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Institutionalization of accrual
accounting in the Indonesian
public sector
Harun Harun
Accrual
accounting
257
The authors would like to thank Professors Jan Bell and Prem Sikka and other participants at the
Second Global Accounting and Organisational Change Conference in Boston 2010 for their comments
and advice. The authors sincere thanks also go to Professors James Guthrie and Jesse Dillard for the
suggestions they provided during their recent visits to the University of Waikato, Hamilton,
New Zealand. The authors would also like to thank Professor Stewart Lawrence and other
participants for their comments at a seminar held by the Department of Accounting, University of
Waikato in April 2010. Finally, the authors give special thanks to the anonymous reviewers of this
journal who provided informative and constructive comments on earlier versions of this paper.
Journal of Accounting
& Organizational Change
Vol. 8 No. 3, 2012
pp. 257-285
q Emerald Group Publishing Limited
1832-5912
DOI 10.1108/18325911211258308
JAOC
8,3
258
1. Introduction
Political reforms and shifts in political power tend to influence accounting and
managerial systems in the public sector generally (Mimba et al., 2007; Chang, 2009).
Such influence may also be felt in developing nations. This certainly appears to be the
case in Indonesia where accounting system change has occurred in a nation marked by
instability and radical change over the last 13-20 years. Under previous administrations,
including the Suharto era (1966-1998), the highest office holders (the President and
Parliamentary members) as well as governors and mayors at the local level were elected
only from state-approved parties (Baswedan, 2007; Fitrani et al., 2005). After the Suharto
regime collapse in 1998, reforms occurred which allowed all parties to be represented
and were a step in Indonesias somewhat uneven movements toward establishment as
a modern democratic state. Successive administrations have imposed reform on
Indonesian systems, laws and practices.
In the Indonesian public sector, such reforms have resulted in movements to decentralize
local government management and to improve the quality of public sector reporting.
In accordance with statutory law approved after 1998, changes were made to the role of
Central Government in creating greater independence for its members and in requiring
reports that are in accordance with internationally-inspired accounting standards. Many of
the governments initiatives appeared to draw from the International Monetary Fund
(IMF), the Asian Development Bank (ADB, 2001) and the World Bank as guidance for
policies designed to achieve better governance and transparency (Nasution, 2008).
These reforms were undertaken by a number of post-Suharto administrations
including those led by Presidents B.J. Habibie (1998-1998), Abdurrahman Wahid
(1999-2001), Megawati Sukarnoputri (2001-2004) and Susilo Bambang Yudhoyono
(2004-2009, 2009-2011). Under the banner of conducting meaningful change, public
budgeting and operational outcomes are now reported, scrutinized and audited in
accordance with the managerial practices similar to those used by the private sector. The
adoption of the accrual accounting system (AAS) in the Indonesian public sector is thus
part of an international trend at the time to ensure that public officials are held to account
and that public money is used efficiently and effectively (Alam, 1997; Guthrie, 1998;
Ryan, 1999; Saleh and Pendlebury, 2006).
Despite such lofty ambitions, studies on such public sector accounting reforms in
developed nations such as Australia and UK indicate no clear benefits from their
adoption (Carlin, 2005; Connolly and Hyndman, 2006; Christensen, 2007). In some cases
such changes have wrought unintended, and undesirable, outcomes (Vamosi, 2000;
Hassan, 2005; Othman et al., 2006; Andon et al., 2007, Norhayati and Siti-Nabiha, 2009).
For example, the adoption of an activity based-costing system in a public sector
(company) in Portugal was met with resistance from production engineers and rejection
by workers (Major and Hopper, 2005). Similar problems were found to have occurred in a
Malaysian public sector organisation by Nor-Aziah and Scapens (2007) where
institutionalization created conflict and tension among workers. Chow et al. (2007, p. 48)
conclude that the global enthusiasm for adopting business-style accounting systems in a
public sector context is [. . .] not supported by strong, detailed empirical evidence.
Drawing from these patterns, and the concerns they raise, it appears that implementing
business-style accounting techniques provides no guarantee that efficiency, transparency
or effectiveness will occur in response. As Ter Bogt and Van Helden (2000) and Nor-Aziah
and Scapens (2007) find, the rules about accounting reporting systems may change
and new types of reports may be produced, but these changes do not necessarily improve
the attitudes and behaviour of people using them. Therefore, it is important for policy
makers and accounting researchers to see the adoption of a private style accounting
system as not merely instrumental but also to understand it within its managerial,
organizational and social contexts (Bale and Dale, 1998). This is our concern in asking the
how one municipality in the Indonesian public sector responds to the imposition of a
private-like sector accounting in the post-Suharto era.
The paper is structured as follows: the research objective is stated and prior literature
is discussed, the theoretical framework and focus of the investigation are then
introduced. Methods and data analysis are presented, findings are drawn, theoretical
implications of the studys findings are presented and then conclusions and
contributions of the study are clarified. Finally, the paper indicates limitations of the
study and suggestions for future studies.
2. Research objective and prior literature
This study examines the institutionalization of an AAS in one local government of the
Indonesian public sector. Drawing on this purpose the research questions of the study
are as follows:
RQ1. How and why has the AAS been adopted?
RQ2. How has the AAS been implemented in one municipal government?
By answering these questions this study will place these events within a social,
economic and political context so as to demonstrate the imposition of AAS on one
administration within a rapidly-changing developing nation.
This study responds to calls for better understandings of the process and
implications of a governments decision to adopt business style accounting techniques in
the public sector. Siti-Nabiha and Scapens (2005) and Chow et al. (2007) suggest that such
studies not only need to look at the process of institutionalization at the macro level, but
also the dynamic features of its institutionalization within an organization. This is
important as the features and the institutionalization of an accounting system depend on
the actions of actors at the social and organizational levels (Dillard et al., 2004).
