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JAOC
2,2 The interaction amongst reform
drivers in governmental
accounting changes
144
The case of Indonesian local government
Marwata
Department of Accounting and Finance, Monash University,
Melbourne, Australia and
Satya Wacana Christian University, Salatiga, Indonesia, and
Manzurul Alam
Department of Accounting and Finance, Monash University,
Melbourne, Australia

Abstract
Purpose – The purpose of this paper is to understand the process of accounting change in Indonesian
local government. It sets to explore how various reform drivers with different interests and preferences
compete and cooperate in the process of governmental accounting reform policy formulation in a
developing country context.
Design/methodology/approach – The paper adopts a qualitative case study research involving
semi-structured interviews with the key informants within the institutional environment under which
the local government organizations operate. This paper looks at the introduction of new accounting
systems as a result of public sector reform in Indonesia local government by focusing on how the
policy of reform was formulated. A review of related documents and regulations, as well as interviews
with key informants, was conducted to gather information on accounting change.
Findings – The process of governmental accounting reform is characterized by rivalries and
alliances amongst reform drivers. This confirms the political nature of the process of accounting policy
formulation found in the extant literature of accounting policy setting.
Research limitations/implications – This is a case study research within the institutional
settings of Indonesian government bureaucracy. Any generalization of the conclusions from this study
should undertaken with care even though there are similarities between Indonesian and other
developing countries as institutions operate differently in different countries.
Originality/value – As the vast majority of studies in the extant literature have focused, mainly, on
accounting reform in the context of developed countries, this paper makes important contribution by
highlighting accounting changes in Indonesian local government.
Keywords Public sector reform, Indonesia, Accounting, Local government
Paper type Research paper

Journal of Accounting &
Organizational Change
Vol. 2 No. 2, 2006
pp. 144-163
q Emerald Group Publishing Limited
1832-5912
DOI 10.1108/18325910610675989
1. Introduction
Following the adoption of market principles in the public sector management,
accountability mechanisms and performance measurement based on output and
outcomes have been preferred to replace a focus on adherence to formalized procedures
which is essentially input-based approach (Hood, 1995; Guthrie and English, 1997).
In such changes, accounting has been implicated and there are new demands for
accounting to make new organizational visibility and to discipline performance
(Hopwood, 1984). Pervasive changes in the public sector accounting practices Interaction
accompanying new public management movement have led to the growing interests in amongst reform
the study of accounting changes in the public sector. Many efforts have been made to
study accounting changes in the public sector and a variety of theoretical approaches drivers
have been adopted to develop understanding of accounting changes phenomena in the
public sector (Broadbent and Guthrie, 1992; Lapsley and Pallot, 2000). Research
questions were raised to provide answers on why governmental accounting innovation 145
took place in some countries and not in others. The contingency theory of accounting
change suggests that innovation in governmental accounting is the outcome of an
interaction between stimuli of reform, social structural variables of a country,
structural variables of the politico administrative system and implementation barriers
(Luder, 1992). However, despite the growing body of governmental accounting change
literature in the contingency paradigm, such literature remains limited in focus, not
least as it treats governmental accounting innovation as a “black box” (Chan et al.,
1996). In such a “black box,” the body of literature has emphasized the exploration of
contextual variables that may promote or hinder innovations, with little attention paid
to the process by which the innovation takes place. This situation has led to a call for
research to analyze the process of generating and implementing governmental
accounting innovations (Chan et al., 1996).
The present study focuses on the role played by various actors in public sector
accounting change. Such an approach is interesting, as the reform actors play different
roles other than merely as rational actors. This is not adequately explained by
contingency theory. Applying this notion in the context of reform process, it can be
expected that the pace and path of this reform process is very much influenced by the
actions of agents and the nature of the relationships amongst those agents. There is a
potential for the process of reform to operate differently in different societies because
the nature of the relationship amongst agents is very much influenced by wider
cultural and socio-economic factors.
Recognizing that accounting reform process can be expected to be different in
different societies, this paper aims to explore the nature of the relationships amongst
reform drivers in the process of governmental accounting reform in a developing
country context. The interest in the reform process in the context of a developing
country is due to the fact that the vast majority of studies in the extant literature have
focused, mainly, on accounting reform in the context of developed countries.
Consequently, the extant literature tends to reflect western institutional values, beliefs,
and arrangements. These are different to the beliefs, and arrangements in developing
countries (Alam and Nandan, 2005). The research issues addressed in this paper are as
follows:
.
How accounting systems were changed in Indonesian local government as part
of the public sector reform process.
.
How various reform drivers with different interests and preferences compete and
cooperate in the process of governmental accounting reform policy formulation
in a developing country context.

The remainder of the paper is organized as follows: section two outlines the theoretical
perspective by which empirical materials of this study will be interpreted. This section
serves as the frame of reference for the study. The third section is devoted to
JAOC a discussion of the methodological issues concerning the study. The fourth section
2,2 describes the empirical materials related to the process of governmental accounting
reforms. Special attention is given to the actors and their roles in the process of the
development of accounting norms at national level. The discussion in the fifth section
highlights the nature of the relationship amongst the reform drivers in the process of
governmental accounting reforms. To conclude the paper, a number of key messages
146 and implications of this study are outlined.

