Municipal Accounting Reforms – Status and Road Ahead

Dr. Ravikant Joshi1

A New Context of Governance

We live in a period that has been witness to sweeping changes in almost every aspect
of our lives. Not only has the last century been acknowledged as the most dynamic in
the documented history of the human race, the last decade itself seems to have
represented more changes in technology, society, economy and politics than we can
even keep track of. It is of no wonder then that the last ten years have also witnessed
important changes in the expectations from governments. Since the early 1990s the
role of governments and its relationship with citizens has been discussed and debated
at the global level. The emerging theme at present has been on the government as a
facilitator and collaborator in the process of development, working closely with other
social institutions such as the Market, and Civil Society. This represents a major shift
from the traditional perception of governments as agencies of control or regulation.
The social and political trends in the last two decades also indicate the emergence of
the ‘third sector’ of people’s institutions and organizations (civil society) as an
empowered and visible force of global proportions. The activity of civil society is
expressed through increasing demands for the two dominant institutions of society,
the State and the Market to become more transparent in their dealings, more
participatory in their approach and more accountable to people. The earlier perception
of the government as a patron or parent is being redefined as a contract between social
partners in which citizens plays a prominent role in designing, implementing and
monitoring public policies by articulating their needs and responses to government
initiatives.
Diversity of Roles
The role of the local government is being continuously modified to keep pace with the
changes in expectation of urban local governance. On one hand the 74th Constitutional
Amendment Act of 1993 has broadened the role of the local government in a formal
way but there are many informal changes that have occurred as a result of the
economic reforms on the 1990s.
The multiple roles that the local government is expected to play today include those
of,
• A Regulator, namely the administration of various acts and regulations
• A Provider, that involves providing urban services efficiently and equitably

1
Dr. Ravikant Joshi is former Chief Accountant of Vadodara Municipal Corporation. Presently he is
working as an Advisor to CRISIL Infrastructure Advisory-Mumbai, Youth for Unity and Voluntary
Action – Mumbai and as a consultant to various multilateral organisations. He is Chair Professor for
Urban Management at St. Joseph College of Business Administration – Bangalore and is associated
with all the leading academic and training institutions working in the field of urban and municipal
management.

1
• An Agent, that takes the schemes of higher levels governments to the people.
This includes promotion of popular participation
• A Welfare Agency, which provides active assistance to higher level governments
in the equitable distribution and delivery of wealth
• An Agent of Development, who pursues continuous improvement in the quality
of life through the augmentation of infrastructure.
Accounting Reforms as Engines of Good Governance
An integral part of the new expectations of governance is for Public Information –
without which there cannot be meaningful participation or shared decision-making.
The contemporary citizen expects a fair account of how the government is faring in its
job in much the same way as investors in a company expect fair accounts of the
company’s financial position and performance. Transparent accounting and financial
reporting is central to the fulfillment of new age governance. The introduction of
acceptable accounting practices and disclosure norms are not just technical practices
but the foundations for the integrity and maturity of the government.
For instance, municipal bodies in India today are facing an unprecedented growth in
the demand for urban infrastructure and civic services. Constraints on the availability
of financial resources to augment the level of urban infrastructure and services, has
become a compelling reason to generate funds by enhancing its own revenue sources
(such as through effective municipal tax administration) and creating conditions for
the involvement of other social institutions to contribute to the development needs of
the city.
Figure 1 - Accounting Reforms and Good Urban Governance

The
Good Governance
Agenda

The Accountability Efficiency Transparency

objectives

The tools Accounting Budgeting Financial Auditin

Reporting g
Introducing double entry accounting serves as a platform
for wider improvements leading to Good Governance

However this calls for robust fiscal health on part of the municipal governments. For
instance, capacities to raise funds from the private sector are directly linked to the
quality of municipal accounting and financial reporting systems. Municipal

2
accounting systems would therefore need to reflect not only financial transactions but
also the ‘financial performance’ of the municipal governments, which includes its
ability to achieve its developmental goals, meet its program targets, its efficiency in
the use of resources, its financial position including income, assets and liabilities as
well as its foresight in dealing with the developmental and financial challenges of
governing the city. Many cities today experience competition in creating a ‘brand’ for
their city that has the right mix of innovation, integrity and social conscience in order
to be able to attract external investments.

