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To cite this article: Harun (2007) OBSTACLES TO PUBLIC SECTOR ACCOUNTING REFORM IN INDONESIA, Bulletin of
Indonesian Economic Studies, 43:3, 365-376, DOI: 10.1080/00074910701727613
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Bulletin of Indonesian Economic Studies, Vol. 43, No. 3, 2007: 365–75
Harun*
This paper draws attention to the importance of improving the quality of public
sector accounting in Indonesia, in line with the aims of reformasi (reform) and
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INTRODUCTION
Ball (2005) suggests three reasons why high-quality financial reporting by govern-
ment agencies, institutions and enterprises is desirable. The first relates to moni-
toring and managing their own performance: government organisations, just like
large private enterprises, need timely and accurate financial information for this
purpose. They shift large amounts of resources from the private to the public sec-
tor with the objective of improving the well-being of society, and if they do not
operate efficiently and effectively, or invest funds wisely, this can represent a huge
drain on the economy.
The second reason is that electors entrust governments with the management
of assets and liabilities that have been accumulated over decades, and will affect
the welfare of citizens for many more decades to come. They are entitled to infor-
mation that allows them to hold governments accountable for their use of public
resources, including information on the extent to which revenues are sufficient to
pay for services being provided, and on the capacity of governments to meet their
financial obligations and to withstand potential shocks.
* I am grateful to Ross H. McLeod and Peter McCawley of the Australian National Univer-
sity, Peter Robinson of the University of Western Australia Business School, Hal Hill and
other participants at the Indonesia Council Open Conference (Canberra, 29–30 September
2003) and four anonymous referees for their valuable comments.
The third reason, closely related to the second, is that a properly functioning
democracy requires its constituents to have confidence in politicians and to be
willing to take an interest in politics. This confidence is enhanced when govern-
ments fully inform their constituents, enabling them to exercise their votes on
the basis of reliable financial information. Transparent financial reporting is one
means by which politicians can engage constituents in the democratic process and
engender confidence.
Other studies have pointed to deficiencies in accounting systems as a signif-
icant weakness in public sector management, particularly in developing coun-
tries. Guthrie, Olson and Humphrey (1998) argue that accounting reforms are an
important part of ‘new public management’ ways of governing, pointing to the
introduction of business-like forms of accounting as an important recent reform
in the public sector. This change involves a shift from cash-based or budgetary
accounting to accrual accounting as part of a broader public sector reform process
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(Robinson 1998).
Jones and Puglisi (1997: 13) highlight potential problems in adopting accrual
accounting in the public sector context: the complexity and cost of designing and
implementing the new accounting systems; difficulties in applying economics-
based definitions of assets, liabilities, expenses and revenues; and, importantly,
managerial and political factors related to change management and resistance to
change. Likewise, Guthrie argues that although the implementation of accrual
accounting has tended to be seen as a ‘good thing’ in public administration, gov-
ernment bodies must consider many issues when adopting it, especially in devel-
oping countries (Guthrie 1998: 5). The purpose of this paper is to identify, and
suggest solutions to, problems encountered by the Indonesian government since
the early 1990s in the adoption of accrual accounting as the basis for public sector
financial management and reporting.1
1 Indonesian public sector accounting covers three areas: the central government; local
government; and non-profit organisations owned by the government, such as schools
and hospitals. State owned-companies use the private sector’s Statement of Financial
Accounting Standards to prepare and present their financial statements.
moves flow from a recognition that the proper functioning of democracy at both
central and local levels requires detailed evaluation of the efficiency, effectiveness
and integrity of government’s use of scarce resources.
In the post-Soeharto era, successive governments have paid lip-service, at least,
to the importance of reform in this area. There have been calls for a switch from
the existing system—in which financial accountability amounts to nothing more
than the basic book-keeping function of recording cash inflows and outflows—to
a more complex system of accounting on an accrual basis, in which statements
of budget realisations are complemented by balance sheets and cash flow state-
ments, and by explanatory notes on all of these.
A move from traditional cash-based accounting to accrual accounting involves
a shift in the recording of revenues and costs from the time they are received or
paid to the time they are incurred. Depreciation expense is charged over the life of
an asset, and is matched with either the original purchase cost or the replacement
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cost. These features allow the accrual accounting model to show, as cash-based
accounting cannot, the true cost of providing services to the community. Knowl-
edge of this is key to ensuring sound decision making, as well as accountability to
parliaments, taxpayers and voters.
