Key Features of Public and Private Sector Organisations - Essay Example

? PUBLIC VS PRIVATE SECTOR AND ACCOUNTING PRACTICES BY PRESENTED Public vs. Private Sector and Accounting Practices Introduction Accounting is the backbone of any organisation. Through accounting, an organisation is able to ensure good record keeping, a good platform to base all judgments and decisions affecting the business, discovering fraud and protecting it, acts as a security to get both short term and long term loans, is a basis through which investors judge the reputation of a company to invest in, and provides the strategic goals and dimensions of the company in line with its vision, mission and objectives. Accounting is not only a way to portray the financial performance of a company, but it entails guiding any decision making involving every single aspect in the company. There are two main types of organisations in the market today. These are the public and private sectors. Public sector involve organisations owned and operated by government or their agents and are mostly set up not for profit, but to offer essential services to the public, though profit still reminds one of the objectives of such organisations. Public sectors will major in owning, producing, providing, allocating and delivering goods and services for the government or the public, on either local or international levels, with service provision being more important than making profits. The managers are government appointees, making public companies political institutions. Private organisations. These ere organisations set up, owned, financed, and operated by business people with the single aims of harnessing opportunities to make a profit. The government in private companies only plays a regulatory role through its legal framework, but does not involve in any decision making in such organisations. Their main aim is to invest and harness resources as much as possible to make the maximum profit possible from the community. Similarities between private and public companies Service to the public. Both the public and private companies are set up to serve a particular public need, though a private company is responsible to its shareholders and investors to offer such services at a profit. Competition. There are many private companies providing services similar to the public sector services; they all compete for customers and resources, as well as market for their products and services. Examples are schools or healthcare faculties. Organisational hierarchy. Both public and private organisations have different staff occupying differently levels of decision making process, though in the private sector such hierarchies may have different tag names. In the two sectors, hierarchy structure is set to delegate work to the appropriate sections or levels (Kearney, Hisrich, & Roche 2009, 28). Differences between Private and Public Companies Organisation level One factor that characterizes the public sector is the many formal processes that must be in place to make such an organisation function appropriately (ESADE, 2011). Decision process in public companies involves more degrees of consultations to formalize, leading to increased bureaucracy. Bureaucracy is defined and the regulations, procedures, and rules that have to be adhered to, but have little or no efficacy to the functional object of the rules themselves (ESADE, 2011). Bureaucracy in public sector is mostly due to the divisions of authority between the executive, legislature, and judiciary arms of the government, which have to be involved in the decision making process. On the other hand, private firms are more efficient and have no elaborate formalisation to put in place. Once they have complied with the legal procedures, they can be as small as the owners prefer and as large as possible, with decision making being retained at the senior management level. This makes private sector more efficient in decision making. Market Economy Another difference between private and public sectors is the market economy and economic systems. The public sector has to provide their services to the public at no additional cost beyond the paid taxes (Holley, Jennnins, WOlters, 2009, 584). The cost of providing services has to be spread among tax payers instead of letting a customer to pay for such costs. However, in the private sector, a customer has to pay for any additional cost by themselves, making services in private sector more expensive than in the public sector. Moreover, there is no substitute good in the public sector compared to the private sector. For example, the police force is the monopoly of the public sector and has no competition from the private sector. Employee rights and obligations Employees in the public sector have more legal rights and obligations that their counterparts in the private sectors do not enjoy (Holley, Jennnins & WOlters, 2009, 586). The off job behavior, political activities, personal appearance, and place of residence are some of the factors regulated udder the public sector that those in private sector do not enjoy. Those in the public sector are held with much higher regard due to the sensitivity of their positions, and public scrutiny compared to those in the private sector. Collective bargaining and decision making Schwenk (1990) in an analysis of decision making process both in the private and public sectors noted that managers in the private sector are not accommodative of any conflict; they perceive conflict negatively to imply that some members of their company do not take their strategic actions positively. However, in the public sector, conflict is perceived positively since it portrays that a number of stakeholders are participating in the decision making process, which ensures the final decision also addresses their concerns and interests (ESADE, 2011). Differences in Accounting Practices in Public and Private Sectors Public sector accounting is an accounting approach applied in non-profit organisations and in the public sector, where profits obtained by such organisations does not matter; profit is not the only measure in evaluating performance in such organisations (Fumiki, 2007). However in private accounting, profit is the major indictor of performance in an organisation with loss making companies considered to be insolvent and most will finally wind up. In addition, in the private sector accounting, accounts of the company are used to identify the financial position of the company to its shareholders (Likiaman 2000, 253). This implies an accountant in preparing the accounts of a private company has to bring out the extent to which the company rewards its shareholders as a measure of sound performance in the company. However, the public sector accounting cannot be evaluated and analyzed in such terms. This is because; the financial consequence of a government and its services to individual citizens depends on the taxation system in the country and not government accounts. The public sectors will mainly apply cost accounting practices while the private companies will embrace the management accounting practices (Cooper & Funnell, 2004, 160). In management accounting, the accountant has to do more than accumulation of costs, to provide a wider range of managerial activities. Such accounting has to incorporate the use of costs and other related information (Cooper & Funnell, 2004, 160). In other words, this approach may be termed as an internal system that has to focus on the needs of the customers, mostly targeting managers in an organisation and not external parties. Accounting procedures in the private sector have no external restrictions; the manager may use the information in the account statements in any form they consider appropriate in as much as the benefits of providing the information will override the costs incurred. However, in