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Public sector accrual accounting: institutionalising neo-liberal principles?

Sheila Ellwood Susan Newberry
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Sheila Ellwood Susan Newberry, (2007),"Public sector accrual accounting: institutionalising neo-liberal
principles?", Accounting, Auditing & Accountability Journal, Vol. 20 Iss 4 pp. 549 - 573
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Public sector accrual accounting:

institutionalising neo-liberal
principles?
Sheila Ellwood
University of Bristol, Bristol, UK, and
Susan Newberry
University of Sydney, Sydney, New South Wales, Australia
Public sector
accrual
accounting
549
Received 4 October 2004
Revised 8 March 2006
Accepted 26 July 2006
Abstract
Purpose The purpose of this paper is to examine the role of public sector accounting in
implementing neoliberal reforms.
Design/methodology/approach The proposition that the adoption and development of accrual
accounting in the public sector is a technical development intended to improve transparency and
accountability is investigated. The paper compares the development and use of accrual accounting in
public sector financial management reforms in the UK and New Zealand.
Findings The findings in this paper suggest that in both countries, accrual accounting, as
developed, also provides a means to reduce the governments role to that of procurer of services and
enforcer of rules set by others, thus advancing a controversial privatisation and trade liberalisation
agenda which is consistent with neo-liberal principles.
Research limitations/implications The paper shows that in contrast to more usual claims about
the need for accrual accounting to provide a read across between the sectors or that public interest
motives assure the neutrality of accounting, seemingly technical accrual accounting developments
seem to function as a political tool to aid a controversial political agenda. There is a need to look at the
overall effect of public sector financial management reforms and the role of, and implications for,
accounting standard-setters.
Originality/value The information in the paper applies to accounting the new political economics
literature on agenda control and information based structures where control is achieved through
information asymmetries.
Keywords Public sector accounting, New Zealand, United Kingdom
Paper type Research paper
In a newspaper article, Stiglitz (2003) argued that the reforms advocated by experts, often
backed by the International Monetary Fund (IMF), are more often based on ideology
than economic science. Stiglitz warned that although proposed reforms may seem
technical, economic policies require choices which favour some groups over others and,
therefore, involve political choices which should not be left to technocrats. The economic
policy underlying the structural adjustment and reform programmes advocated by such
key supra-national agencies as the OECD, the International Monetary Fund (IMF), the
World Bank and its allied agencies, and credit rating agencies is distinctively neo-liberal
The authors thank the anonymous reviewers for their thorough and helpful comments, which
greatly improve the article, and acknowledge with thanks the support of the Pacioli Society at the
University of Sydney for facilitating this joint research.
Accounting, Auditing &

