Accrual accounting by Anglo-American governments: Motivations,developments,and some tensions over the last 30 years

Abstract

This article takes a comparative international accounting history (CIAH) approach (Carnegie and Napier, 2002) to describe and discuss motivations for, and developments in the adoption of accrual accounting in five Anglo-American countries: Australia, Canada, New Zealand, the United Kingdom, and the United States. Although the adoption of accrual accounting across these countries over the last two decades can be attributed to the 1980s philosophy of new public management (NPM), the CIAH perspective illuminates similarities and differences in the nature of accrual accounting practices. The differences are due, in large part, to the timing and speed of change required by government, as well as the role played by the profession. Several tensions have arisen from the adoption of accrual accounting and these are also outlined. Given the inclusion of five countries and a span of 30 years, this article is necessarily in the nature of an overview.

Keywords

Accrual accounting Australia Canada government new public management NPM New Zealand public sector UK US

Introduction

Business entities long ago converted to an accrual basis of accounting. Governments, on the other hand, are much more recent converts. It has only been in the last two decades that accrual accounting has been adopted by the governments of Australia, Canada, New Zealand, the United Kingdom, and the United States. New Zealand, the first country to adopt accrual accounting, did so in 1992. This article uses a comparative international accounting history (CIAH) approach (Carnegie and Napier, 2002) to describe and discuss the motivations for, and developments in the adoption of accrual accounting across these five Anglo-American countries. Tensions arising from this transition are also outlined. The Public Sector Committee of the IFAC, through Occasional Paper 3 (1996), presents one of the few studies that have provided an overview of accrual accounting in these countries, and it is timely to bring that discussion up to date.

Broadbent and Guthrie (2008) identify an increasing stream of public sector accounting research that examines the adoption of private sector practices, including financial accounting techniques, in government entities providing public services. The move to accrual accounting by national governments is attributable to the circumstances and general philosophy associated with the new public management (hereafter NPM) movement of the 1980s. One of the key goals of NPM was to transfer the management techniques of the private sector to the public sector. NPM was experienced in broadly similar ways across the five countries, including an emphasis on making changes in accounting practices (Peters and Savoie, 1994). However, even though accrual accounting was adopted by all five countries, the nature of the accrual accounting adopted and the way in which accrual accounting was adopted played out differently. This was due, in large part, to differences in the timing and speed of change required by government, as well as the role played by the profession.

CIAH studies such as this highlight similarities and differences across a number of countries and enable us to understand better the ways in which changes in accounting practice take place and what motivates these changes. The five Anglo-American countries were chosen because of their broad-based similarities, as noted by early research on international accounting, such as Gray (1988). These similarities facilitate comparison as well as providing an opportunity to isolate reasons for the differences.

Before a discussion of the events, it is important to provide some general background on accrual accounting in government and NPM. Following this background discussion is the description of the adoption and development of accrual accounting on a country-by-country basis, across the five nations. Because of the different ways in which accrual accounting was adopted, various levels of government will be referred to, as necessary, as part of the process. Similarities and differences in the move to accrual accounting are discussed. Then, three tensions that have arisen from the adoption of accrual accounting are briefly outlined. Finally, the article concludes with some summary comments. Given that five countries are included, this study is necessarily in the nature of an overview.

Accrual accounting in government and NPM

Prior to the adoption of accrual accounting, governments tended to use an expenditure basis of accounting. Although an expenditure basis of accounting can be depicted as a cash basis of accounting, many governments actually went through a cash, modified cash, modified accrual, accrual transition process (see, for example, Ellwood (2002) regarding the UK, and Naik (2005) regarding Canada). A number of sources discuss the differences between cash and accrual accounting and the relative benefits of accrual accounting (for example, Dupuis, 2004; FEE Public Sector Committee, 2007; Public Sector Committee of IFAC, 2002). The most significant difference arising from adoption of accrual accounting is the capitalization and amortization of certain long-term assets. With a cash basis of accounting (or modified cash or modified accrual basis, for that matter) all assets are recorded as expenditures in full in the year in which they are acquired. There is no need for depreciation and no allocation of asset costs on a year-by-year basis. Decisions tend to revolve around whether or not to buy new capital assets instead of managing the capital assets on hand. In addition, a failure to recognize an allocated cost of capital assets makes it more difficult to understand the ongoing financial implications of maintaining a given level of service. Thus, a lack of information on depreciation and amortization makes it more difficult to make decisions about expanding or contracting public programs. There are also issues on the liability side, and prior to the implementation of accrual accounting many governments were building up pension liabilities and liabilities for other social benefits that went unrecorded in the financial statements (Public Sector Committee of IFAC, 1996).

On the surface, it may seem that accrual accounting, as developed for the private sector, could be imported directly into the public sector, but the extent to which this could be done produced the most notable tension in the introduction of accrual accounting to government. A number of standard setters and individual authors have explored the ways in which business and government differ as a means for understanding how accounting for business and accounting for government should or should not differ. The standard setters include: the Public Sector Accounting Board (PSAB) in Canada (CICA, 2010, PS 1100.A; PSAB Conceptual Framework Task Force, 2011), the Governmental Accounting Standards Board (GASB) in the US (GASB, 2006), and the International Public Sector Accounting Standards Board (IPSASB) (IPSASB, 2011). Researchers and commentators on the issue have included Barton (2004), Chan (2003), Denning (2000), Graham (2007), Laughlin (2008), Pallot (1992), and Simpkins (2006a, 2006b).

These sources indicate a number of fundamental ways in which government and business differ. These are: powers and purposes; revenue and financing; spending and assets; and stakeholders and accountability. Governments are elected, have regulatory powers, and operate with a civil service that manages government resources. These resources are raised primarily through the confiscatory powers of taxation and are distributed in accordance with a public budget that establishes the government’s spending authority. Governments engage in non-exchange transactions receiving value (such as taxes) without providing equal value in return, or giving value (such as social support payments) without receiving equal value in return. Capital assets in government (such as infrastructure and national art treasures) encompass a broader range of assets than those of business, and, in the main, are not used as a means to generate revenue. Finally, governments have a much broader accountability to a wider variety of stakeholders than does business.

