3.5 Reporting and Classifying Prior Studies on Accruals Adoption
3.5.10 Theoretical Development, Questioning & Reasoning
Ryan (1998
)
stated that Australian government agencies are changing cash basis accounting to accrual basis of accounting. Focuses on how public sector accounting systems are formed by political incentives, and on why general purpose financial reporting dictates government. He utilised an agenda-setting framework intended to explain how accrual basis of accounting became top priority and why it was applied in three phases : the 1976 Royal Commission on Australian Government Administration's support of accountable management, the 1988 financial reform of New South Wales introducing accrual basis of accounting, and political commitment, completed by 1996, all over118
Australia. He set up the endpoint as the issue of AAS31, 'Financial reporting by governments', which resulted in total acceptance of accrual basis of accounting. In conclusion, this is the final achievement of the Public Sector Accounting Standards Board's principles championed by government 'policy entrepreneurs' whom a combination of events took place.
Jaruga et al. (1998) laid down Polish public sector accounting changes since the 1980s and early 1990s, demonstrating the diverse boundaries that came out by different criteria. They pointed out to the five Acts that determine accounting standards and argued that the 1994 Accounting Act based on international standards, then applied it to the business activities within the budgetary sector. They continued and explained on the 1991 Budgetary Law framework and its influence on plans of accounts, and its effect of the tax law. They showed that although pressures for more public accountability, cash basis accounting was still the basis for budgetary reporting and accrual basis of accounting is used only for special purposes financial reports. They utilised flow chart to show the pro and against forces operating for accounting innovations and expects more changes to come in the budgetary reporting system after the implementation of the new constitution in October 1997.
Christiaens & Rommel (2008) proceeds with some empirical observations by presenting the Belgian and Flemish experiences over a range of governments. Specifically, the study focuses on "frequently cited problems of adoption. Next, these practical problems are linked to a conceptual discussion of technical and political issues that have been underestimated in the development of the accounting reforms. Firstly, the accounting
119
framework underlying accrual accounting is not in harmony with the governmental context because of differing accounting objectives and accounting systems. Secondly, the issue of reporting accrual accounting information and budgeting is discussed, with emphasis on the technical deficiencies".
According to Zan & Xue (2011), transformations taking place in China are "of crucial importance in the development of the world economy. The international community is turning its attention to China’s move towards a market economy and assessing the likely impact on the years ahead. This paper aims to plot the evolution of administrative reforms in China with particular reference to the state (and therefore public sector), because the modernisation of the state is an issue that will persist into the future, and because the state itself was driving the country’s transformation towards a market economy in a deliberate way.
The paper revisits the debate on administrative reforms at different levels, i.e. fiscal, budgeting, government organisations, and public sector units (PSUs). In addition to reconstructing the evolution of norms and procedures as part of deliberate strategies by the centre, the paper also investigates how actual practices at the micro level have followed this process of reform, with reference to the administration of cultural heritage at the municipal level, based on a field research project.
A lack of understanding of the role played by actual accounting transformation seems to characterise the current debate on policies. Serious discrepancies can be found between expectations and actual changes; between macro and micro policies, and micro practices. A holistic focus on various trends of reforms is taken, looking at debates that are usually separated, also linking them to actual changes in accounting practice".
120
Lüder (1992) provides a comprehensive contingency model of introducing accounting innovations into the public sector. The model derived from a comparative study of the United States, Canada, and some European countries. The contingency model contains four major modules : stimuli, social structural variables about users of information, structural variables describing the politico-administrative system, and implementation barriers. Whether a more informative accounting system introduced is subject to the specific combination of favourable and unfavourable circumstances in these modules : favourable conditions were found in Canada, Denmark, Sweden, the United States at the federal level, and those states that adopted GAAP. Conditions unfavourable to innovations exist in Germany and France, and to a lesser degree in the United Kingdom and the European Community.
According to Hepworth (2003), of many national governments, UK is one of which has successfully implemented the reform change by moving to accrual basis of accounting. However, the change in itself should not be considered as an end because it will not solve the problems arising where improper cash basis accounting systems exist; control or management will not be better where inadequate control and meager management exist; nor will it get better external audit or the legislature's control over the executive. Prior to the introduction of such reform, cash basis accounting should be robust, control should be secured, external audit should be performing well and the legislature should have a capability to call the executive into account. This study lays down preconditions that governments have to meet to ensure that the full benefits of accrual basis of accounting are accomplished.
