An Appraisal Of Accounting System In The Public Sector (A Case Study Of Board Of Internal Revenue Enugu State)

In chapter two, the researcherfocuses on the review of related literature as it is related to theresearch topic and such review include historical development of government accounting, B

AN APPRAISAL OF ACCOUNTING SYSTEM IN THE PUBLIC

CARITAS UNIVERSITY AMORJI NIKE

ENUGU STATE

JULY, 2010.

An Appraisal of Accounting System

In the public Sector (A case study of board of Internal Revenue Enugu State)

By

Nnamani Ugochukwu J.c.

Acc/2006/241

Department of Accountancy Faculty of Management & Social Science

Caritas University Amorji – Nike,Enugu.

Submitted to

Department of Accountancy Caritas University

In partial fulfillment of Degree of the Requirement for the award of the Bachelor of Science (B.Sc) in Accounting

-

-Mr Agu C.I Date

Mrs Sunday Okechukwu Fredrick Nnamani (J.P.) for theiruntiring efforts towards my academic pursuit.

ACKNOWLEDGEMENT

My utmost gratitude goes to God almighty, who has madethis academic feat possible My beloved parent Mr and Mrs

Suday Okechukwu Nnamani (J.P) deserve everycommendation for their efforts in giving me proper orientation;for their understanding, encouragement, and for that mostvaluable financial support and unending prayers My belovedsiblings Ndidiamaka, Ezinne and Chinecherem Nnamani, theywere always encouraging and praying for me I also extend myunalloyed gratitude to all who has in one way or the othercontributed towards the actualization of this dream Worthy ofmention include: Barr And Mrs SAN Chukwuani, Mr andMrs.Davidson Ownmi and also Mr and Mrs Andy Egbo(National) for their contribution and love shown to me duringthe course of this work and also has been one of the brainbehind my achievement I am equally grateful to my projectsupervisor Mr Agu C.I for his patience, prompt attention,suggestion, strict and careful scrutiny of this work I shall notfail to acknowledge the role of all the lecturers in department

of accountancy especially my H.O.D Mr Collins Ugwu, Mr

P.U Nsoke, Mr Frank Ovute and Chinedu Enekwe for theirtime, academic encouragement, training and assistance.Finally, my appreciation goes to Obiora Onyiorah, UgwuanyiEmmanuel, Ohanwe Emeka, Chisom Mbata, Anya, ChiomaAni, Chinelo, C.Y., G Money, Keke-money, Fabian, Pamela,Ekwe, Chika (MVB), Nnamdi Ukeje, ATM money (Course Rep.),Adaobi, Chika Agu Loveth, phnatex, Lorita, Chineye Ochili andOnyi Madubuko for their support, love, and care throughout

my stay in school

This write up is the result of a studying of the accountingprocess in the public sector The work is principally aimed atproviding an insight into the accounting system of Board ofInternal revenue Enugu State, its inefficience, problems andways these problems could be effectively be managed Thiswork is divided into five chapters namely; The first chapterwhich is the introduction of the topic, the researcher definedpublic sector accounting, the purpose and objective as well asthe significance of the study In chapter two, the researcherfocuses on the review of related literature as it is related to theresearch topic and such review include historical development

of government accounting, Basis of accounting and sources ofcash and recording media In chapter three, the researcherindicated the research method used in detail; also it was inchapter four that the data used were collected, presented,analyzed and show the responses to the area beinginvestigated which were documented along with their

percentage relating to the question asked In the last chapter, the researcher discussed the result obtained from data analysis in chapter four and also a useful and constructive suggestion was put down as that any interested party may be wee guided

TABLE OF CONTENTS

Cover page:

Title page:………

Certification:………

Dedication:………

Acknowledgement:………

Abstract:………

Table of contents:………

CHAPTER ONE: INTRODUCTION 1.1 Background of the study:………

1.2 Statement of the Problem:………

1.3 Objective of the study:………

1.4 Significance of the study:………

1.5 Research question:………

1.6 Scope and Limitation of the study:………

1.7 Definition of terms:………

CHAPTER TWO: REVIEW OF LITERATURE 2.1 Introduction:………

2.2 Historical Development of Government Accounting: 2.3 Financial Information:………

2.4 Sources of cash and Recording Media:…………

2.5 Nature and purpose of Government Accounting:

2.6 Fund Accounting classification:………

2.7 Basis of Accounting:………

2.8 Depreciation:………

CHAPTER THREE: RESEARCH METHODOLOGY AND DESIGN 3.1 Research design ………

3.2 Sources of data ……….

3.3 Population of the study ………

3.4 Determination of sample size and techniques……

3.5 Method of data collection ………

3.6 Procedure of data analysis ………

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS 4.1 Section A (Personal Data)………

