National Treasury and Economic Planning Cabinet Secretary Prof Njuguna Ndung’u poses with the briefcase containing the 2023/2024 budget statement at Treasury Building in Nairobi on June 15, 2023.
As Kenya continues with the robust conversation about public debt, it is important to find a solution to pending bills.
During President Kibaki’s administration, LPOs (Local Purchase Orders) and LSOs (Local Service Orders) were bankable documents. LPO and LSO financing was a selling bank service even among microfinance institutions. Today, hardly any financial institution will give LPO and LSO financing as the probable time of payment is not known.
Over time, contractors and service providers have become reluctant to offer services, especially to counties.
The pending bills problem stems from Kenya’s use of the cash-based accounting system for both our budgeting and accounting. Cash basis is the elementary accounting that recognises revenues and expenditures only when funds are received and expenditures paid out. This is the simplest way of preparing accounts as it only includes transactions when money is paid out or received.
Cash accounting as currently applied by Ministries, Departments and Agencies and county governments does not allow for the complete recording of pending bills in the accounting cycle. This compromises their crediting and completion and as a result, significant funds are used in the verification of these bills, especially after change in regimes. This has even led to different lists of pending bills being presented within the same timeframe.
This mess would, however, be avoided if the government adopted accrual accounting which provides a standard definition and recognition criteria for liabilities.
Under this system, income and expenditure transactions in the period they are earned or incurred are recognised rather than at the time when payments are received or made. This is advantageous in that income for a period is shown against the expenses taken to generate the income. It enables the presentation of a balance sheet that communicates an entity’s net worth at any given time.
Globally, there is a drive for governments to draw up their accounts on an accrual basis. The Committee of Finance and National Planning is considering law amendment to provide for Kenya’s migration from cash to accrual accounting.
The writer is the Molo MP and chairman Finance & National Planning Committee
