International Journal of Public Sector Management

Public sector reform – Implications for accounting, accountability and performance of

state-owned entities – an Australian perspective
Zahirul HoqueJodie Moll
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Zahirul HoqueJodie Moll, (2001),"Public sector reform – Implications for accounting, accountability and
performance of state-owned entities – an Australian perspective", International Journal of Public Sector
Management, Vol. 14 Iss 4 pp. 304 - 326
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 IJPSM
14,4
304
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The International Journal of Public
Sector Management,
Vol. 14 No. 4, 2001, pp. 304-326.
# MCB University Press, 0951-3558
Public sector reform
Implications for accounting,
accountability and performance of
state-owned entities ± an Australian
perspective
Zahirul Hoque and Jodie Moll
School of Accounting and Finance, Griffith University,
Gold Coast, Queensland, Australia
Keywords Public sector reform, Public sector accounting, Australia
Abstract Faced by increased globalization, the dissatisfaction of Australian citizens, and a
curtailing of spending, the Australian Government has embarked on a major reform agenda
centered on new public management ideals to achieve greater economy, efficiency, and
effectiveness. A major driver of reform in all levels of government has been the introduction of the
national competition policy. Describes the recent developments in Australian public sector and
discusses reform implications for accounting, accountability and performance in Queensland local
governments. Suggests that accounting plays a significant role in promoting accountability,
efficiency and effectiveness of public sector services.
Introduction
In recent years, the Australian Government has embarked on a wide range of
financial and administrative reforms. These reforms have two broad themes:
those which concentrate on the management control system (MCS) by
improving the information provided by the accounting systems, clarifying
roles and responsibilities and creating accountability; and those which account
for stabilizing the economy by exposing the public sector to competition
(Competitive Tendering and Contracting by Public Sector Agencies, 1996).
At the national level the two main objectives of the reform process are to:
promote a culture of performance; and to make the public sector more
responsive to the needs of Government by increasing the organizations'
accountability, promoting efficiency and effectiveness, introducing
participative decision making and adopting a customer focus. At a broad level,
the financial reform agenda includes such things as financial reporting, accrual
accounting, full cost pricing, purchaser/provider agreements, and asset
management. The administrative reform encompasses, but is not limited to,
structural reforms, labor reforms, the review of information systems and
accountability reforms. These reforms are centered on new public management
(NPM) ideals (Hood, 1990a, 1990b, 1995a, 1995b).
The introduction of NPM in the public sector has seen a shift in focus from
the adherence of formalized procedures to an emphasis on resource allocation
and goal achievement (Aucoin, 1990). Briefly, NPM encompasses the following
ideas:
 . from management's perspective, the public and private sector are not Public sector
dissimilar and therefore should be managed on the same basis; reform
. the shift in focus from process accountability to accountability for implications
results;
. the separation of commercial and non-commercial business activities;
. an emphasis on improved financial reporting, monitoring and 305
accountability;
. an increase in the contracting out of business activities using specific
contracts for short -term work;
the mimicking of private sector management practices such as the
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introduction of corporate plans, mission statements and strategic plans;

. a shift in preference from non-monetary incentives to monetary
incentives; and
. an emphasis on cost cutting and efficiency.
The purposes of this paper are twofold. First, it examines the recent
developments in the Australian public sector in general and, more specifically,
in the context of Queensland Local Government. Then, it assesses how these
reforms provide motivations for public sector entities to change their
accounting, accountability and performance systems. The paper concludes
with some suggestions for future research in the field.

Reform of the Australian public sector and the national competition

policy
Importance of the reform
A range of social, economic and technological pressures are forcing
governments to become more effective, efficient and accountable for the use of
publicly generated funds. In particular, Rivlin (1996), Sansom (1997) and
Wensing (1997) claim that governments are pressured from increased
globalization, the dissatisfaction of citizens with the current management, and
a curtailing of budget spending. Mellors (1995, p. 1) contends that there are six
key forces driving the change in the public sector, including the following:
(1) changing attitudes to the role of government in the economy;
(2) the process of micro-economic reform;
(3) changing community and business expectations;
(4) resource constraints;
(5) the impact of technology; and
(6) demands for greater accountability.
It has been suggested that reform of the public sector will have the following
outcomes (Management Advisory Board, 1997, p. 2):
 IJPSM . maximize the use of Australian taxpayers' dollars through the use of
14,4 ethical, efficient and effective resources;
. provide a framework for policy advice for public sector use;
. enable public accountability;
. encourage internal and external comparative benchmarking;
306 . promote a more competitive environment, both nationally and
internationally; and
. provide a more flexible organisational structure.

