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Accrual
Institutionalization of accrual accounting
accounting in the Indonesian
public sector
257
Harun Harun
Faculty of Economics, Tadulako University, Tadulako, Indonesia, and
Karen Van Peursem and Ian Eggleton
School of Accounting and Commercial Law, Victoria University of Wellington,
Wellington, New Zealand

Abstract
Purpose – The purpose of this paper is to evaluate the institutionalization of an accrual accounting
system in the Indonesian public sector.
Design/methodology/approach – The authors undertake a case study to gain insights relating to
the critical features of the institutionalization process of the accrual accounting system (AAS) in one
Indonesian public sector municipality. The data are drawn from official documents of the Indonesian
Government and from publicly available information about the accrual adoption processes. The authors
also interviewed key actors who were involved in the accrual accounting policy formulation, standards
development and implementation. The data under investigation cover the period from 1983 to 2010.
Findings – The IPM of Dambrin, Lambert and Sponem is employed to evaluate the process by which
an AAS was idealized, standardized, implemented and used in one Indonesian municipality. Scott’s
pillars of legitimization also inform rationales behind practice. This study reveals how the decision of
the Indonesian Government to adopt accrual accounting in 2003 was part of greater political and
economic reforms following the financial and political crisis that occurred in 1998. Idealized in the early
1980s by technocrats in the Ministry of Finance, accrual accounting practices were deferred and then
enabled by a series of national political events. Their ultimate internalization into our municipality was
led by new legislation but also influenced by the habits and histories of the Indonesian local context and
was as a result decoupled in many respects from ideals, discourses and techniques established for it.
Research limitations/implications – The findings should be understood in the economic, social
and historical context of Indonesia. Findings offered here may differ from other applications due to the
nature of the economic, social and political contexts.
Originality/value – Uniquely employing the IPM model, and drawing from a context which has
undergone significant political change but which has benefitted from little research, this study
contributes to an understanding of the institutionalization and legitimization process of an accrual
accounting system in an emerging-economy public sector. Findings demonstrate how notions of politics
and power inform the complexity of institutionalization in this unique political-economic environment.
Keywords Accrual accounting, Institutionalization, Indonesia, Efficiency, Transparency, Accounting
Paper type Research paper

The authors would like to thank Professors Jan Bell and Prem Sikka and other participants at the
Second Global Accounting and Organisational Change Conference in Boston 2010 for their comments
and advice. The authors’ sincere thanks also go to Professors James Guthrie and Jesse Dillard for the
suggestions they provided during their recent visits to the University of Waikato, Hamilton, Journal of Accounting
& Organizational Change
New Zealand. The authors would also like to thank Professor Stewart Lawrence and other Vol. 8 No. 3, 2012
participants for their comments at a seminar held by the Department of Accounting, University of pp. 257-285
q Emerald Group Publishing Limited
Waikato in April 2010. Finally, the authors give special thanks to the anonymous reviewers of this 1832-5912
journal who provided informative and constructive comments on earlier versions of this paper. DOI 10.1108/18325911211258308
JAOC 1. Introduction
8,3 Political reforms and shifts in political power tend to influence accounting and
managerial systems in the public sector generally (Mimba et al., 2007; Chang, 2009).
Such influence may also be felt in developing nations. This certainly appears to be the
case in Indonesia where accounting system change has occurred in a nation marked by
instability and radical change over the last 13-20 years. Under previous administrations,
258 including the Suharto era (1966-1998), the highest office holders (the President and
Parliamentary members) as well as governors and mayors at the local level were elected
only from state-approved parties (Baswedan, 2007; Fitrani et al., 2005). After the Suharto
regime collapse in 1998, reforms occurred which allowed all parties to be represented
and were a step in Indonesia’s somewhat uneven movements toward establishment as
a modern democratic state. Successive administrations have imposed reform on
Indonesian systems, laws and practices.
In the Indonesian public sector, such reforms have resulted in movements to decentralize
local government management and to “improve” the quality of public sector reporting.
In accordance with statutory law approved after 1998, changes were made to the role of
Central Government in creating greater independence for its members and in requiring
reports that are in accordance with internationally-inspired accounting standards. Many of
the government’s initiatives appeared to draw from the International Monetary Fund
(IMF), the Asian Development Bank (ADB, 2001) and the World Bank as guidance for
policies designed to achieve better governance and transparency (Nasution, 2008).
These reforms were undertaken by a number of post-Suharto administrations
including those led by Presidents B.J. Habibie (1998-1998), Abdurrahman Wahid
(1999-2001), Megawati Sukarnoputri (2001-2004) and Susilo Bambang Yudhoyono
(2004-2009, 2009-2011). Under the banner of conducting meaningful change, public
budgeting and operational outcomes are now reported, scrutinized and audited in
accordance with the managerial practices similar to those used by the private sector. The
adoption of the accrual accounting system (AAS) in the Indonesian public sector is thus
part of an international trend at the time to ensure that public officials are held to account
and that public money is used efficiently and effectively (Alam, 1997; Guthrie, 1998;
Ryan, 1999; Saleh and Pendlebury, 2006).
Despite such lofty ambitions, studies on such public sector accounting reforms in
developed nations – such as Australia and UK – indicate no clear benefits from their
adoption (Carlin, 2005; Connolly and Hyndman, 2006; Christensen, 2007). In some cases
such changes have wrought unintended, and undesirable, outcomes (Vamosi, 2000;
Hassan, 2005; Othman et al., 2006; Andon et al., 2007, Norhayati and Siti-Nabiha, 2009).
For example, the adoption of an activity based-costing system in a public sector
(company) in Portugal was met with resistance from production engineers and rejection
by workers (Major and Hopper, 2005). Similar problems were found to have occurred in a
Malaysian public sector organisation by Nor-Aziah and Scapens (2007) where
institutionalization created conflict and tension among workers. Chow et al. (2007, p. 48)
conclude that the global enthusiasm for adopting business-style accounting systems in a
public sector context is “[. . .] not supported by strong, detailed empirical evidence”.
Drawing from these patterns, and the concerns they raise, it appears that implementing
business-style accounting techniques provides no guarantee that efficiency, transparency
or effectiveness will occur in response. As Ter Bogt and Van Helden (2000) and Nor-Aziah
and Scapens (2007) find, the rules about accounting reporting systems may change
and new types of reports may be produced, but these changes do not necessarily improve Accrual
the attitudes and behaviour of people using them. Therefore, it is important for policy accounting
makers and accounting researchers to see the adoption of a private style accounting
system as not merely instrumental but also to understand it within its managerial,
organizational and social contexts (Bale and Dale, 1998). This is our concern in asking the
how one municipality in the Indonesian public sector responds to the imposition of a
private-like sector accounting in the post-Suharto era. 259
The paper is structured as follows: the research objective is stated and prior literature
is discussed, the theoretical framework and focus of the investigation are then
introduced. Methods and data analysis are presented, findings are drawn, theoretical
implications of the study’s findings are presented and then conclusions and
contributions of the study are clarified. Finally, the paper indicates limitations of the
study and suggestions for future studies.

