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ALLAN BARTON

The Use and Abuse of Accounting in the


Public Sector Financial Management Reform
Program in Australiaabac_283 221..248
Accrual accounting has been central to nancial management reforms
designed to promote greater efciency, effectiveness and accountability in
the Australian public sector. This is the setting for the article; however, the
issues covered apply to all nations that have reformed their public sectors
over recent years. The results of the reforms have been mixed. While
accrual accounting has had some benecial results for the above purposes,
the benets have been offset by aspects of accounting misuse resulting
largely 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 the
objective of reducing the size of government rather than enhancing ef-
ciency of operations. Because Treasury believed that the business model
was not appropriate for budget scal policy purposes, it introduced a
second combined accrual and cash accounting systemthe Government
Finance Statistics system. The use of two accrual accounting systems
reporting different results caused much confusion in parliament.
Key words: Accrual accounting; Financial management reforms; Public
choice theory; Public sector.
INTRODUCTION
The adoption of accrual accounting and budgeting systems was central to the
program of Australian public sector nancial management reforms over the past
thirty years. They were heralded with much praise and promise for improvements in
the efciency of resource management and effectiveness in policy delivery, and in
enhanced transparency of information and accountability to parliament and the
public, by ofcial enquiries and reports, and by the profession.
However, academic reviews of the reforms were mainly critical. It is contended
here that the reforms as a whole did enable signicant improvements in resource
management, accountability and scal performance; that some of the reforms were
inappropriate and created problems; and that most of the problem areas were
resolved over the past ve or so years in the light of experience.
Allan Barton (Allan.Barton@anu.edu.au) is an Emeritus Professor and former Pro Vice Chancellor
and Treasurer of the Australian National University and an Honorary Professor of Accounting at the
University of Sydney.
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This article reviews and appraises the reforms undertaken by the Australian
government since 1976 tothe present time andtheir results, witha focus onthe central
role 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 be
considered together. Those areas where accrual accounting information systems and
the related marketization reforms have been of use in enhancing efciency and
effectiveness in public sector operations are examined; and conversely, where they
have been misused or abused. The shortfalls, where they occur, are attributed to two
interrelated factorsthe adoption of a largely irrelevant business model of accrual
accounting rather than one designed to suit public sector needs, and secondly, to a
political ideology as expoundedinpublic choice theory whichadvocates curtailing the
size 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 the
public sector determine the type of accounting information system required by
government.
2. How rising costs of government and related budget decits 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 the
reforms were implemented1984/95 during which management of government
resources and programs were reviewed, decisions made to adopt accrual account-
ing, and the new systems were implemented; 1996/99 during which most of the
marketization reforms were implemented; and 19992008, when accrual budget-
ing systems were introduced, the former cash accounting system was terminated,
and subsequent renements were made to the reforms.
4. Concerns about some of the reforms and their impacts on accounting as a quality
nancial 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 necessary
information to government; use of some business practices which may not be
appropriate for the public sector; biases in some of the accrual accounting mea-
sures favouring the private sector; and politicization of parts of the reform
program.
Throughout the article, accounting is taken to be a nancial management infor-
mation and reporting system (FMIRS) which assists management in their resource
decision making and other roles, and their accountability to external stakeholders
for their activities and performance. These contiguous objectives form the basis of
SAC 2 (AASB/PSASB, 1990) and the AASB Framework (2004, paras 1220). Fur-
thermore, the information must satisfy the requirements of the 2004 Framework
(paras 2426) concerning criteria for the information to be useful to users and in turn
for the nancial reports to provide a true and fair view. Accounting is basically a
nancial measurement system for recording and summarizing past transactions and
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relevant events and reporting them in informative nancial statements which satisfy
these objectives. Secondly, a distinction is made between the principle of accrual
accounting (whereby all transactions and relevant events are recorded as at dates of
incurrence) and particular measurement models of accrual accounting (which
depend upon the nature and roles of the accounting entity and the basis of income
and net asset measurement). This distinction is not generally made in the literature.
Finally, a normative method of analysis is used to determine what information is
required by government to undertake its activities efciently in pursuit of its policy
objectives and to account for them to parliament and citizens.
The examination is conned to the general government, or budget, sector of the
Australian (or Commonwealth) government, at both the departmental and aggre-
gate levels. As such it does not include public nancial or trading entities (e.g.,
Reserve Bank and Australia Post Ltd). However, similar considerations apply to all
state 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 nancial
management 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 of
government form the basis of the nancial information needs of government and the
electorate. These matters have become contentious issues over recent years, and they
change signicantly over time according to the wishes of citizens. U.S. President
Abraham Lincoln (1863, Vol. 12, p. 282) considered that: The legitimate object of
government is to do for a community of people whatever they need to have done, but
cannot 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 in
providing collective and social welfare goods and services to the public because it
can be more efcient and effective to provide them on this basis (Musgrave and
Musgrave, 1988, Chs 47; Stiglitz, 2000, Chs 14). Many goods and services are
characterized by non-rival and non-excludable consumption attributes. Non-rival
consumption means that use of the good by one individual does not deprive other
citizens from using or beneting from it, whereas non-excludable consumption
means that no one citizen can exclude others from using the good, as there are no
ownership rights attaching to it. These conditions give rise to what are known in
economics as externalities, that is, social and private costs and benets diverge, and
the goods are known as public or collective goods. Typical examples include the
services provided by systems of law and order, the defence forces and good govern-
ment itself. Such goods cannot readily be supplied by private rms because they
cannot capture the recovery of all the benets in price, high xed costs and low
marginal costs, and free-rider problems. Instead, citizens fund their provision collec-
tively through taxation. Social welfare services are provided to citizens having
disadvantages arising from factors such as poor health, unemployment and low
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incomes, with the aim of enhancing the overall well-being of society. In all of these
activities, citizens expect their governments to conduct them to enhance community
and national interests rather than to pursue personal interests.
As elected representatives of its citizens, governments are accountable to them for
all their activities and in particular for the provision of collective goods and services
and social welfare services, and their funding through taxation. Accountability
requires openness and transparency of policy formulation, its implementation and
service delivery. This is achieved by the requirement that all policy decisions and
their implementation must be rst approved by parliament, comprising both oppo-
sition and government representatives, and the results be reported on, including all
nancial ones. Parliament and thereby the public must be provided with appropriate
information for the democratic system to function effectively.