2. Theoretical perspective
An underlying premise in accounting policy formulation is deeply rooted in the
neoclassical economics orthodoxy (Zeff, 1974; Chua, 1986). Accounting policy
formulation is merely viewed as a matter of choosing the right rational decisions. The
accounting policy setting is to be exercised in a technocratic, value-free and
non-political manner (Micallef, 1997; Pallot, 1996). For instance, moving from cash to
accrual accounting in the public sector, is regarded as an attempt to improve
transparency and accountability (Broadbent and Guthrie, 1992). As accrual accounting
has been recognized as the superior basis of accounting recognition, the rational
decision is to adopt it as if it automatically can improve the quality of financial
information production. Even though the rational model is useful in understanding
accounting policy change, it remains partial, as it fails to take a wider view by
incorporating contextual variable impinging the decision-making process (Guthrie,
1998; Robinson, 1998). From this perspective, accounting reform policy making is to be
viewed as a process involving actors and their interests and not simply a linear and
simplistic rational decision-making process. Consequently, the formulation of
accounting reform policy is no longer narrowly viewed as a purely technical
problem of identifying the best practices (Ryan, 1999).
The financial management reform (FMR) model from a contingency view locates
contextual variables including the role of reform actors to explain accounting changes
in public sector organizations (Luder, 1992). As the FMR model gained acceptance, it
was widely applied (El-Batanoni and Jones, 1996; Likierman, 1996; Godfrey et al., 1996;
Pallot, 1996). Such a model was criticized for not including the role of individual needs
(Godfrey et al., 2000) and not focusing on the nature of change. Most of the studies in
governmental accounting change were undertaken on developed countries and the
result is that there has been little substantial analysis of case examples from
developing countries (Alam and Nandan, 2005). This study attempts to partly address
such deficiencies by addressing the accounting change issues in a developing country
where the actors and institutions operate differently as compared to developed
countries.
The underlying assumption in discussing the issue of accounting reform policy
throughout this paper is that accounting reform policy choice is a social choice process
involving a network of policy communities (Ryan, 1998), in which various conflicting
interests have to be resolved (Beaver, 1983). Rather, accounting reform policy
development is to be viewed in a wider context (Bromwich and Hopwood, 1983), in
which the rule-making process is shaped by reform drivers with various political and
other motivations. The reform drivers are assumed to consist of various interest
groups. Many forms of compromise are, therefore, likely to occur in such a social
process. Keeping this perspective in mind, this paper seeks to address the ways the
Indonesian central government is tackling the problem of regulating financial Interaction
reporting practices for Indonesian local governments. amongst reform
As far as reform drivers are concerned, the FMR model reflects the nature of the
relationships amongst institutions and professionals and their roles in the process of drivers
reform in the context of developed countries. In such a context, the institutions and
professionals are assumed to be acting independently because they live in a
predominantly diffracted society in which political and administrative bodies are 147
institutionalized as separate structures (Riggs, 1964). The FMR model with contextual
variables is definitely a better approach in explaining accounting change. However,
such a contingency approach ignores different contexts where institutions and actors
operate differently. This paper aims to extend the Luder model by locating the reform
actors in a developing country context.
The accounting reform policy choice is not just a theoretical agenda in search of a
theoretically sound accounting policy for governmental organizations. This paper is
concerned with understanding the accounting reform processes, and incorporates the
interests and power struggles among policy community. This includes the visible or
hidden clusters that are bound by particular relationships within a policy network
(Ryan, 1999).
Different institutional values, beliefs, and arrangements exist, particularly in
developing countries. Institutions operating in the context of developing countries
might be developed utilizing different logic, and possibly to meet different ends. They
might, for example, be developed simply through mimicking processes to satisfy
legitimation rather than instrumental concerns. For example, institutions and
professionals in developing countries may operate differently from those in developed
countries due to differences in their historical development. The formal institutional
arrangements might be similar to that in developed countries, but they might operate
in different ways. Often they do not function as they appear on the surface
(Riggs, 1964). Although institutions and professionals specified by Luder (2002) as
reform drivers may be found in the developing countries, these agents might function
in different ways. The nature of their demands for accounting reports may be different
from that in the developed countries due to differences in the orientation of the
accountability regime.
Institutions and professionals in developing countries may also operate differently
from those in developed countries due to differences in the nature of the societies in
which they live. Riggs (1964) conceptualizes the nature of society in the developing
countries context as a prismatic society. In such a society, political and administrative
powers are amalgamated in the hands of bureaucrats (Riggs, 1964). This results in the
dominance of bureaucracy in the economic and social life of developing countries
(Turner and Hulme, 1997). Bureaucracy, as the ultimate holder of power in a prismatic
society, exercises its power to pursue its own interests (Riggs, 1964). As a result,
institutions and professionals in such a bureaucracy dominated context may not
operate independently in driving the reform process, as idealized by Luder (2002).
Consequently, due to differences in culture, development history, and economic
advancement, the nature of the relationships amongst institutions and professionals in
developing countries is likely to be different from that in developed countries. This
view is supported by Dillard et al. (2004). In addition, this paper discusses
governmental accounting reform policy-making processes, particularly efforts to
JAOC formulate national policy on financial reporting and accounting systems. In doing so,
2,2 this paper is based on empirical findings during a larger research program on the
process of accounting reform in Indonesian local government. The process by which
local government accounting standards are established and the process by which
accounting system guidelines are developed and socialized, are also investigated.
Owing to its direct relationship with dealing with the problem of regulating financial
148 reports, which is paramount in the overall effort to reform accounting systems, the
development of accounting standards is emphasized throughout this paper.

3. Research method
The empirical materials for this paper were gathered by the first author through a
one-year field study of local governmental accounting reforms in Indonesia[1]. As the
research questions were aimed to understand a social phenomenon within a cultural
context, it was useful to adopt a qualitative research approach. Such a method was
deemed necessary as the researchers wanted to understand the social and institutional
context. Within the overall umbrella of qualitative research, a case study approach was
used, not from a unit analysis but from an overall research approach point of view.
This allowed the investigation of a social phenomenon when boundaries between the
phenomenon and the context are linked together (Yin, 2002). During the fieldwork,
particular attention was given to the way the policy of reform was formulated. A review
of related documents and regulations, as well as interviews with key informants,
revealed that the nature of the interaction amongst main actors deserved particular
attention. This led to a specific effort to pull the emerging themes related to reform
policy formulation process.
Empirical data for this paper was gathered by means of interviews and document
analysis. Seventeen people who were deemed knowledgeable on the issues of concern
were interviewed. The selection of informants was largely based on judgments made
from preceding interviews and document analysis. The legal frameworks state that
the governmental accounting standards committee is the independent body with the
sole authority to establish governmental accounting standards. Key persons in the
committee were interviewed to reveal the direction of governmental accounting reform
as well as the dynamics in the process of accounting reform policy setting. In addition
to key persons in the committee, interviews were also conducted with senior officials at
the Ministry of Home Affairs (MoHA), senior officials at the Supreme Audit Board, and
consultants.
Interviews were conducted in open-ended and semi-structured formats. The
open-ended formats were used at the initial stages to encourage the interviewees to
speak broadly and deeply about the issues of concern. At this stage, informants were
encouraged to speak freely (Glesne and Peshkin, 1992). The semi-structured formats
were used at the later stages, particularly at the confirmation stages, to ensure focused
probing of vague points. On many occasions, loosely structured interviews, interviews
without particular order and with no particular wording (Gomm, 2004), were conducted
during the fieldwork. However, the discussion was centered on the accounting
policy-making process in the Indonesian local government context and specifically,
which agencies were involved, what role each of these agencies pursued, and how
different actors and agencies interacted between them. The interviews were mostly
conducted in a relatively semi-structured manner, viz. as a special occasion, scheduled,
and audio taped. The interviews were mostly transcribed as soon as the interviews Interaction
were completed, and feedback and additional commentaries were sought during the amongst reform
subsequent meetings. Brief notes were also made, either during or after each interview.
The notes were made principally to record general impressions, to determine the bases drivers
on which analytic decisions made to identify future possible informants, and to develop
further interview questions. It is in this sense that intuitive data processing was
conducted while the data were being collected (Gomm, 2004). Based on preceding 149
discussions, further interviews, with either the same interviewee or additional
interviewees, were conducted. Several interviewees were interviewed more than
once, depending on the leads from the previous sessions. Thus, the interviews
were iterative in nature. Although the issues to be explored were stated in the request
letter for an interview, many questions emerged during the actual interviews. As a
result, the interviews, which lasted between a half and three hours, took different
paths.
Regulations, and related documents, were investigated before and after interviews,
especially during a one-month presence in the secretariat of the governmental
accounting standards committee. Despite its limited availability, a considerable
amount of documentary evidence was obtained. The documents deemed relevant to the
issue of concern were analyzed. These include directives at national level in the form of
national regulations, politicians’ and senior bureaucrats’ speeches, policy statements;
organizational documents in the form of local regulations, correspondence, reports and
minutes, annual reports, publications in the form of magazines, newspapers,
newsletters, proceeding of conferences, and training materials. These documents
provide a context for the functioning of accounting as well as attempts at accounting
reform that have taken place from time to time.
A large amount of verbal data based on interviews and documents were
collected during the fieldwork. Efforts have been made from the beginning of the
fieldwork to construct the data in a meaningful way to provide a reasonable basis
for extracting the meaning behind the actions of actors in the accounting reform
process. Data analysis in this study is not a distinct stage of the research as
would occur in a conventional quantitative study. Instead, it is ongoing throughout
the research process.
Data analysis was conducted in two stages. The first stage of analysis was
conducted on a real time basis, i.e. data collection and analysis were conducted
simultaneously and continuously during the research process. During and after the
interview sessions, on-the-spot intuitive data analysis was made, in the sense that the
interpretation/understanding of interviewee’s response led to subsequent questions
(Gomm, 2004). With such a strategy, the author was able to focus and shape the study
as it proceeded (Glesne and Peshkin, 1992). By the end of the fieldwork, major themes
had surfaced.
The later stage of analysis was conducted in a rather formal mode after the
fieldwork was completed. At that stage, thematic analysis was conducted by reading
and rereading the data. In this process, passages were coded as free nodes in the sense
that the coding process was not guided by a particular coding frame. The emerging
themes, then, were constructed in tree nodes, i.e. in a particular structure it became
meaningful and relevant to the purpose of this research. Technically, the coding
process was conducted using the NVivo version 2 software program.
JAOC 4. Public sector accounting change in Indonesia
2,2 4.1 The nature of the site
Indonesia is a unitary state with a three-tier government, namely a central government,
provincial government, and local government[2]. The last two tiers are referred to as
regional government or sub-national government. The relationship between the three
tiers of governments is characterized by a complex web of subordination and
150 coordination, vertically and horizontally. The arrangement of sub-national government
in Indonesian has been marked by swings between favor for centralization and
decentralization.
Indonesian local government systems and structures were once well known for
being arranged in favor of centralization. In such an arrangement, Indonesian local
governments were politically and financially dependent on the central government.
Consequently, Indonesian local governments were in a highly institutionalized
environment in the sense that the actions of organizational actors in Indonesian
local governments were highly oriented to a meaning system imposed by the
central government through massive regulations. Total conformity to the central
government’s rules and regulations beyond instrumental concerns was a salient
feature of Indonesian local government.

4.2 Dynamics of accounting standard-setting process

Financial reporting policies in Indonesian government organizations were traditionally
set in the central state agencies, i.e. “Depkeu” (Ministry of Finance) for the central
government and “Depdagri” (MoHA) for local governments. (A glossary of Indonesian
terms is provided in the appendix.) These two state agencies had financial and
administrative authorities over local government organizations. The reporting policies
were laid down by law and the contents of financial reporting were codified in great
detail in the form of various governmental regulations and ministerial decrees.
The central importance of law in the reporting policies of governments had been a
remarkable feature of governmental financial reporting practices in Indonesia. Owing
to the central role of regulations in the financial reporting practices, there had been no
real need to codify financial reporting policy in the form of formal accounting
standards. It is probably also fair to acknowledge that the absence of formal
accounting standards for government organizations is related to the fact that
governmental financial management and accountability system were based on Dutch
colonial laws. As a former colony of the Dutch, financial reporting policies in
Indonesian governmental organizations were very much influenced by continental
European systems which emphasize the importance of law in accounting (Bromwich
and Hopwood, 1983).
Early efforts to develop governmental accounting standards in Indonesia had been
made in the early 1990s. Apart from “Depkeu” and “Depdagri,” accounting change in
public sector was also promoted by “BAKUN” (State Accounting Agency) and “IAI”
(Indonesian Institute of Accountants). Efforts had previously been made by “BAKUN”
to create a draft of governmental accounting standards and these efforts reflect the
intention to move from law based governmental financial reporting regulation to that
of standard-based reporting. According to an interviewee, the drafts were halted
because the President did not want to have government accounting standards through
which aspects of government finance could be judged.
4.3 Previous efforts to change accounting Interaction
Since, its independence, governmental financial administration systems in Indonesian amongst reform
central and local governments had been based on State Financial Administration Law:
ICW Stbl. 1925 No. 448. The law was enacted by the Dutch colonial government for the drivers
first time in 1864 and came into effect in 1867. Until very recently, governmental
financial administration and reporting norms had been dominated by the spirit of this
old colonial legal framework. It had been widely recognized that financial 151
administration based on ICW Stbl. 1925 was dated and of such poor quality that it
was not capable of providing the necessary information for the decision-making
process. The old financial administration system which was designed to ascertain that
financial plans were being met, has long been regarded as costly, inefficient and
ineffective. Despite detailed reporting provided under numerous existing legal
requirements, the information being produced was confusing at best, and at worst,
misleading. The failure of the existing system to provide meaningful financial
information has meant policy decisions may be made without regard to financial
aspects of the policies. Obviously, this had resulted in poor decision making and
accountability.
The central government has, from time to time, initiated several attempts to refine
the governmental financial administration systems. For example, many efforts to
reform the local government accounting systems had been undertaken by the central
government in the 1980s and 1990s. Various attempts were made to streamline
procedures and to integrate planning, programming and budgeting.
Various projects aimed at improving financial reporting such as “RIAP-P3KT”
(a project aimed at the improvement of administration of local revenue collection),
“PAFPACK” (a project designed to introduce Planning, Programming and Budgeting
systems-PPBS) and “SIKD” (a project run to introduce computer package for the
existing procedures), were initiated by “Depdagri.” An effort to improve the situation
was also made by “Depkeu” which initiated “SPMKD” (Sistem Perencanaan dan
Manajemen Keuangan Daerah – Regional Financial Management and Planning
Systems) project. The project was chaired by the head of “PAKD” (Pusat Analisa
Keuangan Daerah – The Centre for Regional Financial Analysis) and was funded by
the World Bank. The results of those pioneering projects were, unfortunately,
disappointing due to the fact that the efforts were mostly only rearrangements of the
existing systems and tried to address different aspects of local government financial
systems as perceived important by different agencies (Prodjoharjono, 1999).
Prodjoharjono (1999) argues that previous efforts were unsuccessful for a number of
reasons. There had been administrative competition and lack of coordination between
“Depdagri” and “Depkeu” in running the project. While “Depdagri” was the actual
“boss” of local governments, its role was seriously neglected. It is worth noting that,
traditionally, financial systems and procedures in Indonesian local government had
been under the auspices of the “Depdagri”. The direction and policy of the project
had changed several times and, during the period of the project, senior officials in the
two departments had also changed several times. The changes affected the policy on
the project because, according to the existing leadership culture, changing the boss also
meant changing the policy. The local governments were not enthusiastic about
implementing the proposed systems. The effort to reform was not accompanied by the
preparation and training of qualified staff to run the proposed systems at local
JAOC government level. Technically, local governments were not yet ready to implement the
2,2 new systems. In addition, they were not interested in the project because there was no
direct command from “Depdagri” to do so.
4.3.1 Present wave of accounting change. As part of the effort to provide operational
regulations to implement the local autonomy program, which came into effect on
January 1, 2001, the central government passed government regulation “PP” 105/2000
152 on November 10, 2000. The “PP” 105/2000 indicates that at least three accounting
infrastructures are needed: governmental accounting standards (article 35), accounting
systems and procedures (article 14:4), and (organizational) accounting systems and
procedures (article 14:3). The first two infrastructures (standards and guidelines) are
the domain of national government, while the last is the domain of individual local
government organizations. The promulgation of “PP” 105/2000 represented a
milestone for local government financial management systems, because it
introduced new budgeting concepts and financial reporting requirements that were
significantly different from that which already existed.
Among other things, the “PP” 105/2000 requires local governments to produce
balance sheets as part of the final accounts. Given that the existing cash-based
accounting systems and procedures were not capable of providing such a statement,
local governments had to change their basis of accounting to an accrual system.
In subsequent developments, the requirement to move from cash to accrual basis was
reinforced by further regulations such as “PP” 108/2000 (concerning accountability
mechanisms of the heads of regions) and “PP” 11/2001 (concerning regional financial
information), the enactment of Law 17/2003 (concerning state finance) and Law 1/2004
(concerning state treasury). It also appears that some ideas from the private sector
have been transferred into the local government sector. Overall, the enactment of
“PP” 105/2000 has brought about new accounting norms into Indonesian local
government life.
While “PP” 105/2000 introduces relatively difficult new concepts of budgeting and
reporting systems; most local governments lack qualified human resources capable of
implementing the concepts. It has been widely acknowledged that financial
administration of local governments have been managed by public policy groups
whose expertise was in the area of public budgeting only (Prodjoharjono, 1999). Most
of the officials in those groups were not familiar with public sector accounting.
Officials with accounting background were sparse in both Indonesian local
government and “Depdagri.” The local government officials were not used to
dealing with such discretion. As a result of long, highly centralized governance
systems, local governments were used to living with extreme dependence on the
central government. Local governments simply did what the central government
decided to do with minimal independent decisions of their own.
