Government Accounting and Auditing System in Nepal

Historical Background

1494: Luca Pacioli developed the double-entry accounting system.
1828 BS (1771 CE): Establishment of Kumari Chowk Adda in Nepal, marking the beginning of formal government accounting.
Chaitra 2, 2018 BS (1962 CE): Approval of the New Ledger System (Naya Sresta).
Implementation Timeline:
- 2020 BS (1964 CE): Asset accounting system introduced.
- 2031/32 BS (1974/75 CE): Revenue and public construction accounting systems implemented.
- 2044 BS (1987 CE): Deposit accounting system introduced.
- 2052/53 BS (1995/96 CE): Project accounting system implemented.

Definitions

Accounting: As per the Audit Act, 2075 BS (2019 CE), accounting refers to records, books, or documents maintained as per law to reflect financial transactions, including electronic records or data certifying transactions.

Auditing: The process of examining accounts and related activities, followed by evaluation, analysis, and verification.

Accounting System: The comprehensive process of identifying, measuring, analyzing, classifying, recording, and reporting financial transactions.

Government Accounting System

The government accounting system in Nepal is a structured framework for systematically recording all government revenue and expenditure as per prevailing laws. It ensures organized documentation of financial transactions.

Government Financial Transactions

Government Revenue: Includes taxes, grants, dividends, and royalties.
Government Expenditure: Budgeted expenses.
Debt Accounting: Domestic and foreign loans.
Investment: Share and loan investments.
Others: Transactions related to government funds, deposits, etc.

The system encompasses three key aspects (ASA):

Maintaining records of financial transactions (Financial Accounting).
Preparing financial statements (Financial Statement).
Ensuring financial accountability (Financial Accountability).

Objectives of Government Accounting

Reflect the accurate status of government funds.
Ensure organized and transparent financial transactions.
Promote financial discipline and accountability.
Prepare financial statements.
Provide financial information for policy, planning, and budgeting.
Manage assets, revenue, deposits, and appropriations.
Prevent budget limit violations.
Simplify and reduce the cost of auditing.
Support internal control, monitoring, and evaluation.

Features of Government Accounting System

Focuses on development and service delivery rather than profit.
Based on the double-entry system.
Cash-based accounting.
Maintained at operational and central levels.
Simplicity, uniformity, and transparency.
Facilitates comparison of appropriations, disbursements, and expenditures.
Classified by heads and subheads for ledger maintenance.
Guided by the Financial Procedures Act and Rules.
Covers appropriations, revenue, deposits, assets, projects, etc.
Uses approved forms and reporting systems by the Auditor General.
Subject to internal and final audits.
Implements Treasury Single Account (TSA) for streamlined disbursements and budget control.
Utilizes technology-based reporting systems (SuTRA, FMIS, RMIS, LMBIS, PAMS).
Dedicated accounting personnel.
Provides financial data for government decision-making.

Principles of Government Accounting

Compliance with prevailing laws.
Public fund accounting.
Budget control.
Fiscal year accounting.
Double-entry principle.
Reporting standards.
Simplicity, uniformity, neutrality, and clarity.
Financial accountability and continuity.
Monetary measurement.
Cash and accrual-based accounting.
Cost principle.

New Ledger System (Naya Sresta)

The New Ledger System, introduced on Chaitra 2, 2018 BS (1962 CE), is a modern, double-entry, cash-based accounting system for recording and reporting government financial transactions. It remains the current system in Nepal.

Types of Government Accounting Systems in Nepal

Appropriation Accounting System: Tracks budgeted funds, disbursements, expenditures, and reporting.
Asset Accounting System: Records government assets’ receipts, expenditures, and balances (introduced in 2020 BS).
Revenue Accounting System: Manages and reports government revenue to ensure transparency and prevent leakages.
Deposit Accounting System: Records and reports security deposits, including retention money, refunds, and forfeitures.
Project Accounting System: Provides data for government and donor agencies, maintaining records like loan accounts and reimbursement logs (introduced in 2052/53 BS).

Cash vs. Accrual-Based Accounting

Aspect	Cash Basis	Accrual Basis
Simplicity	Simple	Complex
Usage	Government and non-profit organizations	Profit-oriented businesses
Reporting	Quick financial reporting	Time-consuming
Accuracy	May not reflect true financial status	Reflects accurate financial status
Cash Flow Statement	Not required	Required
Utility	Focuses on cash control	Provides real cost and future planning data

Treasury Single Account (TSA)

TSA integrates government bank accounts into a single account for streamlined financial management, introduced on Mangsir 1, 2066 BS (2009 CE). It operates through 81 District Treasury Controller Offices, enhancing transparency, real-time fund status, and efficient resource utilization.

Government Auditing System in Nepal

Auditing: As per the Audit Act, 2075 BS, auditing involves independent, objective examination, evaluation, and analysis of financial records and transactions to identify irregularities and provide recommendations.

Audit Process

Planning: Preparing annual plans, gathering entity information, and approving audit schedules.
Execution and Supervision: Document review, evidence collection, and analysis.
Reporting: Draft, preliminary, final, and annual reports.
Quality Control: File reviews and auditor checks.
Follow-Up: Reviewing actions on past irregularities.

Principles of Auditing

Independence, objectivity, and integrity.
Confidentiality.
Professional competence and due diligence.
Evidence and documentation.
Financial accountability and legal compliance.
Professional ethics and standards.

Objectives of Government Auditing

Ensure accuracy and reliability of financial statements.
Promote economy, efficiency, and effectiveness in resource use.
Detect and prevent errors, fraud, and irregularities.
Enhance public accountability and transparency.
Provide feedback for improving public fund management.
Ensure compliance with laws and standards.

Types of Government Auditing

Pre-Audit: Examining bills and payments for compliance before recording.
Internal Audit: Independent internal review to support management, evaluate controls, and ensure compliance.
Final Audit: Conducted by the Auditor General, a one-time audit of an entity’s financial transactions for a fiscal year.

Types of Irregularities (Beruju)

Theoretical Irregularities: Non-compliance with accounting principles or legal requirements.
Documentary Irregularities:
- Recoverable: Misappropriation, overpayments, or losses to be recovered.
- Regularizable: Irregular transactions or missing documentation.
- Advances: Personal or institutional advances pending settlement.

Reasons for Increased Irregularities

Unrealistic or ambiguous laws.
Lack of monitoring and accountability enforcement.
Weak internal audit systems.
Inadequate staff training and resources.
Failure to link irregularities to performance evaluations.
Lack of rewards or penalties for compliance.

Measures to Reduce Irregularities

Formulate clear, transparent, and practical financial laws.
Assign accountability to office heads for financial transactions.
Mandate timely resolution of irregularities with penalties for non-compliance.
Define clear responsibilities for office heads, accountants, and staff.
Strengthen internal audit systems and integrate with performance evaluations.

Conclusion

Nepal’s government accounting and auditing systems aim to ensure transparency, accountability, and efficient resource management. While the New Ledger System and TSA have modernized financial processes, challenges like cash-based accounting and weak internal audits persist. Strengthening legal frameworks, enhancing internal controls, and promoting accountability are critical for effective financial governance.

4.3 Government accounting and auditing system in Nepal