2. Research objective and prior literature

This study examines the institutionalization of an AAS in one local government of the
Indonesian public sector. Drawing on this purpose the research questions of the study
are as follows:
RQ1. How and why has the AAS been adopted?
RQ2. How has the AAS been implemented in one municipal government?
By answering these questions this study will place these events within a social,
economic and political context so as to demonstrate the imposition of AAS on one
administration within a rapidly-changing developing nation.
This study responds to calls for better understandings of the process and
implications of a government’s decision to adopt business style accounting techniques in
the public sector. Siti-Nabiha and Scapens (2005) and Chow et al. (2007) suggest that such
studies not only need to look at the process of institutionalization at the macro level, but
also the dynamic features of its institutionalization within an organization. This is
important as the features and the institutionalization of an accounting system depend on
the actions of actors at the social and organizational levels (Dillard et al., 2004).
Such research in developing economies is also needed (Marwata, 2006; Sharma and
Lawrence, 2008; Rahaman, 2009). Prior Indonesian studies on post-Suharto public sector
accounting are limited to examining legal frameworks and accounting techniques
employed (Prodjoharjono, 1999; Marwata, 2006), and potential problems encountered at
the national level (Harun, 2007). Although these studies and the concerns they raise
have provided reasons to further examine public sector accounting reforms, the
institutionalization of such reforms is yet to be understood. There is also a substantial
literature that challenges the appropriateness of using business-style systems for public
sector organizations generally, some of the more recent of which include, for example,
Christensen and Parker (2010), Van Peursem (2009), Christiaens and Rommel (2008),
Christensen (2007), Connolly and Hyndman (2006) and Carlin (2005).
Public sector accounting research itself has now ventured beyond economic-based
theories and has adopted social theory to explain complexities and to uncover roles of
power and interest in policy formulation and accounting technology (Covaleski et al.,
1993; Rebiero and Scapens, 2005; Nor-Aziah and Scapens, 2007; Hopper and Major, 2007;
Monteiro and Aibar-Guzman, 2010). Studies in a number of Western nations have
JAOC emerged from this trend, some finding that political reforms and shifts in political power
8,3 affect economic and managerial arrangements in the public sector (Ryan, 1999; Guthrie,
1998; Lapsley and Pallot, 2000; Siti-Nabiha and Scapens, 2005; Mimba et al., 2007; Chang,
2009). In this sense:
[. . .] accounting scholarship is undergoing a reconceptualization in part due to the empirical
failure of efficient market theory, agency theory and contingency theory to provide rationales
260 for developing accounting techniques and systems (Dillard et al., 2004, p. 506).
This study also draws on social frameworks to contextualize and explain the need,
opportunity and rationales surrounding the institutionalization of accrual accounting
into an Indonesian public sector municipality.

3. Theoretical framework
One theoretical informant that has been used to evaluate public sector accounting
reforms is New Institutional Sociology (NIS). As claimed and practiced by, for example,
Covaleski et al. (1993), Broadbent and Laughlin (2005), Nor-Aziah and Scapens (2007),
Dambrin et al. (2007) and Norhayati and Siti-Nabiha (2009), NIS provides a valuable lens
to inform the process of organizational and accounting change. It is said have particular
resonance in the public sector because of the need for budgeted organizations to achieve
legitimacy with its public fund provider (Fowler, 2009, p. 172).
Findings on such matters have indeed emerged. Over a decade ago now, Lapsley and
Pallot (2000) used NIS to investigate changes in public sector reporting systems in
New Zealand and the UK to discover external legitimation practices and economic
pressures. Ter Bogt and Van Helden (2000) applied NIS in The Netherlands’ public
sector to find that accrual was made mandatory but did not necessarily translate into
practice. It seems that simple adoption of a new accounting practice cannot therefore be
assumed to change real attitudes or real practices in the public sector.
These studies also highlight the value of examining the social and political contexts
in which such public sector accounting policy is formed. In Canada, Baker and Rennie
(2006) used NIS to evaluate public sector accrual accounting practices in the Canadian
Central Government. Nor-Aziah and Scapens (2007) employed NIS to investigate
institutionalization in the Malaysian public sector accounting to find that adoption is
neither linear nor simple. Also in Malaysia, Norhayati and Siti-Nabiha (2009) found that
that the intention to institutionalize a new performance measurement system cannot be
realised if there is a lack of (external) pressure, and they point to isomorphic and mimetic
influences that lead to ceremonial adoption (also see Burns and Scapens (2000) and
Sharma and Lawrence (2005) on similar points). Durocher and Fortin (2010) examine
legitimacy motivations in the Canadian Accounting Standards Board to find the
presence of cultural – cognitive legitimacy pressures from the USA and internationally.
Together, these studies suggest to us that there is a reason to engage in research that
looks at broad landscapes within specific contexts and to understand the motivation of
actors involved.
Although NIS-based studies have been useful in explaining change at the
organizational field or level (DiMaggio, 1987; Norhayati and Siti-Nabiha, 2009), “[. . .] less
theoretical consideration is given either to the processes whereby new institutional
practices are established, transposed and decomposed [within their] [. . .] political
context” (Dillard et al., 2004, p. 507). This is important because the direction that the
institutionalization process takes “[. . .] depends precisely on the power of the Accrual
organizational actors’ translation and use of societal expectations” (Dillard et al., 2004, accounting
p. 510). Hopper and Major (2007) also suggest that new practices are framed within their
larger social, economic and political parameters and are promoted by strategic actors
outside the organization. Therefore, and so as to provide a fuller understanding of the
complexities of institutionalization, change should be recognised as part of a broader
political engagement (Dillard et al., 2004, p. 510). Taking a broad view would certainly 261
seem to be appropriate for a public sector organization established within
governmental policy.
Decoupling is also found to be associated with adopting new structures. As Ribeiro and
Scapens (2006, p. 97) state, the “[. . .] formal structures and procedures [. . .] acquire
legitimacy and guarantee the resources required [. . .] but they are detached from the
everyday organization activities”. Durocher and Fortin (2010, p. 497) also found
decoupling in their study of a public sector organization. As such decoupling phenomena
should be taken into account in fully understanding the complexity of accounting
practices within organizations.
Nor-Aziah and Scapens (2007) call for research into accounting system
institutionalization within developing nations, and this study heeds that call within
an Indonesian context. The context is primarily of the post-Suharto Indonesian political
environment as applied to public sector accounting systems reform. We examine how
and why actors come to institutionalize a new accrual system. Institutionalization
provides the broad theoretical framework for the study and the Dambrin et al.’s (2007)
institutionalization process model (IPM) particularlizes the process by which
institutionalization of an AAS occurs.
Drawn from a previous model developed by Hasselbladh and Kallinikos (2000) and
Dambrin et al. (2007) offer a framework of particular value to this project because it is
concerned with process; in particular with how techniques are diffused, developed,
adopted and implemented as a social construct. According to Dambrin et al. (2007) and in
order to obtain a complete picture, four stages are said to occur:
(1) dissemination of new ideals;
(2) elaboration of new ideals into policy development (new discourses);
(3) development of specific management tools based on new ideals (new
techniques); and
(4) implementation of specified techniques (internalization) (Table I).

The first stage – the dissemination of new ideals – are said to normally begin outside
the organization, and later stages are usually internal (also see related discussions in,
for example, Dillard et al. (2004)). This may occur in a public sector because certain
external authorities are influential in establishing reporting policy. So for example, the
ADB may make demands on a nation prior to providing loans for development. This
expectation is shown in Figure 1.
According to Dambrin et al. (2007) however, institutionalization is not complete until
“discourses” and “techniques” have been engaged and until “internalization” has occurred.
For an institutionalization process to be “successful” therefore there must be a coherent
link between new ideals, new discourses and new techniques (see Kostova and Roth (2002)
for a related discussion). That is, an active adoption of accrual accounting occurs only
JAOC
Management culture Distribution of power Accountability principles
8,3
Ideals Ambiguous Conflicting Conflicting
A perverted conception of Shift towards a bypassing Promotion of a more
innovation is slowly of both the doctor and the managerial conception of
emerging (through drug representative accountability (sellerside
262 replication concerns) vs scientific side of the
drug representative’s job)
Discourse In discourse, profitability The dominant department Discourse requiring a
is either a means or an end clearly remains the sales greater level of commercial
depending on the target department efficiency from drug
audience representative is developed
Techniques Marketing techniques Recruitment of “less Performance measurement
designed to satisfy new scientific profiles” in the and remuneration system
replication concerns (e.g. sales and marketing become increasingly
profit measurement of departments. Recruitment similar to the one used in
promotional operations) of management controllers the consumer goods
from the consumer goods industry (behaviour-based
industry as vectors for added to result-based
change assessment)
Internalisation Loose coupling Decoupling Decoupling
Techniques are partly used Sales department retains Decoupling is maintained
in a ceremonial way but the right to have the final because of both legal and
they seem to be say in the decision-making organisational culture
Table I. increasingly accepted process constraints
Stages of
institutionalization Source: Dambrin et al. (2007, p. 177)