4.3.2 Confusion: competing models. Responding to the fact that most local
governments do not know how to reform their financial systems and procedures,
“Depdagri” took action to develop guidelines for developing new financial
management systems and procedures in regional governments. The action was
based on article 14:4 of “PP” 105/2000 which stipulates that the guidelines for financial
management and accountability systems in regional governments be set by
“Depdagri”[3]. This initiative culminated in the enactment of “Kepmendagri”
29/2002 and presented guidelines for local government financial management,
accountability, and supervision, including budget preparation, budget execution and Interaction
administration, and final accounts preparation. The philosophy behind the approach amongst reform
was that abrupt changes in the systems and procedures would be detrimental due to
the fact that relatively difficult accounting concepts brought about by “PP” 105/2000 drivers
could not be appropriately implemented by local governments.
As far as accounting technique was concerned, “Kepmendagri” introduced double
entry system accounting based on a modified cash basis in recording transactions. 153
An interviewee who was one of the architects of the “Kepmendagri” stated:
From legal framework perspective, this “Kepmendagri” is not in the legal framework. In local
governments (legal framework), above the “Perda” (local government regulation) is
presidential decree. So, it is optional. But, because “Kepmendagri” is enacted in order to
implement “PP” 105/2000, if local governments want to implement “PP” 105/2000 they should
follow the “Kepmendagri”. Though, actually local governments could use other concepts
other than “Kepmendagri.”
In terms of timing, the issuance of the guideline was quite late. It was launched only
18 months after the effective date of the local autonomy program when some local
governments, despite their confusions, had developed their own financial systems and
procedures with some technical assistance from many parties such as universities,
private consultants and donor agencies. According to an interviewee, the “Depdagri”
itself was in doubt until the “BPK” (Supreme Audit Board) reminded it that the
“Depdagri” should issue the guideline as stipulated in “PP” 105/2000 article 14:4.
In fact, “Kepmendagri” 29/2002 has not been the only concept of financial systems
and procedures available for adoption by local governments. For instance, almost
simultaneously, “Depkeu” also developed “SAPD” (Sistem Akuntansi Pemerintah
Daerah – Regional Governmental Accounting Systems), a prototype for local
governmental financial accounting systems. “SAPD” had been basically developed as
an accounting system for the central government. However, due to the nature of its
detail, it can be readily adopted by local governments. It was intended to be the
reference point for local governments to develop their own systems and procedures.
The system was published on a web site, and passed to local government by “BAKUN”
(Badan Akuntansi Keuangan Negara – State Financial Accounting Agency). Various
courses and consulting services, as well as accounting software packages, are provided
by “BAKUN” to disseminate the “SAPD”.
At the same time, the “PPA UGM” (the accounting development centre of Gadjah
Mada University) also promoted a prototype of accounting systems and procedures to
enable local government to meet the reporting requirements of “PP” 105/2000. The
concept was promoted directly to local government and was socialized by means
of published academic books, journals, and through various seminars. The concept of
accounting systems developed by the “PPA UGM” represents an effort made by
non-governmental agencies to develop accounting systems for local governments.
The formation of the accounting standards division within the public sector division
of “IAI” marks the beginning of the accounting profession involvement in the area of
governmental accounting standards formulation. In November 2000, five exposure
drafts were launched to the general public for comment. The Indonesian public sector
accounting standards-based accounting standards drafts were intended to be applied
to all public sector entities, including government entities.
JAOC As far as an accounting basis is concerned, the concepts of accounting systems and
2,2 procedures offered by those various parties employed different approaches to meet the
reporting requirements of “PP” 105/2000. For instance, “Kepmendagri” follows a
modified cash basis. However, it is not explicitly stated that this basis of accounting be
followed. Rather, it is indicative from the transactions recording processes and the way
the final accounts are constructed. According to the “Kepmendagri” during the year
154 transactions are recorded on a cash basis. At the end of the year, when final accounts
are about to be constructed, adjustments to accrue and defer certain revenues and
expenses are made. On the other hand, “SAPD” follows a modified accrual approach;
viz. cash basis for revenues and expenditures and accrual basis for assets, liabilities,
and equities. Within this approach, transactions are recorded on a cash basis. For those
transactions related to balance sheet elements (e.g. purchasing fixed assets, debt
payments), additional corollary entries are made to recognize the transactions. At the
end of the year, when final accounts are about to be prepared, adjustments are made for
inventories. The “PPA UGM” explicitly claims that their concept of accounting
systems is formulated on an accrual basis. In that approach, commercial accounting
techniques are fully adopted in the recording transactions of local governments during
the whole year. At the end of the year, adjustments are made to recognize deferral and
accrual elements.
4.3.3 Time to consolidate and negotiate. As “Depdagri” was no longer the institution
with a monopoly position to dictate financial systems and procedures of local
government, many institutions tried to influence the direction of the development of
financial systems and procedures of local governments. The situation reached at a
stage where different competing models were proposed by different actors and
institutions. In order to resolve confusion and misunderstandings, the “Menkeu”
(Ministry of Finance) proposed for a presidential decree regarding the authority to set
public sector accounting standards. This is an attempt by “Menkeu” to resolve long
debates on who has the authority to set accounting standards for government
organizations, particularly local governments. Up to that time, there had been a lack of
clarity over the authority to set accounting standards for local governments.
An interviewee admits that the authority had been disputed among “Depkeu,”
“Depdagri” and “IAI.” “Depkeu” claimed the authority due to its function as the state
treasury, having responsibility over the entire financial matters of state, including
financial matters of local governments.
A compromise deal was made to constitute a consultative board consisting of the
chairpersons of “BAKUN” (State Accounting Agency), “IAI” (Indonesian Institute of
Accountants), “BPK”P (Development and Financial Supervisory Agency), “ISEI”
(Association of Indonesian Economists), Provincial Governments Association,
Regency Governments Association, City Governments Association, and the Director
General of Local Autonomy. The Standards Setting Board is to consist of nine
members proposed by the consultative board and ratified by “Menkeu”. The chosen
members must be persons with academic competence in public sector accounting,
registered accountants, and of good reputation. This board is to be the actual body
with the authority to set due process procedures and public sector accounting
standards.
Responding to the proposal, inter-agency meetings were held at the cabinet
secretariat on April 12, and 22, 2002. The meetings were attended by representatives
from “Depkeu,” “Depdagri,” “IAI” and cabinet secretariat. The presence of Interaction
representatives from “Depkeu,” “Depdagri” and “IAI” in the meetings indicates that amongst reform
efforts have been made to promote reconciliation among the three bodies. The list
of conclusions resulting from the meeting was sent to “Menkeu” on April 23, 2002. drivers
The main conclusions were:
.
The formation of the standards setting body and the definition of its authority
are to be approved by “Menkeu”. A Presidential Decree regarding the authority 155
to set governmental accounting standards was not needed, since the authority to
set such standards has been given to the “Menkeu” according to Presidential
Decrees No. 102/2001 and 109/2001.
. The authority of the standards setting body formed by “Menkeu” is to be limited
to setting accounting standards for governmental organizations only, i.e. the
central government, provincial governments, and local governments.