financial accounting, the accountant has to undertake the entire accounting procedure according to international recognized standards. The use of Generally Accepted Accounting Procedures (GAAP), has to guide the accounting process, has to abide to regulations of local accounting bodies, stock exchange demands, and any regulation determined by the government, making the accounting process more specific and stringent compared to the private companies management accounting approaches (Cooper & Funnell, 2004, 160). In the private sector, the main user of financial statement generated by an accountant is the investor who has taken the risk to supply capital in expectation of a return on the same capital (Accounting Standards Board, 2003). This is different to the public sector. Instead of management accountability being to the shareholders, the government’s political accountability in public sector is passed to the public through their elected representatives in parliament or the council chamber. Thus the defining class of users in the in the public sector has to be the electorate through their representatives, who undertake to hold the government and the managers accountable for the performance of such organisations on the basis of allocated resources to provide the required services and goods. Compared to accounting in the private sector, as accounting in public sector does not involve a higher degree of refinement, but only to indicate how the budget allocated was utilised. The use of accrual accounting in private sector differentiates the accounting procedures between the two sectors. According to Public Audit Forum (2002, 16) accrual accounting was developed to portray the profit earned by an organisation in a specific financial year. In the private sector, accrual accounting facilitates an organisation to match its costs incurred in provision of goods and services and the revenue gained from organisational sales. This in private company offers an overall picture on the achievements and financial performance basing on their objective to make as much profit as possible. However, in the public sector the concept of maiximising profits may not be applicable; these organisations are not profit seeking, but offer essential services to the public at a lower costs. However, when the profit objective is ignored, accrual accounting is still effective in both public and private sect’s (Public Audit Forum 2002, 16). While accountants in the private sector prepare statement to interpret the annual accumulated profits in the company, the public sector accounting undertakes a “budget out–run report,” which is a proof of public accountability and stewardship (Wynne 2003, 8). In other words, accounting statements in the public sector are prepared to indicate the allocated budgets and how the budget has been used annually. These budgets are aimed at increasing accountability in managing such organisations, but not to compare capital versus profits as in private companies. “Government uniquely provides public goods and finances them through taxation. This separates the link between service delivery and revenue recognition, making it impossible to compare revenues and expenses” (Chan 2003, 5). The concept of a surplus or profit in a government would be meaningless, and may indicate the service or project was overfunded, which may be taken as a potential fraud or lack of accountability. One of the major principles behind accounting is providing enough information that is useful “for those for whom they are prepared” (Accounting Standard Board, 2003, 24). The difference between information provided in the private and public sectors is that in public sector, the information is provided for making political decisions and not economic decisions, contrary to information provided in the private sector. This makes accounting in the two sectors to prepare two different sets of information for different decision making processes. In private companies, accountants must take into account the value of the company’s assets; valuation and recognition of the private sector assets has considerable impact on the profit obtained by a company. However, in public organisations, valuation of assets is important (Wynn 2003, 8). It is more important to refer to the cost of maintenance of assets in the public sector, compared to their values. For example, it is important for the accountant to include the cost of maintaining a school’s buildings for its current use compared to the total worth of the school. Public companies are organisations set up according to the public act and with the sole aim of offering essential services to the public. They are financed through taxes; profit is not the major motivation of setting the organisations though it is still an objective. This implies that their performance is not based on the profit generated, but on the efficiency and level of services offered to the public in addition to accountability in using the allocated budget. On the other hand, private companies are set by individuals with the sole purpose of harnessing resources for profits only. Though they provide services to the public similar to public sector, such services cannot be at a cost that outweighs the cost of offering the services or goods. The Private sector is more flexible with much less red tape in their operations. The accounting procedures in private companies are not fixed; any approach that offers the required information the management requires to make a decision may be applied. However, in the public sector, generally accepted accounting procedures GAAP, in addition to other stringent requirements have to be observed. Generally, private companies will have a better performance due to the less red tape and ease of making important decisions as well as attracting more investors due to high profits generated. List of References Accounting Standards Board, 2003. Statement of Principles for Financial Reporting – Proposed Interpretation for Public Benefit Entitie’ Accounting Standards Board Chan, J. L. 2003., Government Accounting: An Assessment of Theory, Purposes and Standards Public Money and Management, April Cooper K., & Funnel W.N., 2012. Public Sector Accounting and Accountability in Australia, Sydney: NewSouth Publishing EASADE, 2011. Differences Between the Public and the Private Sectors? Reviewing the Myth, Newsletter of the Institute of Public Governance & Management, http://www.esade.edu/public/modules.php?name=news&idnew=676&idissue=57&newlang=english [Accessed 17th April, 2013] Fumiki. S., 2007. Public Sector Accounting System and Public Governance, Research Institute of Economy, Trade & Industry, IAA, http://www.rieti.go.jp/en/papers/research-review/003.html [Accessed 17th April, 2013] Holley W.H., Jennings K.M., & Wolters R.S., 2009. The Labor Relations Process, CA: Cengage Learning. Kearney C., & Hisrich R.D., 2009 Public and private sector entrepreneurship: similarities, differences or a combination? Journal of Small Business and Enterprise Development, 16(1), 26 – 46 Likierman, A. 2000. Changes to Managerial Decision-Taking in U.K. Central Government Management Accounting Research, 11(2), 253—261 Public Audit Forum, 2002. The Whole Truth: or Why Accruals Accounting Means Better Management, Public Audit Forum Schwenk, C. R.,1990. Conflict in Organisational Decision Making: An Exploratory Study of Its Effects in For-Profit and Not-For-Profit Organisations. Management Science, 36(4), 436-448. Wynne A., 2003., Do Private Sector Financial Statements Provide a Suitable Model for Public Sector Accounts? Paper Presented at the European Group of Public Administration Annual conference on “Public Law and the Modernising State” in Oeiras (Portugal), 3-6 September 2003-08-09, http://www2.accaglobal.com/doc/publicsector/ps_doc_012.pdf [Accessed 17th April, 2013] Read More