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Into the Shadows A Reflection on International Developments in Public Sector Accounting

by

Olov Olson

Christopher Humphrey

and

James Guthrie

April 2007

_____________________________________________________________________ The authors are grateful to the anonymous reviewers of the European Accounting Association for their helpful comments and Fiona Crawford at The University of Sydney for her editorial assistance.

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Into the Shadows A Reflection on International Developments in Public Sector Accounting by Olov Olson, Christopher Humphrey and James Guthrie

Abstract

Our earlier studies have reported on contemporary international developments in public sector accounting (PSA) within the reforms of New Public Management (NPM) and New Public Financial Management (NPFM). This paper focuses on what we consider to be the crucial change associated with NPFM, the transformation of traditional modified cash accounting into accrual accounting as part of these reforms. This paper discusses the change, in terms of structure and processes, focusing primarily on Australia, Sweden and the United Kingdom. The research finds that the accrual accounting in the public sector in these three different countries varies, and that there is a similar variation in private sector accounting in the three countries. We also find that the influence of the international standard-setters has recently become stronger in the public sector, but that a main decision-maker in the PSA, the politician, seems to be lost in the standard-setting process.

1. Introduction

There is no doubt that many countries invested in the modernisation of the public sector in the later years of the 20th century. These changes were often undertaken in the name of New Public Management (NPM), a label coined in various academic disciplines (e.g., in accounting Olson, Guthrie and Humphrey (1998) and van Helden (2005); in political science Hood (1995; 2004) and Pollit (2002). Recently, Dunleavy, et al. (2005), have argued that NPM has had a significant impact, but that we are now are facing a post NPM era. However, Hood (2004), states that NPM is not dead, but rather middle-aged, and we agree. We observe that NPFM reforms continue to be promoted across a wide range of countries giving the NPFM reform movement a more sustained presence than the term new suggests. We are also becoming increasingly aware that its newness may lie in the way NPM processes can be

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differently interpreted in the public sector context, and therefore the different forms that process reforms take in different settings.

In two books (Olson, et al., 1998; Guthrie, et al., 2005) we examined the state of development of new public financial management (NPFM) systems in 18, primarily OECD-, nations. The work of other scholars has provided us with information on NPFM reform in developing countries (e.g., Hope, 2001; Borins, 1998). We can generally observe that over the past three decades, governments from around the world and from across the political spectrum have been implementing NPM reforms, and much of the reforms have accrual accounting as a core accounting technology.

The new tag given to NPM is invariably shown in inverted commas in the academic literature to indicate that the reforms are, in fact, seldom new, and that they are based, in large part, on traditional notions and techniques of business management. Indeed, many of the reform ideas have been developed as a technology in the private sector context (like accrual accounting) and then translated into the public sector context. In accounting circles, the reform movement (or aspects of it) is often also referred to as new public financial management (NPFM) reform to emphasize that the rationale behind, and technology used in, reform have their basis in financial practices (Olson, et al., 1998).

We should stress that, in our work in this area, we are not promoting public sector financial management reform of the NPFM type. Nor do we want to be seen as representing or defining a limited sub-set of NPM reforms. Rather, we want terms such as NPFM to be used as a way of signalling the growing significance of financial matters to processes of public sector management reform and to direct peoples attention to the implications of financial management for public service provision. Our basic standpoint, and a key motivation for undertaking the follow up to the Global Warning project (Olson et al., 1998b), is that we see NPM and NPFM reforms as an increasingly important element of public sector transformation and believe that they are significantly changing public sector organizations, organisational behaviour and social expectations, without the level of debate that such fundamental development necessitates.

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The aim of this paper is to review the key observations we have made in our earlier research regarding NPFM and in particular, the issue of accrual accounting. Many other processes are linked to it, making it to a core technology of NPFM. This process reform is crucial, in our opinion, because we think that accrual accounting reform is, to a large extent, an irreversible step. The implementation of accrual accounting symbolizes the company-ization (Brunsson, 1994) process.

The most dramatic changeThe process is illustrated by the Australian experience, in which the Australian public sector, in 2005, implemented the International Financial Reporting Standards (IFRS) (Day, Guthrie and Ryan, 2007, forthcoming). This is NPFM reform in its purest form, as IFRS are issued by the International Accounting Standards Board (IASB), and developed for use by listed companies. This change in Australian policy is one of the most dramatic events of NPFM reform history to date, because it is the first implementation of private sector accounting standards in the public sector. We certainly expect that more countries will follow this lead. Therefore, this paper will focus on the role of accrual accounting within NPFM reform, which underlines the notion that financial issues are central to NPFM reform.

The paper is structured as follows. First we give the arguments why we have focused on the issue of accrual accounting in Australia, Sweden and United Kingdom. We discuss the change(s) from an accounting technology perspective in section 3. In section we present the standardization processes in both private and public sectors in the three countries. Thereafter we argue in section 5 that the politicians are lost in the standard-setting processes. In section 6, we discuss the problem and make some conclusions.

2. Focus on accrual accounting in Australia, Sweden and United Kingdom

This paper continues our ongoing interest in NPM and NPFM developments internationally and seeks to build on our previous work in this area (for example, see Guthrie et al., 1990; 1996; 1997; 1999; Olson et al., 1998b; 2001; Jones et al., 2001a; 2001b; Guthrie, et al., 2005). Over the past decades, we have studied the powerful

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effects of NPM and NPFM reforms on the scope, nature, provision and management of public services. The theme of our research in this area has been the need to subject these reforms, both in terms of their ideology and their practical application, to detailed empirical research and analysis at the level of individual technologies, organizations, nations and internationally.

