the use and abuse of accounting in the public sector ... 2009 abacus...the use and abuse of...

ALLAN BARTON

The Use and Abuse of Accounting in thePublic Sector Financial Management Reform

Program in Australiaabac_283 221..248

Accrual accounting has been central to financial management reformsdesigned to promote greater efficiency, effectiveness and accountability inthe Australian public sector. This is the setting for the article; however, theissues covered apply to all nations that have reformed their public sectorsover recent years. The results of the reforms have been mixed. Whileaccrual accounting has had some beneficial results for the above purposes,the benefits have been offset by aspects of accounting misuse resultinglargely from adoption of the business model of accrual accounting, termi-nation of the former cash accounting system, and adoption of some ques-tionable marketization reforms which appear to be more driven by theobjective of reducing the size of government rather than enhancing effi-ciency of operations. Because Treasury believed that the business modelwas not appropriate for budget fiscal policy purposes, it introduced asecond combined accrual and cash accounting system—the GovernmentFinance Statistics system. The use of two accrual accounting systemsreporting different results caused much confusion in parliament.

Key words: Accrual accounting; Financial management reforms; Publicchoice theory; Public sector.

INTRODUCTION

The adoption of accrual accounting and budgeting systems was central to theprogram of Australian public sector financial management reforms over the pastthirty years. They were heralded with much praise and promise for improvements inthe efficiency of resource management and effectiveness in policy delivery, and inenhanced transparency of information and accountability to parliament and thepublic, by official enquiries and reports, and by the profession.

However, academic reviews of the reforms were mainly critical. It is contendedhere that the reforms as a whole did enable significant improvements in resourcemanagement, accountability and fiscal performance; that some of the reforms wereinappropriate and created problems; and that most of the problem areas wereresolved over the past five or so years in the light of experience.

Allan Barton ([email protected]) is an Emeritus Professor and former Pro Vice Chancellorand Treasurer of the Australian National University and an Honorary Professor of Accounting at theUniversity of Sydney.

ABACUS, Vol. 45, No. 2, 2009 doi: 10.1111/j.1467-6281.2009.00283.x

221© 2009 The Author

Journal compilation © 2009 Accounting Foundation, The University of Sydney

mailto:[email protected]

This article reviews and appraises the reforms undertaken by the Australiangovernment since 1976 to the present time and their results,with a focus on the centralrole of the accounting systems in them. Because the accounting reforms were inte-grated with the marketization reforms (see Modell and Wiesel, 2008, and Lapsley,2009, for similar reforms in Sweden and the United Kingdom), they both need to beconsidered together.Those areas where accrual accounting information systems andthe related marketization reforms have been of use in enhancing efficiency andeffectiveness in public sector operations are examined; and conversely, where theyhave been misused or abused. The shortfalls, where they occur, are attributed to twointerrelated factors—the adoption of a largely irrelevant business model of accrualaccounting rather than one designed to suit public sector needs, and secondly, to apolitical ideology as expounded in public choice theory which advocates curtailing thesize of government and the marketization of its activities.

To accomplish the objectives of this paper, the following matters are reviewed:

1. The nature and roles of government, and how the public sector differs in funda-mental ways from the business sector of the economy. The characteristics of thepublic sector determine the type of accounting information system required bygovernment.

2. How rising costs of government and related budget deficits led to a reconsidera-tion of the roles, scope and mode of governmental operations.

3. The reform process is divided into three periods in which major tranches of thereforms were implemented—1984/95 during which management of governmentresources and programs were reviewed, decisions made to adopt accrual account-ing, and the new systems were implemented; 1996/99 during which most of themarketization reforms were implemented; and 1999–2008, when accrual budget-ing systems were introduced, the former cash accounting system was terminated,and subsequent refinements were made to the reforms.

4. Concerns about some of the reforms and their impacts on accounting as a qualityfinancial management information and reporting system. These comprise adop-tion of two accrual accounting systems which report very different results, aboli-tion of the former cash accounting system even though it provided necessaryinformation to government; use of some business practices which may not beappropriate for the public sector; biases in some of the accrual accounting mea-sures favouring the private sector; and politicization of parts of the reformprogram.

Throughout the article, accounting is taken to be a financial management infor-mation and reporting system (FMIRS) which assists management in their resourcedecision making and other roles, and their accountability to external stakeholdersfor their activities and performance. These contiguous objectives form the basis ofSAC 2 (AASB/PSASB, 1990) and the AASB Framework (2004, paras 12–20). Fur-thermore, the information must satisfy the requirements of the 2004 Framework(paras 24–26) concerning criteria for the information to be useful to users and in turnfor the financial reports to provide a ‘true and fair view’. Accounting is basically afinancial measurement system for recording and summarizing past transactions and

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222© 2009 The AuthorJournal compilation © 2009 Accounting Foundation, The University of Sydney

relevant events and reporting them in informative financial statements which satisfythese objectives. Secondly, a distinction is made between the principle of accrualaccounting (whereby all transactions and relevant events are recorded as at dates ofincurrence) and particular measurement models of accrual accounting (whichdepend upon the nature and roles of the accounting entity and the basis of incomeand net asset measurement). This distinction is not generally made in the literature.Finally, a normative method of analysis is used to determine what information isrequired by government to undertake its activities efficiently in pursuit of its policyobjectives and to account for them to parliament and citizens.

The examination is confined to the general government, or budget, sector of theAustralian (or Commonwealth) government, at both the departmental and aggre-gate levels. As such it does not include public financial or trading entities (e.g.,Reserve Bank and Australia Post Ltd). However, similar considerations apply to allstate governments in Australia and likewise to the United Kingdom, New Zealand,Sweden and elsewhere which have broadly adopted New Public Financial Manage-ment (NPFM) principles (Hood, 1995; Ohlson et al., 1998).

WHY DO WE HAVE GOVERNMENTS?

Before beginning the examination of the role of accounting in the recent financialmanagement reform process, it is instructive to consider why we have governments,and what roles they are expected to perform by citizens. The nature and roles ofgovernment form the basis of the financial information needs of government and theelectorate.These matters have become contentious issues over recent years, and theychange significantly over time according to the wishes of citizens. U.S. PresidentAbraham Lincoln (1863, Vol. 12, p. 282) considered that: ‘The legitimate object ofgovernment is to do for a community of people whatever they need to have done, butcannot do at all, or cannot do so well, for themselves in their individual capacities’.

Citizens of democratic nations elect their governments to act on their behalf inproviding collective and social welfare goods and services to the public because itcan be more efficient and effective to provide them on this basis (Musgrave andMusgrave, 1988, Chs 4–7; Stiglitz, 2000, Chs 1–4). Many goods and services arecharacterized by non-rival and non-excludable consumption attributes. Non-rivalconsumption means that use of the good by one individual does not deprive othercitizens from using or benefiting from it, whereas non-excludable consumptionmeans that no one citizen can exclude others from using the good, as there are noownership rights attaching to it. These conditions give rise to what are known ineconomics as externalities, that is, social and private costs and benefits diverge, andthe goods are known as public or collective goods. Typical examples include theservices provided by systems of law and order, the defence forces and good govern-ment itself. Such goods cannot readily be supplied by private firms because theycannot capture the recovery of all the benefits in price, high fixed costs and lowmarginal costs, and free-rider problems. Instead, citizens fund their provision collec-tively through taxation. Social welfare services are provided to citizens havingdisadvantages arising from factors such as poor health, unemployment and low

P U B L I C S E C TO R AC C O U N T I N G U S E A N D A BU S E



incomes, with the aim of enhancing the overall well-being of society. In all of theseactivities, citizens expect their governments to conduct them to enhance communityand national interests rather than to pursue personal interests.