Figure 1.
Stages of
institutionalization
Source: Dambrin et al. (2007, p. 178)

when the actors “[. . .] view the practice as valuable and become committed to the practice”
(Dambrin et al., 2007, p. 176).
When institutionalization fails, a policy’s intent may be lost. That is, and according to
Dambrin et al. (2007, p. 176): “[. . .] without internalisation, there is loose coupling or
decoupling and practices are adopted on a ceremonial basis”. Thus, the success of the
institutionalization process lies in the internalization of the rationales for which the new
system was required and can only be compete if the initial ideals (such as using “accrual” to
improve efficiency and accountability in a public sector) are reflected in the actions of
people who adopt it. Institutionalization occurs when “[. . .] the rules are coherently linked to
the actions (routines) of actors [in a specific organization]” (Burns and Scapens, 2000, p. 6).
There is thus a relationship, and an order, between new ideals, new discourses, new Accrual
techniques and internalization (Dambrin et al., 2007, p. 178). accounting
Dambrin et al. (2007) found that the process of institutionalization of a management
control system in a pharmaceutical company was implemented by managers as a means of
enhancing efficiency. However, they also found that it is difficult for a new system to be
internalized where existing practices coexist with the emerging ideals, and systems of
control occur in ways not intended. They highlighted how discourses of organisational 263
actors even go so far as to contradict the ideals and control techniques intended for the
systems (Dambrin et al., 2007, p. 201).
Thus, and as applied to the institutionalization of an AAS in a public sector
organization, the Dambrin et al. (2007) IPM model is useful to focus the investigation on
processes such as:
.
the formation and communication of the need to implement an AAS (new ideals);
.
a mobilization by government and lobbyists to create policy that is consistent
with that need (new discourses);
.
the formulation of standards, rules and procedures (new techniques); and
.
the production of such reports, their dissemination and their use in a manner and
for a purpose consistent with this intent (internalization).

In other words, the institutionalization process of a new accounting system may be

formally adopted, but it is another matter as to whether it is also used to produce or
apply accounting information in the way intended.
Table II illustrates the focus of this investigation in terms of institutionalizaton.

4. Methods and data analysis

This study uses a case study to provide a deep analysis of one institutional practice. As
Yin (2009) states, a case study is useful when an investigation is set to answer “why”
and “how” questions relating to a specific setting. To ensure data completeness, three
sources of information are employed: government regulations, publicly available
information and interview data.
It is offered that the institutionalization of an accounting technology within the
public sector may be more complex, or complex in a different way, than what would
occur in its “private” sector equivalent. The actors involved may have different
agendas and interests in a public sector organization (Nor-Aziah and Scapens, 2007).
Such actors may include policymakers, those who apply these reporting rules, and

Stages of
institutionalization Focus of investigation

1. New ideals Dissemination of new ideals which require the adoption of AAS in the
Indonesian public sector
2. New discourses Mobilization by actors leading to the passing of a legislative policy to develop a
set of accrual accounting standards
3. New techniques The formulation of a set of new accounting standards Table II.
4. Internalization The production and use of accrual accounting information for the intended Focus of this
purposes highlighted in the Law 17 (2003) and GASt investigation
JAOC users of government reports (Mignot and Dolley, 2000). Users of government reports
8,3 may include managers, politicians, creditors and tax payers. In developing nations,
international financial authorities such as the IMF and the ADB are also influential
(Sharma and Lawrence, 2008; Rahaman, 2009). Hence any such study should incorporate
the interests of these stakeholders.
The interviewees at the national level were chosen to capture the view of those who
264 have involved themselves in disseminating AAS ideals in the Indonesian public sector and
those formulating the accrual-based Government Accounting Standards (GASt). These
participants are or were affiliated with the Indonesian Ministry of Finance (MOF), the
National Parliament, the Ministry of Internal Affairs (MIA), the State Audit Board, and
the Committee of GASt.
At the local level, interviews were conducted with people in the municipality who
were directly involved in preparing and (potentially) using the accrual-based reports of
the municipality. Those interviewed include senior officials in the divisions of financial
and asset management, planning, internal auditing, and human resources. Outside the
municipality interviews were conducted with those who assisted the municipality
prepare its reports including financial consultants and certified accountants. Potential
users interviewed include local parliamentary members and activists of a
non-government organization (Table III).
Questions asked were formulated in accordance with the roles of each participant. For
example, the participants at the national level were asked about the process leading to the
formulation of the AAS regulations and standards. Participants from the municipality
were asked to discuss the processes for which they were responsible or in which

Number of
Group of participants Organizational position/role of participant participants

National level Two former senior officials in MOA 16

One senior official (MOF)
Four senior researcher (State Audit Agency)
Three parliamentary members (national level)
Three members of the Government Accounting Standard
Committee
One senior official in MIA
Two accounting academics
Local level (municipal One deputy mayor 20
government under Three officials at the financial and asset management division
study) Two officials at planning and budget division
Two officials at the inspectorate division
Two officials at the human resource management division
Three local parliamentary members
Two officials at the financial evaluation division for local
governments at a provincial government in which the
municipal government is part of its jurisdiction
Two consultants
Two certified public accountants
One journalist
Table III. Two activists of a non-government organization
Details of participants Total 36
they engaged. We employed a list of interview questions, however to keep the interviews Accrual
flowing in a natural way, the questions were not used in a strict manner to allow accounting
participants to openly reveal relevant information as much as possible.
The interview approach is in accordance with the notion that in a case study a
researcher can interview people from different settings (organizations) to facilitate
multiple levels of analyses (Yin, 2009). Interviewing participants from different
groups of stakeholders or professions (i.e. manager of an accounting unit, preparers 265
and users of government reports and media) has been adopted in previous public
sector accounting studies (Jones and Puglisi, 1997; Van Peursem and Pratt, 1998;
Mignot and Dolley, 2000; Christensen, 2002; Mack and Ryan, 2006). Interviews ran
from 60 to 90 minutes. The interviews were held in the offices of participants and
recorded, and later transcribed and translated. A summary of each interview was
formed and reviewed with each participant as soon as possible after the interview via
a separate telephone or personal contact to ensure that their views were appropriately
represented.
Following Yin’s (2009) recommendations, and once the collection of data was complete,
comments were systematically categorized using classifications found within the IPM
framework provided by Dambrin et al. (2007). Data was then coded, categorized and
labelled. Results reveal patterns which indicate the emergence of ideals calling for accrual
accounting information in the Indonesian public sector, the process of formulating
government law and policy on AAS, the formulation of accrual-based accounting
standards and that which demonstrates how and why the AAS was internalized in one
Indonesian municipality.
In addition, the data were tabulated into categories such as the period of time, people or
organizations and the character of specific actions from specific actors. This was useful in
coming to an understanding of the nuances and complexity of the situation. As the
interviews were conducted in the Indonesian language, and as most of the documents used
are also written in that language, translations to English were undertaken by the first
author. To ensure accuracy of translations, a selection of the interviews and documents
were reviewed (twice each) by two Indonesian-speaking individuals in New Zealand. The
Dambrin et al. (2007) model was helpful in identifying and categorizing the data into
specific themes and patterns. The interviews concluded in 2010.

