Public Sector Accounting, Accountability and Governance

Globalising the Experiences of Australia and New Zealand

Robyn Pilcher, David Gilchrist

• Publisher: Routledge
• Year: 2018
• ISBN:
  9781351349161
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Business allgemein

Funded by taxation, public spending cannot be separated from politics and ensuring efficiency and effectiveness is always high on the political and policy agenda. Accounting, accountability, governance and auditing are essential ingredients in evaluating public sector performance.

Australia and New Zealand are world leaders when it comes to public sector accounting—such as being the first to introduce transaction-neutral accounting standards. This edited collection considers current issues impacting the public sector by primarily drawing upon experiences of Australia and New Zealand. Then, by combining history (from the time of the Domesday book, early sovereignty and Shakespeare) with current practice (differential reporting, international financial reporting standards, government performance, voter turnout, joined-up government and auditing practices), we use these experiences to illuminate the global issues of public sector accounting, accountability and governance.

Based on rigorous research by top public sector researchers, this edited collection offers a multitude of future research ideas to enable those interested in following this pathway—whether they are in Australia, New Zealand, the United Kingdom, Europe, the United States of America, Africa or anywhere else in the world—an avenue to traverse.

1 Introduction

Robyn Pilcher¹

Introduction

This book brings together works by authors specialising in various aspects of the public sector. It integrates experiences of Australia and New Zealand (NZ) in such a way as to conceptualise topics relevant to the western world. There are three main themes presented here—accounting, accountability and governance—and accounting is where it begins. The history of accounting is long and vast with the scientific, traditional side being traceable back to mediaeval times (for example, Martinelli (1983) and his review of 1340 and 1341 Genoese ledgers). Yamey (1994) considered accounting at a slightly later date with his review of double entry accounting and the manuscripts transcribed by Cotrugli in1458 and Pacioli in1494.

On the other hand, it has been argued (see, for example, Hoskin & Macve 1986) that accountability didn’t appear until much later in the 1800s. However, there is enough evidence to prove this was not the case. For example, Seidman (2005) traced accountability back as far as the 13th century: ‘most significantly, the 13th century presented England with the constitutional crisis that forced serious consideration of questions of royal power and accountability’ (Seidman 2005, p. 11). The securing of the Magna Carta in 1215 ensured the King (allegedly) became accountable to the English barons (Seidman 2005).

Finally, we have governance, a buzz word introduced into the public sector with the reforms of the 1980s and 1990s. According to Blackie (1989), the term governance was first used in an effort to improve public sector efficiency—such as in Sub-Saharan Africa. This report from the World Bank defined governance as ‘the exercise of political power to manage a nation’s affairs’ (Blackie 1989, p. 60). Although this links in with Aucoin’s (2012) definition of new political governance (notwithstanding, he takes it further than just political, referring to it as ‘sleazy governance’ (Aucoin 2012, p. 178)), it is too narrow a definition to be the only one considered here. Governance, although not adopted by the public sector until recently, was said to be used as far back as Shakespeare (Edwards 2002). In fact, journals such as Public Integrity have published special issues on whether Shakespeare’s plays teach students and practitioners of public administration important lessons on ethics today.² According to Osborne (1999, p. 38), in the 17th century it was simply ‘a method of management’, whereas now it includes ‘performance, accountability, transparency, participation, relationship management and … efficiency’ (Edwards 2002, p. 52). Hence, we can see how the three themes integrate closely with each other and are all essential components when referring to the public sector.

This chapter begins with a review of the public sector in Australia and NZ. We then consider each of the themes and how the various chapters contribute to the overall objective. Although we recognise the differences between Australia and NZ, there are also many similarities regarding the way the public sector report.

The public sector

To fully understand the public sector in Australia and NZ one must firstly have a brief knowledge of the countries themselves. Australia became an independent nation on 1 January 1901 when the British Parliament passed legislation allowing the six Australian colonies to govern in their own right as part of the Commonwealth of Australia. The Commonwealth of Australia was established as a constitutional monarchy (Parliament of Australia 2012). These colonies became the six states of Australia (New South Wales, Queensland, Victoria, Tasmania, South Australia and Western Australia) with the addition of two, limited governing, territories (Australian Capital Territory; Northern Territory). In NZ, this independence occurred several decades earlier in 1852 with the passing of the New Zealand Constitution Act 1852. However, it was not until 1907 that NZ became a dominion within the British Empire (NZ Ministry for Culture and Heritage 2014). In 1986, the 1952 Act and the Statute of Westminster 1931 were repealed and replaced with the Constitution Act 1986 (NZ). This meant the British Parliament was no longer able to pass laws for NZ. Interestingly, it has been said that NZ turned down several offers from Australia to become part of the Commonwealth (NZ Ministry for Culture and Heritage 2016).