On June 13, 2002, following the decision of the meeting, “Menkeu” established “KSAP”
(Komite Standar Akuntansi Pemerintahan – Governmental Accounting Standards
Committee) by enacting a ministerial decree of “Menkeu” No. 308/KMK.012/2002. The
committee consists of elements from “Depkeu,” “Depdagri” and “IAI”. This means that
a new institution, which was a joint committee between profession and government
agencies, entered the governmental financial reporting policy community. The
composition of the “KSAP” which consists of elements from “Depkeu,” “Depdagri” and
“IAI” shows that a collaborative action had been taken by “Menkeu” in order to
formulate governmental accounting policy. In such a collaborative action, “Depkeu”
has been positioned as the leading body in formulating governmental accounting
policy. The idea of having a joint committee that involves professional and government
agencies is considered to be ideal. As expressed by an interviewee:
The ideal one is a joint committee . . . Since, the main constituency is government, it would be
odd if the authority (to set governmental accounting policy) is given to private bodies. The
role of the government should be dominant.
The idea of a joint committee that involves professional and government agencies is
also supported on the grounds that the two have complementary powers to make the
standards effective. On the one hand, the profession has knowledge power to ensure
that the standards will be highly respected. The governmental agencies, on the other
hand, have coercive powers to impose the standards. On this issue, an interviewee
expresses his opinion:
I think it would be respected higher (if standards are promulgated by “IAI” – profession). The
problem is its enforcement in the field. . . . “IAI” (profession) is powerless. To be powerful, its
implementation should be enforced by the government. So, involving “IAI” (profession) in the
committee is a solution.
It seems that although the “Depkeu” has been given the authority, backed by
regulations, to develop governmental accounting standards, it has tried to gain support
from both “Depdagri” and the profession. The support from “Depdagri” is of particular
importance for the enforcement of the standards because, by tradition, “Depdagri” acts
under the auspices of local governments to whom the standards are also to be applied.
In addition, the support from the profession is needed due to the fact that the actual
JAOC application of the standards is in the hands of members of the profession. The support
2,2 from “Depdagri” and the profession is deemed to be an important determinant of how
effectively the standards will be promulgated. This acknowledgement is in line with
Burggraaff (1983, p. 11) who argues that:
No standard will be effective unless it has sufficient support from the community and from
the profession.
156
In this context, “Depdagri” is deemed to represent the community (local governments)
and “IAI” is considered to represent the profession.
The “KSAP” consists of two sub-committees: a steering committee (five people) and
a working committee (11 people), and as well as a secretariat (five people). The steering
committee is charged with directing the working committee in formulating and
developing governmental accounting standards and seeking advice from the “BPK”
(Supreme Audit Board) before proposing the standard drafts to the “Menkeu”. The
members of the steering committee are ex-officio in nature, consisting of the chairman
of “BAKUN” of “Depkeu,” the director general of local autonomy of “Depdagri,” the
director general of fiscal balance of “Depkeu,” the chair of “IAI,” and the chair of
the fiscal decentralization assistance team of “Depkeu”. Amongst the members of the
steering committee, the chairman of “IAI” is the only member who has an accounting
background. Although disproportionate, the composition of the steering committee
represents the involvement of government agencies (“Depkeu” and “Depdagri”) and the
profession (“IAI”) in a combined effort to formulate governmental accounting
standards. In terms of numbers, it appears that “Depkeu” has been dominant.
While the members of the steering committee were appointed due to their position
outside the “KSAP,” the members of the working committee were appointed due to
their professional technical competencies in public sector accounting. The members,
consisting of prominent accounting academics and accounting practitioners working
in government agencies, are expected to be unbiased experts to determine the
standards of governmental financial measurement and of governmental financial
disclosure. Interviews with key informants revealed that there is a strong belief that
governmental accounting standards should be set by competent, professional
accountants because not only is they experts on the subject but they are also
independent. Although those appointed are associated with particular organizations or
government agencies, they are not supposed to be representatives of the organizations
from which they originate. Nevertheless, the composition of the members represents
the collaboration between government agencies (“Depkeu” and “Depdagri”) and the
profession (“IAI”). In terms of numbers, again, it appears that “Depkeu” has been the
dominant actor. The dominant role of “Depkeu” in the standards-setting process is
even more noticeable from the fact that the secretariat of the “KSAP” is located in
“Depkeu” premises, all the secretariat staff are officers at “Depkeu” and the activities of
the committee are financed through the “Depkeu” budget.
Since, its inception, the two sub-committees have conducted several meetings to
discuss the due process of standards setting, the strategies to develop conceptual
frameworks, and several governmental accounting standards drafts. One of the results
of the meetings was the proposal to establish an ad hoc working group. The brief of the
working group is to prepare position papers and a draft of standards to be discussed
by the working committee. Again, the role of “Depkeu” as the leading sector in the
standards-setting process has been more obvious due to the fact that all of the working Interaction
group members are officers at “Depkeu”. Thus, in practice, the standards-setting amongst reform
process involves three groups, i.e. the steering committee, the working committee and
the working group. drivers
The legitimacy of the committee, however, has been questioned throughout its early
existence, particularly when Law 1/2004 concerning the state treasury was enacted on
January 14, 2004. Article 57:3 of the Law stipulates that a governmental accounting 157
standards committee is to be set-up by presidential decree. Given that the existing
committee was established by “Menkeu” decree, the legitimacy of the committee has
been undermined. To rectify the problem of legitimacy, a new committee has been
proposed to the president.

