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1. INTRODUCTION The global financial crisis has demonstrated that the public sector as well as the private sector needs the highest quality accounting standards. Around the world, accounting in the public sector is practiced in diverse ways and struggles to achieve comparable standard in accountability and transparency. The Securities Act of 1933 gave the commission the authority to prescribe accounting standards to be followed by the companies for the purpose of complying with federal securities laws. The Commission has historical looked to the privates sector to help establish those standard, creating an important joint responsibility. This joint responsibility has recently being subject of concern and comment, from both congress and the business community. The Commission exercises strong oversight in the standard setting process and must do so in the context of complex and challenging accounting issues, some of which are viewed as extremely important in today national and international business environment. Since 1973, the Financial Accounting Standards Board (FASB) has been the designated organization in the private sector in the U.S. for establishing standards of financial accounting and reporting. Those standards govern the preparation of financial reports. They are officially recognized as authoritative by the Securities and Exchange Commission and the American Institute of Certified Public Accountants. Such standards are essential because donors, investors, creditors, auditors and others rely on credible, transparent and comparable financial information. The mission of FASB is to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors and users of financial information. The FASB develops broad accounting concepts as well as standards for financial reporting. It also provides guidance on implementation of standards, known as Statements of Financial Accounting Standards (SFAS). The credit crisis has raised several public sector accounting issues. Governments have extended credit to banks, guaranteed the liabilities of banks, purchased impaired debt instruments and in some instances have assumed control of banks. The unique nature of the credit crisis and the unprecedented response by governments around the world has reinforced the importance of high-quality standards for financial reporting by governments. The credit crisis has increased the need for accountability in the public sector and for transparency in its financial dealings. Based on the situations above, we are going to discuss more about the private sector and public sector regulation of accounting standard, the argument and support among the two regulations.
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1 DEFINITION OF PRIVATE SECTOR AND THE OBJECTIVE Private sector means the part of national economy made up of. it has adopted a complex due process procedure that relies heavily on the responses of all interested constituents. 2|P R I V A T E S E C T O R V S P U B L I C S E C T O R A C C O U N T I N G S T A N D A R D . Private standard setting in the United States has included the Committee on Accounting Procedures and the Financial Accounting Standards Board. The volume of responses to controversial topics shows that the constituents have been expressing interest by participating and voicing their concern through at least three different mediums. PRIVATE SECTOR ACCOUNTING STANDARD 2. Given the FASB is the ongoing standard setting body in the private sector. Individuals can conduct business without necessarily being part of any organization. y The FASB seems to be successful in generating responses from its constituency base and in responding to such input. Second. to provide possible investors with information. The main types of businesses in the private sector are: y Sole trader y Partnership. written responses to a discussion memorandum.2. the standards are more likely to be acceptable to CPA firms. and associations. A variety of legal structures exist for private sector business organizations. receives spec for the business The objective in the private sector is to inform the stakeholder about the performance of the business. with private shares y Public Limited Company ± shares are open to the public. y The FASB seems to be able to be attract. and resources owned by. business firms and external users.2 ADVOCATES OF THE PRIVATE SECTOR APPROACH The private sector approach to the regulation of accounting standards rests on the fundamental assumption that the public interest in accounting is best served if standard setting is left to the private sector. private enterprises. oral responses to an exposure draft. people who possess the necessary technical knowledge to develop and implement alternative measurement and disclosure systems. Private sector approach cite the following arguments in support of their positions: y The FASB seems to be responsive to various constituents. First. it will be used to illustrate the advantages and the limitations of private sector regulation of accounting standards. written responses to an exposure draft. 2. due to the process procedure generates an active concern about the consequences of its actions on the constituents. It includes personal sector (households) and corporate sector (firms) and is responsible for allocating most of the resources within an economy. companies. depending on the jurisdiction in which they have their legal domicile. Third. either limited or unlimited liability y Private Limited Company or LTD-limited liability. it is composed of members of various interested groups in addition to the public accounting profession. As a unit. to aid management decision making and increasingly to inform regulators. Two examples are: y Franchise ± business owner pays a corporation to use their name. its financial support is derived from contributions of a diverse group of individuals. Fourth. as member or as staff.
