Practice-Relevant Accrual Accounting for the Public Sector

Producers' and Users' Perspectives

Hassan Ouda

• Publisher: Palgrave Macmillan
• Year: 2020
• ISBN:
  9783030515959
• Topic: Politics & International Relations
• Subtopic: Public Policy
• Index: Politics & International Relations

This book addresses the necessary developments and adjustments that can be regarded as a promising starting point for making accrual accounting a more practice-relevant for the public sector entities. Specifically, the main focus is on Reshaping the application of accrual accounting principles and assumptions to fit the context of public sector entities; Developing a practice-relevant holistic accounting approach for governmental capital assets, which has been based on developing and reshaping the assets recognition criteria; Scope of general purpose financial reporting from an accountability perspective; Suggesting a sustainable accounting approach for reporting on the long-term fiscal sustainability; Developing a dynamic model for making public sector accrual accounting a more user practice relevant; and finally, Developing a theory of accounting information usefulness, which explains how cognitive aspects do influence the use/non-use of accounting information by the politicians. Fundamentally, the book has tackled these necessary developments and adjustments from both the producer's and the user's perspectives.

© The Author(s) 2021

H. OudaPractice-Relevant Accrual Accounting for the Public SectorPublic Sector Financial Managementhttps://doi.org/10.1007/978-3-030-51595-9_1

Begin Abstract

1. Introduction

Hassan Ouda¹

(1)

Department of Accounting and Finance Faculty of Management Technology, German University in Cairo, Cairo, Egypt

Hassan Ouda

Email: [email protected]

End Abstract

Research in public sector accounting should ultimately fulfill a practical purpose and should aim at improving the public sector accounting practice. While the academics (e.g., CIGAR scholars) have exerted great effort in the last three decades to develop public sector accounting, these efforts are still of little value to the public sector accounting practice. This is because their efforts were not mainly directed towards improving the public sector accounting practice, but they were simply directed to describe or understand, analyze, or critique it. Similar to what has been claimed by Choudhury (1986) for the management accounting research, public sector accounting research is also relevant to practice when it helps practitioners to understand their organizations and improve practices, and when it contributes to a theoretical body of knowledge that is beneficial to effective organizational change in the future. Accordingly, public sector accounting research should be redirected to focus on creating better practices and developing the public sector accounting as an academic discipline. While the movement towards New Public Management (NPM) has required the reforming of public sector accounting through the adoption of accrual accounting in the public sector (Hood 1995; Ball and Grubnic 2007), Lapsley et al. (2009) have argued that despite the limited evidence available on the efficacy of an accrual accounting system, the world of public sector accounting practice regarded the adoption of accrual accounting as self-evident progress; they, however, consider it a ‘problematic’ reform.

It is a problematic reform because the adoption of accrual accounting in the public sector has been based on a one-size-fits all model, which applies conventional accrual accounting principles, developed for the private sector, to public sector entities without taking into consideration that public sector entities and assets are differentiated in purpose and essence. It is also a problematic reform because public sector accounting scholars, standard setters, and professional bodies did not reshape the application of accrual accounting principles and assumptions (which were originally designed for measuring net income in the private sector) to fit the context of public sector accounting practice and to consider the specific nature of public sector entities. In fact, public sector accounting scholars, standard setters, and professional bodies did not develop more practice-relevant recognition and measurement criteria for specific public capital assets. Furthermore, as a result of a wider range of potential users that General Purpose Financial Reporting (GPFR) by public sector entities are expected to serve, the scope of financial statements in the public sector should be expanded to include financial and nonfinancial information, whether this information may be presented in the notes to financial statements or in separate reports included in the GPFR. Reporting such information is necessary for governments to discharge their obligations to be accountable—that is, to account for, and justify the use of, the resources raised from or on behalf of constituents (IFAC 2013).