5. Discussion and conclusion

5.1 The reform drivers: state-profession interaction
Understanding who is involved and how they interact in the process of setting
governmental accounting standards is a necessary step in understanding how and why
particular accounting policy choices are made. Governmental accounting practices,
once the exclusive domain of state agencies, now seem to be an area of intersection
between state agencies and the profession. Control over the direction of governmental
accounting development policy has no longer been the exclusive province of
government regulators. Rather, it has been an area of contestation and interaction
between government agencies and the profession. The situation following the
formation of “KSAP” is markedly different. While previously government agencies
were the sole actors who drove the practices of Indonesian governmental accounting,
they now share the role with the profession in driving governmental accounting
practices.
Referring to the classification of approaches to accounting regulation provided by
Puxty et al. (1987), it seems that the mode of governmental accounting practices
regulations has moved from a legalistic towards a hybrid mode of regulation. In such a
hybrid approach, both government agencies and the profession participate in the policy
setting of governmental accounting. In this case, it is evident that the state agencies
and the profession dynamically interact, as rivals as well as allies, in the process of
governmental accounting reform. The evidence suggests that there is a need to see how
the role of actors evolves from a historical perspective. It is apparent from the empirical
evidence that accounting policy making in Indonesian local government has been
contested among relevant actors.
In the context of Indonesian local government accounting reform, “Depdagri,”
“Depkeu” and “IAI” have been the main actors who share concern over governmental
accounting reform policy. They have, although with varying levels of influence, become
a “policy community” (Ryan, 1999) which shapes the outcomes of governmental
accounting reform policy setting process. The process of reform policy formulation is
apparently shaped by the preoccupations and priorities of those who take part in the
policy community. Through their power, ideas, and skill in the governmental accounting
area, they have been the key animators (Pollit and Bouchaert, 2004) who drive the
process of governmental accounting reform in Indonesia.
The parties involved and the way they interact in the process of governmental
accounting reform policy setting confirms the political nature, both in the strict and in
JAOC a broader sense, of accounting reform policy-setting process as advocated in the extant
2,2 literature. This applies particularly to accounting standards setting literature (Fogarty
et al., 1994; Collett et al., 1998). In the strictest sense, the reform policy-setting process is
political due to the fact that the governmental accounting reform policy-setting process
involves political bodies and government agencies such as the president, cabinet
secretariat, “BPK,” “Depkeu” and “Depdagri”. Leading senior civil servants, backed by
158 leading politicians in these political bodies, have been playing active roles in driving
the process of reform policy formulation. In the broader sense, the accounting reform
policy-setting process is political because it involves some sort of consensus
development which leads to compromises among various reform drivers (Burggraaff,
1983, p. 4).
Those reform drivers who are involved in the political game do not necessarily
evenly influence the reform policy formulation process. In this case, particularly in the
accounting standards setting arena, the “Depkeu” has gained the dominant status in
the governmental accounting policy area. “Depkeu” has been at the center of the
governmental accounting policy community. Its position as the leading sector in the
policy community is backed by state regulation and the fact that traditionally
“Depkeu” possesses the technical capacity in the governmental accounting area.
As mentioned elsewhere in this paper, “Depdagri” has very limited number of officers
with accounting background and “IAI” has been short of accounting groups with
strong knowledge and experience in the area of governmental accounting. In contrast,
“Depkeu” has been the only agency with a large number of officers with an accounting
background and long experience in the governmental accounting area. “Depkeu” has a
long history of holding the “monopoly” of governmental accounting knowledge in
Indonesia. In the words of one interviewee:
In the 1990s this was what happened (accounting) academics knew nothing what happened in
the governmental organizations. Their textbooks were American governmental accounting
textbooks, and they knew nothing about governmental organizations. . . . At that time the
only people who knew governmental accounting were those who work in “BAKUN” – a
division of “Depkeu.”
The empirical evidence shows that the main actors involved in local government policy
process were ministries and other professional bodies, such as, IAI. The general public
uses little accounting information and such information is mainly used by government
entities, such as the ministries. Another observation made in this study is that the
accounting change process mainly concentrated on the institutional actors, such as
different ministries and professional accounting bodies. In contrast to the views of
contingency theory, the focal organizations, such as, local government units (councils)
were not involved in the accounting change process. This can be explained partly by
the bureaucratic culture in Indonesia and partly by the fact that most of these local
governments units lacked accounting personnel to guide this accounting change
process. As a result, such local government units were mainly involved in the
implementation of accounting change when an accounting change was agreed and
accepted at the institutional level.

