The National Commission of Accounting Harmonization

The National Commission of Accounting Harmonization (CONAC) came into existence along with the LGCG as an organization in charge of the coordination for the harmonization of government accounting. The CONAC brings together representatives of the states, the federal government, and the municipalities to indicate the minimal elements of the accounting manuals, to issue the classifiers of the accounting catalogs and accounting standards for the release of financial information, to generate the guidelines for the implementation of a cost system, to establish the methodological framework for the integration between the accounting records and the budget process, and to define the provisions for the accounting record of the public debt scheme.¹

However, though it is important to analyze Mexico's case in light of the technical and legal criteria established by the CONAC, it is also important to estimate the progress achieved at an international level; even more so considering that one of the mandates of the CONAC is to address the best accounting practices. Worldwide, the best practices to develop comparable information at the different government levels are IPSAS—issued by the International Federation of Accountants (IFAC).² The IFAC was founded in 1977 with the purpose of establishing the values of integrity, transparency, and proficiency as the guiding principles of the accounting profession. The mission of the IFAC is to provide accounting guidelines for international use so that the financial statements of the public sector are able to acquire the necessary characteristics to be compared at an international level ( Chan & Zhang, 2013).

The IFAC establishes 32 IPSAS that comprise the accounting practices with the most international reliability for the structuring of quality financial information. These standards include guidelines for the presentation of financial information, such as cash flow statements, financial statements and investments, as well as for the government information of the assets, debt and financial instruments of the public sector ( ^{IFAC, 2013} ). Although the IFAC oversees the elaboration of the accounting standards for the public sector, this organization does not have the ability to enforce their use. However, IPSAS are followed by several countries ( ^{Galera & Bolívar, 2011} ). Some Latin American examples are: Colombia, Costa Rica, Peru and Uruguay ( ^{Araya, Caba, & López, 2011} ). In Europe, Spain chose to use IPSAS in 2010 because of a reform to the general public accounting plan to improve transparency and accountability toward its citizens ( ^{Brusca & Montesinos, 2013} ). In the rest of the world, Australia, New Zealand, the United Kingdom and the United States have successfully integrated IPSAS to their accounting and financial information systems, as part of their modernization strategies for public management ( ^{Benito, Brusca, & Montesinos, 2007}; ^{Fuertes, 2008} ). The experience of the countries that already use IPSAS show that the result is the innovation and the acknowledgment of good accounting and financial practices at an international level.

World organizations such as the International Monetary Fund (IMF), the World Bank (WB) and the United Nations Development Program, consider the adoption of IPSAS as a step toward modernization and government transparency ( Chan & Zhang, 2013 ). Therefore, IPSAS increase the reliability of financial information and promote data provision for accountability. Even the IMF is conditioning developing countries the release of new credits in exchange for the adoption of IPSAS by their authorities ( ^{Chan, 2008}).

It is important to mention that one of the objectives of IPSAS is to achieve the harmonization of the accounting information, as is the case of financial statements, and even to reach the standardization of the accounting practices in the public sector between the different government levels in all countries. Because of these reasons, the observance of IPSAS is considered the first step taken by countries interested in starting a modernization process for their information systems ( ^{Fuertes, 2008} ). Developing countries are the ones that should more urgently incorporate IPSAS within their standards and accounting practices ( ^{Benito et al., 2007}). ^{Chan (2008)} even lists the observance of IPSAS as an international benchmark to evaluate the government accounting practices and the accountability in accounting and financial matters.

The possibilities of IPSAS to improve financial evaluation: some previous considerations

IPSAS 1 and 2 establish the minimal requirements for the generation of both the content and the presentation of financial statements with the purpose of comparing and of having the conditions to make more informed decisions in financial matters in the public sector. It is known that the use of the accrual record or the cash flow record has particular methodological implications. Thus, to compare the financial information between different entities it is necessary to use the same recording system, be it accrual or cash flow. Due to this, the governments must manifest the record system that they use, as the information generated with the accrual record is not comparable with that of the cash of flow record. Although the IPSASB acknowledges the right of the governments to establish accounting guidelines and standards for the presentation of their financial statements, it openly promotes the adoption of the accrual recording system as the best mechanism to obtain more precise information ( ^{Fuertes, 2008}).³