4.2 Section B (Cash)………

4.3 Section C (Cheque)………

4.4 Section D (Stocks/Supplies) ………

CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS 5.1 Summary of findings ………

5.2 Conclusion ………

5.3 Recommendation ………

Bibliography

Appendix

CHAPTER ONE INTRODUCTION

1.1 BACKGROUND OF THE STUDY

History has it that the concept of accountability of public funds dates backs to the history of ancient Greece As old as theory is, it would not be erroneous to say that the idea has been equally lost to antiquity although not much is known about it, this makes the subject, government accounting to remain a myth

Accounting in the public sector has received such a wide attention from scholars that the field of public sector

accounting scans to be neglected

However, there is general awareness all over the world ofthe need to pay greater attention to the development ofgovernment accounting and financial control The reason isobvious, government, in most, if not all nations constitute thelargest single business entity in many places, the core of theeconomy Government in any society is basically formaintaining law and order With changes and the complete

nature of the society, government responsibility hasautomatically changed from the role of maintaining law andorder to business like nature in the modern era Theenormous activities of government, equally call for enlargedgovernment accounting in order to accommodate the immensetask As a result of this development, the traditional cashprocedures of accounting can hardly meet the demands ofreasonable accounting for modern government in providingnecessary services or information Therefore, there is need forgovernment accounting to be dynamic in order toaccommodate both the fundamental roles and thedevelopments.

Government accounting is the process of recording,analyzing, classifying, summarizing, communicating andinterpreting financial information about government inaggregate and in detail, reflecting all transactions involving thereceipts, transfer and disposition of government funds and

property The purpose are to demonstrate the propriety oftransactions and their conformity with established rules togive evidence of accountability for the stewardship ofgovernment resources and to provide useful information forthe good control and efficient management of governmentoperation.

Financial management in the public services as can beobserved has failed to encourage and promote the efficientutilization of public funds or serve as effective basis forplanning and decision making as well as to ensure properaccountability Besides, it does not mean that financialirregularities being detected in public sector at large isbasically based on traditional cash procedure of accountingbut it does arouse a question whether the modern system ofaccounting will make both modern management and financialmanagement viable

STATEMENT OF THE PROBLEM

The problem of this research is to identify theseweaknesses and limitations inherent in the cash accountingsystem of the public sector (in relation to the accountingsystem of the sample ministry).

This is with a view to propose means of eliminating themcompletely or at least reducing them to the barest minimum.Put in question form, what are those weaknesses andlimitation that militates against adequate and efficientaccounting system and financial reporting in the public sectorand how can they be eliminated?

Some of these problem witnessed in the public sectorincludes: the lack of accountability and abuse of delegatedauthority by the officers in authority, fraud andmisappropriation of government funds, as well as lack ofexpertise and business acumen on the part of those officers.Due to the fact that government operation have been termed

“Non-profit oriented operations”, there is no pressure on the

part of these government officers to perform up to optimumexpectation, accounts are kept in messy shape while theofficers get away with lack of proper accountability.

This research is carried out in order to examine theextent to which proper accounts are being kept in the publicsector and to offer solution to the inherent problemdiscovered

The Enugu State Ministry of Finance and EconomicDevelopment is used as a sample ministry for this researchwork

OBJECTIVES OF THE STUDY

The objectives of this research work/study include thefollowing:

- To determine the extent to which the sample Ministry

has installed an accounting system

- To determine the factors that promote or constrain

the accounting system of the sample ministry

- To determine the impact of the accounting procedures

of the sample ministry upon its financial reporting

- To make recommendations based on my findings

IMPORTANCE OF THE STUDY

This research paper is intended to examine theaccounting system common in public sector with a view toexposing and highlighting the inherent limitations in thesystem Therefore, the research paper will be of interest anduseful to the general publics, the government as well as thegoverned

Government entrust public funds in the hands of itsofficials hence government reporting has traditionally stressedstewardship Original accounting emphasis has been directedtowards measuring the public funds generated and expended

by the government’s programme or activities The traditional

reporting approach is filled with many weaknesses of which it

is hoped that this study will make useful recommendation onhow to improve upon the accountability and financialreporting system of the government

The duty to report all its financial activities to the generalpublic is a debt that government must pay Such report willenable the people know how public funds entrusted in thehands of the government have been utilized, this type of report

is very sensitive and useful to the public but very few of them(the public) can understand it This study will serve as auseful medium to such member of the public who findgovernment financial reporting very ambiguous and hard tounderstand

In many institution of higher learning the accountingcurriculum offered is tailored specifically to provide studentswith an understanding of financial reporting as it relates toprofit oriented enterprises For this purpose, students are

frequently surprised to discover that the basic framework offinancial accounting is significantly altered when the profitmotive is removed Though the accounting terminology mayinitially appear to resemble foreign language to all students ofaccountancy, and related professions who always depraved ofknowledge of accounting system of the public sector, thisstudy will be very useful.

