PRIVATE SECTOR VS PUBLIC SECTOR

ACCOUNTING STANDARD

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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2. PRIVATE SECTOR ACCOUNTING STANDARD

2.1 DEFINITION OF PRIVATE SECTOR AND THE OBJECTIVE

Private sector means the part of national economy made up of, and resources owned by,
private enterprises. It includes personal sector (households) and corporate sector (firms)
and is responsible for allocating most of the resources within an economy.

A variety of legal structures exist for private sector business organizations, depending on
the jurisdiction in which they have their legal domicile. Individuals can conduct business
without necessarily being part of any organization.

The main types of businesses in the private sector are:

 Sole trader
 Partnership, either limited or unlimited liability
 Private Limited Company or LTD-limited liability, with private shares
 Public Limited Company – shares are open to the public. Two examples are:
 Franchise – business owner pays a corporation to use their name, receives spec for the
business

The objective in the private sector is to inform the stakeholder about the performance of
the business, to provide possible investors with information, to aid management decision
making and increasingly to inform regulators.

2.2 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 standard setting in the United States has
included the Committee on Accounting Procedures and the Financial Accounting
Standards Board. Given the FASB is the ongoing standard setting body in the private
sector, it will be used to illustrate the advantages and the limitations of private sector
regulation of accounting standards.

Private sector approach cite the following arguments in support of their positions:
 The FASB seems to be responsive to various constituents. First, it is composed of
members of various interested groups in addition to the public accounting profession.
Second, its financial support is derived from contributions of a diverse group of
individuals, companies, and associations. Third, it has adopted a complex due process
procedure that relies heavily on the responses of all interested constituents. Fourth,
due to the process procedure generates an active concern about the consequences of
its actions on the constituents.
 The FASB seems to be able to be attract, as member or as staff, people who possess
the necessary technical knowledge to develop and implement alternative measurement
and disclosure systems. As a unit, the standards are more likely to be acceptable to
CPA firms, business firms and external users.
 The FASB seems to be successful in generating responses from its constituency base
and in responding to such input. 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; written responses to a
discussion memorandum; oral responses to an exposure draft; written responses to an
exposure draft.

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 2.3 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, criticism still exist. 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:
 The FASB lacks statutory authority and enforcement power and faces the challenges
of an override by either Congress or a governmental agency. Kaplan states the case as
follows:
“Acceptance of FASB standards requires voluntary agreement from the
AICPA and the benevolent delegation of authority from the SEC. lacking true
statutory authority, 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.”
This situation is a result of the positions taken by Congress and the SEC on
accounting standard setting. Following the Securities act of 1933 and the Securities
Act of 1934, Congress became the legal authority for standard setting. It then
delegated its authority to accounting profession. Finally, in Accounting Series Release
no. 150, 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 FASB is often accused of lacking independence from its large constituents,
public accounting firms and corporations. This lack of independence translates into a
lack of responsiveness to the public interest, 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 “Big Eight” accounting firms. One way in
which this dominations may manifest itself through pressure in the FASB to avoid
standards that would involve subjective estimates, especially standards that would
require the use of current market prices.
 The FASB is often accused of responding slowly to major issues that are of crucial
importance to some of its constituents. This situation is generally attributed to the
length of time required for due process and extensive deliberation of the Board. The
defenders of the Board maintain, however, that these extensive deliberations
pronouncements. This brings to mind the additional problem that the proposed
standards have a slim chance of being implemented without general support. Hongren
provides the problems associated with the Accounting Principle Boards issuance in
October 1971 of an exposure draft supporting the deferral method:
“Without public support, which usually means without the widespread support
of industry, significant changes are seldom possible. 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. The
investment tax credit is clear example of the impotency of both the SEC and
APB when hostility is rampant. 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, 1971, until receiving
two written commitments. The SEC said it would support the APB position
and the Department of the Treasury indicated that it “will remain neutral in
the matter”. The Senate Finance Committee issued its version of the 1971
revenue Act on November 9. In response to lobbying, the Committee clearly
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 indicated that companies should have a free choice in selecting the
accounting treatments of the new credit”

3. PUBLIC SECTOR ACCOUNTING STANDARD

3.1 DEFINITION OF PUBLIC SECTOR AND THE OBJECTIVE

The public sector is that portion of society controlled by national, state or provincial, and
local governments. In the United States, the public sector encompasses universal, critical
services such as national defense, homeland security, police protection, fire fighting,
urban planning, corrections, taxation, and various social programs.