MUST-HAVES FOR A FINANCIALLY INTEGRAL GOVERNMENT:

 An appropriate and scientific accounting and auditing systems which builds the trust
of people and markets

 A Financial reporting system that is transparent, comparable, accessible and user-

friendly for financial institutions and the public

Municipal Accounting Reforms in India - Status

Although the various factors discussed above have made municipal accounting
reforms not only philosophically relevant but a compelling necessity, not much has
happened yet in reality. The story of municipal accounting reforms in India is barely
two decades old. The period between 1981 and 1991 can be termed the first phase of
municipal accounting reforms in India. There were only three instances of reform in
this period, located in the metro cities of Mumbai Kolkatta and Chennai2 at the
instance of the World Bank. In Mumbai the scope of reform was limited to the water
supply and sewerage system whereas in Chennai an attempt was made to apply
accounting reforms to all of its accounting operations. It did improve quality of
accounting data and operations but as complete conversion was not achieved, the
outcome was very limited in all respects.
The second phase of the municipal accounting reforms can be located from 1990 to
1995. Once again at the behest of the World Bank accrual based accounting was
introduced in seven cities of Gujarat3 as a part of its financial assistance to the Gujarat
Urban Development Project4. The work of reform was facilitated by consultants
appointed by the World Bank and met with varying degrees of success in this period.
The third phase presents a sudden wave of accounting reforms across the country
since 1998. The developments in this period include a statewide municipal accounting
reforms programme in Tamil Nadu through the Tamil Nadu Urban Development
Fund (TNUDF), the introduction of improved accounting systems in Anand (Gujarat),
Jaipur (Rajasthan) and Tumkur (Karnataka) by TATA Consultancy Services-India

2
Earlier known as Madras
3 Ahmedabad, Vadodara, Surat, Rajkot, Bhavanagar, Jamnagar (all municipal corporations) and Anand
(municipal council)
4
Author was part of these accounting reforms being Chief Accountant of Vadodara Municipal
Corporation

3
 under ADB TA No. 3209-IND5, and various reforms in Mirzapur (Uttar Pradesh)
under the Ganga Action Plan. Other initiatives include an accounting system
enhancement project in Bangalore facilitated by a civic organization, the Bangalore
Agenda Tasks Force and self-initiated accounting reforms projects in Indore,
Hyderabad and Ludhiana. Bangalore Municipal Corporation has gone ahead with the
public dissemination and public hearing of their annual accounts in collaboration with
various CBOs – Janagraha, VOICE etc. The state of Maharashtra received technical
and financial assistance in 2002 from United State Agency for International
Development (USAID) to introduce statewide municipal accounting reforms which
were facilitated by a consultant, A.F. Ferguson & Co. Delhi Municipal Corporation
also has embarked on its accounting reforms since 2003 with the help from
Accounting Research Foundation of ICAI. Similarly Raipur in Chattisgadh has also
initiated its accounting reforms in 2003.
Figure 2 - Chronology of Municipal Accounting Reforms in India

2004 - 32 ULB of Andhra Pradesh – under DFID AP, 3 + 40 ULBs

of Karnataka, Nagpur Municipal Corporation,

2003 & still going on – Delhi, 5 MB of Maharashtra &

Jabalpur (M.P.)– USAID TA, Raipur-Chhattisgadh 2002–C&AG Task
c Force, URI Fund
2001-03 Bangalore, Indore, Lundhiana By MOUD GOI
Recent and Hyderabad on their own initiative
Reforms 2000 - ICAI Technical Guide
2000-01 ADB TA
Jaipur, Anand, Tumkur 2001-Supreme Court Directives

1999-2002 All Tamil Nadu Municipalities 2000 – 11th Finance Commission

GOTN initiative through TNUDF Recommendations

1990-94 Anand and

Other cities of Gujarat WB -TA

1980’s – Mumbai, Initial

Chennai, Kolkatta Reforms
WB TA

Time Line: Accounting Reforms in India

This phase has also witnessed broader institutional developments in municipal

accounting reform on the part of C&AG, ICAI, Government of India etc. Most
notable developments may be listed as follows–

5 This is a code number for the technical assistance provided by ADB.

4
 • The 11th Finance Commission recommended that Comptroller & Auditor
General of India (C&AG) should oversee accounts of ULBs and audit
accounts of urban local bodies6.
• The Supreme Court of India in the year 2001 while hearing a Public Interest
Litigation (PIL) relating to the functioning of ULBs opined that urban local
bodies in India should take immediate steps to get their accounts converted
from cash basis to accrual basis.
• The development of a technical guide for accounting and financial reporting
by urban local bodies by the Institute of Chartered Accountants of India
(ICAI) in 2000. Recently in July 1993, Accounting Research Foundation of
The Institute of Chartered Accountants of India – New Delhi, has brought out
publication of Conversion of Accounts of Municipal Bodies to Accrual Basis
– Issues, Concerns and Strategies.
• In the light of these developments, the Government of India constituted a task
force on municipal accounting reforms under aegis of the C&AG in the
beginning of 2002, which submitted its report in December 2002. The Task
Force firmly recommended adoption of accrual based accounting in place of
existing cash based accounting. Along with this main recommendation Task
Force recommended adoption of better budgeting practices, cost sheet and
management information system and provided model accounting, budgeting
and cost formats. Subsequently GOI accepted the Task Force Report and a
meeting of urban secretaries of all states was convened on 26th September
2003 in which state governments have been asked to amend relevant
Acts/Rules and to formulate a time bound implementation programme for
municipal accounting reforms. As a follow up to this meeting C&AG has
undertaken task of preparation of National Accounting Manual through
National Institute of Urban Affairs and with the support of FIRE – D project.
It has also undertaken task of preparing model uniform data base formats for
ULBs and PRIs, to create a national data base regarding local bodies, as
recommended by 11th Finance Commission.
• Another very important development was in 2002 Government of India
announced Urban Reform Incentive Fund to encourage the State to undertake
certain necessary urban reforms. Municipal Accounting Reform has been
included as one of the seven reforms under Urban Reform Incentive Fund.
It can be observed that the third phase in the history of municipal accounting reforms
is marked by manifold qualitative changes compare to earlier two phases. For the first
time in this phase urban local bodies started pursuing accounting reforms on their own
that is without external incentive or compulsion. We observe that accounting reforms
have moved from individualistic reforms (involving singular ULB) to mass scale
reforms involving multiple ULBs made possible by strong state intervention (Tamil
Nadu). We also notice participation of civil society organisations in the
implementation of accounting reforms (Bangalore, Tumkur). Finally we observe
6
Eleventh Finance Commission Recommendations (2000) and Government of India, Ministry of
Finance, Department of Expenditure (June 2001) ‘Guidelines for the utilization of local bodies grants’.