5. Findings and discussion

This section introduces the public sector accounting structure in Indonesia followed by a
discussion of the institutionalization of the AAS in one municipality within the Indonesian
public sector as informed by the IMP model.
The public sector accounting system in Indonesia is comprised of reporting systems for
a central and for all local governments and entities. The latter includes, for example,
municipalities and publicly-owned organizations such as schools, universities, and
hospitals and state-owned companies. Before the issuance of Indonesian GASt in 2005,
agencies and departments at all levels used the cash based system inherited from the
primarily-Dutch colonial era. Exceptions are state-owned companies which have used
the private sector reporting standards (Nasution, 2008). The public sector accounting
reforms referred to earlier have now required the adoption of AAS for all of these sectors.
The following evaluates patterns in terms of IPM’s new ideals, new discourses, new
techniques and internalization.
JAOC 5.1 New ideals
8,3 Several overlapping events on the national level in Indonesia led to calls for the implementation
of AAS in the Indonesian public sector. The first of these was the 1983 oil crisis. It and its
effects were said to inspire MOF technocrats (senior economists and accountants) to press for
public sector accounting reform that would control government spending and to reflect real
performance (Prawiro, 1987; Nasution, 2008). An interviewee states:
266 As far as I know, the rationale behind the idea [the adoption of an accrual based accounting]
was to ensure the Government’s spending would be more efficient as the revenue from the oil
declined (Interviewee 4).
The 1983 oil-price-driven fiscal crisis was indeed very damaging to the economy and
concerns as to its impact was well-publicized. High rates of inflation and public incidents
of social tension were in evidence in the late 1980s and 1990s (Hill, 1999; Papenek, 1993;
Nasution, 2008). Indonesia’s Central Government was under yet more pressure following
the 1997 Asian financial crisis (Boediono, 1999). Internal political divisions and threats
of secession raised further warning signs for this government. According to a World
Bank report:
Latest events in Indonesia bear out the key message of our most recent economic report –
that the country’s newfound economic stability remains highly fragile. The sudden upsurge
in violence in East Timor and the disturbing implications of the Bank Bali affair have shaken
market confidence. These developments have interrupted [. . .] an otherwise steady march
toward economic stabilization (World Development Bank, 1999).
There were even questions as to whether Indonesia was a failed state (Wanandi, 2002).
Reliance on oil revenues to cover up government expenditures or mismanagement was
no longer viable. An academic interviewed shared his view of events:
[During the 1980s] we simply needed a better recording system to ensure that public money
was properly spent for a better result (Interviewee 2).
Macro-political events ultimately led to the fall of Suharto’s Government in 1998 and the
last autocratic regime. The Indonesian bureaucracy, now freed from direct autocratic
control, was more able than perhaps ever before to promote transparency. The second
major influence appears to have been sourced in western practices which found
advocates in Indonesia’s MOF and MIA officials. A number of public sector accounting
reforms had recently occurred in Australia, New Zealand and the UK in particular
(Van Peursem et al., 1996; Ryan, 1999; Lapsley and Pallot, 2000; Sharma and Lawrence,
2008; Chang, 2009) and this would have been “heard” by Indonesian technocrats. Such
reforms were marked by conversions from cash-based to managerialist and
accrual-based accounting systems for public sector assets and reporting.
Given such economic pressures, and the existence of overseas alternatives, some
elements within the Indonesian Government sought to require the adoption AAS. This is
clearly indicated by a MOF 1987 initiative. As documented therein, the old cash-based
accounting system inherited from the Dutch rule was seem to be insufficient to cope with a
fiscal crisis or to be useful for those managing the increasing volume of economic
resources now controlled by the State (Prawiro, 1987; Papanek, 1993). The growing
democratization of Indonesian Government, and its growing complexity as a result,
made it more difficult for cash-based budgets to be acceptable as a means of accounting for
the Indonesian public sector. Prawiro (1987, p. 10) himself states:
 In broader terms, the accounting and financial reporting systems as practiced in Indonesia Accrual
today [. . .] [were promulgated for] measuring and reporting compliance with budget limits set
by the Parliament. [. . .] the old accounting [systems] [. . .] have failed to keep pace and have
accounting
become strained beyond their limits.
Such efforts to encourage AAS echoed the sort of rhetoric found in public sector
accounting reforms common to the time (Guthrie, 1998; Lapsley and Pallot, 2000).
Overseas practices – including AAS – thus became the new “norm” and led to 267
what we consider to be normative institutional pressures for reform. These ideas of
the “normative” draw from Deephouse’s (1996) analysis of commercial banking
(Deephouse and Suchman, 2008) and Scott’s (1991) analytical framework offering
pillars of institutional framing. The “normative”, referring to norms and social
obligations, is often acquired in the education of influential professionals (Kury, 2007,
pp. 370-372). These influences indeed did occur in Indonesia. In particular, ministry
officials did not come by their views in isolation but appear to have been inspired
by lessons they brought home from overseas (western) experiences and from the
public sector accounting rhetoric of the time. A former senior official in the MOF points
to this factor:
There were only a few high officials in the Ministry of Finance who [were] concerned with
that matter [but] they were mainly educated in Western countries (Interviewee 1).
So for example Budiono, the deputy governor of Bank Indonesia in 1997-1998 who was
later MOF received degrees from the University of Western Australia and Monash
(Australia), and a doctorate from Wharton (USA).
Calls for change led by the MOF, led to other internal voices – such as those within
Central Government and Parliament itself – for AAS:
They [national Parliamentary members] supported the implementation of a more accountable
and transparent [reporting system] in this country (Interviewee 2).
Finally, there was direct pressure for reform from external supporters such as the USA
(Chomsky, 1998; Wanandi, 2002). External financial providers also set out expectations
including the IMF which had a history of supporting Indonesia (Boediono, 2002), and the
ADB via their Country Assistance Plan. ADB documents of the time also revealed
serious concerns with the quality of Indonesian accountability (ADB, 2011a, b). This is
not surprising as corrupt transfers of government funds had become such a problem in
1997 and 1998 that as much of 30 percent of World Bank funds may have been diverted
for corrupt uses (Fried, 2011). Funding providers were demanding accounting system
reform (Fried, 2011).
Lack of transparency and accountability were thus the root causes for concern, a
belief widely held by influential parties both at home and overseas. In a sense, such
discourse not only indicated a competition between government and non-government
actors as was suggested by Christensen and Parker (2010), but also between and
among government actors themselves. Together, a new “norm” was being established as
“ideal”, and this encouraged and encompassed the use of AAS in the Indonesian public
sector. Prior to Suharto’s demise in 1998 however, these “normative” pillars were not
successfully transformed into new ideals. Neither new discourses nor new techniques
had been formed at the time.
JAOC 5.2 New discourses
New discourses in the institutionalization of AAS in Indonesia began therefore with the
8,3 collapse of the Suharto administration in 1998 and culminated in the issuance of laws
passed between 1998 and 2006 that put into place mandates for accrual accounting. The
problems and pressures that led to the fall of Suharto’s Government, and indeed which led
to the introduction of selective democratic practices in Indonesia, form therefore an
268 important part of explaining the reforms that followed. At least with respect to accounting
reform, post-1998 governments and parliaments enabled new ideals to be converted into
new discourses (laws primarily) and change accounting and reporting expectations.
The political and economic reforms undertaken by post-Suharto administrations can
be thus said to have been driven by Government’s responses to the economic crisis. It was
successive presidents – B.J. Habibie (1998-1999), Abdurrahman Wahid (1999-2001) and
Megawati Sukarno Putri (2001-2004) – who led from the front in political, economic
and public sector reforms that neither Suharto nor previous leaders had undertaken:
Following the fall of Suharto’s regime [. . .] comprehensive reforms were undertaken including
the implementation of autonomy policies for local governments, the improvement of the
budgetary system, the increasing role of State Audit Board, and the implementation of
the accrual accounting system (Interviewee 1).
Such reforms, via statute, included the adoption of direct elections for president and
local officials (governor and mayors) and also greater autonomy for local governments
(Baswedan, 2007). This is significant as to be discussed later in terms of understanding
a local municipality’s budgetary power.
One statute issued during this period of time established the new accounting ideals into
law. This was Law 17 (2003) which itself uses the language of reformers in Australia and
New Zealand: that is, to “enhance accountability, transparency and efficiency” of
government institutions (Law 17/2003). Law 17 specified that every government official in
the country has the responsibility to ensure that public sector financial management
practices are undertaken in accordance with stated principles including, again drawing on
Western language, “efficiency, effectiveness, tranparency, public accountability and
fairness” (Law 17, para-1). This may not appear to be out of the ordinary for readers
accustomed to practices in Western societies, but this introduced new principles into
Indonesian law in defining basic principles necessary for the financial management of the
Indonesian public sector. Law 17 also required the adoption of AAS:
[it required the] public sector to produce accrual based reports (Interviewee 4, An academic).
Law 17 was drafted by MOF bureaucrats, met no formal resistance when tabled and
passed Parliamentary vote with little revision or opposition. It was thus a strong
statement that led to significant changes in the types and content of government
financial reports for organizations at both the national and the local government levels.
Other law reforms reinforced or provided the foundation on which these changes could
occur. In Laws 22 and 25 (1999) the Central Government of Indonesia grants autonomy to
local administrations for financial, management and budgeting arrangements. This
means that they are not only held to account at a local level, but are also responsible for
reporting in the particular manner required. Law 15 (2006) was imposed to strengthen the
role of the State Audit Board. This statute gave the State Audit Board of the Republic of
Indonesia, now an independent body, the right to perform financial, performance and
special purpose audits as they see fit. Under statute, the board has the right to determine
the audit objective and plan, and empowers them with reasonably wide authority to do so. Accrual
This strengthened the constitutional role and also built on the November 2001 statute accounting
(which itself required the use of professional auditors).
Also, and in accordance with Law 17 concerning state finance (2003) the
promulgation of GASt in 2005 was made possible and was imposed on government
departments. Public sector organisations are required to adopt AAS as part of
complying with these internationally-inspired accounting standards. 269
Law 17 (2003) and similarly-inspired statutes thus represent a watermark in
Indonesian statutory law, influencing public reporting systems at all levels of
government. Its enactment also represents the transformation of AAS from a new ideal
to the realm of new discourse. So while the need for reporting reform had been introduced
as a new ideal in the 1980s, it is important to bear in mind that the issuance of Law 17
(and other relevant statutes) only occurred following on from, and in response to, the
Suharto administration collapse in 1998. That is, the new discourses were not only
driven by the actors in the MOF and others, but also by dramatic changes in the national
political environment and from having new political actors in the highest echelons of
power. Therefore, the nature and extent of this reform cannot be isolated from the
influence of social and political changes. This accommodates the notion that “an
understanding of accounting [. . .] change requires an understanding of various
organizational and historical contingencies” (Scapens and Roberts, 1993, p. 30) as this
was certainly important toward evaluating the new discourses in accounting in the
Indonesian public sector.
So while the powers that came to influence these statutes may have been “normative”
in the sense of their having established new expectations for reporting and accounting
systems, as laws they imposed a form of coercive institutionalism on the Indonesian
public sector. This is discussed in the following section where the process of
institutionalizing these laws into policy is revealed.