The reforms described and discussed in Global Warning (Humphrey, et al., 2005) have continued to be promoted across a wide range of countries giving the NPM or NPFM reform movement a more sustained presence than the term new suggests. The recent book (Guthrie et al., 2005) contains new and significantly different studies from a number of countries included in the Global Warning book (Olson et al., (1998a) namely, Australia (English, Guthrie and Parker, 2005); New Zealand (Newberry and Pallot, 2005) , Spain (Pina and Torres, 2005), Sweden (Olson and Sahlin-Andersson, 2005), UK (Chow, Humphrey and Miller, 2005) and USA (Jones and McCaffery, 2005) . Additionally, it includes studies on a further set of countries, including Canada (Cooper and Ogata, 2005), Ireland (Robbins and Lapsley, 2005) , Italy (Mussari, 2005) and the Netherlands (ter Bogt and van Helden, 2005), together with a study that provides a combined analysis of NPFM reform experiences in Bulgaria, Lithuania and Romania (Vagnoni, 2005).

One issue stood out from the studies included in the book, that is, the take up of accrual accounting. Most of the literature recognizes that the intention of NPFM

reform has been to make the the public sector more effective and efficient, and by this reduce the size and scope of the public sector. A main ideological base is the idea of rationality (see, e.g., Meyer, 1998), and especially formal rationality. Further, a dominating idea in economic theory is that price of services or commodities, in a competitive economy, generates efficient resource allocation (see, e.g. Stiglitz, 1986). An analysis of the public sector from this perspective (known as public choice theory) suggests that the public sector needs prices and competition in order to increase the efficiency of resource allocation. Consequently accounting, and especially private sector accounting, often labelled as accrual accounting, has become an increasingly accepted model. Mechanisms other than the price-mechanism and accrual accounting, which may be used to increase the efficiency of the public sector are decentralized decision-making, measuring of outputs, and extending auditing processes (see Olson

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et. al., 1998). The number of instruments can both be fewer or more, depending on which country and to which time-period we refer. In any case, NPM may certainly be classified as transforming the public sector.

We have chosen to focus on those three countries we know most about (i.e. Australia, Sweden and the United Kingdom). These three countries have invested much in NPFM reform (see Hood, 1995), but are different in many ways. For instance, Australia, Sweden and the United Kingdom have about 20, 9 and 60 millions citizens respectively. All three countries have had a change in government over the years, even though the Social Democratic Party in Sweden has been in power most of the time. That governments in these countries come from both sides of the political divide illustrates that NPFM is by no means a conservative phenomenon. Further, the amount each country spends on governmental consumption also varies. The table below illustrates the governmental consumption expenditure (GCE) per capita in 20051.

12 000 10 000 8 000 6 000 4 000 2 000 0 AUS SWE Country UK

Table 1. Governmental expenditure consumption per capita in USD

These figures show that GCE varies greatly. The Australian GCE/capita is roughly 50% of the Swedish spending and about 70% of that of the UK. This table illustrates dramatic differences in governments approach to the welfare state. Despite this
1

The figures are calculated ((total governmental consumption expenditure / number of citizens) x exchange rate USD). All data is collected in the Yearbook of OECD (2005).

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difference in policy, these three countries all invest in NPFM, in particular, adopting accrual accounting.

3. The change from an accounting technology perspective

Broadly speaking, public sector accounting has been transformed from cash flow accounting to accrual accounting over the last three decades. However, there are several ambiguities with this statement. Both forms of accounting existed in some European countries in the 16th century, in a form known as cameralistic accounting, (see, e.g., Monsen 2002; 2006). This form of accounting included cash transactions, it was based on single entry book-keeping and the budget was an integrated part of it. It was first used in the public sector but then also in the private sectors. This is, of course, a description of a model, rather than of practice - it developed over centuries. In general terms, early versions of cameral accounting are almost the opposite of accrual accounting. Further, accrual accounting is based on double entry, not single entry, and the budget is not integrated in ex-post accounts.

Cameral accounting, and consequently, public sector accounting did not develop from one model to the other in one step. During this gradual process, cash transactions have been complemented with other transactions, especially working capital transactions (e.g., accounts receivables), and single entry book-keeping was substituted with double entry book-keeping. The dis-integration of the budget seems, however, to have occurred more lately.

Accrual accounting introduced new accounts. One new overall account is the income account, which accounts for the difference between revenues and expenses. However, it may also be labelled something else, e.g. surplus/deficit, which to some extent reflects the name of an overall account in public sector accounting of the past. But still, the account surplus/deficit do the same as the account income, it calculates the income as the difference between revenues and expenses, and not payments.

There are several basic differences between cash flow accounting and accrual accounting. Income can be calculated in different ways. One way is to calculate the

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difference between revenues and expenses. Another is to start with cash flow from operations (CFO) then add working capital transactions related to operations (WCO) and those transactions which influence income but not cash (INC), for example, depreciations (Olson, Falkman and Pauli, 1995; Olson and Sahlin Andersson, 1998). The latter two groups of transactions may be labelled judgements-transactions (JT), because they are based on judgements of the actor who has control over the accounting process. It is also characteristic that while the CFO describes the historical cash flow, the JT describes transactions, which are related to future cash flow. Glover, Ijiri and Liang (2002) argue, in line with Ijiri (1980), that income because of the inclusion of transactions which are related to the future (i.e. the JTs) is forecast income, and that it therefore represents soft data, not hard data.

Income may be formulated as:

I = CFO + JT JT = WCO + INC The difference between cash flow accounting and accrual accounting is therefore the JT, i.e. WCO and INC. According to our understanding, public sector accounting in general in Australia, Sweden and the United Kingdom has long included some important WCO transactions such as accounts receivable and accounts payable. Further, depreciation of assets (e.g., an INC transaction) has also been included, at least in public sector accounting in Swedish local government since, at least, the 1950s. This means that a more appropriate statement about accounting technology reform is that public sector accounting has been changed from modified cash accounting2 into accrual accounting.