The global trend toward adoption of accrual accounting for the public sector
was stimulated by the Organisation for Economic Co-operation and Develop-
ment (OECD), which noted in 1993 that ‘while the advantages of [a cash-based
system] are acknowledged in terms of assessing short-term economic impact
and compliance with spending limits, the ability of cash information to enable
informed decisions on the stewardship and financial position is constrained
because it excludes physical and financial assets and liabilities’ (OECD 1993).
The shift to accrual accounting has been relatively limited internationally, but
there is a gradual move in that direction. Australia, New Zealand and the United
Kingdom are among the countries that appear to have made the most far-reach-
ing changes (Pollit and Bouckaert 2000; Lye, Perera and Rahman 2005; Mack and
Ryan 2006).
Government efforts to adopt accrual accounting began in the early 1990s in
Indonesia, but its use remains much less advanced in the public than in the pri-
vate sector. Most government institutions at central and regional levels still rely
on the single-entry system based on the Indonesische Comptabiliteitswet (Indo-
nesian Government Accounts Law) introduced by the Dutch colonial government
to assess the performance of government bodies, but this is significantly inferior
to more modern approaches. Guthrie, Parker and Shand (1990), Sugianto, Dunadi
and Loho (1995), Guthrie, Olson and Humphrey (1998) and Harun (2005) high-
light the main deficiencies of the Indonesian cash-based system:
• there is no standard way of recording transactions, either for budgeting
purposes or for realised expenditures;
• the grouping of accounts is not in a form that affords proper analysis and control
of activities and programs supporting public sector provision of services;
• there is no distinction between capital and operational expenditures;
• such reporting is only for the purpose of fulfilling the statutory requirements
of each government institution;
• financial reporting does not satisfy the audit requirements set out in Law
17/2003 on State Finance;
no instrument that could serve as a basis for the uniform treatment of economic
transactions and standardisation of government reporting.
comprising a realised budget report, a balance sheet and a statement of cash flows.
Thus local governments came under increasing pressure to adopt sound financial
management and accounting systems.
Following decentralisation in 2001, some district and municipal governments
participated in a pilot project to implement financial accountability procedures
based on Government Regulation 105/2000. These included the city of Semarang
(the capital of Central Java province) and the district of Sleman (in Yogyakarta
Special Region). The pilot project was then followed by dissemination and rep-
lication in nine other cities around the country: Sawahlunto, Sukabumi, Metro
Lampung, Solo, Probolinggo, Sumbawa, Kendari, Gorontalo and Mataram, in col-
laboration with the United Nations Development Programme (Bastian 2003).
In parallel with the implementation of decentralisation, the central govern-
ment, through Minister of Finance Decree 308/2002, established the Committee
on Accounting Standards for Central and Local Governments (Komite Standar
Akuntansi Pemerintah Pusat dan Daerah), which was charged with drafting a
set of accounting standards for the public sector. Members of the committee were
drawn from the Ministry of Finance, the Supreme Audit Agency (Badan Pemeriksa
Keuangan, or BPK), the Ministry of Home Affairs, the Finance and Develop-
ment Supervisory Agency (Badan Pengawasan Keuangan dan Pembangunan,
or BPKP), the Indonesian Institute of Accountants (Ikatan Akuntan Indonesia, or
IAI) and various universities. The committee prepared a draft entitled ‘Standar
Akuntansi Pemerintah Pusat dan Daerah’ (Accounting Standards for Central and
Local Governments) in 2002.
The objective of the new standards was to provide information that would
assist a wide range of users in making and evaluating government decisions
about resource allocation. This objective was to be achieved by providing infor-
mation about all assets controlled by public sector agencies and about the alloca-
tion and uses of financial resources within the government; information about
how the entities in question financed their activities and met their cash require-
ments; information that would be useful in evaluating entities’ ability to finance
their activities and to meet their liabilities and other commitments; and informa-
tion about the financial condition of these entities and changes therein.
After receiving comments on the draft standards from BPK, the Indonesian Insti-
tute of Accountants, universities and elsewhere, the finance ministry promulgated
that can act independently in solving accounting problems within public sector
institutions (Lundqvist 2003; Robinson and Harun 2004).