The actual definition of the public sector is one that changes not only from within countries with several states, such as Australia, but between countries as well. According to Funnell, Cooper and Lee (2012, p. 2), ‘public sector organisations can be identified according to financing arrangements, ownership, management and accountability arrangements’. Government departments that provide a service to the public are traditionally known as being part of the public sector. In Australia these include education, policing and defence (Funnell, Cooper & Lee 2012). Other areas are not so obvious. For example, in Australia the railways are part of the public sector, whereas in other countries (such as Britain), they are not. In regards to differences between states, the electricity suppliers are a good example of where there is a blurring of the lines between the public and private sectors. Behind much of the reform process was the thought that the private sector’s practices, managerial styles and objectives were superior to those of the public sector (Funnell, Cooper & Lee 2012; Pilcher 2011).

The Australian Bureau of Statistics (2016, p. 3) offered a more definitive definition of the public sector: public sector agencies are all those ‘owned and/or controlled by one of the three levels of government’. In NZ the definition is very similar with the public sector consisting of local government and state sector organisations. Within the wider state sector lie the Offices of Parliament (e.g. the Auditor-General); state-owned enterprises (such as NZ Post); tertiary education institutions (TEIs); and legislative branch departments. These four areas are governed at arms-length from ministers. Also, within the state sector there are the state services such as Crown entities (other than TEIs); other departments (such as NZ Police); Public Finance Act 1989 Schedule 4 Organisations and others (such as Reserve Bank). Finally, there is the public service which consists of all other departments working closely with the ministers (Dovey 2003).

One major difference between Australia and NZ is the lack of a federal/commonwealth government in NZ. In NZ there are the state and local governments whereas in Australia there is the addition of the overarching federal government. Still, in essence, the public sector is similar in general; it is only how it is structured that occasionally differs.

Once Australia and NZ became constitutions in their own right at the beginning of the 20th century, there was a period of incremental change within government administration until the mid-1970s. It was then the public began to expect more accountability and transparency from its governing administrators. In Australia in 1974 the Prime Minister implemented a Royal Commission into government administration which resulted in major changes in the public sector from 1975. It recognised the need for more accountability, better communication, a more economical use of resources, a change in managerial styles and a devolution of responsibility. According to Funnell, Cooper and Lee (2012, p. 129), the report resulted in ‘an increase in responsibility for departmental performance … and improvements in accountability’. Public servants were expected to be more efficient and would be judged on their performance.

The NZ public sector also underwent major reform in the 1980s when the country was apparently about to default on several international loans. The State Sector Act 1988 and the Public Finance Act 1989 were instrumental in change. Based on the need to provide better public accounting practices and managerial accountability (central tenets of these pieces of legislation), NZ moved to accrual accounting and output budgeting in 1988. According to Mulgan (2004), these two Acts, combined with the State-Owned Enterprises Act 1986, formed the basis for adoption of a ‘radical’ version of what is now known as New Public Management (NPM) (Mulgan 2004, p. 1).

In both countries, one of the aims of the reform process was to delineate roles and hence reduce the confusion between politicians, public services and public servants. This, in turn, was supposed to lead to greater accountability for performance.

As mentioned above, NPM was the unofficial basis for the reform process moving many of the public sector processes closer to those of the private sector. According to Bovaird and Downe (2006), the United Kingdom (UK) was the first to launch NPM-type reforms. Since the appearance of the NPM in Australia in the 1980s, all political parties have supported its underlying principles (MacDermott 2007; Pilcher 2014). The acceptance of NPM ideas by government, in particular, allegedly ‘added impetus for greater participation by communities’ (Aulich 2010, p. 37). Accounting was a key element in NPM since it, purportedly, ‘reflected high trust in the market and private business methods and low trust in public servants and professionals’ (Hood 1995, p. 94). The development of NPM was seen as a means by which to enhance accountability and transparency of governments and this, in turn, required financial information that was more comparable, relevant and useful for decision-making within the public sector (Pilcher 2014). This leads us onto the first theme of the book—accounting.