Such research in developing economies is also needed (Marwata, 2006; Sharma and
Lawrence, 2008; Rahaman, 2009). Prior Indonesian studies on post-Suharto public sector
accounting are limited to examining legal frameworks and accounting techniques
employed (Prodjoharjono, 1999; Marwata, 2006), and potential problems encountered at
the national level (Harun, 2007). Although these studies and the concerns they raise
have provided reasons to further examine public sector accounting reforms, the
institutionalization of such reforms is yet to be understood. There is also a substantial
literature that challenges the appropriateness of using business-style systems for public
sector organizations generally, some of the more recent of which include, for example,
Christensen and Parker (2010), Van Peursem (2009), Christiaens and Rommel (2008),
Christensen (2007), Connolly and Hyndman (2006) and Carlin (2005).
Public sector accounting research itself has now ventured beyond economic-based
theories and has adopted social theory to explain complexities and to uncover roles of
power and interest in policy formulation and accounting technology (Covaleski et al.,
1993; Rebiero and Scapens, 2005; Nor-Aziah and Scapens, 2007; Hopper and Major, 2007;
Monteiro and Aibar-Guzman, 2010). Studies in a number of Western nations have
Accrual
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emerged from this trend, some finding that political reforms and shifts in political power
affect economic and managerial arrangements in the public sector (Ryan, 1999; Guthrie,
1998; Lapsley and Pallot, 2000; Siti-Nabiha and Scapens, 2005; Mimba et al., 2007; Chang,
2009). In this sense:
[. . .] accounting scholarship is undergoing a reconceptualization in part due to the empirical
failure of efficient market theory, agency theory and contingency theory to provide rationales
for developing accounting techniques and systems (Dillard et al., 2004, p. 506).
This study also draws on social frameworks to contextualize and explain the need,
opportunity and rationales surrounding the institutionalization of accrual accounting
into an Indonesian public sector municipality.
3. Theoretical framework
One theoretical informant that has been used to evaluate public sector accounting
reforms is New Institutional Sociology (NIS). As claimed and practiced by, for example,
Covaleski et al. (1993), Broadbent and Laughlin (2005), Nor-Aziah and Scapens (2007),
Dambrin et al. (2007) and Norhayati and Siti-Nabiha (2009), NIS provides a valuable lens
to inform the process of organizational and accounting change. It is said have particular
resonance in the public sector because of the need for budgeted organizations to achieve
legitimacy with its public fund provider (Fowler, 2009, p. 172).
Findings on such matters have indeed emerged. Over a decade ago now, Lapsley and
Pallot (2000) used NIS to investigate changes in public sector reporting systems in
New Zealand and the UK to discover external legitimation practices and economic
pressures. Ter Bogt and Van Helden (2000) applied NIS in The Netherlands public
sector to find that accrual was made mandatory but did not necessarily translate into
practice. It seems that simple adoption of a new accounting practice cannot therefore be
assumed to change real attitudes or real practices in the public sector.
These studies also highlight the value of examining the social and political contexts
in which such public sector accounting policy is formed. In Canada, Baker and Rennie
(2006) used NIS to evaluate public sector accrual accounting practices in the Canadian
Central Government. Nor-Aziah and Scapens (2007) employed NIS to investigate
institutionalization in the Malaysian public sector accounting to find that adoption is
neither linear nor simple. Also in Malaysia, Norhayati and Siti-Nabiha (2009) found that
that the intention to institutionalize a new performance measurement system cannot be
realised if there is a lack of (external) pressure, and they point to isomorphic and mimetic
influences that lead to ceremonial adoption (also see Burns and Scapens (2000) and
Sharma and Lawrence (2005) on similar points). Durocher and Fortin (2010) examine
legitimacy motivations in the Canadian Accounting Standards Board to find the
presence of cultural cognitive legitimacy pressures from the USA and internationally.
Together, these studies suggest to us that there is a reason to engage in research that
looks at broad landscapes within specific contexts and to understand the motivation of
actors involved.
Although NIS-based studies have been useful in explaining change at the
organizational field or level (DiMaggio, 1987; Norhayati and Siti-Nabiha, 2009), [. . .] less
theoretical consideration is given either to the processes whereby new institutional
practices are established, transposed and decomposed [within their] [. . .] political
context (Dillard et al., 2004, p. 507). This is important because the direction that the
Accrual
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Ideals
262
Table I.
Stages of
institutionalization
Figure 1.
Stages of
institutionalization
Management culture
Distribution of power
Ambiguous
A perverted conception of
innovation is slowly
emerging (through
replication concerns)
Conflicting
Shift towards a bypassing
of both the doctor and the
drug representative
Accountability principles
Conflicting
Promotion of a more
managerial conception of
accountability (sellerside
vs scientific side of the
drug representatives job)
Discourse
In discourse, profitability The dominant department Discourse requiring a
is either a means or an end clearly remains the sales
greater level of commercial
depending on the target
department
efficiency from drug
audience
representative is developed
Performance measurement
Techniques
Marketing techniques
Recruitment of less
and remuneration system
designed to satisfy new
scientific profiles in the
become increasingly
replication concerns (e.g.
sales and marketing
profit measurement of
departments. Recruitment similar to the one used in
of management controllers the consumer goods
promotional operations)
from the consumer goods industry (behaviour-based
added to result-based
industry as vectors for
assessment)
change
Internalisation Loose coupling
Decoupling
Decoupling
Decoupling is maintained
Techniques are partly used Sales department retains
the right to have the final because of both legal and
in a ceremonial way but
they seem to be
say in the decision-making organisational culture
constraints
increasingly accepted
process
Source: Dambrin et al. (2007, p. 177)
when the actors [. . .] view the practice as valuable and become committed to the practice
(Dambrin et al., 2007, p. 176).