Moreover, potential researcher in this aspect ofaccounting will find this research paper a very reliablereference base

RESEARCH QUESTIONS

Three dominant questions being reviewed by thisresearch include;

- Is the accountancy/accounting system in the public

sector effective and adequate?

- Does the accounting system in the public sector

provide for proper financial control and accountability

of stewardship?

- Does the accounting system in the public sector

provide useful information for the effective control andmanagement of government operations?

SCOPE AND LIMITATION OF THE STUDY

As the research topic would suggest at a glance, thescope of this, is essentially focused on the accounting system

of the sample ministry as a general overview sample study ofthe accounting in the public sector

Therefore, this study will look into the nature of theaccounting system of the sample ministry; how the systemoperates, the relevance of the system to the environment,problems and prospects of the system

LIMITATION

- Scarcity of material:

This aspect of accountancy (as pointed out above) hasreceived very little attention from scholars despite its longhistorical age Consequently, there are few literary publication

on the student; the researcher was therefore limited toreviewing few literature which are mostly in origin, throughrelevant to the study

- Bureaucracy:

Government establishment are well known formaintaining utmost screening as regards their operations,more so, where it is a study that concerns their financialoperation the researcher found it difficult to obtain materialrelating to the study (that is literature) and some officials whohave been very elusive and uncooperative More so thebureaucracy and protocol the research went through to obtainmaterial and an appointment has been very discouraging

Due to all this constrains, the researcher cannot say forcertain whether the study has covered very rutty gritty of thesample ministry as regards its accounting systems andprocedures, but one thing is certain, enough materials havebeen gathered to help express an opinion as to the operative ofthe sample ministry.

Apart from the above listed limitations witnessed by thisresearcher is time constraint This is a major limiting factor

as the time between approval of the study and the deadline forsubmission was very short The researcher relied heavily onthe good will of the research supervisor because heunderstands my plight Again lack of sufficient funds toconduct an extensive study was another handicap

This was part of the reason why I had to limit my work tofewer staffs than was earlier planned

DEFINITION OF TERMS

Every field, discipline or profession has itsterminology Therefore, government accounting can never be

an exception In order to ensure easy understanding by theusers of this work in relation to government accounting whichare extensively applicable in public sector and or which havedifferent meaning from private sector interpretation and usageare here by define below:

(1) Accounting Entity: Clearly defined economic unit which(a) Engages in identifiable economic activities

(b) Controls economic resources (for which accounting recordsare maintained and periodic financial statement is prepared (c) is distinct from the personal dealings of its owners oremployees To ensure that the fundamental accountingequation always refers to the same distinct entity theboundaries of the unit, once established, must not bemanaged arbitrarily also called reporting entity

Accounting entity is in the accounting and auditing,banking, commerce and finance and corporate, commercialand general law subjects.

Accounting entity appears in the definition of thefollowing terms; accounting change, reporting entity,combination, fund and accounting policies

(2) Accrual Accounts: The principles of “accruals” makes adistinction between the receipt of cash and the right to receive

it, and the payment of cash and the liability to pay it, stressingthe importance of the right to the assets or the legal obligation

in favour of the movement of the cash

(3) Annual Appropriations: These are issues required tomeet the expenditure of the state other than those covered bydirect issues from the consolidated Revenue Fund

(4) Capital: Is a plan of action quantified usually inmonetary units to serve as a guild for the achievement ofgovernment objectives

(5) Cash accounting; the recording of the transaction inwhich revenue and expense are reported (cash inflow andoutflow) in the period in which the related cash receipts andpayment occur The wide spread use of cash accounting inpublic sector results from the government’s historically basedrequirement for financial information that shows fiscalcompliance.