Accountability Journal
Vol. 20 No. 4, 2007
pp. 549-573
q Emerald Group Publishing Limited
0951-3574
DOI 10.1108/09513570710762584
AAAJ
20,4
550
(Kelsey, 1995, p. 17). Economic policies are relatively powerless in the absence of detailed
intermediating processes, such as rules and regulations, to bring them into effect (Deakin
and Wilkinson, 1998). Arguably, accounting and requirements to observe accounting
rules provide another form of intermediating process, and this article considers the role
of accounting in such reforms.
The three key features of neo-liberal reforms consist of independently-administered
anti-inflationary monetary policy; macro-level fiscal disciplines imposed on
governments to achieve balanced budgets; and micro-economic reforms to liberalise
trade and to expand the business sector (McKinnon, 2003, p. 316). This neo-liberal iron
tripod is intended to constrain and reduce the size and power of governments, while at
the same time supporting and encouraging the expansion of business activity. These
changes in relative size of government and business sectors are brought about in part
through privatisation, defined broadly as a process of reducing the role of government
or increasing the role of the other institutions of society in producing goods and
services and in owning property (Savas, 2000, p. 3). To the extent that tax-funded
services remain, the governments role is re-cast as merely a procurer, rather than a
provider of services, purchasing in a competitive, or at least, contestable, market. The
commercialisation of government activities and introduction of competition is,
therefore an integral part of such reforms.
Differing views about the appropriate size and role of governments are a feature of
political debate in many countries, and government-provided services may include
education, health, welfare, energy and water. Decisions about such services might seem
to be matters for political debate and decision in each country, but recent world trade
developments show the potential effect of intermediating processes through the
establishment of trade rules which now provide scope to challenge as barriers to
competition any state controls imposed on services for social purposes. All of these
services are targeted for trade liberalisation (Drake and Nicolaidis, 1992). The
privatisation and trade liberalisation of energy and water is well advanced, while
education and health are a particular focus of current efforts through the Doha trade
round.
This article focuses on the introduction and development of accrual accounting in the
public sectors of the UK and New Zealand, and considers the role of accounting. A
feature of the accounting development in both countries is that the form of accounting
introduced is that known as generally accepted accounting practices (GAAP) as
developed for the business sector, albeit with some modifications for the public sector.
Accounting standard-setters in the business sector have tended to represent accounting
as a neutral technology intended to provide even-handed financial and other
information that, together with information from other sources . . . assists in promoting
efficient allocation of scarce resources in the economy (Leisenring, 1987, p. ii). If such a
description of accountings nature and role has ever been appropriate for the business
sector, it is certainly not appropriate for governmental accounting. According to Jones
(1992, pp. 155-156), governmental accounting has always been used primarily to control
peoples behaviour: to encourage them to do what they otherwise would not do or to
prevent them from doing what they otherwise would. Arguably, the development of
governmental accounting should pursue the fundamental purpose of governmental
accounting, constitutional control by the parliament over the executive government
(Pallot, 1992). Hopwood (1984, p. 171) has summed up the misgivings of many about this
development in the public sector, commenting that in a whole series of ways the
practices of accounting are increasingly being used to infiltrate and change, rather than
merely record, the activities of the State.
The controversy surrounding the implementation of accrual accounting in the
public sector is not about the use of accrual accounting per se, but about the
implementation of accrual accounting as originally devised for business purposes,
accompanied by claims that this provides a read across between sectors. Even at the
conceptual level, marked differences are apparent (Ellwood, 2003; Newberry, 2001).
Further detailed requirements have been added, many also similarly derived from the
business sector but these too are applied differently (for example, full cost accounting).
Numerous concerns have been raised about this development. Some have observed
that many of the techniques adopted had already been discredited in the business
sector, and that the developments do not really remove differences between the public
and private sector as claimed (see, for example, Barton, 1999a, b; Carnegie and
Wolnizer, 1995, 1997, 1999; Ellwood, 2003; Gray and Jenkins, 1993; Guthrie, 1998;
Guthrie and Carlin, 1999; Mayston, 1993; Micallef and Peirson, 1997). Of special
concern has been that the fundamental purpose of governmental accounting is
protection of public money, and that business sector accounting practices were not
devised for that purpose (Pallot, 1992, pp. 39-40; Chan, 2003). Gradually, some pattern
is emerging, as experience over time reveals the running down of public sector
activities through financial resource constraints and biases which load public sector
costs (Carlin, 2003, 2005; Newberry 2002a, 2003; Newberry and Pallot, 2004).
This article proposes that the form of accrual accounting under development in the
public sector supports and advances the neo-liberal agenda of shrinking the
government through privatisation and trade liberalisation by providing misleading
data. It begins by reviewing the new political economics literature associated with
public sector reforms, noting some potential roles and uses of accounting before
comparing key features of the accounting aspects of public sector reforms in the UK
and New Zealand. The UK is seen as the initiator of public service reform whereas New
Zealand began as a late-starter but became the renowned leader, especially in the
adoption and development of accrual accounting. The discussion and conclusion
reconsiders the nature of accounting in light of new political economics and the
cross-country comparisons.
Public sector reforms, new political economics, and the potential role of
accounting
Internationally, efforts to reform the public sector have waxed and waned in
popularity. During the 1970s and 1980s, and after a long post-war period of
government expansion, the relatively large size of the public sector in member
countries of the Organization for Economic Co-operation and Development (OECD)
was viewed as one cause of the reduced economic growth experienced by those
countries. Public attitudes increasingly reflected antipathy to government involvement
in essentially business activities; market resource allocation mechanisms were
preferred over government intervention, and individual and corporate freedom were
regarded as crucial to economic and social progress (Mascarenhas, 1991). Privatisation
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was pursued openly as public policy for a while, but soon became controversial,
attracting increasing opposition (Savas, 2000).
New political economics (NPE), a body of relatively recently developed, and still
developing, theories became popular, those associated academically with the Chicago
School in the USA being most relevant to the analysis in this article. These theories
apply economics to politics, and include public choice theory, constitutional economics,
transaction cost economics, and agency theory, which, in combination, focus on
government and the management of government (Jones, 1992, p. 149; Buchanan, 1997).
The ideas underlying these theories range from ideas about peoples voting behaviour,
about how a government operates and ideal constitutional rules, to ideal structures for
organising and coordinating activities, and arrangements for controlling relationships
within those structures. Much of the analysis focuses on bureaucracy, . . . regulation,
. . . corruption, rent-seeking by interest groups, and constitutional provisions . . .
(Rubin, 1992, pp. 131-132). All of these NPE theories rely on the same underlying
assumptions, that individuals are self-interested, opportunistic and boundedly rational,
and that they will seek to maximize their individual utility by whatever means
available including, according to Rubin (1992, p. 131), the possible use of
governmental accounting. These individualistic assumptions reject, or at least ignore
the possibility of, any concept of public interest or altruistic behaviour.
These NPE adherents believe that institutions (rules) are crucially important
(Meckling, 1978, p. 106). An early wave of NPE theories developed from the late 1940s in
opposition to Keynesian economics then dominant in Western countries (Jones, 1992).
Keynesian economics proposes that governments should try to counterbalance economic