When institutionalization fails, a policys intent may be lost. That is, and according to
Dambrin et al. (2007, p. 176): [. . .] without internalisation, there is loose coupling or
decoupling and practices are adopted on a ceremonial basis. Thus, the success of the
institutionalization process lies in the internalization of the rationales for which the new
system was required and can only be compete if the initial ideals (such as using accrual to
improve efficiency and accountability in a public sector) are reflected in the actions of
people who adopt it. Institutionalization occurs when [. . .] the rules are coherently linked to
the actions (routines) of actors [in a specific organization] (Burns and Scapens, 2000, p. 6).
There is thus a relationship, and an order, between new ideals, new discourses, new
techniques and internalization (Dambrin et al., 2007, p. 178).
Dambrin et al. (2007) found that the process of institutionalization of a management
control system in a pharmaceutical company was implemented by managers as a means of
enhancing efficiency. However, they also found that it is difficult for a new system to be
internalized where existing practices coexist with the emerging ideals, and systems of
control occur in ways not intended. They highlighted how discourses of organisational
actors even go so far as to contradict the ideals and control techniques intended for the
systems (Dambrin et al., 2007, p. 201).
Thus, and as applied to the institutionalization of an AAS in a public sector
organization, the Dambrin et al. (2007) IPM model is useful to focus the investigation on
processes such as:
.
the formation and communication of the need to implement an AAS (new ideals);
.
a mobilization by government and lobbyists to create policy that is consistent
with that need (new discourses);
.
the formulation of standards, rules and procedures (new techniques); and
.
the production of such reports, their dissemination and their use in a manner and
for a purpose consistent with this intent (internalization).
Accrual
accounting
263
Focus of investigation
Dissemination of new ideals which require the adoption of AAS in the
Indonesian public sector
Mobilization by actors leading to the passing of a legislative policy to develop a
set of accrual accounting standards
The formulation of a set of new accounting standards
The production and use of accrual accounting information for the intended
purposes highlighted in the Law 17 (2003) and GASt
Table II.
Focus of this
investigation
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users of government reports (Mignot and Dolley, 2000). Users of government reports
may include managers, politicians, creditors and tax payers. In developing nations,
international financial authorities such as the IMF and the ADB are also influential
(Sharma and Lawrence, 2008; Rahaman, 2009). Hence any such study should incorporate
the interests of these stakeholders.
The interviewees at the national level were chosen to capture the view of those who
have involved themselves in disseminating AAS ideals in the Indonesian public sector and
those formulating the accrual-based Government Accounting Standards (GASt). These
participants are or were affiliated with the Indonesian Ministry of Finance (MOF), the
National Parliament, the Ministry of Internal Affairs (MIA), the State Audit Board, and
the Committee of GASt.
At the local level, interviews were conducted with people in the municipality who
were directly involved in preparing and (potentially) using the accrual-based reports of
the municipality. Those interviewed include senior officials in the divisions of financial
and asset management, planning, internal auditing, and human resources. Outside the
municipality interviews were conducted with those who assisted the municipality
prepare its reports including financial consultants and certified accountants. Potential
users interviewed include local parliamentary members and activists of a
non-government organization (Table III).
Questions asked were formulated in accordance with the roles of each participant. For
example, the participants at the national level were asked about the process leading to the
formulation of the AAS regulations and standards. Participants from the municipality
were asked to discuss the processes for which they were responsible or in which
Group of participants
National level
Table III.
Details of participants
Number of
participants
16
20
36
they engaged. We employed a list of interview questions, however to keep the interviews
flowing in a natural way, the questions were not used in a strict manner to allow
participants to openly reveal relevant information as much as possible.
The interview approach is in accordance with the notion that in a case study a
researcher can interview people from different settings (organizations) to facilitate
multiple levels of analyses (Yin, 2009). Interviewing participants from different
groups of stakeholders or professions (i.e. manager of an accounting unit, preparers
and users of government reports and media) has been adopted in previous public
sector accounting studies (Jones and Puglisi, 1997; Van Peursem and Pratt, 1998;
Mignot and Dolley, 2000; Christensen, 2002; Mack and Ryan, 2006). Interviews ran
from 60 to 90 minutes. The interviews were held in the offices of participants and
recorded, and later transcribed and translated. A summary of each interview was
formed and reviewed with each participant as soon as possible after the interview via
a separate telephone or personal contact to ensure that their views were appropriately
represented.
Following Yins (2009) recommendations, and once the collection of data was complete,
comments were systematically categorized using classifications found within the IPM
framework provided by Dambrin et al. (2007). Data was then coded, categorized and
labelled. Results reveal patterns which indicate the emergence of ideals calling for accrual
accounting information in the Indonesian public sector, the process of formulating
government law and policy on AAS, the formulation of accrual-based accounting
standards and that which demonstrates how and why the AAS was internalized in one
Indonesian municipality.
In addition, the data were tabulated into categories such as the period of time, people or
organizations and the character of specific actions from specific actors. This was useful in
coming to an understanding of the nuances and complexity of the situation. As the
interviews were conducted in the Indonesian language, and as most of the documents used
are also written in that language, translations to English were undertaken by the first
author. To ensure accuracy of translations, a selection of the interviews and documents
were reviewed (twice each) by two Indonesian-speaking individuals in New Zealand. The
Dambrin et al. (2007) model was helpful in identifying and categorizing the data into
specific themes and patterns. The interviews concluded in 2010.
