Comparative Issues in Local Government Accounting - Essay Example

? Describe the various purposes, as discussed in the literature, of budgeting for national governments. Discuss the relative importance of these purposes and the ways in which some of the purpose may conflict. [words 4315] 1. Introduction The development of effective governmental policies is usually related to the ability of governments to keep a balance between the public interests and the resources available for responding to these interests. Techniques used in the private sector can be used by governments for managing resources at national level. Budgeting is an example of such technique. The purposes on which the budgeting for national governments is based are critically reviewed in this paper. Particular emphasis is given on the conflicts that can possibly appear between these purposes. Two different perspectives are presented: a Micro-perspective and a macro-perspective. In the case of micro-perspective reference is made to the criteria on which government budgets are based and the methods involved for developing the relevant process. The macro-perspective focuses on all aspects of the distribution of the relevant benefits among the stakeholders. It seems that, when referring to budgeting for national governments, conflicts are unavoidable. Still, measures can be taken so that the effects of these conflicts on public interests are minimized. Moreover, it has been proved that each government tends to use different techniques for managing conflicts related to budgeting at national level. The social and political framework of each country and the strength of the economy are the key factors influencing governmental decisions related to national budget. 2. General Perspective The use of national budget, as a tool for controlling the national economy, is related to a series of purposes. In order to understand these purposes, in terms of their role and their content, it would be necessary to review primarily the characteristics of national budget, the rules on which its operation is based and the mechanisms, if any, of its monitoring. 2.1 Company budget vs national budget Budget, as a term, can be used for describing the categorization of costs and income related to a particular economic activity so that the financing of the specific activity to be appropriately arranged. The term budget can be related not only to the economic life of a nation but also to the activities of enterprises; reference is made to the company budget, as opposed to the national budget. Even if the two types of budget have many similarities, their scope and principles are highly differentiated. The differences of these types of budget could be made clear mostly through their purposes, i.e. through their role. The key mission of national budget is clear: the national budget shows ‘the amount of funds that a government is willing to spend on public purposes’ (Gosling 2012, pl.20). The term ‘public purposes’ as used above is related to a high range of activities developed in the context of certain sectors, such as ‘education, health, national defense and foreign assistance’ (Gosling 2012, p.20). On the other hand, the national budget indicates the level of tax that will be imposed on various economic activities, in regard to the forthcoming financial year (Gosling 2012). In general, the national budget should be considered as a framework for checking the balance between the income and the expenses of the state (Gosling 2012). National income can be based on taxation, investments, donations and so on (Gosling 2012). As for national expenses these are commonly related to specific public interests and rights, such as education, health and defense (Gosling 2012). On the other hand, the national budget needs to be clearly analyzed, as of all its components, otherwise severe social conflicts may appear (Premchand 1983). Reference can be made, for example, to taxation. The taxes related to the various economic activities developed in the context of a country have to be analytically described in the country’s annual budget (Premchand 1983). As for the company budget, this is used also for showing a balance between income and expenses of a specific organization. In regard to this role, the company budget is similar to the national budget (Hall and Lieberman 2007). In addition, company budget can have two forms: it can either refer to future expenses/ income or it can show actual expenses/ income (Hall and Lieberman 2007). In other words, company budget is not standardized as of its structure/ content. Each firm can include in its budget the economic activities that are considered most important for the evaluation of the organizational performance (Heisinger 2009). On the contrary, national budget has to include, necessary, estimated figures for specific economic activities, being standardized as of its structure/ content (Heisinger 2009). According to Abraham et al. (2008) the company budget can be more complex than the national budget since the former has to reflect the current market trends (Abraham et al. 2008). In its initial form, the budget is prepared in advance, based on estimated figures in relation to a firm’s various operations. The second type of budget is prepared after the end of the economic year/ period to which it refers and it is commonly used in comparison to the first type of budget in order to show whether the activities of an organization have been profitable or not (Hall and Lieberman 2007). National budget needs to be developed and approved by the parliament in advance, i.e. before the beginning of the financial year to which the budget refers (Heisinger 2009). Most important, company budget is not obligatory (Weygandt et al. 2009). It is used just as a tool for controlling the financial performance of the organization involved. In opposition, national budget is obligatory (Heisinger 2009). It needs to be developed and approved annually and there is no case of cancellation of its submission, at the level that it shows the planned expenses/ income of the country for the forthcoming year (Musell 2008). 