ACCRUAL ACCOUNTING Introduction From the

ACCRUAL ACCOUNTING Introduction From the early 1990s, the New Public Management (NPM) movement has been emerged though out the world, prominently in OECD member countries. The new paradigm ‘centers on the presumption that a distinct activity called "management" can be applied to public and private businesses alike’ (Bale & Dale 1998, p.120), one of which is the changes in the “accountability” framework where there is a shifting from ‘input controls, rules, and procedures toward output measurement and performance targets’ (p. 120). ‘An increasingly notable element of the New Public Management movement' also indicated in public sector budgeting by introducing New Public Financial Management. (Guthrie et al. 1999, p. 210). Guthrie et al. note there are at least five distinct sets of reforms; ‘changes to financial reporting systems’; ‘the development of commercially minded, market oriented management systems and structures’; ‘the development of a performance measurement approach’; ‘the development/decentralization or delegation of budgets’; and last but not least, ‘changes to internal and external public sector audits’ (p. 210-1). The adoption of accrual accounting is one of the agenda to be done in reforming the financial reporting system (p. 210). Accrual accounting is believed to improve financial management, increasea accountability, refining management tools of public sector, as well as to improve responsiveness of government in providing public services (Blöndal 2003a; Blöndal 2003b; Christiaens & Rommel 2008; McPhee 2006). Despite some positive objectives in the adoption of accrual accounting, some studies suggest that there are some hidden intentions that lie behind it (Guthrie 1998; Lapsley 1999; Christense 2002). Another argument claims that this reform implemented to aid and improve the neo-liberal agenda (Ellwood & Newberry 2006). This paper would examine the objectives of the adoption accrual accounting in public sector reform, briefly discuss other arguments on possibly hidden objectives that underlying the accruals adoption, discuss some issues of the implementation such reform to then conclude that worth to consider some fundamental differences between public sector and business sector, so that accrual accounting can not be fully applied to the entire scope of the public sector, but merely to organizations that have business activities. Promoting Accrual Accounting Guthrie et al. (1999) assert that the adoption of accrual-basis accounting system reflects ‘the commitment to importing commercial practices from the private sector’ (p. 214), as part of NPM movement. This notion emerged primarily from the results of their findings to the budgeting reform in some OECD countries, where the subsequent reform in Australia, for example, have adopted accrual accounting, including ‘accrual financial reporting, whole of government reporting, accrual management systems, and accrual budgeting’ (p. 214). Accordingly, there were two distinct actors promoted the adoption of accrual accounting in Australia in 1999/2000: government and the professional accounting community (Blöndal 2008). A coalition government regarded accrual-basis as part of NPM reforms, ‘heralding a new “businesslike” era in government’, while the accounting professionals viewed this as a technical change in achieving advanced financial reporting (p. 20). Traditionally, OECD member countries applied cash-based accounting and budgeting that ‘records the cash receipts, payments and balances at the time cash is exchanged’, while in contrast, accrual basis ‘is explained as a recognition of revenue and expenses in the accounting period in which they are earned or incurred respectively rather than when cash is paid or received’ (Guthrie 1998, p. 5). Thus, the difference between the two accounting system only on the timing of the transaction will be recorded. However, this makes a difference since the timing model used in the cash-based potentially gives loopholes for the occurrence of financial reporting errors. Payments or receipts can be pushed back to the previous year or forward to the next; future costs, such as pension benefits can be removed from the budget; the government can sell assets and book the income as current revenue; it can hive off certain expenses into off-budget accounts; and so on. (…) The accrual basis inhibits these opportunities by requiring that revenue be recorded when it is earned (rather than when it is received) and expenditures when the liability is incurred (rather than when payment is made)’. (Schick 2002, p. 13) Hence, accrual accounting allows the government spending to be more transparent, while ‘a focus on cash only can distort the true cost of government’ (Blöndal 2003b, p. 45). Blöndal makes an example in which ‘outstanding government debts can be designed in such a way that all interest expenditure is paid in a lump sum at the end of the loan rather than being spread through the years when the loan was outstanding’. Moreover, the promotion of accrual accounting is part of the idea to modernize financial management, aiming better fiscal outcomes. According to his research on OECD member countries that have had implemented budget reforms, specifically the institutional arrangements for budgeting, Blöndal (2003a) suggests that budget reform has significant influence in improving the fiscal outcomes in these countries that eventually result in steady budgetary surpluses in the period of 1993 to 2001. He argues that countries that has been vigorously revolutionizing their budgeting system would likely to experience fiscal surpluses compare those that maintain their economic performance and ‘political commitment to fiscal discipline’ (p. 8). Further, he identified seven key institutional arrangements that has fundamental role in governing public expenditures, including ‘modern financial management practice’ (p. 10), the promotion accrual accounting is one of several steps to modernize financial management. According to his study, accruals improve transparency and decision-making in government for the usage of enhanced information in their budgeting that eventually will objectify higher efficiency and the effectiveness of decision-making by the managers (p. 23). By using this accounting system, managers will be more careful in managing their resources as they are required to provide the necessary information as well as be responsible