Accounting

Whether relating to the public or private sectors, certain financial information is essential for informed decision-making (Pilcher & Dean 2009). One of the key elements of the public sector reforms in both Australia and NZ was the adoption of accrual accounting in the preparation of financial reports. It has been recognised globally that these two countries were not only the first to implement accrual accounting into the public sector but did so more comprehensively than most other western countries (Champoux 2006; Guthrie 1998). According to Cavanagh, Flynn and Moretti (2016), in 2015, 41 governments (21 percent) had completed the transition from cash-based to accrual-based accounting, 16 governments accounted on a modified accrual basis (8 percent), 28 governments (17 percent) used a modified cash basis, and 114 governments (57 percent) remained on pure cash accounting.

One reason for the implementation of accrual accounting in Australia was the perceived lack of usefulness of the cash-based system for making decisions by users (Funnell, Cooper & Lee 2012). Initially in Australia local government was targeted (1991), followed by state government departments (1993) and finally government as a whole (1996) (Walker, Clarke & Dean 1999). This move has been aligned to the ‘domino theory’ of change (Leeson & Dean 2009; Pilcher 2006a). Another outcome of the reform process was the requirement that the public sector, including governments, establish an asset register and report on all non-current assets and their related depreciation expense in annual reports.

Until 1989, NZ was using a cash-accounting system for its budgeting process. With the introduction of the Public Finance Act 1989, the NZ public sector adopted an output-based budgeting process. This allowed departments to use accrual-based projections of cost and revenue for its ‘outputs’ (e.g. services) so that parliament could then compare these with those from the private sector. Between 1992 and 1994, all accounting in the public sector became based on the accrual system.

The introduction of accrual accounting into the public sector brought with it several benefits. Apart from those referred to above, it allowed a more comprehensive and accurate view of an organisation’s performance and the cost of providing services. With this (allegedly) came greater integrity and transparency and made the government departments more accountable to the public (Cavanagh, Flynn & Moretti 2016). However, along with the potential efficiencies and improved accountability, there were also critics of accrual accounting for the public sector. For example, questions were asked as to its suitability to accounting for long-life infrastructure, something the private sector did not need to worry about (Barton 1999; Pilcher 2006b).

Initially both Australia and NZ had their own standards for public sector accrual-based accounting. Then, in Australia, under the transaction-neutral philosophy (where transactions were considered to be the same whatever the sector), the International Financial Reporting Standards (IFRS) were implemented (with an Australian flavour, A-IFRS) on 1 January 2005. In NZ, early adoption of NZ-IFRS could occur from 1 January 2005 with compulsory adoption from 1 January 2007.

As indicated above, one of the major issues with accrual accounting was the need to establish an asset register for all infrastructure—including those items with very long lives such as roads or heritage buildings. Added to this was the requirement to depreciate such assets. Chapter 3 considers depreciation of infrastructure in detail. The chapter details asset management and depreciation concerns as applied to transport infrastructure (concentrating on roads) in local government in Australia and NZ. Based on Sterling’s (1975, p. 28) ‘recycled ideas without resolving issues’ observation, it traces asset management and depreciation from as far back as the Domesday Book through to current accounting practices. By analysing relevant discussion forums, it concludes that problems experienced by local government today are no different from those confronted by accountants and engineers back in the 11th century. An interesting and informative read, it provides many avenues for researchers to follow in regards to their own research interests – wherever they may reside.

On the other hand, Chapter 2 considers an alternative to IFRS in the public sector. After its introduction, it did not take long for people to recognise that A-IFRS and NZ-IFRS were too complex for many entities (see, for example, Pilcher & Dean 2009; Ryan, Guthrie & Day 2007), including small and medium-sized enterprises (SMEs), not-for-profits (NFPs) and public sector organisations. Hence, differential reporting was proposed, initially ...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• List of tables
• List of figure
• Contributors
• Acknowledgements
• 1 Introduction
• 2 Differential reporting: what does it really mean for the public sector?
• 3 Depreciation in local government—still the problems continue
• 4 The consequences of the current public sector reporting framework for government accountability and decision making
• 5 Westminster system, parliamentary sovereignty and responsible government: executive accountability in New Zealand and Australia
• 6 The relationship between pre-election reports in New Zealand local governments and voter turnout
• 7 Watching the watchdogs: how auditing is contributing to governance
• 8 Same, same but different: a comparison between performance audit and operational audit
• 9 Just do it? A cautionary tale on implementing performance management regimes
• 10 The intention and the reality: A commentary on the not-for-profit reform Agenda in Australia
• 11 Utopia: joined-up government in Australia and New Zealand
• 12 Conclusion and globalising accounting, accountability and governance
• Index