5
strong support and intervention especially after 2000 by the central government and
national level institutions like C&AG, Supreme Court, ICAI etc.
Broadly speaking, the urban local bodies have used four different models of
transition. One of the earlier experiments was in Gujarat, where the Ahmedabad
Municipal Corporation, in particular, was unable to raise finance because of the lack
of transparency in its financial accounts. Thus, the transition to an accrual-based
accounting system became a device to enhance transparency in order to raise a loan.
The corporation was one of seven urban local bodies to pursue reforms in the state.
In Tamil Nadu, on the other hand, the transition was part of broader and thorough
accounting reforms. Led by the Tamil Nadu Urban Development Fund, 107 urban
local bodies in the state achieved the transition. In another case, Bangalore, the
transition was a component of revamping the entire public expenditure management
system. And in Indore and Hyderabad, the transition was part of a Computerisation
project. Though both municipal corporations followed same model, their pre-reform
preparations, the reform process and impact of reform were different. In another
unique instance, Delhi Municipal Corporation became perhaps the only urban local
body in the world to pursue accounting reforms at the behest of the country’s apex
court, the Supreme Court of India.
The four models highlight various issues related to municipal accounting reforms, and
there are many similarities and dissimilarities between them. In some cases, the
reforms were triggered by an external funding agency like the World Bank; in some
cases, there were local change agents such as state-level bodies and even, a citizens’
forum. Some municipal bodies received financial assistance, some bore the cost of
reforms on their own; some adopted the top-down approach, some the bottoms-up
one; some achieved the required outcome, some only achieved partial results.
However, the following message emerges clearly.. There are lessons to be derived
from all these experiences, especially since more and more urban local bodies will
traverse the Reforms Path in the approaching decade. There are some common
factors leading to success such as local ownership of reforms, the need and
willingness to reform, the participation level of the stakeholders and the creation of an
enabling environment through government support. Also, conceptualizing and
designing the reforms is not difficult; it is the implementation of the new accounting
system that holds the key to success. Again, different ULBs have adopted different
approaches at each step of the implementation process, whether it was completing
legal formalities, or adopting computerisation and the timing of the same, or the
duration of the parallel run of the old and new accounting systems. Then, there are
issues such as the need for technical and financial assistance, given ULBs inadequate
human resources and poor financial positions.
Very Recent Developments –
The saga of Indian municipal accounting reforms does not stop at the end of third
phase but it is poised to enter into an exciting phase wherein everybody – state
governments, central government, multilateral funding agencies, municipal bodies on
their own and civil societies are going for accounting reforms

6
 • Karnataka State Government has awarded a contract (June 2004) for
implementing accounting reforms in its 3 pilot municipal bodies which
includes preparation of uniform accounting manual, uniform software, budget
formats and capacity building of the Director of Municipal Administration
office in phase one. This will lead to implementation of accounting reforms in
40 selected municipal bodies in second phase.
• Maharashtra State is contemplating introduction of accounting reforms in its
40 municipal bodies and by end of 2004 the actual reform work is expected to
begin.
• Andhra Pradesh State has started implementation of accounting reforms in 32
municipal bodies7 which are at present receiving technical and financial
assistance under the APUSP project funded by DFID.
• West Bengal State Government is planning to undertake similar reforms in its
municipal bodies under a DFID funded project. Meanwhile Kolkatta
municipal corporation has awarded a contract to give a finishing touch to its
age old incomplete accounting reforms and to introduce wider financial
management systems.
• Nagpur Municipal Corporation has awarded accounting reform contract in
August 2004.8
• Tamil Nadu has embarked upon the massive programme of implementing
accounting reforms in Nagar Panchayats throughout the state.
• Motivated by PROOF (Public Record of Operations and Finance) experiment
involving Bangalore Municipal Corporation (BMC) and civil society for
public dissemination and hearing of accounts of BMC; the civil societies of
A.P., Tamil Nadu, and Maharashtra are planning to adopt it in their cities.
Municipal Accounting Reforms – Road Ahead
Thus the Indian municipal scenario is now prolific in various municipal accounting
reform experiments. Ambitious plans regarding introduction of accounting reforms in
most of the municipal bodies are being formulated by the different state governments.
Coupled with this, various international funding and donor agencies like World Bank,
ADB, USAID, DFID, and UNDP are complementing these efforts through technical
and financial assistance. But the task is far from easy. There are more than 4500
municipal bodies in India and till date accounting reforms have taken place only in
less than 150 municipal bodies. The micro level reform initiatives and the macro level
developments have created a conducive environment for implementing municipal
accounting reforms but at the same time they have thrown open certain issues, which
will have to be addressed by all types of governments and other stakeholder
independently and jointly.