While cash flow accounting is simple to define, we find it much more complicated to define accrual accounting. The definition of cash accounting is the same, regardless of context or time. Accrual accounting, however, varies dependent on context and time, and the change is related to the JT. Consequently, the producers of public sector accounts have to be prepared not only to make more judgements in the future, but also

Jones (1985) uses the term modified accrual accounting for the same phenomena

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to change their judgments over time. The advocates of accrual accounting in the public sector do certainly argue that accrual accounting will generate more hard data in decision-making processes. But this may viewed differently. The change may also support a greater reliance on, what Ijiri and colleagues labels as, soft data in the political decision-making processes, and a need to trust those who are in power of controlling the JTs.

4. Standard-setting of accounting in the three countries

We will in this chapter presenting and comparing the standard-setting structures for both the private sectors and the public sectors in the three countries.

4.1 Standard-setting in the three countries The actors who are involved in the process of elaborating and decide about the norms are often divided into two groups - the regulators and the standard-setters. The regulators are those who make decisions about the norms, or decide how to delegate, the decision of the norms. The regulator in a country, or a state, is usually the Parliament.

Private sector accounting has the investor as the main user, and often the lender as a secondary user. Both actors are acting increasingly more internationally, and so are the big companies. Those companies which are represented on more than one stockexchange may of course prefer one set of standards instead of two or more. The accounting craft needs definitively more attention when two or more standards are regulating the work of calculating the JTs. The work of commenting the same operations but with different results needs certainly also some time and skills. The international users and the international companies have therefore been used to legitimate international standards in the private sector. A major change in the world of private sector accounting took place with the decision by the European Union (EU) that all listed European companies must follow the International Accounting

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Standards (IAS)/IFRS issued by the IASB (Larson and Street, 2004)3. This means that the IASB has become a much more powerful standard-setter than before. However, within the EU, few countries are expected to follow IFRS for non-listed companies (Haverty, 2006). This means that Sweden and the United Kingdom have IFRS for listed companies and national standards for non-listed companies (NL). Australia has decided, however, that both listed and non-listed companies have to follow IFRS (see Table 2).

Australia Listed companies IFRS

Sweden IFRS

United Kingdom IFRS

Non-listed companies

IFRS

SS.NL

UK.NL

Table 2. Standards for listed and non-listed companies in the three countries (SSNL= Swedish standard for non-listed companies)

There has been much discussion in the international accounting literature about various models of accounting, such as the British-American model, the European Continental model, etc, (see, e.g., Mueller, Gernon and Meek, 1991). The introduction of IASB has, however changed this, at least regarding consolidated accounting for listed companies. One oversight in the discussion has been the differences between listed companies and non-listed companies. The studies, therefore, gave the impression that private sector accounting within one country was more uniform than it actually was (dArcy, 2001; 2004). It is, therefore, difficult to say that one accounting model exists in the private sector internationally - there is, in fact, variation both internationally and nationally.

The Financial Accounting Standards Board (FASB) is the US standard-setter, and its standards, the US GAAP, are different to the IFRS. The main difference is that IFRS
From 2005, the standards were renamed, however, for the purposes of this paper IFRS includes references to the IAS.
3

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allows revaluation of assets and liabilities according to the market value, while US GAAP does not (Haverty, 2006). Historic values are therefore dominant in accounting according to the US GAAP and market values are dominant in accounting according to the IFRS. There are, however, recent attempts to harmonize US GAAP and IFRS.

Despite this, the main international difference regarding listed companies is between the IFRS and the US GAAP. In the area of non-listed companies the situation is different. Most countries have national regulations, often based on, or informed by, IFRS, although this is not the case in Australia. Accounting for non-listed companies, or SME (small and medium sized enterprises), is however on the agenda of the IASB, but so far accounting for non-listed companies is not internationally regulated.

4.2 Standard-setting in the public sector We have earlier argued that NPFM reform has varied between countries (Olson et. al., 1998). We will below discuss standard-setting for public sector accounting in the three countries from both a structural and historical perspective.

There are more possible regulators in Australia than in Sweden and the United Kingdom, because of the structure of the federal government and states in Australia. From this perspective, we should expect larger variation of accounting standards within Australia than in Sweden and the United Kingdom. But, as we already have said, the opposite is true. Regulation of public sector accounting in Australia was, to a large extent, very liberal up to the 1970s. Then the auditors-general of the commonwealth, New South Wales and Victorian governments argued that public sector accounting standards had to be developed by the accounting profession, instead of by internal standard-setters, such as Treasury departments or Departments of Finance (Day, Guthrie and Ryan, 2007, forthcoming). The Public Sector Accounting Standards Board was formed in 1983 in order to include the profession in public sector accounting. Over the years the profession, in both private and public sectors, has become increasingly powerful, at the same time as different versions of accrual accounting have been implemented by commonwealth and some state governments, e.g., New South Wales. Since 2000, however, there has been one standard-setter in Australia, and it is the Australian Accounting Standards Board (AASB). The AASB decided in 2000 that its standards should be sector neutral, which means that these

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standards are used in both the private (listed and non-listed companies) and public sectors from 2005. Public sector accounting in Australia has consequently changed dramatically, from a liberal form of regulation to a legal form (Day et. al., 2006).