121
Dutta & Reichelstein (2005) inspected an alternative accrual basis of accounting rule from the angle of motivational and control perspective. They considered alternative asset valuation rules for an array of familiar production, for financing and investment decisions, the decisive factor for distinguishing among these rules is that the equivalent performance measure that should supply managers with robust incentives to maximise present value decisions. Such objective congruence is shown to need inter temporal matching of revenues and expenses, though the precise form of matching required for control purposes commonly differs from GAAP. The practitioner-oriented literature on economic profit plans (EPP) has made various, and at times contradictory, recommendations concerning adjustments to the accounting rules used for external financial reporting. Authors' objective congruence approach provides a framework for comparing and evaluating these recommendations.
Van der Hoek (2005) stated that, conventionally, "governments used to set up input-based budgeting systems and cash-based accounting systems. However, these systems do not provide the information that is necessary for a government to operate efficiently and effectively. Therefore, a growing number of countries have already transferred or are planning to transfer from cash-based to a less degree of full accrual accounting in the public sector". More often, the implementation of some level of accrual-based system is associated with wider financial management reforms including performance management, which necessitates information on cost. Study centred on the Dutch experience on the shift from cash basis accounting and budgeting systems to an accrual basis of accounting system.
Mir & Rahaman (2006) investigated the role of accounting and leadership in the commercialising of Australia’s New South Wales State Mail Service (SMS). He detailed the SMS reform story and process undertaken. They Described how the cultural change
122
required posed challenges, which led the general manager to initiate a participative management style and to introduce new management control techniques, and a team approach. They described performance management system, collaborative budgeting process, and employee empowerment. They listed some ways in which the team associates and managers strengthened cultural change. They pointed out how general managers used accounting information as a convincing tool, managed the company's change to accrual basis of accounting, over passed the communications gap between accounting and other staff and commenced the idea of other departments as internal customers. The results showed how transformational leadership along with an effective use of accounting and management control systems assisted organisational and cultural change in a government agency.
Ouda (2010) suggested a "Prescriptive Model" for central governments to transform from cash basis to accrual basis of accounting. The core of the proposed model is to provide an inclusive transition framework, which will explain the complete reform process. The new model contained all related factors and tried to resolve the deficiencies of the previous developed models on governmental accounting innovation (e.g. Contingency Model, its developments, and the Basic Requirements Model). It concentrated not only on the contextual and behavioural variables and on establishing a climate suitable for the accounting reform process, but on the content, technical and capacity variables. The initiation stage of developing the Prescriptive Model is that the previous explanatory models mentioned above were unable to explain the complete reform process by compiling all relevant variables required for putting forward the accounting innovations into actual practice. The fact that the change to accrual basis of accounting is a major cultural change, administrative and technical change have to be considered. For a successful adoption, the
123
transition must take place and be performed in phases according to a clear outset established plan of progress. Thus, the proposed Prescriptive Model contains three phases : the reform decision-making phase, the transition phase, and the post-transition phase, adding to that the outcomes’ results and overcoming of the transition barriers.
Chan (2003) pointed out that the aims of government accounting and financial reporting "is to protect and manage public money and discharge accountability". These specified objectives, and the public-produced goods and tax financing, naturally bring about differences with private sector (commercial) accounting, which has not yet reflected in either government accounting standards in English-speaking developed countries or in international public sector accounting standards. In summary, all mentioned are greatly influenced by the practices of the private sector, which utilised the accrual basis of accounting and consolidated reporting. He argued to adopt a symmetric and gradual approach toward accruals, a blend of government-wide, and fund reporting. He suggested a number of wide-ranging accounting principles to encourage political and economic accountability.
He refers to the reasons behind the international mounting attention on government accounting :-
Modern governments’ growing scale and functions demand the use of more money, which in turn require more financial accounting. To manage with less public money in order to improve efficiency and economy requires different accounting systems. International organisations and donor countries know that accounting in
124
thus realised its value in maintaining sound financial systems. Reliable accounting numbers helps them to know where the money went and how it was spent.
The accounting professional bodies found out the potential in the public sector to extend their services and skills.
English-speaking, developed countries came together to champion a new form of government accounting.
Comparative International Government Accounting (CIGAR) and International Public Management Net work (IPMN) generated visible forums for active exchange between academics and practitioners in cyberspace across the globe.