For those governments that use the cash flow system, IPSAS 1 requests the full compliance of the provisions issued mainly to inform about this recording system. This is achieved through the publication of the collection and cash payment statement. In the presence of these omissions, the IFAC recommends using IPSAS 1, which corresponds to the accrual recording system, and voluntarily revealing in the “Financial statements notes” the accounting policies and the measurement bases used for the elaboration of the financial statements. The aforementioned is done so that the potential users of this information are able to correctly use these data and compare and analyze them against those of other governments ( ^{IFAC, 2013} ). Therefore, the financial information should always be carefully reviewed, as it could be assumed that the public servants have incorporated the accrual recording system into their routines and procedures, when in fact they have not.

To carry out a more complete financial evaluation, another important provision is IPSAS 17, the aim of which is the recognition and valuation of the fixed asset ( ^{IFAC, 2013} ). It is not hard to imagine that, appropriately accounting the needs of investment in a fixed asset, of the passive levels, or of the levels of public debt, shall improve the information about the value of public patrimony to implement public policies in the country. The analysis of three aspects of the Mexican government accounting system is below: the amount of data it generates, the quality of the same considering IPSAS; and the degree of harmonization reached during the analysis period.

Methodology and data

The first objective is to analyze the public accounts in the corresponding electronic portals of the state governments, Mexico City, and the Federal government to record the presence or absence of the 10 accounting information reports indicated by the CONAC in its Conceptual Framework for Government Accounting ( Marco Conceptual de Contabilidad Gubernamental – MCCG) during the period of 2008–2012.⁴ Subsequently, the presence or absence of the financial statements that IPSAS 1 indicates as a full set of financial statements for the public sector for the states, Mexico City, and the Federal government for each one of the years within the period of 2008–2012 is evaluated.

Source: Own elaboration with state and federal public accounts.

Figure 1 Publication percentages of accounting reports indicated by the CONAC (2008–2012).  

The second objective is to quantify the financial information published considering the requirements set by IPSAS 1, 2, and 17 as an indicator of their quality, given that they represent the best international practices in the elaboration of the financial statements of the public sector. In this manner, an assessment is made on whether the reports have the same information to build the financial reasons that facilitate the comparison of the state information with the information from the federal government and that of Mexico City.

The third objective is to calculate the level of harmonization of the accounts in the financial reports considering IPSAS 1 and 2, to see if the financial statements present the same accounts so that comparative assessments can be carried out between them.

Analysis of the government accounting system in Mexico

Publication of the financial statements indicated by the CONAC (Consejo Nacional de Armonización Contable)

Figure 1 indicates the frequency each one of the financial statements required by the CONAC (Consejo Nacional de Armonización Contable) is published during the analysis period. It can be observed that the statement of financial position is the most published (87%), whereas the statement on contingent liabilities is the least published, followed by the cash flow statement. This information proves that the states present basic information regarding their assets, liabilities, and capital through the statement of financial position. However, they present insufficient reports regarding their obligations and the variations of assets, rights and their obligations.

Publication of the financial statements indicated in International Public Sector Accounting Standard (IPSAS) 1

IPSAS 1 defines a full set of financial statements as that which include the statement of financial position, income statement, statement of changes in the financial position, cash flow statement, and notes to the financial statements. It is worth mentioning that this documentation is included in the financial statements recommended by the CONAC.

In 2008, all states, including the federal government, published the income statement. The states of Mexico, Guanajuato, Querétaro, and Zacatecas were the states that published the most financial statements, reaching the maximum percentage observed in that year (75%).⁵ In 2009, with the implementation of the LGCG, an increase is observed regarding the publication of these financial statements when compared to the previous years: the average production of financial information at a national level increased 27 percentage points, reaching the highest average observed during the analysis period. Aguascalientes, Baja California Sur, Mexico City, Guanajuato, Jalisco, Morelos, Nayarit, Nuevo León, Oaxaca, Quintana Roo, Sonora, Tamaulipas, and Yucatán were the entities that released the most financial statements. Annex 2 presents the analysis of the publication of the financial statements by the states, in accordance with the requirements of IPSAS 1.⁶ The statement of financial position was published by all the states in 2009, except for Chihuahua and Guerrero (the latter did not present any type of accounting information in its internet website). For its part, Tlaxcala was the only state that generated its cash flow statement, an event that only occurred once during the entire analysis period.