5. Findings and discussion
This section introduces the public sector accounting structure in Indonesia followed by a
discussion of the institutionalization of the AAS in one municipality within the Indonesian
public sector as informed by the IMP model.
The public sector accounting system in Indonesia is comprised of reporting systems for
a central and for all local governments and entities. The latter includes, for example,
municipalities and publicly-owned organizations such as schools, universities, and
hospitals and state-owned companies. Before the issuance of Indonesian GASt in 2005,
agencies and departments at all levels used the cash based system inherited from the
primarily-Dutch colonial era. Exceptions are state-owned companies which have used
the private sector reporting standards (Nasution, 2008). The public sector accounting
reforms referred to earlier have now required the adoption of AAS for all of these sectors.
The following evaluates patterns in terms of IPMs new ideals, new discourses, new
techniques and internalization.
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The 1983 oil-price-driven fiscal crisis was indeed very damaging to the economy and
concerns as to its impact was well-publicized. High rates of inflation and public incidents
of social tension were in evidence in the late 1980s and 1990s (Hill, 1999; Papenek, 1993;
Nasution, 2008). Indonesias Central Government was under yet more pressure following
the 1997 Asian financial crisis (Boediono, 1999). Internal political divisions and threats
of secession raised further warning signs for this government. According to a World
Bank report:
Latest events in Indonesia bear out the key message of our most recent economic report
that the countrys newfound economic stability remains highly fragile. The sudden upsurge
in violence in East Timor and the disturbing implications of the Bank Bali affair have shaken
market confidence. These developments have interrupted [. . .] an otherwise steady march
toward economic stabilization (World Development Bank, 1999).
There were even questions as to whether Indonesia was a failed state (Wanandi, 2002).
Reliance on oil revenues to cover up government expenditures or mismanagement was
no longer viable. An academic interviewed shared his view of events:
[During the 1980s] we simply needed a better recording system to ensure that public money
was properly spent for a better result (Interviewee 2).
Macro-political events ultimately led to the fall of Suhartos Government in 1998 and the
last autocratic regime. The Indonesian bureaucracy, now freed from direct autocratic
control, was more able than perhaps ever before to promote transparency. The second
major influence appears to have been sourced in western practices which found
advocates in Indonesias MOF and MIA officials. A number of public sector accounting
reforms had recently occurred in Australia, New Zealand and the UK in particular
(Van Peursem et al., 1996; Ryan, 1999; Lapsley and Pallot, 2000; Sharma and Lawrence,
2008; Chang, 2009) and this would have been heard by Indonesian technocrats. Such
reforms were marked by conversions from cash-based to managerialist and
accrual-based accounting systems for public sector assets and reporting.
Given such economic pressures, and the existence of overseas alternatives, some
elements within the Indonesian Government sought to require the adoption AAS. This is
clearly indicated by a MOF 1987 initiative. As documented therein, the old cash-based
accounting system inherited from the Dutch rule was seem to be insufficient to cope with a
fiscal crisis or to be useful for those managing the increasing volume of economic
resources now controlled by the State (Prawiro, 1987; Papanek, 1993). The growing
democratization of Indonesian Government, and its growing complexity as a result,
made it more difficult for cash-based budgets to be acceptable as a means of accounting for
the Indonesian public sector. Prawiro (1987, p. 10) himself states:
In broader terms, the accounting and financial reporting systems as practiced in Indonesia
today [. . .] [were promulgated for] measuring and reporting compliance with budget limits set
by the Parliament. [. . .] the old accounting [systems] [. . .] have failed to keep pace and have
become strained beyond their limits.
Such efforts to encourage AAS echoed the sort of rhetoric found in public sector
accounting reforms common to the time (Guthrie, 1998; Lapsley and Pallot, 2000).
Overseas practices including AAS thus became the new norm and led to
what we consider to be normative institutional pressures for reform. These ideas of
the normative draw from Deephouses (1996) analysis of commercial banking
(Deephouse and Suchman, 2008) and Scotts (1991) analytical framework offering
pillars of institutional framing. The normative, referring to norms and social
obligations, is often acquired in the education of influential professionals (Kury, 2007,
pp. 370-372). These influences indeed did occur in Indonesia. In particular, ministry
officials did not come by their views in isolation but appear to have been inspired
by lessons they brought home from overseas (western) experiences and from the
public sector accounting rhetoric of the time. A former senior official in the MOF points
to this factor:
There were only a few high officials in the Ministry of Finance who [were] concerned with
that matter [but] they were mainly educated in Western countries (Interviewee 1).
So for example Budiono, the deputy governor of Bank Indonesia in 1997-1998 who was
later MOF received degrees from the University of Western Australia and Monash
(Australia), and a doctorate from Wharton (USA).
Calls for change led by the MOF, led to other internal voices such as those within
Central Government and Parliament itself for AAS:
They [national Parliamentary members] supported the implementation of a more accountable
and transparent [reporting system] in this country (Interviewee 2).
Finally, there was direct pressure for reform from external supporters such as the USA
(Chomsky, 1998; Wanandi, 2002). External financial providers also set out expectations
including the IMF which had a history of supporting Indonesia (Boediono, 2002), and the
ADB via their Country Assistance Plan. ADB documents of the time also revealed
serious concerns with the quality of Indonesian accountability (ADB, 2011a, b). This is
not surprising as corrupt transfers of government funds had become such a problem in
1997 and 1998 that as much of 30 percent of World Bank funds may have been diverted
for corrupt uses (Fried, 2011). Funding providers were demanding accounting system
reform (Fried, 2011).
