Accruals accounting in Accruals accounting in the public sector: a the public sector: a

road not always takenroad not always taken

Ciaran ConnollyCiaran Connolly

&&

Noel HyndmanNoel Hyndman

Queen’s University BelfastQueen’s University Belfast

The Road not Taken The Road not Taken byby Robert Frost Robert Frost

Two roads diverged in a yellow wood,Two roads diverged in a yellow wood,

And sorry I could not travel bothAnd sorry I could not travel both

And be one traveler, long I stoodAnd be one traveler, long I stood

And looked down one as far as I couldAnd looked down one as far as I could

To where it bent in the undergrowth;To where it bent in the undergrowth;

Then took the other, as just as fair,Then took the other, as just as fair,

And having perhaps the better claim,And having perhaps the better claim,

Because it was grassy and wanted wear;Because it was grassy and wanted wear;

Though as for that the passing thereThough as for that the passing there

Had worn them really about the same,Had worn them really about the same,

And both that morning equally layAnd both that morning equally lay

In leaves no step had trodden black.In leaves no step had trodden black.

Oh, I kept the first for another day!Oh, I kept the first for another day!

Yet knowing how way leads on to way,Yet knowing how way leads on to way,

I doubted if I should ever come back.I doubted if I should ever come back.

I shall be telling this with a sighI shall be telling this with a sigh

Somewhere ages and ages hence:Somewhere ages and ages hence:

Two roads diverged in a wood, and I-Two roads diverged in a wood, and I-

I took the one less traveled by,I took the one less traveled by,

And that has made all the difference. And that has made all the difference.

IntroductionIntroduction

• New Public ManagementNew Public Management

• Research Objective Research Objective To investigate the actions of the public

sectors in NI, as part of the UK, and the RoI with respect to their accounting choice regarding

accruals and cash accounting

FormatFormat

1.1. NPM, Accruals Accounting and NPM, Accruals Accounting and Institutional TheoryInstitutional Theory

2.2. Trajectories of ChangeTrajectories of Change

3.3. Research Method Research Method

4.4. Results of Empirical ResearchResults of Empirical Research

5.5. Discussion, Analysis and ConclusionsDiscussion, Analysis and Conclusions

NPM, Accruals NPM, Accruals Accounting and Accounting and

Institutional TheoryInstitutional Theory

• NPM Reforms – variability of NPM Reforms – variability of adoptionadoption

• Institutional Theory – other Institutional Theory – other factorsfactors

Intensity of adoption of NPMIntensity of adoption of NPM CountryCountry

High

AustraliaCanada

New ZealandSweden

UK

Medium

AustriaDenmarkFinlandFrance

Republic of IrelandItaly

NetherlandsNorwayPortugal

USA

Low

GreeceGermany

JapanSpain

SwitzerlandTurkey

The UK – From Cash to The UK – From Cash to Accruals AccountingAccruals Accounting

1.1. UK - four separate countries within one UK - four separate countries within one main political unitmain political unit

2.2. Devolution 1999Devolution 19993.3. Traditional accounting model = cash Traditional accounting model = cash 4.4. Resource Accounting and Budgeting:Resource Accounting and Budgeting: Announced 1994Announced 1994 RA dry run 98/99, 99/00, 00/01 – live RA dry run 98/99, 99/00, 00/01 – live

01/0201/02 RB dry run 99/00 – live 03/04RB dry run 99/00 – live 03/04 Mandatory central planMandatory central plan

The RoI – From Cash to The RoI – From Cash to Cash with Some Accrual Cash with Some Accrual

NotesNotes 1.1. Traditional accounting model = cashTraditional accounting model = cash2.2. 1991 – Joint Working Group of the 1991 – Joint Working Group of the

Department of Finance and the Office of Department of Finance and the Office of the Comptroller and Auditor General was the Comptroller and Auditor General was established to examine improvements to established to examine improvements to government accounting proceduresgovernment accounting procedures

3.3. 1994 – Strategic Management Initiative 1994 – Strategic Management Initiative (SMI) – rolling programme of (SMI) – rolling programme of modernisation and change initiatives in modernisation and change initiatives in the Irish Civil Servicethe Irish Civil Service

4.4. March 1995 – SMI Co-ordinating Group of March 1995 – SMI Co-ordinating Group of Secretaries of Departments (now called Secretaries of Departments (now called Implementation Group of Secretaries Implementation Group of Secretaries General) to review existing systems, General) to review existing systems, including financial management systems including financial management systems – resulted in DBG 1996– resulted in DBG 1996

5.5. 1995 – DPE pilot project re. accruals-1995 – DPE pilot project re. accruals-based accountsbased accounts

6.6. 1995 – On basis of joint working group 1995 – On basis of joint working group (1991) the Department of Finance (1991) the Department of Finance introduced a number of changes (in introduced a number of changes (in circulars 1/95 and 1/96) requiring circulars 1/95 and 1/96) requiring departments to compile a fixed asset departments to compile a fixed asset register and to present some accruals-register and to present some accruals-based information for the annual 1994 based information for the annual 1994 and 1995 AAs onwardsand 1995 AAs onwards

