THE EFFECT OF ADOPTION OF INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS (IPSAS) ON FINANCIAL REPORTING IN THE PUBLIC SECTOR IN NIGERIA

1.1 Background of the Study

Over the last few decades, the public demand for radical improvement of public sector management has resulted in a wave of organizational, managerial, financial and accounting reforms in the public sector worldwide (Christians and Rommel, 2018). The result of these reforms brought about the concept of New Public Management (NPM) which implies managing based on use of economic regularities and market efficiency principles (Azuma, 2012). The NPM reform underpin six core elements in public sector governance namely privatization, marketization, decentralization, output orientation, quality systems and intensity of implementation (Connolly and Hyndman, 2016).

According to Hood (2015), the NPM focuses on reducing the difference between public and private sectors by moving public sector practice closer to private sector practice, shifting the emphasis from process accountability towards accountability in terms of outcomes and results. This has led governments to introduce cost improvement programs, performance indicators, financial management information systems, financial targets, delegated budgets and resource allocation rules (Aarlinton and Watkins, 2017). Thus, accounting reorientation as part of the New Public Financial Management led to adoption of accrual accounting by the public sector. In this regard, International Federation of Accountants Committee Public Sector Committee (IFAC PSC) and OECD Public Management Committee (PUMA) directly or indirectly supported the adoption of International Accountings Standards (IASs) as a basis of development of International Public Sector Accounting Standards (IPSASs) (IFAC PSC, 2015).

The IPSASs set out guidance for the structure, minimum requirements, recognition, measurement and disclosure requirements in the general purpose financial reporting intended to meet the needs of users who are unable to require the preparation of financial reports tailored for their specific needs. The major objective of IPSASs is to prescribe a manner in which general purpose financial statements should be prepared to ensure comparability both with the entity‟s financial statements of previous periods and with the financial statements of other entities. IPSASs are set through a due process commencing with research and deliberations held before tentative positions are adopted. Exposure drafts of proposed standards are disseminated to solicit the views of interested parties which are considered in revising and finalizing a standard (IFAC, 2014).

Traditionally, public sector organizations used cash-based accounting systems which posed challenges due to lack of standardized international reporting practices. The cash based system lacked internationally accepted rules and guidelines on recognition, measurement, reporting and management of debt and state assets (Luder and Jones, 2013). Taking into account that relevant and reliable accounting information is an important resource in management decision making, a comprehensive accounting information system is crucial for management performance (Vasicek, 2014). This increased focus on public sector financial management has created increasing demand for high-quality standards and guidance on how to adopt and implement such standards.

The adoption of IPSASs by public sector entities is driven by the need to strengthen efficiency, accountability and professionalism in management of public resources (Aggestam, 2015). Accrual accounting improves decision making through comprehensive reporting of assets and liabilities and increased financial control as it provides a representation of the entity’s overall financial position by providing a snapshot comparison between financial periods while enhancing strategic planning (Aggestam, 2015). IPSASs also improve comparability, harmonization, transparency and accountability in financial reporting by public entities as they provide more relevant, reliable and timely financial information for decision making (IFAC Public Services Committee, 2012). Other benefits attributed to accrual accounting include: identification of total cost of government programs and activities through better measurement of costs and revenues; greater focus on outputs; more efficient and effective use of resources and greater accountability, better presentation of financial position of the public sector organizations and greater attention to assets and more complete information on liabilities through better assets and liabilities management (Mellet, 2017; Olsen, 2016).