Municipal Accounting Reforms In India

1. Municipal Accounting Reforms In India History Genesis Pre-reform Systems Post-reform Systems Issues Way Forward Accomplishing Transition

2. 9/4/2012 ASCI-WBI, 2004 Programme on Strengthening Urban Management in India 2 Municipal Accounting Reforms In IndiaHistory Municipal accounting reforms initiatives MA reforms are only two decade old. 81-90�Mumbai, Kolkatta & Chennai � WB TA 91-95-Six municipal bodies of Gujarat - WB 97-02 �All municipal bodies of Tamil Nadu 99-02-Anand, Jaipur & Tumkur - ADB TA 99-02-Banglore accounting reforms � BATF 01-03-Five municipal bodies of Maharashtra 01-03�Delhi, Hyderabad, Indore & Ludhiana TNUDF leadership Anand(Gujarat), Jaipur(Rajsthan) & Tumkur (Karnataka) ADB TA USAID TA to Maharashtra for accounting reforms in five municipal bodies Hyderabad, Indore and Ludhiana carried out transition on their own TNUDF leadership Anand(Gujarat), Jaipur(Rajsthan) & Tumkur (Karnataka) ADB TA USAID TA to Maharashtra for accounting reforms in five municipal bodies Hyderabad, Indore and Ludhiana carried out transition on their own

3. 9/4/2012 ASCI-WBI, 2004 Programme on Strengthening Urban Management in India 3 Municipal Accounting Reforms In India History Technical guide on accounting and financial reporting by urban local bodies by ICAI Supreme Court direction 11th Finance Commission recommendation Covered under Urban Reforms Incentive Fund set up by GOI for States December 2002 � CAG Task Force Report Emergence of City Managers Association Emergence of Consulting firms and professionals with sector specific expertise

4. 9/4/2012 ASCI-WBI, 2004 Programme on Strengthening Urban Management in India 4 Municipal Accounting Reforms In India Genesis Municipal accounting system reforms have become compelling necessity due to Changing �state-citizens� relationship Inadequacy of traditional accounting system Paradigm change in financing urban development New relationship based on three foundations � accountability, transparency and efficiency Change in the people�s perception viewing themselves as Consumers. Governance is seen as a participatory and contractual process. Change in the people�s perception viewing themselves as Consumers. Governance is seen as a participatory and contractual process.

5. 9/4/2012 ASCI-WBI, 2004 Programme on Strengthening Urban Management in India 5 Municipal Accounting Reforms In India Pre-reform municipal accounting system Cash based single entry accounting system Heterogeneity in every aspect Consolidated fund accounting system. Non updated municipal account codes Accounts pending over the years Non-capitalization and incompleteness. Absence of system documentation. Procedural inadequacy- no internal checks. Imbalance staffing Heterogeneity in every aspect - account code, chart of accounts, classification, formats etc. States did not update municipal account codes for past thirty to forty years. Weak core and burdensome peripheral Heterogeneity in every aspect - account code, chart of accounts, classification, formats etc. States did not update municipal account codes for past thirty to forty years. Weak core and burdensome peripheral

6. 9/4/2012 ASCI-WBI, 2004 Programme on Strengthening Urban Management in India 6 Municipal Accounting Reforms In India Post-reform municipal accounting system Double entry Modified accrual base Fund based accounting Computerised Fully integrated with budget, uses matrix chart of account and budget heads Maintenance & Disclosure of Accounts as per accounting standards

7. 9/4/2012 ASCI-WBI, 2004 Programme on Strengthening Urban Management in India 7 Municipal Accounting Reforms In India Issues in Nation/State-wide Implementation Reform initiatives have confirmed that reforms are possible in municipal environment. But reform initiatives have raised certain issues. Individuality/Heterogeneity Slow pace/Incomplete Attainment Non-replicability of Reforms No reforms in financial reporting, auditing & budgeting systems, even in the bodies adopting accounting reforms

8. 9/4/2012 ASCI-WBI, 2004 Programme on Strengthening Urban Management in India 8 Municipal Accounting Reforms In India Issues in Nation/State-wide Implementation Contemplating a way forward is difficult. More than 4500 local bodies having different size, degree of complexities, powers & resources and stage of development. Less than 5 per cent of local bodies (150) have carried out any sort of reforms. Need an accounting system having blend of governmental & commercial accounting system. Commercial form of government accounting