2.2 Nature of budget system As noted above, the national budget is an obligatory activity at the level that there can be no political decision for cancellation in regard to the development and submission of national budget since in such case there would be no plan for expenses and income at national level, a fact that could threaten public order (Abraham et al. 2008). In other words, the development of national budget can be primarily considered as a political activity, securing public interests (Abraham et al. 2008); of course, the development of such budget is also an economic activity, being related to the management of finances of the state as an economic and social framework (Abraham et al. 2008). From a similar point of view, the development of national budget shows the authorization of a group of persons to decide on the level and the priorities of public financing (Leonard 1999). Indeed, the development of national budget can be based on different authority forms: a) appropriations; they refer to ‘the right of public agencies to establish financial obligations and make payments’ (Leonard 1999, p.53); b) authority to borrow; needs ‘to be regulated in the state’s permanent law’ (Leonard 1999, p.53), c) authority to proceed to contract; it also needs ‘to be regulated by permanent laws’ (Leonard 1999, p.53) and d) authority to set obligations based on offsetting collections; this authority also ‘is provided by permanent laws’ (Leonard 1999, p.53). At the same time, the national budget reveals the power of the government in the context of local political framework (Caperchione and Mussari 2000). In particular, the content and the structure of national budget shows the level at which the local government is able to control the various aspects of the social and economic life of the nation, establishing obligations and allocating resources so that all economic and social activities, at national level, are secured (Caperchione and Mussari 2000). In this context, the national budget is often considered as a reflection of the state’s political structure. 2.3 Why government use control/budget (Micro and Macro point of view) Government uses the budget for a series of reasons. These reasons would be based on two perspectives: a) the Micro perspective and b) the Macro perspective. The Micro perspective reflects the need of the government to respond to its obligations, in terms of resource allocation, as a government duty (Musell 2008). From a Macro perspective, the government has to develop the national budget for responding to a series of public needs and for securing the public interests (Diamond 2006). In other words, the Micro perspective of the national budget refers to the efforts of a government to cover its own needs while the Macro perspective of the national budget refers to the initiatives that a government develops for covering the needs of the state and of the public. These two perspectives are analytically explained below. 2.4 Sub-conclusion The use of national budget as a tool for developing political power cannot be doubted. However, a national budget is also related to the economic needs of a state/ nation and for this reason its structure and content have to be thoroughly checked before the verification of the national budget by the parliament. The power of government to formulate the national budget is not unlimited but it is controlled using the local laws and ethics. One of the most important aspects of the national budget is the following one: a national budget needs to meet certain standards, as set by the relevant laws and has to be carefully checked, both before its verification and afterwards, when applied in practice. After the verification of national budget its alteration is possible following the relevant guidelines of the law. In this context, the national budget can be considered as an indication not only of the government’s power but also of the public’s rights, at the level that the public is able to promote the change of certain parts of the national budget when these are considered as harming the public interests and rights. 3. Micro perspective 3.1 Government duty (GASB) As explained above, the government budget is developed on the basis of two different perspectives: the Macro perspective and the Micro perspective. In the context of the Micro perspective, the budget making process reflects the efforts of the government to promote its policies and to cover its own needs (Aggaarwal and Vijav 1998). The micro perspective shows not only the installation process of these policies but also the planning phase of the above policies (Johnson 2011). The enhancement of the national economy is among the priorities of each country’s government; from this point of view it can be stated that budgeting is an activity that can be characterized as government duty (Aggaarwal and Vijav 1998). In USA the budget is prepared using the Generally Accepted Accounting Principles (GAAP) which are set by the Governmental Accounting Standards Board (GASB). GASB is an institution that defines the terms on which the financial reports at national or local (state) level will be prepared (Harrell 2006). 