5.3 New techniques

During the new techniques stage, the institutionalization of the AAS is characterized by
the formulation and promulgation of accrual-based GASt, a process which was completed
in 2005. The new reporting standards are very specific in defining the type and content of
reports now required of government departments and of agencies at both the central and
local levels. As with the Law 17 (2003) the GASt require government organizations to
produce budget realization reports (cash-based reports), balance sheets (accrual),
statements of cash flows, and notes to financial statements (Table IV). These reports must
be made available at both the provincial level (consolidated reports) and each division
(agencies, organisations, hospitals) of a province.

Reporting system Types of report

Old reporting system 1945-2003 Budget realisation reports (cash base-reports)

New reporting system accordance with the Law 17 Budget realisation reports
(2003), GASt (2005) and MIA Decrees (2006/2007) Balance sheet
Cash flow Table IV.
Notes to financial statements Types of reports
JAOC The members of the committee who formulate these standards represent the normative
8,3 form of Scott’s (1991, 2001) legitimacy pillars as they were “shaped by common formal
training and education and [. . .] shared networks” (Fowler, 2009, p. 173). That is, standard
setting board members were chosen by the President from subsets of professional society
in Indonesia including academia, the State Audit Board and the Indonesian Institute of
Accountants. Also, this standard setting body is led by a member of the MOF. Essentially
270 therefore, the policies and the daily activities of the committee are under the control of the
MOF (GASt, 2005) and hence also the main body which was influential in forming the
new ideals for Indonesian public sector accounting.
In 2006 the MIA, which had also lobbied for AAS, issued a separate set of rules for local
governments in what is termed the MIA Decree No. 13 (the Decree). The Decree was
revised in 2007 and now forms guidance for programs, budgets and annual reports. As
with the GASt, the Decree sets out basic principles, frameworks and procedures for
planning and reporting, and these are also imposed on all Indonesian local governments.
This effectively creates a second complete set of reporting requirements for local
governments. That is, on issuance of the MIA Decree, local governments are now not only
required to prepare their reports in accordance with GASt, they are also required to comply
with this MIA ministerial Decree. As a consequence local governments are now required to
produce two complete sets of reports under different standards, whereas before they only
had to complete one. The new “norms” seem to have created in themselves a complexity far
beyond that envisioned by those who had formed the new ideals of AAS.