cycles and allocate resources to maximise welfare. The NPE theorists, however, argued
that Keynesian economics and, in particular, the rules of functional finance theory
associated with Lerner, contained an inbuilt bias towards government expansion and
caused increased public sector debt and inflation (Buchanan and Wagner, 1978). They
proposed a set of rules (meaningful constitutional norms) intended to reverse the rules of
functional finance theory and, therefore, the effects of Keynesian economics by tightly
constraining a governments access to resources. Those norms included the iron tripod
previously mentioned, viz, independently administered anti-inflationary monetary policy;
macro-level fiscal disciplines imposed on governments to achieve balanced budgets
without incurring debt; and micro-economic reforms to provide incentives for private
sector investment (see, for example, Buchanan and Wagner, 1978, p. 176; Buchanan,
1989, p. 56; Jones, 1992, p. 153).
Niskanen (1975, p. 617) focused on the micro-level reforms required seeking the
pursuit of efficiency through market processes. He believed that government provision
of services would always be inefficient when it is the only game in town and that the
cause of this inefficiency was self-interested, budget-maximising bureaucrats. NPE
theorists subsequently opposed the bureaucratic supply of services . . . and favoured
two fundamental dimensions of reform: privatization and competition (Miller and
Moe, 1983, p. 297).
Extensions of Niskanens work focussed on agenda-control, using either
authority-based structures where responsibility lies with individuals or groups, or
information-based structures where control is achieved through information
asymmetries (Rubin, 1992). From the early 1990s, interest developed in the use of
information-based control structures. The theory was that the amount and type of
information generated by bureaucrats and made available to policy-makers influences
perceptions of the efficiency and effectiveness of a policy proposal, and this, in turn,
influences the decisions about the policy. The self interest assumptions suggest
ministers and parliamentarians should beware of delegating the power to set rules that
determine the information they will receive. The information asymmetry between
bureaucrats and politicians can give the bureaucrats enormous power, and the use of
information-based control structures carries with it the potential for ministers and
parliamentarians to lose control (Bendor et al., 1985).
NPE is founded on views that economics and politics are two sides of the same coin
(Jones, 1992). Several NPE theorists acknowledge their philosophical stance as key to
their economic policy proposals (see, for example, Buchanan, 1989; Breit, 1978; Parkin,
1987, p. 331), but admit those views encounter public resistance (see, for example,
Buchanan, 1997). They acknowledge that proposals for reform require symbolic
rhetoric (such as economy and efficiency) intended to appeal in the particular
government circumstances and political climate (March and Olsen, 1989, p. 76; see also
Henisz, 1999). Whereas the policies are intended to increase the likelihood of
privatisation and reduce the size of the public sector (see, for example, Buchanan, 1997,
p. 42; Buchanan, 1993, p. 57) the objectives are stated using such symbolic terms as
economic efficiency and fiscal responsibility. Occasionally, these symbolic terms are
acknowledged as minor issues (see, for example, Buchanan et al., 1987, p. 69).
Arguably, the rhetorical claims accompanying complicated and seemingly technical
reforms represent a form of information asymmetry.
In summary, through NPE, the policy directions sought are privatisation and
reductions in public sector size and power largely through the use of seemingly
technical economic policies. Evidently, monitoring of policy requires the use of
accounting both as a means of ensuring compliance with balanced budget constraints
and for restoring efficiency through the use of market processes. There is, therefore, as
Jones (1992) suggests a potentially normative aspect to governmental accounting
developments. Accounting standard-setters claim that accounting provides
information specifically not intended to influence decisions one way or another
(Leisenring, 1987; IASB (International Accounting Standards Board), 2006, p. 52).
However, the information asymmetry assumptions applied in the context of
information-based agenda control raise the potential for the construction and use of
accounting data to influence policy processes and outcomes in a particular direction.
Comparison of accrual accounting developments in the UK and New
Zealand
This section examines and compares the implementation and use of accrual accounting
in the UK and New Zealand. Both the UK and New Zealand have implemented
neoliberal reforms that include macro-level fiscal controls and micro-level reforms
intended to encourage private sector investment and liberalise trade. The adoption of
accrual accounting has been a feature of both countries reforms, and a variety of
potential benefits from the use of accrual accounting has been claimed. Evans (1995)
identifies a representative set of benefits which include: better measurement of costs
and revenues including comparisons between years; greater focus on outputs rather
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accounting
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than inputs; more efficient and effective use of resources, for example through charges
for fixed assets; full cost of providing a service can be compared with outside suppliers;
a better indication of the sustainability of government policy; improved accountability;
better financial management; and greater comparability of management performance
results. While not denying those benefits, this section identifies inconsistencies that
raise questions about further motives. It begins with macro-level fiscal controls before
moving on to the micro-level to examine the implementation of business-style
accounting in the public sector, the flow-through to competition policies and efforts to
use accounting for comparison of public sector full costs with private sector prices, and
efforts to link the macro-level controls with those at the micro-level.
The UK
From the early nineteenth to the mid twentieth century there was considerable growth
in the extent of UK state enterprise. By 1951, many infrastructure services, including
water and drainage, roads, gas, electricity, telephone services, rail transport, and
international air services, as well as the BBC, coal mines, the steel industry and the
road haulage industry were in state hands. Between 1892 and 1950 central and local
government expenditure grew from 11 to 39 percent of GNP, most of the growth
arising between 1910 and 1950 (Greenleaf, 1983). Public expenditure as a percentage of
GNP continued to rise until the Conservative Party returned to power in 1979 and
Prime Minister Mrs Thatcher commenced her world-leading efforts to privatise
government activities and reduce public expenditure.
Efforts to privatise government activities involved an attempt to differentiate
across government between activities that are at the core of the public sector and must
remain so, and the remaining functions that can be undertaken either within or outside
the public sector. The privatisation of nationalised monopoly utilities, such as British
Telecom, British Gas, the UK electricity industry and the English water industry, took
place as part of a general transfer of ownership from the public to the private sector
(Marsh, 1991).
Macro-level fiscal controls were adopted to achieve absolute reductions in public
expenditure; reductions in real terms, and reductions as a proportion of GDP. The
adoption of fiscal controls seemed to prompt a competition among countries to reduce
public expenditure below that of others (Buchanan and Musgrave, 1999). In 1996, for
example, William Waldegrave, Chief Secretary to the Treasury, stated that, The
countries that are going to make it . . . have brought their spend well under 40 per cent.
We have to join the leading group or we will be in trouble. Prime Minister of the time,
John Major, reinforced that view stating that he wanted to reduce expenditure to 35 per
cent of GDP.
The early fiscal controls were subsequently modified after New Labour was elected
to government in 1997 and pressed ahead with its version of reforms. As Chancellor of
the Exchequer, Gordon Brown (2002, pp. x-xi), subsequently explained:
The reforms are built on three pillars: first, a monetary policy framework with an
independent Monetary Policy Committee responsible for setting interest rates to meet the
Governments inflation target; second, a fiscal policy framework which is delivering sound
public finances through a Code for Fiscal Stability, firm fiscal rules and better planned public
spending which focuses on the quality of public service provision; and third, new institutions
such as the Financial Services Authority to ensure financial stability through transparency,
responsibility and clear lines of accountability.
In 1998, the New Labour government had introduced a public expenditure

