CAPITAL ACCOUNTING, USER NEEDS AND THE FOUNDATIONS OF A CONCEPTUAL FRAMEWORK FOR PUBLIC SECTOR FINANCIAL REPORTING

This paper analyses the need for an adequate conceptual framework for financial reporting, particularly in the public sector, and examines several factors which may have worked against progress in the UK in developing such a conceptual framework in the past. The paper then analyses in detail the needs of potential users for capital accounting information in public sector financial reports, and the relevance of accruals accounting and different measurement bases in this context. Given the large amount of existing work outside the UK on the development of conceptual frameworks for financial reporting, the paper argues the need not for a new framework, but rather for a more focused analysis of several key conceptual issues that are relevant to meeting user needs.     

Constituent Participation in the Australian Public Sector Accounting Standard-Setting Process: The Case of ED 55

The Australian public sector has recently undergone a period of intense reform including a comprehensive reform of financial reporting policies. A major aspect of this reform is the involvement of the Australian accounting profession in the formulation of financial reporting standards through the Public Sector Accounting Standards Board (PSASB). Despite this extensive change, scant research has examined constituent participation in the Australian public sector accounting standard-setting 'due process'. This paper considers the regulatory model adopted for accounting standard-setting in the public sector in Australia and identifies the implications of this model for constituent access to the 'due process'. In particular, the co-operation between the PSASB and the various regulatory bodies in each Australian jurisdiction suggests that these bodies may have more direct influence over the standard-setters than other constituents. The submissions made on ED 55 Financial Reporting by Government Departments are examined as a case study of the 'due process' as it operates in the public sector. Different constituent groups were found to respond in varying proportions, to hold conflicting positions on some issues contained in ED 55 and to use different strategies to present these positions. The research identifies a lack of input by the major group affected by the proposed standard, the account preparers (government departments). In addition, account preparers which did respond to ED 55 were found to use less sophisticated lobbying strategies than other respondents who weighted their responses by commenting on a greater number of issues and by supporting their position with conceptual arguments. These results support the contention that some constituents have favourable access to the 'due process' and that standard-setters may not have received all pertinent information from affected and/or knowledgeable constituents.     

Making up users

Within recent years, financial statement users have been accorded great significance by accounting standard-setters. In the United States, the conceptual framework maintains that a primary purpose of financial statements is to provide information useful to investors and creditors in making their economic decisions. Contemporary accounting textbooks unproblematically posit this purpose for accounting. Yet, this emphasis is quite recent and occurred despite limited knowledge about the information needs and decision processes of actual users of financial statements. This paper unpacks the taken-for-grantedness of the primacy of financial statement users in standard-setting and considers their use as a category to justify and denigrate particular accounting disclosures and practices. It traces how particular ideas about financial statement users and their connection to accounting standard setting have been constructed in various documents and reports including the conceptual framework and accounting standards.     

Public Choice and Accounting Standard Setting in New Zealand: An Exploratory Study

Recent studies in accounting regulation have used either the capture argument or the pluralistic notion to describe the enactment of accounting regulations. This paper explores the nature of the impact of public choice in accounting standard setting in New Zealand using the pluralistic notion. To provide an insight into the standard-setting process, this paper involves an examination of the establishment, withdrawal and re-establishment of New Zealand's most controversial standard after current cost accounting — the standard on investment property accounting (SSAP 17). The investigation considers the nature of public choice in the agenda entrance, demand and supply factors influencing standard setting in New Zealand. The results indicate that the New Zealand accounting standard-setting process is pluralistic in a limited way. Like most other English-speaking countries, the scope of participation for certain groups has been institutionalized on the supply side by way of membership of standard-setting committees of the New Zealand Society of Accountants. On the demand side, however, consumers of accounting have been provided with only limited scope for participating in the formal process of standard setting. Nevertheless, other means (i.e., exogenous and informal ones) may be used to influence the process. Overall, from both the demand and supply perspectives of regulation, the Big-8 accounting firms (as they were previously known) followed by the preparers of financial statements, seem to have greater participatory capacity in the New Zealand standard-setting process.     