In addition, the financial reporting of public sector entities needs to be expanded to provide information about financial commitments that can have an impact on the sustainability of service delivery. Accordingly, the new set of financial statements should include all items that will affect the fiscal sustainability of governments in the future; for example, the financial statement might be supplemented by separate statements of future and contingent liabilities, statements of commitments, and a “trust assets” statement that includes heritage assets in physical units. Furthermore, one of the common reasons given for the adoption of accrual accounting in the public sector is the discharge of accountability. However, there is an argument in the literature that strongly debates whether the requirement for public sector entities to provide financial statements based on private sector Generally Accepted Accounting Practices (GAAP) impacts positively or negatively on public sector accountability outcomes (see, for example, Barton 1999; Carnegie and West 2005; Wild 2013; Micallef and Peirson 1997; Cooper and Owen 2007). The discharge of accountability obligations requires the provision of information about the entity’s management of resources entrusted to it for the delivery of services to constituents and others. Given the way in which the services provided by public sector entities are funded (primarily by taxation revenues or other non-exchange transactions) and the dependency of service recipients on the provision of those services over the long term, the discharge of accountability obligations will also require the provision of information about such matters as the entity’s service delivery achievements during the reporting period, and its capacity to continue to provide services in future periods.

1 Accrual Accounting and Its Practice-Relevance for the Public Sector

In fact, when an accounting method is introduced into a new environment, “it is naïve to assume that by simply assembling the components of a system that desired or officially intended outcome will be achieved” (Hodges 2013). Hodges has further argued that the long-standing academic argument for using accrual accounting in the public sector (Taussing 1963) appears to have missed some necessary adjustments. The general finding is that mimicry of private sector techniques can be imposed and apparently complied with but that their assimilation into the culture of the public sector, if it is achieved at all, will take a considerable period of time and require a considerable change that makes it suitable for the public sector entities that are differentiated in purpose and essence. Moreover, Mellett et al. (2009) argue that although the adoption of accrual accounting in the public sector requires some necessary adaptation, public sector accounting policies start from the private sector’s GAAP and change only where it is necessary to match them with the different environment of the public sector; such amendments have been relatively few in practice. The lack of such amendments/adjustments and the differences between the public and private sectors give rise to trouble for practitioners/producers. Accordingly, the following question can be raised:

• What are the necessary adaptations/adjustments that are required for making accrual accounting more practice-relevant for public sector entities?

This book provides a starting point for developing a more practice-relevant version of accrual accounting to fit the context of public sector entities and improve public sector accounting practices, thus helping producers (which include two circles of producers of accounting information: (1) inner circle practitioners/preparers of financial statements such as the employees in an accounting department, controllers, and internal audit office; and (2) outer circle such as standard setters, professional bodies, and academics) to understand the nature of governmental entities and how to apply accrual accounting to the public sector. Therefore, the final aim of this book is to open the door for developing a new version of accrual accounting that is initially designed for public sector entities and not just a modified version of commercial accrual.

The topic of practice-relevance of accrual accounting for the public sector from both producers’ and users’ perspective has been considered as a fascinating research topic for the last two decades. Although this research has resulted in publications in several accounting journals, it would be a good time to reflect on that topic and bring the necessary adjustments together to provide a cohesive big picture of the practice-relevance of accrual accounting for the public sector.

Accordingly, the particular benefits offered by this book and the needs that it aims to satisfy are as follows:

First: Making public sector accrual accounting more practice-relevant should be approached from two perspectives: the users’ and the producers’. This is because public sector entities and assets are differentiated in purpose and essence, which in turn require public sector academics, standard setters, professional bodies, and practitioners to find practical solutions for the challenging accrual accounting issues that cause problems for practitioners and to challenge the design of public sector accounting to better fit into users’ practices and to meet the diverging needs of different users (e.g., politicians, public managers, oversight bodies, and citizens).

Second: Reshaping the application of accrual accounting principles and postulations to fit the public sector accounting practice is an important aspect for making public sector accrual accounting more practice-relevant. It has been noticed that the last three decades have witnessed standard setters, academics, and practitioners direct their efforts to force public sector entities’ information into business-reporting frameworks (Carlin 2005; Mack and Ryan 2006), instead of really thinking about reshaping the application of accrual accounting principles, assumptions, and concepts to make them more practice-relevant for public sector entities. Laughlin (2008) also argues that “some of the [private sectors] underlying concepts and standards need reshaping to allow them to fit the context of PBEs [Public Benefit Entities].” While the International Public Sector Accounting Standards Board (IPSASB) (and its predecessor) has issued the IPSASs (International Public Sector Accounting Standards) to be applied to the public sector entities and has developed a Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities (IPSASB 2014), both IPS...

Table of contents

• Cover
• Front Matter
• 1. Introduction
• Part I. The Producers’ Perspective
• Part II. The Users’ Perspective
• Back Matter