This situation is generally attributed to the length of time required for due process and extensive deliberation of the Board. which usually means without the widespread support of industry. the Committee clearly indicated 3|P R I V A T E S E C T O R V S P U B L I C S E C T O R A C C O U N T I N G S T A N D A R D . The investment tax credit is clear example of the impotency of both the SEC and APB when hostility is rampant. Following the Securities act of 1933 and the Securities Act of 1934. 1971. this theme gained popularity as a results of assertions made in the Metcalf Report that the accounting and financial reporting standard setting process dominated by the ³Big Eight´ accounting firms. In response to lobbying. y The FASB is often accused of responding slowly to major issues that are of crucial importance to some of its constituents. lacking true statutory authority. Let me describe the events without getting tangled in the pros and cons of the conceptual issues: The APB didn¶t issue its exposure draft of October 22. until receiving two written commitments. 150. Kaplan states the case as follows: ³Acceptance of FASB standards requires voluntary agreement from the AICPA and the benevolent delegation of authority from the SEC. No system is perfect and both the FASB and the Commission are continually attempting to improve both accounting standards and the manner which those standards are established Opponents of the private sector approach cite the following arguments in the support of their position: y The FASB lacks statutory authority and enforcement power and faces the challenges of an override by either Congress or a governmental agency. that these extensive deliberations pronouncements. public accounting firms and corporations.´ This situation is a result of the positions taken by Congress and the SEC on accounting standard setting. especially standards that would require the use of current market prices. in Accounting Series Release no. This lack of independence translates into a lack of responsiveness to the public interest. Hongren provides the problems associated with the Accounting Principle Boards issuance in October 1971 of an exposure draft supporting the deferral method: ³Without public support. the private standard setting agency is always susceptible to end runs by aggrieved constituents when they feel their particular ox is about to be gored. It then delegated its authority to accounting profession. The SEC recognized the authoritative nature of the pronouncements of the FASB and the same time retained its role as adviser and supervisor as a constant threat of override. The Senate Finance Committee issued its version of the 1971 revenue Act on November 9. The SEC said it would support the APB position and the Department of the Treasury indicated that it ³will remain neutral in the matter´. Finally. This brings to mind the additional problem that the proposed standards have a slim chance of being implemented without general support.2. Congress became the legal authority for standard setting. Perhaps the situational would be better expressed negatively. If there is widespread hostility to a regardless of how impeccable or how heavy the support within the Board. criticism still exist. One way in which this dominations may manifest itself through pressure in the FASB to avoid standards that would involve subjective estimates.3 OPPONENTS OF THE PRIVATE SECTOR APPROACH Despite the fact that the accounting profession and the commission have work together to establish the best accounting system in the world. y The FASB is often accused of lacking independence from its large constituents. however. The defenders of the Board maintain. significant changes are seldom possible.
Burton suggests: The SEC has as its objective achieving a level of public disclosure at least user. y It is argued that the structure of securities regulations established by the Securities Act of 1933 and 1934 serves to protect investors against perceived abuses. critical services such as national defense. since and underlying premise of its regulatory purpose to assure the 4|P R I V A T E S E C T O R V S P U B L I C S E C T O R A C C O U N T I N G S T A N D A R D . Without a doubt. fire fighting. It provides mechanism to offset the preparer bias that institutionally exists in the standard setting process. y The SEC is motivated by the desire to create a level of public disclosure deemed necessary and adequate for decision making. to facilitate democratic transparency. and has been taking place in recent years on a large scale throughout the world. to identify assets and liabilities. given the circumstances. province to province. security services. the public sector encompasses universal.1 DEFINITION OF PUBLIC SECTOR AND THE OBJECTIVE The public sector is that portion of society controlled by national. but health care is one area where some governments are providing or experimenting with services previously furnished by private providers. police protection. urban planning. If it errs in this objective. The public sector overlaps with the private sector in producing or providing certain goods and services.2 ADVOCATES OF THE PUBLIC SECTOR APPROACH Public sector regulation of any activity is always the subject of heated debate between advocates and opponents. and city to city. and various social programs.that companies should have a free choice in selecting the accounting treatments of the new credit´ 3. To be effective. PUBLIC SECTOR ACCOUNTING STANDARD 3. as well as to offset the economics suggestion through speeches. the exercise of rule making power granted process. The extent of this overlap varies from country to country. service providers move from the public sector to the private. however. and local governments. taxation. This overlap is most often seen in waste management. provide possible investors with information about creditworthiness. In other instances. a service may shift from the private sector to the public. regulation must ascribe to certain general principles. its seek to do so on the side of providing more information rather than less. public sector regulation has gain a high degree of legitimacy and become part of American and international traditions and legal frameworks. Advocates of public sector regulation of accounting standards cite the following arguments in favor of their position: y It is generally maintained that the process of innovation in accounting rests on the role of a governmental agency such as the SEC as a ³creative irritant´. The objective in the public sector accounting is to inform the stakeholders about the financial situation of the government. and shelters for homeless and abused people. Thus public sector regulation of accounting standards is motivated by the need to protect the public interest. Sometimes. This is less common. state to state. state or provincial. This is known as privatization. water management. and the power not to accelerate the effectiveness of a registration statements and to discourage accounting in cases judged to be inappropriate. corrections. homeland security. In the United States. aid management decision making. 3. health care.