In 2010, the publication average of the financial statements analyzed decreased by 12%. This downward trend was also observed in 2011—three years after the entry into force of the LGCG—when only 54% of the financial statements analyzed that year were published. Aguascalientes, Baja California Sur, Mexico City, Morelos, Nayarit, Oaxaca, Querétaro, Sonora, and Yucatán were the states that published the most financial statements. Hidalgo—same as Guerrero—once again did not publish any financial statement, same as other states that did not comply, such as: Baja California, Durango and Sinaloa, who only presented one financial statement. The following year, an increase in the average of published financial statements can be observed, even though it is not very large ( Annex 2).

The balance during the studied period is that Aguascalientes and Yucatán are the states with the largest amount of published financial statements required by IPSAS 1. Nayarit is one of the states that released the most financial statements in the last couple of years. The rest of the states present an inconsistent behavior. For example, among the states that published more statements at the beginning of the study is Querétaro, but in 2012 it only published one statement. During the analysis period Guerrero did not present any type of accounting information, and Chiapas and Tabasco are the states with the lowest percentage of compliance (20%).

Publication of the accounts indicated in IPSAS 1 and 2

The accounts or items that are presented in each financial statement are reviewed based on the set of accounts that the IFAC establishes in IPSAS 1 to evaluate the financial development of the states. Thus, the analysis unit is the financial-accounting elements. The details of this section can be found in Annex 3 . This means that the compliance of IPSAS 1 was evaluated through the presence or absence of the following elements in the financial statements: (a) The statement of financial position shows the lines of the current assets, cash, cash equivalents (Banks), inventories, accounts receivable from transactions with considerations (services), accounts receivable from transactions without considerations (taxes, fines), short-term credits, income from investments, noncurrent assets, properties, facilities and equipment, investment properties, land and buildings, short-term liabilities, long-term liabilities, public finance, retained earnings, reserves, period result; (b) In the income statement (or statement of financial performance) the accounts of the income, expense, financial costs, earnings or losses after taxes, and period result must be submitted; (c) In the notes, a summary is included regarding the accounting policies, such as measurement bases and the upgrading of the fixed asset; (d) The state publishes a statement of changes in the net assets; and (e) The cash flow statement is included in the set of financial statements presented in the Account of public finance of each state. The elements of sections (a), (b), (c), and (d) enable the assessment of IPSAS 1, whereas the compliance of IPSAS 2 is determined by the report mentioned in section (e).

In accordance with Table 1 , the states that publish more accounts and therefore have the best possibility to evaluate their financial performance, at least for one year of study, are: Aguascalientes, Mexico City, Veracruz, Baja California, Baja California Sur, Oaxaca, Morelos, Guanajuato, and the federal government. The aforementioned is due to the fact that they present an average above 80% in regard to the publication of accounts required by the IFAC. It can be observed that in 2009, the information available in terms of assets at a national level increased with the help of Aguascalientes, Nayarit and the Federation, who published 90 percent of the elements requested. Eighty percent of the frequency of data related to the assets was published in Aguascalientes, Guanajuato, Morelos, Veracruz, and the Federation in 2010. In the following years, the percentage increased to 90 and was reached by Chiapas, Guanajuato, and Veracruz in the period of 2011, and only in the state of Oaxaca for 2012. It was the Federation and the state of Aguascalientes who published the most information regarding the assets in the study period.

Equity information by public entities is scarce: during the years analyzed, only in 2010 and 2011 did more than one state present these requirements in a complete manner. Aguascalientes, Durango, Puebla, Quintana Roo, San Luis Potosí, Sinaloa, Tamaulipas, Veracruz, Yucatán, Zacatecas, and the Federation are the ones that published the most information regarding public equities in 2010. The following year, this position was occupied by Baja California Sur, Chiapas, Colima, Durango, Guanajuato, Jalisco, Michoacán, Morelos, Querétaro, San Luis Potosi, Veracruz, and the Federation. The information presented is more substantial when the records of the liabilities are analyzed: most of the states publish information from these accounts, except for Chihuahua, Coahuila, Guerrero, Hidalgo, and Tlaxcala.

