State-owned
enterprise results should be consolidated into the annual accounts. Annex D discusses the benefits of accrual
basis of reporting.

10. The PIFRA project is supporting the implementation of the New Accounting Model.
Institutional and individual capacities in both the public sector financial management agencies, as well as the
executive/service delivery formations are being developed through implementation of a comprehensive
capacity development program mainly sponsored by PIFRA. The PIFRA project is supporting the
implementation of the New Accounting Model through the implementation of computer accounting
hardware and software application to all district accounts offices.

(2) Education and Training

11. The Audit and Accounts Training Institute (AATI) is a countrywide network providing
professional training in public financial management to both accounting and executive arms of the
government. The AATI conducts long-term courses that lead to the Pakistan Institute of Public Finance
15
Accountants (PIPFA) certification. The AATI also conducts short courses for professional development.

12. The AATI has included the use of IPSAS in its course work. Through the technical assistance
provided under the PIFRA, AATI has revitalized its syllabi and learning methodologies. It is now geared to
teach areas of practical application, including IPSAS. The AATI has developed a comprehensive annual
training program and has set targets for the first year.

13. Offering international education standards will help to develop more professional audit
and accounting staff. The strategy is to offer learning opportunities to develop qualifications that are
compliant with the IFAC International Education Standards (IES) and acceptable to other professional
accountancy bodies. The AATI has been cooperating with professional accountancy bodies to seek

13
Notification of financial reporting policy, dated June 29, 2005, adopts Cash Basis IPSAS with a trial implementation of the policy for
FY2004-05 and effective date in FY2005-06.
14
The annual financial statements consists of the following: (a) statement of assets and liabilities, (b) statement of revenues and
expenditures (by function and by object), (c) statement of cash flows, (d) notes to financial statements, (e) summary of
appropriation accounts by grants and appropriation, (f) appropriation accounts by economic function and department/division (g)
appropriation accounts by grant, and (h) analysis of revenue by division/department.
15
The PIPFA is a body of professional accountants and an associate member of the International Federation of Accountants. It is a
joint initiative of the Auditor General of Pakistan, the Institute of Chartered Accountants of Pakistan , and the Institute of Cost and
Management Accountants of Pakistan.

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acceptance of AATI qualifications that would meet the qualifications for professional accreditation of other
professional bodies — the Association of Chartered Certified Accountants (ACCA), UK; Institute of
Chartered Accountants of Pakistan (ICAP); and Institute of Cost and Management Accountants of Pakistan
(ICAMP).

14. The selection and training of government accountants differs from one departmental
cadre to another, and falls short in ensuring the qualifications essential for providing competent
professional accounting service in the public sector. The bachelor of commerce/accounting is the
minimum academic requirements for an individual seeking to work in the departmental cadre of public sector
accountants. However, the inter-departmental cadre civil servants do not require such qualifications; they
are recruited as generalists through the Federal Public Service Commission. These inter-departmental
officers are given nine-months of probationary training at the AATI and are encouraged to take further
specialist training. Nevertheless, this approach continues to fail to provide for competent professional
accounting service, equivalent to that provided by the private sector with its ICAP requirements.

(3) Code of Conduct

15. A code of ethics should be included in staff contracts. The INTOSAI Code of Ethics has been
adopted by the Auditor General of Pakistan and should be followed by staff doing audits and maintaining
16
accounts. The same has been included in the AATI syllabus. As such, the code of ethics is part of the overall
guidance provided by the head of an organization to each staff member. Non-compliance of the code could
lead to actions in accordance with Efficiency and Discipline Rules of the Government of Pakistan. The code of
ethics should be made a part of staff contracts upon acceptance of a job, or separately signed by the
employees as a legally enforceable document.

(4) Public Sector Accountant Arrangements

16. Duality of control over accounting staff should be resolved. With the exception of a few
departmentalized accounts, the Government follows a regime of centralized accounting offices that keep
accounts of all departments in their regional jurisdiction. Out of 10,000 staff posted in the accounts offices,
921 staff members are employed by the federal government. The remaining staff comes mainly from the
treasury services under the provincial finance departments. These provincial offices serve under the
technical supervision of the Accountant General who is responsible to the Comptroller of General Accounts;
but treasury staff is answerable to the Secretary of Finance of the relevant province. This duality of control
over the accounting staff remains a problem of administration and authority and needs to be resolved.

16
Some adaptations and deletions were made by a committee constituted by the Auditor General of Pakistan in connection with
issuing the INTOSAI Code of Ethics and Auditing Standards. Only one paragraph relating to political neutrality (paragraph 21) was
deleted from the Code of Ethics and minor changes of nomenclature were made.

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17. Budget officers (chief financial officer) should be adequately qualified to maintain internal
financial control. The budget officers should have the qualifications to undertake responsibility for
maintaining systems of internal financial controls that manage risks, and for preparing regular financial
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management reports for the principal accounting officer. The principal accounting officer is generally
supported by a budget officer from within that line agency. These agency staff members require substantial
training to equip them with the necessary tools of financial management to effectively assist the principal
accounting officers. New positions of Chief Finance and Accounts Officers (CFAO) have been introduced
under the system of financial control and budgeting introduced in September 2006. The system specifies that
the CFAO shall be a well-trained and experienced officer. It is important that the Establishment Division
which is to arrange the postings of these officers, ensures that this requirement reflects the expertise needed
for the function.

