1 Introduction
Financial sustainability in public administrations is an emerging area of research. Prior literature has focused on the possible causal factors of financial distress (Groves and Valente 2003; Kleine et al. 2003; Carmeli 2007; Jones and Walker 2007; Zafra Gómez et al. 2009; Padovani and Scorsone 2011; Cohen et al. 2012), and discussed the need to create favourable conditions to improve financial sustainability (Torres and Pina 2001; Adams et al. 2014; Ball et al. 2014; Drew and Dollery 2014; McKinney 2015). There is an emerging body of literature on the determinants of financial sustainability and the implementation of financial sustainability initiatives by governments (Brusca et al. 2015; Navarro-Galera et al. 2016; Rodríguez Bolívar et al. 2014, 2016). While international organizations (European Commission [EC] 2013; International Public Sector Accounting Standards Board [IPSASB] 2013) and prior literature (Navarro-Galera et al. 2016; Rodríguez Bolívar et al. 2016) appreciate the usefulness of government financial statements for reporting on the financial sustainability of public sector entities, there is no elaboration on how governmental accounting can contribute towards this objective. In other words, the current literature lacks focus on the role of accounting frameworks in the endeavour to make public sector entities financially sustainable.
Financial sustainability of a public sector entity embraces its ability to manage its financial capacity in the short and long term while maintaining the level of services. It requires the implementation of policies that ensure feasible provision of public services to the present generation, while protecting the needs of future ones, thus ensuring intergenerational equity (IPSASB 2013). The evaluation of public value should take into consideration the long-term financial sustainability of political programmes and policies. Liguori et al. (2012) highlighted the limitations of general-purpose financial statements aimed at satisfying these information needs. From this perspective, Antonio and Hay (1990) identified important disclosures regarding present or expected events that would impact future expenditures and revenues to include information on long-term debts, pension obligations and other employee benefits. Given that such information involves statistical and economical computations that do not normally fall in the domain of accountants, one could question how information from public sector accounting may support a financial sustainability framework for governments to achieve more sustainable outcomes.
In the next section, we present a broad view of what accounting frameworks are, since we intend to provide a holistic approach of the contribution of public sector accounting towards financial sustainability. However, it is still necessary to refer to extant conceptual frameworks for financial reporting in order to start exploring the usefulness of accounting frameworks as a reference for useful information to support financial sustainability, which is the objective of this chapter.
The need for financial sustainability in public administrations has been brought in the limelight by the financial and economic crisis (Rodríguez Bolívar 2017). The reaction of the European Union (EU) included a demand for better governmental accounting systems that would provide more reliable data that would ensure better monitoring of EU member states performance and financial condition.
2 Accounting Frameworks
Accounting frameworks are not just conceptual frameworks designed by standard setters and the ensuing financial reporting standards. Accounting frameworks also refer to the underlying legislation of the jurisdiction in which the conceptual frameworks and financial reporting standards are made applicable, which legislation would ideally aim to consolidate good governance and oversight structures. In this sense, accounting frameworks would support accounting in a broader sense. They are not there only for financial reporting but also to enable management accounting and financial management, including budgeting and performance management, and also national accounts and other reporting practices that deviate from the traditional financial statements. Thus, the scope of accounting frameworks is wide enough to include financial reporting, budgetary systems, national accounts, management accounting and performance reporting systems.
Starting our discussion with financial reporting, we refer to Dennis (2018), who, in his exploration of what constitutes a conceptual framework for financial reporting in the private sector, reminds us that a conceptual framework is basically a legitimating tool for standard setters since they have no legal authority to impose their rules. The issuance of a conceptual framework would induce preparers to follow the rules in the standards that they promulgate. As a result, standard setters aim that financial reports would present information that satisfies the objectives of preparing such reports, while the preparers may tend to forget the objectives, because their main concern is to follow the rules issued by the standard setters. Having said this, Dennis (2018) points out that the starting point of designing a conceptual framework is to determine what is wanted from financial reporting, that is, what are the objectives. If different people want different things, then more than one conceptual framework can be envisaged, each starting from a different objective. This would undermine the whole purpose of standard setting, and experts working on conceptual frameworks have adopted different strategies to try and avoid the consequences of this difficulty. As a result, in spite of the years of debate surrounding financial reporting conceptual frameworks, there is still an impression of ‘unfinished business’ (Dennis 2018, p. 27).
Since the focus is on financial sustainability of public sector entities, reference is made to the IPSASB’s conceptual framework for public sector entities, which was finalized in October 2014. It is broadly based on the International Accounting Standards Board (IASB)’s conceptual framework designed for private sector entities, but takes into consideration public sector characteristics. The principles developed in the IPSASB conceptual framework provide guidance for the development of International Public Sector Accounting Standards (IPSAS) and the preparation of General Purpose Financial Reports (GPFRs), which include, but are not limited to, IPSAS financial statements (IPSASB 2014). The principles should assist public sector entities to prepare, for example, reports on long-term sustainability of their finances. These reports would require broader forward-looking information compared to traditional financial reports and would extend beyond the one-year time horizon. To this effect, the IPSASB extended its framework to include a Recommended Practice Guideline for Reporting on the Long-Term Sustainability of an entity’s finances, namely, RPG 1 (IPSASB 2013). Here, the IPSASB took the view that, provided an entity gives appropriate attention to three dimensions of long-term fiscal sustainability (i.e., service, revenue and debt), users will be given adequate informa...