These conditions do not apply in the private sector of the economy. Rather,
business rms provide other types of goods which are characterized by rival and
excludable consumption. These goods, known as private goods, are better provided
by private rms operating in response to customer needs. Externalities other than
pollution are not important in most private goods markets, and rms and citizens can
operate on an individual user-pays basis. It can be demonstrated that efciency and
effectiveness in the provision of private goods and services to customers is enhanced
through rms 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 and
public sectors are largely complementary in their activities.
The activities of governments in satisfying the collective needs of the nation can
be 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 nations natural and cultural environment,
5. pursuit of intergenerational equity, and
6. management of government resources which are used to provide the above goods
and services.
The management of these activities determines the nancial management informa-
tion and reporting needs of government.
The rst ve roles involve important externalities and lie outside the business
sector of the economy. Such externalities provide the reason for their being govern-
ment rather than private responsibilities, and they provide the basis for Lincolns
observation. They are met through government scal (or budget) policies. They all
involve the expenditure of cash by government and its collection from taxation and
other 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 scal
policy functions. However, the nal role of government in efciently managing the
resources 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 decits, requires the
use of a full accrual accounting and budgeting system (AABS). The accrual budget
also 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 scal policies and their
intergenerational effects.
The roles of government were traditionally considered to be conned to its
responsibility for scal policy formulation and management covering the rst four
roles, while the intergenerational equity and resource management roles were added
only in recent years in the reform programs following the many reviews of govern-
mental activities which highlighted inefciencies in their operations. Government
recognition and acceptance of its responsibility for the efcient management of its
resources thus led to the adoption of accrual accounting in the public sector.
RECENT PUBLIC SECTOR REFORMSWHY?
In a word, money, or the lack of it by governments is the reason. Public dissatisfaction
with the cost and scope of government activities became widespread in many demo-
cratic nations in the 1970s and 1980s. Governments found it difcult to fund their
activities from recurrent revenues, and the rising levels of government debt arising
from budget decits stimulated growth in interest rates which reacted adversely on
their economies. This, together with high levels of taxation, caused a major rethink
about the roles of government, their scope of activities and modes of operation, and
the efciency and effectiveness of their activities. These matters were reviewed in
many nations as well as inAustralia, andprograms of major reforms were commenced
in them(Ohlson et al., 1998; Ohlson, 2001). Concurrently, a relatively newneo-liberal
political philosophy of small government which operated through the market, known
as 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 be
curtailed to bring about small government, and that market principles should be
adopted by government in their remaining, scaled-down operations (Self, 1993;
Mueller, 1997; Buchanan and Musgrave, 1999). Small government is achieved mainly
through the privatization of government business enterprises, outsourcing activities
and curtailing welfare benets. In order to enhance the efciency and effectiveness of
their remaining operations, governments should be operated like business rms and
adopt business principles and practices. After reviewing the reforms in the U.K., New
Zealand 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 marketmeaning not only that public responsibilities should be
reduced and public policies adjusted to the pressure of economic markets, but also that
government itself should be remodelled and reformed according to market concepts of
competition and efciency.
Adoption of these principles has been widespread throughout many Western
democracies, and they have been accepted by all major political parties in them.
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They are embodied in New Public Management reforms adopted by governments
around 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 Public
Service. It served as the basis for subsequent reforms and for several further reviews.
The major reviews are briey examined in Funnell and Cooper (1998, Ch. 4).
Australias public sector reform program can be divided into three periods, though
there was some overlap in the 1990s198495, 199699 and May 19992008.
Adoption of Accrual Accounting, 198495
At the Commonwealth government level, the reform implementation program
began in 1984 with theAustralian Public Service Board (APSB) and the Department
of Finance (DOF) instituting a diagnostic study, the Financial Management Improve-
ment Program (FMIP, p. v) to improve nancial and related management prac-
tices . . . so as to achieve effective and efcient management of Government
programs and resources. The main focus of the study concerned the need to specify
objectives of programs and to evaluate their outcomes. Many changes followed in
management practices and accounting systems over the next four years. Major
limitations of the existing cash accounting and budgeting systems for program and
resource management were noted, though the adoption of full accrual accounting
was 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 nancial 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 and
this was undertaken by Sutcliffe (1985). AARF is the research arm of the two boards
and it prepares drafts of the accounting standards for their subsequent consider-
ation. Sutcliffe recognized that there were some fundamental differences between
the business and government sectors of the economy which would require special
consideration. He also saw the need for accrual accounting in the public sector and
advocated the adoption of a system designed to suit its environment. Subsequent
studies on nancial reporting by government departments (Sutcliffe et al., 1991) and
by governments (Micallef et al., 1994) also recommended the use of appropriately
designed accrual accounting and reporting systems. Unfortunately, AARF and the
PSASB arguably took little notice of these research monographs and their recom-
mendations. Walker (1989) also challenged the prescription of the same reporting
standards to both sectors.
In the meantime the adoption of accrual accounting had been pushed ahead by
the 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 efciency in the gov-
ernments operations by becoming more businesslike. In this, he was initially advised
by two senior U.S. CPAs who persuaded him to adopt the existing set of AAS and
not to waste time by reinventing the wheel. (Christensen, 2003, 2005). He was
subsequently advised by senior partners of the large public accounting rms whose
expertise lay in business accounting, and these rms implemented the systems for
the government. In the opinion of Christensen, who studied the adoption process in
detail, there was a zealous belief (by the consulting rms) that bringing public sector
accounting into line with private sector accounting was an inherently righteous
objective (2005, p. 1).
In 199293 the state government produced its rst consolidated set of nancial
statements, thus setting the pattern for the Commonwealth and other states to
follow. The Commonwealth government announced its adoption of accrual account-
ing in November 1992 (DOF, 1994a, Foreword). All departments prepared accrual
nancial statements by 1994, and the rst draft set of consolidated nancial 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 (and
revised in October 1996) and December 1996 (AAS 31) relating to the whole of
government. However, neither of these standards changed the pre-existing business
basis of accrual accounting; rather they provided for some administrative arrange-
ments occurring within government such as the publication of departmental nan-
cial reports and the separation of administered items from controlled items.
Administered items comprise payments by the government for the services provided
to recipients, whereas controlled items comprise departmental administrative
expenses. The attitude of AARF from the late 1980s had become that the same set
of 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 are
applicable to nancial reporting by all types of reporting entity. That is, no distinction is
made between entities on the basis of . . . sector location (public or private).
Having apparently completed its separate tasks, the PSASB was merged with the
AASB in December 1999.