18. Internal audit units should be established as per staffing and operational planning
developed under PIFRA. Under PIFRA, a comprehensive plan was developed to initiate the internal audit
function in government agencies for which a center of excellence is envisaged within the office of the
Comptroller of General Accounts. Chief audit officers have been posted in 15 federal ministries with
responsibilities for internal audit, reconciliation of accounts, coordination with departmental and
parliamentary Public Accounts Committees, and the financial propriety of expenditure and receipts. More
funding should be arranged to enable an effective internal audit function as per the staffing and operational
plans developed under PIFRA.

B. Accounting Standards as Practiced

19. The diagnostic questionnaires collected information on the current arrangements and the apparent
gaps in Pakistan for setting public sector accounting standards, and for presenting financial reports.

(1) Setting Public Sector Accounting Standards

20. In the existing format of the finance and appropriation accounts, there are considerable
departures from Cash Basis IPSAS. Gradually the budget sector is being converted to the NAM Chart of
Accounts. Conversion to the NAM reporting framework is dependent on the roll-out of the PIFRA
accounting systems and the implementation of all the accounting functions. Pensions, general provident fund,
and asset accounting are examples of functional modules yet to be implemented. Government accounts are
presented in the old formats of the finance and appropriation accounts.

17
The principal accounting officer is usually the secretary of a ministry or head of the line department.

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(2) Presenting Financial Reports

21. Use of the cash basis of financial reporting provides a necessary scope to the
implementation of the New Accounting Model. One particularly useful feature of the Cash Basis IPSAS
format is the disclosure of third party payments in separate columns on the face of the statement of cash
receipts and payments. These disclosures enable users to identify the total amount of payments made; the
purposes for which they were made; and whether, for example, the payments were made from amounts
allocated or appropriated from general revenue or from special purpose funds or other sources. A case in
point within the government sector is the payment of the electricity utility, WAPDA, by the central
government, which then deducts these payments at source from its transfers to provincial governments.
Provincial governments in turn deduct at source from transfers to local governments. As provincial and local
governments are not well-notified of these deductions (as would be required in meeting Cash Basis IPSAS),
they become a source of confusion and inefficiency. The government entities are unaware of their power
costs and hence less likely to seek ways to be more economical. Also, as bills are already “paid,” there is less
incentive for the utility to ensure that its records reconcile with customers' records.

22. Table 1 identifies the current position and steps required if the Cash Basis IPSAS were to be adopted.

Table 1. Required Steps for Adopting Cash Basis IPSAS

Activity required to adopt Cash Basis
Requirements Current deficiencies
IPSAS
F i n a n c i a l s t a t e m e n t s The Pakistan reporting structure A statement of cash receipt and payment
presented in IPSAS focuses on consolidated fund and as per the Cash Basis IPSAS can be
public accounts and the Cash Basis prepared using existing information from
IPSAS for financial statements is not the accounting records. Also, for each
followed. entity (i.e., ministry and department), an
additional statement in accord with Cash
Basis IPSAS can be prepared. This may
require some restructuring of the NAM
computerized reporting formats.18
Information required in All this information is available on the This work requires restructuring of the
accordance with IPSAS in the government reporting system, but is reporting formats and rectification of
statement of cash receipts in formats inconsistent with IPSAS. errors in recording and compiling the
and payments Some negative balances are accounts. Third party payments would be
appearing in the finance accounts. shown separately in the Cash Basis IPSAS
The cash balance appearing in the format.
financial statements is not reconciled
with the bank accounts and

18
It is understood that changes in the financial reporting formats would not be considered as a departure from the new structure of
accounting policies and practices as approved by the Auditor General with the consent of the President.

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Activity required to adopt

Standard Current status
international standards
receivables are appearing from
bodies that no longer exist.

Accounting policies and Statements of accounting policy are There is a need to state the accounting
explanatory notes not provided in the budget or policies for various elements of the
accounts documents. financial statements and the basis on
which the accounts are prepared.

General considerations At present financial statements are It would be necessary to reduce the
· reporting period not available within 6 months of the reporting lag; and to disclose further
· adequacy of reporting period; cash balances that information. Legislation should enforce
information about the are available for use and cash balances specific timelines for the publication of
entity that are subject to external annual audited financial statements of the
· presentation of restrictions and un-drawn borrowing government.
comparative facilities are not disclosed, and
presentation does not meet certain
transparency requirements.
Although the authorization date is
mentioned on the accounts, it is not
clear when these financial statements
become accessible to the general
public or media.
Correction of errors The nature of errors in prior periods, Further training and better supervision of
disclosed the amount of the correction, and the accounts officers would be needed to
· nature of error fact that comparative information has correctly classify expenditures and
· amount of correction been restated, or that it is disclosure of errors rectified prior to the
· comparative impracticable to do so, is not reporting period and restatement of
information restated disclosed. comparative information where
practicable.
C o n s o l i d a t e d f i n a n c i a l The government budget sector is a A statement of cash receipt and payment
statements reporting entity, as well as an as per the Cash Basis IPSAS can be
economic entity. prepared. Further steps will be needed to
include controlled entities as per IPSAS
and Section 7(b) of the CGA Ordinance.