9. 9/4/2012 ASCI-WBI, 2004 Programme on Strengthening Urban Management in India 9 Municipal Accounting Reforms In IndiaWay Forward Objectives of Reforms Improvement in accountability, transparency, and financial performance of municipal bodies Comparability and uniformity of system and data while allowing micro level diversity Simple, cost effective and scalable reforms Multi-level & multi-dimensional efforts

10. 9/4/2012 ASCI-WBI, 2004 Programme on Strengthening Urban Management in India 10 Municipal Accounting Reforms In IndiaWay Forward Role of Central Government putting in place model municipal accounting & financial reporting system manual Incentive grants to States and Municipal bodies � suitable changes in URIF, CCF guidelines Model budget code and matrix code. Setting up of government or municipal accounting standard board. Formation of Professional association of municipal accountants and auditors

11. 9/4/2012 ASCI-WBI, 2004 Programme on Strengthening Urban Management in India 11 Municipal Accounting Reforms In IndiaWay Forward Role of State Governments State governments to revise their municipal account, audit and budget codes. Institutional strengthening (capacity building) efforts for municipalities. opinion building efforts to change perception of all the related people Suitable changes in legislation Technical assistance, financial assistance for reforms Elevation of status of account & audit function, pay scales, recruitment rules

12. 9/4/2012 ASCI-WBI, 2004 Programme on Strengthening Urban Management in India 12 Municipal Accounting Reforms In IndiaWay Forward Civic Education-equip NGOs/CBOs with technical knowledge so that they can participate in a meaningful way. Role of Urban Local Body Synergy between budget and account code Change in perception towards accounting function & giving due importance to it. Induction of professionally qualified people

13. 9/4/2012 ASCI-WBI, 2004 Programme on Strengthening Urban Management in India 13 Municipal Accounting Reforms In India Accomplishing Transition� Steps/Process Perceived or Felt Need for Reforms Willingness to Reform Initiator or Change Agent Champion of Reform or Transition Level of Participation Enabling Environment Support of Higher Level Government Technical and Financial Assistance

14. 9/4/2012 ASCI-WBI, 2004 Programme on Strengthening Urban Management in India 14 Municipal Accounting Reforms In India Accomplishing Transition� Steps/Process Hiring of Professional Support Resolving Accounting Policies Designing System & Accounting Manual Implementation Strategy / Approach Capacity Building Parallel Run Use of Computer Technology Post Reform Blues

15. 9/4/2012 ASCI-WBI, 2004 Programme on Strengthening Urban Management in India 15 Municipal Accounting Reforms In India Accomplishing Transition� Steps/Process Local Ownership - Felt Need for Reforms Starting point for any transition / change Internal � higher success rate External � reforms seen as covenants Willingness to Reform Closely associated with the first factor Higher Level ensures successful transition If found low, municipal body should create it through opinion building exercises There was no perceived or felt need for accounting system transition in earlier attempts Mumbai, Chennai, Kolkatta, six municipal bodies of Gujarat and in recent time in case of Jaipur Municipal Corporation. In case of Tamil Nadu, Banglore, Indore, Hyderabad there existed felt or perceived need for accounting reforms. Earlier attempts were probably ahead of the time, the not so successful attempts of phase 1 and changed urban scenario especially after 1994 created felt need among the second lot of municipal bodes. Willingness to Reform was low in all the first generation accounting reform efforts which took place prior to 1994. Tamil Nadu, Banglore, Hyderabad are characterized by well planned opinion building efforts not only for employees but for every stakeholder in transition and even general public. Jaipur lacked felt need for transition resulting in to inadequate willingness to reform and opinion building or willingness creation efforts. Indore felt need was present and willingness to reform among small group but failed to undertake opinion building efforts.There was no perceived or felt need for accounting system transition in earlier attempts Mumbai, Chennai, Kolkatta, six municipal bodies of Gujarat and in recent time in case of Jaipur Municipal Corporation. In case of Tamil Nadu, Banglore, Indore, Hyderabad there existed felt or perceived need for accounting reforms. Earlier attempts were probably ahead of the time, the not so successful attempts of phase 1 and changed urban scenario especially after 1994 created felt need among the second lot of municipal bodes. Willingness to Reform was low in all the first generation accounting reform efforts which took place prior to 1994. Tamil Nadu, Banglore, Hyderabad are characterized by well planned opinion building efforts not only for employees but for every stakeholder in transition and even general public. Jaipur lacked felt need for transition resulting in to inadequate willingness to reform and opinion building or willingness creation efforts. Indore felt need was present and willingness to reform among small group but failed to undertake opinion building efforts.