(6) Capital Budget: This is the budget that sets out theproposed acquisition of fixed (long-term) assets or projects andtheir finance

(7) Depreciation: A non cash expense that reduces the value

of an asset as a result of wear and tear, age, or obsolescence.Most assets lose their value over time (in other words, thedepreciated), and must be replaced once the end of theiruseful life is reached There are several accounting methodsthat are used in order to write off an asset’s depreciation costover the period of its useful life Because it is a non-cash

expense depreciation lowers the company’s reported earningwhile increase free cash flow Although, governmentaccounting does not recognize depreciation and this is one ofthe criticisms of the system.

(8) Encumbrance: Is an expense, which is both contingentand estimated Obligations in the form of purchase order,contact or salary commitments which are chargeable to anappropriation and for which a part of the appropriation isreserved These obligations cease to be encumbrances whenpaid or when paid or when the actual liability is recorded.This term has no equivalent in the private sector accountingsince unperformed portions of executing contracts are notrecognized in the accounts

(9) Estimated Revenue (Budget): If the accounts are kept onthe accrual basis, this term designates the amount of revenueestimated to accrue during a given period regardless ofwhether or not it is all to be collected during the period

(10) Expenditure (Actual Expenses): this is expenditurechargeable to an appropriation.

(11) Fixed Assets: A long – term, tangible assets held forbusiness use and not expected to be converted to cash in thecurrent or upcoming fiscal year, such as manufacturingequipment, real estate, and furniture (also called plant)

(12) Functional Budget/Programme Budget: A budget thatallocates costs (or inputs) to particular functions or activities.(13) Fun Accounting: This is basically operated on cashbasis It is an accounting arrangement whereby self-balancingset of accounts are provided for specific purpose This system

of accounting is usually used by non-profit organization and

by the public sector

(14) Fund balance; the excess of assets of a fund over itsliabilities are reserves, except in the case of funds subject tobudgetary accounting where prior to the end of a fiscal period

It thus represents the excess of the fund’s assets and revenuesfor the period over its liabilities reserves, and appropriationsfor the period.

(15) Historical cost Accounting; the traditional system ofaccounting that is based on valuations made in terms of theprice ruling when transactions take place In practice, this ismodified by the concept of prudence and the possiblerevaluation of fixed assets

(16) Revenue (Actual Revenue): is that revenue which arerecorded on accrual basis, this term designates additions toassets which:

- Do not represent the recovery of the expenditure

- Do not represent the cancellation of certain liabilitieswithout a corresponding increase in other liabilities ordecrease in assets

(17) Warrant: Authority for expenditure from theconsolidated Revenue fund covered by the appropriation law inrespect of recurrent budget or from the capital developmentfund is the case of a capital budget.

because most government units are now engaging in the profitmaking ventures, while some commercial enterprises alsoengage in non-profit ventures.

The two main differences usually pointed out are:

1 The absence of a profit motive in government and;

2 That managers in government primarily aim at

conforming to legislative” (Anthony 1980 Pg 83 – 93).However, the profit making motive of the government isonly applicable to a very few areas, while the commercialsectors profit is on the basis of yearly activities

According to Premchand (1983 P.380) “There is no (andthere cannot be any) equivalent of profit in the governmentthough the concern of government and the commercial worldare the same all over in regard to the allocation and use ofresources both material”2 Whether in the public sector or inthe private is for “measurement and communication and to

provide economic and social information about an identifiableentity to permit users to make judgment and decision….”3Landgendefer (1973, pg 50) By and large, governmentaccounting is supposed to feed two groups of users; thegovernment and the general public.

HISTORICAL DEVELOPMENT OF GOVERNMENT ACCOUNTING

The growth of government accounting can be traced tothe period before and during the middle ages when localofficials had to lender accounts for receipt and payment orexpenses to their master, the king or the royal auditor Theruin of the royal finances and the chaotic state of account inFrance in the eighteenth century was one of the causes of theFrench revolution which promulgated the doctrine of popularsovereignty over public finance so that tax could be leviedwithout the assent of the nation The separation of law

making function of government and the executive power in theFrench constitution during the time of Montesquieu renderedthe existing accounting system disproportionate and theexecutive had to request and to render account to thelegislature.

Similar condition prevailed in Great Britain, which calledfor high degree accountability with respect to public funds.There was a long historical tussle in Britain for parliamentarycontrol of funds with respect to control over taxation Theconsolidated fund Act of 1787 provided a single general formfor expenditures There was thus laid basis for thecomprehensive financial statement of operation andstewardship of public funds

In United States of America since 1789, the secretary oftreasury has been required to prepare and report uponestimates of public revenue and expenditures The budgetlater became a mechanism whereby the president submits his

programmes to the congress and this resulted in an effectivemeans through which (the president) could be holdresponsible The United States of American BudgetAccountancy act of 1921 formed the basis for a responsibleand responsive government, which provided the necessaryframework with respect to government funds Historically, theaccounting system of government was based on cash madeavailable for such purposes and the disbursement of suchcash With the gradual separation of power between the lawmaking power and the executive as from the 17th centuryonwards, the pattern of accountability became that ofexecutive and legislature, the principle of legislativesupremacy in finance then became firmly established.