management system, which imposed controls ranging from the macro-level to the
micro-level. The details of this system are set out in HM Treasury (1998). At the macro
level, the EFSR specifies two criteria for judging governmental expenditure. For
current spending, the Golden Rule applies. This rule states that over the economic
cycle, current spending (including depreciation) will be met from revenue, and the
Government will borrow only to invest. For capital expenditure (EFSR 4.2.2.) the
macro-economic criterion is the sustainable investment rule directed at a prudent
debt-to-GDP ratio. The Government continues to monitor spending across the public
sector but there is no longer a target for public spending as a share of national income
(EFSR 4.2.1).
New Zealand
New Zealand has been independent from Britain since 1906 but, as a member of the
British Commonwealth, it retains the British Monarch who is represented as titular
Head of State by the Governor-General. New Zealands unitary central government was
modelled on the British system but the Upper House was abolished in 1951, leaving a
unicameral legislature. Throughout the second half of the twentieth century until 1996,
the first-past-the-post electoral system was dominated by two main political parties,
National and Labour, with the result that the party in power could function almost as
an elected dictatorship. However, in 1996, following the outcome of a binding
referendum conducted in conjunction with the 1993 general election, the countrys
first-past-the-post electoral system was replaced by a mixed-member proportional
(MMP) representation system. The outcome of the four general elections conducted
under the MMP system (1996, 1999, 2002 and 2005) suggests that coalition
governments are now the norm, although the dominant coalition partys powers seem
scarcely diminished. In comparison to the relatively strong central government, local
government has tended to be weak (Scott, 1979; Bush, 1980). A set of reforms similar to
those described below for central government has been imposed on local government
where much of the countrys infrastructure is located[1].
From 1935, New Zealand developed a comprehensive social welfare system, which
lasted until the public sector reforms of the 1980s and 1990s. Between 1975 and 1984,
under the leadership of the Prime Minister and Minister of Finance, Robert Muldoon,
the National government resisted the neo-liberal economic reforms being implemented
in other OECD countries and advocated by the Treasury. However, increasing pressure
on the Prime Minister from within his party meant that some changes were made. In
May 1984, just two months before the snap election which ended the National partys
nine year term in government, the Prime Minister approved the establishment within
the Treasury of a financial management support unit to develop a reformed
accruals-based financial management and accounting system (McKinnon, 2003).
New Zealands reforms are recognised as Treasury-led (see for example, Boston
et al., 1991). In the midst of the constitutional and foreign exchange crisis that
immediately followed the snap election, The Treasury (1984) convinced the incoming
Labour government of the need for urgent economic reform. Within days of the
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election, the newly-elected Labour government began the rapid implementation of

