Accounting and audit systems

This page provides an introduction to the topic of Accounting and Audit Systems, and is part of the topic guide on Public Financial Management and Accountability.

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Definition of topic and content

Where is a good place to start?

Accounting systems

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Definition of topic and content

Good quality accounting and audit systems are crucial for effective budget management, financial accountability, and decision-making. They are also critical to the effective use of international development aid. Accounts presented by ministries to the Ministry of Finance and Parliament state their financial activity during the previous budget year and form the basis for ministries' reports on how they have used their allocated resources. Auditing is the mechanism whereby Parliament is assured that accounts are accurate and demonstrate probity, and that spending has complied with agreed allocations and policy objectives.

Where is a good place to start?

Schiavo-Campo, S and Tommasi, D. 1999, 'Chapter 10: Accounting', in Managing Government Expenditure, Asia Development Bank, Manila.
This chapter from the ADB's comprehensive manual explains and defines the key terms in cash and accrual accounting and budgeting systems. It provides a guide to the key issues and areas of analysis required when undertaking reform of existing accounting systems and gives attention to weaknesses and special issues in the organisation of accounting, budgetary controls and cash management.
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Schiavo-Campo, S. and Tommasi, D. 1999, 'Chapter 11: Reporting', in 'Managing Government Expenditure', Asian Development Bank, Manila.
This chapter from the ADB's manual explains what systems and procedures need to be in place for developing country governments to carry out effective reporting within the public expenditure management cycle. Traditionally, reporting was aimed at showing compliance with the budget. Whilst this function is met in countries with a parliamentary tradition and adequate audit capacity, in other countries, improving compliance remains the priority challenge. In addition, the growing demand for transparency and accountability calls for a wider scope of reporting.
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Accounting systems

While most developing countries operate a system of cash-based accounting and budgeting, the introduction of some form of accrual accounting by many OECD countries has increased interest in its potential benefits for developing countries. However, while an accruals system may provide a more complete picture of financial health, and is therefore a better tool for budgeting, it requires a high level of management capacity to implement and run effectively.

Athukorala, S.L. and Reid, B., 2003, 'Accrual Budgeting And Accounting In Government And Its Relevance For Developing Member Countries', ADB, Manila.
This article, written for the Asian Development Bank (ADB), examines the advantages and disadvantages of implementing accrual accounting in the Developing Member Countries (DMCs) of the ADB. It also looks at how accrual accounting should be applied in DMCs. Recent studies of DMCs of the ADB show that many of their governments are either moving towards, or are considering moving towards, accrual accounting from cash accounting.
Comment: A lengthy (95 pages) but very good study of the issues in developing country contexts.
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Diamond, J., 2002, 'Performance Budgeting - Is Accrual Accounting Required?', IMF, Working Paper No. 02/240
This IMF Working Paper is relevant to middle-income or transitional economies which are considering the move from cash-based to accrual accountancy. It argues that, following changes in government finance statistics reporting standards, some emerging economies have been too eager to adopt accrual accounting. Accrual systems are most likely to be effective if they are implemented gradually as part of a wider process of public sector reform.
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Internal auditing

Internal auditors support managers in monitoring and controlling an organisation's behaviour and performance against agreed constraints and objectives. They typically report to internal managers or ministries, rather than to Parliament.

Diamond, J., 2002, 'The Role of Internal Audit in Government Financial Management: An International Perspective', International Monetary Fund (IMF), Washington D.C.
How relevant are Internal Audit (IA) guidelines to developing and transitional countries? A variety of IA models and methods exist, is there one model that can represent the way forward for all countries? This report sanctioned by the International Monetary Fund (IMF) explores the relationship between the Public Expenditure Management (PEM) system and the IA, offering suggestions for viable strategies to develop it in hostile institutional environments.
Comment: Excellent study which is unusual in focusing on internal audit and demonstrates good understanding of different audit traditions internationally.
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INTOSAI, 2001, 'Internal Control: Providing a Foundation for Accountability in Government', INTOSAI, Vienna.
This booklet argues that it is essential that all managers in an organisation understand the importance of establishing and maintaining effective internal control. To help them implement effective internal control, the booklet puts forward an overall framework for establishing and maintaining it.
Comment: Short study with clear guidance produced by the International Organisation of Supreme Audit Institutions.
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External auditing

External auditors oversee a wide range of activities, including the audit of financial statements and the legality and probity of transactions. In some countries, auditors also assess the value for money, or performance, of operations. External auditors are completely independent of the organisation being audited and report to Parliament.

Dye, K. M. and Stapenhurst, R., 1998, 'Pillars of Integrity: The Importance of Supreme Audit Institutions in Curbing Corruption', Economic Development Institute of the World Bank, Washington D.C.
This paper from the World Bank discusses the role of Supreme Audit Institutions (SAIs) in promoting accountability and transparency within government. It considers some of the factors making for effective SAIs and highlights the links between the audit institutions and other institutions notably the media and Parliament.
Comment: Locates Supreme Audit Institutions within an anti-corruption role.
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Department for International Development (DFID) 2004, Characteristics of Different External Audit Systems, DFID, London
Accountability for the use of public funds is a cornerstone of good public financial management. Supreme Audit Institutions (SAIs) are the national bodies responsible for scrutinising public expenditure. How do they operate? This paper by the United Kingdom Government Department of International Development gives an overview of the principal characteristics of the three most common systems, their potential strengths and weaknesses, and some of the implications of working with SAIs from different traditions.
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What other resources are available on the GRC Exchange?

Organisations

A summary of the UK's National Audit Office is available on the GRC Exchange website.

Use the site search at the top of this page, or within the left navigation if you wish to look for wider resources on accounting.

Additional information resources

International Organisation of Supreme Audit Institutions (INTOSAI)

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