That is why SEC spends a small fraction of its budget on estimating costs and benefits and large fraction on the lawyers who produce and enforce regulation´ y There is the danger that standard setting may become increasingly politicized. which called for the SEC to vote on the pronouncements of the FASB before companies are required to comply with them. Neither of these initiatives. Unlike FASB. the replacement cost disclosure of accounting series release No. The problem is a matter of concern to opponents of public sector regulation of accounting standards. Kaplan provides the following illustration: For example. Chairman of the House Banking Committee¶s subcommittee on capital markets.3 OPPONENT OF THE PUBLIC SECTOR ACCOUNTING However strong arguments against public sector regulation of accounting standards: y It¶s generally maintained that there is a high corporate cost for compliance with government regulation of information. y Some have argued that bureaucrats have a tendency to maximize the total budget of their bureau. Baker. introduced in 1988 the Financial Accounting Fairness Act. Special interest groups may possess the added initiative to lobby the governmental agency for special treatment. would have to consider the same set of question as it does when it makes rules or approves the rules of self-regulatory organizations like the National Association of Securities Dealers. A minimum of governmental intervention is deemed necessary to avoid the extreme and negative behavior. Applied to the SEC. the SEC. The SEC¶s function is t o issue regulations. 3. The financial reports required by the federal government keep increasing to comply with such legislation. the SEC is better able to conduct experiments in disclosure policy when they are enforceable and can go uncontested by all participants in the standard setting process. political appointees may feel that ³witch hunts´ are 5|P R I V A T E S E C T O R V S P U B L I C S E C T O R A C C O U N T I N G S T A N D A R D . All of these reports have an impact on business organization in terms of paper costs and in terms of constant changes in organizational structure that cause the formation of new positions or department. under the bill. historical. cost-based system. could have been accomplished by the FASB nearly so quickly or with so little public debate. SEC is secured greater legitimacy through its explicit statutory authority. given that its objectives may sometimes contradict the public interest. Representative Richard H.y y y existence of adequate information so that the capital allocating mechanism of market places will work effectively. Moreover. to prosecute and to appear to be acting to remedy ³perceived´ abuses. In short. which represented major departures from the conventional. this argument assumes that the SEC is staffed with people who tend to maximize their own welfare with no consideration for the costs and benefits of additional disclosure. Watts makes the same point: If the SEC¶s budget is determined by politicians more concerned with appearance than substanc e. Allowing serious calculations of costs to effect those regulations would by dysfunctional. Added to that is a greater enforcement power than a private agency and the absence of an explicit constituency that mat ³feel particular ox is about to be gored´. Some claims that the private sector has to be watched and controlled. in deciding whether to make FASB principles applicable to public companies. 190 and the recently announced Reserve Recognition Accountings for oil and gas company were accomplished by the SEC with little prior discussion and were considerable speed. I would expect the SEC¶s actions to be more concerned with appearance rather than fact.
The lack of provision for impairment of customer receivable makes it impossible to take the risk of non-payment into account. CRITICAL DIFFERENCE BETWEEN PUBLIC AND PRIVATE SECTOR ACCOUNTING STANDARD The table below showing the difference between public sector accounting and private sector of accounting: PRIVATE SECTOR Prepared accrual basis Fixed assets treated as capital The depreciation of the fixed assets is calculated Test of performance such as performance such as profit or rate of return Financial measure needed Decisions made for financial decision Test of management competence is for financial PUBLIC SECTOR Prepared cash basis Fixed assets treated as expenses The depreciation of the fixed assets is not calculated No test of performance such as profit or rate of return Non financial measure needed Decisions made for political reasons Test of management is political Forms of accounting in the public sectors are the cash basis. tax revenue and parliamentary approval to raise taxes are essentially about cash revenue. Another fear is that ³uninformed populists´ may want some of the action at the expenses of accounting standards and the accounting profession Some have question the need for a governance system backed by a police power. public sector accounting doesn¶t give a true image of the asset base of the central or local government and makes it impossible to project the future correctly. Therefore. the budget is drawn up on a cash basis. 6|P R I V A T E S E C T O R V S P U B L I C S E C T O R A C C O U N T I N G S T A N D A R D . First. No notions of commitments given and received: various variable. Therefore. It is claimed that such a situation may hinder the conduct of research and experimentation of accounting policy and is not essential to achieve standardizations of measurement. Forth. labor related commitment or etc or financial commitments (guarantees. Also. collateral. Public sector accounting is traditionally characterized by the absence of the concept of balance sheet where there is no distinction between expenses (which pertain to the activity of public sector entity) and fixed asset (which pertain to the asset based of public sector entity).y necessary to protect the public interest. The budget deficit is funded by tax revenue or by borrowing ± again a cash transaction. etc). provisions for contingent liabilities. reporting to parliament about what has happened has to be on the same basis which is cash basis. There are some reason why cash basis being used in the public sector. 4. parliamentary approvals are granted on a cash basis. the absence of a concept of depreciation makes it impossible to relate the level of wear on an asset and the need to replace it. Second.