Thus, there is a need to consider accounting procedures for different types of transactions and assets in the public sector. Several authors (for example, Carnegie and West, 2005; Carnegie and Wolnizer, 1996; Stanton and Stanton, 1998; West and Carnegie, 2010) have commented on problems regarding the reliability and usefulness of applying accrual accounting concepts from business to the capitalization of such public sector resources as libraries and heritage assets. On a larger scale, the very nature of the “bottom line” (and other indicators in accrual financial statements) differs between the private sector and the public sector. Because the public sector does not exist to maximize profits, the logic of interpreting a government’s operating results is more complicated. Having a surplus is not necessarily “good”. Think here, for example, of a government’s failure to provide aid relief in the case of a domestic natural disaster. Similarly, having a deficit, say, because of economic stimulus initiatives, is not necessarily “bad”.

Close attention to public sector accounting is only three decades old. For example, Jones (1992) comments on the historical perspective of the UK government in respect to public sector accounting: “ … the government has not needed to establish its legitimacy for many years, probably centuries: it has the power to set and enforce its financial and accounting policies and, one way or another, it has done this” (Jones, 1992: 262). Nevertheless, the 1980s saw major changes in the approach to public sector management, and elected officials in Anglo-American governments started to give accrual accounting serious thought (Public Sector Committee of IFAC, 1996).

This interest in accrual accounting was propelled by the NPM movement that began in the late 1970s and early 1980s and brought managerialism to the public sector. Managerialism, as used here, refers to the introduction of private sector practices into the public sector (see, for example, Pallot, 2003). The philosophy of NPM is based on the belief that private sector management is superior to public sector administration. As much as possible, the goal is to transfer government activities to the private sector by means of privatization and contracting. This serves to fulfil an agenda of shrinking the size of government (see for example, Ellwood and Newberry, 2007). However, “Given that all government activities can hardly be transferred to the private sector, the next best solution is to transfer business management practices to government operations” (Savoie, 1995: 113).

The 1980s NPM call for public sector reform was fuelled by several phenomena: (1) the growing size of the public sector; (2) increasing levels of taxation; (3) the growing cost of government and government debt; and (4) a declining standard of living. These concerns arose in many democratic nations in the 1970s and 1980s and were expressed by public dissatisfaction (Barton, 2009), which in turn found its way into election platforms. It was the political leadership of this time, Thatcher (in the UK), Reagan (in the US), Mulroney (in Canada) and Hawke (in Australia) that put NPM into practice (Peters and Savoie, 1994), but even with a change of leadership, Clinton in the US, Major in the UK and Chrétien in Canada, the various reforms continued (Savoie, 1995). All five countries under study had similar financial problems. Long-term interest rates over the 1970s and 1980s changed dramatically. Interest rates in Australia rose from 6.65 per cent in 1970 to a high of 15.38 per cent in 1982; Canada went from 7.97 per cent to 14.99 per cent in 1981; New Zealand from 5.51 per cent to a high of 17.66 per cent in 1985; the UK rose from 8.63 per cent in 1970 to a high of 14.88 per cent in 1981; and the US from 7.35 per cent in 1970 to a high of 13.91 per cent in 1981 (OECD Statistics, 2011).

Hood and Peters (2004: 268) comment that NPM has had a number of characteristics and benefits attributed to it by numerous authors, “But like most divinities, NPM turned out to be somewhat mystical in essence, as no two authors of that era listed exactly the same features in enumerating its traits”. What is common, at least to several authors (Guthrie et al., 1999; Hood, 1995; Pollitt, 1995), is the need for changes in financial reporting and an increased emphasis on performance-based management, which requires performance measurement and reporting. Accrual accounting was an obvious and logical accompaniment to NPM because it was associated with private business management methods which, simplistically put, were viewed as “good”, as opposed to public sector administrative processes which were perceived as outdated and “bad” (Hood, 1991, 1995).

Motivations and developments in the move to accrual accounting

This section includes six sub-sections. The first five provide an overview of the adoption of accrual accounting on a country–by-country basis, whereas the sixth sub-section analyses the similarities and differences across the five countries.

New Zealand

Public debt and government deficits continued to grow in New Zealand throughout the 1970s and 1980s. The country was experiencing double digit inflation and in 1983 New Zealand’s credit rating was downgraded (Lye et al., 2005). New Zealand had descended from the fifth highest standard of living in the western world in the early 1950s to the twenty-fifth by the late 1980s (Public Sector Committee of IFAC, 1996: 5). Thus, the 1984 election platform was built on seeking broader economic reforms, including reforms in public sector management (Lye et al., 2005).

The 1984 election was won by a new Labour government and in 1989 the Public Finance Act was passed, requiring a full set of financial statements from the government, prepared on an accrual basis. In 1992 New Zealand published its first accrual-based Crown Financial Statements, and in doing so became the first national government to adopt accrual accounting for the public accounts. The Minister of Finance responsible for introducing this Act made the following comments (Public Sector Committee of IFAC, 1996: 8–9):

These accounts, which are independently audited, have two benefits: they remove the scope for fiscal trickery, and they encourage governments to focus on the longer-term consequences of policies …

Most valuably, for the first time, we were able to begin to interpret our net worth. Not surprisingly it was very negative, but at last we had a reliable measure of improvement over time.

Of course, accrual accounting does not remove the ability to engage in fiscal trickery, nor does it necessarily enforce a long-term view. Comments such as this one serve to underline the symbolic role played by a government’s adoption of accrual accounting.

The idea of adopting accrual accounting had been raised in New Zealand prior to the 1984 election. The 1978 Shailes Report from the Controller and Auditor-General advocated accrual accounting (Lye et al., 2005; Pallot, 2001) and in 1979 the Council of the New Zealand Institute of Chartered Accountants (known then as the New Zealand Society of Accountants) made a commitment to pursue accrual accounting for public sector entities. The Council required its standard-setting committee, the Accounting Research and Standards Board (ARSB), to set accounting standards for the public sector, and a subcommittee, the Public Sector Study Group, was established in 1981 (Bradbury and Baskerville, 2007; Devonport and van Zijl, 2010; Pallot, 2001). In 1984 the Group issued an informal exposure draft and discussion paper, and in 1987 its first public sector accounting standard. The Group became the Public Sector Accounting Committee (PSAC) in 1986, and from 1988 to 1991 the Committee issued a series of five Technical Guidance Bulletins (Devonport and van Zijl, 2010).