7.7. 19961996 – Delivering Better Government – Delivering Better Government (DBG) – advocated the development of (DBG) – advocated the development of accruals-based accounts (in addition to accruals-based accounts (in addition to cash accounts) – within five yearscash accounts) – within five years

8.8. 19971997 – Public Services Management Act – Public Services Management Act – specific legislative backing given to the – specific legislative backing given to the preparation and publication of strategy preparation and publication of strategy statements statements

9.9. 1999 – Approval to develop a 1999 – Approval to develop a Management Information Framework Management Information Framework (MIF) – separately for each department(MIF) – separately for each department

10.10.1999 – 1999 – Financial Management in a Financial Management in a Reformed Public Service Reformed Public Service – pro accruals – pro accruals accounting but suggested that there accounting but suggested that there could be local variationscould be local variations

11.11.2002 – 2002 – Report of the Management Report of the Management Accounting Working Group to the Accounting Working Group to the Consultative Committee on the Evaluation Consultative Committee on the Evaluation of the Appropriation Accounts and of the Appropriation Accounts and Department of Public Enterprise Pilot Department of Public Enterprise Pilot Project by Capita Consulting Project by Capita Consulting - pro accruals - pro accruals accounting; highlighted performance accounting; highlighted performance information as wellinformation as well

12.12.2002 – 2002 – Evaluation of the Progress of the Evaluation of the Progress of the Strategic Management Initiative / Delivering Strategic Management Initiative / Delivering Better Government Modernisation Better Government Modernisation ProgrammeProgramme – significant changes required; – significant changes required; MIF considered by senior managers as ‘just MIF considered by senior managers as ‘just about accruals accounting’; little evidence about accruals accounting’; little evidence that senior managers in that senior managers in departments/offices were convinced that departments/offices were convinced that the MIF would significantly enhance the MIF would significantly enhance decision makingdecision making

Research MethodResearch Method

• Semi-structured interviewsSemi-structured interviews

• 35 interviewees (13 NI; 22 RoI)35 interviewees (13 NI; 22 RoI)

• 22 organisations (11 NI; 11 RoI)22 organisations (11 NI; 11 RoI)

InterviewsInterviewsJurisdiction

UK RoI

Interviewee:

Departmental Operational Accountant

9 11

Overseer/Commentator 4 11

13 22

Organisation:

Central Government Department 8 7

Overseer/Commentator Organisation

3 4

11 11

The NI Story: The NI Story: The Accruals RoadThe Accruals Road

• Understandability, Use and Understandability, Use and Complexity of RABComplexity of RAB

• Cost-benefit IssuesCost-benefit Issues

• Availability of Budgetary Control Availability of Budgetary Control Reports for Department BoardsReports for Department Boards

Understandability, Use and Understandability, Use and Complexity of RABComplexity of RAB

I do not know if it’s being used… but I would be sceptical. .... I am not sure how many people out there in a department or a branch really use it to manage their budget… I am not sure how many working decisions are taken from the accounting information. I am just not sure. It is complex.... Even I don’t fully understand it. UKO/C3

I have no idea if they understand; they ask how much has been spent in the last five years on whatever, and you just give them the figures. I have no idea whether they understand what they are looking at but you never get any questions back again. UKA3

The concept is wonderful, this idea of matching things… But I don’t really believe it has made any great difference to the way we manage our finances. Also, it’s a great puzzle to me – I don’t get the difference between budgets and estimates and the actual benefit from reconciling our outturn with our estimates and budgets. UKA3

Cost-benefit IssuesCost-benefit IssuesIn reality I am not sure if it hasn’t just introduced a lot of unnecessary complications. There are additional complexities that don’t add very much value at all. The biggest benefit is probably on capital... Unfortunately I don’t think the usage of assets has changed because the accounting treatment has changed. UKA3

There might be benefits but just look at the number of accountants… the number of staff, qualified staff, now working on the accounting side of things… the cost must have been horrendous and are things really that much better? UKA8

The level of accounting expertise has certainly improved in recent years. There are many more accountants… But I wonder how many of them are just churning out figures that maybe they don’t really understand, and I guess many of the people who are getting these reports don’t have the background to understand them either. UKO/C3

Availability of Budgetary Availability of Budgetary Control Reports for Control Reports for Department BoardsDepartment Boards

Reporting to the board is now in place in most departments about the financial position. This was not something that was common even three or four years ago. Our view of it is that most of the departments now produce information, whether it is monthly or quarterly, about the accounts position. That must have a direct consequence. UKO/C2

Most departments have started to do quarterly, and even monthly, reports. Although I have supervised some that are struggling to get quarterly or even half-yearly reports out. I don’t think some of the people preparing it actually understand it. On the boards, while all Directors of Finance are supposed to be qualified, apart from them, I am not sure how many others would have a clear understanding of Resource Accounting. UKO/C3