3.2 National government purpose link with GASB GASB has a particular mission: ‘to set and to improve the standards on which national financial reporting, including the national budget will be based’ (GASB Mission, Vision and Core Values 2013). On the other hand, the national government has a key priority: to take all necessary measures for the growth of the national economy, both in the short and the long term (Stillman 2009). From this point of view, it can be stated that GASB contributes in the achievement of national government’s purpose. Of course, the priorities of national policies can be alternated; still, the power of the national government to doubt the authority of GASB is quite limited (Sexton 2009). In fact, the national government in USA is obliged to accept GASB, even if its decisions are opposed to current choices of the national government (Tucker 2010). It should be noted that the power of GASB ‘to set the standards of financial reporting’ (GASB Facts about GASB, 2013) is recognized not only at national level but also at local level, meaning at the level of states. 3.3 Conflicts in accountability It should be noted that in case of important failures in national budget the responsibility is usually allocated to the members of the government, meaning especially those who participated in the preparation of the national budget (Lexuan 2011). The allocation of responsibility to the members of the parliaments also cannot be rejected since the verification that the parliament has offered to the national budget made the budget a powerful criterion for cooperation, under the pressures of USA for global peace (Lexuan 2011). Accountability, as part of the budgeting process, can have another aspect: it can be related to the duties of the national government in regard to the public interest (Shah 2007). The participation of the national government in the budgeting process increases ‘the government’s accountability towards the public’ (Shah 2007). The vision of GASB is described in the organization’s website: ‘greater accountability and well-informed decision making through excellence in public – sector financial reporting’ (GASB Mission, Vision and Core Values 2013). In regard to government, accountability may not be a priority, especially if the pressures on economy are severe or if the resources required for securing high accountability are not available. At this point, the purpose of the government, to develop a budget that can secure benefits for all interested parties, is clearly in conflict with GASB’s vision, as presented above. Referring to the accountability of government there are certain issues that should be made clear. The level of accountability in regard to a national budget can be increased according to the level of the funds included (Lee 2012). Extremely high budgets are expected to attract the interest of the public, and possibly of the justice, in regard to the necessity of the expenses and costs included in the budget (Lee 2012). Indeed, in case of a national budget with extremely high costs for a specific sector, such as the investments on defense purposes, accountability would be problematic, since the exact terms of the relevant agreement are not permitted to be revealed, for reasons of national security. However, the costs made may be higher than the costs of similar equipment in other countries. Conflicts can appear between the members of the government that promoted the particular project and the local authorities, as representatives of the public. 3.4 Conflicts in use of budget (allocation of resources) The most common problem that a government has to face when developing the budgeting process is the identification of resources that will be required so that the objectives of the budget to be achieved (Braddon and Hartley 2011). Usually, the allocation of resources is based on the governmental plans in regard to the needs of the state and the needs of the society (Premchand 1983). Reference should be made primarily to the bodies and institutions involved in the particular activity. Then, the most common type of these conflicts would be presented. In practice, the allocation of the resources required for the realization of the projects included in the national budget can be quite difficult; the help of GASB in regard to this task is of great importance. The ‘Governmental Accounting Standards Advisory Council (GASAC)’ (GASB Governmental Accounting Standards Advisory Council, 2013) helps the members of GASB to respond to their duties, especially in regard to ‘the prioritization and the organization of tasks’ (GASB Governmental Accounting Standards Advisory Council, 2013). The ‘Financial Accounting Foundation (FAF)’ (GASB Government Affairs and External Relations, 2013) is another institution supporting the activities of GASB; the above institute provides to all interested parties necessary information on ‘accounting and financial reporting standards’ (GASB Government Affairs and External Relations, 2013). Being supported by the above two organizations, the members of GASB are able to provide to the government effective solutions in regard to resource allocation, so that the interests of all parties are secured, as possible. Conflicts in regard to the allocation of resources may have the following form: a) at the first level the plans promoted by each government need to be aligned with the needs of