`Sector Neutrality' and NPM'Incentives': Their Use in Eroding the Public Sector

Despite New Zealans public-sector reformers' claims that financial reporting changes promote competitive neutrality and improved accountability and transparency, privatisation-favouring "incentives" were designed into the system at a hidden detailed level. That distorted system has been encompassed within the accounting profession's standard-setting activities through standard-setters' erroneous claims, in Australia and New Zealand, that the accounting profession's conceptual framework and accounting standards are sector-neutral. These claims help to conceal the fact that the public-sector financial management system has been designed to be partial, with its incentives structured to erode the public sector and favour privatisation.     

A European view on the legitimacy of accounting procedures: Towards a deliberative-accountability framework for analysis

Accounting rules affect fundamental areas of social interaction encompassing groups that have diverse and conflicting interests regarding financial reporting. In the absence of a coherent social choice theory, concepts of legitimacy can be used to assess the acceptance of accounting standard-setting processes and their resulting norms. In this paper, we analyze the standard-setting process in Europe. Accounting rules in Europe are developed in a two-stage process involving both private standard-setting and public rule-making. From a structural perspective, the European Union (EU) is well positioned to develop legitimate accounting procedures. However, the original purpose and the ensuing legitimacy of its control mechanism are jeopardized when EU structures are used and sometimes abused for policy formation and the creation of EU-IFRS.     

'Sector Neutrality' and NPM 'Incentives': Their Use in Eroding the Public Sector

Despite New Zealans public-sector reformers' claims that financial reporting changes promote competitive neutrality and improved accountability and transparency, privatisation-favouring "incentives" were designed into the system at a hidden detailed level. That distorted system has been encompassed within the accounting profession's standard-setting activities through standard-setters' erroneous claims, in Australia and New Zealand, that the accounting profession's conceptual framework and accounting standards are sector-neutral. These claims help to conceal the fact that the public-sector financial management system has been designed to be partial, with its incentives structured to erode the public sector and favour privatisation.     

Reciprocal and Non-Reciprocal Transactions: The FASB's Stock-Based Compensation Project

Whether the FASB's conceptual framework can be used to derive accounting treatments has been debated. Mozes (1998) argued that the conceptual framework's high level of abstraction meant that several alternative views were possible for the treatment of stock-based compensation and that this was unhelpful. This article identifies a problem at the abstract level of the conceptual framework that requires resolution before Mozes' proposals to remedy the high level of abstraction may be acted upon—the inappropriateness of the conceptual framework's distinction between liabilities and equity. The conceptual framework is clear that equity transactions are non-reciprocal but the accounting treatment to be derived from this view is unacceptable and was not presented as an option in the stock-based compensation project. Instead, the FASB's basis for conclusions is based on reciprocal transactions, disguising the inappropriateness of the conceptual framework's definitions. Failure to revise the conceptual framework leaves the FASB, and other standard-setting bodies drawing on the FASB's concepts, open to developing serious inconsistencies in other pro-jects where the distinction between liabilities and equity is important, and without conceptual support for their stance on stock-based compensation.     

LOCAL AUTHORITY ACCOUNTING – THE DEVELOPMENT OF A CONCEPTUAL FRAMEWORK

A number of writers have bemoaned the lack of a conceptual framework for public sector accounting. This paper surveys briefly the recent accounting history of UK local authorities. It continues with an outline of a number of frameworks which are available and concludes that an inclusive framework based on the concept of worldviews, recognising the variety of views and perspectives, would be more appropriate. This is then applied to explain the current debate on capital asset accounting, suggesting that there has been a major shift in the worldviews of accounting policy makers from fiduciary stewardship towards performance evaluation. The need for further research is recognised.     