The adoption of accrual accounting was praised by all the later enquiries into
government administration (e.g., National Commission of Audit, 1996), government
reports (DOF, 1994b; JCPA, 1995a, 1995b) and the profession (ASCPA, 1993). It
should be noted though that they only referred to accrual accounting in general and
not to any specic model of it. On the other hand, its use was criticized by many
academics. Their criticisms were mainly directed at specic problems in the govern-
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ment accounting standards and at the possible politicization of the reform program
rather than whether accrual accounting was potentially useful for governments.
Concerns were raised about provisions of AAS 29 (Lewis, 199394; McCrae and
Aiken, 1994; Jones and Puglisi, 1997); the nature and treatment of specialized public
sector 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 recognize
the General Government Sector as a nancial reporting entity (Challen and Jeffery,
2005). Guthrie (1998. p. 1) in a broad ranging review of its adoption, emphasized the
central role played by accrual accounting in the whole NPFM reform program and
noted that it was not socially, politically or economically neutral. This matter is
examined later below. Several subsequent reviews of the reform program include
Potter (2002), Guthrie et al. (2003) and Carlin (2005).
Notwithstanding the above history of the adoption of accrual accounting in the
public sector in Australia, its adoption was necessary once governments accepted
responsibility for efcient management of their resources in order to achieve cost
savings in a period of mounting budget decits. It is argued here that efcient
resource management cannot be achieved without the provision of relevant accrual
accounting information about assets, liabilities, revenues and expenses. The limita-
tions of cash accounting and budgeting systems (CABS) for resource management
and performance accountability reporting is documented in the 1984 FMIP diag-
nostic study (APSB and DOF). While CABS provides necessary information for
government scal policies, the FMIP study noted that it does not do so for the
resource management function of government and performance assessment. The
need for accrual accounting information for these purposes formed the basis of the
subsequent Department of Finance Report (1994b). For them, governments require
information on three matters.
One: the full annual costs of programs and of departmental activities, and hence of
the total budget sector. This information is necessary for determining budget priori-
ties and for the efcient management of operations and of resources. Under CABS,
only those costs involving current expenditures are recognized, whereas under
accrual accounting the costs of all resources consumed (including using up of inven-
tories, depreciation of non-nancial assets, and unfunded long service leave and
superannuation charges) are recognized. Furthermore, management focus must be
redirected towards total cost control and away from just controlling expenditures in
accordance 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 governments non-cash assets and its non-
borrowed liabilities such as superannuation. For example, as at 30 June 2003, the
government reported non-cash nancial assets of $66,664m (compared with cash
$2,339m) and non-nancial assets of $69,290m, while non-borrowed liabilities were
$123,285m (compared with borrowings of $63,083m) (2003 Consolidated Financial
Statements, pp. 7071). The gures relate to the General Government Sector only
and do not include public nancial and trading enterprises. The above amounts are
enormous 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 efciently. As a consequence, asset purchase and disposal
decisions may not be appropriate, asset care and maintenance are likely to be
neglected, and the existence of the large superannuation liability is largely ignored
and unfunded. Furthermore, there were no pressures provided for their good man-
agement, and assets were often regarded as free goods. These deciencies were
widely recognized by senior management (FMIP, 1984; MAB, 1991; DOF, 1994b), in
ANAO reports (No. 27, 199596; No. 41, 199798; No. 2, 19992000), by parliament
(JCPA, 1995a, 1998, 2000) and in the later external reviews of government (National
Commission of Audit, 1996).
Three: the performance of management with respect to efcient revenue and cost
control, asset and liability management, and service delivery for reporting to parlia-
ment and the public. In addition to accounting information on the total costs
incurred, performance reporting requires information on program objectives and
services provided in order to evaluate the policy results. Absence of this information
is a serious shortfall in performance accountability. Performance accountability
under CABS is limited to budget compliance, and its broadening to encompass
efciency in resource management and effectiveness in program delivery required a
cultural change in public sector management (JCPA, 1995a, 1995b, 1998).
In contrast, an accrual accounting system can provide a complete set of required
nancial information for efcient resource management because it is based on
records of all external transactions and relevant events (as specied by the particular
model of accrual accounting adopted). The annual accrual accounting budget shows
all revenues received and receivable for the year and all the costs incurred in
providing services to the public. The budget balance shows the extent to which the
cost of service provision has been covered by revenue and its impact on government
net worth. It is also relevant for assessing the longer term sustainability of present
scal policies and for their intergenerational equity effects. Finally, it can provide
necessary information for the efcient management of government assets and
liabilities, a major objective of accounting reports (SAC 2, 1990). Furthermore, the
economic theory of efcient resource use is based on the requirement that decision
makers have full and complete nancial information about the resources used.
However, the potential benets from accrual accounting information can only be
realized if the system is designed to suit the unique environment and nature of
government activities. Only then can the system provide relevant and reliable infor-
mation which is required by users. As noted earlier, the public sector environment
differs from that of business in several fundamental respects. These differences must
be incorporated into the design of its accrual accounting systems, as emphasized in
AARF monographs (Sutcliffe, 1985; Sutcliffe et al., 1991; Micallef et al., 1994), by
Walker (1989) and explained in Barton (1999c, 2003, 2005). Unfortunately, this
requirement 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 be
resolved in the application of accrual accounting to the assets used in some areas
unique to the public sector. These include specialized military equipment; many
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infrastructure, heritage, cultural and environmental assets; and land under roads.
Meaningful and reliable nancial valuations may not be obtainable for these items
or be relevant for their good management. Each of these requires its own special
treatment 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 under
roads (Barton, 1999a), and infrastructure assets (Carnegie and West, 1997; Walker
et al., 2000).
In summary, the issue about accrual accounting should not have been whether to
adopt it or not, but the appropriate model for government use. Its adoption for
commercial-type assets was inevitable once governments accepted the need to
manage their resources efciently.
Because accrual accounting was integrated into the whole package of nancial
management reforms (which are outlined in the following section), its probable
benets cannot be considered here in isolation. Rather, they are covered later in the
paper.