As elected representatives of its citizens, governments are accountable to them forall their activities and in particular for the provision of collective goods and servicesand social welfare services, and their funding through taxation. Accountabilityrequires openness and transparency of policy formulation, its implementation andservice delivery. This is achieved by the requirement that all policy decisions andtheir implementation must be first approved by parliament, comprising both oppo-sition and government representatives, and the results be reported on, including allfinancial ones. Parliament and thereby the public must be provided with appropriateinformation for the democratic system to function effectively.

These conditions do not apply in the private sector of the economy. Rather,business firms provide other types of goods which are characterized by rival andexcludable consumption. These goods, known as private goods, are better providedby private firms operating in response to customer needs. Externalities other thanpollution are not important in most private goods markets, and firms and citizens canoperate on an individual user-pays basis. It can be demonstrated that efficiency andeffectiveness in the provision of private goods and services to customers is enhancedthrough firms operating in competitive market conditions (e.g., Stiglitz, 2000, Ch. 3).Accepting this, there is no need for governments to provide such goods.

Because of these consumption goods and social welfare attributes, the private andpublic sectors are largely complementary in their activities.

The activities of governments in satisfying the collective needs of the nation canbe summarized as follows (Barton 2003, 2005):

1. provision of public goods and services to citizens,2. provision of social welfare goods and services to citizens,3. macroeconomic management of the economy,4. conservation of the nation’s natural and cultural environment,5. pursuit of intergenerational equity, and6. management of government resources which are used to provide the above goods

and services.

The management of these activities determines the financial management informa-tion and reporting needs of government.

The first five roles involve important externalities and lie outside the businesssector of the economy. Such externalities provide the reason for their being govern-ment rather than private responsibilities, and they provide the basis for Lincoln’sobservation. They are met through government fiscal (or budget) policies. They allinvolve the expenditure of cash by government and its collection from taxation andother sources to fund their provision, and over 80 percent of Commonwealth expen-diture occurs on them (JCPAA, Report No. 388, 2002, p. 70). Hence, a cash account-ing and budgeting system (CABS) is required by government for these annual fiscalpolicy functions. However, the final role of government in efficiently managing theresources used to provide the above goods and services, and the borrowings which

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are raised to help fund their acquisition and budget operating deficits, requires theuse of a full accrual accounting and budgeting system (AABS). The accrual budgetalso shows the extent to which total revenues cover total costs of service provision,and this is an indicator of the long-term sustainability of the fiscal policies and theirintergenerational effects.

The roles of government were traditionally considered to be confined to itsresponsibility for fiscal policy formulation and management covering the first fourroles, while the intergenerational equity and resource management roles were addedonly in recent years in the reform programs following the many reviews of govern-mental activities which highlighted inefficiencies in their operations. Governmentrecognition and acceptance of its responsibility for the efficient management of itsresources thus led to the adoption of accrual accounting in the public sector.

RECENT PUBLIC SECTOR REFORMS—WHY?

In a word, money, or the lack of it by governments is the reason. Public dissatisfactionwith the cost and scope of government activities became widespread in many demo-cratic nations in the 1970s and 1980s. Governments found it difficult to fund theiractivities from recurrent revenues, and the rising levels of government debt arisingfrom budget deficits stimulated growth in interest rates which reacted adversely ontheir economies. This, together with high levels of taxation, caused a major rethinkabout the roles of government, their scope of activities and modes of operation, andthe efficiency and effectiveness of their activities. These matters were reviewed inmany nations as well as inAustralia,and programs of major reforms were commencedin them (Ohlson et al., 1998; Ohlson, 2001). Concurrently, a relatively new neo-liberalpolitical philosophy of small government which operated through the market, knownas public choice theory (PCT), became increasingly popular. The theory was devel-oped by economists from Chicago University, principally von Hayek, Friedman,Buchanan and Mueller, who advocated that the roles of government should becurtailed to bring about ‘small government’, and that market principles should beadopted by government in their remaining, scaled-down operations (Self, 1993;Mueller, 1997; Buchanan and Musgrave, 1999). Small government is achieved mainlythrough the privatization of government business enterprises, outsourcing activitiesand curtailing welfare benefits. In order to enhance the efficiency and effectiveness oftheir remaining operations, governments should be operated like business firms andadopt business principles and practices.After reviewing the reforms in the U.K., NewZealand and some other nations, Self (1993, cover page) noted that:

Economic or public choice theories have contributed powerfully to a new paradigm of‘government by the market’—meaning not only that public responsibilities should bereduced and public policies adjusted to the pressure of economic markets, but also thatgovernment itself should be remodelled and reformed according to market concepts ofcompetition and efficiency.

Adoption of these principles has been widespread throughout many Westerndemocracies, and they have been accepted by all major political parties in them.




They are embodied in New Public Management reforms adopted by governmentsaround the world (Hood, 1995; Ohlson et al., 1998).

THE AUSTRALIAN FINANCIAL MANAGEMENT REFORM PROGRAM

The Commonwealth government reform program began with the Royal Commis-sion on Australian Government Administration 1976 (the Coombs Commission).The review was a wide-ranging one concerning the purpose, functions and organi-zation of departments and of the structure and management of the Australian PublicService. It served as the basis for subsequent reforms and for several further reviews.The major reviews are briefly examined in Funnell and Cooper (1998, Ch. 4).

Australia’s public sector reform program can be divided into three periods, thoughthere was some overlap in the 1990s—1984–95, 1996–99 and May 1999–2008.

Adoption of Accrual Accounting, 1984–95At the Commonwealth government level, the reform implementation programbegan in 1984 with the Australian Public Service Board (APSB) and the Departmentof Finance (DOF) instituting a diagnostic study, the Financial Management Improve-ment Program (FMIP, p. v) ‘to improve financial and related management prac-tices . . . so as to achieve effective and efficient management of Governmentprograms and resources’. The main focus of the study concerned the need to specifyobjectives of programs and to evaluate their outcomes. Many changes followed inmanagement practices and accounting systems over the next four years. Majorlimitations of the existing cash accounting and budgeting systems for program andresource management were noted, though the adoption of full accrual accountingwas not formally proposed.

Concurrently in late 1983, a Public Sector Accounting Standards Board (PSASB)was established alongside the existing Australian Accounting Standards Board(AASB) to develop financial accounting and reporting standards for governments(Kent, 2003). The Board requested the Australian Accounting Research Foundation(AARF) to prepare the framework and objectives for public sector reporting andthis was undertaken by Sutcliffe (1985).AARF is the research arm of the two boardsand it prepares drafts of the accounting standards for their subsequent consider-ation. Sutcliffe recognized that there were some fundamental differences betweenthe business and government sectors of the economy which would require specialconsideration. He also saw the need for accrual accounting in the public sector andadvocated the adoption of a system designed to suit its environment. Subsequentstudies on financial reporting by government departments (Sutcliffe et al., 1991) andby governments (Micallef et al., 1994) also recommended the use of appropriatelydesigned accrual accounting and reporting systems. Unfortunately, AARF and thePSASB arguably took little notice of these research monographs and their recom-mendations. Walker (1989) also challenged the prescription of the same reportingstandards to both sectors.

In the meantime the adoption of accrual accounting had been pushed ahead bythe newly elected Premier Greiner in New South Wales in 1988. He had made its

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adoption an election pledge as part of his policy to enhance efficiency in the gov-ernment’s operations by becoming more businesslike. In this, he was initially advisedby two senior U.S. CPAs who persuaded him to adopt the existing set of AAS andnot to waste time by ‘reinventing the wheel’. (Christensen, 2003, 2005). He wassubsequently advised by senior partners of the large public accounting firms whoseexpertise lay in business accounting, and these firms implemented the systems forthe government. In the opinion of Christensen, who studied the adoption process indetail, ‘there was a zealous belief (by the consulting firms) that bringing public sectoraccounting into line with private sector accounting was an inherently righteousobjective’ (2005, p. 1).