Selective Commercialisation of Public-Sector Accounting and its Consequences for Public Accountability

This paper examines the exclusion of two accounting standards from the commercialised public-sector accounting model in Australia. It locates the commercialisation in the wider context of the global neo-liberal reform ideology and argues that the selective commercialisation is a product of the neo-corporatist standard-setting process and policy networks that can be explained by public choice and agency theories. It is found that the exclusions have resulted in a significant erosion of public accountability. As implementing the excluded standards will constitute a contradiction in policy, abrogation of the commercialised accounting model might be feasible and appropriate     

FINANCIAL REPORTING IN THE PUBLIC SECTOR AND THE DEMAND FOR INFORMATION

The public good nature of information in the public sector means that the concept of direct'user need'as a basis for the development of a conceptual framework for financial reporting needs to be extended to the more general concept of'individual informational benefits'. Lack of individual demand for financial reporting information does not imply zero potential individual benefit from the use of such information. The achievement of a social optimum in the use of information is likely to require both a well-grounded conceptual framework for financial reporting and independent monitoring bodies able to make effective use of the information.     

Financial statement users’ institutional logic

In this paper, we investigate what we call “financial statement users’ institutional logic,” defined as users’ expressed fundamental views and beliefs about accounting information. We analyze users’ comment letters to standard setters in response to the proposed standards on lease accounting to identify the dimensions of the institutional logic that underlie their views on accounting information. Our qualitative analysis identified and validated ten principal dimensions, namely economics and substance, due process issues, measurement, readiness and relevance for use, conceptual foundations, clarity, presentation and disclosure, cost-benefit issues, comparability and consistency, and financial statement manipulation. Quantitative analyses revealed that four of these dimensions, i.e. due process issues, readiness and relevance for use, comparability and consistency, and cost-benefit issues, occupy a medium or large amount of space in users’ comments and are referred to in strong terms, while economics and substance and measurement, although also widely discussed, are addressed in weaker terms. Overall, our study begins to fill a gap in the literature by providing insights into users’ views on accounting information. These insights challenge the “homo economicus user” currently constructed in standard-setting debates.     

A Multi-Issue/Multi-Period Analysis of the Geographic Diversity of IASB Comment Letter Participation

The International Accounting Standards Board (IASB) establishes accounting standards now used in some form in over 100 countries. Diverse geographical participation in International Financial Reporting Standards (IFRS) standard-setting is seen as desirable as it may improve the consistency of IFRS applications, reduce criticism of regional over-influence, and promote the legitimacy of the IASB. This study investigates country participation and the regional and institutional factors that influence the geographic diversity of comment letters (CLs) in the IASB's standard-setting process. Using CLs regarding 57 IASB issues from 2001 through 2008, we find that countries with EU membership, G4+1 membership, donations to the IASB, and larger equity market development are associated with larger numbers of CLs and CL writers. Analysis of a subsample of more developed countries finds some evidence that countries with more historic divergence in accounting standards from IFRS also have more CL writers. In most countries, one of several major stakeholder interest groups, such as professional accountancy bodies, accounting standard-setters, and public accounting firms, send at least half of the CLs. While response levels for most countries vary greatly depending upon the nature or topic of an IASB issue, overall response levels remain low at just over 100 responses per issue and did not increase over time. While geographic diversity and response rates are greater than its predecessor the International Accounting Standards Committee, they are lower than those of many national standard-setters, possibly raising due process and legitimacy issues for the IASB.     