each voters, meaning that a government has to respond to the promises it gave to its voters during the pre-election period; at the same time, the government has to allocate resources in such way so that motives are established for investors, both local or foreigners; in other words, the first type of conflict related to resource allocation refers to the conflict between voters and investors (Premchand 1983); b) the second type of conflicts related to resource allocation is the following: a budget cannot fully address the needs of all parties; such target cannot be achieved since the interests of the parties related to a budget can contradict, as in the case mentioned above, meaning the conflict between voters and investors; also, by responding to the interests of certain parties it is possible that the resources left are not adequate to respond to interests of other parties; in other words, the second type of conflicts in regard to resource allocation refers to the differentiation of purposes, as related to each budget (Premchand 1983). In any case, conflicts are difficult to be avoided. For GASB meeting the deadlines in financial reporting is critical; government may decide to add resources in regard to a specific part of the budget, where needs for additional funds may appear in the last minute. For GASB such practice is not accepted; this fact would lead to a severe conflict between GASB and the government. 4. Macro perspective 4.1 Purpose in Macro point of view In its macro perspective the budgeting process refers to the government’s efforts to introduce schemes for covering key public needs (Walker 1999). For example, the funds provided to educational institutes for covering the educational needs of children and adolescents at national or local level (Walker 1999). Moreover, schemes that aim to facilitate the access of certain groups of the population to health institutions and which are funded by the government are also incorporated in the macro perspective of the national budget (Walker 1999). The Macro perspective also shows the intervention of the government in the realization of projects focusing in the enhancement of a region’s crops or fisheries so that growth at local level is secured (Hawkesworth and Kogan 1992). The macro perspective is also related to the distribution of benefits among parties involved (Pozzoli 2008). This means that the oppositions of the interested parties against the national budget are part of the macro perspective of the national budget. The forms of such oppositions and conflicts are analyzed below. 4.2 Conflicts in users, parties’ interest (limited resources) When developing the budgeting process a government often has to face the following dilemma: on which criteria the allocation of resources will be based, especially if the emergent needs of the state are many (Braddon and Hartley 2011). Conflicts can appear because of the lack of funds for covering all expenses (Braddon and Hartley 2011). Setting an hierarchy of needs, so that all emergent issue are addressed, can be a challenging task (Pozzoli 2008). Limited resources are considered as a critical factor in regard to the failure of budgets at national level (Walker 1999). Securing the control in all the phases of the budgeting process could limit the chances for budget’s failures due to limited resources (Walker 1999). In practice, the limited sources could lead to conflicts between the purposes of the government and the interests of certain social groups. For example, the government may decide to invest high amounts of money on the promotion of certain athletic events; concerns could be developed by various social groups, such as people with disabilities, in case that their benefits are reduced by the government so that the funds required for supporting the above investment, i.e. the promotion of athletic events, are secured. In the above case, the firms that would be promoted through the specific athletic events would support the government’s decision; a further conflict would appear between these firms and the social group suffered the damages resulted from the specific governmental decision. The ability of a government to prioritize the needs to which the national budget has to respond is often criticized. For example, the public’s interests in regard to the management of water are related to the public control over water resources of the country. However, for the government, the income from the privatization of the organization that manages the water resources across the country can be important for covering emergent needs, such as salaries of public servants or the operational costs of healthcare organizations of the public sector. In this way, the purpose of government to cover critical public needs can conflict to certain public interests; in the above case, the right of the public to low cost water is in conflict with the right of public servants to be paid for their work. On the other hand, reference should be made to the following fact: it is, practically, impossible for a government to have access to unlimited resources (Premchand 1983). In other words, the limitation of budget’s resources is a standard term of each country’s economic environment. The public is expected to be unsatisfied if all its interests are not covered; from this point of view, conflicts between the government and people because of unlimited resources are unavoidable. Moreover, since resources are limited, covering fully the needs of specific social groups would lead to insufficient resources for covering the needs