In Sweden, the first moves to implement accrual accounting were taken by individual local governments in co-operation with an accounting scholar at the beginning of the 1980s (see Brorstrm, 1982). These ideas spread to other governments and, in the next step, to the Association of Local Governments and the Federation of Swedish County Councils, the standard-setters for accounting in local government and counties at that time. The two standard-setters developed the ideas and new norms were issued in 1986. The issue of accounting in local governments became thereafter a rather big issue, partly because of concerns surrounding pension liabilities. The Swedish Parliament made a decision to change the law, and in the law it was stated that local government accounting should be based on general accepted accounting principles. A consequence of the changes of the law was that the standard-setting task was moved from the two standard-setters in the local government sector to the Council for Local Government Accounting, which was located outside the local government sector. This council produces its own standards, which to a large extent today are related to the standards of the Swedish Accounting Board, which are primarily translations (from English to Swedish) of the IFRS. The council follows also very carefully the development of the International Public Sector Accounting Standards (IPSAS), issued by the International Federation of Accountants special group for public sector issues, the Public Sector Committee (PSC). In the Swedish central government the National Audit Bureau has been the standard-setter for central government accounting. But this has also changed. In the end of the 1990s the Bureau was divided into two authorities, one became responsible for auditing and the Swedish Financial Management Authority (SFMA) became responsible for accounting and financial management issues in the central government, and for standard-setting, (see, e.g.,

Ekonomistyrningsverket (2001)). There is, however, no special council for standardsetting of central government accounting, which is carried out by SFMA. Like the Council for Local Government Accounting, this authority also closely follows the development of IPSAS, and IFRS. The IFRS, and earlier the IAS, has become important in Sweden primarily in the latter part of the 1990s. However, none of these

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changes has in standard setting has changed the essential nature of the standards public sector accounting standards have remained within the public sector

Regulation of public sector accounting in the United Kingdom is divided between local government and central government. Sometimes the National Health Service (NHS) is regarded as a special unit (see Ellwood, 2003, and Perrin, 1998), as are nationalised industries and the water authorities (see e.g. Perrin, 1998). Local government has at least 100 years experience with, what we label as, modified cash accounting4, which means that receipts are continuously accrued and payments are either continuously accrued or are converted to expenditure at the years end (Jones, 1985:xx). In 1996 a joint Committee with members from Chartered Institute of Public Finance and Accounting and Local Authority Accounts Advisory Committee was formed to develop a code, known as the Statement of Recommended Practice, which is reviewed by the Accounting Standards Board. The standard-setter of local government accounting is today the Chartered Institute of Public Finance and Accounting, whose main other task is to educate and train accountants in the public sector in the United Kingdom. Central government accounting in the United Kingdom is characterized by its continued use of cash accounting principles (Perrin, 1998), until recently. The NHS, as a part of central government domain, is, however, a unique case. The NHS pioneered NPFM, which among other thing included DRG-based pricing, and the introduction of depreciations of assets and interest charges in the early 1990s (Perrin, 1998, Ellwood, 2003). The accounting change in the NHS was regulated in special regulations, called the Manual of Accounts for NHS trusts (Ellwood, 2003). The standard-setter for the central government since 1996 has been the Financial Reporting Advisory Board (FRAB), which has a close relationship to the Accounting Standards Board, the standard-setter in the private sector in United Kingdom. The ASB has, in its conceptual framework, argued that its principles are also relevant for financial reporting in not-for profit entities (Ellwood, 2003). The main change to accrual accounting was made in the beginning of the 2000s. Full resource accounting and budgeting came into effect for departments from 2001-02 (Bourn, 2003). The government has since then extended the objective of public sector accounting in the United Kingdom, which today also includes whole of government

Jones (1985) labels it as modified accrual accounting.

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accounting (WGA). The main idea is that a consolidated accounting report for the whole public sector shall be implemented. This means that, in comparison with consolidated statements for the central government, a whole of accounting report also includes local government. New Zealand is the only other country to have made this change (Chow and Humphrey, 2006). It is also said that consolidation methods used shall be the same as those used in private sector accounting, and according to EU regulations, these are those set by the IFRS. In order to be able to prepare WGA all public sector units have to follow the same norms, which means that local government has to change its accounting norms too. Further, WGA will include both ex-ante data and ex-post data, and performance data.

There is consequently a difference between the countries in who sets the standards and which standard they set. The standard-setter in Australia is external to the public sector. The standard-setters in Sweden is within the public sector, and so is the standard-setter for central government accounting in the UK too. The standard-setter for local government accounting in UK is focusing just on local governments, and may interpreted to be within a public sector context. The variation in standards is illustrated in Table 3.

Australia Central government IFRS

Sweden SS.CG

United Kingdom UK.CG

Local government

IFRS

SS.LG

UK.LG

Table 3. Standards in the three countries (SS.CG=Swedish standard central government etc.)

However, it is important to note that the role of the IFRS varies from country to country. In Australia the IFRS is absolute, whereas in Sweden the IFRS are interpreted. By comparison, the UK approach is unique since the various actors primarily refer to accrual accounting, but not to the IFRS or IPSAS. Consequently, all three countries have implemented accrual accounting, but the form it takes varies

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across the three countries and, in the case of Sweden and the UK, between central government and local government. So despite the adoption of accrual accounting in the name of NPFM in the public sector, there is no homogeneous approach.

4.3 Summary There is a big variation of standards in the three countries, in both sectors. The variation is however bigger in the public sector. The public sector varies to an extent of 5actual to 6 possible alternatives, and the private sector varies to an extent of 3/6. In Australia there is no variation (1/4), while in both Sweden and UK the variation is maximal, i.e. 4/4.