Lack of transparency and accountability were thus the root causes for concern, a
belief widely held by influential parties both at home and overseas. In a sense, such
discourse not only indicated a competition between government and non-government
actors as was suggested by Christensen and Parker (2010), but also between and
among government actors themselves. Together, a new norm was being established as
ideal, and this encouraged and encompassed the use of AAS in the Indonesian public
sector. Prior to Suhartos demise in 1998 however, these normative pillars were not
successfully transformed into new ideals. Neither new discourses nor new techniques
had been formed at the time.
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Such reforms, via statute, included the adoption of direct elections for president and
local officials (governor and mayors) and also greater autonomy for local governments
(Baswedan, 2007). This is significant as to be discussed later in terms of understanding
a local municipalitys budgetary power.
One statute issued during this period of time established the new accounting ideals into
law. This was Law 17 (2003) which itself uses the language of reformers in Australia and
New Zealand: that is, to enhance accountability, transparency and efficiency of
government institutions (Law 17/2003). Law 17 specified that every government official in
the country has the responsibility to ensure that public sector financial management
practices are undertaken in accordance with stated principles including, again drawing on
Western language, efficiency, effectiveness, tranparency, public accountability and
fairness (Law 17, para-1). This may not appear to be out of the ordinary for readers
accustomed to practices in Western societies, but this introduced new principles into
Indonesian law in defining basic principles necessary for the financial management of the
Indonesian public sector. Law 17 also required the adoption of AAS:
[it required the] public sector to produce accrual based reports (Interviewee 4, An academic).
Law 17 was drafted by MOF bureaucrats, met no formal resistance when tabled and
passed Parliamentary vote with little revision or opposition. It was thus a strong
statement that led to significant changes in the types and content of government
financial reports for organizations at both the national and the local government levels.
Other law reforms reinforced or provided the foundation on which these changes could
occur. In Laws 22 and 25 (1999) the Central Government of Indonesia grants autonomy to
local administrations for financial, management and budgeting arrangements. This
means that they are not only held to account at a local level, but are also responsible for
reporting in the particular manner required. Law 15 (2006) was imposed to strengthen the
role of the State Audit Board. This statute gave the State Audit Board of the Republic of
Indonesia, now an independent body, the right to perform financial, performance and
special purpose audits as they see fit. Under statute, the board has the right to determine
the audit objective and plan, and empowers them with reasonably wide authority to do so.
This strengthened the constitutional role and also built on the November 2001 statute
(which itself required the use of professional auditors).
Also, and in accordance with Law 17 concerning state finance (2003) the
promulgation of GASt in 2005 was made possible and was imposed on government
departments. Public sector organisations are required to adopt AAS as part of
complying with these internationally-inspired accounting standards.
Law 17 (2003) and similarly-inspired statutes thus represent a watermark in
Indonesian statutory law, influencing public reporting systems at all levels of
government. Its enactment also represents the transformation of AAS from a new ideal
to the realm of new discourse. So while the need for reporting reform had been introduced
as a new ideal in the 1980s, it is important to bear in mind that the issuance of Law 17
(and other relevant statutes) only occurred following on from, and in response to, the
Suharto administration collapse in 1998. That is, the new discourses were not only
driven by the actors in the MOF and others, but also by dramatic changes in the national
political environment and from having new political actors in the highest echelons of
power. Therefore, the nature and extent of this reform cannot be isolated from the
influence of social and political changes. This accommodates the notion that an
understanding of accounting [. . .] change requires an understanding of various
organizational and historical contingencies (Scapens and Roberts, 1993, p. 30) as this
was certainly important toward evaluating the new discourses in accounting in the
Indonesian public sector.
So while the powers that came to influence these statutes may have been normative
in the sense of their having established new expectations for reporting and accounting
systems, as laws they imposed a form of coercive institutionalism on the Indonesian
public sector. This is discussed in the following section where the process of
institutionalizing these laws into policy is revealed.
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Reporting system
Types of report
Table IV.
Types of reports
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The members of the committee who formulate these standards represent the normative
form of Scotts (1991, 2001) legitimacy pillars as they were shaped by common formal
training and education and [. . .] shared networks (Fowler, 2009, p. 173). That is, standard
setting board members were chosen by the President from subsets of professional society
in Indonesia including academia, the State Audit Board and the Indonesian Institute of
Accountants. Also, this standard setting body is led by a member of the MOF. Essentially
therefore, the policies and the daily activities of the committee are under the control of the
MOF (GASt, 2005) and hence also the main body which was influential in forming the
new ideals for Indonesian public sector accounting.
In 2006 the MIA, which had also lobbied for AAS, issued a separate set of rules for local
governments in what is termed the MIA Decree No. 13 (the Decree). The Decree was
revised in 2007 and now forms guidance for programs, budgets and annual reports. As
with the GASt, the Decree sets out basic principles, frameworks and procedures for
planning and reporting, and these are also imposed on all Indonesian local governments.
This effectively creates a second complete set of reporting requirements for local
governments. That is, on issuance of the MIA Decree, local governments are now not only
required to prepare their reports in accordance with GASt, they are also required to comply
with this MIA ministerial Decree. As a consequence local governments are now required to
produce two complete sets of reports under different standards, whereas before they only
had to complete one. The new norms seem to have created in themselves a complexity far
beyond that envisioned by those who had formed the new ideals of AAS.
5.4 Internalization stage
While the municipality under study now produces accrual-based reports, we find little
evidence to suggest that the institutionalization of the accrual-based accounting
standards has significantly changed how actors in this municipal government employ
them. A number of critical issues have been identified as leading to this situation, and
these are as to a lack of participation, a low level of compliance, a low level of use and
unintended consequences.