5.4 Internalization stage

While the municipality under study now produces accrual-based reports, we find little
evidence to suggest that the institutionalization of the accrual-based accounting
standards has significantly changed how actors in this municipal government employ
them. A number of critical issues have been identified as leading to this situation, and
these are as to a lack of participation, a low level of compliance, a low level of use and
unintended consequences.
5.4.1 Lack of participation. According to the accounting officials in the municipality
the new accounting system is said to be difficult to implement. An interviewee points
out the root of the problem:
It is mainly due to their education and professional backgrounds that differ from accounting
(Interviewee 32).
Existing employees in the accounting and finance division of this municipality no
longer appear to actively engage in the preparation of the municipal government
reports. The preparation is now outsourced to external consultants. This is said to
occur because the existing accounting employees lack accrual accounting skills. An
auditor at the State Audit Board points out that this problem occurs on a large-scale:
Most of local governments in this region including [this] Municipal Government still very
much rely on consultants in preparing their reports (Interviewee 33).
Although the GASt requires financial statements for every division and consolidated
reports for the municipality as a whole, staff who have the accounting skills necessary to
create them is very limited. Of a total of 24 officials in the accounting and bookkeeping
section in the municipality’s financial and asset management division, only two
were accounting graduates (Interviewee 21; State Audit Board, 2008). The lack of Accrual
qualified accountants is not an unusual situation in the Indonesian public sector. accounting
Commenting on the issue, a senior auditor at the State Audit Board, who had audited this
municipality, states:
As far as I know, in this region it is difficult to find qualified people that can accomplish their
task either at the top position or technical level. Their backgrounds have nothing to do with
accounting (Interviewee 20). 271
A certified accountant (Interviewee 33), who was involved in assisting our municipality
prepare its budgets and financial statements, agreed. Another participant who trained
officials in the municipality stated that the accrual based reporting system “has not
been well implemented and most of the employees in the financial and accounting
division lack basic training or professional backgrounds in the field” (Interviewee 14).
Furthermore, the human resource management systems within the Indonesian public
sector generally, and for this municipality specifically, have not been reformed in ways
that serve the new ideology. So for example, those Indonesians who are experienced and
skilled professionals, such as accountants from the private sector, have been reluctant to
become civil servants due to the low salary and age limits (McLeod, 2006; Setiyono and
McLeod, 2010).
Overall, these events have led to cost increases. While departmental cost changes are
difficult to determine at this time, adding new bureaucratic layers to an existing base
must result in significant cost increases. That is, while the accrual based report
preparation is outsourced, existing government “accounting” employees are still paid
and employed at the same level as before (Interviewee 22). This cannot be seen to fulfil
the intent of those who formed the new ideals, and it supports the notion that with a lack
of institutional capacity, unintended consequences can occur. That is, the outcomes and
implications of the adoption of a new accounting system seem to run counter to the
motives held by the policy makers who sought to implement them (Mimba et al., 2007;
Nor-Aziah and Scapens, 2007; Norhayati and Siti-Nabiha, 2009). This may be a matter of
having fallen back into old habits, a point which gains resonance as further
internalization practices are revealed.
5.4.2 Low level of compliance. Both the GASt and the Decree issued by the MIA
require Indonesian local governments to prepare reports for the local government body
and for of each of their division and sub-organizations. However, our municipality was
only able to provide a set of consolidated reports by 2007, four years after the original
requirement was put in place. A similar situation of reports delayed or unmade
apparently occur elsewhere and, at least as of 2007, some had as yet to provide any
reports at all (State Audit Board, 2007, 2008). This appears to be an ongoing problem, as
suggested from an interviewee at the State Audit Board:
What we have audited so far are only the consolidated reports of a municipal or a provincial
government, not the reports [from their divisions] (Interviewee 26).
Even as at 2010, the consolidated reports of the municipality under study have yet to
fully comply with the new GASt or provide the basis on which the State Audit Board can
come to an opinion on its reports. Its reports for 2006 and 2007 both received disclaimer
opinions from the State Audit Board. Assurance as to the quality of information
provided is not, therefore, available.
JAOC This failure to receive a “clean” audit opinion prevents a real accounting of this local
8,3 government and furthermore may provide opportunities to engage in account
mismanagement. Indeed, such mismanagement appears to have occurred. In the 2006
and 2007 audits a number of irregularities were identified even as auditors acknowledged
their inability to come to an “opinion” overall. The board found irregularities that indicate
susceptibilities relating to cash and asset management, to the provision of supporting
272 documents for some transactions and expenditures which were disbursed without
apparent or appropriate approval documentation (State Audit Board, 2008).
The low level of compliance discovered in our municipality does not appear to be
unique, and may exist in most of these local governments. According to the State Audit
Board (Table V) only 5 percent of local governments’ reports in 2005 were prepared in
accordance with GASt to be awarded unqualified opinions.
Counter to what might be expected for systems under reform, this compliance rate
decreased to 1 percent in 2006 and 2007 and only slightly bettered itself to 2.7 percent in
2008.
Raising another type of concern, there were 7.2 percent of local governments’ reports
with adverse opinions in 2008, a worsening situation from 2005 which reported only a
3 percent rate of adverse opinion. As to the reports produced at the central level, and where
such reports were prepared at all, the failure to present them in a form complying with
GASt has been apparently common (Nasution, 2008). This means that both in terms of
production and quality, progress on these matters has been poor. Furthermore, given the
patterns over time, it does not appear to be improving; a situation also found in our
municipality. Irrespective of the authority of the (new discourse) statutory law, or the
clarity of new techniques and the standards it produced, it seems that the New Ideals have
not as yet been effectively translated into actual practice.
5.4.3 Low level of use. Although Law 17 (2003) and the GASt and MIA standards
require multiple reports in the “new” style, demand for them by users appears to be very
low. One reason for this may be in the limited ability to understand or take meaning from
them. Among the potential users, the State Audit Board (a national actor) may be one of the
only parties with sufficient capacity (in terms of human resources and skills) to evaluate
and offer opinions about their content (Nasution, 2008). So while it may be claimed that
AAS serves efficiency, transparency and effectiveness “ideals”; there is no evidence which
suggests they have been employed for this purpose. Managers appear rather to rely only
on the old type of reports (cash and budget realized reports), not the new reports. The Vice
Mayor of our municipality gives us a sense of how dire this lack of use may be:
As you know, these reports can be accessed by the public after being audited by the State
Audit and formally submitted to the [local] parliament. But in this office, I have never seen
anyone outside the office come here and ask the reports (Interviewee 13).

Year Unqualified (%) Qualified (%) Disclaimer (%) Adverse (%) Total (%)

2005 5 85 7 3 100
2006 1 70 23 6 100
Table V. 2007 1 63 17 19 100
Local governments’ 2008 2.7 74.1 16.0 7.2 100
reports by State Audit
opinion (%) Note: These audit opinions were issued to 469 local governments (Nasution, 2008)
As agreed by other interviewees who are with MOF and the State Audit Board, Accrual
respectively (Interviewees 5 and 27), this lack of use reflects a pattern at both the national accounting
and local levels. In enquiring of internal managers and of the municipality’s
parliamentary members, no clear evidence is found to suggest that they use these
reports. In contrast, there is evidence that they have used the cash based reports. Two
senior officials in the municipal government state:
273
[. . .] we are still more familiar with the budget realization reports. We have used them for a
long time (Interviewee 29).

Now we are also required to produce [accrual] balance sheets and cash flows, but we only use
these reports as our accountability document to the State Audit Board and the Local
Parliament. [. . .] most of us [here] have been more familiarized with that information [of cash
based reports] (Interviewee 14).
A local parliamentary member states:
We only use the budget realization reports [case-based reports]. It is easier for them to
understand (Interviewee 30).
This undermines the value of having accrual-based information for decision making.
The lack of a will or means to understand, the reliance on historical cash-based accounts
and the lack of technical accounting knowledge generally has led to the situation in
which the Internalization of the AAS for this municipality is ineffective for managerial
or policy purposes. With respect to the user situation in particular, we suggest that,
again as to the internalization of AAS, the “taken-for-granted assumptions and symbolic
aspects of social life” (Fowler, 2009, p. 173) as represented by the old cash-based reports
continue to dominate. This would seem to comprise a cultural-cognitive/mimetic pillar in
the institutionalization of AAS within a municipality of Indonesia.
5.4.4 The emergence of unintended outcomes. Along with the critical problems
identified above, internalization of AAS systems and standards has had at least one
other unintended consequence: the emergence of a bribe-kickback scheme as part of the
process of account and report construction. This information comes directly from
interviewees including several of the private consultants who assisted our municipality.
Such practices occur during the tendering process when accounting is outsourced to
external consultants:
The municipal government [under study] spends a lot of money to pay accounting
professionals outside the government to prepare these reports. But the situation is worsened
by the fact [as the process to outsource the accounting function [would involve] tendering
processes which in many cases are vulnerable to bribery and corruption (INT-34).
What occurs is that those who bid for municipal projects tend to be informally called upon
to make private cash payments to local authority individuals who have the right to
determine the outcome. Such practices exist elsewhere in Indonesian bureaucracy
(discussed below) but have found a new outlet in financial report preparation. It is not due
to declines in civil service wages, which actually increased in 1999 (World Bank, 1999, p. 2).
It appears to an opportunistic event. Because the officials and their employees once
prepared the reports themselves, there was no opportunity in the past for “kickbacks” from
externals; now however, there is. There is a certain irony in the emergence of such a scheme
JAOC from an accounting practice which is idealised as one formed to increase transparency.
8,3 The decoupling of new ideals from internalization is apparent in this practice.
It is difficult to know the extent to which such bribery occurs, though reports of
“mismanagement” may give some indication of where such problems lie. So for
example and with respect to reporting contracts, the State Audit Board disclosed the
presence of similar schemes in their 2007 report. It was also there reported that Rp
274 (rupiah) 383,599,998 (approximately US $38,360) of the municipal government budget
in 2006 allocated for the annual costs of the housekeeping of the Mayor were not used,
recorded, administered or reported in accordance with relevant rules. Such a finding
was but one of multiple irregularities found in 2006 and problems discovered came to a
total of 2,439,810, 266 rupiah (approximately US $ 248,931) (State Audit Board, 2007).
Together, this indicates either poor financial management practices, unauthorised use
of funds, or both.
Bribery and kickbacks have been part of tendering processes of government
projects in this municipality in the past (State Audit Board, 2008) and in Indonesian
public sector organizations generally (KPPOD, 2005; Kuncoro, 2004; World Bank, 2008;
Transparency International, 2010). Transparency International (2010) still ranks
Indonesia as one of the most corrupt countries in the world. Its presence within the
report preparation process is not out of line with local practice therefore, but does
appear to be new to the financial report preparation process, “in this municipality”.
So although political and economic reforms have been undertaken since Suharto left
office in 1998, including the adoption of AAS for central and local governments, their
internalization has yet to fulfil the hopes of its conceivers. The presence of AAS and
accrual-based reports have not focussed the attention or actions of people on “efficiency”
or “effectiveness” as the reports are rarely used. “Transparency” does not also appear to be
improved given the quality and number of reports that have been produced so far.
Furthermore, internalization has, in this case, produced at least one serious unintended
consequence: illegal kickback practices. Interested parties, in particular those within the
MOF and the MIA internally and the World Bank, ADB externally, would have to be
disappointed that the new ideals expressed in the 1980s and the new discourses fought for
in laws enacted from 1999 to 2005 (in particular Law 17 (2003)) have not found realisation
in practice.
Siti-Nabiha and Scapens (2005) refer to the possibility that new systems may be
resisted if they challenge “prevailing” institutions. In this vein, the existing attitudes and
the behaviours of local actors of the municipal government studied have made real
Internalization impossible. Table VI summarizes the evidence in accordance with the IPM
model adapted from Dambrin et al. (2007).