From Accountability to Accounting
The global climb of governmental accounting is due to the increasing demand for accountability in a democratic market economy. Democratic governance and market transactions necessitate and promote the principle of reciprocity —the exchange of benefits of equal value— upon which accountability is based upon. Accounting information can be utilised to monitor and put into effect the terms of economic, social, and political contracts. When a government is involved in market transactions - whether through buying or selling services, lending or borrowing fund - it is put-into economic accountability. When it collects taxes to finance public services, it incurs political accountability.
Government accounting development is linked to separation of powers; checks and balances between legislators, executives, and judicial branches of the government. All governments do a level of planning and control, only democratic countries’ governments have to open its books to auditors and to the public by providing general-purpose financial reports. Fiscal transparency is a feature of limited government, to provide information to
125
give up authority. Government officials provide required information that does not go against their interest. Therefore, only financial disclosures are delivered in response to demand.
The regulation structure of government financial disclosures reflects the trends of accountability in the government and its political system. In administrative hierarchy, subordinates are held responsible by their superiors and have to provide feedback information reflecting their performance.
While legislators supervise, the works of the executive level in the execution of the approved appropriations of the budget the government then has to disclose information to persuade others to provide it with resources. As such, governments have the incentive to sell varying securities to investors, buy goods and services from vendors on credit and financial aids provided by grantors. In such voluntary exchanges, information can be used to forecast the ability of the government to fulfil the contracted conditions. When such transactions are done, the accounting information in monitoring contractual performance base, as governments are not fully obligated to disclose financial information to out of advantageous persons at short term such as taxpayers. Mandated standards tends to allow for more information access to those who unable to demand it or to have their rights to know.
To execute accountability, institutions are needed. With reference to government accounting, these are the standard setting bodies and their disseminated standards. As thus, it important to lay down the general purposes of government accounting and contrasted it with that of private sector accounting.
126
Purpose of Government Accounting
Government accounting mainly has three general purposes :-
1. Basic - To safeguard the public money by preventing and detecting corruptions and grafts;
2. Intermediate - To facilitate sound financial management; and
3. Advanced - To help the government to discharge its public accountability at its three levels principle agent relationship :-
a. Accountability of bureaucracy to the chief executive; b. Of the chief executive to the legislator; and
c. Of the government to the people.
Hussein (1981) stated that most accounting change literature points out that economic benefit and technical considerations are not the only factors that affect the adoption or rejection of accounting changes. The suggestion that changes in financial accounting standards is a social process resembling diffusion and adoption of an innovative process, is described and explained. Study objective is to describe and explain an innovation process model that is not the same as other models used to study the process of adopting GAAP standards.
Findings show how innovation theory can be applied to examine the process of adopting generally accepted accounting standards. The process approach to innovation study is used. There are five aspects of this process approach :-
1. nature of the process, i.e. initiation and implementation;
127
3. formation of attitudes about perceived and objective characteristics of innovative processes;
4. the implicit bargaining-legitimating-sub process; and 5. outcome, i.e. adoption or rejection of a change in standards.
Hussein (1981, p. 28) pointed out based on his review of the literature, to two approaches to studying innovation. The result approach, which looked at the outcomes keeping the process veiled in a ‘black box’, and the process approach, which pays attention to the process itself from the initiation stage to the closing stage, the outcome.
Change agents either external or internal play significant role in the initiation stage by providing the advice. Internal change agents, on the other hand, are members of the group participating in the change process (Hussein 1981, p.29).
Hussein (1981, p. 28) explained in the formation of attitudes towards the change, based on the existence of stimuli, the importance of the systems members’ attitude towards the innovation. Part of many factors influencing the outcome of the innovation is the perceived characteristics of the innovation that influence the attitude formation about the innovation, not the objective characteristics that are importance in the innovation process.
128
Figure (3.2) : Hussein’s Model of the Innovation Process with Respect to Accounting Change Source : Hussein (1981, p. 29) Mass Communication Inter-personal Communication Implicit bargaining (legitimating) Performance Gap Perceived Characteristics of the Innovation Inter-personal and Mass Communication Outcome Adopt Reject Pre-empt Social structure and norms of groups and sub- groups Results of experimentation by some organisations Other parties in the environment Presence of coalitions Interpersonal relationships between group leaders Experience with similar methods Formation of Attitudes Relative power of each group, sub- group or coalition Innovators and Opinion Leaders Change Agents Knowledge and Awareness
129