Need for a Public Sector-Specific Accounting System in Australia - Case Study Example

THE NEED FOR A PUBLIC SECTOR-SPECIFIC ACCOUNTING SYSTEM IN AUSTRALIA By (Name) Course Professor’s Name University Name Date THE NEED FOR A PUBLIC SECTOR-SPECIFIC ACCOUNTING SYSTEM IN AUSTRALIA Introduction As from the early 1980s, there has been a lot of transformation in public sector financial reporting and accounting. New Zealand and Australia led this, and one major feature of the new trend was the abandonment of cash accounting in favour of a commercial accrual approach (Hooks & Tooley 2007) The public sector comprises of the state apparatus that ensures provision of social goods to the people, funded by taxes, while the private sector includes businesses which sell utilities to the people, and are funded from voluntary customer purchases (Funnell & Cooper 2012). Although the adoption of a private sector approach has been functional for many decades in Australia, having a private sector approach to public sector accounting is wrong. This paper discusses the adoption of accrual accounting in Australia’s public sector accounting, and argues against the assumption that a uniform system can work for both private and public sectors. For a long while, business accounting has gradually been accepted as the best model for public affairs accounting. According to Hooks & Tooley (2007), the main reason behind this is the perception of a convergence between the private sector and public sector’s processes and objectives in management. Accrual accounting has since been considered as not only offering a means for measuring results and reporting achievements, but also a basis for negotiation. Tickell (2010) explains that the largest feature of reform in Australia’s public sector accounting has been the move from cash basis accounting to accrual accounting, especially from 1998 to 2000. In Australia, accrual accounting covers Accrual Management Systems, Accrual Financial Reporting, Accrual Budgeting and Whole of Government Reporting. According to Davis (2010), the adoption of accrual accounting in the Australian Public Sector dates back to 1976 when the Royal Commission on Australian Government Administration (RCAGA) recommended devolved management, greater accountability and improved performance measurement within the sector that was then a traditional bureaucratic one. In Senate Standing Committee reports on the issue presented between 1978 and 1982, accrual accounting was suggested as a remedy. The AASB recommends a sector-neutral, unified set of standards for accounting, and these will fit differently into the respective contexts depending on the types of entities or sectors and the kind of transactions which they conduct. The International Financial Reporting Standards (IFRS) offers the core direction on accounting’s handling of transactions or other related events. Local standards are created in a way that would cover matters which have not been addressed at the international level. Transaction neutrality is upheld, and this is considered to be a guiding principle and not a constraint (Funnell & Cooper 2012). The accrual system is used as the basis measurement of performance in terms of expenses and revenues. According to Rich (2012), these come out as decreases and increases in net assets. Because liquidity is important in the entire process, a Statement of cash Flow is prepared. The organization is assumed to have the primary goal of providing goods and services. It is therefore allowed to recognize its sales revenues, and these are either decreased liabilities or increased assets to the much that it has done so. This measurement method for financial performance is referred to as full accrual, and expenses are matched with revenues in order to identify net loss or income. The implementation of an Accrued Accounting System within the public sector is one of the measures for ensuring that public officials are always accountable and that there is effective and professional use of public resources (Harun et al. 2012). However, it is wrong to have it in such a context. Private and public sector accounting practices are different. For instance, within the public sector, accounting is concerned with ensuring accountability. Funnell & Cooper (2012) suggest that a public firm tends to be audited more because the financial statements arising may be used by many people within the population in making investment decisions. Private firm auditing might on its part be limited to the satisfaction of the owners’ personal requirements or those of lending institutions that they will be dealing with. It would not be wise to generalize accounting standards across public and private sectors. According to Barton (1999), each sector’s standards should be able to respond to their specific conditions. Otherwise, the consequence would be information that does not meet the criteria of relevance, understandability and reliability necessary for useful information. The main reason for accrual accounting’s success is that it is tailored to work well with the users’ information needs and it has also been dynamically adapting to changes within the business environment for over two centuries. He recommends that there is the need to adapt public sector accounting to its specific user needs. In the adaptation, there should be great emphasis on resource management and accountability needs while acknowledging the uniqueness in characteristics and functions of the sector’s products. According to Davis (2010), the Australian welfare state’s characteristics have exposed it to crises