Tr e a t m e n t o f f o r e i g n The government largely follows Need to comply with the disclosure

currency cash receipts, IPSAS except for the disclosure aspects of the accounting and financial
payments, and balances aspects in respect of accounting reporting treatment of foreign currency.
treated in compliance with treatment of foreign currency.
IPSAS
Effective date of IPSAS Part I The government has not formulated Need for the Auditor General to formally
and transitional provision a migration path and timeline for adopt IPSAS and for the CGA to prepare
compliance. achieving Cash Basis IPSAS, Part I, an implementation plan and timeline

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Activity required to adopt Cash Basis

Requirements Current deficiencies
IPSAS
compliance. setting out specific steps to be taken,
including disclosure, if necessary, of
application of the transitional provision
(i.e., full compliance achieved within 3
years) for reporting periods beginning on
a date within 3 years of first adoption of
IPSAS.

C. Assessment of Accounting and Auditing in State-Owned Enterprises

23. It should be mandated by law that the financial statements of the state owned enterprises
be prepared in accordance with the IAS/IFRS. Many state-owned enterprises are registered under the
Company Law. Under the Companies Ordinance 1984, it is obligatory for all listed companies to present
their financial statements in accordance with IAS/IFRS.19 These companies are required under the
Companies Ordinance to be audited by a chartered accountant. The Institute of Chartered Accountants in
Pakistan has mandated the observance of International Standards on Auditing by its members. Upon receipt
from the IFAC, exposure drafts of proposed International Standards on Auditing are sent to ICAP members
for comments. These comments are returned for consideration by IFAC. When the final standard is issued,
ICAP adopts the International Standard on Auditing without modification. For non-listed companies, the
implementation and enforcement of IAS/IFRS is not finalized. Enforcement of International Standards on
Auditing for the audit of non-listed companies is less stringent than that for the listed companies. State-
owned enterprises, which are not incorporated under the Company Law, do not usually apply IAS/IFRS for
accounting and financial reporting. The financial statements are generally audited after a long lag time.

24. There are serious issues relating to the use of public funds in state-owned enterprises that
are not subjected to legislative scrutiny by the Public Accounts Committee. A review of a sample of
financial statements of state-owned enterprises that are audited by Chartered Accountants indicated that the
audit reports generally contained either significant qualifications and/or emphasis of matter paragraphs
modifying the audit opinion. The Auditor General of Pakistan while conducting the regularity or
performance audit cannot utilize the qualifications given in the audit report on the financial statements. The
Auditor General does not have access to the management letter given by the external auditors to the state-
owned enterprises, nor do they have access to the financial audit working papers. Thus serious issues
relating to the use of public funds are not subjected to legislative scrutiny by the Public Accounts Committee

19
The Report of Observance of Standards and Codes – Accounting and Auditing in, Pakistan, 2005, provides the implementation
status of IAS IFRS and related issues.

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through consideration of the Auditor General's reports. The preferable practice is for the Auditor General to
be able to review the working papers and reports of the contracted audit firms.20

25. There is a need for specialized training in the utilizing of IAS/IFRS, ISA, and using the work
of other auditors. The resources for auditing public sector enterprises in the DAGP are in short supply; and
DAGP staff generally is not adequately trained in accounting. The need for additional specialized training in
the applications of IAS/IFRS and ISA and using the work of other auditors has been recognized as a need.
Greater provision of this training could be provided perhaps through the AATI or outsourced to the private
sector institutions.

26. The Commercial Audit Wing of the Auditor General of Pakistan should perform a
monitoring role for the compliance of IAS/IFRS by state-owned enterprises. Monitoring of state-
owned enterprises needs improvement. There is currently no Public Sector Enterprises Monitoring Board
as established in other countries. This role is performed by the Corporate Wing of the Ministry of Finance.
Some proposals are in place for strengthening the Corporate Wing. There is little involvement of the Auditor
General in the selection of the external auditors of these state-owned enterprises.21 The respective
ministries/departments with which individual state-owned enterprises are attached exercise varying levels of
monitoring on these bodies. Many of these state-owned enterprises are outside the enforcement
mechanisms (of IAS/IFRS and other financial reporting) by the Securities and Exchange Commission of
Pakistan and the State Bank of Pakistan. Hence, there is a need for the Commercial Audit Wing of the Auditor
General of Pakistan to be strengthened to perform a more comprehensive review role for the compliance of
IAS/IFRS by state-owned enterprises.

20
Section 25, A Model National Audit Office Act, The Association of Chartered Certified Accountants, UK, 2004.
21
Although there is a requirement to get approval of the selected auditor's (CA) name, in many cases it is not observed. Even with
compliance, in practice management finalizes the selection of the audit firm, a practice that throws into question the independence
of these auditors.

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