7
The author was involved with this accounting reforms exercise taken in 32 ULBs as an advisor and
has updated uniform accounting manual. He also prepared training binder and provided induction
training.
8
The author is involved with Nagpur accounting reforms as a team leader

7
Challenges of Future Municipal Accounting Reforms
While the above initiatives have confirmed that accounting and financial reporting
reforms are possible in the municipal government, it has also highlighted challenges
in the system that need to be confronted. This includes issues of,
Individuality/Heterogeneity – Each and every experiment of Municipal Accounting
Reforms, at present, is unique and individualistic. At the initial stage of the reform
process it is bound to be so, but indefinite continuation of such practice will lead to
non-compatibility of accounting data and performance measurement. The non-
compatibility of accounting and financial data is the most important problem faced by
higher governments (Central and state), research institutes, financial institutions and
rating agencies regarding municipal accounting and financial data.
Slow Pace and Incomplete Attainment – It has taken too much time to implement
present municipal accounting reform experiments. In some cases it has been more
than five to seven years. In spite of such a long implementation period, only one or
two local bodies have attained complete or real conversion to Accrual based double
entry accounting system. A country having more than 4500 municipal bodies cannot
afford such slow pace of accounting reforms if it wishes to make its local bodies
competitive, and an effective partner in national development. There is a need to
evolve a user friendly, simple accounting model, which can be implemented at
reasonable pace and with complete attainment of objectives.
Inadequacy of Accrual base Accounting System – Municipal bodies posses
different characteristics and they exist for different purposes. Existing efforts directed
towards implementation of accrual based accounting system without appropriate
changes, have resulted in various implementation problems.
Non-replicability of Reforms – One does not find replicability of innovations,
reforms that have been successful in one or more ULBs. Another ULB starts similar
reform from the scratch. There is no adequate dissemination of reforms experiments,
and at the same time, no enthusiasm to learn from each other’s reforms and
innovations.
Expensive– At present the cost of accounting reforms in most of the cases appears to
be on higher side and so, acts as deterrent. It is possible to reduce reform cum
transition cost by adopting appropriate implementation strategies, but not much
attention has been paid to this aspect.
Scalability – Municipal bodies in India range from population less than 25,000 to 1.3
million. They differ greatly not only in terms of population but also in terms of
geographical size, functions, resources, complexities and stage of development. There
is need to evolve a municipal accounting system, which is theoretically sound, simple,
user-friendly, economical and most importantly, scalable or tailor made for the
concerned municipal body. Thus India needs a uniform accounting system with a
built-in flexibility to cope with the diversity at the local level.
A basic fact underlying these issues is the need for convergence or harmonization
between different players right from MOUD-GOI, C&AG, international funding and

8
donor agencies to State and Local Governments, audit agencies and professional
consultants and finally civil societies.
Factors Inhibiting Better Accounting in Municipalities
The key reason for the dominance of the cash based single entry accounting system is
not only the simplicity of the system but also the lack of information on actual
transactions, liabilities and receivables of a municipal body, the political apathy for
the fiscal and financial performance of the city and the cloak of secrecy that exists
around the financial status of a municipal body. The present system and policies allow
a municipal body to hide its own inefficiencies and therefore protect policy makers
from the consequences of their performance. .
A Secondary Function
Accounting has not been considered as an important function in the municipal
context. The general perception is that an accountant’s job is to make payments for
work accomplished, to record receipts (bookkeeping) and to consolidate figures and
report against the budget at the year-end. As a result, the organizational hierarchy of
the Accountant within a municipality is not even at the rank of a middle manager.
This is largely responsible for the lack of professional capacity to innovate alternate
systems.
At present municipal accounting departments do not possess the competence to
introduce and maintain double-entry accrual-based accounts. Employees are
frequently transferred among departments inhibiting their ability to specialize in
accounting. Further, the municipal account codes (each state has separate municipal
account code) are outdated and provide only for the cash based single entry
accounting system. There is no statutory or legal compulsion on municipal bodies to
improve the accounting system. Following the Tamil Nadu experience, other state
governments are taking initiative to revise the municipal account code but the pace is
very slow.
A Piece-Meal Approach
A holistic approach to municipal accounting is clearly absent. Systems and procedures
have evolved over a time period dictated by the functional requirements, often
overlooking their internal consistency and overall municipal operational efficiency. In
addition to this is the absence of documentation across all levels municipal
administration. This prevents decision makers from developing an overview of the
entire accounting and budgeting positions to be able to engage in midcourse
corrections. As a result, the departmental heads either over-emphasize or under
emphasize their functional areas, overlooking the impacts of their decisions on the
overall financial position of the municipality.
Further, since the accounting system in municipal bodies are evolved and is not
planned, the accounting modules reflect operational convenience rather than the long-
term institutional objectives. The functional integrity of a particular module is not
maintained and does not take into account the checks and balances necessary in
accounting. The volume of accounting transactions is relatively high in the municipal
bodies and in the absence of scientific assessment of workloads, it is common that