The activity report is evaluated with the accounts of the income statement, that is, the income and expenditure accounts, the financial costs, and the result of the financial year. The states of Zacatecas, Yucatán, and the Federation are the only ones that present all the accounts required to evaluate government activities. The rest of the states comply with 75% of the requirements.

It is important to remember that, for the information produced under the guidelines of IPSAS 1 to be comparable, it is necessary that the government specifies the recording basis of its accounting. In this manner, the financial statements done with an accrual recording basis could be comparable with other financial statements produced under the same accounting basis ( ^{IFAC, 2013} ). Thus, IPSAS 1 indicates the need to report – in the notes of the financial statements – the method used to evaluate the fixed asset and whether said evaluation has been updated, including their depreciation. The states of Oaxaca, Nuevo León, San Luis Potosí, Tabasco, Veracruz, and Yucatán publish information that enables the assessment of their quality and whether they can be compared with each other. Said statements provide information in regard to the update of the fixed asset and the measurement basis of their accounting statements during each one of the years after 2008. The rest of the states were not consistent with the presentation of this information.

Publication of the accounts indicated in IPSAS 17

IPSAS 17 establishes the minimum requirements to validate the recording of noncurrent assets of public entities, their depreciation (loss of value due to its use or over the course of time), as well as the measurement bases of the resources.⁷ This standard must be applied to all entities in the public sector that own properties, facilities, equipment—including those of a military nature—and the infrastructure asset. It is worth mentioning that IPSAS 17 does not require recording the historical, artistic or cultural heritages; however, should an entity fail to do so, it is recommended that it follows the guidelines established in this provision ( ^{IFAC, 2007}).

Through IPSAS 17 it is possible to infer the comparability of the information published in the financial statements of the states, as the noncurrent assets comprise the resource that remains through time, and in a long-term period. The calculation of the real value of the resources is facilitated when depreciation is recorded. These records, along with the measurement basis, allow for the determination of whether the information is comparable when the same method is used to value these resources ( ^{González, 2011}).

Before the year 2000, there is a great lack of information related to the noncurrent assets, investment properties, movable and immovable property, and the measurement basis with which these assets are assessed in each one of the studied government bodies ( Annex 4 ). However, with the entry into force of the LGCG, the dissemination of this accounting information has considerably improved, going from a publication average of 47–68% in 2012 ( Table 2).

Harmonization index in the accounts indicated in IPSAS 1 and 2

Once the financial information requirements complied with by the states, Mexico City and the federal government have been analyzed, then the degree of financial harmonization can be evaluated to determine how comparable the data is between the bodies of the public sector that were studied throughout the course of time. For this purpose, the Herfindahl-Hirschman Index (HHI) is used.⁸ The information obtained from the HHI allows for the inference of the degree of uniformity of the data and thus, it is possible to conclude the level of accounting comparability in the country ( ^{Lara et al., 2011} ). The value of the HHI will vary between zero and one. When the publication of the data is concentrated in a few states, the HHI will take values closer to one. The HHI expression is the following:

H=∑i=1kpi2  

where H is the HHI, p indicates the number of elements that appear in the reviewed reports of each state ( i ) that comply with IPSAS 1 and 2 with regard to the total criteria found at a national level, and variable ( k ) is the number of states studied. Therefore, pi2 is the squared relative frequency of the elements of IPSAS 1 and 2 found in the sample ( ^{Rodríguez, 2009} ). Thus, based on the requirements of IPSAS 1 and 2, H indicates the concentration level with which the states publish their accounting information.⁹ The HHI indicates that the years with the highest accounting harmonization were 2009 and 2012, with a degree of harmonization of (0.03342560) and (0.03342658), respectively, as shown in Annex 5.

