Accounting system needs rehaul: CAG

The Comptroller and Auditor General (CAG) today underlined the need to modernise the accounting system by moving towards an accrual-based system from the present one of cash.

The transformation, which could be achieved over the next 10 years, would help make the accounting system more transparent and user- friendly.

Headed by former State Bank of India Chairman DN Ghosh, an expert committee, set up to consider incorporating the "virtuous" elements of accrual-based accounting, has in its draft report recommended a 10-12 year period to move towards the accrual system.

"There is a need for review of cash basis and considering the required changes to be made to enhance the quality of accounting," CAG VN Kaul said, while addressing state finance secretaries here.

The recommendations of the committee, expected to be finalised by the month end, would be placed before the government accounting standards advisory board (GASAB), and then forwarded to the government for approval.

GASAB officials present at the meeting said that the committee would make a presentation to the finance ministry and the Planning Commission before sending the report to the government for approval.

The committee has, for the purpose of a sample study, selected the ministry of urban development, the central board of direct taxes under the revenue department, the ministry of railways and the department of posts.

It has also used four states "" Andhra Pradesh, Assam, Bihar and Gujarat "" and covered the departments of sales tax, health, finance and PWD in each state for the study.

The strategy recommended by the committee in its draft report suggested that the first step could cover transition in areas with commercial activities such as works, irrigation or where performa accounts are in place.

The next step could cover areas where transition is possible with certain additional documentation and re-organisation like the non-tax recepts. Another suggestion made by the committee is to get state governments to set up an office of management and budget.

At the end-stage of the reform process, the states could move either from the present cash system to the modified cash system or to a full accrual system.

The need to incorporate elements of the accrual-based system is being felt since under cash-based accounting, useful assets at hand are not known and the complete fiscal state of health is not coming out. At the same time, a full accrual accouting system is expensive and the feasibility of implementation has to be analysed.

Finance officials of several states, including Maharashtra, Tamil Nadu and Rajasthan, pointed out that since the accrual system of accounting was not without faults, it would not be feasible for states to shift from the present cash-based system.