The Marketization Reforms, 199699
Once the accrual accounting systems had been implemented, the next step in the
reform process involved the remodelling and reforming of departmental operations
according to business principles and practices, as noted by Self (1993). The business
model of accrual accounting did not t easily into departments which did not sell their
services to the public and retain the proceeds but whose activities are funded from
budget appropriations, and which did not pursue prots, own assets or have their own
liabilities. So, rather than adopting an accrual accounting system to suit the unique
environment 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 them
more businesslike and to introduce some market contestability and competition into
public sector operations. A suite of so-called marketization reforms was developed
and implemented over the late 1990s so that departments were converted from
administrative cost centres into businesslike prot centres in the delivery of
government services. As Self (1993) noted, this had occurred in the United Kingdom
and New Zealand. Public choice theory provided the theoretical justication for this
business mode of operations of departments. Corbett (1996, p. 69) denes PCT as
the application of (neo) classical economic methods of analysis to political and
administrative systems. The theory is explained in Self (1993), Mueller (1997) and
Buchanan and Musgrave (1999).
Although PCT was developed by economists, it is a political and administrative
systems theory which applies the methodology of economic theory to the operation
of the public sector, and in particular, the motivating assumption of the pursuit of
self-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 motivated
by 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 the
system beyond the provision of law and order and defence.
In the process of remodelling departmental operations along business lines, the
following marketization changes were implemented (Wanna et al., 2000, Ch. 10).
Departments were funded on an accrual basis according to the purchases at specied
prices 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 losses
without prior approval from the Finance Minister. Their budgets were formulated on
an outcomes-outputs basis, where outcomes comprise the desired end results the
government wished to achieve and outputs were the services purchased from
departments to achieve the desired outcomes. Departments were given one-line
administrative budgets with departmental heads being given substantial autonomy
over their allocation and operating matters. They were permitted to have their own
bank accounts and were responsible for their own cash management. Within this
framework, they were to:
separate policy formulation roles from service delivery rolesgovernments
should be steerers and the departments the rowers;
separate their dealings with the government as owner and investor from those
with 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 cash
budget compliance as had occurred beforehand;
market test provision of services wherever possible, and outsource them if there
were apparent cost savings or where it is in accord with government policy direc-
tions under theyellowpages test (a reference tothe business telephone directory);
operate as largely independent business units without needing to cooperate with
each other (the silo approached);
be charged for the cost of funds (the capital-use charge) invested in departmental
net assets at the estimated cost of funds to the private sector and not the
government;
be required to earn a healthy surplus and pay a dividend back to the government as
owner and investor at the years end in recognition of its investment in the
departments net assets;
be permitted to privatize assets such as real estate and major equipment and lease
them back on a sale and lease-back arrangement;
be permitted to write contracts with private rm suppliers on a commercial-in-
condence basis as occurs in business.
To facilitate implementation of the reforms, extensive staff training programs were
undertaken and a large number of Better Practice Guides (45 by 2003) were prepared
by 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),
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Life Cycle Costing (2001b), and Annual Performance Reporting (2004). The ANAO
introduced performance audits in 199697 in which departmental activities are
evaluated in terms of their efciency and effectiveness in resource management and
service delivery. The Better Practice Guides are used as benchmarks for these audits.
In199697, 35 audits were conducted.The early guides andperformance audit reports
played an important role in bedding down the reforms and revising them where
necessary. Pressure on departments to reduce costs has been exerted through the
imposition of an efciency dividend whereby appropriations for running costs are
reduced by one per cent annually. Responsibility for efcient resource management
and performance was vested with executive staff of departments under the Financial
Management andAccountabilityAct 1997, and departments are required to report on
resource use efciency matters in their annual reports.
Obviously, some of the reforms can be benecial in terms of enhancing efciency
and effectiveness of departmental activities and should enhance value for money for
taxpayers. These benets should occur wherever the reforms are soundly based from
a management perspective. Clearer specication of policy objectives and a focus on
results facilitates the achievement of objectives; market contestability of departmen-
tal activities, outsourcing of activities, use of leased equipment, some devolution of
authority to departmental managers over their administrative budgets, asset main-
tenance and the disposal of unneeded assets, can all produce signicant cost savings
if appropriately applied. The use of information from relevant accrual accounting
standards should promote better cost control and determination of policy priorities,
and lead to better asset and liability management. But major reservations remain
about those reforms based on the pursuit of an ideology, a matter to be examined
later.
Accounting and Budget Reforms, May 19992008
Two subsequent reforms were made to the accounting and budgeting systems in
1999 following the Charter of Budget Honesty Act 1998. Accrual budgets were
introduced, as recommended by the National Commission of Audit (1996) and cash
budgets were abolished along with the direct reporting of cash transactions. Further-
more, two accrual budgets were presented to parliament as the Act required that the
budget be based on external reporting standards, and there are two such sets of
standardsthe Australian Accounting Standards (AAS) and the Government
Finance Statistics (GFS) standards. AAS accrual budgets were introduced to be
comparable in format to the outcome nancial statements, as advised by the
National Commission of Audit. The GFS system is an International Monetary Fund
system designed toprovide a comprehensive conceptual and accounting framework
suitable for analysing the general budget sector and the broader public sector of any
country (IMF, 2001, paras 1.21.4). It was designed to suit the special nature and
roles of government in serving the nation by providing collective services and to
measure the economic impact of government activities. It also forms part of the
United Nations System of National Accounts (SNA) used for the measurement of
national 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 and
principles of scal management to be followed by the government. To maintain
ongoing economic prosperity, the government adopted a policy of setting budgets in
a medium-term framework to moderate cyclical uctuations in economic activity,
maintain government debt levels at prudent levels, ensure its scal policies con-
tribute to national saving and have regard to the nancial effects of its policies on
future generations.
However, while there is substantial overlap between the two accrual accounting
systems, there are also some signicant differences, resulting in the presentation of
very different nancial data. This has created much confusion about the budgets
which must be passed by parliament before they can be implemented. Table 1
illustrates the problem.
The different results produced from each system are due to basic differences in
their purposes and structure. While there is much overlap between the systems (e.g.,
all transaction records are identical), some signicant differences occur in the treat-
ment of non-transaction events used in the compilation of the operating statements
and balance sheets for each system. These involve differences in, for example,
classications of items, the entity concept, bases of asset valuation, and concepts of
income and capital maintenance. The differences occur because the AAS system is
designed for the business environment (primarily for prot and wealth measure-
ment purposes), while the GFS system is designed for governments (primarily for
scal policy management purposes and national income measurement); the AAS
system takes a balance sheet approach while the GFS one adopts a transactions
resource ow approach; and the GFS system requires the use of current market
values throughout whereas the AAS one does not. The two systems are explained in
Barton (2007). At the contents level of the nancial reports, the major differences
concern the treatment of the Goods and Services Tax, asset revaluations and expen-
Table 1
200304 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-nancial 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. 45, and Statement 10, pp. 23.