In 1992–93 the state government produced its first consolidated set of financialstatements, thus setting the pattern for the Commonwealth and other states tofollow.The Commonwealth government announced its adoption of accrual account-ing in November 1992 (DOF, 1994a, Foreword). All departments prepared accrualfinancial statements by 1994, and the first draft set of consolidated financial state-ments for the whole of government and the general government sector were com-pleted for 1995.

The adoption of accrual accounting and reporting by the N.S.W. and Common-wealth governments thus preceded the formulation of standards by the PSASB.Unfortunately for the public sector, the Board in fact applied all the existing stan-dards developed for business accounting to it except for AAS 16 (1987) and AAS 22(1993). The two major standards developed for the public sector were not promul-gated until December 1993 (AAS 29) relating to government departments (andrevised in October 1996) and December 1996 (AAS 31) relating to the whole ofgovernment. However, neither of these standards changed the pre-existing businessbasis of accrual accounting; rather they provided for some administrative arrange-ments occurring within government such as the publication of departmental finan-cial reports and the separation of ‘administered items’ from ‘controlled items’.Administered items comprise payments by the government for the services providedto recipients, whereas ‘controlled items’ comprise departmental administrativeexpenses. The attitude of AARF from the late 1980s had become that the same setof accounting standards should apply to both the private and public sectors (Walker,1989; Barton, 1999c). Thus, McGregor, the director of AARF, stated (1999, p. 3):

an important feature of the concepts statement developed by the Board is that they areapplicable to financial reporting by all types of reporting entity. That is, no distinction ismade between entities on the basis of . . . sector location (public or private).

Having apparently completed its separate tasks, the PSASB was merged with theAASB in December 1999.

The adoption of accrual accounting was praised by all the later enquiries intogovernment administration (e.g., National Commission of Audit, 1996), governmentreports (DOF, 1994b; JCPA, 1995a, 1995b) and the profession (ASCPA, 1993). Itshould be noted though that they only referred to accrual accounting in general andnot to any specific model of it. On the other hand, its use was criticized by manyacademics. Their criticisms were mainly directed at specific problems in the govern-




ment accounting standards and at the possible politicization of the reform programrather than whether accrual accounting was potentially useful for governments.Concerns were raised about provisions of AAS 29 (Lewis, 1993–94; McCrae andAiken, 1994; Jones and Puglisi, 1997); the nature and treatment of specialized publicsector assets (Pallot, 1990; Carnegie and Wolnizer 1995; Burritt and McCrae 1996;Carnegie and West, 1997; Barton, 1999a, 1999b; Walker et al., 2000); possible discon-tinuance of CABS (Ma and Mathews, 1993; Barton, 1997); and failure to recognizethe General Government Sector as a financial reporting entity (Challen and Jeffery,2005). Guthrie (1998. p. 1) in a broad ranging review of its adoption, emphasized thecentral role played by accrual accounting in the whole NPFM reform program andnoted that it was ‘not socially, politically or economically neutral’. This matter isexamined later below. Several subsequent reviews of the reform program includePotter (2002), Guthrie et al. (2003) and Carlin (2005).

Notwithstanding the above history of the adoption of accrual accounting in thepublic sector in Australia, its adoption was necessary once governments acceptedresponsibility for efficient management of their resources in order to achieve costsavings in a period of mounting budget deficits. It is argued here that efficientresource management cannot be achieved without the provision of relevant accrualaccounting information about assets, liabilities, revenues and expenses. The limita-tions of cash accounting and budgeting systems (CABS) for resource managementand performance accountability reporting is documented in the 1984 FMIP diag-nostic study (APSB and DOF). While CABS provides necessary information forgovernment fiscal policies, the FMIP study noted that it does not do so for theresource management function of government and performance assessment. Theneed for accrual accounting information for these purposes formed the basis of thesubsequent Department of Finance Report (1994b). For them, governments requireinformation on three matters.

One: the full annual costs of programs and of departmental activities, and hence ofthe total budget sector. This information is necessary for determining budget priori-ties and for the efficient management of operations and of resources. Under CABS,only those costs involving current expenditures are recognized, whereas underaccrual accounting the costs of all resources consumed (including using up of inven-tories, depreciation of non-financial assets, and unfunded long service leave andsuperannuation charges) are recognized. Furthermore, management focus must beredirected towards total cost control and away from just controlling expenditures inaccordance with the cash budget appropriation, as occurred under CABS.

Two: all assets and liabilities of the government. Under CABS there is no system-atic record of the vast stock of the government’s non-cash assets and its non-borrowed liabilities such as superannuation. For example, as at 30 June 2003, thegovernment reported non-cash financial assets of $66,664m (compared with cash$2,339m) and non-financial assets of $69,290m, while non-borrowed liabilities were$123,285m (compared with borrowings of $63,083m) (2003 Consolidated FinancialStatements, pp. 70–71). The figures relate to the General Government Sector onlyand do not include public financial and trading enterprises. The above amounts areenormous by business standards and they are not reported under a cash accounting

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system.Without appropriate accrual accounting information, these assets and liabili-ties cannot be managed efficiently. As a consequence, asset purchase and disposaldecisions may not be appropriate, asset care and maintenance are likely to beneglected, and the existence of the large superannuation liability is largely ignoredand unfunded. Furthermore, there were no pressures provided for their good man-agement, and assets were often regarded as ‘free’ goods. These deficiencies werewidely recognized by senior management (FMIP, 1984; MAB, 1991; DOF, 1994b), inANAO reports (No. 27, 1995–96; No. 41, 1997–98; No. 2, 1999–2000), by parliament(JCPA, 1995a, 1998, 2000) and in the later external reviews of government (NationalCommission of Audit, 1996).

Three: the performance of management with respect to efficient revenue and costcontrol, asset and liability management, and service delivery for reporting to parlia-ment and the public. In addition to accounting information on the total costsincurred, performance reporting requires information on program objectives andservices provided in order to evaluate the policy results.Absence of this informationis a serious shortfall in performance accountability. Performance accountabilityunder CABS is limited to budget compliance, and its broadening to encompassefficiency in resource management and effectiveness in program delivery required acultural change in public sector management (JCPA, 1995a, 1995b, 1998).

In contrast, an accrual accounting system can provide a complete set of requiredfinancial information for efficient resource management because it is based onrecords of all external transactions and relevant events (as specified by the particularmodel of accrual accounting adopted). The annual accrual accounting budget showsall revenues received and receivable for the year and all the costs incurred inproviding services to the public. The budget balance shows the extent to which thecost of service provision has been covered by revenue and its impact on governmentnet worth. It is also relevant for assessing the longer term sustainability of presentfiscal policies and for their intergenerational equity effects. Finally, it can providenecessary information for the efficient management of government assets andliabilities, a major objective of accounting reports (SAC 2, 1990). Furthermore, theeconomic theory of efficient resource use is based on the requirement that decisionmakers have full and complete financial information about the resources used.

However, the potential benefits from accrual accounting information can only berealized if the system is designed to suit the unique environment and nature ofgovernment activities. Only then can the system provide relevant and reliable infor-mation which is required by users. As noted earlier, the public sector environmentdiffers from that of business in several fundamental respects.These differences mustbe incorporated into the design of its accrual accounting systems, as emphasized inAARF monographs (Sutcliffe, 1985; Sutcliffe et al., 1991; Micallef et al., 1994), byWalker (1989) and explained in Barton (1999c, 2003, 2005). Unfortunately, thisrequirement was rejected by the AASB under the ‘sector neutrality’ principle(McGregor 1999).

Finally, it needs to be recognized that there are still some major problems to beresolved in the application of accrual accounting to the assets used in some areasunique to the public sector. These include specialized military equipment; many




infrastructure, heritage, cultural and environmental assets; and land under roads.Meaningful and reliable financial valuations may not be obtainable for these itemsor be relevant for their good management. Each of these requires its own specialtreatment in an accounting system, as examined by, for example, Mautz (1988),Pallot (1990), Carnegie and Wolnizer (1995), Barton (2000) and Hooper et al. (2005)for heritage and cultural assets; environmental assets (Barton, 1999b), land underroads (Barton, 1999a), and infrastructure assets (Carnegie and West, 1997; Walkeret al., 2000).

