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decisions where they want to go. There is the complication that most municipalities in India are still using cash accounting systems. The disadvantage of this system is that debts are not reported and that rating agencies require more time to provide a rating if the municipality is accounting on a cash basis. This is an argument to move to more modern accounting methods, for example accrual accounting, even if the state governments continue with cash accounting.ix

The financial sector may not really care whether the customer has accrual or fund based accounting. In the Indian situation the banks are at present only interested in providing finance to the five major Municipal corporations. However, with the existing accounting system it takes 4 to 5 months to assess the financial system of local governments. Gaining access to capital markets requires more than just moving to accrual accounting. The change also requires training people at the state level, training people at the local level and involving chartered accountants. It is a good occasion to check on all assets and to see that all properties are brought into the tax net. Local government finance reporting is meant for very different users, ranging from the local SLFI to ADB (1996) and from the World Bank to HUDCO, or a commercial bank.

At the moment no one asks a municipality for a balance sheet except the ADB and HUDCO. Municipal councilors often do not know what the numbers mean. If the president of the Municipal council would also ask for it, then there is an incentive for the people doing the daily management of the reformed system to provide this information. Local governments should require accounts that give the information they need. This requires training and consultancies, but there are a number of problems, which keep coming back. In the first place training and consultancies tend to be one time things and improved accounting is only useful in a different organizational context where people value information. Secondly, Local councilors also need to be trained which information they should ask for at what moment of time. Such training would contribute to local ownership of the improved system.

There are organizational issues before a financial statement can be issued. To start with, all information has to be available. Secondly, there are often poor and inappropriate procedures; there is a lack of basic records and no information on fixed assets and long-term liabilities. Sometimes there is no property register, or the register is not updated since 1975. It is impossible to produce the final result before such register would be in place.

Another problem is that the personnel at the municipal level tends to change very often. The incoming officials are often not trained and if someone who is familiar with the system leaves it will stop. One municipality in Gujarat has not produced a single financial statement in ten years. What TCS-IHS (2000) recommended would take two to three years to implement. The basic new accounting model looks so different from the budget format to which local governments are used. They have to be taught to start all over again. At the moment there is no transition strategy: who will carry on this work for the next 4 to 5 year. Who will pay for it? The State government will have to provide incentives because otherwise the local government will build up resistance to change and just forget about it.x

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