The RoI Story: The RoI Story: The Sceptic’s RoadThe Sceptic’s Road

• Initial Enthusiasm and Influences Initial Enthusiasm and Influences from Elsewherefrom Elsewhere

• RoI Pragmatism vs UK DogmatismRoI Pragmatism vs UK Dogmatism

• The OutcomeThe Outcome

Initial Enthusiasm and Initial Enthusiasm and Influences from ElsewhereInfluences from Elsewhere

The first objective was to improve the quality and efficiency of financial reporting. It was certainly felt that there were significant gaps in financial reports in the civil service. RoIO/C1

The genesis for SMI was this MSc group of Assistant Secretaries that visited New Zealand and Australia. They were influenced by what they saw there. When they came back, one of the things on the agenda was accruals accounting. They saw this as a better way of doing things. RoIO/C4

I do not feel the UK influence was strong at all. We brought some guys over who had been involved in rolling out accruals accounting in the UK. I think we totally frustrated them because we were just concerned with having good management information systems and they couldn’t convince us that moving to accruals for reporting and budgeting was inherently better. My own experience is that the UK had very little influence. We looked at what others did and at the end of the day we did our own thing. RoIA2

 

RoI Pragmatism vs UK RoI Pragmatism vs UK DogmatismDogmatism

The way we do things is to take things a piece at a time then stop and say ‘is this what we want to do?’ There is very little of that in the UK. RoIA5

My view is that we are not ideologically driven. I don’t think you would meet an Irish politician who would say we’ve got to follow New Public Management as a way of changing how the country is managed. …You wouldn’t find people here ever describing a government’s policies as ‘Thatcherite’ or ‘Blairite’ as a way of defining their policies. RoIO/C2

We did a pilot it and it resulted in a report. But nobody seemed to be convinced and it didn’t light any light bulbs for anyone. RoIA3

The OutcomeThe big disadvantage of accruals accounting is that there would be a big resource issue for departments, not only in terms of the staff needed but also building up the skills to do it. People who are not of a financial reporting background generally feel there is not any point in carrying out accruals accounting. They don’t believe there is a need for it. RoIA1

From my own perspective the objective of going to accruals accounting has just faded away. … At a senior level inter-departmental committee I can recall a senior official in the Department of Finance saying that when it comes to accruals accounting I would advise you to make haste slowly. RoIA5

There is a difference in the UK and Ireland and the way these things happen. In the UK it is mandated and everyone does it. … We [RoI] find a lot of change is bottom up or more consensual. You do find things that evolve into a middle ground and I suspect that’s one way of looking at the accruals issue. … You didn’t get a middle ground forming in which several parties are suddenly saying we need to have this and we should be doing this. When you get that then it becomes diffused and fades. RoIO/C4

Discussion and Analysis Discussion and Analysis • Different trajectories – unsurprising in Different trajectories – unsurprising in

terms of NPM adoption (fits with terms of NPM adoption (fits with variability in intensity of NPM literature)variability in intensity of NPM literature)

• Cost-benefit issues discouraged RoICost-benefit issues discouraged RoI• RoI intially committed but little RoI intially committed but little

happened – influence of ‘MSc’ grouphappened – influence of ‘MSc’ group• Coercive isomorphism in UK – bottom-Coercive isomorphism in UK – bottom-

up approach in RoIup approach in RoI• Political, ideological and cultural Political, ideological and cultural

rationalerationale• Success in UK??Success in UK??• The better way?The better way?

The Road not Taken The Road not Taken byby Robert Frost Robert Frost

Two roads diverged in a yellow wood,Two roads diverged in a yellow wood,

And sorry I could not travel bothAnd sorry I could not travel both

And be one traveler, long I stoodAnd be one traveler, long I stood

And looked down one as far as I couldAnd looked down one as far as I could

To where it bent in the undergrowth;To where it bent in the undergrowth;

Then took the other, as just as fair,Then took the other, as just as fair,

And having perhaps the better claim,And having perhaps the better claim,

Because it was grassy and wanted wear;Because it was grassy and wanted wear;

Though as for that the passing thereThough as for that the passing there

Had worn them really about the same,Had worn them really about the same,

And both that morning equally layAnd both that morning equally lay

In leaves no step had trodden black.In leaves no step had trodden black.

Oh, I kept the first for another day!Oh, I kept the first for another day!

Yet knowing how way leads on to way,Yet knowing how way leads on to way,

I doubted if I should ever come back.I doubted if I should ever come back.

I shall be telling this with a sighI shall be telling this with a sigh

Somewhere ages and ages hence:Somewhere ages and ages hence:

Two roads diverged in a wood, and I-Two roads diverged in a wood, and I-

I took the one less traveled by,I took the one less traveled by,

And that has made all the difference. And that has made all the difference.