In summary, the issue about accrual accounting should not have been whether toadopt it or not, but the appropriate model for government use. Its adoption forcommercial-type assets was inevitable once governments accepted the need tomanage their resources efficiently.

Because accrual accounting was integrated into the whole package of financialmanagement reforms (which are outlined in the following section), its probablebenefits cannot be considered here in isolation. Rather, they are covered later in thepaper.

The Marketization Reforms, 1996–99Once the accrual accounting systems had been implemented, the next step in thereform process involved the remodelling and reforming of departmental operationsaccording to business principles and practices, as noted by Self (1993). The businessmodel of accrual accounting did not fit easily into departments which did not sell theirservices to the public and retain the proceeds but whose activities are funded frombudget appropriations, and which did not pursue profits, own assets or have their ownliabilities. So, rather than adopting an accrual accounting system to suit the uniqueenvironment of government, the reverse process was adopted of converting depart-ments into separate pseudo business enterprises having a large degree of autonomy.

Departmental activities were reorganized along business lines so as to make themmore businesslike and to introduce some market contestability and competition intopublic sector operations. A suite of so-called marketization reforms was developedand implemented over the late 1990s so that departments were converted fromadministrative ‘cost centres’ into businesslike ‘profit centres’ in the delivery ofgovernment services.As Self (1993) noted, this had occurred in the United Kingdomand New Zealand. Public choice theory provided the theoretical justification for thisbusiness mode of operations of departments. Corbett (1996, p. 69) defines PCT as‘the application of (neo) classical economic methods of analysis to political andadministrative systems’. The theory is explained in Self (1993), Mueller (1997) andBuchanan and Musgrave (1999).

Although PCT was developed by economists, it is a political and administrativesystems theory which applies the methodology of economic theory to the operationof the public sector, and in particular, the motivating assumption of the pursuit ofself-interest.Thus it assumes that all the parties involved in the public sector process(i.e., parliamentarians and ministers, public servants and electors) are all motivatedby self-interest to maximize their own rewards. There is no ‘public interest’ in PCT

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and concern for the community or the nation. Few externalities are recognized in thesystem beyond the provision of law and order and defence.

In the process of remodelling departmental operations along business lines, thefollowing marketization changes were implemented (Wanna et al., 2000, Ch. 10).Departments were funded on an accrual basis according to the purchases at specifiedprices that the government wished to buy from them. There was an emphasis on the‘bottom line’ results of departments and they were not permitted to incur losseswithout prior approval from the Finance Minister.Their budgets were formulated onan outcomes-outputs basis, where outcomes comprise the desired end results thegovernment wished to achieve and outputs were the services purchased fromdepartments to achieve the desired outcomes. Departments were given one-lineadministrative budgets with departmental heads being given substantial autonomyover their allocation and operating matters. They were permitted to have their ownbank accounts and were responsible for their own cash management. Within thisframework, they were to:

• separate policy formulation roles from service delivery roles—governmentsshould be ‘steerers’ and the departments the ‘rowers’;

• separate their dealings with the government as ‘owner and investor’ from thosewith it as ‘customer’;

• use ‘purchaser-provider contracts’ and ‘sell’ their services at a ‘price’ to the gov-ernment as ‘customer’;

• emphasize the pursuit of outputs and outcomes of government policies and use‘output-based budgets’, rather than focusing on administrative processes and cashbudget compliance as had occurred beforehand;

• market test provision of services wherever possible, and outsource them if therewere apparent cost savings or where it is in accord with government policy direc-tions under the‘yellow pages’ test (a reference to the business telephone directory);

• operate as largely independent business units without needing to cooperate witheach other (the silo approached);

• be charged for the cost of funds (the capital-use charge) invested in departmentalnet assets at the estimated cost of funds to the private sector and not thegovernment;

• be required to earn a healthy surplus and pay a dividend back to the government as‘owner and investor’ at the year’s end in recognition of its investment in thedepartment’s net assets;

• be permitted to privatize assets such as real estate and major equipment and leasethem back on a sale and lease-back arrangement;

• be permitted to write contracts with private firm suppliers on a ‘commercial-in-confidence’ basis as occurs in business.

To facilitate implementation of the reforms, extensive staff training programs wereundertaken and a large number of Better Practice Guides (45 by 2003) were preparedby the ANAO and DOFA (see http://www.anao.gov.au/director/publications/betterpracguides.cfm).These guides covered topics such as Asset Management Hand-book (1996), Managing APS Staff Reductions (1999), Contract Management (2001a),




http://www.anao.gov.au/director/publications

Life Cycle Costing (2001b), and Annual Performance Reporting (2004). The ANAOintroduced performance audits in 1996–97 in which departmental activities areevaluated in terms of their efficiency and effectiveness in resource management andservice delivery.The Better Practice Guides are used as benchmarks for these audits.In 1996–97,35 audits were conducted.The early guides and performance audit reportsplayed an important role in bedding down the reforms and revising them wherenecessary. Pressure on departments to reduce costs has been exerted through theimposition of an ‘efficiency dividend’ whereby appropriations for running costs arereduced by one per cent annually. Responsibility for efficient resource managementand performance was vested with executive staff of departments under the FinancialManagement and Accountability Act 1997, and departments are required to report onresource use efficiency matters in their annual reports.

Obviously, some of the reforms can be beneficial in terms of enhancing efficiencyand effectiveness of departmental activities and should enhance value for money fortaxpayers.These benefits should occur wherever the reforms are soundly based froma management perspective. Clearer specification of policy objectives and a focus onresults facilitates the achievement of objectives; market contestability of departmen-tal activities, outsourcing of activities, use of leased equipment, some devolution ofauthority to departmental managers over their administrative budgets, asset main-tenance and the disposal of unneeded assets, can all produce significant cost savingsif appropriately applied. The use of information from relevant accrual accountingstandards should promote better cost control and determination of policy priorities,and lead to better asset and liability management. But major reservations remainabout those reforms based on the pursuit of an ideology, a matter to be examinedlater.

Accounting and Budget Reforms, May 1999–2008Two subsequent reforms were made to the accounting and budgeting systems in1999 following the Charter of Budget Honesty Act 1998. Accrual budgets wereintroduced, as recommended by the National Commission of Audit (1996) and cashbudgets were abolished along with the direct reporting of cash transactions. Further-more, two accrual budgets were presented to parliament as the Act required that thebudget be based on external reporting standards, and there are two such sets ofstandards—the Australian Accounting Standards (AAS) and the GovernmentFinance Statistics (GFS) standards. AAS accrual budgets were introduced to becomparable in format to the outcome financial statements, as advised by theNational Commission of Audit. The GFS system is an International Monetary Fundsystem designed to ‘provide a comprehensive conceptual and accounting frameworksuitable for analysing the general budget sector and the broader public sector of anycountry’ (IMF, 2001, paras 1.2–1.4). It was designed to suit the special nature androles of government in serving the nation by providing collective services and tomeasure the economic impact of government activities. It also forms part of theUnited Nations System of National Accounts (SNA) used for the measurement ofnational income and its components and which is comparable across nations.

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The Charter of Budget Honesty Act (ss 4 and 5) sets out the objectives andprinciples of fiscal management to be followed by the government. To maintainongoing economic prosperity, the government adopted a policy of setting budgets ina medium-term framework to moderate cyclical fluctuations in economic activity,maintain government debt levels at ‘prudent’ levels, ensure its fiscal policies con-tribute to national saving and have regard to the financial effects of its policies onfuture generations.