IASB is becoming an increasingly more important standard-setter in the private sector in the world. This has also consequences for the public sector. First, the IFRS, are viewed as a model by the international standards-setter IFAC, when it has developed IPSAS. Second, the IFRS are used for regulating the PS directly, as in Australia. Third, national standard-setters view IAS/IFRS as models in the national standardsetting processes (as in Sweden). Fourth, national standard-setters view IPSAS as models in the national standard-setting processes (as in Sweden). The regulating bodies in U.K. make however no references to IFRS or IPSAS, and it is therefore difficult to understand if, and eventually how, these international standard-setters influence the national standard-setters in U.K.

There is a clear difference of the distance between the standard-setting bodies and the public sector. In Australia the standard-setting body is definitively external to the public sector domain, but in Sweden and U.K. they are within the PS domain. Consequently the standard-setting bodies in Sweden and U.K. are closer to the services the regulated accounting is supposed to reflect and at the same time the division between central and local government standard-setters make this distance even closer. These circumstances are probably influencing the content of the standards per se, but also the traditions of national standard setting and other cultural characteristics may also influence the standard-setting processes and resulting standards. One such cultural difference is the view of the PS, reflected in the GCE/C. The figures in table 1 shows that the governmental consumption expenditure per capita in Australia is 50 % of that in Sweden, and about 70 % of that in U.K. These

Draft, version 6 figures may certainly reflect that PS in Sweden and U.K. are politically viewed as

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more important than in Australia. The political ideology, which influence the level of the welfare state may certainly also be a part of the explanation why the standardsetters in Sweden and U.K still are within the PS domain, and why there actually are two standard-setters.

Accrual accounting has definitively become a new form of public sector accounting in the three countries. But accrual accounting as standards in the three countries is not the same phenomena. There are many choices to make by a standard-setter. In a world where there exists no accepted accounting theory, the existing theories, or ideas, may be used as market for excuses for choices in processes of standard-setting (Watts and Zimmerman, 1979). McKerrnan (2007) argues on the other hand that politicization of accounting is to expect when accounting stakeholder has interest in the practice. From these perspectives variation between the countries regarding their standard-setting structures should not be a big surprise. The variation would eventually be larger if not the EU had decided about the IFRS for listed companies. It is the one standard solution in Australia, which is the unexpected in this political context.

5. The politician as a user is lost in the development process

There is no doubt that financial accounting has a financial orientation, which is firmly based on past financial and/or real transactions of the organization. Modern management accounting includes these transactions, but also other types of information, e.g., non-financial information and non-transaction information (i.e. about events external to the actual organization). Investment in accrual accounting has increased the focus in periodical financial reports towards the financial dimension of the public sector. This raises two question: why is this important, and who for?

Accrual accounting is, according to its rhetoric, in an implicit private sector context, important in order to primarily inform those actors, who supply the company with financial resources. There is one type of actor, who has been given priority in the

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accrual accounting model the investor (the current and future owners). The main framework of accrual accounting is built to fit the investor by disclosing information about the financial consequences of actions taken by the company, on behalf of the investor. The income, or more precisely the owners income, is supposed to indicate how the wealth invested by the owner in the company has changed in the period, and the equity, or the owners equity, is supposed to indiciate the level of the wealth. The same framework, i.e., the accrual accounting model, is used to supply other stakeholders in the private sector context, including lenders, with information, even though income and equity is not directly related to the information needs of these stakeholders (see e.g. Hendriksen and Van Breda, 1992). The relevance of accounting in the private sector has become more hotly debated in light of recent scandals, such as Enron.

The public sector does not have investors. It does, however, have stakeholders similar to those of the private sector, e.g. lenders, management, employees, suppliers etc. AA accrual accounting in the public sector produces the same type of information as accrual accounting in the private sector, that it is geared towards investors. Consequently, all the stakeholders of the PS have to handle this information. However, a fundamental difference between the private sector and the PS is that the private sector is supposed to supply customers with products, whereas the public sector is supposed to supply service to citizens (e.g. pupils, students, elderly etc), which in rhetoric in some versions of NPFM citizens are transformed to customers. The investor invests capital in a company, and gets some financial return from this. The citizen is paying tax, in order to supply the PS with financial resources, but these are not related to the individual service. In democracies, politicians are elected and they are supposed to represent the ideas and interests of the citizens. One of their roles is to allocate resources to appropriate activities or program5. Barton (2005) discusses these questions from the perspectives of private decisions in the market vs. collective decisions, private interest vs. collective interest, and further the role of public goods and the social welfare in the society. Barton refers to Sutcliff (1985), who certainly illustrates that the differences where well known in economics before the main changes of public sector accounting were made.

About the role of the program-concept in public sector budgeting, see Olson (1990).

Draft, version 6 It is however impossible to find a rhetoric coupled to the politicians demand for

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information in the processes by which the accrual accounting has been implemented in the public sector. We cant find in IASBs documents, nor in the national standardsetters documents.

In discussing why accrual accounting has been so easily adopted by the public sector, despite the dramatic difference in context, it is useful to view the PS as a company (Brunsson, 1994) or an organization which has the company as a model (see e.g. Brunsson and Sahlin, 2000). A legitimate question then is if the main user in the private sector, the investor, understands accrual accounting, which may be an appropriate pre-requisite in order to base decisions and action on the information. But, it seems that it may be problematic to say that the investor understands the accounts s/he gets. Lee and Tweedie (1977) studied private shareholders understanding of the corporate (annual) report already in the 1970s and the presented the problem. Standard-setters in the public sector have based their decision to implement accrual accounting on this notion, without consideration of the politician as human and a user. In so doing, they have disregarded research that examines difficulties of private shareholders in understanding of the corporate (annual) report.