radical neo-liberal economic policies which became known as Rogernomics after the
Minister of Finance, Roger Douglas. Once embarked on this reforming path,
continuation of the reforms seemed unstoppable, and New Zealand soon became
known as an extreme and rapid mover (Ferlie et al., 1996, p. 16; James, 1992).
In New Zealand, as in the UK, the reforms involved efforts to reduce government
size and expenditure through macro-level fiscal controls and privatisation, which was
unpopular with the wider voting public and within the Labour party. The efforts to
privatise were preceded by reforms, the stated intention of which was to improve
efficiency by identifying the more commercial activities of government and then
establishing them as State Owned Enterprises (SOEs). Shortly after this step, a
massive programme of privatisation was announced in late 1987. The need to privatise
was defended by presenting the level of government debt as a particular worry and the
sale of assets, including SOEs, as essential for its reduction. The assets subsequently
sold included electricity generation and supply, forests, telecommunications services,
the national airline, the rail system, and a bank. The privatisation programme soon
became controversial and the subject of considerable public opposition. Roger Douglas,
Minister of Finance at the time of this initiative, subsequently admitted the weakness
of the argument that SOEs needed to be sold to reduce debt but acknowledged its
political convenience (Birchfield and Grant, 1994, p. 163).
From the beginning of New Zealands reforms, when the public sector accounting
systems were still cash-based, The Treasury (1984) advocated the adoption of
published macro-level fiscal targets, including a general rule of fiscal balance. Such
targets were adopted unofficially as part of the budgeting process, and these targets
involved efforts first to reduce government deficits, then to reduce government
expenditure as a percentage of GDP; and to reduce government debt as a percentage of
GDP. The publication of fiscal targets became official under S4A of the Fiscal
Responsibility Act 1994 (FRA) which in late 2004 was absorbed into the Public Finance
Act 1989. The legislation specifies principles of fiscal responsibility and requires
demonstration of consistency between the principles and the actual fiscal policies
adopted.
The principles of fiscal responsibility specify the application of any operating surplus
to repay debt until debt is reduced to an unspecified prudent level; and the need for
balanced budgets after that. Had they been legislated in a cash-based accounting
environment, these principles might seem reasonable. However, the Fiscal Responsibility
Act 1994 came five years after accrual accounting had been adopted throughout the
public sector in compliance with the requirements of the Public Finance Act 1989. In an
accrual accounting environment a reported operating surplus is not necessarily cash and
cannot, therefore, be expected to automatically reduce debt. Two brief examples may
help to illustrate this point. Unrealised gains from the revaluation of commercial forests
are reported in the operating statement and therefore included in the reported operating
surplus (available at: www.treasury.govt.nz/financialstatements/year/jun06/27.asp).
More worryingly, the modified equity method of consolidation used to prepare whole
of government financial reports from 1992 to 2002, meant that some increases in debt
were reported as revenue and included in the reported operating surplus, and reported as
operating cash inflows in the statement of cash flow[2]. It follows that a budget balanced
for accruals-based revenues and expenses also does not necessarily have any connection
with the level of debt.
The fiscal targets actually adopted, which are consistent with, but not the same as,
those specified in the FRA, are net debt as a percentage of GDP and expenses as a
percentage of GDP. Those targets have been lowered over time, the net debt target
being 35 percent at the time of its introduction when net debt was 43 percent, then
gradually reduced to 15 percent, while the current coalition Labour government has
claimed an intention to reduce it to zero by 2010[3]. The expense target began at 40
percent, then reduced to 30 percent but currently is 35 percent of GDP under the
Labour coalition government.
Comparison
In both the UK and New Zealand, the privatisation of some activities occurred quite
quickly, although it was not universally accepted by the wider electorate.
In both countries the macro-level rules seem intended to control total public sector
expenditure by limiting current year expenses to current year revenue, and imposing
limitations on capital expenditure, while suggesting that the controls imposed will
facilitate maintenance of a prudent debt level. In both countries, closer scrutiny of those
rules reveals misconceptions. One misconception, which is more applicable to New
Zealand than to the UK, is that there is an essential and controllable link between the
result reported in an accruals-based operating statement and the level of reported debt
such that a result balanced for revenues and expenses will automatically mean no
increase in debt. Accountants typically provide a statement of cash flow in addition to
an operating statement and balance sheet to show the adjustments necessary to
explain the links between the operating result and debt but, as shown in the modified
equity accounting example above, that too can be misleading[4]. The other
misconception overlooks valid reasons for borrowing money besides investment. In
the UK, where investment is over the economic cycle rather than the annual cycle, this
second misconception is less rigid and it has since been eased in New Zealand.
Micro-level accrual accounting
Much of the international discussion of accrual accounting in the reformed public
sector gives the impression that New Zealand led the world in all aspects. This is not
strictly true because an earlier accrual accounting development in both countries
achieved greater acceptance in the UK than it did in New Zealand. Nationalised
industries in the UK retained accrual accounting when nationalised and then took up
and retained current cost accounting (CCA) from the late 1970s even though the private
sector abandoned it. However, the adoption of accrual accounting more extensively in
the UK public sector following the public sector reforms was selective and might be
characterised as the non-application of UK GAAP rather than its claimed application
(Ellwood, 2003). Superficially at least, New Zealands accrual accounting developments
might be characterised as the application of NZ GAAP.
As noted above, the later move to adopt accrual accounting was accompanied by
efforts to commercialise the public sector. Although accrual accounting was advocated
as a means of improving management in the public sector, there was also an intention
to compare the full cost of services with outside suppliers as part of an effort to achieve
efficiencies. Other discussion at the time referred to the creation of a level playing field
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and the ability to achieve a read across between sectors. Possibly, these objectives
helped to motivate the introduction of private sector-style accrual accounting rather
than the development of accrual accounting practices specifically designed for use in
the public sector.
558
UK: the non application of GAAP

The UK has six professional accounting bodies, including one involved largely in the
public sector, the Chartered Institute of Public Finance and Accountancy (CIPFA, 1999).
This has meant some professional separation between public sector and private sector
accounting and accountants. It has also meant that new accounting ideas developed and
disseminated might be accepted in one sector and rejected in another. This was the case
with CCA, which was accepted in parts of the public sector despite rejection in the
private sector. The private sector accounting standard-setter, today the Accounting
Standards Board (ASB) has, at least until recently, tended to confine its attention largely
to the private sector. During the late 1990s, the ASB adopted a Statement of Principles for
Financial Reporting (SOP), a derivation of the conceptual frameworks adopted in other
countries, all of which are based on the Financial Accounting Standards Boards
conceptual framework. A feature of these conceptual frameworks is rejection of the
matching approach to accounting, which is fundamental to CCA. The ASBs adoption of
that conceptual framework, therefore, reinforced the differences in accrual accounting
ideas between the public and private sectors in the UK.
A marked feature of accrual developments in the UK public sector is variety in
approach, as discussed in Ellwood (2003). The Local Government Planning and Land
Act 1982 which applied to local authority Direct Service Organisations (DSOs) required
the use of accrual accounting, largely on a current cost basis, with current cost
depreciation and a return on assets required. A number of DSOs were set up as
separate reporting entities within local authorities so that competitive tendering could
be applied. These included, for example, highway maintenance, and refuse disposal.
CIPFA, together with the Local Authority Accounts (Scotland) Advisory Committee
(LASAAC) determines a code of practice for local authority accounting, and this is
formally received by the ASB as a Statement of Recommended Practice (SORP).
Some of the service areas remaining in the public sector after the early public sector
reforms were subject to New Public Management (NPM). This required movement to a
more commercial basis under purchaser-provider splits adopted in the National Health
Service (NHS) or compulsory competitive tendering/ best value arrangements adopted
at local government level. These commercialising NPM reforms were accompanied by
the selective introduction of accruals accounting. Those areas of the core public sector
that were not commercialised were not required to adopt accruals accounting either.
The use of accrual accounting on a current cost basis was extended to National
Health Service (NHS) Trusts in 1991, local authorities as a whole in 1995, and
departments of the central government from the 1999/2000 financial year. Departments
of the central government were required first to produce accruals-based shadow
accounts, and then to shift solely to the accruals regime from the 2002/2003 financial
years. Exceptions to current cost valuation requirements have been allowed for some
assets, local authorities retaining historic cost for reporting infrastructure assets, and a
notional amount for community assets, but the valuation methods required in central
government are largely current replacement cost.
The Government Resources and Accounts Act 2000 now requires accrual
accounting (known as resource accounting) throughout the public sector. Resource
accounts are required to present a true and fair view, and to conform to GAAP subject
to such adaptations as are necessary in the context of the departmental accounts. HM
Treasury has the responsibility to determine those adaptations for central government
accounting requirements.
Evidently, the move to apply GAAP was regarded as practical, a key advantage
being that, rather than having to devise a new framework, public sector financial
reports based on business sector GAAP would provide a read-across to the financial
reports of other organisations outside the public sector, assist the understanding of
those outside government who are already familiar with business-style accrual-based
financial reports, and require merely adapting an already established framework,
rather than creating a new one (Likierman, 1998, p. 19). However, whereas the public
sector has retained current cost accounting ideas, which rely on matching, the
conceptual framework, which is now supposed to guide standard setting, rejects
matching.
There are other differences besides those brought about by inconsistencies arising
from the continuation with current cost ideas. The application of private sector GAAP
has been selective, and involves deferrals of application of standards, modifications to
standards and generally accepted accounting practices, and efforts to influence or
reinterpret private sector accounting standards. After suggestions the international
financial reporting standards (IFRS) would be adopted in the public sector from 2005,
that move was deferred by a year. Ellwood (2002) provides examples of how the
Treasury in 1998 deferred the application of several standards in the NHS to allow
patient care, financial discipline, funding and practical implications to be properly
considered within the context of these Financial Reporting Standards. Modifications
to the application of standards mean that some standards are only partially applied or
modified. For example, the Resource Accounting Manual (RAM) lists several
accounting standards that are stated to apply only partially (for example, FRS2:
Accounting for Subsidiary Undertakings, and FRS3: Reporting Financial
Performance), or as adapted (for example, FRS5: Reporting the Substance of
Transactions, FRS10: Goodwill and Intangible Assets, FRS11 Impairment of Fixed
Assets and Goodwill, and SSAP 9). To take one example, FRS10 Goodwill and
Intangible Assets does not permit the revaluation of development expenditure but the
RAM states that development expenditure is subject to annual revaluation using
indexation.
The most well-known instance of the Treasury becoming involved in accounting
standard-setting issues is in relation to FRS5: Reporting the Substance of Transactions.
The Treasury and the ASB clearly disagreed over accounting for the Private Finance
Initiative (PFI), and the Treasury seemed determined to ensure such financing
initiatives were off-balance sheet. Amidst considerable controversy (Hodges and
Mellett, 1999), the difference in stance between the Treasury and the ASB was resolved
following the development of a Technical Note (TN99) which allowed public sector
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continuation of off-balance sheet arrangements under some circumstances, hence the