6. Theoretical implications
Drawing from these findings, we present four theoretical implications of the study. First, as
the price of oil dropped in 1983, the technocrats in the MOF lobbied for alternative ways
to report and measure government revenues and spending. The presence of a fiscal crisis
and the internal and external pressure brought to bear on Indonesia to follow accepted
accounting practices of the time facilitated the mobilization of these new ideals. Similar to
that discovered by Maguire et al. (2004) in their Canadian study, the technocrats in
the Indonesian MOF played a leading role as agents of change in these institutional
arrangements and transformed existing understandings through their lobbying,
 Accrual
Domain of institutionalization
process accounting
Evidence
Stages of found in this
institutionalization Main evidence identified study IPM model

1. New ideals (1993-1998)The economic motive was behind the National National level 275
ideal to adopt AAS (outside
Technocrats at MOF were the main organization)
promoters of the aspiration to adopt
accrual accounting
Suharto’s tight political control blocked
a further effort to reform to change the
law on state finance and reporting
system
2. New discourses The collapse of the Suharto National Local
(1998-2003) administration in 1998 was the main (outside (organizational
impetus of public sector accounting organization) level)
reforms as part of wider reforms in
economic and political system
A new law issued (law 17 on state
finance) which required the adoption of
an accrual reporting system issued in
2003
MOF was the main actor endorsing the
Law 17 (2003)
3. New techniques MOF and MOF issued their reporting National Local
(2003-2007) rules for local governments (outside (organizational
GASt issued by a committee back by organization) level)
MOF and MIA issued MIA Decree
No. 13 issued in 2006
4. Internali-zation (in The lack of participation from existing Local Local
municipal government) employees and accounting costs (organizational (organizational
(after 2006) increase level) level)
Low level of compliances reports to
rules
Low level of demand on government
reports from potential users Table VI.
Underuse of accrual based reports for Issues identified based
managerial purposes on the IPM model
The emerging of an illegal practice of Dembrin et al. (2007)

government regulation (laws and decrees) and standard-setting process of public sector
accounting practices in the country.
Järvenpää (2009) points out that while distinctions are evoked at different points in
the institutionalization process, pillars of institutionalization can and “do” occur through
their own distinctive mechanisms and processes. That is, pillars of legitimation can
emerge at different stages of the process, something that seems to have occurred here.
Normative influences are apparent in the calls for AAS in the 1980s and during
the formation of new ideals through the efforts and involvement of the MOF, the State
Audit Board, Parliament and the MIA.
JAOC Second, the fall of Suharto’s government in 1998 was an event that allowed these new
8,3 accounting ideals to be realised in the form of real public (new) discourses. Such reforms
as were made from 1998 to 2005 cannot be understood independently of the domestic
upheavals and international pressures of which they were a part. There were also open
and public demands for a more accountable bureaucracy and a transparent government.
While pressures for change existed prior to Suharto’s fall, the Indonesian Government
276 did not (or could not) react to them until regime change forced a form of democracy onto
the nation as a whole. The idea that different organizations react differently to
cognitive-cultural pressures finds support here, as AAS reform was also dependent on
Indonesian Government reform. That is, and during Suharto’s Government, neither the
oil crisis of 1983, the Asian crisis of 1997, the aspirations of MOF technocrats, nor
encouragement from overseas players were, alone, effective in creating reporting
practice change. Yet when this firmly-established order was replaced with new regimes
after 1998, those behind public sector accounting reforms could mobilize as part of these
wider political and economic reforms and convert the new ideals into new discourses and
new techniques. Without support from the top echelons of power following the fall of
Suharto’s regime in 1998, it does not seem probable that change could have occurred
beyond Dambrin et al.’s (2007) conception of new ideals.
Yet even at that point, the transition to new discourses was not smooth.
Regulatory/coercive pillars were apparent in the construction of laws and standards now
imposed on municipalities such as the one under study. The established and traditional
roles of the MOH and the MIA as coordination ministries for local administrations led to
the creation of duplicate reporting regimes. Why this occurred is not entirely clear,
although there may be a competitive element between the two ministries not fully
acknowledged by these interviewees. Irrespective, the existence of two separate sets of
standards has made the implementation of the AAS unreasonably complex, particularly
for these preparers and these users (Interviewees 10 and 26; State Audit Board, 2008);
and probably more complicated than was necessary to meet the intent of these new
ideals. As has been found or theorised elsewhere (Hassan, 2005), interests and the powers
of regulating agencies have shaped how these accounting rules were formulated.
As the standards and requirements of these agencies and institutions are subsequently
internalized, another pattern emerges. This is our third point and relates to the application
to practice of what appears to be cultural norms of Indonesian society. In particular, the
ongoing “use” of cash-based reports by managers, and their failure to prevent (and
perhaps to be complicit in) a kickback scheme in outsourcing their preparation draws from
traditions and a culture present long before AAS had emerged onto the public agenda.
A related influence is that the technical capacity and resource dependence of actors
who internalized this accounting system seems to have determined the extent to which it
was ultimately realised. As we find, the internalization of an AAS by the actors in this
municipality is far from complete; and there is nothing to suggest that this is unusual
within the Indonesian public sector. In other words there is a decoupling phenomenon
between the intended outcome of new ideals, discourses and techniques and their
Internalization into report preparation and use. This is indicated by these two primary
sources of evidence:
(1) that the existing employees in this municipal government lack the
accrual accounting skills to prepare such reports, leading to new (and
kickback-enhancing) costs to achieve the result; and
 (2) that the potential users of these accrual-based reports lack the expertise, Accrual
knowledge and interest to effectively use the information for the managerial accounting
decisions it was intended.
Nevertheless, although existing employees and bureaucrats lack such skills and
understandings, the municipal government is starting to produce these reports, albeit at
a very slow pace. There is a coercive element here however. These municipalities rely on 277
Central Government for a significant portion of their finance. In 2006 financial support
from the Central Government to municipalities accounted for more than 90 percent of our
municipality’s annual budget (State Audit Board, 2007). The Vice Mayor stresses:
It is the obligation of the local government [local bureaucracy] to implement all regulations
imposed to them by the central government (Interviewee 14).
So there is a strong incentive to produce them. As we have seen however, the form they
have taken has turned out to be both incomplete and, in great part, of an unacceptable
quality. Therefore, and from an institutional perspective, this local government in
Indonesia may be adopting accrual accounting under duress, and a coercive isomorphism
appears to be taking place (Baker and Rennie, 2006, p. 87). It is in the interest of this
municipal government to conform to the rules imposed by Central Government.
This inevitability also explains why the institutionalization of AAS in this
municipality has been dominated by actors at the central level; in particular, national
presidents after 1998 and leaders in the Central Government MIA and Finance. The
dominant role of the MOF emerged even before Suharto’s fall. That is, the new ideals
were, in this case, formed at a point before the time in which those ideals could
reasonably be converted into the new discourse and new techniques. Furthermore, and
until the government itself fell and became newly democratized, such new ideals found
only fallow ground in which to grow.
Yet, even radical change at the top, when it did occur, did not cause new ideals to be
fully institutionalized as intended, in particular during the internalization process. The
State Audit Board is found to be the only apparent user of local governments’
accrual-based reports. Managers do not use them, nor do other senior officials. Nor do
they or their employees even prepare them any longer, leaving that task to contracted
external consultants. The new standards for reporting have therefore added yet another
layer of bureaucracy to this municipality and opened it up to other means by which quiet
illegalities in the form of “kickbacks” can be allowed to occur.
Finally, some “seeking legitimacy” patterns may also be revealed insofar as
new discourses (through law) and the new techniques (via new standards) mirror
overseas language and practices. While there may or may not have been a desire to
achieve homogeneity with other jurisdictions, this influence is difficult to know. What
we do know however is that the primary agents of change (MOF and MIA bureaucrats)
returned from their overseas’ experiences with new ideals consistent with such views at
the time. In an era where there was little competition for Western powers on the
global accounting stage, it is perhaps not surprising that it was their principles and
their standards that were brought to bear on this administration. The relationship
between actors and stages is shown in Figure 2.
We wonder what could have been done to have modified the effect of such distorting
influences. Perhaps if this municipality had provided resources to train existing
employees in accounting, there would have been no need to outsource the preparation of
JAOC
International trend
8,3 Fiscal stress (1983)