5.4.1 Lack of participation. According to the accounting officials in the municipality
the new accounting system is said to be difficult to implement. An interviewee points
out the root of the problem:
It is mainly due to their education and professional backgrounds that differ from accounting
(Interviewee 32).
Although the GASt requires financial statements for every division and consolidated
reports for the municipality as a whole, staff who have the accounting skills necessary to
create them is very limited. Of a total of 24 officials in the accounting and bookkeeping
section in the municipalitys financial and asset management division, only two
were accounting graduates (Interviewee 21; State Audit Board, 2008). The lack of
qualified accountants is not an unusual situation in the Indonesian public sector.
Commenting on the issue, a senior auditor at the State Audit Board, who had audited this
municipality, states:
As far as I know, in this region it is difficult to find qualified people that can accomplish their
task either at the top position or technical level. Their backgrounds have nothing to do with
accounting (Interviewee 20).
A certified accountant (Interviewee 33), who was involved in assisting our municipality
prepare its budgets and financial statements, agreed. Another participant who trained
officials in the municipality stated that the accrual based reporting system has not
been well implemented and most of the employees in the financial and accounting
division lack basic training or professional backgrounds in the field (Interviewee 14).
Furthermore, the human resource management systems within the Indonesian public
sector generally, and for this municipality specifically, have not been reformed in ways
that serve the new ideology. So for example, those Indonesians who are experienced and
skilled professionals, such as accountants from the private sector, have been reluctant to
become civil servants due to the low salary and age limits (McLeod, 2006; Setiyono and
McLeod, 2010).
Overall, these events have led to cost increases. While departmental cost changes are
difficult to determine at this time, adding new bureaucratic layers to an existing base
must result in significant cost increases. That is, while the accrual based report
preparation is outsourced, existing government accounting employees are still paid
and employed at the same level as before (Interviewee 22). This cannot be seen to fulfil
the intent of those who formed the new ideals, and it supports the notion that with a lack
of institutional capacity, unintended consequences can occur. That is, the outcomes and
implications of the adoption of a new accounting system seem to run counter to the
motives held by the policy makers who sought to implement them (Mimba et al., 2007;
Nor-Aziah and Scapens, 2007; Norhayati and Siti-Nabiha, 2009). This may be a matter of
having fallen back into old habits, a point which gains resonance as further
internalization practices are revealed.
5.4.2 Low level of compliance. Both the GASt and the Decree issued by the MIA
require Indonesian local governments to prepare reports for the local government body
and for of each of their division and sub-organizations. However, our municipality was
only able to provide a set of consolidated reports by 2007, four years after the original
requirement was put in place. A similar situation of reports delayed or unmade
apparently occur elsewhere and, at least as of 2007, some had as yet to provide any
reports at all (State Audit Board, 2007, 2008). This appears to be an ongoing problem, as
suggested from an interviewee at the State Audit Board:
What we have audited so far are only the consolidated reports of a municipal or a provincial
government, not the reports [from their divisions] (Interviewee 26).
Even as at 2010, the consolidated reports of the municipality under study have yet to
fully comply with the new GASt or provide the basis on which the State Audit Board can
come to an opinion on its reports. Its reports for 2006 and 2007 both received disclaimer
opinions from the State Audit Board. Assurance as to the quality of information
provided is not, therefore, available.
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This failure to receive a clean audit opinion prevents a real accounting of this local
government and furthermore may provide opportunities to engage in account
mismanagement. Indeed, such mismanagement appears to have occurred. In the 2006
and 2007 audits a number of irregularities were identified even as auditors acknowledged
their inability to come to an opinion overall. The board found irregularities that indicate
susceptibilities relating to cash and asset management, to the provision of supporting
documents for some transactions and expenditures which were disbursed without
apparent or appropriate approval documentation (State Audit Board, 2008).
The low level of compliance discovered in our municipality does not appear to be
unique, and may exist in most of these local governments. According to the State Audit
Board (Table V) only 5 percent of local governments reports in 2005 were prepared in
accordance with GASt to be awarded unqualified opinions.
Counter to what might be expected for systems under reform, this compliance rate
decreased to 1 percent in 2006 and 2007 and only slightly bettered itself to 2.7 percent in
2008.
Raising another type of concern, there were 7.2 percent of local governments reports
with adverse opinions in 2008, a worsening situation from 2005 which reported only a
3 percent rate of adverse opinion. As to the reports produced at the central level, and where
such reports were prepared at all, the failure to present them in a form complying with
GASt has been apparently common (Nasution, 2008). This means that both in terms of
production and quality, progress on these matters has been poor. Furthermore, given the
patterns over time, it does not appear to be improving; a situation also found in our
municipality. Irrespective of the authority of the (new discourse) statutory law, or the
clarity of new techniques and the standards it produced, it seems that the New Ideals have
not as yet been effectively translated into actual practice.
5.4.3 Low level of use. Although Law 17 (2003) and the GASt and MIA standards
require multiple reports in the new style, demand for them by users appears to be very
low. One reason for this may be in the limited ability to understand or take meaning from
them. Among the potential users, the State Audit Board (a national actor) may be one of the
only parties with sufficient capacity (in terms of human resources and skills) to evaluate
and offer opinions about their content (Nasution, 2008). So while it may be claimed that
AAS serves efficiency, transparency and effectiveness ideals; there is no evidence which
suggests they have been employed for this purpose. Managers appear rather to rely only
on the old type of reports (cash and budget realized reports), not the new reports. The Vice
Mayor of our municipality gives us a sense of how dire this lack of use may be:
As you know, these reports can be accessed by the public after being audited by the State
Audit and formally submitted to the [local] parliament. But in this office, I have never seen
anyone outside the office come here and ask the reports (Interviewee 13).