for the outcomes and / or outputs of the budget while reducing the use of the control input (Blöndal 2003b, p. 45). Likewise, the adoption of accrual basis accounting in public sector financial system is mainly to increase accountability and improving management tools of public sector (Christiaens & Rommel 2008). The usage of accrual-basis is allowing policy choices and decision-making that had been made by the government to provide ‘information useful in assessing financial position’ and changes as well as ‘information useful in evaluating the government’s performance in term of service costs, efficiency an accomplishments’ (Lapsley et al 2009, p. 720-1) that would increase the transparency of the programs, which means allowing a more comprehensive basis for accountability (McPhee 2006). Accrual accounting is also believed can improve responsiveness of government in providing public services (McPhee 2006). As financial information useful should be provided for decision-making, the managers required to carefully analyzing the transactions’ prospective from the accounting framework point of view. The process of analyzing will increase a greater and better understanding of all transactions that will be made, including the risk management or the probability of future situation. The analyzes of the future and the risk of transactions in return will let the public managers learn to recognize creation of public value, what they regard as valuable for public, ‘by positioning their organizations in complex, dynamic environments’ (Moore 2013, p.8). Hidden Objectives of the Adoption of Accrual Accounting Despite some objectives in the adoption of accrual accounting that has mentioned above, some studies indicate hidden objectives were underlying the adoption. Christensen (2002) argues that the decision of the New South Wales government to promote accrual basis financial report was based on the influence of the private sector consultant to the most dominant player of the reform, that were Premier and Treasurer, to immediately change the cash basis accounting towards accrual basis, ‘to push accrual accounting faster rather than to become more cautious’ (p. 111). Further, he argues that such decision has been overlooking other considerations that might choke the implementation of such reform. Accordingly, there was a tendency that this accounting changes gained lack of support from so called ‘producers of information’ for many reasons. The used of accruals basis required a recruiting staff to operate a new system, or at least staff training to improve their accounting skills, despite of the necessity to updating accounting systems. From this point of view, both Premier and Treasurer considered to ignore the effect of this impediment (p. 111). Another argument claims that such reform implemented to aid and improve the neo-liberal agenda (Ellwood & Newberry 2006). They argue that the idea to “force” the adoption of accrual accounting is “more often based on ideology than economic science”, is part of the agenda to succeed the liberalization and marketization movement by reducing the size and power of the government. This reform is part of the concept of new political economics (NPE), new theories where politics and economics viewed as politics and economics as “two sides of the same coin” by applying economics to politics. The ideas that underpinning such theories range from ‘ideas about people’s voting behavior, about how a government operates and ideal constitutional rules, to ideal structures for organizing and coordinating activities, and arrangements for controlling relationships within those structures’ (p. 552) and the idea ‘to increase the likelihood of privatization and reduce the size of the public sector’, aiming ‘economic efficiency and fiscal responsibility’ (p. 553). Conceivably, the introduction of accrual accounting in many countries is an attempt to develop a neo-liberal policies. They claimed that accrual accounting would support the neo-liberal agenda with the development of privatization through privileging decisions effect owned by such accounting system. The fiscal controls and budgeting processes facilitate the withholding and withdrawal of financial resources from public sector operations, thus forcing service reductions and the running down of services. The more detailed accrual accounting requirements, especially revaluation requirements and the imposition of charges based on the revalued assets (depreciation and capital charge) which load the full-costs required for comparison with potential alternative suppliers and are used in the various review processes are biased against continued public sector provision, and thus support and encourage business activity by suggesting public sector services are inefficient. (Ellwood & Newberry 2006, p. 566) Approvingly, Carlin (2005) views the adoption of accruals to public sectors was not the result of “silent revolution”. The idea of introducing such reform in public sector accounting and financing report has been ongoing for years through several publication of ‘body of literature which express support for the widespread adoption’ then he called ‘lack of empirical evidence put forward to support its claims’ (p. 313). Furthermore, he asserts that these publications as a rhetoric to affirm assumptions. These works are more akin to sermonising than serious explications of principle. They constitute accrual accounting as a ‘good thing’ in public management but do so on essentially emotive grounds. As such they represent, at best, a call to action, a statement of ‘why’ organisations within the public sector ought to adopt a new reporting structure, but not an explanation of ‘how’ this ought to be carried into practice, nor ‘what’ the effects will be once the task of implementation is complete. (Carlin 2005, p. 314) Feasibly, this is the cause of the emergence of a variety of problems in the implementation of accrual accounting. Issues in Implementation Regardless of the debate on the objectives that drive the introduction and implementation of accrual accounting, in practice, the implementation of accrual basis accounting system in the public sector is not always easy to implement, one of the reason is the different characteristics of the public sector environment as compared to the business sector, which in practice is always very familiar with the system. Entities in the public sector providing services to the public or the public without aiming to make a profit from the services it provides, while for business entities, the acquisition of profit from any activity undertaken is a necessity so that the entity can continue to run its operations in the future. Also, it would be difficult to expect the efficiency in the public sector, especially government, because of various kinds of services to be provided to the public. With the use of accrual basis accounting system organized the government, one of which, can be measured in the cost of government services, efficiency and performance of the Government. In accrual basis system also can be known as government contingent liabilities or commitments recorded contingent rights and obligations of the state, especially for revenue and expenditure budgets beyond the period of one year. Accrual basis budget will allow long-term budget planning in excess of one fiscal year. Moreover, some assets and liabilities that owned by the public sector do not exist in the private sector, such as “heritage assets”, “military assets”, “infrastructure assets”, and “the treatment of social programs” that raise some issues on how these assets will be treated in an accrual environment (Blöndal 2003b, p. 45). One of the several issues that rose against infrastructure assets is in term of recognizing infrastructure assets: how to determine the appropriate depreciation schedule for assets that have relatively long useful lives. For example, some countries decided not to depreciate infrastructure assets with an argument that for them these assets have ‘infinite life-spans’. Other issues that often rose the recognition of the essentiality for infrastructure maintenance budget; the difficulty of the original acquisition cost estimation, especially for the old age assets and to separate out original investments and maintenance costs; as well as how to select the valuation methods. All these issues are not appear in the private sector accounting environment. Moreover, in relation to the implementation, there are some issues that often arise when adopting such accounting system (Blöndal 2003b). Firstly, implementing accruals is more towards to “cultural change” rather than a “technical accounting exercise” that required broader public management reforms. Without this “cultural change” or behavior and attitude change, the benefits of accrual basis would not perceived. For instance, if the information that provided is not used as mean to improve decision-making by policy makers, then the changing in accounting system would still not able to improve the efficient and effective use of public budget (p. 52). In addition, since promoting accruals need “cultural change”, close communication with politicians, specifically parliament members, is very essential to gain enough support for the reform. Especially, when this reform introduce in a “big bang” approach where accruals have to be applied at the same time in every government’s department and agencies. Blöndal (2003b) suggests that it is very important to provide an introduction to the underlying concepts of accruals to the media before the reforms carried out, given the experience in OECD countries has shown there was huge communication gap with media and public that led to confusion (p.53). Further, as mentioned above, switching accounting system towards accruals also prerequisite the skill levels improvement of public sector accountants (Christensen 2002; Blöndal 2003b). In the worst case scenario, the government might need to hire new accountants to operate accruals if there is a limited number of technical personnel who are able to use accrual accounting. Nonetheless, adopting accrual basis accounting is clearly costly. Christensen (2002) and Blöndal (2003b) agree that such reform also need an improvement of information technology system and to upgrade the old or previous accounting system which generally requires no small cost, especially if this system will be implemented simultaneously and thorough in every government organizations, rather than as a gradual change. Furthermore, Christiaend & Rommel (2008) found that the adoption of accruals accounting has been implemented very poorly, particularly in Belgian and Flemish governmental practices. Their study recommends that ‘the adoption problems are symptomatic of a deeper conceptual problem: a misunderstanding of the objectives and uses of both cameralistic and accrual accounting’ (p. 64). They argue that not every government organizations, specifically those that have not businesslike activities, can adopt accruals accounting, so while insisting that this accounting system to be implemented in the public sector in total will result in failure in its implementation. Conclusion The adoption of accruals accounting is part of the New Public Management movement, to improve government’s performances, especially improving financial management, promoting transparency and accountability, refining management tools of public sector, as well as to improve responsiveness of government in providing public services. Other arguments suggest that the promotion of such accounting system was actually part of hidden objectives to spread out the neo-liberal agenda worldwide by changing government institutions become more businesslike. However, some issues then rose during the implementation. Public sector’s and business sector‘s characteristic and environment are clearly different. There are many functions, assets and liabilities that public sector has which do not exist in private environment, so that some objectives that suppose to be achieved by adopting accrual accounting in public sector tend to face barriers. Arguably, in discovering the best and appropriate accounting system in public sector, it is worth to consider several concerns. Firstly, to recognize the distinct nature of public and private sector that is obviously not the same. Accruals might be successfully implemented in some organizations that have business activities, but might fail in organizations that have administrative functions. Thus, something that works in one sector might not be working in the other. Secondly, there is other accounting system that might be more appropriate to be implemented in public sector, for example cameralistic/cash accounting, which is more relevant for most administrative activities (Christiaend & Rommel 2008). 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