public sector application of FRS5 as adapted.
Although modifications such as these are claimed to be necessary for the specific
public sector context, the effect is to modify the business-style accounting practices
beyond recognition (Jones, 2000) while also projecting an appearance that public sector
and private sector reports may validly be compared.
Until recently, the ASBs announced position has been that the setting of
accounting standards for the public sector in the UK is a matter for the legislation
governing the bodies concerned, and the Accounting Standards Board has no direct
locus (Accounting Standards Board, 2003a, p. 7). However, the ASB has issued
discussion documents and an exposure draft reinterpreting the Statement of Principles
for public benefit entities, arguing that, with these reinterpretations, the principles are
equally applicable to public and private sector entities (Accounting Standards Board,
2003b, 2005). Those reinterpretations are similar to those applied in New Zealand and
Australia, the effect being significant but disguised differences between sectors (see
next section). This change in stance evidently reflects changed relationships, the chair
of the ASB having become head of the Government Accountancy Services, and
diminishing differences between the ASB and the Treasury over the application of
standards.
Application of NZ GAAP
New Zealand has only one professional accountancy body which, at least until the
early 1980s confined its attention to the private sector. Until 1996, this body was
known as the New Zealand Society of Accountants (NZSA), when its name changed to
the Institute of Chartered Accountants of New Zealand (ICANZ) and subsequently the
New Zealand Institute of Chartered Accountants (NZICA). Accountants in the public
sector tended not to hold NZSA membership, and the NZSAs effort to introduce CCA
in the late 1970s related to the private sector which rejected it. In the early 1980s, the
NZSA established a public sector interest group, which developed a conceptual
framework especially for the public sector (see Pallot, 1992, 1997 for a description).
This framework was subsequently rejected following a consultants advice to the
Treasury that a business-like (and therefore commercial) approach should be applied to
all government activities. The consultant observed that future public sector
performance assessments would rely on financial reports, and that financial reports
are a function of the accounting policies adopted. He advised the Treasury to restrict
allowable accounting policies (The Treasury, 1987, pp. 184, 188, 199-202)[5].
The corporatisation of SOEs as limited liability companies meant they were
required to adopt business sector-derived accounting standards. The Public Finance
Act 1989 applies to the remainder of government activities, and requires financial
reporting practices in accordance with generally accepted accounting practices
(GAAP) recognised in New Zealand as appropriate for the public sector. Although this
suggests the public sector might apply practices quite different from private sector
GAAP, events following friction over the appropriate accounting treatment for
infrastructure and heritage assets give the impression that GAAP is now the same in
both sectors. Treasury staff became closely involved in accounting standard-setting by
the NZSA which then adopted a purportedly sector-neutral approach to accounting.
The Treasury withdrew its earlier opposition to proposed legislation (the Financial
Reporting Act 1993) requiring companies to comply with accounting standards, and
shortly before enactment a requirement was added that the public sector be required to
comply with them as well (Treasury, July 1993; see Pallot, 1997 for comment about the
differing views over renewal accounting).
The Financial Reporting Act 1993 created a regulatory body, the Accounting
Standards Review Board. This board holds the delegated power to approve and thus
make legally enforceable accounting standards applicable to the private and the public
sectors. By this time, the NZSA had adopted a much abbreviated form of the conceptual
framework derived from that originally devised by the Financial Accounting Standards
Board, and subsequently modified and taken up in Australia. Although claimed sector
neutral, the conceptual framework uses one set of terms to refer to the various elements
of financial reports, but two sets of interpretations are applied. The result is that the
same terms have significantly different meanings depending on whether they are
interpreted for application to the public sector or the business sector (Newberry, 2001;
Barton, 2002; Carnegie and Wolnizer, 2002; Newberry, 2002b). The effect is deceptive
because the claim is made that accounting standards are neutral between sectors and,
therefore, facilitate cross-sector comparability of financial reports (Newberry, 2001,
2002b). In addition, some financial reporting standards contain modifying paragraphs
that either add requirements for the public sector or release the public sector from some
requirements. More recently, with the move to IFRS, New Zealands accounting
standard-setters are claiming their application to both the public and private sectors but
the standards are modified for application to the public sector. The standards are not
sector-neutral.
Comparison
In the UK and New Zealand, the projected appearance is that the form of accrual
accounting adopted is GAAP as developed initially for the private sector, and this in
turn gives the impression that public sector and private sector financial reports may
validly be compared. In each country the idea has been developed from a different base
but convergence is clear. A key difference seems to have been the level of cooperation
between the Treasury and the relevant accounting standard-setting body. In the UK,
until recently there was a clear difference of opinion between the two, whereas in New
Zealand, the relationship became closer and cooperative from about 1992. In both the
UK and New Zealand, however, the impression that sector neutrality or the ability to
read across sectors exists appears to be misleading. Of further concern is the manner
in which developments at an even more detailed level, intended to support competition,
potentially impact on performance assessments and comparisons across sectors.
Competition: the UK
With accrual accounting in place, one stated objective has been to allow the
comparison of the full costs of public sector services with the prices charged by other
providers (for example, Evans, 1995). Following the 1982 introduction of accrual
accounting using current cost valuation for local government DSOs, the DSOs were
required to measure and report the capital consumption involved in their activities. In
some aspects of their activities, they were also required to generate improved
efficiencies through compulsory competitive tendering (CCT).
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Similarly, the adoption of accrual accounting in the NHS in 1991 was accompanied
by the introduction of a purchaser-provider split and the creation of an internal health
market whereby hospitals were required to price their services to recover full costs.
Having adopted a current cost base for accrual accounting, the NHS trusts had to
include in their costs depreciation at current cost and a capital charge imposed at 6
percent of the reported value of their assets. This 6 percent rate equates to the then test
discount rate applied on public sector investments. It was lowered to 3.5 percent in
2003/2004, and 2.2 percent from 2005/2006. Similar requirements were subsequently
imposed on local authorities, and, more recently, departments of Government, which
adopted the accruals accounting regime from the 1999/2000 financial year. Given that
potential providers in the private sector quote prices, not full costs, and in any event
are not required to apply a current cost base for asset valuations, the requirements
imposed on the public sector bodies automatically have the potential for comparatively
high costs to result. The system as applied in NHS Trusts depletes operating capacity
as dividends at the set interest rate must be paid quarterly to the government even
when no surplus before interest arises.
Initially, compulsory competitive tendering (CCT) in which public sector full costs
were compared with prices quoted by non-public sector providers was conducted
openly, but it was controversial and unpopular. Later, although CCT seemed to cease,
various review processes were devised to allow officials to conduct comparisons. These
were known variously as Prior Options Reviews, Best Value Reviews, and
Comprehensive Performance Assessments. Osborne and Plaistrik (1997, p. 93) who
note the unpopularity of CCT describe such reviews in the UK as a clear the decks
procedure intended gradually and continuously to reduce the governments role.
Although later versions (for example, EFSR(98) suggest that other considerations
besides the direct financial comparisons also matter, the review processes rely heavily
on the numerical accounting information (Shaoul, 2005). As noted above, the validity of
the numerical comparisons is dubious because of the differences in accounting
requirements. In the absence of understanding of the differences between the two
sectors, the effect seems likely to result in judgements that public sector full costs are
unnecessarily high and therefore the public sector is inefficient.
Competition: New Zealand
The Public Finance Act 1989 required the adoption of accrual accounting throughout
New Zealands public sector. It included a purchaser-provider split by conceptualising
virtually all activities as the production of outputs. It requires that outputs be fully
costed (Public Finance Act 1989, s. 2, 4). That legislation also delegated to the Treasury
the power to develop more detailed rules (s. 79-81).
More detailed output specification and costing requirements were developed and
refined over a four-year period (1991-1994), the Treasury taking a dominant, and
controversial, role. Expectations were that public sector delivery of outputs would
reduce, and in developing the specifications, departments were encouraged to imagine
that their department did not exist, and they were assigned a budget to acquire the
same services through contracts (Scott, 2001, p. 179). This was consistent with the
machinery of government principles on which the reforms were based, which intended,
inter alia, that the emergence of competition would result in the cessation of public
sector functions (Treasury, August, 1988).
Ministers were advised that their role was to choose exactly what to purchase and in
what quantity; and to ensure that the individual outputs are value for money by
comparing the outputs offered by a department with those from other sources
(Treasury, March 1993). Their ability to perform this task was always doubtful, and
the Treasury offered to assist by performing an advisory function for ministers. The
Treasury proposed that it would advise ministers on both purchasing and how to
achieve cost reductions. In addition, the Treasury would perform efficiency
assessments and find alternative sources of supply (Treasury, February and
December 1993).
Stated expectations were that the creation of a competitively neutral environment (or
level playing field) and opening markets to external suppliers would prompt efficiency
improvements. However, as described in Newberry and Pallot (2004, pp. 252-253), the
terminology underwent subtle changes over time and rules were introduced which had
the effect of loading output costs. Important among these was the requirement to revalue
assets, which resulted in increased depreciation expense and increased capital charges.
Further, the rate of the capital charge was biased high intentionally (see Newberry and
Pallot, 2004, for explanation). Other documentary evidence suggests that in light of the
known public opposition to CCT in the UK, the operation of New Zealands public sector
financial management system was intended to bring about privatisation without
publicly visible pressure (Treasury, September 1992).
From 1993 when the Treasury lamented the lack of competition, it began to develop
rules that are more detailed and review processes. These seemed to increase
departmental costs. From these came exhortations and efforts to value and report
internally developed intangible assets (statistical databases, for example). These would
have increased output costs further because the increased amounts reported would
increase capital charges and amortisation, and because of the valuation and
compliance costs involved. This drive to impose increasingly detailed rules prompted
within-Treasury controversy about this growing information and accountability
leviathan (Gorringe, 1995, p. 21).
From 1996, forms of review by officials were introduced, beginning with the output
price review. These reviews are similar to the clear the decks reviews Osborne and
Plaistrik (1997, p. 93) mention but the Treasury had no mandate to conduct such
reviews, and had to work jointly with the State Services Commission (SSC) (1998). By
1998, after several such reviews, the SSC (December 1998) objected that the options
presented to ministers should not be limited to reductions and divestments of public
sector activities. Subsequently, similar review processes were designed into the
budgeting system, which the Treasury claimed as its sole responsibility. Although
these review processes, such as the Value for Money review, claim to take wider issues
into consideration the Treasury has acknowledged the logic is similar to the output
price review which focused on output cost comparisons (Treasury, December 1999;
November 2001). The imposition of various review processes clearly provides an
important means of protection of public money but, to the extent that the numerical
aspects of the reviews rely on the biased cost calculations required within the public
sector, the application of seemingly reasonable processes of review seems likely to
result in unfair judgements.
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In summary, although a competitively neutral environment (level playing field)