5.2 Interagency cooperation

This case study provides evidence that government agencies should not be viewed as a
single actor in the contest of accounting reform policy formulation. In fact, different
sectors of government agencies also compete with each other in the process of Interaction
governmental accounting policy formulation. Their interests and preferences with amongst reform
respect to (local) government accounting development are diverse in themselves. Their
views are incompatible at best, and conflicting at worst. In this case, “Depdagri” and drivers
“Depkeu” have engaged in a long rivalry in the efforts to reform Indonesian local
government accounting. It appears that interagency cooperation between “Depdagri”
and “Depkeu” in this area has been poor. Lack of coordination between the two 159
agencies in the “SPMKD” project and “Kepmendagri” 29/2002 reflects poor interagency
cooperation. This phenomenon is hardly surprising. It has long been recognized that
one of the salient features of public administration in developing countries is poor
coordination and lack of integration amongst pubic agencies (Riggs, 1964).
However, the formation of an interagency committee to formulate accounting
standards can be viewed as an effort to remedy poor interagency cooperation.
Nevertheless, as a means of rectifying the problem, it seems that the nature of an
interagency committee in the form of “KSAP” is top down and politically imposed.
The involvement of representatives from various agencies and the profession in
the “KSAP” is largely based on an assignment from top officials of “Depkeu”
following interagency meetings facilitated by the cabinet secretariat. This indicates
that their presence in the “KSAP” is not because they want to engage in a
cooperative relationship, but because they have been told or mandated (by the
decree) to do so. Reliance on the official decree as the basis for cooperation and
coordination amongst the members of the “KSAP” suggests that their involvement
in the process of reform policy formulation is largely based on the logic of
command rather than on the logic of interagency cooperation (Thomas, 1997).
Public administration literature suggests that the employment of such a top down
and politically imposed mechanism will be less likely to promote coordination.
It may only result in the appearance of coordination because making them sit at
the table does not necessarily mean making them cooperate (Thomas, 1997;
Seidman and Gilmour, 1986).
The abovementioned argument leads to a concern about the nature of the
relationship amongst reform drivers. By definition, to be qualified as an epistemic
community, a network of people from various disciplines should be based on shared
normative values (Thomas, 1997; Haas, 1990; 1992). The fact that those reform drivers
are actually bound by ministerial decree, instead of by shared beliefs and normative
values, suggests that cooperation amongst reform drivers in the “KSAP” does not
reflect the notions of idealism. Their involvement in the “KSAP” is simply a form of
interagency coalition mandated by higher governing official to reduce interagency
rivalries and to foster interagency coordination. This suggests that the birth of “KSAP”
seems to be a means of conflict resolution among state agencies and the profession;
that is a forum for the harmonious resolution of conflict between “Depkeu,” “Depdagri”
and “IAI.” Peterson and Bomberg (1999) argue that to be qualified as an epistemic
community, a network of experts in a particular domain is primarily motivated by
technocratic considerations rather than interagency harmony.

6. Concluding remarks
This paper responds to a call for the study of the process of accounting reforms in the
governmental sector. The process of accounting reform policy formulation in Indonesia
JAOC has been used as a case study to highlight the nature of the interaction amongst reform
2,2 drivers in the process of accounting reforms, especially in the context of a developing
country. Our narrations show that the process of governmental accounting reforms in
Indonesia is driven by many parties and the nature of their interaction, however, does
not seem to reflect those of an epistemic community.
Broadly speaking, governmental accounting reforms in Indonesia have been driven
160 by state agencies and the profession. This study finds that, during the process of
governmental accounting reforms, the reform drivers have engaged in a dynamic
interaction as both rivals and allies. The inherent mix of competition and cooperation
amongst reform drivers in the process of reforms confirms the political nature of the
accounting policy-setting process found in the extant literature. The empirical findings
lead us to a number of observations:
.
The institutional environment of Indonesian public sector accounting is very
complex. Different institutions and agencies tried to promote accounting change
in an unharmonious way.
.
The institutions and actors operate within the administrative bureaucracy,
which is very different to that depicted by different authors from developed
country perspectives (Luder, 2002).
.
The bureaucracy seemed to hold the ultimate power, but different segments
within the bureaucracy tried to influence the policy-making process to gain
legitimacy. Accounting policy change appeared to be highly contested and could
not be explained by the rational choice model.

This study indicates the complex nature of accounting change in a developing country
context. Similar studies could be undertaken in other developing countries for
comparison purposes and to provide a better picture. Also, it would be useful to study
implementation issues once new accounting rules are introduced at the local
government level.

Notes
1. The fieldwork was conducted in two stages: December 2002-February 2003 and July
2003-March 2004.
2. Local governments consist of regencies (kabupaten) and cities/municipalities (kota).
The regency term is used for rural areas, the city/municipality term for urban areas.
3. Commenting on article 14:4, an interviewee who was involved in the process of drafting the
“PP” 105/2000 said that the stipulation was the result of “guerilla tactics” undertaken by
“Depdagri” to secure the role for “Depdagri” in the financial management development of
Indonesian local governments. The article was labelled “a smuggling article” because, in the
original draft of the “PP” 105/2000 (prepared by a team in the “Depkeu”), there was no such a
stipulation.

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Appendix. Glossary
“Depdagri” – MoHA.
“Mendagri” – MoHA.
“Depkeu” – Ministry of Finance.
“Menkeu” – Minister of Finance. Interaction
“BPK” – Supreme Audit Board. amongst reform
“IAI” – Indonesian Institute of Accountants.
drivers
“KSAP” – Governmental Accounting Standards Committee.
“PP” – Government Regulation.
“Kepmendagri” – Minister of Home Affairs Decree. 163
“BAKUN” – State Accounting Agency.

Corresponding author
Manzurul Alam is the corresponding author and can be contacted at: Manzurul.Alam@BusEco.
monash.edu.au

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