The highest value of HHI is observed in 2008 (0.03453), which means that in that year the comparability of the information was lower in comparison with the following years. This lack of harmonization can be explained by the fact that the guidelines of the LGCG were just emerging. The lowest harmonization or comparability in the financial information is observed in 2011, with an HHI of (0.03442). Fortunately, the HHI of 2011 does not reach that of 2008, which represents progress by itself.

A criteria to evaluate whether the changes were significant and therefore favorable throughout the years is to employ the concentration resolution mechanism of the Federal Economic Competition Commission ( Comisión Federal de Competencia Económica ), which states that if the change in the HHI is lower to (|0.02|), the changes that present themselves are not significant ( Comisión Federal de Competencia, 1998 ).

Based on Table 3 , it can be concluded that the marginal changes of the periods of 2008–2009 and 2011–2012 were superior to (|0.02|), and therefore the changes for a better accounting comparability are significant. The previous statement is consistent with the analysis presented up to this moment, in which it is declared that the years with the highest accounting harmonization were 2009 and 2012.

It can be concluded that the topic of financial harmonization at the different government levels in Mexico has obtained favorable results when compared to the year 2008, year in which the LGCG was not yet present. However, there is still room for improvement so that the harmonization of the accounting information is fully established in all states in the country.

Other advances on the road to improve the financial evaluation of the public sector in Mexico

The LGCG authorizes the National Commission of Accounting Harmonization (CONAC) to dictate the design and operation of the accounting system at a national level. The CONAC—comprised by representatives of the federation, the states and the municipalities—is in charge of designing the provisions that enable the compliance of the aspirations of the LGCG. The results show that the CONAC is keeping its promise to increase the amount of accounting and financial information of the Mexican government. They also show its concern to improve the quality of the information. Proof of this is that in 2009, it indicated the following financial statements as essential within the accounting information to be generated by the states: (i) Statement of financial position; (ii) Statement of activities (similar to the former Income Statement); (iii) Statement of changes in public finance/equity (formerly Statement of Changes in the Financial Position); (iv) Cash flow statement; and (v) Notes in the financial statements.

Furthermore, the manual, “Standards and Methodology for the Release of Financial Information and Structure of the Basic Financial Statements of the Public Entities and the characteristics of their notes” ( Normas y Metodología para la Emisión de Información Financiera y Estructura de los Estados Financieros Básicos del Ente Público y características de sus notas ), presents a format for the filling of the “Cash Flow Statement”, the structure of which is consistent with the one recommended by IPSAS 2. The invitation of the CONAC for the generation of this report since 2010 is another improvement that promotes the release of information regarding the input and output flow of the resources of public administration. In 2012, according to article 9 of the LGCG, new recommendations were issued for the contents of the government account manuals, along with the re-classifiers of account catalogs; as well as the standards for accounting and for the release of financial information that have been formulated and proposed by the Technical Secretary of the CONAC.

The progress related to the unification of the depreciation system is also encouraging. The Secretariat of Finance and Public Credit issues standards—through its Government Accounting and Reports on Public Administration Unit ( Unidad de Contabilidad Gubernamental e Informes sobre la Gestión Pública – UCGIGP)—to regulate its government accounting system. More specifically, it regulates anything related to use value, depreciation and re-evaluation, establishing the need to depreciate the tangible noncurrent assets of the public sector in order to carry out gradual economic projections to maintain and preserve public heritage.¹⁰ These institutional improvements are subject to the compliance on behalf of the states and to the agreement reached at a national level to define assets and national heritage. It is necessary for the states, led by the CONAC, to be willing to unify the depreciation evaluation system at the three government levels. Otherwise, the information will continue to not be comparable because, as previously explained, each state can make use of one of the accounting record methods to assess its assets (cash flow or accrual). The CONAC will also have to reconsider that the state governments inform the amounts of depreciation within the Financial Situation Statement of each one of the assets, as it is usually done in the private sector, instead of generally presenting it in the notes of the financial statements. This practice done in the private sector allows to more easily and specifically read the value of each one of the noncurrent assets, their accumulated depreciation and the net value once the same is subtracted. The hope is for these good practices to be complied with by the public sector and that their intention permeates the agreements that are promoted by the CONAC at a national level in regard to the valuation and depreciation of assets.