seemed to be a key objective accompanying the introduction of accrual accounting in
New Zealand, the increasingly detailed financial management and accountability rules
and review processes are biased. This disadvantages continued governmental service
provision in any efficiency assessment if the assessment is based on full costs because
the public sector option is automatically comparatively high.
Comparison
In both the UK and New Zealand, accrual accounting provides a base for full costing
processes and the introduction of competitive processes ostensibly intended to create a
level playing field. In both countries, however, that level playing field appears to have
been tilted, and the public sector bodies are playing uphill. This is consistent with some
findings reported in Australia (see, for example, Robinson, 1998; Guthrie, 1998; Guthrie
and Carlin, 1999). Developments over time suggest that the unpopularity of processes
applied more openly, for example, the UKs CCT, led to the use of less obvious means
the application of detailed review processes by officials, who focus on financial numbers
produced as if comparison is fair and valid. These misleading numbers, in turn, are
likely to be used as evidence in reports and proposals to ministers and the wider public.
Linking the macro to the micro
In both the UK and New Zealand efforts have been made to link the macro-economic
fiscal controls with the micro-economic budgeting processes. However, the thinking
behind such macro-level controls as balanced budget constraints is derived from
efforts to control aggregate expenditure in a cash-based environment, whereas both
countries have moved to accrual accounting. The imposition of such controls over
accruals-based expenses does not necessarily achieve the same effect.
The UK
The Treasury undertakes a comprehensive spending review biennially, which looks
ahead three years, although separate budgets and different criteria apply for current and
capital expenditure. The features of this review system are noticeably similar to the
PPBS strategic planning and budgeting system adopted in the mid-1960s. It includes
medium term programming for resources and short-term operational budgeting.
This comprehensive review begins at the macro-level with the macro-level fiscal
discipline targets[6]. It is claimed to achieve a combination of fiscal prudence and good
public services by ensuring that, within their spending limits, each department has
clear objectives, measurable targets and measures of efficiency. Some spending cannot
reasonably be subjected to firm annual spending limits because it is determined by
prior policy commitments. This includes social security, and Common Agricultural
Policy. For the remaining expenditure, which excludes the Local Authority Self
Financed Expenditure (LASFE), multi-year spending limits based in real terms are set
for a three-year period and rolled forward. However, the application of spending limits
to departments of government is not increased if inflation substantially varies from
forecast.
New Zealand
Shortly after implementation of the principles of fiscal responsibility, some means of
linking the information systems for budgeting with those of reporting the
governments finances was recommended (Scott, 1995, pp. 10-12). A separate
counting framework intended to provide this link was devised and introduced in
1997. From 2003, the counting framework has been incorporated in the budgeting
guidelines (Newberry and Pallot, 2003).
The counting framework is described in more detail in Newberry and Pallot (2003).
The rules are supposed to maintain expenditure control by converting the fiscal targets
for debt and expenses into dollar amounts, and then using those figures in conjunction
with a three-yearly rolling budget baselines regime, which maintains departmental
maximums in nominal dollar terms[7]. In the conversion process, the debt fiscal target
is converted to a capital expenditure figure by applying the erroneous assumption that
capital expenditure (but nothing else) increases debt. The counting framework
muddles debits and credits, as exemplified by converting the debt target into an
amount for capital expenditure. It also muddles accrual and cash-based accounting
ideas. For example, departments receiving accrual-based appropriations were expected
to retain cash over the longer term and replace their assets from their own resources,
with criticism resulting from failure to do so. At the same time, counting framework
adjustments meant no increase in resources when departments were required to
recognise pre-existing liabilities, such as superannuation liabilities, or non-output
expenses, such as restructuring costs. Instead they were required to use pre-existing
financial resources, which was the depreciation component of appropriations. In some
cases, as exemplified by the Department of Statistics, they have been required to fund
major projects into the future with the depreciation component of future appropriations
while also facing criticism for failure to save the depreciation component for asset
replacement[8]. The combined effect of the rules in the counting framework is to
incorporate a series of biases, which discourage the purchase or retention of assets in
favour of longer-term off-balance sheet arrangements such as operating leases.
Although the manner in which the fiscal targets are determined involves calculations
based on GDP and they are, therefore, adjusted in real terms, the budget baselines
regime imposes controls in nominal dollar terms, thus preventing any increase in cash
to departments.
The effect of the budget baselines regime on departments is to impose continued
downward pressure on the amounts of cash provided to departments by allowing
inflation to erode spending power (Barnes and Leith, 2001). Eventually, this forces a
bid for additional money. Initially, a precondition for such a bid was extreme
financial distress, and the prior application of an output price review, to which the SSC
eventually objected and alternative forms of review are now conducted as part of the
budgeting process (see above).
Comparison
New Zealand Treasury officials interviewed for Newberry and Pallot (2003) stated that
New Zealands rules linking the macro-level fiscal controls to the micro-level budgets
are similar to those in the UK. Worthy of note, therefore, is the function of the nominal
dollar spending levels, and the muddling of debits and credits and accrual and cash
accounting as outlined above.
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The link between the macro and the micro is deceptive. Superficially, the link
functions as a means of tracing the macro-level fiscal controls through to lower levels
but the macro-level limit is adjusted in real terms while the micro-level is tied to a
nominal dollar. This has the effect of tightly constraining the provision of cash, while
encouraging engagement in off-balance sheet arrangements such as operating leases,
and, notoriously, public private partnership arrangements. For example, in the UK the
Code for Fiscal Stability does not take into account the impact of finance leases on
public sector net debt as the impact cannot be accurately estimated FSBR 2006: C.34.
This further encourages private finance.
Discussion and conclusion
Stiglitz (2003) warned that seemingly technical economic policies advocated by such
supra-national agencies as the OECD, IMF and World Bank are more often based on
ideology than economic science. A detailed consideration of literature on accounting
and ideology is outside the scope of this article, but readers might refer, for example, to
Tinker et al. (1982). In both the UK and New Zealand, the three legs of the neo-liberal
iron tripod are apparent, namely, independently-administered anti-inflationary
monetary policy; macro-level fiscal disciplines imposed to achieve balanced budgets;
and micro-economic reforms to liberalise trade and to expand the business sector
(McKinnon, 2003, p. 316). A strong belief in markets underpins neo-liberalism. Efforts
to reduce the size of government would be consistent with the desire to foster and
encourage business activities. Accompanying the early neo-liberal reforms were
openly-pursued efforts to do this by privatising previously-governmental activities. In
both the UK and New Zealand, the early stages of these privatisation efforts mostly
involved the outright privatisation of some infrastructure-based industries, and were
defended at least partly as a means of reducing government debt. These privatisation
efforts were tolerated initially, but they soon became controversial and the subject of
considerable public opposition. More gradual, less visible processes seemed to follow,
some of which, as suggested above, are buried in seemingly technical details.
Advocates of privatisation (for example, Savas, 1982, p. 123) propose various ways to
proceed with privatisation gradually which run less risk of bruising ideological battles
than methods pursued openly. These include running down public services and
encouraging natural forces to develop markets in those formerly public services.
Arguably, the pursuit of such policies is assisted by the manner in which accrual
accounting has been and is being developed in the public sector in both the UK and New
Zealand. The fiscal controls and budgeting processes facilitate the withholding and
withdrawal of financial resources from public sector operations, thus forcing service
reductions and the running down of services. The more detailed accrual accounting
requirements, especially revaluation requirements and the imposition of charges based
on the revalued assets (depreciation and capital charge) which load the full-costs required
for comparison with potential alternative suppliers and are used in the various review
processes are biased against continued public sector provision, and thus support and
encourage business activity by suggesting public sector services are inefficient. The
manner in which accrual accounting has been developed in the public sector has the effect
of privileging decisions, which advance the privatisation aspect of the neo-liberal agenda.
That an underlying privatisation agenda continues becomes apparent only
occasionally. For example, in the UK, the NHS improvement plan states as an objective
that by 2008 the independent sector will provide 15 percent of procedures on behalf of
the NHS. Occasional policy documents released in New Zealand reveal similar aims
but, for the most part, the moves to privatisation seem to depend for their legitimacy on
demonstrations of public sector ineptness or inefficiency. The detailed rules designed
into the public sector financial management systems in both countries seem likely to
cause both, the withholding and erosion of financial resources reducing the capacity of
public sector services to function, and the accrual accounting requirements loading
reported full costs.
This research relates only to the UK and New Zealand, but the Chancellor of the
Exchequer, Gordon Browns introduction to HM Treasury (Brown, 2002) raises
questions about the extent to which similar developments are being pursued
internationally.
Just as in the mid 1940s a new British economic policy was matched by the high ideas that
brought the creation of the World Bank and the IMF, so too at the turn of the century the
same high ideals are driving change from debt relief to major reforms in the international
financial architecture. We must, at an international level, build a new consensus . . .
ensuring countries have in place the macro-economic, financial, structural and social policies
for long-term success in the global economy. For this reason we have been active in
international institutions such as the G8, the IMF and World Bank . . . And while much
remains to be done before a new international financial architecture is in place, I believe we
are making progress.
Given Stiglitzs warning, and the findings reported here, issues for continued and
future research include scrutiny of the public sector accounting developments
advocated and imposed by supra-national organisations, and of the detailed nature of
their efforts through the International Federation of Accountants (IFAC) to standardise
public sector accounting world-wide. Even more important for future research is the
need to ensure the fundamental purpose of governmental accounting, protection of
public money, receives due attention and is strengthened rather than weakened as
seems to be the case, at least in New Zealand (Newberry and Pallot, 2005).
Jones (1992) commented that the function of governmental accounting is to control
peoples behaviour by encouraging or discouraging particular actions. This makes
clear that accounting in the public sector should not be represented or regarded as a
neutral technology. It is accepted that there is value in the use of accrual accounting in
the public sector, but the manner and form in which accrual accounting has been
introduced and developed results in the presentation of accounting data as if it may
validly be compared with business sector accounting information. Arguably, this
supports advancement of neo-liberal policies of privatisation and trade liberalisation
by providing biased and misleading data. If this effect has been brought about
knowingly, it might be regarded as exemplifying information-based agenda control
through which the amount and type of information produced and made available is
intended to influence decisions and policy outcomes (Rubin, 1992; Bendor et al., 1985).
The suggestion that this accrual accounting development in the public sector is merely
the application of business sector practices intended to provide a read across or be
sector neutral misleads. Areas for future research include closer scrutiny of the
overall effect of public sector financial management reforms, as well as the role of, and
implications for, accounting standard-setters.
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Files obtained under the Official Information Act (predominantly Treasury files and
archives of former Ministers of Finance, Ruth Richardson, and David Caygill)
Date
File number
(if any)
August 1988
November 1989
August 1991
September 1992
CM88/32/8
Treasury/SSC
T91/3516
T92/2652
February 1993
T93/233
March 1993
July 1993
T93/434
T93/1792
December 1993
T93/2951
March 1997
December 1998
December 1999 T99/61
November 2001
Title
Source/archive
Corporate planning resource allocation process

