Accrual Accounting for the Public Sector - a fad that has had its day?

By Andy Wynne, andywynne@lineone.net

The latest issue of the International Journal of Governmental Financial Management (www.icgfm.org/digest.htm) contains a useful review of the experience of implementing accrual accounting by central governments.  Its findings should increase the number of governments which have considered this approach, but have decided that other reforms are more important and are more likely to deliver significant benefits.

For the last decade accrual accounting has been presented as the reform for public sector accounting.  However, it is becoming increasingly clear that the claimed benefits of introducing accrual accounting are not being realised in practice.  Few countries have actually adopted accrual accounting as the basis for their central government accounts.  Spain was possibly the first in 1989 followed by the celebrated case of New Zealand.  A few other governments followed suit over the next decade or so, but, according to Wynne (2007), by 2006 still only around 10 of the nearly 200 governments in the world had adopted accrual accounting. 

In Australia, New Zealand and the UK the evidence now suggests that, if their governments’ knew then what they know now, then the move to accrual accounting may never have taken place (Dorotinsky, 2008).  Wynne’s most recent paper on this topic reviews the evidence which is available from these countries so that governments considering this type of reform can base their decisions on the actual experience of those few countries which have adopted this approach.  Just as the current world recession is undermining the previously dominant view on the efficacy of the free market, so the failure of accrual accounting to deliver on its promises is having a demoralising effect on at least some of its previous supporters. 

Supporters of the move to accrual accounting argue that a range of significant benefits are available to governments which move from the cash to the accrual basis of accounting.  Such arguments have been widely reported and repeated at many conferences.  However, the authoritative independent research which is now available suggests that few, if any, of these benefits have been actually achieved in practice.  In contrast, the costs of moving to accrual accounting are accepted as being substantial.

Some governments may consider that a move to accrual accounting will provide the opportunity for a complete overhaul of their financial management systems through the adoption of leading edge twenty first century reforms.  However, Noel Hepworth (2003) argues against such a strategy and recommends that:

before this reform [accrual accounting] is introduced, cash accounting should be robust, control should be secure, external audit should be functioning well and the legislature should have an ability to call the executive to account. (page 37)

Several leading OECD countries are still not convinced of the overall benefits of moving to full accrual accounting and budgeting, for example, China, Germany, Italy, Japan and Russia.  A recent multi-country overview by the US General Accountability Office also concluded “Accrual Budgeting useful in certain areas but does not provide sufficient information for reporting on our nation’s longer-term fiscal challenge”.  This reinforces growing recent scepticism on the value of a full transition to accrual accounting and budgeting.

The full article is available for free download from: http://tinyurl.com/ceuj72.

Comments

[Bill Dorotinsky]

Correction. In the third paragraph, I am cited as the source for a quote on accrual accounting in NZ, Australia, and the UK. In fact, a comment I made in a presentation in 2008 was citing the work of Mr. Wynne himself. I have no independent evidence supporting this assertion, and Mr. Wynne should be cited as the source.

[Doug Hadden]

It is somewhat a case of "show me the money!"

The advocates for full accrual accounting in government have strong arguments. Governments can only consume so many PFM reforms. The benefits of moving to full accrual relative to other reforms are in question - especially the costs associated with training and capacity building in many countries.

There is no question that operating in a full cash mode of accounting has serious pitfalls to any government. The books can be "cooked" to show meeting budget requirements, when in fact, the government has huge obligations on received goods and services.

Accruing expenses and payroll at year-end can eliminate many systemic problems. Accruing on a period basis may have some benefits, but as long as there are commitment controls, expenses should not get out of hand. The benefit of full accrual with asset management and contingent liabilities requires an order of magnitude more complexity - and often at a high cost - such as annual property assessments. Many practitioners are reluctant to propose full accrual.

We also experience the effects of politicians in the accrual debate. Electoral terms are typically a lot shorter than asset depreciation cycles. We see this in the Public Private Partnership area. A government may sell a toll road, bridge, port or airpot to private sector company. This adds revenue and shows a budget surplus for that year. The government may receive a portion of the usage payments from the private sector company. Do politicians want to know about the real present value of the sold asset? The incentive for politicians is to bring money to their districts like "earmarks". Whether the earmark is a good government investment over a ten year period is beyond the political "half life".

[Howard Clark]

Isn't it fascinating?

Measurement of money by budget with no relationship to service performance!

For a better way see The Systems Thinking Review:

http://www.thesystemsthinkingreview.co.uk/