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diture on military equipment. A reconciliation of the data sets is provided in 2003/04
Budget Paper No. 1, Statement 8, pp. 1114.
CONCERNS ABOUT THE REFORMS
While many of the reforms have been successful in improving efciency, those that
were based on ideology rather than sound management principles or which
detracted from the integrity of accounting as being a quality FMIRS, have had
questionable results. The particular problem areas are:
1. Presentation of Two Sets of AABS
The presentation of two sets of AABS budget statements and outcome nancial
reports 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 to
their validity. Furthermore, they illustrate the importance of selecting an appropriate
nancial measurement model for governments. Which set of budget gures are to be
believed and approved by parliament, and likewise for the subsequent outcome
statements? 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 nancial
assets worth $58,369m or $97,598m; and so on? Corporations are not allowed to
publish two sets of nancial reports, and neither should governments. The confusion
led to a Joint Committee on Public Accounts andAudit (JCPAA, 2002) review of the
presentation of budget papers, but they were unable to resolve the problem.
In December 2002, the Financial Reporting Council (the government body which
oversees nancial reporting inAustralia) issued anurgent directive to the AASB to
harmonize the two systems into one unied system (Challen and Jeffery, 2003). The
Board eventually issued AASB 1049, Whole of Government and General Govern-
ment Financial Reporting, in October 2007. While AASB 1049 made signicant
progress in recognizing the GGS as a valid accounting and reporting entity and its
acceptance of GFS transactions treatment where it did not conict with the AAS
treatment, it did not resolve other fundamental accounting issues. As well, some
changes were made to the GFS by the Australian Bureau of Statistics (ABS) to
accord with AAS (ABS, 2005). These changes, while narrowing the differences
between the systems, do not eliminate them. In its May 200809 budget, the govern-
ment chose to use only the modied ABS GFS system (2005) for its budget presen-
tation and for the subsequent outcome nancial reports (Budget Paper No. 1, pp.
3.223.24). This decision brought to an end the confusing dual reporting system.
2. Use of a Business Model of Accrual Accounting
AAS were developed for use in business enterprises, and prior to AASB1049 (2007),
they were modied only marginally to accommodate some administrative differences
in the public sector, as indicated earlier. All the standards relating to the objectives of
accounting and nancial reporting, concepts of assets, entity and so on, and bases of
asset valuation, were retained, as part of the sector neutrality principle. The sector
neutrality principle is not accepted in most countries around the world; NewZealand
and 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 adequate
substance because it ignores the fundamental differences between the two sectors.
Accounting as an FMIRS should be designed to suit the environment in which the
entity operates and the purposes for which the information is required for it to
provide useful information. It should apply the information attributes as specied in
the AASB Framework (2004, paras 2426), particularly understandability, relevance,
reliability and comparability. The nancial statements can present a true and fair
view only if these requirements are satised.
In view of the nature of government operations and the above characteristics of
useful information, much of the business model of accrual accounting and some of
the marketization reforms adopted by departments to accommodate it are not
appropriate for core government activities. These include the following.
1: The use of outcome-output based budgets. It is difcult to specify and measure
the outputs of government departments from their nancial statements. Substantial
effort has been expended on measurement of outputs and outcomes of governments
but with little success. In his review of output and performance measures used by the
Victorian government, Carlin (2002, p. 97) observed considerable turmoil in indi-
cator disclosure, low survival rates of indicators and that in many cases there was
no actual data even reported (see also Carlin, 2005). Likewise the ANAO (200102,
Report No. 18, p. 4) concluded that: a common limitation of the performance
information in all 10 audited agencies portfolio budget statements and annual
reports related to performance indicators which did not actually measure outcome
performance.
The problem is that the outputs of government departments cannot be measured
from their nancial operating statements. The budget and outcome nancial state-
ments do not measure outputs but the full cost of inputs required to produce service
outputs. However, the services produced are designed to achieve government policy
objectives, that is, outcomes. The difculties incurred in measuring the outputs of
many government services should occasion no surprise when one considers the
complex nature of public goods. Consider, for example, the varied nature of law and
order services, health services and defence services. Although output-based
budgets were introduced with the accrual accounting reforms, the difculties
encountered in measuring outputs and service delivery performance are not due to
accrual accountingthe same problems occur in cash accounting. The attempts to
introduce program budgeting in the 1970s and 1980s when cash accounting was in
use failed for the same reasons (Wanna et al., 2000, p. 304).
The budget framework could be enhanced by including all stages of the service
delivery process in the model, that is, inputs, processes, outputs and outcomes. The
rst two stages are important for parliamentary scrutiny and accountability pur-
poses. These matters were reviewed by the government in its Operation Sunlight
program (Tanner, 2005; Murray, 2008).
1
1
Mr L. Tanner, the Finance Minister in 200809, proposed an examination of budget transparency in the
outcomes-outputs budget model in 2005 when in Opposition. As minister, he commissioned Senator
Andrew Murray (now retired) in April 2008 to prepare the report. He completed the report in June
2008, and the government responded in December 2008, accepting most of the recommendations.
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2: The key concepts of assets, liabilities, equity, revenue and expenses, as specied
in the AASB Framework (2004, paras 4780) are inappropriate for most core
government activities. The whole AAS system is designed to measure and report on
these items. This is a large topic which cannot be covered here; sufce to state that
all the concepts are based on the notion of assets being future economic benets
embodied in an asset that ow to the entity (Framework, para. 53). This is a defective
denition, even for the business sector. Rather, assets are resources which are used
to produce future economic benets; they are not the benets themselves. However,
in the public sector environment, most government non-nancial assets do not
provide economic benets to the government. Rather, they provide both economic
and social benets to the communities through the provision of collective services.
This topic is covered in Barton (2000, 2003, 2005, 2007), and for community and
cultural assets, in Pallot (1990) and Carnegie and Wolnizer (1995). The GFS deni-
tions are appropriate for the public sector environment and overcome these limita-
tions of the AAS system.