Report on departmental incentives
Financial disclosure
Reply to contracting out proposal from Mr
Michael Cox
Enhancing vote analysis as part of Treasurys
core business
Purchase agreements
Financial Reporting Bill: Applying GAAP to the
public sector
Purchase agreements
Caygill U537
Treasury
Richardson 721
Richardson 794
Statistics New Zealand Output Price Review

Future application of output pricing reviews:
incentives, options and strategies
Value for Money in the Public Sector
E-mails to S. Newberry
Richardson 1093
Richardson 817
Richardson 909
Richardson
FM/2/13
Treasury
Treasury
Treasury
Treasury
Notes
1. For example, water, sewage, local roads.
2. The governments financial statements for 1997 demonstrate how increases in SOEs debt
could be reported as revenue to the government. These are available at: www.treasury.govt.nz/
pubs/fmb/CFS97/contents.htm. Note 9 explains the modified equity method of consolidation
under which dividends received from SOEs are reported as revenue, and then the total net
surplus/deficit of SOEs, net of the dividends already reported as revenue is shown before
achieving the reported operating balance. A change in company law in 1993 removed the
earlier earned income limitations on dividend payments, and this meant dividends paid could
exceed reported profits, and in the case of some SOEs did exceed reported profits (see Note 9).
One SOE, Contact Energy Ltd, an electricity generator, was split off from another SOE in
November 1995, with the government holding 100 percent of its shares. It was required to
borrow to help finance the assets with which it was established. For its financial year ended on
30 September 1996, it reported a deficit of NZ$32 million. Following a decision in 1996 to
increase the Contact Energy Ltds gearing, the SOE paid to the government a dividend of $150
million. The state of the Contact Energy Ltds balance sheet at the time makes clear that it
would have been forced to borrow to pay the $150 million dividend (see, www.contactenergy.
co.nz/web/pdf/financial/1996_annualreport_financials.pdf) The modified equity method
adopted to incorporate SOEs into the whole of government financial reports meant that the
SOE borrowings, effectively, forced to provide the dividend, were reported in the whole of
government financial report for the 1997 financial year as investment revenue, and in the
statement of cash flows as operating cash inflows (available at: www.treasury.govt.nz/pubs/
fmb/CFS97/contents.htm pp. 40, 43, and Note 3). Although there is a further relatively small
adjustment to the governments operating statement to pick up the difference between the total
of dividends received and the reported results of the equity accounted entities, the presentation
conceals the fact that the dividends came from only a few SOEs, some of which had to borrow.
Some of the reported investment revenue is, in fact, borrowings.
3. Net debt is calculated by offsetting financial debt against particular financial assets.
Consequently, it may be lowered by increasing investment in financial assets rather than by
reducing debt.
4. Not only did the modified equity method result in an increase in debt to the SOE being
reported as revenue and operating cash inflows in the whole of government financial report,
that method also meant that the SOEs debt was off-balance sheet to the whole of
government financial report.
5. Much of the detailed information reported here is drawn from Treasury documents accessed
under the terms of the Official Information Act 1982 and drawn from Treasury files and the
archives of two former Ministers of Finance (Ruth Richardson and David Caygill). Because
these are not easily accessible reference, where possible is to published sources. Where
reference is directly to these documents, they are identified by month and year, and listed in
the references separately from the publicly available sources.
6. These macro level fiscal targets are based on national accounts definitions (Government
Finance Statistics) which are reconciled to the Departmental Expenditure Limits (DEL) and
Annually Managed Expenditure (AME).
7. Although the baselines establish maximum nominal dollar figures, the budgeting guidelines
contain various processes, which reduce amounts under particular circumstances.
8. In 1997, the Department of Statistics was criticised for spending all of its depreciation as it
goes . . . This means that either the Crown will have to fund the shortfall (something it is
unlikely to favour given that it has already funded it once), or SNZ will have to run cash
surpluses until such time as an adequate reserve is established (Treasury, March 1997). The
means by which the department was brought to this state is explained in a little more detail
in Newberry (2002a). The Department of Statistics Annual report for the following year
(1998) revealed continuing barriers to its ability to save for asset replacement. A $24.2
million project it had commenced in 1996 had received direct funding of only $18 million.
The department was required to fund the remaining $6.2 million with the depreciation
component of future appropriations (Statistics New Zealand, 1998).
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Further reading
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York, NY.
Corresponding author
Susan Newberry can be contacted at: S.Newberry@econ.usyd.edu.au
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UK: the non application of GAAP

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continuation of off-balance sheet arrangements under some circumstances, hence the

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In summary, although a competitively neutral environment (level playing field)

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Corporate planning resource allocation process

Statistics New Zealand Output Price Review

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Meckling, W. (1978), The political biases of Keynesian economics: comments, in Buchanan, J.

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