in the past where increased debt levels and fiscal deficits have been witnessed. Such negatively affect government legitimacy, and to counter them, there is reduction of government outlays while legitimising the activities through an appeal to socio-cultural norms and values. Accrual accounting has so far well facilitated these roles through overstating of public service costs, thereby offering objective evidence to justify cost-cutting. It has also enabled the appeal to anti-government and pro-private sector prejudices as a way of gaining at least short term legitimacy during trying times. However, it simply represents a change in priorities that leads to aspects which may not be relevant to the public sector. This is likely to raise more legitimacy issues. The unique characteristics of the public sector make its accounting system unique. Rich (2012) explains that the government is not focused on profit. In the long run, its expenses and revenues are supposed to even out. As a result, practices and concepts meant for profit generation are not likely to work in the public sector. Readers of public financial reports seek accountability from the government, unlike those for private firms which need the information for equity trading. Harun et al. (2012) add that public sector accountability is also broader as compared to private business where there is a narrow emphasis on the financial aspect. It is therefore unfair for users of its financial reports to be given only information which that should help investors and analysts. The business model guiding government differs from that guiding private business. Information needs are therefore totally different. Characteristics of accrual accounting make it unattractive for the public sector. According to Khan & Mayes (2009), recognition of business revenues is based on outcomes while expense recognition comes after revenue recognition. Rewarding of firms is not founded on production, but rather its sales. The financial accounting aspect considers production of goods as only changing the inventory’s composition and there is the likelihood of more liabilities emerging in the process. Cost of goods is related with accrual as it is considered as assets up to the time when the sales transaction converts the assets into expenses. These aspects help in presenting information. There is also a lot of political power within its institutions. Private sector accounting also lacks tools and concepts to deal with some aspects such as tax revenue accruals, measure accrual of tax revenues and the outlining of government responsibilities in a balance sheet. Accrual Accounting has not been inclusive enough in public sector management. According to Rich (2012), there are some resources that are non-financial for instance, but have to be subjected to some monetary valuation. Where major non-financial resources are supposed to be valued, the reforms have not ensured the promotion of enhanced accountability mechanisms because they have a near exclusive focus on the financial aspects and fail to look at broader accountability issues that relate with the public sector. In addition, accountability is a significant issue in dealing with public sector accounting. This includes assessment of the implications on the social and organizational functioning of all the entities involved. The adoption of the business approach and overlooking of alternative approaches in the enhancement of public sector accountability is against the spirit of making accounting more accountable. Conclusion In conclusion, there has been a general trend towards adoption of business accounting in public sector financial administration, especially beginning in the 1980’s. In Australia, this has mainly been marked by the uptake of accrual accounting in place of the pre-existing cash accounting. From a broader framework, there are a lot of inconsistencies that arise because of a misplacement of approach such as this. The two sectors can not really be said to be similar. There is the need for reporting frameworks for every sector to be founded on sound conceptual models that are appropriate to their own operating contexts. There is a significant difference between operating environments for profit-oriented businesses and public sector institutions. There are variations in their revenue streams, purposes, users, financial processes and budgetary obligations. Bibliography Barton, A., 1999. Public and Private Sector Accounting - the Non-identical Twins. Australian Accounting Review, Vol. 9(2), pp. 22-31 Davis, N., 2010. Accrual Accounting and the Australian Public Sector- A Legitimation Explanation. Australasian Accounting, Business and Finance Journal, Vol. 4(2), pp. 61-78 Funnell, W and Cooper, K., 2012, Public Sector Accounting and Accountability in Australia, Sydney: UNSW Press Harun, H, Van Peursem, K and Eggleton, I., 2012. Institutionalization of Accrual Accounting in the Indonesian Public Sector. Journal of Accounting & Organizational Change, Vol. 8 (3), pp.257 – 285 Hooks, J and Tooley, S, 2007. Exercising Professional Judgment in an Era of Sector Neutrality: A Study of Choices Made by New Zealand Reporting Entities. Financial Reporting, Regulation & Governance, Vol. 6:1 Khan, A and Mayes, S., 2009, Transition to Accrual Accounting, Washington, DC: International Monetary Fund Rich, J., 2012, Cornerstones of Financial & Managerial Accounting, Mason: South-Western/Cengage Learning Tickell, G., 2010. Cash to Accrual Accounting: One Nation's Dilemma. The International Business & Economics Research Journal, Vol. 9 (11), pp. 71-78 Read More