3: Naming departmental statements as statements of nancial performance and
of nancial position (prior to adoption of International Accounting Standards in
2005, when they were renamed as income statements and balance sheets). The names
are misleading as they portray departments as prot seeking businesses. Financial
performance in business is measured primarily in terms of sales revenue as a
measure of output and prots generated as a measure of performance, and the
statement of nancial performance is designed to do this. But departments are cost
centres, not prot centres. The statement shows the expenses incurred in providing
the departments services over the year, the budget funding designed to cover their
net expenses, and any residual balance. The funding should be designated as the
budget appropriation and not as revenue. This statement shows necessary informa-
tion for program and departmental costing purposes and for management cost
control. The residual balance is not a measure of nancial performance, as is prot
in a business. Portrayal of the statement in this way will enhance its relevance,
representational faithfulness and understandability. In so doing, it will enhance the
usefulness of the statement information for resource use and decision making pur-
poses, and the greater transparency will enhance the fullment of accountability
requirements. Likewise the name, statement of nancial position for a department
is misleading and liable to misinterpretation. Departments own no assets, have no
liabilities, and have no equity in the net assets. Moreover, most of the non-nancial
assets are not cash generating as are commercial assets. All the assets belong to the
government, and the government is responsible for repaying all liabilities. Depart-
ments are merely the administrative arms of government. The statements cannot
show the nancial position of departmentsthey have none.
As an example of the misleading nature of departmental nancial statements, for
the 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, asset
revaluation reserves $6,200m, and retained surpluses $38,000m). On these gures,
the department appears to be a highly protable enterpriseit generated a surplus
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of 23 per cent on revenue, 340 per cent on contributed capital and 9.7 per cent on
total equity. As well, it appears to be largely self-funded, as the asset revaluation
reserve and retained surpluses contributed 97 per cent of total equity. No business
corporation in Australia can match such an outstanding nancial performance! This
matter is examined more in Barton (2004).
Similar considerations apply to the aggregate nancial statements for the budget
sector. The operating statement is not a statement of nancial performance in the
business sense. In a mechanistic way, governments can always improve on their
nancial performance by raising taxes and/or cutting expenditures to boost the
surplus as they have monopoly powers; however, such an approach could be socially,
economically and electorally disastrous. Likewise the statement of nancial posi-
tion does not measure the governments nancial position in a business sense
because it does not include the major funding source of governmentthat is, the
power to taxand the non-nancial assets do not generate revenue from sales of
products. The taxing power effectively replaces the role of contributed capital in
business.
The GFS system avoids this misleading nomenclature by naming the statements as
operating statements and balance sheets.
3. Termination of CABS
CABS was discontinued in 1999 because it did not seem to mesh in with the AAS
model of AABS. But cash accounting information is required for scal policy pur-
poses and all appropriations must be approved by parliament prior to their expen-
diture. Although cash ow outcome statements are published, they are prepared
from the accrual nancial statements by adding back the non-cash items. This is both
a time consuming and difcult task in a large organization such as the government.
The outcome cash ow statements derived from the two systems report very differ-
ent results. For example, the net operating cash surplus reported for 200304 in the
GFS statement was $9,892m while the AAS statement reported $12,114m (Com-
monwealth of Australia, 2004, pp. 21, 40). Parliament and citizens can justiably
expect an identical measure of the actual operating cash surplus. Furthermore,
the statements are not available until about three months after the end of the year
and hence cannot be used for intra-year scal policy monitoring and daily cash
management.
The ows of government cash receipts and expenditures encompassed in the
governments scal policies have major effects on the state of the economy (eco-
nomic growth, employment, ination, etc.), on nancial markets (bond markets,
interest rates, etc.), and on social welfare. These must be monitored continuously for
good macroeconomic management as well as for the management of government
cash balances. Direct reporting of all cash transactions is required to provide this
information.
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 system
in the 200809 budget. Because the GFS system is based on the direct recording and
reporting of transactions, cash budgets can be readily prepared from the system.
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Cash management has been re-centralized inTreasury, overnight departmental bank
account balances are swept up into the governments 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 Practices
In the context of the markets in which governments provide their services, many of
the 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 administrative
arms of government which undertake its supply function, and are funded from
budget 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 normally
complex and heterogeneous in nature and it is difcult to measure the unit of
service which is to be priced (Carlin, 2003a). Moreover, there are often no private
sector markets for many of these services from which competitive selling prices
could 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 service
rhetoric.
Departments operating as largely independent entities. This led to duplication and
lack of coordination of services. Many policy outcomes require use of services
from several departments. For example, border protection involves services from
defence, 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 coordinate
services straddling more than one department was reviewed by the Management
Advisory Committee (2004), a senior government body, and it implemented an
integrated, whole of government approach headed by the Department of Prime
Minister 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 government
assets and thereby to improve upon their management. However, the mechanism
for applying it was not appropriate. The charge was originally set at 12 per cent on
net assets of each department, reduced to 11 per cent in 2002/03, and abolished as
from 30 June 2003 because it was not effective (JCPAA, 2002, p. 75). The total
budget allocation to fund the CUC in 2002/03 was $6,500m (Budget Paper No. 1,
Statement No. 12, pp. 3132) and this had a signicant interest cost to the govern-
ment. Departments were funded up-front for the amount of the chargeit was
included (but not disclosed) in their appropriation for the year, and repaid at the
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years end as a dividend. No charge was made for capital use in departmental
expenses, and the appropriation owed through to the bottom line. It thereby
enabled departments to report healthy surpluses as if they were successful busi-
nesses and for example the Department of Defence reported a surplus of $4,410m
in 2002 (Barton, 2004, p. 139). Departments were allowed to invest the funds for
the year and retain the interest earned thereon. The dividend payment was not
included as a distribution of surplus in the operating statement but was hidden in
a 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 way
of improving asset management is for departments to adopt the principles of good
asset management developed by the ANAO (1996). These include the cost of
capital in all capital budgeting appraisals, but not in the nancial statements.
The above marketization practices are very articial and contrived in the context
of governmental operations. Thus the government can be both a monopoly seller
(i.e., its department) and a monopoly buyer (as customer) of services provided by
itself (as owner). The provision of most government services cannot be market
tested because of their inherent nature. Outputs of most services cannot be readily
measured 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 be
appropriate for the government to adopt a commercial capital-use charge for the
pricing of its services to enable comparisons with prices quoted by rms for the
supply of outsourced services, it is not appropriate to include the charge in its own
nancial statements.
The use of commercial-in-condence contracts for outsourcing the provision of
services. This practice was widespread until a Senate Order in June 2001 substan-
tially banned its use (ANAO, 200102, Report No. 38, 200304, Report No. 5;
JCPAA, 2000). Commercial-in-condence contracting is standard practice in the
private sector because of the need to keep the information from competitors.