Martin Hoogendoorn, professor at Erasmus University Rotterdam, partner of Ernst and Young and Chairman of ASB in Netherlands said at the opening plenary session of European Accounting Associations meeting in Dublin 2006 that he dont know any Chief Financial Officer who understands the financial statements ruled by IFRS. The CEOs of the main 6 international accounting firms argue in the executive summary of their vision about future accounting and auditing that:

Complex rules must be resisted and withdrawn. Todays rules can produce financial statements that virtually no one understands (DiPiazza, Rake, MacDonnel, Samyn, Parrett and Turley, 2006:3). These actors are certainly not talking about the public sector context, they are referring the private sector accounting, and the starting point of their argument is the big scandals. The current American president recently, in the context of financial scandals, said about private sector accounting that:

Draft, version 6 we are moving corporate accounting out of the shadows, so the investing public will have a true and fair and timely picture (Bush, 2002).

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But accounting is politics, and nine days after this speech President Bush decided to implement the Sorbanne Oxley Act. The obvious question that this invites is whether public sector accounting should be moving into the so-called shadowy world of the private sector at the same time as the political head of the most powerful country in the world implies that private sector accounting needs to move out?

It is very difficult to understand how accrual accounting serves the interests of the investor, and other stakeholders, if it is difficult to understand for both producers and users. Young (2006) has however some ideas which can help us to understand some of the problem. She argues that the standard-setter (she studies Financial Accounting Standards Board in the U.S.) constructs abstract models of users of accounting, especially the investor, in order to simplify the extremely complex process of setting standards. The investor becomes in this process a model of the rational economic decision-maker. And she argues that:

The decisions of these rational economic users seemingly occur within a timeless and static economic framework. Timeless and static in that a rational decision requires no context but can be assumed to be the same across time periods, economic situations and decision-makers. These presumptions remain despite psychological research that suggests decision contexts impact decision makers (references excluded by the authors). (Young, 2006:596) According to Young actual investor behaviour has not been seriously dealt with in the standard-setting processes, instead a simplified model of the investor has been used. This means that the investors who act in reality get accounting information, which may difficult to understand and maybe in-appropriate for the decisions to be taken. From this standard-setting perspective accrual accounting is not constructed to support the information demand of the investors in real life, which certainly is in contrast to the rhetoric of accrual accounting.

Barton (2005) analyzes eight Australian standards (which existed before 2005). One conclusion he makes is that accrual accounting may be useful in the public sector, but

Draft, version 6 that the standards need to be adapted to the public sector in order to generate accounting, which is understandable and useable.

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Youngs study can also be used in our discussion about why accrual accounting has been so easily adopted by the public sector even though the dramatic differences in context. The trick is to view the PS as a company (Brunsson, 1994), and by this sharing the timeless and static economic framework, which have been used in the private sector accounting regulation. The standard-setters in the PS have been able to make reference to the rational decision-makers in the private sector, who actually only is simplified models. It is however the politicians in the Parliaments, as regulators, who make the decisions about implementation of accrual accounting. Of course they know their own situation, but still they decide to implement accrual accounting. Accrual accounting in the US public sector which has developed over the years, see IFAC, 2006) may as the accrual accounting be viewed as being in the shadows, but president Bush have not talked about that. What can the politicians do? Can they actually do anything else than silent accept the proposals from the standardsetters? Which are the alternatives? No standard-setter has actually discussed the alternatives, simply because they have ignored both the politician as an human and as a user, and the democratic framework the political system is based on.

As earlier versions of public sector accounting, accrual accounting also enters political arenas in the public sector. We will leave the questions of using the accrual accounting information in decision-making processes, like budgeting etc. Accounting is also of interest in accounting practice, where transaction are recorded and reported, and in the standard-setting processes, and we will now focus on such a processes.

Carlin (2005) argues, based on a case-study, that that AA as it was constructed in the Australian state Victoria actually may undermine the quality of certain key decisions, e.g. decisions about budgets, taxes and loans, in public sector. Newberry and Pallot (2005) illustrate the latter clearly by discussing the New Zealand experience.

The move to an accruals base for appropriations has resulted in parliament appropriating book entries which are not necessarily related to either raising loans or spending public money. It has also been facilitated the running down of public sector activities by withholding and

Draft, version 6 withdrawing money from those activities while allowing AA to project an appearance of continued levels of public activities. Close scrutiny of appropriations requirements reveals muddle and confusion and, contrary to good governance practices, the system is apparently un-documented and will be even less documented if legislation, which proposes secret regulations, is allowed to be enacted. Appropriation requirements should revert to focus on actual financial activity, specifically, raising loans and spending public money, rather than focusing on book entries. (Newberry and Pallot, 2005:274).

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Newberry and Pallot say that the use of accounting is transformed to participating in the accounting practice by focusing on book entries, which definitively are the JTs. This means that accrual accounting invites politicians to create transactions, which may result in new reported values.

Brorstrm (1998) discusses the standard-setting process and what we label the JTs, and he argue has the standard-perspective and means that:

that a financial requirements must be anchored with hard, simple and understandable facts; a political system cannot handle estimated items. This does not mean that accounting according to accrual principles is not useful for identifying problems and reducing uncertainty, only that the political system is unable to apply it as was intended. (Brorstrm, 1998:332) Brorstrm argues consequently that public sector accounting standard-setting should not carried out within the public sector, and this is actually what has happened in Australia. If a non public sector standard-setter is going to have better success in applying what is intended is of course an open question. The first question is of course what is intended. This seems nowadays also to be an open question with the cont ext of private sector accounting.

