Assessment of selected Urban Local Bodies preparedness for Timely Preparation of Annual Financial Statements in line with 15th Finance Commission

Introduction

India is one of the fastest-growing economies in the world, and its growth is propelled by its cities. Cities contribute 66% to the national GDP, and the number is expected to rise to 80% by 2050. The growth and sustainability of these cities would be dependent on what extent they can meet their expenses with their financial position. Their Financial Position is determined by their financial statements which are prepared by Urban Local Bodies as per the State Municipal Accounts Manual (SMAM) & National Municipal Accounts Manual (NMAM).

In line with the State Municipal Accounts Manual (SMAM) & National Municipal Accounts Manual (NMAM), Urban Local Bodies (ULBs) prepare their Annual Financial Statements (AFS) on an annual basis to depict their financial performance in the financial year. Para 31.4 of Chapter 31 of NMAM “Financial Statements states that the Annual Report/ financial statements” of the ULB shall include the following:

1. Balance Sheet;
2. Income and Expenditure Statement;
3. Statement of Cash flows (a summary of an enterprise’s cash flow over a given period);
4. Receipts and Payments Account (detailed as per the account heads);
5. Notes to Accounts; and
6. Financial Performance Indicators.

More than 30 years have passed since autonomy was provided to Urban Local Bodies (ULBs) through the 74th Constitutional Amendment Act (CAA), still financial reporting is at a nascent stage restricting to the preparation and uploading of Annual Financial Statements (AFS). None of the Guidelines whether City Financing ranking or 15th FC specifies what financial statements shall cover to comply with condition of uploading of Annual Financial Statements. Most of the Urban Local Bodies (ULBs) fail to adhere to timelines required for preparing and publishing Annual Financial Statements (AFS) despite their dependence on third-party professionals for its preparation.

14th and 15th FC and other Guidelines issued by MoHUA requires Urban Local Bodies (ULBs) to prepare and publish Annual Financial Statements (AFS). (Table 1)

It is evident that the 15th Finance Commission has mandated timeline of 15th May of the year for publishing unaudited accounts of the previous year with the vision that accounts of local-self government are prepared well on time like that of listed companies. This will further put financial discipline in place making it easier for ULBs to explore the bond market in the coming years. In today’s era of Aatma Nirbhar visioned cities, punctuality in financial reporting needs to be addressed.

Scope of the Assessment

10 Cities of Two States i.e. Jharkhand and Assam, have been selected based on random sampling. Annual Financial Statements for the past three years i.e. FY 2019-20, 2020-21, & 2021-22 have been examined from the city financial portal (https://cityfinance.in/home).

Methodology

A realistic study based on secondary sources was steered to find the measures adopted by the Government of India and State Governments for financial reporting through the preparation of annual financial statements. The data was collected from government reports, research articles, reports of research agencies, and other online resources. The assessment of 10 cities is based on author’s experience in the Municipal Finance field.

Regulatory Framework for Accounting

Urban Local Bodies (ULBs) are governed by their respective State Municipal Act like Urban Local Bodies (ULBs) of Jharkhand are currently governed by the Jharkhand Municipal Act (JMA), 2011. Urban Local Bodies (ULBs) of Assam are currently governed by the Assam Municipal Act, 1956 (amended in 2022). Some States have made necessary amendments to their Municipal Acts regarding the method of accounting to be followed by ULBs and other provisions related to it realizing the importance of financial Statements.

To Illustrate: The Jharkhand Municipal (Accounts & Finance) Rules, 2012 have been prepared in congruence with the Jharkhand Municipal Act, 2011.

• Part A – Jharkhand Municipal (Accounts & Finance) Rules, 2012: The Jharkhand Municipal (Accounts & Finance) Rules, 2012 have been presented with the rules containing Accounting and Financial matters and forms and registers related to the rules.
• Part B – Jharkhand Municipal Accounts Preparation Guidelines: Jharkhand Municipal Accounts Preparation Guidelines have been prepared in pursuance to Rule no. 13 of Jharkhand Municipal Accounts & Finance Rules, 2012. The Guidelines in separate volumes consist of:
  • Accounting Principles under the double-entry accrual system of accounting;
  • Chart of Accounts;
  • Guidelines for the preparation of the Opening Balance Sheet;
  • Formats and procedures to record the accounting entries.

However, there are no Assam Municipal (Account & Finance) Rules, unlike The Jharkhand Municipal (Accounts & Finance) Rules, 2012 which are based on the National Municipal Accounts Manual (NMAM). Thus, there is inconsistency among states regarding the adoption of State Municipal Accounting manuals to empower ULBs through the power of Governance with the weapon of Municipal (Account & Finance) Rules.