However, apart from those few instances where condentiality has legal or secu-
rity protection, commercial-in-condence contracts in the public sector abrogate
the 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 efciency of operations, and there
are many instances of substantial cost overruns, for example, with respect to IT
outsourcing (ANAO, 200102, Report No. 9) and major construction projects such
as the Bruce Stadium in Canberra (ACT Auditor General, 2000; Barton, 2006).
5. Bias in Accounting Measurements in the Public Sector
Another major issue in deciding whether to use accrual accounting is assessing if
some of the cost measurements are biased against the public sector continuing to
provide the service in-house. One of the justications advanced for use of the same
accounting standards for the public and private sectors was that it would provide for
a level playing eld across the sectors, and thereby enable the service to be provided
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from the more efcient, lower cost source of supply. However, the playing eld may
not be level where departmental costs are inated by the following practices:
Asset revaluations. The public sector is required to revalue its assets progressively
over a three-year period at current market prices (realizable prices for nancial
assets and replacement costs for non-nancial assets). But private sector busi-
nesses normally do not do so on a regular basis. This inates the depreciation
charges in the public sector and can cause them to exceed those on similar assets
in the private sector. As well, it produces an inated capital-use charge. Further-
more, there are difcult problems in valuing those public sector assets which do
not have private sector counterparts, such as specialized military equipment and
community assets, and which are not used for revenue generating purposes.
The capital-use charge. The charge was set to reect the costs of funds to the
business sector, and it was about twice the government bond rate. Even though
most departmental assets are funded from appropriations (which have been fully
funded from tax and user charge revenues in recent years, when the budget has
been 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 according
to the risk proles of each business, and it would be less than 12 per cent for
soundly established companies in stable industries; for example, regulators in the
electricity 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 ofce property holdings in
the late 1990s, generally on a sale and leaseback arrangement, it set a rental yield
of 1415 per cent as the hurdle rate of return. At the time, market rental yields
were around 9 per cent (ANAO, Report No. 4, 200102, p. 14). The ANAO
observed that the charge overwhelmingly favoured divestment of property over
retention (p. 12) and that its application would have resulted in divestment of
virtually all of the [governments] property holdings (p. 15). Carlin (2003b) found
similar problems with the charge in his examination of its use by the Victorian
state government.
Additional accountability costs incurred in the public sector (Ohlson, 2001).
Because of the importance of transparency and accountability for public sector
operations to parliament and the public, some additional costs are incurred. Due
processes must be followed more diligently in the public sector, and the public
sector audit requirements are more extensive and demanding than those in the
private sector. These costs are largely avoided in the private sector.
As a consequence of the above, the playing elds may not be at all level between
the two sectors; rather, they have been tilted against the public sector.
6. Politicization of the Reform Program
It has beenrecognizedfor some time that many of the accounting reforms of the 1990s
may be biased against the public sector in order to force its contraction. In the United
Kingdom, NewZealand and Sweden, the reforms were openly based on public choice
theory which advocated that governments should adopt business methods not only to
achieve greater efciency 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 inAustralia. But it
was recognized by some analysts. For example, a senior New South Wales Treasury
ofcer, Dr N. Conn (1996, p. 2) stated that: In reality, the term accrual accounting has
become 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 in
the package of NPFMreforms inAustralia, observed that:public sector accounting is
not socially, politically or economically neutral. Rather, the conjoint emphasis in
Australia has been to change the administration of the public sector, replacing old
discourse ideals and methods with newmanagerialism, contracting and market-based
activities. Likewise, Ohlson et al. (1998, p. 20) after reviewing the reforms undertaken
inmany countries, concludedthat:the NPFMreforms have the capacity tochange the
ruling language and priorities in organizations, often in relatively quiet and unnoticed
waysor as Hall suggested, without a shot being red.
The NewZealandexperience inadopting business accrual accounting andpractices
illustrates similar concerns (Newberry, 2003; Newberry and Pallot, 2005; Ellwood and
Newberry, 2007). Newberry gained access to condential Treasury records. She found
the reforms were clearly based on the new political economy of public choice,
transactions cost and principal-agency theories.While the reforms were claimed to be
based on the objectives of improving public sector efciency, effectiveness and
accountability, there was in fact an additional hidden agenda of privatization of public
sector supplies. The implementation of many of the marketization reforms outlined
earlier, assisted by the use of business accrual accounting and the upward biasing of
departmental costings, was designed to justify privatization and outsourcing. New-
berry quotes US authors (Savas, 1982, 1987; Israel, 1987; Mintzberg 1996) in support
of 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 servicesthat is, the steerers,
not rowers, philosophy of government. Newberry claims that the above mechanisms
have 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 efciency, effectiveness and accountabil-
ity, one needs to be aware that some of its proponents have the curtailing of
government activities and responsibilities as their primary aim, in accord with public
choice theory. This theory largely ignores the existence of externalities and the
publics desire for social justice and pursuit of public interest over private interest as
responsibilities of government. In a democratic nation, any reduced roles of govern-
ment should be agreed to by the electorate through normal political processes rather
than occur surreptitiously through the NPFMreforms, aided by the inappropriate use
of business accrual accounting, and without explicit public debate and approval. In
other words, there must be public accountability for the real objectives of the reforms.
Sound accounting principles and practices have been abused in the NPFM reform
process where business accounting systems have been used to help drive the reforms
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themselves. Hence, rather than the accounting systems being designed as an FMIRS
to suit the public sector environment, the mode of operation of the public sector was
changed to suit the new accounting model. It is imperative that governments are
provided with good quality information to facilitate their policy making, resource
management and accountability functions, as only then can they operate efciently
in the provision of required public services. The function of the accounting system is
to provide useful information to management, parliament and the public, rather than
irrelevant or misleading information intended to drive another agenda.