In a democracy the Parliament is the main regulator of accounting. It is therefore impossible to avoid that accounting reflects parliamentary politics. Further the processes of accounting standard-setting, accounting practice and use of accounting are also included in political processes. The meaning of accounting is be to be included in political processes in order to influence decisions and action, and consequently political processes will influence accounting standards, accounting practice and accounting use. Accrual accounting offers now possibilities for political

Draft, version 6 action compared with traditional PSA, and it is the JTs. Consequently the introduction and implementation of AA in the PS means that accounting to a larger extent than before will based on political values and intentions. This will take place in processes of accounting standard-setting and in closing the books, and this is

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processes which very complicated and problematic to understand. The content of t he processes are therefore also hidden for most of the stakeholders, even though they are supposed to make decision based on information the system produce. This is processes which are far from democratic processes in the sense Dahl (1989) has given the concept.

8. Conclusions and discussion

This paper has focused on what can regarded as a crucial change in the name of NPFM, namely, the transformation of forms of modified cash accounting into various forms of accrual accounting. Of the three countries studied, Australia has taken the firmest step in this direction with its adoption of IFRS accounting standards for the public sectors. We found variation between the countries, and also between central government and local government in both Sweden and the UK. In fact, despite the frequent reference in about 20 years to public sectors internationally adopting accruals accounting, it is clear that the form and level of adoption in public sector standards does vary rather more than it coincides as do accounting capacities, expertise and practices both within national private sectors and across nations. Indeed, it is important not to forget that in todays era of so-called globalised accounting and auditing standards, there is a substantial difference between setting such standards or committing to adopt them and the bigger and essentially more problematic task of ensuring that they are applied consistently in practice. We have in this paper only focused on the standards, but we expect that practice vary more than the standards.

While external standard setters becoming more influential in terms of what is seen as legitimate and modern accounting practice, it remains a more open question as to whether the politician (particularly those not in the Executive) as a supposed key user of accounting information is getting lost, forgotten or merely bypassed in the process

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of transformation from accrual to cash accounting. It is difficult to find references to politicians as decision-makers and as laymen in accounting in the various documents produced in standard-setting process. You can certainly ask to what extent politicians, often with limited accounting training, really are capable of judging the extent to which essentially private sector accounting models fit well in the public sector context? Indeed, it is worth asking the degree to which politicians are merely rubber stamping decisions and systems developments that have largely been constructed by technical experts or consultants working in governmental administration. But, still the politicians in a democracy are still supposed to be decision-makers in economic issues in the public sector.

Such questions of process and practice are crucial for two principal, but directionally contrasting, reasons. First, the growing commitment to international public sector accounting standards means that the setting of standards will lie increasingly outside of or distanced from democratic national domains. While claims as to the value of having independently set accounting standards in the public interest as against government (and politically) influenced standards, it has to be remembered that politics does not cease to exist once one enters the international arena and that standards set in the global public interest may well prove not to be in the national interests of particular countries, nor congruent with alternative definitions or understanding of the public interest. As we have shown in table 1, there is a large variation regarding the view of the public sector in the three studied countries regarding these dimensions. To take a topical example, politicians who choose to remain distant from such standard setting processes may find their national government being required to implement accounting standards which have a detrimental effect on the scale and longevity of its citizens pensions (as has increasingly claimed in the private sector in light of the growing demise of defined benefit pensions). If political flak can fly over taxation rule changes by Treasury Ministers that damage individuals pensions (by reducing the overall profitability of pension funds), it can certainly be expected to arise over any (subsequently deemed, inappropriate) accounting standard adoptions.

The second reason is almost the corollary of the first in that governments are increasingly working (via accruals based systems) with accounting procedures that

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allow them to exercise arguably larger degrees of judgement over what counts as government revenues, expenditures, assets and liabilities. This essentially demands greater levels of transparency over the processes by which governmental financial figures are determined. That said, in a situation where values and figures are being sort for ever more subjective elements of governmental finances (including talk of incorporating in current year financial statements, capitalised values of future taxation revenue streams or the need to camouflage ever rising levels of government debt and commitments relating to public-private partnership (PPP) arrangements), it is always likely that levels of trust in governmental financial reporting will decline. This in turn has to lead to more demands for transparency and regulation and ever more resources transferred from front-line delivery services into the monitoring, audit and inspection of governmental finances. In the most extreme of scenarios whereby a powerful government is able both to influence significantly the form and content of international public sector accounting standards, that in turn give it (and fellow national governments) maximum levels of discretion and judgement, it could be well be that the once heralded move from, what was wrongly labelled as, backward looking, conservative cash accounting results at some stage in a major collapse in confidence in standards of governmental reporting. With such evident gaps in the scale and reach of normal democratic processes, can one really expect citizens to trust and rely on such modern standards of governmental reporting?

Such a scenario may seem extreme but at some stage something has to give in the field of public sector accounting practice and research. From a practice perspective, the clear enthusiasm is for accrual accounting indeed, one can regularly meet people steering public sector financial management policy who look perplexed and disbelieving when they encounter people who do not accept that the case for accrual accounting has been won and convincingly won. Critics are consequently seen as individuals with an axe to grind people who hark back naively to some glorious but mythical days when cash was king. As we have shown in section two, public sector accounting has developed over hundred of years. The most simple form of cash accounting, which some standard-setters and scholars refers to existed in for more than 200 years ago. Contemporary local government accounting in the 1970s included also working capital transactions, i.e. some JTs. Indeed, one of the real ironies in the field of public sector accounting research is to see how many authors are (and have

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been for many years) critical of the adoption of accrual-based accounting systems in the public sector. Yet, collectively, they have been unable to prevent or re-shape the progression and expansion of such systems (even though such expansion is often based on the propounding of myths or at best gut feel views as to the nature of accrual accounting practice in the private sector and grand (but empirically unproven) claims as to the value of its application in the public sector. There can be no more telling sign as to the lack of impact of such criticism and emphases on the special nature of the public sector context as the recent set of initiatives in Australia which are implementing sector neutral standards! On the other hand, the critics maybe sharpened the arguments for the advocates of the new.