However, while there is substantial overlap between the two accrual accountingsystems, there are also some significant differences, resulting in the presentation ofvery different financial data. This has created much confusion about the budgetswhich must be passed by parliament before they can be implemented. Table 1illustrates the problem.

The different results produced from each system are due to basic differences intheir purposes and structure. While there is much overlap between the systems (e.g.,all transaction records are identical), some significant differences occur in the treat-ment of non-transaction events used in the compilation of the operating statementsand balance sheets for each system. These involve differences in, for example,classifications of items, the entity concept, bases of asset valuation, and concepts ofincome and capital maintenance. The differences occur because the AAS system isdesigned for the business environment (primarily for profit and wealth measure-ment purposes), while the GFS system is designed for governments (primarily forfiscal policy management purposes and national income measurement); the AASsystem takes a balance sheet approach while the GFS one adopts a transactionsresource flow approach; and the GFS system requires the use of current marketvalues throughout whereas the AAS one does not. The two systems are explained inBarton (2007). At the contents level of the financial reports, the major differencesconcern the treatment of the Goods and Services Tax, asset revaluations and expen-

Table 1

2003–04 BUDGET DATA

Operating statements AAS $M GFS $M Difference $M

Total revenues 181,666 210,375 28,709

Total expenses 180,561 209,761 29,200

Net operating results $1,105 m $614 m -$491 m

Balance sheets

Financial assets 58,369 97,598 39,229

Non-financial assets 68,042 35,459 -32,583

Total assets $126,411 m $133,058 m $6,647 m

Liabilities 174,949 177,941 2,992

Net worth -48,538 -44,883 3,655

Total $126,411 m $133,058 m $6,647 m

Source: Budget Paper No. 1, Statement 9, pp. 4–5, and Statement 10, pp. 2–3.




diture on military equipment.A reconciliation of the data sets is provided in 2003/04Budget Paper No. 1, Statement 8, pp. 11–14.

CONCERNS ABOUT THE REFORMS

While many of the reforms have been successful in improving efficiency, those thatwere based on ideology rather than sound management principles or whichdetracted from the integrity of accounting as being a quality FMIRS, have hadquestionable results. The particular problem areas are:

1. Presentation of Two Sets of AABSThe presentation of two sets of AABS budget statements and outcome financialreports which contain material differences in the data about the same set of transac-tions and events is confusing to parliament and the public, and raises questions as totheir validity. Furthermore, they illustrate the importance of selecting an appropriatefinancial measurement model for governments.Which set of budget figures are to bebelieved and approved by parliament, and likewise for the subsequent outcomestatements? Does the government expect to raise $181,666m from taxes etc. or$210,375m; are its expenses expected to be $180,561m or $209,761m; are its financialassets worth $58,369m or $97,598m; and so on? Corporations are not allowed topublish two sets of financial reports, and neither should governments. The confusionled to a Joint Committee on Public Accounts and Audit (JCPAA, 2002) review of thepresentation of budget papers, but they were unable to resolve the problem.

In December 2002, the Financial Reporting Council (the government body whichoversees financial reporting in Australia) issued an ‘urgent directive’ to the AASB toharmonize the two systems into one unified system (Challen and Jeffery, 2003). TheBoard eventually issued AASB 1049, Whole of Government and General Govern-ment Financial Reporting, in October 2007. While AASB 1049 made significantprogress in recognizing the GGS as a valid accounting and reporting entity and itsacceptance of GFS transactions treatment where it did not conflict with the AAStreatment, it did not resolve other fundamental accounting issues. As well, somechanges were made to the GFS by the Australian Bureau of Statistics (ABS) toaccord with AAS (ABS, 2005). These changes, while narrowing the differencesbetween the systems, do not eliminate them. In its May 2008–09 budget, the govern-ment chose to use only the modified ABS GFS system (2005) for its budget presen-tation and for the subsequent outcome financial reports (Budget Paper No. 1, pp.3.22–3.24). This decision brought to an end the confusing dual reporting system.

2. Use of a Business Model of Accrual AccountingAAS were developed for use in business enterprises, and prior to AASB 1049 (2007),they were modified only marginally to accommodate some administrative differencesin the public sector, as indicated earlier.All the standards relating to the objectives ofaccounting and financial reporting, concepts of assets, entity and so on, and bases ofasset valuation, were retained, as part of the sector neutrality principle. The sectorneutrality principle is not accepted in most countries around the world; New Zealandand Australia have been its major proponents. The Financial Reporting Council had

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the principle reviewed (Simkins, 2006) and it found the case for it lacked adequatesubstance because it ignores the fundamental differences between the two sectors.

Accounting as an FMIRS should be designed to suit the environment in which theentity operates and the purposes for which the information is required for it toprovide useful information. It should apply the information attributes as specified inthe AASB Framework (2004, paras 24–26), particularly understandability, relevance,reliability and comparability. The financial statements can present a ‘true and fairview’ only if these requirements are satisfied.

In view of the nature of government operations and the above characteristics ofuseful information, much of the business model of accrual accounting and some ofthe marketization reforms adopted by departments to accommodate it are notappropriate for core government activities. These include the following.

1:The use of ‘outcome-output based’ budgets. It is difficult to specify and measurethe ‘outputs’ of government departments from their financial statements. Substantialeffort has been expended on measurement of outputs and outcomes of governmentsbut with little success. In his review of output and performance measures used by theVictorian government, Carlin (2002, p. 97) observed ‘considerable turmoil in indi-cator disclosure’, ‘low survival rates of indicators’ and that ‘in many cases there wasno actual data even reported’ (see also Carlin, 2005). Likewise the ANAO (2001–02,Report No. 18, p. 4) concluded that: ‘a common limitation of the performanceinformation in all 10 audited agencies portfolio budget statements and annualreports related to performance indicators which did not actually measure outcomeperformance’.

The problem is that the outputs of government departments cannot be measuredfrom their financial operating statements. The budget and outcome financial state-ments do not measure outputs but the full cost of inputs required to produce serviceoutputs. However, the services produced are designed to achieve government policyobjectives, that is, outcomes. The difficulties incurred in measuring the ‘outputs’ ofmany government services should occasion no surprise when one considers thecomplex nature of public goods. Consider, for example, the varied nature of law andorder services, health services and defence services. Although ‘output-based’budgets were introduced with the accrual accounting reforms, the difficultiesencountered in measuring outputs and service delivery performance are not due toaccrual accounting—the same problems occur in cash accounting. The attempts tointroduce program budgeting in the 1970s and 1980s when cash accounting was inuse failed for the same reasons (Wanna et al., 2000, p. 304).

The budget framework could be enhanced by including all stages of the servicedelivery process in the model, that is, inputs, processes, outputs and outcomes. Thefirst two stages are important for parliamentary scrutiny and accountability pur-poses. These matters were reviewed by the government in its Operation Sunlightprogram (Tanner, 2005; Murray, 2008).1

1 Mr L.Tanner, the Finance Minister in 2008–09, proposed an examination of budget transparency in theoutcomes-outputs budget model in 2005 when in Opposition. As minister, he commissioned SenatorAndrew Murray (now retired) in April 2008 to prepare the report. He completed the report in June2008, and the government responded in December 2008, accepting most of the recommendations.




2: The key concepts of assets, liabilities, equity, revenue and expenses, as specifiedin the AASB Framework (2004, paras 47–80) are inappropriate for most coregovernment activities. The whole AAS system is designed to measure and report onthese items. This is a large topic which cannot be covered here; suffice to state thatall the concepts are based on the notion of assets being future economic benefitsembodied in an asset that flow to the entity (Framework, para. 53).This is a defectivedefinition, even for the business sector. Rather, assets are resources which are usedto produce future economic benefits; they are not the benefits themselves. However,in the public sector environment, most government non-financial assets do notprovide economic benefits to the government. Rather, they provide both economicand social benefits to the communities through the provision of collective services.This topic is covered in Barton (2000, 2003, 2005, 2007), and for community andcultural assets, in Pallot (1990) and Carnegie and Wolnizer (1995). The GFS defini-tions are appropriate for the public sector environment and overcome these limita-tions of the AAS system.