Source: Annual Financial Statements and State Municipal Acts

15th Finance Commission Timelines: Assessment

Timely financial reporting ensures meeting of statutory deadlines and availability of information to decision-makers promptly. The relevance of financial information tends to be lost if it is delayed so it is important to provide up-to-date and current data for decision-making.

• Seeing the importance of timelines of financial reporting, Section 137 of the Companies Act, 2013 has given a statutory timeline of filing Annual Financial Statements within 30 days of the Annual General Meeting of the Company.
• The Ministry of Housing and Urban Affairs (MoHUA) in its city financial ranking, 2023 has also given a timeline of Timely Audit Closure & Publication of Audited Annual Accounts in the public domain - i.e. within 12 months of ending the financial year, else zero marks will be awarded out of 25 marks.
• 15th Finance Commission has given a timeline of 15th May of 2024 for ULBs to become eligible for 2022-23 grants.

However, once these Urban Local Bodies (ULBs) are listed for municipal bonds, they need to get annual accounts prepared and audited within the timeline of SEBI for listed companies. The Ministry of Housing and Urban Affairs (MoHUA) (earlier known as MoUD) has also established a national portal of ULB finances, i.e., http://www.cityfinance.in that is a repository of municipal financial information where all urban Local Bodies need to publish annual accounts audited and unaudited for verification by Project Management Unit (PMU), MoHUA. Each state has its system of preparing annual financial statements (AFS) and getting its audit done. Some illustrative examples of State of Assam, Jharkhand, Chhattisgarh, and Tamil Nadu have been given below:

• Jharkhand: Each ULB has an accountant as an employee who prepares Annual Financial Statements (AFS) reviewed by the State Project Management Unit (PMU).
• Assam: Most ULBs except in Guwahati, day-to-day accounting is done on a cash basis by a ULB accountant on a manual basis. For the preparation of Annual Financial Statements, external parties are hired by ULB themselves. In Guwahati Municipal Corporation, a professional CA has been hired for the maintenance of day-to-day accounting and preparation of the Annual Financial Statements.
• Chhattisgarh: Tenders have been floated by the State Urban Development Agency (SUDA) for the preparation of annual financial statements (AFS) on an accrual-based double-entry system by external parties.
• Tamil Nadu: The ULB accounting Department prepares annual financial statements (AFS) through their Centralized Software Urban Tree (UTIS) and accounts are audited by a Local Fund auditor.

Source: City Financial Ranking (https://cityfinance.in/login)

Table 2 and Table 3 indicate that due to the requirement of 15th FC and City Financial ranking, pending audit of various past years was done lately like some ULBs of Assam, audit for 2019-20 annual accounts has been done in FY 2023-24. The prime reason for the delay in auditing Annual Financial Statements (AFS) is the delay in the preparation of annual accounts due to a lack of real-time updating of Tally accounting software by Urban Local Bodies (ULBs). This is a clear indication that the time has come to link reform to Grants so that timeliness in financial reporting can be adhered.

Annual Financial Statements Assessment

Annual accounts prepared by ULB either themselves or with external support have to be in line with the SMAM & NMAM. Furthermore, it shall also meet the qualitative characteristics of financial statements for effective financial reporting. Assessment against these parameters has been done in Table 4 and Table 5:

Source: City Financial Ranking (https://cityfinance.in/login)

Conclusion & Strategic Roadmap

Preliminary assessments of Annual Financial Statements (AFS) of sample cities indicate that lately due to the 15th FC condition for claiming Grants and City Financial Ranking requirements, cities have started preparation and auditing of financial statements seriously. Sample assessment of 10 cities indicates that delay significantly reduced in 2021-22 as compared to 2019-20 as even earlier years’ financial statements have been audited in the years 2021-22 and 2022-23. The challenge is that all cities of India where accounts are not updated in real-time will face difficulty in meeting the deadline of 15th May from FY 2024-25 onwards.

This article attempts throw light on areas where States and ULBs need to gear up well on time by getting their all tools in place like getting all accounting entries updated, all reconciliations done, and appointing a Statutory auditor well on time else the timeline of 15th May of Financial Year may become the dream for certain ULBs leading to their failure to claim Grants for FY 2024-25.

Some of the key tools/suggestions that the State and ULB can place in their baggage of complying with 15th FC conditions well before the close of 31st March of FY have been presented below: