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International Journal on Governmental Financial Management – 2008 117
ACCRUAL ACCOUNTING FOR THEPUBLIC SECTOR -- A FAD THAT HASHAD ITS DAY?
Andy Wynne - andywynne@lineone.net
Introduction
For the last decade accrual accounting has been presented as
the
reform for public sector accounting and the basis for the wider New Public Management reforms and themarketisation of the public sector (Barton 2005, Ellwood and Newberry 2007, Ouda 2004& 2005, Wynne 2007, etc). However, it is becoming increasingly clear that the claimed benefits of introducing accrual accounting are not being realised in practice. In the fewcountries which have actually adopted this reform, for example, Australia New Zealandand the UK, the evidence is now suggesting that, if their governments’ knew then whatthey know now, that the move to accrual accounting may never have taken place(Dorotinsky, 2008).Several other countries have also reviewed the evidence and have decided that a move toaccrual accounting is not appropriate, at least in the short-term (for example, China, GhanaMalaysia, Mauritius, Namibia, Netherlands, Pakistan). So what are the claims made for the advantages of moving to accrual accounting and what is the actual evidence for theextent to which they have been delivered? This paper reviews the evidence which isavailable so that governments considering this type of reform can base their decisions onthe actual experience of those few countries which have adopted this approach. This isimportant as those individuals and organisations which promote this idea appear to basethis on their faith in the value of the public sector adopting private sector practice rather than objective evidence. Just as the current fall-out from the credit crunch is underminingthe previously dominant view on the efficacy of the free market, so the failure of accrualaccounting to deliver on its promises is having a demoralising effect on at least some of its previous supporters.
International Pubic Sector Accounting Standards Board
IFAC’s International Public Sector Accounting Standards Board (IPSAS Board) has setitself the task of developing a full set of accruals-based international public sector accounting standards, promoting its standards and ensuring that these are adopted aswidely as possible (IPSAS Board, 2008b). The Board arranges its meetings in different places around the world, including, for example, China, Ghana, Russia and Switzerland in
 
118 International Journal on Governmental Financial Management – 2008
the last two years. This enables it to combine these meetings with local promotionalevents. IPSAS Board argues strongly that all governments should adopt the accrual basis.Even in the introduction to its Cash Basis IPSAS (IPSAS Board, 2007: page 1) it states thatthe Board “encourages governments to progress to the accrual basis of accounting”.However, the standing of the IPSAS was significantly undermined in early 2007 when theUK Government (home to the IPSASB Chair) announced that it would be adopting theInternational Financial Reporting Standards rather than the IPSAS.The IPSAS Board (IFAC, 2003: page 7) summarises the advantages of reporting on anaccrual basis in the public sector as follows:
•
it shows how a government has financed its activities and met its cash requirements
•
it allows users to evaluate a government’s ongoing ability to finance its activitiesand to meet its liabilities and commitments
•
it shows the financial position of a government and changes in its financial position
•
it provides a government with the opportunity to demonstrate successfulmanagement of its resources and
•
it is useful in evaluating a government’s performance in terms of its service costs,efficiency and accomplishments.Despite this promotional work by the IPSAS Board and others, the actual use of accrualaccounting by public sector entities is still unusual. Few governments have actuallyadopted this approach, certainly at the national government level. Spain was possibly thefirst in 1989 followed by the celebrated case of New Zealand by 1993 and Australia in1994. A few other governments followed over the next decade or so, but by 2006 the totalwas still only around 10 of the nearly 200 countries in the world (Wynne, 2007). Evenfewer have adopted the accrual basis for their central government budgeting system(Pinaand Torres, 2003).Country
Adopted by centralgovernment
Accrual budgeting usedSpain 1989No New Zealand 1993YesSweden 1993YesAustralia 1994YesUSA 1998NoUK 2002YesCanada 2003NoFinland 2005NoFrance 2006No
 
International Journal on Governmental Financial Management – 2008 119
Taken from Wynne 2007.
Several of the central governments of the largest economies in the world have yet tointroduce such changes, for example, China, Germany, Italy, Japan and Russia. InDecember 2007, Mike Hathorn (chair of the IPSAS Board) said that only six governmentsacross the world had actually issued financial statements on the full accrual basis (at theFEE Public Sector meeting, Brussels).In their summary of the extent of adoption of IPSAS, the IPSAS Board (IPSAS Board,2008a: page 4) list more than 50 countries which have made moves towards adoptingIPSAS, but then admit that only five countries have fully adopted accrual accounting inline with their approach:
Governments that already apply full accrual accounting standards and applyaccounting standards that are broadly consistent with IPSAS requirements:
 – 
 Australia
 – 
Canada
 – 
 New Zealand 
 – 
United Kingdom
 – 
United States of America.
So what is the actual evidence of the real benefits achieved by introducing full accrualaccounting in these countries? In the following sections we review the evidence from theUK, Australia and New Zealand.
Evidence from the UK 
The UK has possibly the most extensive experience of adopting this approach for its publicsector financial statements. Birmingham City Council, then the sixth biggest economicentity in the UK, moved to a form of accrual accounting in 1850, other local governmentsslowly followed over the next century. However, the current moves to accrual accountingin the UK only really started with the health service in 1991. Central government onlyintroduced accrual accounting from around 2000 (Wynne, 2007).Despite this long experience of using accrual accounting in the public sector, the use of cash accounting and budgeting, for central government at least, was almost universallyaccepted until relatively recently. So, for example, Andrew Likierman (the person who waslater responsible for the transition to accrual based accounting in UK central government)was able to say, in a book published as late as 1992 that:
“Those who believe that private sector accounts are superior need to bear two factors in mind. First, that there are no immutable accounting or other financial reporting rules which apply irrespective of the nature and purposes of the
of 00

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andywynne

For a warning on the real risks of adopting accrual accounting see the following two reports from the Auditor General of the Cayman Islands: http://tinyurl.com/accrualcayman1 http://tinyurl.com/accrualcayman2

reply06 / 11 / 2010
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