Although public service figures were added to the ARSB – Wayne Cameron from the Auditor-General’s Office in 1985 and Ian Ball from the Treasury in 1988 – separate public sector based accrual accounting standards were never fully developed (Devonport and van Zijl, 2010). The speed of structural changes in government overtook the efforts of the profession. The pronouncements from the Public Sector Accounting Committee did not cover all of the government accounting issues that needed to be addressed. These included heritage, defence, and infrastructure assets; taxation revenues; and welfare obligations (Pallot, 2001). As a result, the financial management branch of the New Zealand Treasury took on the task of adapting private sector standards for use in the public sector, and resolving such national government accounting issues (Pallot, 1994).

Ball et al. (1999: 11) note that “all but three of approximately 45 departments effected the change successfully within one year”. The ability to adopt accrual accounting with such speed was due, in part, to leveraging off the standards of the private sector. This included use of generic private sector accounting software and related expertise (Public Sector Committee of IFAC, 1994).

The Public Sector Accounting Committee pronouncements were withdrawn in 1993 and a single standard setting approach for all sectors was adopted instead (Devonport and van Zijl, 2010). The Financial Reporting Act 1993 established the Accounting Standards Review Board (ASRB) as an independent crown entity with statutory authority over both private sector and public sector accounting standards. The ASRB was to approve financial reporting standards as developed by the Financial Reporting Standards Board (FRSB) and give them legal backing (ASRB, 2010). The FRSB was a successor to the former Accounting Research and Standards Board of the New Zealand Institute of Chartered Accountants (Bradbury and Baskerville, 2007; Devonport and van Zijl, 2010).

In 2002, the ASRB announced its decision to adopt International Financial Reporting Standards (IFRSs). However, in order to apply IFRSs to the public sector it was necessary to undergo a significant conversion exercise which included modifying certain IFRSs or, in the case of certain issues unique to the public sector, introducing additional requirements (Treasury, New Zealand, 2010; Warren, 2005).

Almost 20 years after the adoption of a single standard approach, the ASRB concluded in 2011 that user needs cannot be met by a single set of accounting standards applied to all entities. On 1 July 2011 the ASRB was reconstituted and replaced by the External Reporting Board (XRB).

Australia

Chua and Sinclair (1994) note a backlash against big government in the mid-1970s. Australia’s economic decline was being blamed, in part, on the recent and rapid expansion of government, which was seen as being obstructive to economic growth. A number of state-based inquiries were conducted in the 1970s. In addition, the findings of a Royal Commission on Australian Government Administration were published in 1976. These reports came to a similar conclusion – that government was too big and was unaccountable (Potter, 1999).

The Hawke Labor Government was elected in 1983 on a platform of reforming government administration. “Prescriptions for change were rooted in the advocacy of formal rational management, an emphasis on the necessity for clear goals, corporate plans, and, above all, internal and external accounting systems with clear responsibility lines for output performance measurement” (Parker and Guthrie, 1993: 62).

At the time, the Australian Accounting Research Foundation (AARF) was the technical body for the two accounting associations: the Institute of Chartered Accountants in Australia (mainly private sector practitioners) and the Australian Society of Accountants (accountants in industry and government) (Carnegie and West, 2005; Chua and Sinclair, 1994). The AARF also encompassed the private sector Accounting Standards Board as well as the Auditing Standards Board.

Chua and Sinclair (1994) describe the events leading to the formation of the Public Sector Accounting Standards Board (PSASB). They note that, beginning in 1979, government accountants regularly approached the AARF to discuss the development of public sector accounting standards, although they did not seek accrual accounting. Their efforts were unsuccessful and eventually a contest between private sector interests and public sector interests emerged within the profession, with government accountants seeking a standard-setting committee that was independent of the AARF. The threat of government intervention in standard setting forced a compromise between accountants in the two sectors, and in 1983 the PSASB was created within the AARF to develop financial accounting and reporting standards for government.

It was not until 1991 that the PSASB issued is first exposure draft applicable only to public sector entities. Chua and Sinclair (1994) comment that the establishment of the PSASB did not seem to enable the Board to move the public sector agenda much more quickly, as the demands of the private sector continued to dominate.

Before the Board could make any real progress, accrual financial statements based on private sector GAAP were being produced by the state of New South Wales. The Premier of New South Wales, elected in 1988, made an election pledge to enhance government efficiency by becoming more businesslike (Barton, 2009). He pushed the accrual accounting agenda for the state, and New South Wales produced its first set of accrual financial statements for the 1993 year-end. Christensen and Parker (2010) explore this transition as a contest between public sector accrual accounting and cash-based government finance statistics (GFS). There were several factors that supported this change. The private sector consultants that had been engaged argued for the adoption of private sector accrual accounting and offered to provide the necessary systems and related accounting advice. In addition, the change to accrual accounting was supported by public sector accountants who were trained in private sector accounting and saw the move as a means to enhance their status in government.

Barton (2004) indicates that the PSASB tended to adopt private sector standards and apply them to the public sector. There were only three accrual-based statements specifically promulgated for the public sector: AAS 27 – Financial Reporting by Local Governments in 1990 (Ryan, 1998); AAS 29 – Financial Reporting by Government Departments in 1993 (Potter, 1999); and AAS 31 – Financial Reporting by Governments in 1996 (Christensen, 2002). AAS 27 was required for 1994 year-ends and Laing (2007) notes that, with respect to New South Wales, there was a high level of compliance. As a result, local governments in Australia were producing accrual accounts one year before the national government did.

The national government announced the adoption of accrual accounting in 1992, and by 1994 all departments prepared accrual financial statements. Accrual statements for the whole of government were produced for the first time in 1995 (Barton, 2009). Barton notes that the contest between accrual accounting and the GFS approach continued, and both approaches were being used with very different results.

Although part of the impetus to form the PSASB was the avoidance of government intervention in standard setting, that avoidance was short-lived. Accounting standards for all sectors are now set by a government agency known as the Australian Accounting Standards Board (AASB). The AASB website (AASB, 2010) outlines several structural changes to standard setting that involve government. In 1984 the Accounting Standards Review Board (ASRB) was established by government to review the standards produced by the profession, and, if deemed appropriate, issue them as ASRB standards with the force of law. In 1988 the ASRB merged with the profession’s Accounting Standards Board, and in 1991 the ASRB was renamed the Australian Accounting Standards Board. The PSASB was merged with the AASB in 2000. Also in 2000, the Financial Reporting Council (FRC) was created by government to oversee the activities of the AASB (with limited technical involvement).

In 2002, the FRC announced the requirement for adoption of IFRSs beginning in 2005. As was the case with the adoption of IFRSs in New Zealand, the AASB undertook a process for adapting and supplementing IFRSs to suit the public sector. Also beginning in 2002, the FRC directed the AASB to pursue harmonization of GAAP and GFS financial reporting (Treasury, Australia, 2004).

Effective 1 July 2008, the three PSASB public sector standards were withdrawn and replaced by a number of topic-based standards, as well as AASB 1049 Whole of Government and General Government Sector Financial Reporting (Australian National Audit Office and CPA Australia, 2008). AASB 1049 was produced as a result of the first phase of the GAAP/GFS harmonization project (Kober et al., 2010).

United Kingdom

As the Report of the House of Lords Select Committee on Public Service (UK Parliament, 1998) notes, the UK government has had a history of concern over the size and functioning of the civil service, extending back at least 40 years. The Report refers to the Fulton Committee Report in 1968 and the Financial Management Initiative launched in 1982. Humphrey et al. (1993) describe concerns with public sector management as “erupting” in the UK in the 1980s. At the time, the UK public sector employed a range of diverse accounting practices which, by and large, did not include accrual accounting. The first widespread application of accrual accounting (aside from nationalized entities) began in 1991 (for the 1991–1992 year-end) when National Health Service (NHS) trust hospitals started using company style accounts (Ellwood, 2002; Mellett, 1997).

Resource Accounting and Budgeting (RAB) was the terminology used to describe the accounting reform and the move for government departments in the UK to adopt accrual accounting. RAB was broader than the adoption of accrual accounting as it sought to focus on resources and link inputs, departmental aims, objectives, and outputs (Public Sector Committee of IFAC, 2002). The pursuit of RAB was announced by the Chancellor of the Exchequer in the November 1993 budget statement, but the principles behind RAB had a longer history as they were based on the Financial Management Initiative of 1982 (Mellett, 1997; Public Sector Committee of IFAC, 2002).

The RAB announcement was followed by a Green Paper (consultation paper: UK Treasury, 1994), Better Accounting for the Taxpayer’s Money: Resource Accounting and Budgeting in Government, that was promulgated in 1994 with a focus on accrual accounting (Mellett, 1997). In 1995 a White Paper (policy paper: UK Treasury, 1995) with the same title was produced and this paper set out a timeline whereby accrual accounts would be published for the 1999–2000 year-end (Mellett, 1997; Public Sector Committee of IFAC, 2002). The scope of RAB included all UK central government departments and many of the main public service pension plans. According to Chow et al. (2007), the UK parliament expressed interest in a consolidated set of accounts for central government. However, the differences in accounting practices between the various government departments meant that such a set of accounts would not be very meaningful. Therefore, the emphasis was placed on RAB and achieving change at the departmental level, before addressing central government accounts. The first year that UK government departments produced accrual accounts was for the 2000 year-end (Ellwood, 2002).

The 1994 Green Paper and the 1995 White Paper outlined the accounting principles to be used for RAB. They were to be UK GAAP, in particular the accounting and disclosure requirements of the Companies Act 1985. It was recognized that this source would need to be adapted to take account of the public sector context (Public Sector Committee of IFAC, 2002). The Green Paper envisioned that the Treasury would publish any guidance required for the public sector as a supplement to commercial GAAP. However, this approach was criticized. For example, the Public Sector Committee of IFAC (2002: 10) describes how the Controller and Auditor General responded to the Green Paper by saying users needed to play a role in standard setting. The independent public sector accounting standard setting bodies in Canada, the US, and Australia were cited by way of example. As a result of such concerns, the government established the Financial Reporting Advisory Board (FRAB) in 1996 to advise the Treasury on the application of commercial GAAP and provide an independent review of accounting standards for government (HM Treasury, 2011a; Public Sector Committee of IFAC, 2002).

Whole of government accounting (WGA) in the UK has been a work in progress for a considerable period of time. In the May 1997 general election, Labour replaced the Conservatives as the ruling party and, rather than deal with just central government accounts, the decision was made in 1998 to develop WGA accrual accounts for 2005–2006 (Chow et al., 2007; Ellwood, 2002; Naik, 2005). However, this goal was not met, and the timeline for audited accrual WGA statements has been extended a number of times (Chow et al., 2008).

In July 2011, HM Treasury published a WGA unaudited summary report for the 2009–2010 fiscal year. According to Note 1 of the 2009–2010 summary report, the Comptroller and Auditor General must, under statute, provide an opinion on the complete WGA accounts for 2009–2010 by 31 October 2011 and HM Treasury must publish the audited accounts by 31 December 2011 (HM Treasury, 2011c). The Whole of Government Accounts website for the Treasury indicates that this timeline was met and audited whole of government accounts for the year ended 31 March 2010 were published in November 2011 (HM Treasury, 2012).

Currently, financial reporting for the public sector is based on IFRSs adapted for the public sector (HM Treasury, 2011b). This has been effective from the 2009–2010 fiscal year (UK Parliament, 2009). According to a recent HM Treasury memorandum of understanding (MOU) (HM Treasury, 2011b), public sector financial reporting guidance is to be prepared using the following hierarchy: (1) EU-adopted IFRSs; (2) International Public Sector Accounting Standards; and (3) UK accounting standards issued by the Accounting Standards Board. The Accounting Standards Board (ASB) has the responsibility for setting accounting standards for the private sector, and in order to have input on public sector issues, the ASB established the Public Sector and Not-for-Profit Committee in 1994. In 2005 the Committee was renamed the Committee on Accounting for Public-benefit Entities (Accounting Standards Board, 2011).

United States

The United States currently has two bodies that set government accounting standards. These are the Federal Accounting Standards Advisory Board (FASAB) for the federal government, and the Governmental Accounting Standards Board (GASB) for state and local governments. Both these bodies produced accrual accounting pronouncements for their respective levels of government in the 1990s. Yet, the IPSASB (2006: 4) refers to a 70-year road to accrual accounting for governments in the US. Curiously, it seems that at the state and local level there was a string of profession-based standard setting bodies concerned with public sector accounting dating back to 1933 with the formation of the National Committee on Municipal Accounting (which later became the National Council on Government Accounting), but until the formation of the GASB none of them promulgated accrual accounting standards (Dyer, 1996; IPSASB, 2006; Johnson and Langsam, 1991). At the federal level, various initiatives dating back to 1950 required adoption of accrual accounting, but until the development of the FASAB no such standards were set (Chan, 2008; Congressional Budget Office, 1977).

The GASB was established in 1984 under the oversight of the Financial Accounting Foundation (FAF). The FAF is a private sector not-for-profit entity that also has oversight over the FASB (Financial Accounting Standards Board) which sets for-profit standards in the US (FAF, 2010). The state and local government accounting standard setting agenda was turned over to the GASB from a predecessor body, the National Council on Government Accounting (NCGA). This agenda included two projects the NCGA was working on: the measurement focus and basis of accounting project and the financial reporting model project. These projects became the basis for the accrual-based financial reporting model for state and local governments (IPSASB, 2006).

GASB standards are not law and the GASB does not have any powers of enforcement. Instead, its authority is maintained through a combination of self-directed legislation in some states, as well as auditor reference to conformity with GASB as GAAP (GASB, 2010). Thirty-six of the 50 states in the US have legislation prescribing use of government GAAP for at least some of their political subdivisions (GASB, 2008).

GASB Statement No. 34 Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments, was issued in June 1999, and among other changes to the financial reporting model, it required a full accrual basis of accounting for government-wide financial statements (Kravchuk and Vorhees, 2001), including the recognition and depreciation of all capital assets (Patton and Bean, 2001). Issuing this standard was the culmination of more than 15 years of work that included GASB Statement No. 11 which was never put into practice because it was an accrual standard that was applicable only to the operating statement (IPSASB, 2006). GASB Statement No. 34 laid out an implementation timetable based on the size of government. Earlier adoption was encouraged but, depending on size, certain governments had until their 2004 year-end to comply (Kravchuk and Vorhees, 2001).

The push for accrual statements at the state and local level would have been motivated, in part, by a growing interest in government accounting in the 1970s created by problems in cities with infrastructure and debt.

At that time, the country’s infrastructure was wearing out, revenues were slowing, services were being cut, and some major cities defaulted on debt (New York City in 1975 and Cleveland in 1978). These forces brought government accounting and financial reporting to the forefront of the profession. (Foltin, 2008: 27)

At the federal level, though, recognition of the need for accrual accounting came much earlier. Two Hoover Commissions, one in 1950 and another in 1956, recommended that the federal government adopt accrual accounting. A law to that effect was passed in 1956 directed at the head of each executive agency of the federal government (Chan, 2008; Congressional Budget Office, 1977). The Congressional Budget Office (1977: 29) noted that: “Neither the committee reports accompanying the 1956 legislation nor the hearings preceding it contain a definition of the term ‘accrual basis’”. Despite this law and other events that transpired, nothing was done about implementing accrual accounting until inter-agency conflicts were set aside (Chan, 2008) and, as noted below, further legislation was put in place.

Accounting standard setting at the federal level was under the purview of three offices: the General Accounting Office (GAO, now the Government Accountability Office); the United States Treasury; and the Office of Management and Budget (OMB) (IPSASB, 2006). In 1990 these three offices established a memorandum of understanding to create the FASAB. The Chief Financial Officers Act of 1990 required annual audited financial statements for the whole of government, as well as its financial reporting entities, and the FASAB was established in the same year to develop the applicable accounting standards to meet this legislative requirement (Federal Accounting Standards Advisory Board, 2010). It should be noted that an electronic-based word search of the Chief Financial Officers Act does not find any instance of the word “accrual”. Nevertheless, the FASAB issued accrual-based standards in 1995 (Mosso, 2006). There is some debate as to the independence of the FASAB. Despite a 2002 restructuring to include a supermajority of non-federal members, the FASAB remains subject to the veto power of sponsoring federal offices (Federal Accounting Standards Advisory Board, 2011; Patton and Mosso, 2009; Steinberg, 2009).

The 1998 year-end was the first year that federal executive branch agencies prepared financial statements in accordance with FASAB accounting principles (Comes and Riley, 1999). It was not until the following year, 1999, that the auditing profession recognized them as GAAP (Mosso, 2005). Some departments and agencies have been able to get clean audit opinions on their financial statements. On the other hand, for government-wide financial statements, which have been audited for 14 years (as at fiscal year-end 2010), the US Government Accountability Office has not yet been able to express an opinion on the accrual-based consolidated financial statements due to material weaknesses in internal control (Government Accountability Office, 2011).

Canada

The Auditor General’s Report of September 1998 (Office of the Auditor General of Canada, 1998) describes the impetus for accrual accounting as being driven by government. In the 1994 budget, the Minister of Finance announced an undertaking called Program Review. This effort was directed at reviewing government priorities and focusing diminished government resources on the highest priorities. In the 1995 budget, the Minister explained “that Program Review would lead to long-lasting structural change in what the government does. He spoke in terms of getting government right” (Office of the Auditor General of Canada, 1998: paragraph 18.8, emphasis in original). In the 1995 budget the Minister also announced the intention of the federal government to move to full accrual accounting.

The 1995 budget announcement came long after two Royal Commissions that had already recognized a need for major changes in government organization and financial management. These were the 1962 Glassco Commission on Government Organization and the 1979 Lambert Commission on Financial Management and Accountability. The Glassco Commission wrote explicitly about the need for accrual accounting, whereas the Lambert Commission called for a cost-based accounting system that included all costs on a timely basis (Baker and Rennie, 2006; Canadian Institute of Chartered Accountants, 1980).

Interestingly, the Department of Finance provided a five-point explanation, “What is the rationale for implementing full accrual accounting” (Department of Finance, 2002). One of the points seems to be based on “peer pressure”: “Many provinces have adopted full accrual accounting as have a number of foreign governments, including the United States, Australia and New Zealand. The United Kingdom has indicated its intention to adopt full accrual accounting”. Another point seems to indicate that, to some extent, the profession was driving the process: “The Public Sector Accounting Board of the Canadian Institute of Chartered Accountants recommends that senior levels of government adopt full accrual accounting in their financial statements”.

Canada currently has a separate standard setting board for government accounting, the Public Sector Accounting Board (PSAB), and a separate set of GAAP for the public sector. PSAB standards required accrual accounting by senior governments (federal, provincial and territorial) for the 2005–2006 fiscal year. The federal government produced its first set of accrual-based financial statements for the year ending 2003 and received a clean audit opinion (Auditor General of Canada, 2003; Naik, 2005).

The PSAB got its start from a task force, established in the summer of 1975 by the Joint Research Steering Committee of the CICA (Canadian Institute of Chartered Accountants). The task force was charged with determining “whether the Government of Canada and the provincial governments need accounting and reporting standards and whether the Institute might contribute to their development” (CICA, 1980: 1st page of Foreword). As a first step, the task force recommended that a report be prepared on existing practices in government accounting, reporting and auditing. The report, Financial Reporting by Governments, published in 1980, concluded that there was a need for generally accepted reporting standards for sovereign governments in Canada. “The financial statements of Canadian governments are now so complex and varied in presentation and terminology that even persons familiar with government accounting have difficulty in appreciating the significance of the information conveyed” (CICA, 1980: ii). The report also noted the following:

Since only the governments themselves can decide how they will report, some framework is needed for them to develop standards. The Study proposes that the CICA should ask governments to co-operate in creating, and appointing the members of, some independent body to work towards the development of government accounting standards. The CICA, because of its experience in developing such standards for commercial enterprises, should offer to help any independent body that is created. (CICA, 1980: viii)

The Public Sector Accounting and Auditing Committee (PSAAC) was established in 1981. The PSAAC did not initially establish accrual standards. Instead, its stated role was to “improve and harmonize” government financial reporting (Roy, 1988). The first challenge faced by the PSAAC was the need to follow due process, set against a desire to get a set of accounting and auditing standards developed quickly. Also, as the Committee was getting established, there were those who argued that government did not need a separate set of accounting standards (CAmagazine, 1991).

Effective in 1993, the Committee became a board known as the Public Sector Accounting and Auditing Board (CAmagazine, 1993). Within five years, by 1998, it was decided that the auditing role for the Board belonged to the Audit and Assurance Board of the CICA and the board became the Public Sector Accounting Board (CICA, 2000).

Although the PSAB has no statutory authority, jurisdictions in Canada generally have chosen to adopt GAAP as promulgated by the Board. Often, these standards are subsumed under government accounting policies. For example, Note 1 to the 2010 Public Accounts of Canada explains this position:

These financial statements are prepared using the Government’s accounting policies stated below, which are based on Canadian generally accepted accounting principles for the public sector. The presentation and results using the stated accounting policies do not result in any significant differences from Canadian generally accepted accounting principles.

Similarities and differences across the five countries

The five countries under study share a number of similarities, as well as a number of differences, that have resulted in different approaches to accrual accounting in the public sector. These similarities and differences will be discussed along the following dimensions:

calls for accrual accounting;

announcements of public sector reform and the requirement for accrual accounting;

government accounting standard setting boards; and

speed of change and resulting approaches to accrual standard setting.

Evidence was found that indicated three of the five countries had calls for public sector accrual accounting that pre-date the movement for public sector reform. These are: the 1950 and 1956 Hoover Commissions in the US (Congressional Budget Office, 1977); the 1962 Glassco Commission in Canada (Baker and Rennie, 2006), and the 1978 Shailes Report from the Controller and Auditor-General in New Zealand (Pallot, 2001). Australia and the UK certainly had earlier calls for public sector reform. These are, respectively, a Royal Commission on Australian Government Administration in 1976 (Chua and Sinclair, 1994), and the Fulton Report in the UK in 1978 (UK Parliament, 1998). It does not seem, though, that the Australian or UK reports explicitly called for accrual accounting in the public sector. At least for the US, Canada, and New Zealand, the idea of public sector accrual accounting had been presented at such a level as to garner notice by non-accountants in government.

Public sector reform is a much larger package to implement than accrual accounting, and it is to be expected that the general reform announcement would precede the requirement for accrual accounting. In two of the countries, Australia and New Zealand, public sector reform played a significant role in election platforms. Australia elected a new Labor government in 1983. New Zealand elected a new Labour government in 1984. In New Zealand, it took until 1989 before accrual accounting was required by the Public Finance Act, whereas the requirement was announced in Australia in 1992. On the other hand, both the UK and Canada announced public sector reform in national budget speeches, and in both countries the requirement for accrual accounting lagged behind announcements of public sector reform by only one year. In the UK, reform was announced in the 1993 budget, with accrual accounting announced in the 1994 green paper. In Canada, reform was announced in the 1994 budget and accrual accounting became a requirement with the 1995 budget. Of course, by this time, Canada and the UK had New Zealand and Australia as examples of Commonwealth countries that had already made a commitment to producing national accounts on an accrual basis. As for the US, accrual accounting on a national government basis was required by law in 1956 (Congressional Budget Office, 1977), and yet it is difficult to find a defining moment where this requirement was taken seriously. The Chief Financial Officers Act of 1990 led to the formation of the FASAB, but this Act does not stipulate any requirement for accrual accounting. In summary, with the exception of the US, elections platforms and national budgets were a common venue for promoting and announcing public sector reform and heralding the requirement for accrual accounting.

While government was contemplating reform, government accountants and the rest of the accounting profession were contemplating separate accounting standards for government. In all the countries studied here except the UK, standard setting bodies were created by the profession to develop accounting standards for the public sector. Both the Public Sector Study Group in New Zealand and the PSAAC in Canada were created in 1981. The PSASB of Australia was formed in 1983, while the GASB was established in 1984. Thus the four bodies were formed within a period of four years. Of these, only the body in New Zealand began with a focus on accrual accounting. And, of the four bodies created, only the PSAB (formerly PSAAC) and the GASB survived (with FASAB being formed later in 1990). It should be recalled that there are differences in the authority of these non-UK bodies, as the New Zealand and Australian bodies developed standards that required approval by a government appointed entity and were given the force of law.

The due process of standard setting takes time, and time was not available in New Zealand for the development of a separate set of public sector accounting standards. Government departments had two years to change, and adopting private sector accrual accounting (modified by the Treasury where required) was the only way to meet the deadline. As for Australia, change occurred similarly quickly. It took two years for departments to move to accrual accounting and three years for the government as a whole. Again, it was not possible to develop a complete set of public sector accrual standards in that time frame. Once government had adopted a single standard approach, it seemed that there was no need to pursue a separate set of government GAAP.

NPM, accrual accounting and some tensions

Across the five countries, NPM called for closer attention to public sector accounting and accountability, including the need for accrual accounting in government. The standard setting arrangements by which accrual accounting was adopted created a number of tensions. The three most significant tensions are:

Problems with applying private sector standards to the public sector;

Development of government accounting standards internationally; and

The need for guidance for broader performance reporting.

Because there are similarities and differences in the ways in which accrual accounting was brought to the public sector in the five countries, there are similarities and differences in the extent to which these are marked by tensions. Rather than provide a complete country-by-country comparison, discussion will focus on those countries where the tension is notable.

Problems with applying private sector standards to the public sector

Initially, New Zealand and Australia adapted private sector GAAP for use in the public sector, and this treatment continued when these countries adopted IFRSs as the basis for public sector accounting. There is an ongoing challenge with using IFRSs as a starting point because these are developed for the private sector alone, and do not deal with governments or not-for-profit organizations. As indicated earlier, there are aspects of the public sector such as infrastructure and heritage assets, taxes, and social support payments that have no private sector counterparts, and decisions must be made on whether and how to account for these items.

There is another challenge that arises in using private sector standards as a starting point. Despite the potential for adaptation, it seems as though having a single set of standards has hampered public sector input as part of due process. As Barton (2004: 296) says, referring to Australia: “The Standards Board is dominated by members from the accounting profession and business who appear not to appreciate that there are fundamental differences in the nature of the operations of the two sectors”. This sentiment, that the public sector has not been well understood, together with the idea that due process has not been effectively applied, has also been discussed by Baskerville and Newby (2002) with regard to New Zealand, and Carnegie and West (2005) for both Australia and New Zealand.

In Australia in 2005, a study was commissioned by the AASB oversight body, the Financial Reporting Council, to review whether the single standard approach meets the needs of users and the public interest. Kevin Simpkins, Deputy Controller and Auditor-General of New Zealand for three years until May 2005, was commissioned to undertake the study. Simpkins (2006b) notes there are stakeholders that have significant concerns about the differences between the public sector and the private sector and who feel that accounting standard setting needs to respond more to those differences. Action has been taken to respond to these concerns, and during the 2010–2011 year the FRC established the Public Sector Task Force as one of five task forces to advance a range of priority projects (FRC, 2011).

For some time, New Zealand has been exploring a move to a multi-standards approach. Towards this effort, in 2010, a working group of the ASRB (now External Reporting Board (XRB)) published a report, Suitability of IPSAS Review (ASRB, 2010). In September 2011, a position paper was issued that indicates:

… user needs in the future cannot be adequately addressed by a single set of accounting standards applying to all entities … Accordingly the ASRB concluded that the new accounting standards framework should consist of two sets of accounting standards: one applied by entities with a for-profit objective; and another applied by entities with a public benefit objective. (External Reporting Board, 2011: 7)

Thus, a multi-standards approach will be adopted, and the 2011 report of the Auditor-General (Office of the Auditor-General, 2011) confirms that the new standards for public benefit entities will be based on the work of the International Public Sector Accounting Standards Board.

Development of government accounting standards internationally

Standing alone, neither the IPSASB nor the accounting profession has the power to require compliance with IPSASs. The success of the IPSASB’s efforts is dependent upon the recognition and support for its work from many different interested groups acting within the limits of their own jurisdiction. (IPSASB, 2007: 6, paragraph 29)

At the same time that Anglo-American governments were adopting accrual accounting, the accounting profession was working to establish the International Public Sector Accounting Standards Board (IPSASB). The IPSASB is one of the standard setting boards of the IFAC (International Federation of Accountants). It was established in 1986 as the Public Sector Committee, and in 2004 it was renamed the International Public Sector Accounting Standards Board (IPSASB, 2007). The IPSASB develops accrual-based accounting standards, International Public Sector Accounting Standards (IPSASs), for the public sector in two ways (International Federation of Accountants, 2008): first by addressing financial reporting issues that apply to the public sector and that have not been appropriately addressed by an IFRS or for which there is no related IFRS; and second by developing IPSASs that are convergent with IFRSs by adapting them to the public sector context. Thus, IPSASB standard setting activity ranges from IFRS style with terminology changes, to a separate project to create a standard because there is no comparable IFRS.

New Zealand was at the leading edge of adopting accrual accounting, and is now at the leading edge of basing public sector accounting on IPSASs. Although Australia has not progressed as far in exploring the adoption of IPSASs, it was a topic of discussion at the December 2010 meeting of the Financial Reporting Council (FRC, 2010).

As noted earlier, the UK has a memorandum of understanding between the relevant authorities that grants IPSASs second-tier status in the government accounting standard hierarchy (HM Treasury, 2011b). As far as Canada is concerned, the PSAB has as part of its mission statement, “contributing to the development of internationally accepted public sector financial reporting standards” (CICA, 2012). The vision, mission and core values statement found on the GASB website is silent on the issue of internationalization, as is the FASAB website. Nevertheless, despite these differences amongst the five countries, all five of them have representation on IPSASB (IFAC, 2011).

The question is whether or not IPSASs will become as uniformly adopted across governments internationally as IFRSs have been across listed companies internationally. It is important to recall that the IASB had no more power to enforce adoption of IFRSs than the IPSASB has to enforce adoption of IPSASs.

Need for guidance for broader performance reporting

Accrual accounting (of any type) fails to provide the kind of performance measurement called for by NPM. After all, accrual accounting is an economic model (not a business model) that measures resource flows (Mosso, 1999). Accrual financial statements indicate the resources flowing in and out of an entity, but they cannot indicate whether or not the government achieved sufficient and appropriate results for the money that was spent. In addition, governments are responsible and accountable for much more than the management of financial resources (Pallot, 2003). Thus, as called for by NPM, understanding the efficiency and effectiveness of government and the fulfilment of various government responsibilities requires an emphasis on performance management and performance reporting.

Regardless of whether it is called results-based management or outcome-based management or given some other label, all of the Anglo-American governments are engaged in performance management and the associated reporting thereon (see for example, Ellis and Mitchell, 2002; Heinrich, 2002; Talbot, 2010; Treasury Board of Canada Secretariat, 2011). Performance reporting comes with its own set of challenges. The Australian National Audit Office and CPA Australia (2008) note the difficulties in the specification and measurement of outputs and outcomes. Regardless of the extent to which performance reporting is mandated – in New Zealand, for example, the Public Finance Act 1989 made a Statement of Service Performance a legal reporting requirement (New Zealand Government, 2012) – there is a need for guidance on performance measurement and reporting. The question is, “Who is to provide this guidance?”, or perhaps, more specifically, “Do the public sector accounting standard setters have a role?”.

In the US and Canada, the answer to that latter question is “yes”. The GASB and the PSAB, as independent public sector accounting standard setting boards, have published guidance on how the public sector may voluntarily engage in broader performance reporting to address more extensive requirements for accountability. In the US in July 2010, the GASB issued suggested guidelines for voluntary reporting called Service Efforts and Accomplishments Reporting (SEA). “The objective of SEA reporting is to assist citizens, elected officials, and other interested parties … in assessing the performance of services provided” (GASB, 2011). This means the inclusion of non-financial measures and benchmarks in reporting to the public. The production of these guidelines was extremely controversial and the GASB came under serious attack, primarily from the Government Finance Officers Association. Many were of the opinion that GASB had to limit itself to financial transactions and that accountability was beyond the GASB’s jurisdiction (McCall and Klay, 2009).

In Canada, the PSAB has four Statements of Recommended Practice (SORPs), which do not form part of GAAP but are provided as guidance for supplementary reporting.

SORPs provide general guidance to a government or government organization (entity) choosing to provide supplementary information beyond that contained in its financial statements. SORPs address specific aspects of supplementary reporting on topics such as financial condition and financial and non-financial performance. (CICA, 2010: Introduction to Statements of Recommended Practice, paragraph.03)

Nevertheless, the four SORPs are filed with the GAAP Handbook for practical purposes (CICA, 2010). They are:

SORP-1 Financial statement discussion and analysis (June 2004);

SORP-2 Public performance reporting (September 2006);

SORP-3 Assessment of tangible capital assets (November 2008); and

SORP-4 Indicators of financial condition (May 2009).

These developments would seem to suggest that an independent, multi-standards approach to standard setting can facilitate development of such broader performance reporting guidance by the public sector accounting standard setters.

Some concluding comments

This article has provided a CIAH overview of the adoption of accrual accounting across five national Anglo-American governments. Although NPM served as a catalyst in all five countries, the adoption of accrual accounting played out in different ways with different results. This was due in large part to differences in the timing and speed of change required by government, as well as the role played by the profession.

New Zealand and Australia, first to adopt accrual accounting, in 1992 and 1995 respectively, were able to do so quickly by taking a single standard setting approach that meant adapting private sector standards. Despite having the PSAC in New Zealand and the PSASB in Australia, government required a speed of change that prohibited these bodies from developing a full set of public sector GAAP. The US and Canada developed separate standard setting bodies, the GASB, the FASAB, and the PSAB, that remain in operation today. In these two countries, the government move to accrual accounting was much more gradual than it was in New Zealand and Australia, and the standard setting bodies were able to develop separate sets of public sector GAAP.

Interestingly, the similarities are geographically based, with the North American countries experiencing similar results and the southern hemisphere countries experiencing similar results, albeit much different from the North American outcomes. Given close trading ties and government relationships, this pattern should not come as a complete surprise. This leaves the UK as somewhat of an outlier in terms of not only geography, but also history. This may be due in part to the UK having the longest-standing national government of all five countries under study.

The similarities and differences in the ways in which accrual accounting was adopted have led to similarities and differences in the resulting tensions. First, because government is fundamentally different from business, it is not possible to transfer private sector accounting, holus-bolus, to the public sector. As a result, for New Zealand and Australia, who took a single standard setting approach, there have been ongoing challenges in adapting private sector accounting standards for use in the public sector. Second, all five countries have representation in the process for developing public sector accounting standards internationally, yet none of them have adopted these standards. New Zealand appears to be the furthest along in this regard. Third, the independent public sector accounting standard setters in the US and Canada have moved into the area of setting guidance for accountability reporting outside of the financial statements. The outcome of these three tensions has yet to play out.

Where is the future of government accounting headed (at least for the five countries in question)? Any comments in this regard can only be speculative. Nevertheless, it would seem that the path travelled thus far leads to the following plausible conclusions. Save for recent developments in New Zealand, it would seem that the public sector accounting standard setting structures are fixed, at least for the short term. There is the possibility that the IPSASB will become the standard setter de facto for national governments but, for this to happen, the IPSASB would need the acceptance of sovereign governments. Further, governments will continue to grapple with the kind of performance reporting that NPM and a broad accountability to the public requires, and, at least in certain jurisdictions, the accounting standard setters think they have a role to play.

There have been many dramatic changes to government accounting standard setting in the last 30 years and it remains to be seen what the next 30 years will hold.

Footnotes

Appendix: Glossary of acronyms

AARF Australian Accounting Research Foundation

AASB Australian Accounting Standards Board

ARSB Accounting Research and Standards Board (New Zealand)

ASB Accounting Standards Board (UK)

ASRB Accounting Standards Review Board (New Zealand)

CIAH Comparative international accounting history

CICA Canadian Institute of Chartered Accountants

FAF Financial Accounting Foundation (US)

FASAB Federal Accounting Standards Advisory Board (US)

FEE Fédération des Experts Comptables Européens

FRAB Financial Reporting Advisory Board (UK)

FRC Financial Reporting Council (Australia)

FRSB Financial Reporting Standards Board (New Zealand)

GASB Governmental Accounting Standards Board (US)

IFAC International Federation of Accountants

IPSAS International Public Sector Accounting Standard

IPSASB International Public Sector Accounting Standards Board

NPM New public management

OAG Office of the Auditor General (Canada)

PSAAC Public Sector Accounting and Auditing Committee (Canada)

PSAB Public Sector Accounting Board (Canada)

PSAC Public Sector Accounting Committee (New Zealand)

PSASB Public Sector Accounting Standards Board (Australia)

RAB Resource Accounting and Budgeting (UK)

SORP Statement of Recommended Practice (Canada)

WGA Whole of Government Accounting (UK)

XRB External Reporting Board (New Zealand)

Acknowledgements

Thanks go to participants at the sixth Accounting History International Conference in Wellington, New Zealand in August 2010. As well, the incredibly thorough and detailed advice from the referees is most gratefully acknowledged. Without such advice, this article would not have been possible.

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