In developing world – Nigeria for example, governmentaccounting or budgeting has a slow development and was notfully visualized as a major instrument of planning Incidently,the system being practiced in Nigeria public service is

fashioned along the line of former colonial masters Britain andAmerica The USA constitution from which Nigeria adoptedher constitutional set up for instance, specially stipulated that

“No money shall be disbursed from the treasury but inconsequence or appropriation made by law and a regularstatement of account of receipt and expenditure of all publicmoney shall be published from time to time”4

Consequently, in the constitution of Federal Republic ofNigeria 1978 section 79, similar provision is made “No moneyshall be withdrawn from consolidated revenue of theFederation except to meet expenditure that is charged up onthe fund or where the issue of those money has beenauthorized by appropriation, act, supplementary appropriationacts or by an act passed in pursuance of section 75 of thatconstitution”5 Paragraph 3 of section 74 stipulated the same

“No money shall be withdrawn from the consolidated revenue

fund or any other of public fund of the federation except in themanner prescribed by the National Assembly”6.

In the case of state, the constitution under section 112specifically stipulates the authority for issue of money fromthe consolidated revenue fund of the state; the clauses are thesame after substituting states for federation, house ofassembly for the national Assembly

The recognition of the need for forward planning forFrance at the national level gave birth to national budget Theemergency of budgeting influenced to a great extent thedevelopment of government accounting; also while governmentaccounting was originally related to taxation and revenuecontrol and subsequently to the recording of the accountabilityfor receipts and expenditure, the development of budgetingand budget gave much scope to the development ofgovernment accounting The budget essentially became amanagerial and policy making instrument

FINANCIAL INFORMATION

According to Lirving et al (1960, pg.2) he says that “thepurpose of government accounting is to produce financialinformation in a form that is readily useful to all the partiesconcerned”7

As can be seen by another author, the importance ofaccounting system of a government unit is “concernedprimarily with adherence to legal provision rather than thefinancial positions and the income determination”8

(Copeland et al (1971, pg 400), he further stated that

“the primary purpose of government accounting is to exercisecontrol over the financial affairs of the government unit Suchcontrol is exercised to be sure that legal provisions andformally adopted budgets are conformed to and have not beenviolated

The bureaucracy nature of government deparmtnet orunit on adherence to formally adopted budget and keepingwithin cash target has not given room for explicit andcomprehensive financial reporting.

Hence, operating within the legal framework prescribeddoes not show any efficiency and effectiveness in theiroperations according to Clynn (1987, p 5-7), he says that

“because a department or unit keeps within a predeterminedcash target or because a nationalized industry keep withinborrowing limits - it cannot be assured that theirprogrammes are both effective and efficient “10 many authorshave called for a reform of the whole system of accounting ofgovernment units in order to ensure that users informationneeded are provided As Dye puts “it is time to focus on theway in which government account for reporting what theyhave done …”11

SOURCES OF CASH AND RECORDING MEDIA

The term cash is freely used in this paper to mean

“public money” as defined by section 2 if the (financial controland management) act October (1985) which includes:

The public Revenue of the federation or State, anymonies held in his official capacity whether subject to anytrust or specific location or not, by any officer in the publicservice or the Federation or by any agent of the governmentwhether alone or jointly with other person’12

The cash include;- currency, coin, cheques, postal orderand express money orders, bank draft on hand or on depositwith an official or agent designed as custodian of cash andbank deposit

In every financial year, government makes revenueestimated to be collected from various sources, the bulk,which will be derived from taxes

THE SOURCE

includes:-(a) Direct taxes e.g income tax of an individual company’s

income tax and other taxes

(b) Licenses and internal revenue e.g motor vehicles

licenses, stamp duties, wires and television licenses,private radio licenses

(c) Fees e.g those derived from courts, government

schools and hospital etc

(d) Earnings and sales e.g Toll from express way,

publications and vacuums

(e) Rent of government properties, which includes land,

offices and residential houses

(f) Interest on loan e.g those from loan to statutory

corporation, dividend from investment in public andstate owned companies

(g) Interest on loan to other state