Public Sector Accounting Reform at Local Government Level in Indonesia

This paper describes and analyses the challenges encountered in attempting to reform public sector accounting in Indonesia, the main objective of which is to combat corruption and thus help improve governance. Our observations suggest that this reform has been seriously hindered by a lack of staff with adequate accounting skills — a problem exacerbated by the decision to continue to prepare old‐style cash‐based reports alongside the new accrual‐based reports. Our key contribution is to demonstrate the danger of rushing to copy public sector financial management techniques from quite different country contexts, especially when there are significant differences of opinion as to the appropriate design of these reforms among the influential policy‐making agencies.     

The Use and Abuse of Accounting in the Public Sector Financial Management Reform Program in Australia

Accrual accounting has been central to financial management reforms designed to promote greater efficiency, effectiveness and accountability in the Australian public sector. This is the setting for the article; however, the issues covered apply to all nations that have reformed their public sectors over recent years. The results of the reforms have been mixed. While accrual accounting has had some beneficial results for the above purposes, the benefits have been offset by aspects of accounting misuse resulting largely from adoption of the business model of accrual accounting, termination of the former cash accounting system, and adoption of some questionable marketization reforms which appear to be more driven by the objective of reducing the size of government rather than enhancing efficiency of operations. Because Treasury believed that the business model was not appropriate for budget fiscal policy purposes, it introduced a second combined accrual and cash accounting system—the Government Finance Statistics system. The use of two accrual accounting systems reporting different results caused much confusion in parliament.     

Decision Usefulness of Cash and Accrual Information: Public Sector Managers’ Perceptions

This study examines the usefulness of accrual accounting information for internal decision‐making contexts in the Western Australian public sector. Based on questionnaire responses of public sector managers, it was found that accrual accounting is perceived to be more useful than cash accounting in 16 of the 19 decision situations. These results suggest that the perceived usefulness of the accrual accounting system has improved with the passage of time. It may well be that perceptions of the usefulness of information derived from an accounting system will change over time as users gain familiarity and experience with a system.     

MIND YOUR ACCRUALS: PERCEIVED USEFULNESS OF FINANCIAL INFORMATION IN THE AUSTRALIAN PUBLIC SECTOR UNDER DIFFERENT ACCOUNTING SYSTEMS

This study examines the usefulness of three accounting systems (cash, Generally Accepted Accounting Principles (GAAP) accrual, and Government Finance Statistics (GFS) accrual) for public sector decision‐making. From a survey of internal users, external users, and preparers in Australia, we find that GAAP accrual information is perceived to be relatively more useful and understandable than the other two systems for most decisions examined. The relatively higher ratings for GAAP accrual information differ from earlier studies and may reflect an experience or familiarity effect whereby perceptions of usefulness are enhanced because respondents have become more used to the system. This effect might also explain the lower ratings for GFS accrual.     

Evaluating the Implementation of a Mandatory Dual Reporting System: The Case of Indonesian Local Government

Informative and transparent financial information in the public sector is crucial for improving public sector management and eradicating corruption. Given this, Indonesia has reformed its public sector accounting, reporting and accountability systems by implementing a dual reporting system known as ‘cash towards accrual’, following similar reforms in developed countries. Drawing on the experience of five local governments (districts) in Indonesia, this study finds that the implementation of the dual reporting system has helped local governments to produce transparent and informative reports. However, the accrual‐based contents of the dual reports produced by the new reporting system are underused for decision making. In addition, there has been a significant increase in costs associated with the implementation of the new accounting regime in the jurisdictions studied. The study also finds that the ability of the users to use information generated by the new accounting system is more important than just a legal and mandatory requirement to use the new system.     

Professional Accounting Standards and the Public Sector—a Mismatch

Professional accounting standards have been applied to the public sector in Australia as part of the process of adopting accrual accounting. However, the reason given for their application to the public sector is questionable. The modes of operation of governments and of the business sector are very different, and accounting standards must be tailored to suit the specific information needs of each sector for the accounting systems to provide relevant information. The four Accounting Concepts Statements and the broad requirements of AAS 29 and AAS 31 are examined to show where changes are needed in the standards to make their information more relevant to the needs of the public sector. These changes would better enable accrual accounting information systems to assist in enhancing the efficiency and effectiveness of public sector operations and the accountability of governments to parliament and citizens.     