9
either works are piled up or the municipal system modifies procedures as knee jerk
reactions to intense pressures, rather than as organizational strategies.
This piece-meal approach has crept in accounting reforms. Barring one or two
exceptions in most cases accounting reforms have been carried out for the sake of
accounting reforms. Municipal accounting reforms lacked holistic approach that is
they are not backed by internal control, auditing, budgeting, cost accounting and
performance system reforms. The post reform analysis of highly successful Tamil
Nadu accounting reforms showed that accrual based double entry accounting system
has got in place and is functioning well but it has not led to improved decision making
because decision makers lacked capacity to utilize improved data/information for
management decision making.
Absence of Internal Control and Assessment Systems
Conceptually, an internal control system demands crosschecking of the works
(accounting points) to be done by staff in the accounting department. This would be
possible only if the system is well thought out and designed to take care of the same.
In a system that has evolved incrementally over a period of time such internal checks
are missing. On the contrary, due to apprehensions about account reconciliation,
works are often intertwined or clubbed together to make internal checks difficult.
The departmental staffing pattern in a municipal body is not structured according to
the workloads. This is because staffing in municipal bodies is not done on the basis of
manpower planning or job and volume studies. This kind of organizational culture
results in a backlog in book writing and ultimately effects the reconciliation and
finalization of accounts.
Requirements of an Effective Municipal Accounting System
Understanding the Unique Nature of Municipal Bodies
A local government has a two-fold character: public and private. As a miniature body
polity, the local government is an organized entity that exercises sovereignty within
its geographical boundaries. It is formed by the local citizens to whom it must be
accountable. It is also an agent of the state and thus represents public interest.
As a body corporate, local government has a private character. Its close proximity to
the people provides it with a platform to undertake market-based economic and
business activities. This second character makes the introduction of accounting &
financial reforms relevant in a municipal body. At the same time, the duality of
character makes designing and implementing a modern accounting system in the local
government highly complex and difficult. Thus municipal bodies require an
accounting system that caters to both its characters, governmental and commercial.
An accounting system designed for cities must incorporate the following key
characteristics of the municipal body,
• Diverse Sources of Income
A typical local government mobilizes revenue from a variety of sources. The
sources municipal incomes are diverse and quite different from the revenue
sources of the private sector.

10
 A large part of local government revenue comes from local taxes and grants. That
is, more than three-quarters of the revenue of the local bodies is not dependent on
or governed by market forces. Moreover, these taxes are collected from a large
number of taxpayers and this job is quite voluminous. The accrual concept of
revenue recognition cannot be applied in its pure form to tax revenue. It needs
appropriate modifications.
Similarly local governments receive various types of specific-purpose (capital)
grants, which need to be treated at the initial stage as a liability and not as
revenue. Such grants can be treated as revenue (addition to equity) only after
specified objectives; tasks, purposes, and development are attained.
• Diverse Functions
Local governments undertake diverse sets of functions ranging from the
administration and regulation of activities to welfare and development functions.
Many of these functions entail providing services without a direct charge or with a
service charge. This may not cover the full cost of providing the service. In other
instances a tax or fee may be charged without providing a direct benefit against it.
Certain functions may also be linked with a specific source and governed by
distinct policy guidelines for financing. For instance, the local body may be
focused on the development of infrastructure without detailing the economic
feasibility or the rate of return. A municipal accounting system needs to address
these complexities arising from unique nature of municipal activities.
• Funds Management
A local government holds public resources for a specific purpose in the capacity
of a trustee. This characteristic once again distinguishes government accounting
from business accounting. The management of several funds leads to complexities
that cannot be tackled by simple conversion of single-entry cash-based accounting
system to the double-entry accrual-based accounting system. At present, the usual
practice in municipal bodies for such funds is to open separate bank accounts.
However this practice does not meet the requirement for distinct accounting for
distinct resources earmarked for specific purpose. The current practice also does
not prevent the municipal bodies from spending the money of an earmarked fund
on other activities. Thus municipal bodies need an accounting system that can
manage different funds within a single governmental unit.
• Multiple Levels
A local government typically has a highly complex organizational structure that must
be integrated in its accounting system. This includes the representation of various
levels and branches of government and the creation of a system of checks and
balances.
• Diverse Nature of Resources
In the commercial sector, there is a direct relationship between the goods or services
provided by a company and the price paid by the customer. However, in the
government this relationship does not exist for many transactions. In such instances