3: Naming departmental statements as ‘statements of financial performance’ andof ‘financial position’ (prior to adoption of International Accounting Standards in2005, when they were renamed as income statements and balance sheets).The namesare misleading as they portray departments as profit seeking businesses. Financialperformance in business is measured primarily in terms of sales revenue as ameasure of output and profits generated as a measure of performance, and thestatement of financial performance is designed to do this. But departments are costcentres, not profit centres. The statement shows the expenses incurred in providingthe department’s services over the year, the budget funding designed to cover theirnet expenses, and any residual balance. The funding should be designated as thebudget appropriation and not as revenue. This statement shows necessary informa-tion for program and departmental costing purposes and for management costcontrol. The residual balance is not a measure of financial performance, as is profitin a business. Portrayal of the statement in this way will enhance its relevance,representational faithfulness and understandability. In so doing, it will enhance theusefulness of the statement information for resource use and decision making pur-poses, and the greater transparency will enhance the fulfilment of accountabilityrequirements. Likewise the name, ‘statement of financial position’ for a departmentis misleading and liable to misinterpretation. Departments own no assets, have noliabilities, and have no equity in the net assets. Moreover, most of the non-financialassets are not cash generating as are commercial assets. All the assets belong to thegovernment, and the government is responsible for repaying all liabilities. Depart-ments are merely the administrative arms of government. The statements cannotshow the ‘financial position’ of departments—they have none.

As an example of the misleading nature of departmental financial statements, forthe year ended 30 June 2002 the Department of Defence (2002, pp. 130, 140)reported total revenues $18,990m, surplus $4,410m, capital-use charge paid $4,600m,net assets and equity $45,590m (comprising capital contribution $1,300m, assetrevaluation reserves $6,200m, and retained surpluses $38,000m). On these figures,the department appears to be a highly profitable enterprise—it generated a surplus

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of 23 per cent on revenue, 340 per cent on contributed capital and 9.7 per cent ontotal equity. As well, it appears to be largely self-funded, as the asset revaluationreserve and retained surpluses contributed 97 per cent of total equity. No businesscorporation in Australia can match such an outstanding financial performance! Thismatter is examined more in Barton (2004).

Similar considerations apply to the aggregate financial statements for the budgetsector. The operating statement is not a statement of financial performance in thebusiness sense. In a mechanistic way, governments can always improve on their‘financial performance’ by raising taxes and/or cutting expenditures to boost thesurplus as they have monopoly powers; however, such an approach could be socially,economically and electorally disastrous. Likewise the ‘statement of financial posi-tion’ does not measure the government’s financial position in a business sensebecause it does not include the major funding source of government—that is, thepower to tax—and the non-financial assets do not generate revenue from sales ofproducts. The taxing power effectively replaces the role of contributed capital inbusiness.

The GFS system avoids this misleading nomenclature by naming the statements asoperating statements and balance sheets.

3. Termination of CABSCABS was discontinued in 1999 because it did not seem to mesh in with the AASmodel of AABS. But cash accounting information is required for fiscal policy pur-poses and all appropriations must be approved by parliament prior to their expen-diture. Although cash flow outcome statements are published, they are preparedfrom the accrual financial statements by adding back the non-cash items.This is botha time consuming and difficult task in a large organization such as the government.The outcome cash flow statements derived from the two systems report very differ-ent results. For example, the net operating cash surplus reported for 2003–04 in theGFS statement was $9,892m while the AAS statement reported $12,114m (Com-monwealth of Australia, 2004, pp. 21, 40). Parliament and citizens can justifiablyexpect an identical measure of the ‘actual’ operating cash surplus. Furthermore,the statements are not available until about three months after the end of the yearand hence cannot be used for intra-year fiscal policy monitoring and daily cashmanagement.

The flows of government cash receipts and expenditures encompassed in thegovernment’s fiscal policies have major effects on the state of the economy (eco-nomic growth, employment, inflation, etc.), on financial markets (bond markets,interest rates, etc.), and on social welfare. These must be monitored continuously forgood macroeconomic management as well as for the management of governmentcash balances. Direct reporting of all cash transactions is required to provide thisinformation.

These problems have now been overcome through the reintroduction of (GFS)cash budgets (along with the accrual budgets), and by the sole use of the GFS systemin the 2008–09 budget. Because the GFS system is based on the direct recording andreporting of transactions, cash budgets can be readily prepared from the system.




Cash management has been re-centralized in Treasury, overnight departmental bankaccount balances are swept up into the government’s account at the Reserve Bank,and all cash appropriations to departments are again reported from the Consoli-dated Revenue Fund.

4. Use of Inappropriate Business PracticesIn the context of the markets in which governments provide their services, many ofthe marketization practices are not appropriate. For example:

• The separation of government functions between those as ‘owner’ and ‘investor’from those of departments being the ‘supplier’ of the services, that is, the ‘steerers’and not ‘rowers’ philosophy of government. Departments are the administrativearms of government which undertake its supply function, and are funded frombudget appropriations to do so.

• The use of ‘purchaser-provider’ contracts between departments and the govern-ment, for the above reasons.

• The use of ‘selling prices’ for departmental services. Their services are normallycomplex and heterogeneous in nature and it is difficult to measure the ‘unit’ ofservice which is to be priced (Carlin, 2003a). Moreover, there are often no privatesector markets for many of these services from which competitive selling pricescould be obtained. In reality, the ‘selling prices’ of these services are their bud-geted costs of provision, as determined on an accrual accounting basis.

The above three practices have now largely disappeared from public servicerhetoric.

• Departments operating as largely independent entities.This led to duplication andlack of coordination of services. Many policy outcomes require use of servicesfrom several departments. For example, border protection involves services fromdefence, immigration, customs and agriculture; and social welfare involves pen-sions, employment, health and immigration. As administrative arms of govern-ment, they should not operate as independent entities. The need to coordinateservices straddling more than one department was reviewed by the ManagementAdvisory Committee (2004), a senior government body, and it implemented anintegrated, whole of government approach headed by the Department of PrimeMinister and Cabinet.

• Arrangements concerning the capital-use charge (CUC). The CUC was intro-duced for the good reason to recognize the cost of capital invested in governmentassets and thereby to improve upon their management. However, the mechanismfor applying it was not appropriate.The charge was originally set at 12 per cent onnet assets of each department, reduced to 11 per cent in 2002/03, and abolished asfrom 30 June 2003 because it was not effective (JCPAA, 2002, p. 75). The totalbudget allocation to fund the CUC in 2002/03 was $6,500m (Budget Paper No. 1,Statement No. 12, pp. 31–32) and this had a significant interest cost to the govern-ment. Departments were funded up-front for the amount of the charge—it wasincluded (but not disclosed) in their appropriation for the year, and repaid at the

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year’s end as a ‘dividend’. No charge was made for capital use in departmentalexpenses, and the appropriation flowed through to the ‘bottom line’. It therebyenabled departments to report healthy surpluses as if they were successful busi-nesses and for example the Department of Defence reported a surplus of $4,410min 2002 (Barton, 2004, p. 139). Departments were allowed to invest the funds forthe year and retain the interest earned thereon. The ‘dividend’ payment was notincluded as a distribution of surplus in the operating statement but was hidden ina note to changes in equity in the balance sheet. This complete lack of transpar-ency was part of the reason for the charge being ineffective. A more effective wayof improving asset management is for departments to adopt the principles of goodasset management developed by the ANAO (1996). These include the cost ofcapital in all capital budgeting appraisals, but not in the financial statements.