IPSAS or IFRS as the Framework for Public Sector Financial Reporting? New Zealand Preparers’ Perspectives

The last 30 years have seen public sector accounting in many countries undergo considerable change. More recently, some governments adopted accrual accounting and International Public Sector Accounting Standards (IPSAS), some adopted modified International Financial Reporting Standards (IFRS) while others continued with cash‐based accounting. New Zealand (NZ) has, for more than two decades, followed a sector neutral approach to financial reporting and standard setting where the same accounting standards were applied to all entities in all sectors: for‐profit, not‐for‐profit and the public sector. This period included the adoption of IFRS by for‐profit entities with minor modifications for the public sector. The suitability of IFRS for the public sector has been questioned and, recently, standard setters in NZ decided to adopt a sector‐specific standard‐setting approach with multiple tiers for each sector. The for‐profit sector will continue to follow IFRS but reporting standards for the public sector will be based on IPSAS. In this period of change we sought the views of preparers of public sector financial reports regarding the users of such reports and their preferences for the public sector reporting framework. We also sought the views of the preparers regarding the usefulness of each financial statement for users, and whether the benefits of reporting by their organisations exceeds the costs. The findings indicate support for maintaining IFRS as a basis for reporting in the NZ public sector. However, IPSAS modified to NZ conditions is also perceived as an acceptable option by respondents in this study. The income statement is, in the opinion of the respondents in this study, the most useful statement while cash flows appear to hold little value. A high proportion of respondents believe that the benefits of reporting exceed the costs, which contradicts the view that such reports are mainly compliance documents that provide little value. This finding contributes to the continuing debate on costs versus benefits on the recent introduction of IPSAS as the reporting framework for the public sector and the perceived appropriateness of IPSAS in public sector reporting.     

Management accounting innovations for rationalizing the cost of services: The reassessment of cash and accrual accounting

ABSTRACT

Management accounting can be a useful tool in austerity government because it produces information about the costs of public services and can be used for informed decision-making. Spanish local governments are required to submit data on the cost of their services to central government, which publishes this information online. The calculation of costs is based on budgetary cash accounting instead of accrual accounting; therefore cash accounting is being used for decision-making and accrual accounting has no role in this process. This paper critically analyses the innovation from three perspectives: the use assigned to the cost information in the legal framework; the opinion of academics and experts; and the perception of professionals about the usefulness of the information produced with the new system.     

Application of Accrual Accounting in the Australian Public Sector – Rhetoric or Reality

This paper presents a contextual. historical analysis of recent accrual accounting developments in the Australian Public Sector (APS). It takes a critical stance in that it questions the accrual accounting developments on a number of grounds. The paper examines changes in public sector financial management and accountability in four distinct settings, being: accrual financial reporting, accrual management systems, whole of government reporting, and accrual based budgeting. The findings show that already in Australia accrual accounting has made significant encroachments into some areas of annual financial and budget reporting. This influx has meant that terms such as 'deficit', 'debt', 'liabilities', 'operating results', 'assets', etc. have begun to change in meaning, which it is argued has important implications for the current process of transformation of aspects of the APS.     

Budgetary Accounting in National Governments: Anglo versus American Accounting

Abstract: This paper offers an understanding of the US federal budgeting and accounting system, in context. The system is unique among the major Anglophone countries, in being both cash‐based and obligation‐based, thereby providing what can be termed a polar opposite case to an accrual‐based system, the technicalities of which the paper explains. The paper uses, as a comparator, the UK government's cash‐based and accrual‐based system, also in context. This shows that the US system is primarily a system of control by the legislature, whereas the UK's is primarily one of control by the executive. The paper analyses the long history of institutions of the US federal government defending the obligation basis in the face of accrual‐based assaults; the obligation basis has remained resilient.     

IPSAS in Latin America: innovation,isomorphism or rhetoric?

ABSTRACT

Over the past 30 years, many initiatives have been undertaken to reform public administration in Latin American countries. Among other aspects, the reforms seek to improve the transparency and accountability of the public sector by modernizing public accounting and budgeting systems. The adoption of accrual accounting in the public sector has been seen as an innovation and it is driven by the implementation of IPSAS. This paper sheds light on the process of reform of public financial management in Latin America and the state of implementation of IPSAS. The paper analyses the driving forces for adopting or adapting IPSAS, as well as the obstacles and challenges in doing so.     

Accounting System Reform in Japanese Local Governments

The New Public Management (NPM), of which the change from cash accounting to accrual accounting is considered an important tool, has been in fashion in many developed countries. Japanese governments, however, have preserved control of expenditures on a cash basis, though recently financial management reforms in local government have begun to adopt NPM ideas. Using a contingency framework which views the reform of accounting sub-systems (management accounting, financial accounting and auditing) as stimulated by a combination of internal and external pressures, this paper explores why Japanese local governments managed to survive without accrual accounting and the prospects for further reform in the future. It is suggested that system change itself can be accomplished by internal pressures, in the form of mandated policies, alone but that sustained external pressures by citizens are required in order to achieve the intended outcomes of accounting reform.     

The usefulness of accrual-based surpluses in the Canadian public sector

This paper investigates the usefulness of accrual-based surpluses for predicting future cash flows and surpluses in the context of the Canadian public sector. We provide evidence that surpluses incrementally enhance the ability of operating cash flows to predict future cash flows and surpluses. Analysis of our accrual quality model illustrates that accrual accounting is useful in the public sector for mitigating the noise in operating cash flows. We also find that decomposing surpluses into operating cash flows and accruals enhances the ability of surpluses to forecast future cash flows and surpluses, indicating that aggregate and disaggregated surpluses are positively related to both relevance and reliability. Our test results do not indicate the presence of conservatism in the Canadian public sector, and confirm that the usefulness of surpluses in making predictions is independent of selected control factors.     