Table V.
Local governments
reports by State Audit
opinion (%)
Year
Unqualified (%)
Qualified (%)
Disclaimer (%)
Adverse (%)
Total (%)
2005
2006
2007
2008
5
1
1
2.7
85
70
63
74.1
7
23
17
16.0
3
6
19
7.2
100
100
100
100
Note: These audit opinions were issued to 469 local governments (Nasution, 2008)
As agreed by other interviewees who are with MOF and the State Audit Board,
respectively (Interviewees 5 and 27), this lack of use reflects a pattern at both the national
and local levels. In enquiring of internal managers and of the municipalitys
parliamentary members, no clear evidence is found to suggest that they use these
reports. In contrast, there is evidence that they have used the cash based reports. Two
senior officials in the municipal government state:
[. . .] we are still more familiar with the budget realization reports. We have used them for a
long time (Interviewee 29).
Now we are also required to produce [accrual] balance sheets and cash flows, but we only use
these reports as our accountability document to the State Audit Board and the Local
Parliament. [. . .] most of us [here] have been more familiarized with that information [of cash
based reports] (Interviewee 14).
This undermines the value of having accrual-based information for decision making.
The lack of a will or means to understand, the reliance on historical cash-based accounts
and the lack of technical accounting knowledge generally has led to the situation in
which the Internalization of the AAS for this municipality is ineffective for managerial
or policy purposes. With respect to the user situation in particular, we suggest that,
again as to the internalization of AAS, the taken-for-granted assumptions and symbolic
aspects of social life (Fowler, 2009, p. 173) as represented by the old cash-based reports
continue to dominate. This would seem to comprise a cultural-cognitive/mimetic pillar in
the institutionalization of AAS within a municipality of Indonesia.
5.4.4 The emergence of unintended outcomes. Along with the critical problems
identified above, internalization of AAS systems and standards has had at least one
other unintended consequence: the emergence of a bribe-kickback scheme as part of the
process of account and report construction. This information comes directly from
interviewees including several of the private consultants who assisted our municipality.
Such practices occur during the tendering process when accounting is outsourced to
external consultants:
The municipal government [under study] spends a lot of money to pay accounting
professionals outside the government to prepare these reports. But the situation is worsened
by the fact [as the process to outsource the accounting function [would involve] tendering
processes which in many cases are vulnerable to bribery and corruption (INT-34).
What occurs is that those who bid for municipal projects tend to be informally called upon
to make private cash payments to local authority individuals who have the right to
determine the outcome. Such practices exist elsewhere in Indonesian bureaucracy
(discussed below) but have found a new outlet in financial report preparation. It is not due
to declines in civil service wages, which actually increased in 1999 (World Bank, 1999, p. 2).
It appears to an opportunistic event. Because the officials and their employees once
prepared the reports themselves, there was no opportunity in the past for kickbacks from
externals; now however, there is. There is a certain irony in the emergence of such a scheme
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Stages of
institutionalization
Domain of institutionalization
process
Evidence
found in this
study
IPM model
National
(outside
organization)
National level
National
(outside
organization)
Local
(organizational
level)
National
(outside
organization)
Local
(organizational
level)
Accrual
accounting
275
Local
Local
(organizational (organizational
level)
level)
government regulation (laws and decrees) and standard-setting process of public sector
accounting practices in the country.
Jarvenpaa (2009) points out that while distinctions are evoked at different points in
the institutionalization process, pillars of institutionalization can and do occur through
their own distinctive mechanisms and processes. That is, pillars of legitimation can
emerge at different stages of the process, something that seems to have occurred here.
Normative influences are apparent in the calls for AAS in the 1980s and during
the formation of new ideals through the efforts and involvement of the MOF, the State
Audit Board, Parliament and the MIA.
Table VI.
Issues identified based
on the IPM model
of Dembrin et al. (2007)
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Second, the fall of Suhartos government in 1998 was an event that allowed these new
accounting ideals to be realised in the form of real public (new) discourses. Such reforms
as were made from 1998 to 2005 cannot be understood independently of the domestic
upheavals and international pressures of which they were a part. There were also open
and public demands for a more accountable bureaucracy and a transparent government.
While pressures for change existed prior to Suhartos fall, the Indonesian Government
did not (or could not) react to them until regime change forced a form of democracy onto
the nation as a whole. The idea that different organizations react differently to
cognitive-cultural pressures finds support here, as AAS reform was also dependent on
Indonesian Government reform. That is, and during Suhartos Government, neither the
oil crisis of 1983, the Asian crisis of 1997, the aspirations of MOF technocrats, nor
encouragement from overseas players were, alone, effective in creating reporting
practice change. Yet when this firmly-established order was replaced with new regimes
after 1998, those behind public sector accounting reforms could mobilize as part of these
wider political and economic reforms and convert the new ideals into new discourses and
new techniques. Without support from the top echelons of power following the fall of
Suhartos regime in 1998, it does not seem probable that change could have occurred
beyond Dambrin et al.s (2007) conception of new ideals.
Yet even at that point, the transition to new discourses was not smooth.