of other social groups (Premchand 1983). Conflicts would then be caused both between the social groups that had different treatment by government but also between the government and those social groups that were unsatisfied by the distribution of resources (Premchand 1983). The phenomenon of limited resources could lead to another problem: concerns could be created to tax-payers in regard to the distribution of funds raised through taxation (Premchand 1983). Favouring specific social groups would lead to social conflicts as of the lack of equality and fairness in the distribution of resources (Premchand 1983). In practice, there would be an effective way to face problems related to limited resources: certain social needs, such as those referring to health and education, would be addressed first (Premchand 1983). Other social needs would be addressed only if the above needs are fully covered (Premchand 1983). In this way, conflicts related to the distribution of resources, which are limited, would be decreased. 4.3 Conflicts in Investment (expenditure vs Income) As noted above, resources are limited. The increase of resources is a key concern for governments worldwide. An effective way for facing the problem of limited resources would be the following: the government should emphasize on the allocation of investment so that resources are increased covering a high percentage, as possible, of existing needs (Premchand 1983). However, the allocation of investment is another part of the budgeting process that can lead to severe conflicts (Premchand 1983). The foreign direct investment is the most common type of investment supporting the national budget (Gosling 2012). The provision of treasuries is another, common, practice for increasing the funds available for covering the budget’s costs (Gosling 2012). A detailed and well-structured budget is the most efficient tool for attracting investment (Miller 2012). In addition, by publishing analytical financial reports in regard to its finances, a government can increase its credibility in regard to the management of resources and attract investors (Miller 2012). Keeping a standard balance in its currency exchange could also improve a government’s image in the global market, a fact that could also increase the country’s potential to attract foreign investment (Miller 2012). According to Gwartney et al. (2009) conflicts in investment when developing the budgeting process can result because of the practice of the government to treat the above process as ‘a political decision’ (Gwartney et al. 2009, p.137). This trend is reflected to the following fact: ‘since 1960 the budget has been in surplus only twice’ (Gwartney et al. 2009, p.137). Indeed, despite the continuous deficits, the country’s government has not changed its strategic priorities in terms of the national budget (Gwartney et al. 2009). The above issues would be made clear through the following example: the increased expenditures in national budget would favour the government increasing its popularity; high popularity is a critical issue for a government as it is related to the intention of its voters to remain loyal to the government. High popularity could also result to the attraction of more voters in the forthcoming elections. For example, increasing the monetary benefits for single parents across the country would make the government more popular. However, these expenditures could be possibly replaced by investments so that the future benefits of the public are increased, as in the case, for example, on the investment made on the update of the equipment of healthcare institutions at national level. 5. Conclusion As national level, budgeting can be characterized as a challenging task. As revealed above, the government holds the responsibility for the development of successful budgets. The responsibility of governmental institutions and agencies, such as GASB, for the completion of the relevant process cannot be ignored. In addition, it has been proved that the potentials of government to monitor all phases of the budget’s implementation are of critical importance. However, in certain cases the control over the budget is not feasible, either because of lack of resources or because of lack of time, meaning especially the cases where emergent national issue keep the government and its surrounding institutions quite busy. In any case, the government should keep the exclusive responsibility of the budget making process not allowing interventions by third parties, so that the public interests are not threatened. A key finding of the research developed for this study is the following one: the ability of government to respond to its obligations in regard to the budgeting process cannot be considered as successful or not unless the performance of the budget in real terms is checked. This means that each budget, both from its macro and its micro perspective, should be evaluated by referring to the achievement or not of the objectives set by its planners, as these objectives have been related to specific deadlines. Bibliography Abraham, A., Glynn, J. and Murphy, M., 2008. Accounting for managers. 4th ed. Belmont: Cengage Learning. Aggaarwal, S. and Vijay, Y., 1998. Together with Economics. New Delhi: Rachna Sagar Braddon, D. and Hartley, K., 2011. Handbook on the Economics of Conflict. Cheltenham: Edward Elgar Publishing. Caperchione, E. and Mussari, R., 2000. Comparative issues in local government accounting. New York: Springer. Diamond, J., 2006. 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