The above marketization practices are very artificial and contrived in the contextof governmental operations. Thus the government can be both a monopoly seller(i.e., its department) and a monopoly buyer (as customer) of services provided byitself (as owner). The provision of most government services cannot be ‘markettested’ because of their inherent nature. ‘Outputs’ of most services cannot be readilymeasured because of their complex and heterogeneous nature, nor can the market‘price’ of a unit of these services be established (Carlin, 2003a). While it may beappropriate for the government to adopt a commercial capital-use charge for thepricing of its services to enable comparisons with prices quoted by firms for thesupply of outsourced services, it is not appropriate to include the charge in its ownfinancial statements.

• The use of ‘commercial-in-confidence’ contracts for outsourcing the provision ofservices. This practice was widespread until a Senate Order in June 2001 substan-tially banned its use (ANAO, 2001–02, Report No. 38, 2003–04, Report No. 5;JCPAA, 2000). Commercial-in-confidence contracting is standard practice in theprivate sector because of the need to keep the information from competitors.However, apart from those few instances where confidentiality has legal or secu-rity protection, commercial-in-confidence contracts in the public sector abrogatethe requirements for transparency of information and accountability to parlia-ment and the public. Moreover, without this openness of public sector contracts,there is less pressure on management to pursue efficiency of operations, and thereare many instances of substantial cost overruns, for example, with respect to IToutsourcing (ANAO, 2001–02, Report No. 9) and major construction projects suchas the Bruce Stadium in Canberra (ACT Auditor General, 2000; Barton, 2006).

5. Bias in Accounting Measurements in the Public SectorAnother major issue in deciding whether to use accrual accounting is assessing ifsome of the cost measurements are biased against the public sector continuing toprovide the service in-house. One of the justifications advanced for use of the sameaccounting standards for the public and private sectors was that it would provide fora level playing field across the sectors, and thereby enable the service to be provided




from the more efficient, lower cost source of supply. However, the playing field maynot be level where departmental costs are inflated by the following practices:

• Asset revaluations.The public sector is required to revalue its assets progressivelyover a three-year period at current market prices (realizable prices for financialassets and replacement costs for non-financial assets). But private sector busi-nesses normally do not do so on a regular basis. This inflates the depreciationcharges in the public sector and can cause them to exceed those on similar assetsin the private sector. As well, it produces an inflated capital-use charge. Further-more, there are difficult problems in valuing those public sector assets which donot have private sector counterparts, such as specialized military equipment andcommunity assets, and which are not used for revenue generating purposes.

• The capital-use charge. The charge was set to reflect the costs of funds to thebusiness sector, and it was about twice the government bond rate. Even thoughmost departmental assets are funded from appropriations (which have been fullyfunded from tax and user charge revenues in recent years, when the budget hasbeen in surplus), the charge was built into departmental costs for pricing purposes.But the cost of funds to the private sector varies over a substantial range accordingto the risk profiles of each business, and it would be less than 12 per cent forsoundly established companies in stable industries; for example, regulators in theelectricity supply industry at this time prescribed a rate of return of c. 7.5 per cent.When the government adopted a policy of selling its office property holdings inthe late 1990s, generally on a sale and leaseback arrangement, it set a rental yieldof 14–15 per cent as the hurdle rate of return. At the time, market rental yieldswere around 9 per cent (ANAO, Report No. 4, 2001–02, p. 14). The ANAOobserved that the charge ‘overwhelmingly favoured divestment of property overretention’ (p. 12) and that its application ‘would have resulted in divestment ofvirtually all of the [government’s] property holdings’ (p. 15). Carlin (2003b) foundsimilar problems with the charge in his examination of its use by the Victorianstate government.

• Additional accountability costs incurred in the public sector (Ohlson, 2001).Because of the importance of transparency and accountability for public sectoroperations to parliament and the public, some additional costs are incurred. Dueprocesses must be followed more diligently in the public sector, and the publicsector audit requirements are more extensive and demanding than those in theprivate sector. These costs are largely avoided in the private sector.

As a consequence of the above, the ‘playing fields’ may not be at all level betweenthe two sectors; rather, they have been tilted against the public sector.

6. Politicization of the Reform ProgramIt has been recognized for some time that many of the accounting reforms of the 1990smay be biased against the public sector in order to force its contraction. In the UnitedKingdom,New Zealand and Sweden, the reforms were openly based on public choicetheory which advocated that governments should adopt business methods not only toachieve greater efficiency but to also curtail the size of governments (Self, 1993;

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Ohlson et al., 1998; Guthrie, 1998; Newberry, 2003; Newberry and Pallot, 2005).However, little prominence was given to this aspect of the reforms in Australia. But itwas recognized by some analysts. For example, a senior New South Wales Treasuryofficer, Dr N. Conn (1996, p. 2) stated that: ‘In reality, the term accrual accounting hasbecome code for a much wider range of changes’ (i.e., New Public Financial Manage-ment). Guthrie (1998, p. 1), after reviewing the role played by accrual accounting inthe package of NPFM reforms in Australia, observed that:‘public sector accounting isnot socially, politically or economically neutral. Rather, the conjoint emphasis inAustralia has been to change the administration of the public sector, replacing olddiscourse ideals and methods with new managerialism,contracting and market-basedactivities.’ Likewise,Ohlson et al. (1998,p.20) after reviewing the reforms undertakenin many countries,concluded that:‘the NPFM reforms have the capacity to change theruling language and priorities in organizations,often in relatively quiet and unnoticedways—or as Hall suggested, without a shot being fired’.

The New Zealand experience in adopting business accrual accounting and practicesillustrates similar concerns (Newberry, 2003; Newberry and Pallot, 2005; Ellwood andNewberry, 2007). Newberry gained access to confidential Treasury records. She foundthe reforms were clearly based on the new political economy of public choice,transactions cost and principal-agency theories.While the reforms were claimed to bebased on the objectives of improving public sector efficiency, effectiveness andaccountability, there was in fact an additional hidden agenda of privatization of publicsector supplies. The implementation of many of the marketization reforms outlinedearlier, assisted by the use of business accrual accounting and the upward biasing ofdepartmental costings, was designed to justify privatization and outsourcing. New-berry quotes US authors (Savas, 1982, 1987; Israel, 1987; Mintzberg 1996) in supportof this contention as being the primary reason for the marketization reforms under-taken by the public sector.According to Mintzberg (1996, quoted by Newberry, 2003,p. 3) the ultimate aim of new political economy advocates is for departments to‘arrange for private organizations to provide public services’—that is, the steerers’,not rowers’, philosophy of government. Newberry claims that the above mechanismshave seriously eroded departmental capabilities of performing their desired func-tions, and that this in turn has led to further outsourcing.

By justifying the NPFM reforms, including the use of business accrual accounting,under the commendable cloak of enhancing efficiency, effectiveness and accountabil-ity, one needs to be aware that some of its proponents have the curtailing ofgovernment activities and responsibilities as their primary aim, in accord with publicchoice theory. This theory largely ignores the existence of externalities and thepublic’s desire for social justice and pursuit of public interest over private interest asresponsibilities of government. In a democratic nation, any reduced roles of govern-ment should be agreed to by the electorate through normal political processes ratherthan occur surreptitiously through the NPFM reforms,aided by the inappropriate useof business accrual accounting, and without explicit public debate and approval. Inother words, there must be public accountability for the real objectives of the reforms.

Sound accounting principles and practices have been abused in the NPFM reformprocess where business accounting systems have been used to help drive the reforms




themselves. Hence, rather than the accounting systems being designed as an FMIRSto suit the public sector environment, the mode of operation of the public sector waschanged to suit the new accounting model. It is imperative that governments areprovided with good quality information to facilitate their policy making, resourcemanagement and accountability functions, as only then can they operate efficientlyin the provision of required public services. The function of the accounting system isto provide useful information to management, parliament and the public, rather thanirrelevant or misleading information intended to drive another agenda.