11
 the taxpayer is in effect an involuntary resource provider. Governments may also
receive assets at zero cost by way of its sovereign or public domain. Similarly,
municipal bodies also have to incur liabilities without a corresponding increase in the
fixed assets (saleable) or capital outlays. The construction of roads by incurring a
liability is such an instance.
• Political Pressure
The economic policies of a local body are also influenced by the pressure on elected
officials to provide the maximum amount of services at the lowest possible cost. This
is a feature that is unique to the government. This may lead to taxing the future
generation for the services provided to the present generation.

The Road Ahead

The discussion so far clearly indicates that the road ahead for improved accounting
system in municipal bodies cannot be a linear one. One will have to start efforts
simultaneously from all the corners and on all fronts. Also the process of introducing
municipal accounting reforms will vary from state to state. Still there are certain
lessons, which can be learned from the various experiments of municipal accounting
reforms, which have taken place in the last two decades. There are points, which one
will have to keep in mind to create a unified system of modern municipal accounting
system throughout India.
Though there should be a uniform framework for nation-wide implementation of
accrual based fund accounting system for municipal bodies; it cannot be drawn for a
single set of municipal bodies. The framework has to address a multitude of municipal
bodies at different stages of reforms / development. India has around 4500 urban local
governments out of which more than 300 municipal bodies have to manage above 0.1
million population, while 50 municipal bodies have to manage a city with more than
1.0 million population. The point of concern is that if the right kind of framework /
policy model is not framed regarding municipal accounting system reforms, these
urban local bodies are likely to adopt different kind of accounting models in a
sequential manner or in a disjointed manner before reaching the ideal accounting
system/model. This will result in wastage of time, energy, and money, which we
cannot afford. Also it will result in non-compatibility of accounting and financial data.
India faces a dual challenge. It must design an appropriate accounting policies and
accounting model which will take care of the nation wide unity, compatibility and
homogeneity of accounting policy, system, standards, reporting etc; At the same time,
India should design an accounting system which possesses enough flexibility to take
care of diversity, heterogeneity which characterize our municipal systems . In the
light of these ground realities the following road ahead is outlined.

The Role of Central Government - The Government of India will have to play a role
of an able navigator taking diverse agencies towards unified nation-wide municipal
accounting system while maintaining identity and diversity at local level. The
ministry of urban development, GOI has prepared a set of accounting policies and

12
standards by bringing together C&AG, ICAI, representatives of state governments,
representatives of municipal bodies. This is a very good move in right direction.
Sequel to this pragmatic move the ministry of urban development has also recently
convened a meeting of urban secretaries regarding implementation of C&AG Task
Force Report in a time bound manner. As a follow-up to this high power meeting
C&AG has undertaken preparation of National Accounting Manual comprising model
account code, which will comprise chart of Accounts, Budget code, system
description, operational guidance, agreed accounting policies and standards for
municipal bodies. C&AG is simultaneously preparing model data based formats for
the creation of national data base on urban local bodies’ finances. Once National
Accounting Manual and Model Data Base Formats are ready GOI should then place
this model municipal account code in force with some legal sanction. A state
government can adopt it in full or can develop own separate municipal account code
but in such circumstances it will have to follow the charts of accounts, budget code up
to the second level of the National Municipal Accounting Manual and all the major
accounting policies and standards in totality. This is so because if every state
government goes ahead with formulating its own account and budget codes and
accounting policies differently they may be able to correct the ills of the existing
accounting system at micro or individual municipal body level or at the most state
level. Yet there will remain the problem of comparable data. State level (accrual
based double-entry accounting system) improved account codes will improve
accounting system of municipal bodies, but will not solve the problem of non-
comparable data, which we all (national government, various research organisations,
institutions, individuals) face today.
In another very good move, Government of India is giving incentive to State
Governments to undertake municipal accounting reforms by including it under Urban
Reform Incentive Fund. But this fund includes some reforms which involve political
and fiscal ramifications. As a result many States are not going forward with URIF
implementation. Consequently municipal accounting reforms are also not pursued
adequate by such State Governments. If it is necessary then GOI should delink
Municipal Accounting Reforms from the URIF and should provide separate incentive
grant to States to undertake municipal accounting reforms.
For sustainability and updatation of uniform municipal accounting system GOI should
consider setting up of a Municipal Accounting Standard Board as a part of the
Government Accounting Standard Board or a separate board under aegis of C&AG.
This board should look after the development, standardisation and regulation of
municipal accounting system. It should also work for promotion of professionalism in
municipal bodies.
Formation of or necessary help to form Association of Municipal Accountants and
Auditors of India will create a much-desired platform to share experiences and to
inculcate professionalism into municipal accountants and auditors. The municipal
Chief Accountants and Auditors of Gujarat have formed such an association way back
in 1993. This association is registered under Indian Societies Registration Act and
Public Trust Act. This association has remained dormant and limited to Gujarat due to
lack of support. It is necessary to revitalize such an association.

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The Role of State Governments – As per our federal structure urban local bodies are
state subject or creation of state hence central government cannot play its role beyond
a point. Consequently it is the State Government, which will have to play the crucial
and leading role if municipal accounting reforms are to come through. But barring
one or two exceptions till date State Governments have not played their expected role
in municipal accounting reforms and when compared to the pragmatic role played by
central government and apex agencies its failure is becoming very obvious.
The State Governments should also undertake the task of revising municipal account
code (on the lines of Tamil Nadu State Government) using the national level model
municipal accounting manual at least up to 2nd level. State Municipal Accounts codes
should develop Budget and Account Codes up to third level, that is, group account
code or sub-budget heads. The fourth level, that is, accounting ledger or budget items
can be provided in the account code but municipal bodies should be allowed to
finalise the fourth level coding / classification (accounting ledgers & budget items)
structure / items. It must be noted that the state governments should place modified
accrual based double entry account code in place because it only can provide legal
mandate and compulsion to municipal bodies to implement improved accounting
system. The account code should also provide stipulations regarding the disclosure
norms and financial statement (taking into account ICAI guidelines), which are
required, by the SEBI & stock exchanges in order to access the capital market.
Putting revised municipal account code in place will not be sufficient. The state
governments will have to undertake a massive programme of upgrading accounting
systems of municipal bodies. It will have to take initiative to provide adequate
institution strengthening (capacity building) services to municipal bodies. Such an
initiative will a require lot of funds. The lending agencies like World Bank, ADB;
HUDCO, L.I.C. etc. should be roped in to share the cost of institutional strengthening.
Municipal bodies will have to be motivated to improve through appropriate scheme of
positive and negative incentives. For timely implementation of the new accounting
system/reforms State Government should adopt following strategies.
Any transition from the single-entry cash-based accounting to the accrual-based
double-entry accounting entails considerable costs. So far, in some cases, the
municipal bodies have borne most of the costs. But given the current financial
condition of most ULBs in the country, only a handful of them will be capable of
financing accounting reforms in future. Hence, most of them will require financial
support and State governments will have to come forward with adequate financial
assistance.
Setting a time frame spanning two to three years for implementation of double entry
accounting systems in the ULGs, will be beneficial
Indicating the incentives for compliance with specified time frames for upgradation
and punitive measures on non-achievement will bring about progress at the desired
rate.
Financial statements produced by improved accounting systems at defined
periodicity, should be demanded.

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Other Concurrent Level Issues - One area that will need special attention is
incorporation of budgetary systems and reports in municipal accounting reforms
programme. Therefore, it is important to incorporate in the initial stages of
implementation plan the reformatting of budgetary statements in consonance with the
accounting system and financial statement presentation. Lack of synergy between the
two can act as a major hurdle in upgrading the accounting system. Central and State
Governments should address this issue while framing model accounting system for
the municipal bodies. A municipal body should take care of its operational part.
Although there is widespread agreement about the desirability of development of an
Indian GAAP for local governments, there is an equally widespread recognition that
this will neither be implemented easily, nor in a few years time. Basic skills of the
accounting professionals employed by local governments, record-keeping systems at
the local level, on which all financial reporting depends, and several transitional
issues about specific principles in the Indian GAAP are some of the issues which need
to be addressed. Skills and record keeping systems at the ULG level need to be
upgraded. All the levels of Government, ICAI, and CA & AG will have to jointly
address this issue. State governments will have to take lead in this respect as
individual ULB will not be capable of doing so.
The key implementation issue remains as to how an earnest, honest, and basically
competent, but typically untrained employee, who prepares a municipality’s financial
statements can make the transition most effective – from single-entry accounts
(incomplete because of past neglect in record-keeping), to a system based on the
standard model and emerging Indian GAAP (based on double-entry book-keeping and
the special principles and accounting standards for governments). An appropriate
programme of human resource development of municipal bodies will have to be
undertaken by the respective state governments.

The Role of Urban Local Bodies – Ultimately it is ULBs whom municipal

accounting reforms will have to be carried out. They will have to face real brunt of the
transition. Urban local bodies need to play a proactive role regarding following
aspects -
The most important thing, which should happen at the local municipal level, is change
in the perception of all concerned (the elected members, bureaucratic executive head,
and the fellow municipal officers) towards accounting functions. For this, specially
tailored, structured opinion building workshops need to be conducted by a local body
going for accounting and other related reforms.
Only a change in the perception will not be sufficient, induction of professionally
qualified accounting personnel in the municipal bodies will be a must. In order to
attract such personnel municipal bodies will have to suitably upgrade organisational
status of their municipal accountants, auditors. Also, working conditions and recurrent
training facilities should be improved.
The most difficult issues are technical ones, such as valuation of general fixed assets,
and fundamental questions of law (like, who actually owns the road or a particular

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public land, or who is actually liable for the unpaid electricity, bills from the state
government’s Electricity Board, for the electricity provided to a ULG under previous
administration). Clearly, such issues cannot be resolved by accounting, especially by a
typical municipal accountant, or even a typical municipal commissioner. At the same
time, such issues need to be resolved before most of the Indian local governments
fully implement a modern system for governmental financial reporting and accounting
conforming to government objectives. ULBs will have to sort out these technical
issues at the ground level with the guidance from apex bodies like C&AG, ICAI and
by hiring appropriate professional support.
Last but not least in importance is civic education. Municipal bodies have continued
with rudimentary outdated accounting system and without any meaningful financial
disclosure because our society at large including NGO’s / CBO’s or media or interest
groups never compelled them for improvement, transparency, accountability. As
discussed, at present, neither the municipal body’s present comprehensive annual
financial report (CAFR), nor society demands it. For healthy democracy it is
necessary that people should come forward for meaningful participation and should
press the government for accountability, transparency and information in user-friendly
manner. For this, higher-level government should hold workshops for NGO’s /
CBO’s, other related organizations and individuals, regarding municipal accounting
system, information disclosure norms, performance indicators etc.

To Sum Up
Accounting reforms in the Indian municipal sector have made great strides in recent
years especially after 1999 but have simultaneously thrown up a kaleidoscope of
issues, implementation strategies and indigenous solutions. Some of the transitions
have worked; some have not entirely achieved the desired results. Yet each one
entailed hard work and opened new horizons. Together, these experiments have
facilitated several policy-level initiatives and created an atmosphere where more
reform initiatives are being pursued. It is thus likely that if the road ahead enumerated
above is pursued by all the stakeholders, then by end of present decade (2010), all the
municipal bodies in the country will adopt a modern, accrual-based accounting system
and other related system reforms that will make them more transparent, accountable
and efficient. Such transparent, accountable and efficient ULBs will then be capable
of delivering ‘good urban governance’.
Reviewed Material / Bibliography
Accounting Research Foundation – The Institute of Chartered Accountants of India –
New Delhi (July – 2003), Conversion of Accounts of Municipal Bodies to Accrual
Basis – Issues, Concerns and Strategies. (arf@icai.org)
Accounting Standards Board - The Institute of Chartered Accountants of India-New
Delhi (October–2000); A Technical Guide on Accounting and Financial Reporting by
Urban Local Bodies. (www.icai.org)

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Charles D. Francis (December 1996); Accounting and Financial Management System
Review of Ahmedabad Municipal Corporation, A Review Report, Prepared for FIRE
– D Project – USAID–New Delhi.
Comptroller and Auditor General of India – New Delhi (December 2002); Report of
the Task Force on Accounting and Budget Formats for Urban Local Bodies
Government of Tamilnadu – Municipal Administration and Water Supply Department
(2000); Accounting Manual For Urban Local Bodies in Tamilnadu, A System
Manual.
Jeanine Kleimo (April 1997); Accounting case Studies of Baroda Municipal
Corporation and the Water Supply and Sewerage Division of Mumbai Municipal
Corporation, A Review Report, Prepared for FIRE – D Project – USAID–New Delhi,
Joshi Ravikant, ‘Municipal Accounting Reforms: The Success Story of Vadodara
Municipal Corporation’, Urban India Vol. XXI No.2 (2001), National Institute of
Urban Affairs – New Delhi;
Joshi Ravikant, National Institute of Urban Affairs-New Delhi (2003), ‘Municipal
Accounting and Financial Reporting System Reforms in India; A study commissioned
by the UNDP – India Office;
Joshi Ravikant, ‘Succeeding in Municipal Accounting Reforms: The Gujarat, Tamil
Nadu and Karnataka Experiments’, India Infrastructure Report 2003, 3i Network,
Oxford University Press
Joshi Ravikant, ‘Value for Money and Municipal Accounting Reforms’, India
Infrastructure Report 2004; 3i Network, Oxford University Press-New Delhi
Joshi Ravikant, ‘Municipal Accounting Reforms in India’, (2004) World Bank
Institute – Washington – Unpublished
Joshi Ravikant, (September 2004), ‘From Accounting to Accountability: A Case for
Municipal Accounting Reforms’, Published by Youth for Unity and Voluntary Action
– Mumbai;
Narayanan Edadan and Atual Sharma – REALM – New Delhi (2001); A manual to
improve The Fiscal And Financial Performance of Municipal Corporation, A study,
Commissioned by the Ministry of Urban Development.
NIUA / USAID / TCS – (Oct. 1996); Elements of Accounting, An Instructor’s Guide
TATA Consultancy Services, India (2000); Modern Government Financial
Accounting Framework and Guidelines for Urban Local Governments, A Discussion
Paper, Prepared Under a technical assistance project of ADB.

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