Regulatory/coercive pillars were apparent in the construction of laws and standards now
imposed on municipalities such as the one under study. The established and traditional
roles of the MOH and the MIA as coordination ministries for local administrations led to
the creation of duplicate reporting regimes. Why this occurred is not entirely clear,
although there may be a competitive element between the two ministries not fully
acknowledged by these interviewees. Irrespective, the existence of two separate sets of
standards has made the implementation of the AAS unreasonably complex, particularly
for these preparers and these users (Interviewees 10 and 26; State Audit Board, 2008);
and probably more complicated than was necessary to meet the intent of these new
ideals. As has been found or theorised elsewhere (Hassan, 2005), interests and the powers
of regulating agencies have shaped how these accounting rules were formulated.
As the standards and requirements of these agencies and institutions are subsequently
internalized, another pattern emerges. This is our third point and relates to the application
to practice of what appears to be cultural norms of Indonesian society. In particular, the
ongoing use of cash-based reports by managers, and their failure to prevent (and
perhaps to be complicit in) a kickback scheme in outsourcing their preparation draws from
traditions and a culture present long before AAS had emerged onto the public agenda.
A related influence is that the technical capacity and resource dependence of actors
who internalized this accounting system seems to have determined the extent to which it
was ultimately realised. As we find, the internalization of an AAS by the actors in this
municipality is far from complete; and there is nothing to suggest that this is unusual
within the Indonesian public sector. In other words there is a decoupling phenomenon
between the intended outcome of new ideals, discourses and techniques and their
Internalization into report preparation and use. This is indicated by these two primary
sources of evidence:
(1) that the existing employees in this municipal government lack the
accrual accounting skills to prepare such reports, leading to new (and
kickback-enhancing) costs to achieve the result; and
(2) that the potential users of these accrual-based reports lack the expertise,
knowledge and interest to effectively use the information for the managerial
decisions it was intended.
Accrual
accounting
Nevertheless, although existing employees and bureaucrats lack such skills and
understandings, the municipal government is starting to produce these reports, albeit at
a very slow pace. There is a coercive element here however. These municipalities rely on
Central Government for a significant portion of their finance. In 2006 financial support
from the Central Government to municipalities accounted for more than 90 percent of our
municipalitys annual budget (State Audit Board, 2007). The Vice Mayor stresses:
277
It is the obligation of the local government [local bureaucracy] to implement all regulations
imposed to them by the central government (Interviewee 14).
So there is a strong incentive to produce them. As we have seen however, the form they
have taken has turned out to be both incomplete and, in great part, of an unacceptable
quality. Therefore, and from an institutional perspective, this local government in
Indonesia may be adopting accrual accounting under duress, and a coercive isomorphism
appears to be taking place (Baker and Rennie, 2006, p. 87). It is in the interest of this
municipal government to conform to the rules imposed by Central Government.
This inevitability also explains why the institutionalization of AAS in this
municipality has been dominated by actors at the central level; in particular, national
presidents after 1998 and leaders in the Central Government MIA and Finance. The
dominant role of the MOF emerged even before Suhartos fall. That is, the new ideals
were, in this case, formed at a point before the time in which those ideals could
reasonably be converted into the new discourse and new techniques. Furthermore, and
until the government itself fell and became newly democratized, such new ideals found
only fallow ground in which to grow.
Yet, even radical change at the top, when it did occur, did not cause new ideals to be
fully institutionalized as intended, in particular during the internalization process. The
State Audit Board is found to be the only apparent user of local governments
accrual-based reports. Managers do not use them, nor do other senior officials. Nor do
they or their employees even prepare them any longer, leaving that task to contracted
external consultants. The new standards for reporting have therefore added yet another
layer of bureaucracy to this municipality and opened it up to other means by which quiet
illegalities in the form of kickbacks can be allowed to occur.
Finally, some seeking legitimacy patterns may also be revealed insofar as
new discourses (through law) and the new techniques (via new standards) mirror
overseas language and practices. While there may or may not have been a desire to
achieve homogeneity with other jurisdictions, this influence is difficult to know. What
we do know however is that the primary agents of change (MOF and MIA bureaucrats)
returned from their overseas experiences with new ideals consistent with such views at
the time. In an era where there was little competition for Western powers on the
global accounting stage, it is perhaps not surprising that it was their principles and
their standards that were brought to bear on this administration. The relationship
between actors and stages is shown in Figure 2.
We wonder what could have been done to have modified the effect of such distorting
influences. Perhaps if this municipality had provided resources to train existing
employees in accounting, there would have been no need to outsource the preparation of
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New ideals
278
National actors:
MOF
MIA
State Audit
Board
New discourses
Political system & behaviour of
powerful actors
New techniques
Local actors:
Senior officials
Local consultants
As
Idealised
Figure 2.
The pattern of the
institutionalization of
AAS in the Indonesian
public sector
Internalization
(in one municipality)
Improve
efficiency &
transparency
Use not
made,
kickbacks
Note:
= Influence from outside Indonesian public sector
= Influence from inside Indonesian public sector
= Flow of institutionalization process
its reports. Budgetary constraints could not reasonably form an excuse for not training
up its own staff; after all, there were resources for contracting consultants. In thinking
about this, it may be important to recall that kickbacks also emerged from this
internalization process, and it may not have been in managements interest to train their
own staff. Irrespective, this does suggest to us the power of local actors and personal
incentives to divert the intent of government policy. As Hopper and Major (2007, p. 66)
discovered [. . .] criteria for allocating material and human resources are linked to
domination [by powerful actors at organizational level]. In this case, these new ideals
were effectively defeated at the level of these local managers and bureaucrats.
In any case, our findings demonstrate how calls for greater financial efficiency
through accounting system reform did not, in this case, translate to effective
accounting practice. This appears to primarily be because new ideals, new discourses
and new techniques were not internalized. The nature of the political system and the
behaviour of powerful actors within this municipality are powerful reasons that
institutionalization failed to occur.
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