Such a state of affairs can serve to encourage retrenchment and a pattern of behaviour whereby critics only ever talk to critics and likewise for those in favour of the reforms and never the twain shall meet so to speak. However, this is a seriously retrograde step and one, which both academics, accounting practitioners, politicians, front line service providers and standard setters should work hard to rectify. Behind the

protective rhetoric there is a good deal of potentially rich ground for mutually beneficial analysis and reflection. At the research-practice interface you hear many intriguing stories of qualitative oriented researchers who are deeply critical of the accrual accounting reform process who have seldom, if at all, talked to those charged with the responsibility for setting and implementing policy in this area. There are actually also academics, which by action research have searched for, and produced, accounting information that politicians want to get and can use. You hear practitioners dismissing research papers as representing a witch-hunt against the accrual accounting programme, yet subsequently, following lengthy discussion of the practicalities of such a reform initiative, admitting, on more than one occasion, that the witches actually had some legitimate points. Similarly, you come across senior practitioners who recognise the political nature of the accrual accounting process and who readily acknowledge that the skills of certain key players rested not so much in their technical accounting expertise but in their ability to convince others, particularly Ministers, that their desired set of accounting reforms was worth pursuing.

Whilst talking of positive aspects of such reforms and where constructive change and improvement is seen to have taken place, they express confidentially their worries that

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certain aspects of the programme have been over sold (particularly in areas such as the expansion of accrual accounting into a consolidated form of whole of government accounting where there has been a real mismatch between the promises made to a disaggregated set of user groups as to the value of a massively aggregated set of financial accounting data). You can also talk with politicians who have overseen efficiently, at least in terms of their degree of diligence in attending parliamentary committee meetings where accrual accounting developments were discussed, who a couple of years down the line have almost no recall as to what the initiative was about and what it has achieved in practice. So much for the politics of accounting standard setting!

In many respects, the power of the metaphor of coming out of the shadows rests not in its utilisation by George Bush or in any rough and ready contrasting of the worlds of public and private sector accounting. Rather it resides in the need for more frank and open discussion and access to the world of public sector accounting practice. The comments, concerns and wry smiles that people express privately or with the protection of research anonymity needs to come more into the open. We need to know more about the way in which (international) public sector standards are set, implemented and enforced (or ignored). Likewise, about the bodies responsible for setting such standards, and their interactions with other key institutions, networks and players on the global regulatory scene. We need to explain how certain ideas and experiences travel and how others get left unnoticed. We need to focus more on the shifting balance of power between national and global bodies and the whole host of intermediary regulatory associations that increasingly base (lending) decisions on the basis of compliance with international standards.

We also need to focus more on the actual nature of public sector accounting practice and not just the setting of public sector accounting standards. We need to avoid hanging on to old hobby horses as to the so-called value of generically labelled cash or accruals systems and recognise the diversity and sheer mix of practice that exists under both systems. We need to study in more depth the interaction in practice (not

in formal procedures and rule charts) between accounting and economic/statistical based (national income) reporting systems particularly giving consideration to their mobilisation in relation to processes of asset valuation and the ability it has given

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senior public officials to manage with imperfect information sets in situations of uncertainty. Of particular importance is the need for accrual accounting not to be seen just as a system of financial reporting or financial reporting standard setting but to study its impact and interaction within public sector organisations and the whole complex of leadership, financial management, service delivery and other cultural traditions that exist in, and serve to make up, such organisations in practice.

It may well be at times that accrual accounting is the easy target for failings or limitations in other aspects of the managerial system. Indeed, you can talk to many managers in the public sector who in todays, so-called accounting dominated, world seldom see any financial information or receive any financial reward for providing service levels and standards of quality above that expected. For them, the crucial failing is not the accounting reporting format but the sheer lack of delegated financial management. They see this as the organisational philosophy or mindset on which so much accounting reform depends and if it is not delivered then accrual accounting systems are highly vulnerable to game playing and the possible manipulation of performance and financial data to ensure targets are reached. Similarly, the problem with the apparent accounting abuses in fields such as Public-Private-Partnerships (PPPs) rests significantly not with the way in which such contracts are reported financially but the way in which they were agreed and signed off. If weak managers or inept (or even corrupt) politicians have not secured the best possible deal for the public sector, then is the problem really one of accounting but of management and if accounting is implicated, then the failings lie in the area of management (not financial) accounting and the organisational role and power assigned to the management accounting team (or, most probably, person)? If the growing use of (private sector) management consultants is reflected of anything, aside from the political preferences or failings of government, it is the inadequacies of public sector management systems. Any management system working well should not require the soaring amounts of money being spent on external management consultants. At the very least, the presumably prominent financial management controls should be calling such expenditure into action.

As has been said elsewhere and on many different occasions, a valuable way of bringing such issues out of the shadows is to promote discussion at academic-

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practitioner conferences and for space to be created so that well informed and intentioned qualitative research projects can seek to explore and explain what is being done in the name of public sector (accruals) accounting. If this does not happen and the arena opens up in terms of its willingness to expose issues and experiences to date, which is what is supposed to happen in a political democracy, then the field of public sector accounting research (and practice) is destined to be an inherently disappointing one, inhabited by distinct camps of what are likely to be rather miserable and frustrated people. In some of our earlier work, we have spoken of the dangers of an evaluatory trap (see Olson et al, 2001) it would be a real shame if we ended up producing a research trap in the field of public sector accounting research but some of the signs are not encouraging!

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