SOME BENEFITS FROM THE REFORMS

The financial situation of the Australian Commonwealth government in 2008 wasvastly stronger than that during the 1970s–90s when the pressures for the reformprograms developed and the reforms were implemented. Since the election of aconservative coalition government in 1996, government policies have focused ontight overall management of the economy and on its operating costs, assets andliabilities. During the previous twenty-four years (1974–97), there were seventeenyears of cash budget deficits and only seven surplus years, and net debt of the GGSgrew from a surplus of 3.1 per cent GDP to a net debt of 17.6 per cent in 1996–97(Budget Paper No. 1, 2007–08, p. 13-7). In contrast, at the time of preparing thisarticle, the budget has been in surplus every year since 1997, except for a minordeficit in 2001–02 of 0.1 per cent GDP. As part of its liability management program,the surpluses (together with proceeds from the privatization of some business enter-prises and asset sales for policy purposes) were used to repay borrowings. Netfinancial indebtedness declined from $96 billion in 1996 (18.5 per cent of GDP) tillits elimination in 2006.As at 30 June 2008, net debt was -$43 billion (i.e., net financialinvestment assets). Net interest payments from the budget were also eliminated,resulting in savings of $8.5 billion per annum, whereas investment income of $8billion was earned in 2007–08 (Budget Paper No. 1, p. 9-3) A Future Fund wasestablished into which $18 billion of the above net investments were placed, and intowhich some later budget surpluses and asset sales receipts were transferred. Thebalance in the fund had reached $63 billion by June 2008 (Australian FinancialReview, 22 October 2008, p. 10). The fund is to be used for payment of future staffsuperannuation benefits, which amounted to $108 billion at 30 June 2007 (Consoli-dated Financial Statements, p. 35). The net worth (i.e., assets less liabilities) of thegovernment improved from -$73 billion at 30 June 1995 when the first accrualfinancial statements were prepared to +$61 billion at 30 June 2008 (Financial State-ments, 1994–95, p. 11; Budget Paper No. 1, 2008–09, p. 9-4).The above improvementsin financial performance were achieved in a period when substantial tax reductionswere made and budgets were contained to c. 23 per cent of GDP.

While much of this progress is due to improvements in general macroeconomicfactors affecting the economy, part of it can be attributed to the reform programleading to tight fiscal policy management and to improvements in public sectoroperational efficiency following the introduction of accrual accounting and themanagement reforms. Some of the early improvements are summarized below. The

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information is taken from ANAO performance audit reports which concentrated onlabour costs and asset management issues as the two largest running cost items of thepublic sector.

Soon after adopting the major administrative reforms in the mid-1990s, an exten-sive staff reduction program was undertaken covering all departments. Over thethree year period, 1995/6 to 1997/8, public sector staff in core policy making andadministration functions was reduced by 23,700 or 16 per cent (ANAO Report No.49, 1998–99, p. 60). These reductions exclude those resulting from the privatizationand outsourcing of activities.

With respect to asset management, reviews of asset holdings by departments ledto sales of surplus or obsolete property, plant and equipment which generatedsubstantial proceeds amounting to $3641m over 1996–99 (Table 2). Concurrently thegovernment made policy decisions to sell some government business enterprises andother properties on sale-and-leaseback arrangements. (The large 1998 proceedsmainly resulted from the sale of the first tranche of Telstra Corporation shares.) Theproceeds of $23,449 m from the above assets sales were used to reduce governmentdebt, that is, for liability management.

The first ANAO performance audit on asset management of June 1996 (AuditReport No. 27, p. vii) found that while significant progress had been made in assetmanagement as a result of the adoption of accrual accounting, further improvementscould still be made. It recommended the development of staff training programs incost and asset management and, together with the Department of Finance, developedan Asset Management Handbook (September 1996) for use in training staff in thetask. In its follow-up Report (No. 41) of 1997–98, the ANAO found ‘significantacceptance of the recommendations’ (p. 5) made in its earlier report, and thatdepartments ‘had progressively improved control over their assets’, but ‘had yet totake a strategic approach to asset management’ (p. 7). In its report on propertymanagement (No.19,2003–04),covering both owned and leased property, the ANAOconcluded that, ‘property management services . . . were operating efficiently andwere generally providing an adequate level of support for the delivery of the organi-zations’ services’ (p. 12). These and many other ANAO performance audit reportsshow that high priority is now given by departments to cost and asset management.

Table 2

Surplus asset sales Policy asset sales

1996 $416 m $1,044 m

1997 $954 m $3,162 m

1998 $1,346 m $12,967 m

1999 $925 m $6,276 m

$3,641 m $23,449 m

Source: Consolidated Financial Statements—Cash Flow Statements for each year ended 30 June.




It should be noted that the operational cost savings, disposal of surplus assetholdings and reductions in interest payments resulting from government debt reduc-tion produced permanent savings for the government and that accrual accountinginformation was central to the savings being made. But accrual accounting informa-tion by itself does nothing—the benefits accrue from its appropriate use for govern-ment policy making and management resource use decision making and controls. Ittook some years to make effective use of the information after the mid-1990s. Themanagement changes included the legal vesting of responsibility for efficientresource management to senior staff, appointment of asset management staff, andreporting on resource use efficiency in departmental annual reports. As well, con-tinuing pressure for efficiency improvements is exerted by ANAO performanceaudits. Unless sound reasons can be given for not accepting ANAO recommenda-tions, they must be adopted, and the ANAO monitors their subsequent use. Thisenvironment of public sector management operations contrasts with that pertainingunder the former cash accounting system wherein resource management issues werelargely ignored, except for cash management. Nevertheless, while major improve-ments have been made there is always scope for further improvement in a progres-sively changing public sector environment. In a 2006 review of the use of accrualaccounting by government, the Australian Auditor General, Mr I. McPhee (2006, p.3) concluded that: ‘It is the case that accrual information provides better informationfor decision making and accountability purposes than earlier information availableto managers, government and the parliament’.

SUMMARY AND CONCLUSIONS

The adoption of accrual accounting was integral to the whole NPFM reformprogram implemented by the Australian government. Following the reviews of theiroperations, governments accepted the need to broaden the focus of public sectormanagement to encompass all resources in addition to fiscal policy and cash man-agement, and to consider the outcomes of government policies in relation to theirtotal costs. The stated purpose for the reforms of promoting greater efficiency andeffectiveness in resource use and enhanced accountability for performance washighly commendable. Better management in government benefits the nation’s citi-zens. Accrual accounting can provide the information necessary for program anddepartmental cost control, for the efficient management of most public assets andliabilities, and for the long-term sustainability of fiscal policies. However, to meetthese objectives, the system must be designed to suit the unique environment andinformation needs of government, and the information produced must satisfy theAASB Framework requirements for it to be useful.

The success of the total reform program has been mixed, having both positive andnegative results. The enhancement of management responsibilities to include allresources and the consequent adoption of accrual accounting, additional focus onoutputs and outcomes of service provision, some devolution of authority to depart-mental management over their budget allocations and modes of operation, andformulation and adherence to a set of prudent fiscal management principles have

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enabled significant improvements in efficiency of resource use and the government’sfinancial position. However, those accounting and market reforms based on businesspractices inappropriate for the public sector or on political ideology had mainlynegative results.These reforms have since been terminated or significantly curtailed.

The recent adoption of the modified GFS system as the sole accounting informa-tion system has removed a major source of duplication, misdirected effort andconfusion. It has enabled the government to use an accounting system designed forthe public sector environment which reports both accounting and cash information,and thereby satisfies the need for both resource management and fiscal policyinformation. The remaining required reform is that of modifying the outcomes-outputs budget framework to acknowledge difficulties in measuring these matters,and to include the need to give more attention to the inputs and processes involvedin departmental service delivery. This change will enhance the transparency andaccountability of their operations to parliament and the public generally.

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