The public sector overlaps with the private sector in producing or providing certain goods
and services. The extent of this overlap varies from country to country, state to state,
province to province, and city to city. This overlap is most often seen in waste
management, water management, health care, security services, and shelters for homeless
and abused people. Sometimes, service providers move from the public sector to the
private. This is known as privatization, and has been taking place in recent years on a
large scale throughout the world. In other instances, a service may shift from the private
sector to the public. This is less common, but health care is one area where some
governments are providing or experimenting with services previously furnished by
private providers.

The objective in the public sector accounting is to inform the stakeholders about the
financial situation of the government, provide possible investors with information about
creditworthiness, aid management decision making, to identify assets and liabilities, to
facilitate democratic transparency.
3.2 ADVOCATES OF THE PUBLIC SECTOR APPROACH
Public sector regulation of any activity is always the subject of heated debate between
advocates and opponents. Without a doubt, public sector regulation has gain a high
degree of legitimacy and become part of American and international traditions and legal
frameworks. To be effective, however, regulation must ascribe to certain general
principles.

Advocates of public sector regulation of accounting standards cite the following

arguments in favor of their position:
 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 “creative irritant”.
 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. Thus public
sector regulation of accounting standards is motivated by the need to protect the
public interest. It provides mechanism to offset the preparer bias that institutionally
exists in the standard setting process, as well as to offset the economics suggestion
through speeches, the exercise of rule making power granted process, and the power
not to accelerate the effectiveness of a registration statements and to discourage
accounting in cases judged to be inappropriate, given the circumstances.
 The SEC is motivated by the desire to create a level of public disclosure deemed
necessary and adequate for decision making. Burton suggests:
The SEC has as its objective achieving a level of public disclosure at least user. If it
errs in this objective, its seek to do so on the side of providing more information
rather than less, since and underlying premise of its regulatory purpose to assure the
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 existence of adequate information so that the capital allocating mechanism of market
places will work effectively.
 Unlike FASB, SEC is secured greater legitimacy through its explicit statutory
authority. Added to that is a greater enforcement power than a private agency and the
absence of an explicit constituency that mat “feel particular ox is about to be gored”.
Kaplan provides the following illustration:
For example, the replacement cost disclosure of accounting series release No.
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. Neither of these initiatives, which represented major
departures from the conventional, historical, cost-based system, could have
been accomplished by the FASB nearly so quickly or with so little public
debate.
In short, 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.
 Some claims that the private sector has to be watched and controlled, given that its
objectives may sometimes contradict the public interest. A minimum of governmental
intervention is deemed necessary to avoid the extreme and negative behavior.
 Representative Richard H. Baker, Chairman of the House Banking Committee’s
subcommittee on capital markets, introduced in 1988 the Financial Accounting
Fairness Act, which called for the SEC to vote on the pronouncements of the FASB
before companies are required to comply with them, under the bill, the SEC, in
deciding whether to make FASB principles applicable to public companies, 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.

3.3 OPPONENT OF THE PUBLIC SECTOR ACCOUNTING

However strong arguments against public sector regulation of accounting standards:
 It’s generally maintained that there is a high corporate cost for compliance with
government regulation of information. The problem is a matter of concern to
opponents of public sector regulation of accounting standards. The financial reports
required by the federal government keep increasing to comply with such legislation.
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.
 Some have argued that bureaucrats have a tendency to maximize the total budget of
their bureau. Applied to the SEC, 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 substance, I would expect the SEC’s actions to be more
concerned with appearance rather than fact. The SEC’s function is to issue
regulations, to prosecute and to appear to be acting to remedy “perceived”
abuses. Allowing serious calculations of costs to effect those regulations
would by dysfunctional. 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”
 There is the danger that standard setting may become increasingly politicized. Special
interest groups may possess the added initiative to lobby the governmental agency for
special treatment. Moreover, political appointees may feel that “witch hunts” are
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 necessary to protect the public interest. Another fear is that “uninformed 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. 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.

4. 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 PUBLIC SECTOR

Prepared accrual basis Prepared cash 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
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. There are some reason why
cash basis being used in the public sector. First, parliamentary approvals are granted on a
cash basis. Second, tax revenue and parliamentary approval to raise taxes are essentially
about cash revenue. Therefore, the budget is drawn up on a cash basis. The budget deficit
is funded by tax revenue or by borrowing – again a cash transaction. Forth, reporting to
parliament about what has happened has to be on the same basis which is cash basis.

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).
No notions of commitments given and received: various variable, labor related
commitment or etc or financial commitments (guarantees, collateral, provisions for
contingent liabilities, etc). The lack of provision for impairment of customer receivable
makes it impossible to take the risk of non-payment into account. Also, 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. Therefore, 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.

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 In the public sector there is no market. Therefore a critical difference between the private
sector and the public sector is that:
 In the private sector you have a choice about whether to spend and on what to spend
 In the public sector through taxation, you have no choice, you are force to spend
usually depending upon your level of income

5. IPSAS STANDARDS, BRING TOGETHER PUBLIC AND PRIVATE

SECTOR ACCOUNTING STANDARD

5.1 HISTORY AND DEFINITION

The modernization of the accounting regimes of public sector institutions began some ten
years ago in many countries. It aimed at:
 Providing them with a more effective and more harmonized accounting system
 Responding to the new financial responsibilities deriving from enchanted
decentralization and new requirements in accounting and financial reporting

In this context, a process of reflection was begun that lead to the creation of IPSAS
(INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS) beginning in
1996. The IPSAS focuses on accounting and financial reporting needs of national,
regional and local governments, related governmental agencies, and the facilitating the
exchange of information among accountants and those who work in the public sector or
rely on its work. These standards recommend adoption of accounting for commitments
based on private sector accounting, especially IAS standard, and the establishment of
financial statement applied to all aspect of a government.

INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS are

independently-developed financial reporting standards.  They are widely considered best-
practice for public sector organizations, as they impose the most stringent requirements of
clarity and transparency.  IPSAS are based on full accrual accounting, in contrast to the
United Nations System Accounting Standards (UNSAS) UNDP currently uses, which are
based on a modified accrual method.

5.2 ADVANTAGES OF IPSAS

IPSAS standards are common accounting framework for all public sector entities of a
government or an organization. They provide a “business” view of public sector
accounting, while proposing solutions that are adapted to the special characteristics of
public sector organizations. They promote a close tie with the budgetary process and at
the same time strengthen the idea of audit and comparability.

Setting up financial statements in conformity with IPSAS standards makes it possible to:
 Make true cost of public administration more transparent
 Have a greater number of indicator for the preparation of the budget
 Make the lawmakers aware of future expenses that do not appear in purely budgetary
approach
In absence of public service concessions or contract, the adoption of these standards by
government authorities, with an independent expert to audit their application, can also
contribute to improved efficiency and a better evaluation of the performance of public
sector services.

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6. CONCLUSION

IPSAS will help by presenting an accurate and fair view of governments’ and
supranational organizations’ fiscal position, financial performance and cash flows. This
will allow governments and supranational organizations to provide standardized and
comparable information from across the public sector. As a result, citizens will have
access to fuller information about the financial consequences of political decisions, 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
setting accounting standard demand our utmost attention. As accounting issues continue to
increase in complexity, the tasks of standard setting and active oversight will also be more
complex. It is extremely important to the standard setting process that all concerned
parties.

Public administration are traditionally characterized by resistance to change in the way

they operates, for lack of innovation, a difficulty in adapting to demand, high operating
costs and inappropriate capital expenditures.

The introduction of regulation and accounting standards applicable to the private sector,
whether in the form if concessions or other contracts or through the evolution of public
sector accounting standards, makes it possible to improve flexibility, dynamism and
efficiency in management as well as the financial or socio-economic profitability of public
services or infrastructure.

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