Carrot and stick policy needed for urban local body accouting reforms: NITI Aayog-ICAI report
1 min read . Updated: 04 Feb 2023, 02:55 PM IST
Premium- Governments worldwide are making the shift to “accrual” system of accounting, which is known to be more effective than traditional “cash” system in ensuring completeness and correctness of the information provided by financial reports
New Delhi: A carrot and stick policy, in addition to legal mandate, will help in successful accounting reforms at urban local bodies, according to a report by NITI Aayog and Institute of Chartered Accountants of India (ICAI).
The report deals with the issue of transition from conventional cash-based accounting to sophisticated accrual accounting by urban local bodies.
'Transition to accrual accounting: models and learnings for urban local bodies,' published by the federal policy think tank that the weak fiscal position of urban local bodies is primarily on account of two factors--weak position of own-source revenues of municipalities and poor fiscal management, with the latter often exacerbating the former," the two agencies said the report.
To service the demands of the rapidly growing urban population, there is an increasing demand on municipalities to become financially self-reliant, the report said. "In addition to a legislative mandate, incentives and disincentives must be utilised effectively to encourage implementation," said the report.
Municipalities are expected to increase their own-source revenue as well as raise resources from open-market through municipal bonds and other debt instruments. To float bonds, a municipality needs to obtain a credit rating to establish its credit-worthiness. Reliable financial statements are essential to be able to obtain a credit rating.
The quality of financial information available to decision-makers is known to have a significant bearing on the quality of fiscal management, the report said. Good financial information results when the underlying accounting system is reliable. Governments worldwide are making the shift to the “accrual" system of accounting, which is known to be more effective than the traditional “cash" system in ensuring completeness and correctness of the information provided by financial reports. It is said that, by 2025, governments in more than 50% jurisdictions worldwide will report on accrual, the report said . In India, successive Central Finance Commissions (CFC), starting with the twelfth, have recognized the need for accrual accounting in government, the report said.
Past experience of states that have attempted the transition to accrual system of accounting in urban local bodies shows that these reforms are complex and have a high risk of failure if not implemented properly. While a few tates (for instance Karnataka, Kerala and Tamil Nadu) have managed to sustain the change, in most other states, the transition continues to be a work in progress, the report said.