The absence of an independent standard setting body for public sector account-
ing in Indonesia signals a reluctance on the part of the government and the
bureaucracy to loosen their control of the process, and suggests a concern among
some officials that reform might make it more difficult to conceal practices on
which they rely to supplement their relatively low civil service salaries. On this
interpretation, it is unsurprising that progress in public sector accounting reform
remains elusive.
tive media). While it seems to have some interest in reforms intended to improve
government accountability, the electorate is less conscious of the need for reform
of public sector accounting practices. Kartomo Wiryobroto, former Director of
Accounting Development and Evaluation at the Ministry of Finance, says that the
public has shown little interest in responding to the draft standards issued by the
public sector accounting division of the Indonesian Institute of Accountants, and
that the parliament also lacks concern about accounting issues.2
It is widely believed that many members of parliament still view their posi-
tions as providing scope for advancing personal interests, rather than as bestow-
ing on them (especially those whose parties are not part of the government) the
responsibility to monitor the executive and the bureaucracy on behalf of their con-
stituents. There is little doubt that the lack of public and parliamentary pressure
on bureaucrats to improve government financial accountability by switching to a
more informative public sector accounting system reduces the likelihood of pub-
lic sector accounting and managerial reform. This is consistent with the absence
of an independent accounting standards body for the public sector. It reflects the
absence of both a strong civil society and a substantial group of private and pub-
lic professionals, as exists in other countries, to advocate for the establishment
of such a body. A number of studies have pointed out that pressure from parlia-
ments, professional organisations and other interest groups was important to the
successful implementation of such reforms in Australia, New Zealand and the UK
(Christensen 2002). In Indonesia, strong pressure from citizens, professionals and
members of parliament is likewise needed to influence the attitudes of govern-
ment agencies to disclosure of information on financial management and to the
need for a more informative accounting system.
Since many members of the bureaucracy and the executive are heavily depend-
ent on non-salary, quasi-legal or illegal forms of remuneration, these officials are
2 Interview with author, 5 November 2003. Since the late 1990s the Indonesian Institute of
Accountants has released several exposure drafts of accounting standards for the govern-
ment, but these have received little attention from government, the public or the parlia-
ment. Although Law 17/2003 on State Finance requires accounting standards to be de-
veloped by an independent body, the Government Accounting Standards of 2005 were
developed by a standard-setting body set up by the government (Harun 2004).
It is widely recognised that the government has limited capacity to manage the
functions of public sector institutions because of a lack of skilled staff in specialised
fields. At the local level, following decentralisation, only a few districts have been
able to absorb all of their new duties quickly and meet appropriate quality stand-
ards in the public services provided (Robinson and Harun 2003). The adoption of
more sophisticated accounting approaches requires skilled and experienced staff.
The majority of government accounting staff are not accounting professionals,
and have direct experience only of the cash-based single-entry system inherited
from the Dutch. Although there are no precise data on the number of accountants
within the government, previous studies have pointed to a lack of skilled account-
ing staff within government agencies at the central and regional level (Soepomo
1999; Robinson and Harun 2004). The best prospect for stimulating accounting
reform may therefore involve focusing on the accounting skills shortage.
3 Statements reported in this paragraph were made at interviews the author conducted
with officials in November 2003.
lower levels, overwhelmingly on the basis of seniority. Moreover, there are very
few job descriptions for positions in the civil service, so people are recruited on
the basis of their educational attainment level (as undifferentiated secondary or
tertiary graduates) rather than on the basis of their field of study (engineering,
political and social studies, accountancy and so on). Training existing generalist
personnel in accounting is not a feasible solution to the accounting skills short-
age, because the process is drawn out, and the outcome for each individual is
uncertain. And finally, since salaries are not comparable with those paid for simi-
lar qualifications and experience in the private sector, it is difficult to recruit and
retain officers of high quality (and to discourage civil servants from involvement
in corrupt activity).
These circumstances are very different from those in countries such as Australia,
New Zealand, the UK, the US and Canada, where large numbers of accounting
specialists with private sector experience work in the public sector (Christensen
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CONCLUSIONS
The proper functioning of democracy depends, among other things, on financial
accountability of governments to elected representatives of the people, and to the
people themselves. In turn, this relies on the determination of a set of meaningful
and useful standards for the preparation and presentation of public sector finan-
cial accounts, and on the availability of sufficiently skilled and well-motivated
practitioners within the civil service to implement these standards.
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ISEAS
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