The Nature and Rationale of a Conceptual Framework for Financial Reporting by Islamic Banks

Islamic banks have to abide by the revealed doctrines in Islam in conducting their business and financial transactions. They employ in-house religious advisers—often referred to as Shari'a Supervisory Board (SSB)—who issue a special report to inform users of financial statements whether or not the bank has adhered to the Islamic principles. Recently, a private standard-setting body—the Financial Accounting Organization for Islamic Banks and Financial Institutions (FAOIBFI)—has been set up to externally regulate the financial reporting by Islamic banks. The FAOIBFI has published two statements on the objectives and concepts of financial reporting to act as a framework in setting accounting standards for Islamic banks. This paper examines the FAOIBFI's approach for developing objectives and concepts of financial accounting and investigates its need for such a theoretical framework. It is argued that the FAOIBFI's objectives and concepts would not be useful in mandating accounting standards on issues that are affected by religious ruling. This does not necessarily mean that such a framework may not be useful in legitimating the FAOIBFI's role and in setting accounting standards for issues that are not governed by revealed moral doctrines although it will be subject to similar limitations to those found by other standard-setting bodies in utilising and applying their framework. However, it implies that the more the FAOIBFI sets accounting standards that incorporate religious ruling, the less it would tend to find its own objectives and concepts useful. The ambiguities that may arise from different interpretations of the religious rules will require resolutions primarily by reference to religious rather than accounting authority.     

Using the standard-setting process to demystify the concepts statements: The case of SFAS 76

To illustrate the accounting standard-setting process and how conceptual consistency is lost during the negotiations involved in that process, Statement of Financial Accounting Standards (SFAS) 76 Extinguishment of Debt is used as a case study. Excerpts from actual “Comment Letters” sent to the FASB are used to highlight issues and stimulate discussion. Classroom results, wherein SFAS 76 was used, are summarized. While SFAS 76 as a case study was found to be an excellent vehicle for illustrating the problems faced by standard-setters and the role of the Conceptual Framework, any pronouncement could be used. The SFAS 76 case takes 20 or more minutes to use. However, the case can be substituted for some of the lecture on standard-setting so it does not have to expand the time needed to cover the topic.     

Sorting and comparing: Standard-setting and “ethical” categories

The Financial Accounting Standards Board (FASB) describes its public interest function as “…developing standards that result in accounting for similar transactions and circumstances in a like manner and different transactions and circumstances…in a different manner (Facts about FASB).” This statement implies that rule-makers possess an expertise that makes analogizing transactions or circumstances to other transactions or circumstances unproblematic. In this paper we utilize two instances of standard-setting, SFAS 123R and SFAS 143, to demonstrate from FASB's analogic reasoning in these cases that similarity and dissimilarity are not so easily ascertained. A judgment about similarity invariably involves ignoring some perspectives of similarity that would lead to substantially different conclusions about the appropriate accounting. We also illustrate via the two examples the inherent value judgments that underlie the conclusions reached by FASB and how these value judgments raise questions about the ethics of the current standard-setting process.     

Governmental Financial Reporting of Heritage Assets From a User Needs Perspective

The implementation of IPSASs in European Union countries and the harmonization of governmental financial reporting are intended to respond to the needs of citizens. An important characteristic of reforms to governmental accounting and financial reporting is the incorporation within the accounting systems of all public authority assets, which include the case of ‘heritage assets’. This paper investigates to what extent IPSAS 17 responds to user needs of governmental financial reporting about heritage assets by conducting a survey of mayors and councillors in the Italian local government.     

AN EXPERIMENT IN THE USE OF DATA ENVELOPMENT ANALYSIS FOR EVALUATING THE EFFICIENCY OF UK UNIVERSITY DEPARTMENTS OF ACCOUNTING

One problem in evaluating the efficiency of public sector organisations is the lack of a single index of efficiency, such as profit, by which a significant element of aggregate performance of each organisation can be assessed. This article examines the potential of using data envelopment analysis to overcome such a problem in the context of an area of much current concern in the UK, namely that of assessing the efficiency of university departments. The methods involved are, however, equally applicable in other countries or in a wide range of public sector bodies. Data envelopment analysis was introduced to the accounting literature by its inventors, Charnes and Cooper (1980), but accountants generally seem to have overlooked its existence. This article aims to stimulate a greater interest in the technique and a widespread examination and evaluation of it in a variety of contexts.