A theoretical basis for public sector accrual accounting research: current state and perspectives

ABSTRACT

Public sector or government accounting has been the subject of many research endeavors. However, scholars have repeatedly criticized the lack of a consistent and well-defined theoretical basis for international research. So far, most researchers have drawn from various streams of theoretical perspectives with often unsatisfactory results. The goal of this paper is to put forward the International Public Sector Accounting Standards Board’s (IPSASB) Conceptual Framework as a point of reference for establishing a better-fitting theoretical basis for public sector accrual accounting research.     

The influence of the nature of government accounting and reporting in decision-making: evidence from Switzerland

A key objective of government accounting and reporting has been to achieve accountability and its use in that respect has been well documented, however its use for decision-making has had less coverage. This article addresses the latter issue, providing evidence from Switzerland that the accounting basis used (accrual versus cash) influences decision-making. This is the result of the effect that the different approaches have on the nature of the information used for decision-making. Switzerland was among the first western democracies to adopt accrual accounting at both state (canton) and local levels of government in the 1980s. The Swiss federal government followed in 2007. The main examples of the use of accrual information in decision-making are: the focus on self-financing of investments in order to control borrowing, as well as the fiscal policy targets of debt reduction and maintenance of capital. All three require accrual basis information. Therefore accrual basis information is key in fiscal decision-making in Switzerland.     

Accrual Accounting and the Efficiency of the Core Public Sector

This paper evaluates the 'microeconomic' case for the extension of accrual accounting to the core government for the purposes of performance measurement, competitive tendering and asset management. Having found the microeconomic case to be weak, it suggests that it is the potential role of accrual accounting as an indicator of the fiscal stance of the public sector (particularly in respect to intergenerational equity) which provides a convincing rationale for its introduction in core government, and that this has significant methodological implications.     

USING IDEAS TO ADVANCE PROFESSIONS: PUBLIC SECTOR ACCRUAL ACCOUNTING

This study investigates a contest of ideas that took place between public sector accrual accounting (PSAA) and Government Finance Statistics (GFS) in the Australian state of New South Wales. The debate, its context and its course is historically analysed from a neo‐institutional theory perspective, employing both documentary and oral history sources. Important in PSAA's win over GFS were: phantom images of PSAA success; a dominant politician; discourse control directing attention to the balance sheet; and, normative isomorphism from professionally qualified public sector accountants. Understanding public sector accounting change requires analysis beyond technical change; in this case the actors and their motives overwhelmed the technical.     

Beyond Self‐Evident: Recognising the Problematic Political Context of Accrual Accounting Adoption in South Korea

This paper responds to a recent call by researchers that we need to move beyond both advocacy of and technical arguments about the value of accrual accounting to more fully recognise the institutional forces, key change agents and the local political fields. We draw on elements of institutional theory and the practice theory of Pierre Bourdieu to explore the ‘problematic’ aspects of institutional forces, key organisational change agents and the local political field associated with the adoption of accrual accounting in the South Korean public sector. We found that accrual accounting was driven by many factors including a local financial scandal, the advocacy of a civil society group and the ambitions and the ideology of key actors. The contribution of this paper is that it shows how the practices of accounting cannot be separated from their political and personal context.     

ACCRUAL ACCOUNTING REFORMS: ONLY FOR BUSINESSLIKE (PARTS OF) GOVERNMENTS

Based on governmental accounting experiences and on the rising criticism of accrual accounting, this paper proposes that accrual accounting in governments will only succeed in businesslike (parts of) governments in the coming years. This proposition leans on the inappropriate transfer of the accrual accounting framework from the profit sector, the underestimation of difficulties considering accrual budgeting and the lack of attention to the political dimension. This paper points out that the advocates of accrual accounting have neglected some important considerations.     

ACCOUNTING REFORMS: DETERMINANTS OF LOCAL GOVERNMENTS' CHOICES

The introduction of accrual accounting in Italian Local Governments has been mandated in a way that permits, and in fact encourages, a merely formal compliance. Local Governments must produce accrual‐based financial statements, but double‐entry bookkeeping is not mandatory, nor may traditional budgetary accounting be abandoned. Why, then, should they bother to introduce an integrated system of budgetary and accrual accounting? In this paper, we empirically investigate the determinants of Local Government's choices of accounting innovation. According to our results, ‘rational’ elements such as complexity, types of activities performed, presence of surpluses, and access to capital markets are seemingly unhelpful in explaining why a Local Government decides to introduce accrual accounting. What counts are ‘institutional’ and cultural explanations, such as the perceptions of CFOs and the North‐South divide.