in contrast to the United Nations System Accounting Standards (UNSAS) UNDP currently uses. IPSAS are based on full accrual accounting. It aimed at: y Providing them with a more effective and more harmonized accounting system y Responding to the new financial responsibilities deriving from enchanted decentralization and new requirements in accounting and financial reporting In this context. IPSAS STANDARDS.2 ADVANTAGES OF IPSAS IPSAS standards are common accounting framework for all public sector entities of a government or an organization. BRING TOGETHER PUBLIC AND PRIVATE SECTOR ACCOUNTING STANDARD 5.In the public sector there is no market. They promote a close tie with the budgetary process and at the same time strengthen the idea of audit and comparability. They are widely considered bestpractice for public sector organizations. you have no choice. especially IAS standard. They provide a ³business´ view of public sector accounting. which are based on a modified accrual method. 7|P R I V A T E S E C T O R V S P U B L I C S E C T O R A C C O U N T I N G S T A N D A R D . the adoption of these standards by government authorities. a process of reflection was begun that lead to the creation of IPSAS (INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS) beginning in 1996. INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS are independently-developed financial reporting standards. related governmental agencies. 5.1 HISTORY AND DEFINITION The modernization of the accounting regimes of public sector institutions began some ten years ago in many countries. regional and local governments. The IPSAS focuses on accounting and financial reporting needs of national. These standards recommend adoption of accounting for commitments based on private sector accounting. with an independent expert to audit their application. and the establishment of financial statement applied to all aspect of a government. you are force to spend usually depending upon your level of income 5. can also contribute to improved efficiency and a better evaluation of the performance of public sector services. while proposing solutions that are adapted to the special characteristics of public sector organizations. Setting up financial statements in conformity with IPSAS standards makes it possible to: y Make true cost of public administration more transparent y Have a greater number of indicator for the preparation of the budget y Make the lawmakers aware of future expenses that do not appear in purely budgetary approach In absence of public service concessions or contract. as they impose the most stringent requirements of clarity and transparency. Therefore a critical difference between the private sector and the public sector is that: y In the private sector you have a choice about whether to spend and on what to spend y In the public sector through taxation. and the facilitating the exchange of information among accountants and those who work in the public sector or rely on its work.
a difficulty in adapting to demand. dynamism and efficiency in management as well as the financial or socio-economic profitability of public services or infrastructure. The tasks of setting accounting standard demand our utmost attention. as well as about the financial situation of their government. These remarks are intended to offer a future involving continued responsiveness to criticisms and a willingness to take initiatives towards improvement will become increasingly important as the FASB deals with increasingly important issues. the tasks of standard setting and active oversight will also be more complex. financial performance and cash flows. As a result. for lack of innovation. 8|P R I V A T E S E C T O R V S P U B L I C S E C T O R A C C O U N T I N G S T A N D A R D . Public administration are traditionally characterized by resistance to change in the way they operates. high operating costs and inappropriate capital expenditures. It is extremely important to the standard setting process that all concerned parties.6. The introduction of regulation and accounting standards applicable to the private sector. This will allow governments and supranational organizations to provide standardized and comparable information from across the public sector. makes it possible to improve flexibility. whether in the form if concessions or other contracts or through the evolution of public sector accounting standards. CONCLUSION IPSAS will help by presenting an accurate and fair view of governments¶ and supranational organizations¶ fiscal position. citizens will have access to fuller information about the financial consequences of political decisions. As accounting issues continue to increase in complexity.
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