SOME BENEFITS FROM THE REFORMS
The nancial situation of the Australian Commonwealth government in 2008 was
vastly stronger than that during the 1970s90s when the pressures for the reform
programs developed and the reforms were implemented. Since the election of a
conservative coalition government in 1996, government policies have focused on
tight overall management of the economy and on its operating costs, assets and
liabilities. During the previous twenty-four years (197497), there were seventeen
years of cash budget decits and only seven surplus years, and net debt of the GGS
grew from a surplus of 3.1 per cent GDP to a net debt of 17.6 per cent in 199697
(Budget Paper No. 1, 200708, p. 13-7). In contrast, at the time of preparing this
article, the budget has been in surplus every year since 1997, except for a minor
decit in 200102 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. Net
nancial indebtedness declined from $96 billion in 1996 (18.5 per cent of GDP) till
its elimination in 2006. As at 30 June 2008, net debt was -$43 billion (i.e., net nancial
investment assets). Net interest payments from the budget were also eliminated,
resulting in savings of $8.5 billion per annum, whereas investment income of $8
billion was earned in 200708 (Budget Paper No. 1, p. 9-3) A Future Fund was
established into which $18 billion of the above net investments were placed, and into
which some later budget surpluses and asset sales receipts were transferred. The
balance in the fund had reached $63 billion by June 2008 (Australian Financial
Review, 22 October 2008, p. 10). The fund is to be used for payment of future staff
superannuation benets, which amounted to $108 billion at 30 June 2007 (Consoli-
dated Financial Statements, p. 35). The net worth (i.e., assets less liabilities) of the
government improved from -$73 billion at 30 June 1995 when the rst accrual
nancial statements were prepared to +$61 billion at 30 June 2008 (Financial State-
ments, 199495, p. 11; Budget Paper No. 1, 200809, p. 9-4). The above improvements
in nancial performance were achieved in a period when substantial tax reductions
were made and budgets were contained to c. 23 per cent of GDP.
While much of this progress is due to improvements in general macroeconomic
factors affecting the economy, part of it can be attributed to the reform program
leading to tight scal policy management and to improvements in public sector
operational efciency following the introduction of accrual accounting and the
management reforms. Some of the early improvements are summarized below. The
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information is taken fromANAO performance audit reports which concentrated on
labour costs and asset management issues as the two largest running cost items of the
public sector.
Soon after adopting the major administrative reforms in the mid-1990s, an exten-
sive staff reduction program was undertaken covering all departments. Over the
three year period, 1995/6 to 1997/8, public sector staff in core policy making and
administration functions was reduced by 23,700 or 16 per cent (ANAO Report No.
49, 199899, p. 60). These reductions exclude those resulting from the privatization
and outsourcing of activities.
With respect to asset management, reviews of asset holdings by departments led
to sales of surplus or obsolete property, plant and equipment which generated
substantial proceeds amounting to $3641m over 199699 (Table 2). Concurrently the
government made policy decisions to sell some government business enterprises and
other properties on sale-and-leaseback arrangements. (The large 1998 proceeds
mainly resulted from the sale of the rst tranche of Telstra Corporation shares.) The
proceeds of $23,449 m from the above assets sales were used to reduce government
debt, that is, for liability management.
The rst ANAO performance audit on asset management of June 1996 (Audit
Report No. 27, p. vii) found that while signicant progress had been made in asset
management as a result of the adoption of accrual accounting, further improvements
could still be made. It recommended the development of staff training programs in
cost and asset management and, together with the Department of Finance, developed
an Asset Management Handbook (September 1996) for use in training staff in the
task. In its follow-up Report (No. 41) of 199798, the ANAO found signicant
acceptance of the recommendations (p. 5) made in its earlier report, and that
departments had progressively improved control over their assets, but had yet to
take a strategic approach to asset management (p. 7). In its report on property
management (No. 19, 200304), covering both owned and leased property, the ANAO
concluded that, property management services . . . were operating efciently and
were generally providing an adequate level of support for the delivery of the organi-
zations services (p. 12). These and many other ANAO performance audit reports
show 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 StatementsCash Flow Statements for each year ended 30 June.
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It should be noted that the operational cost savings, disposal of surplus asset
holdings and reductions in interest payments resulting from government debt reduc-
tion produced permanent savings for the government and that accrual accounting
information was central to the savings being made. But accrual accounting informa-
tion by itself does nothingthe benets accrue from its appropriate use for govern-
ment policy making and management resource use decision making and controls. It
took some years to make effective use of the information after the mid-1990s. The
management changes included the legal vesting of responsibility for efcient
resource management to senior staff, appointment of asset management staff, and
reporting on resource use efciency in departmental annual reports. As well, con-
tinuing pressure for efciency improvements is exerted by ANAO performance
audits. Unless sound reasons can be given for not accepting ANAO recommenda-
tions, they must be adopted, and the ANAO monitors their subsequent use. This
environment of public sector management operations contrasts with that pertaining
under the former cash accounting system wherein resource management issues were
largely 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 accrual
accounting by government, the Australian Auditor General, Mr I. McPhee (2006, p.
3) concluded that: It is the case that accrual information provides better information
for decision making and accountability purposes than earlier information available
to managers, government and the parliament.
SUMMARY AND CONCLUSIONS
The adoption of accrual accounting was integral to the whole NPFM reform
program implemented by the Australian government. Following the reviews of their
operations, governments accepted the need to broaden the focus of public sector
management to encompass all resources in addition to scal policy and cash man-
agement, and to consider the outcomes of government policies in relation to their
total costs. The stated purpose for the reforms of promoting greater efciency and
effectiveness in resource use and enhanced accountability for performance was
highly commendable. Better management in government benets the nations citi-
zens. Accrual accounting can provide the information necessary for program and
departmental cost control, for the efcient management of most public assets and
liabilities, and for the long-term sustainability of scal policies. However, to meet
these objectives, the system must be designed to suit the unique environment and
information needs of government, and the information produced must satisfy the
AASB Framework requirements for it to be useful.
The success of the total reform program has been mixed, having both positive and
negative results. The enhancement of management responsibilities to include all
resources and the consequent adoption of accrual accounting, additional focus on
outputs and outcomes of service provision, some devolution of authority to depart-
mental management over their budget allocations and modes of operation, and
formulation and adherence to a set of prudent scal management principles have
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enabled signicant improvements in efciency of resource use and the governments
nancial position. However, those accounting and market reforms based on business
practices inappropriate for the public sector or on political ideology had mainly
negative results. These reforms have since been terminated or signicantly curtailed.
The recent adoption of the modied GFS system as the sole accounting informa-
tion system has removed a major source of duplication, misdirected effort and
confusion. It has enabled the government to use an accounting system designed for
the public sector environment which reports both accounting and cash information,
and thereby satises the need for both resource management and scal policy
information. The remaining required reform is that of modifying the outcomes-
outputs budget framework to acknowledge difculties in measuring these matters,
and to include the need to give more attention to the inputs and processes involved
in departmental service delivery. This change will enhance the transparency and
accountability of their operations to parliament and the public generally.
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