• Economic and political shocks

New ideals (financial and political crisis
in 1997 and 1998)
278 • Domestic & international pressures
for better accountability &
democratic government
National actors:
• MOF New discourses
• MIA
• State Audit Political system & behaviour of
Board powerful actors

Interest & power

New techniques

Local actors:
• Senior officials
• Local consultants Internalization Technical capacity &
(in one municipality) resource dependence

Improve ‘Use’ not

As ‘efficiency’ & made,
Idealised Power, old habits and
‘transparency’ ‘kickbacks’ social context & local
actors

Figure 2.
The pattern of the Note:
institutionalization of = Influence from outside Indonesian public sector
AAS in the Indonesian = Influence from inside Indonesian public sector
public sector
= Flow of institutionalization process

its reports. Budgetary constraints could not reasonably form an excuse for not training
up its own staff; after all, there were resources for contracting consultants. In thinking
about this, it may be important to recall that kickbacks also emerged from this
internalization process, and it may not have been in management’s interest to train their
own staff. Irrespective, this does suggest to us the power of local actors and personal
incentives to divert the intent of government policy. As Hopper and Major (2007, p. 66)
discovered “[. . .] criteria for allocating material and human resources are linked to
domination [by powerful actors at organizational level]”. In this case, these new ideals
were effectively defeated at the level of these local managers and bureaucrats.
In any case, our findings demonstrate how calls for greater financial efficiency
through accounting system reform did not, in this case, translate to effective
accounting practice. This appears to primarily be because new ideals, new discourses
and new techniques were not internalized. The nature of the political system and the
behaviour of powerful actors within this municipality are powerful reasons that
institutionalization failed to occur.
7. Conclusion and contribution Accrual
The purpose of the study is to examine the institutionalization of the AAS in one accounting
municipality within the Indonesian public sector by answering two research questions:
how and why the AAS has been adopted and how it has been implemented in one
municipal government. Through a case study, this investigation collected the data from
document sources and interviews.
Drawing from the institutionalization model of Dambrin et al. (2007) there are found to 279
be two primary conclusions of the study. First, the ideals promoting the use of
accrual-based reporting system launched by the technocrats at the MOA in the early 1980s
responded to the fiscal crisis. However, the formal adoption of the AASs could not occur
until regime change occurred at the very top of Indonesian Government. Accounting
events in Indonesia’s public sector cannot be isolated therefore from the broader economic
and political reforms undertaken by post-Suharto regimes. Changes at the national level
opened up the opportunity for technocrats in the MOF and others to transform the new
ideals into accrual accounting standards and rules. Such a development indicates that both
economic and political factors shaped policy formulation related to new accounting rules
in the public sector. As such, the findings of this study support the need, expressed by
Dillard et al. (2004), Nor-Aziah and Scapens (2007), Hopper and Major (2007) and Monteiro
and Aibar-Guzman (2010) who offer that institutional theory would do well to incorporate
notions of politics and power so as to better capture the macro-complexity of the processes
and dynamics which lead to change.
Second, technical capacity, power and the old habits and social history of actors in this
organization were important in determining the extent to which AAS was internalized.
In this case and despite Indonesian Government efforts to reform public sector
accounting as a part of greater political and economic changes, the process by which that
institutionalization occurred is far more complex and its road less straightforward than
its idealists may have envisioned. In the end, that achieved contradicts in several
respects the intended benefits of this change. There is a gap between the idealised
purpose of nurturing efficiency and transparency and that which is now revealed. The
findings remind us that the processes of institutionalization of a new accounting system
is determined by a multitude of factors, including those which are external (Burns and
Scapens, 2000) and “the organization activities, processes and routines that may or may
not accepted as institutions” (Hassan, 2005, p. 126).
Drawing on the IPM model of Dambrin et al. (2007) the study contributes to
an improved understanding of a system which has been destabilised by
regime-changing political-economic events. In this case, what occurred not only a
change in “government”, but also change in the nature of that government. While a study
about policy formulation and internalization of accounting systems in a public sector
context, it is also as to change on a broad nation-based political spectrum. This study
contributes therefore to existing research about the roles of actors within their social and
institutional contexts surrounding the institutionalization of an accounting system
within a context that has been rarely explored. The lessons learned here could usefully
be taken into account by policy makers in informing how a process of
institutionalization can be complex and its outcomes diverted. Beyond this, the study
fills a gap in research-based knowledge about public sector accounting practices in
developing and emerging economies generally.
JAOC 8. Limitations and recommendations for future studies
8,3 The findings of the study are not free from limitation. First, as one of the sources of the
data was drawn from one municipal government the results of the study cannot be
taken to represent a general pattern attributable to other local governments in
Indonesia or elsewhere. Second, given the qualitative and complex nature of the study,
it is possible the interpretation offered here may not be the only one. Nonetheless, the
280 methods employed are such that the analysis derives from the views and documents
relevant to the situation. Furthermore, the project contributes to research generally in
that the findings can be used to explore, and tested against, other public management
practices in Indonesia such as that having to do with public sector audit, performance
measurement, and output based budget systems.
Dambrin et al.’s (2007) IPM model used in the study also has the potential to
illuminate the details of institutionalization processes within other organizations, and it
is shown how it can be used to reveal the interaction between institutions and actors at a
local, national and national level. Moreover, it is revealed how the model can be used both
to identify the actors involved in an institutionalization process and to explain the
behaviours of actors.
From a historical perspective, this study helps map an important period of accounting
and political change in Indonesia. A future study could duplicate the approach to
undertake a comparison among local administrations in Indonesia, or to compare it with
situations in other contexts and in other political environments. Moreover, as accounting
is not merely a technical device, future studies should also consider the nature
and the social and institutional features of accounting as a tool for mobilizing powers
and control on people or organizations. In this case, social, economic, political, and
institutional aspects of accounting provide interesting grounds for future studies.

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About the authors

Harun Harun is a Lecturer in Accounting at Tadulako University, Central Sulawesi, Indonesia
and a PhD Student in accounting at Waikato Management School, University of Waikato,
Hamilton, New Zealand. Harun Harun is the corresponding author and can be contacted at:
hh95@waikato.ac.nz
Karen Van Peursem is a Professor in Accounting and Auditing at the School of Accounting
and Commercial Law, Victoria University of Wellington, New Zealand.
Ian Eggleton is a Professor in Management, Public Sector and Behavioural Accounting and he
is also the Head of the School of Accounting and Commercial Law, Victoria University of
Wellington, New Zealand.

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