16. 9/4/2012 ASCI-WBI, 2004 Programme on Strengthening Urban Management in India 16 Municipal Accounting Reforms In India Accomplishing Transition� Steps/Process Initiator or Change Agent Very crucial element for transition Internal � high probability of completion External/Foreign � act adversely Local Champion of Reform or Transition Desirable Element Level of Participation Higher the participation of all concerned � higher willingness or acceptance of reforms In earlier cases international funding or donor agency, an external agency was the initiator of transition � all of these met with limited success. In recent Jaipur Municipal Body case again we observe a external initiator and the story is not different. In recent cases we find internal or domestic change agent � In case Tamil Nadu � TNUDF, Banglore � BATF and KUIDFC, in case of Hyderabad, Indore, Ludhiana � municipal body and its chief executive itself. Local Champion of reforms or transition is a highly desirable element as he internalizes and naturalises change initiative which is basically foreign in nature in an organisation. Wherever the initiator or change agent was internal or domestic and close to municipal body, it has acted as champion of accounting reforms. In case of earlier transition efforts there was absence of local champion of reform as a result initiator or change agent was viewed as foreign and transition was perceived as forced act. Participatory is approach is must for introducing accounting reforms. The transitions which are characterized by high level of participation of all the related people have attained better design and smooth implementation of transition. For example Tamil Nadu, Banglore, Hyderabad where everybody right from urban secretary of state, employees of municipal body, municipal elected representatives, staff of government audit and other departments, consultants, outside experts and citizen forums etc. There was lack of adequate participation in earlier not so successful transition cases. In earlier cases international funding or donor agency, an external agency was the initiator of transition � all of these met with limited success. In recent Jaipur Municipal Body case again we observe a external initiator and the story is not different. In recent cases we find internal or domestic change agent � In case Tamil Nadu � TNUDF, Banglore � BATF and KUIDFC, in case of Hyderabad, Indore, Ludhiana � municipal body and its chief executive itself. Local Champion of reforms or transition is a highly desirable element as he internalizes and naturalises change initiative which is basically foreign in nature in an organisation. Wherever the initiator or change agent was internal or domestic and close to municipal body, it has acted as champion of accounting reforms. In case of earlier transition efforts there was absence of local champion of reform as a result initiator or change agent was viewed as foreign and transition was perceived as forced act. Participatory is approach is must for introducing accounting reforms. The transitions which are characterized by high level of participation of all the related people have attained better design and smooth implementation of transition. For example Tamil Nadu, Banglore, Hyderabad where everybody right from urban secretary of state, employees of municipal body, municipal elected representatives, staff of government audit and other departments, consultants, outside experts and citizen forums etc. There was lack of adequate participation in earlier not so successful transition cases.

17. 9/4/2012 ASCI-WBI, 2004 Programme on Strengthening Urban Management in India 17 Municipal Accounting Reforms In India Comparative Analysis Enabling Environment Enabling provisions in law or account code, system of audit, transparency needs or culture of sharing of information Support of Higher Level Government Municipal bodies are state subject, highly dependent in all respect on the State Technical & Financial Assistance Must for successful transition, most of the municipal bodies are weak in all respects

18. 9/4/2012 ASCI-WBI, 2004 Programme on Strengthening Urban Management in India 18 Municipal Accounting Reforms In IndiaAccomplishing Transition� Steps/Process Formal Policy Decision about Transition First step, essential from consensus point & from legal point of view Hiring of Professional Support Essential and desirable, need for clear vision about role of consultant, unambiguous TOR Resolving Accounting Policies By involving maximum stakeholders Brings clarity, involvement & commitment

19. 9/4/2012 ASCI-WBI, 2004 Programme on Strengthening Urban Management in India 19 Municipal Accounting Reforms In IndiaAccomplishing Transition� Steps/Process Designing System & Accounting Manual Blending of field experience and professional knowledge yields better accomplishment Implementation Strategy / Approach Can follow any approach but hard work continuous supervision, handholding, participation, sympathetic behaviour are must Capacity Building Absolutely necessary, active involvement in transition and on-job training ensure success

20. 9/4/2012 ASCI-WBI, 2004 Programme on Strengthening Urban Management in India 20 Municipal Accounting Reforms In India Accomplishing Transition� Steps/Process Parallel Run Should not be too short or too long. Short run keeps cost down but robs on-job-training, long run leads to good capacity building turns costly Use of Computer Technology Can complicate transition but has usually helped switch over to new system Post Reform Blues Handholding or live wire support facility leads to sustainability of reforms Parallel Run should not be too short or too long. It was very lengthy or very short in phase I accounting reform experiments. In Phase 2 experiments Jaipur has stuck in the parallel run only, even Banglore, Tumkur, Indore took considerable time in parallel run before switching over to new accounting system. Tamil Nadu and Hyderabad had just adequate parallel run not too short nor too long. Introduction of double entry accrual based accounting system on manual basis results in to increased workload and complexity. Adoption of computer technology to maintain accounting system reduced workload considerably and back hand processes of accounting software take care of conceptual complexities and formulation of balance sheet and other annual accounting statements. Whether to use or not use computer technology is not a issue but when to use it right from the beginning or at the end? Or what type computer technology to be used? Are real critical issues. In phase 1 accounting transition cases computerisation was not envisaged even in design stage. Tamil Nadu and Hyderabd insisted parallel run and complete transition on manual basis and introduced computer technology later on. In Maharashtra parallel run in four of five municipal bodies is conducted on manual basis. Bangalore, Indore went for computerisation right from the beginning. Transition to accrual based accounting and formulation of opening and first year end balance sheet is not sufficient in case of Indian municipal bodies. They need handholding or live-wire support kind of a arrangement for extended period to deal with post reform blues and sustainability of accounting reforms. This period can range from minimum one year to three years. Such kind of arrangement was not envisaged in phase 1 World Bank TA accounting reform cases, even in recent ADB TA for Jaipur, Anand, Tumkur post reform sustainability mechanism was absent. Tamil Nadu was first to recognize this need, Bangalore and Hyderabad have provided for such arrangement. Parallel Run should not be too short or too long. It was very lengthy or very short in phase I accounting reform experiments. In Phase 2 experiments Jaipur has stuck in the parallel run only, even Banglore, Tumkur, Indore took considerable time in parallel run before switching over to new accounting system. Tamil Nadu and Hyderabad had just adequate parallel run not too short nor too long. Introduction of double entry accrual based accounting system on manual basis results in to increased workload and complexity. Adoption of computer technology to maintain accounting system reduced workload considerably and back hand processes of accounting software take care of conceptual complexities and formulation of balance sheet and other annual accounting statements. Whether to use or not use computer technology is not a issue but when to use it right from the beginning or at the end? Or what type computer technology to be used? Are real critical issues. In phase 1 accounting transition cases computerisation was not envisaged even in design stage. Tamil Nadu and Hyderabd insisted parallel run and complete transition on manual basis and introduced computer technology later on. In Maharashtra parallel run in four of five municipal bodies is conducted on manual basis. Bangalore, Indore went for computerisation right from the beginning. Transition to accrual based accounting and formulation of opening and first year end balance sheet is not sufficient in case of Indian municipal bodies. They need handholding or live-wire support kind of a arrangement for extended period to deal with post reform blues and sustainability of accounting reforms. This period can range from minimum one year to three years. Such kind of arrangement was not envisaged in phase 1 World Bank TA accounting reform cases, even in recent ADB TA for Jaipur, Anand, Tumkur post reform sustainability mechanism was absent. Tamil Nadu was first to recognize this need, Bangalore and Hyderabad have provided for such arrangement.

21. Municipal Accounting Reforms In India Thank You Dr. Ravikant Joshi