The national competition policy

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The major catalyst for change of Australian public sector organizations has
been the national competition policy (NCP). The Independent Committee of
Inquiry (1993) claimed that Australia needed such a policy for three reasons.
Firstly, Australia has become a single, integrated market because of advances
in technology and transport. This means the economic significance of state
boundaries is reduced and therefore firms are able to trade interstate. The
second factor identified, which suggests that a NCP is essential to the economic
wellbeing of the nation, is a review of the Trade Practice Act. The existing Act
imposed restrictions on certain sectors of society reducing their ability to
compete in the market. Finally, the Independent Committee of Inquiry claims
that although various reforms have been implemented on an individual sector
basis (i.e. at either the commonwealth level, the individual state level or the
individual local government level), a broad reform of all tiers of government is
necessary to promote nationally consistent approaches and reduce the costs of
establishing industry-specific reforms (Independent Committee of Inquiry into
a NCP, 1993). In short, the application the NCP prescribed that public sector
entities should be operating according to the same commercial principles as the
private sector, if they are to become more economic, efficient, and effective.
Consequently, a series of the financial and administrative reforms have been
introduced.
The increase in globalization sought the need for the Australian economy to
increase competition to sustain improved living standards. In October 1992, a
committee, headed by Professor Hilmer, was commissioned by Prime Minister,
Paul Keating to undertake an independent inquiry into the need for a national
policy aimed at ``promoting and maintaining competitive forces to increase
efficiency and community welfare, while recognizing other social goals''
(Independent Committee of Inquiry into a NCP, 1993). In August 1993 the
commission presented the proposals from its inquiry to Government
(Queensland Government, 1996a). These proposals are what is now referred to
as the NCP. NCP is built on the premise that increasing competition and
leveling the playing field between the public and private sector will lead to an
improved use of national resources. According to the Independent Committee
of Inquiry, ``Competition offers the promise of lower prices and improved choice
 for consumers and greater efficiency, higher economic growth and increased Public sector
employment opportunities for the economy as a whole'' (Pascoe, 1994, p. 35). As reform
suggested above, the impetus for introducing such a policy stems from the implications
demand for improved use of resources and ultimately a higher standard of
living (Queensland Government, 1995; 1996a). NCP seeks to do this by
encouraging the structural reform of public monopolies, ensuring government
business activities operate on a level playing field with the private sector, 307
providing competition across state boundaries through the development of
national markets, providing efficient pricing, controlling market abuse by
government monopolies, applying the same anti-competitive rules to business
activities regardless of ownership, facilitating access to essential infrastructure
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and abolishing legislative restrictions to competition (Independent Committee

of Inquiry, 1993). These elements are illustrated in Figure 1.
In 1994, the Council of Australian Government (COAG) agreed to reforms set
out in NCP. In 1995, along with Commonwealth, and other State and Territory
governments, the Queensland Government accepted the three agreements of
NCP: the Conduct Code Agreement, the Competition Principles Agreement
(CPA) (Commonwealth of Australia, 1995) and the Agreement to Implement
National Competition Policy and Related Reforms Revision (Queensland
Government, 1996a). These agreements provide a framework for the
implementation of NCP. Briefly, the conduct code agreement extends the

Figure 1.
NCP elements
 IJPSM competitive conduct provisions of Part IV of the Trade Practices Act (1974).
14,4 Conversely, the CPA encompasses a new set of principles to address other
forms of anti-competitive behavior. The five elements of the CPA are: third-
party access, prices oversight, structural reform, competitive neutrality and a
legislative review (Queensland Treasury Department, undated a). The
agreement to Implement National Competition Policy and Related Reforms
308 Revision is a timetable of the implementation of NCP and COAG agreements
relevant to specific industries such as water, waste, electricity and roads
revision (Queensland Government, 1996a). Although local governments did not
participate in the acceptance of the agreements of NCP, Section 7 (1) of the CPA
states that the principles of NCP will also apply to local government. The CPA
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further stipulates that the individual state and territory governments determine
how NCP is to be applied at the local government level. Subsequently, in
Queensland, the Local Government Act 1993 has been used to facilitate the
implementation of NCP to local governments (refer to Section 543).
More specifically, Chapter 8 of the Local Government Act ``National
Competition Reform of Significant Business Activities'' classifies the local
government business activities into ``type 1'', ``type 2'' and ``type 3'' activities for
the purpose of applying the intergovernmental agreements (i.e. The Code of
Competitive Conduct, The CPA and The Agreement to Implement National
Competition Policy and related reforms revision). In accordance with the Local
Government Act, water and sewerage activities are classified as a type 1
activity if they exceed the expenditure threshold of $28.1 million for 1997/1998.
For other activities the minister set an expenditure threshold of $16.8 million
for the 1997/98 financial year. Type 2 activity expenditure thresholds are $8.4
million for water and sewerage activities for the 1997/1998 financial year and
$5.6 million for other activities during the same period (Local Government Act
1993). Type 3 activities are subject to the Voluntary Code of Competitive
Conduct.
To date, eight local government activities in Queensland have been
categorized as a type 1 business activity and 17 have been categorized as type 2
business activities (Section 545). Subsequently, NCP has been applied to those
business activities where the introduction of increased competition results in
improved socially beneficial outcomes. The elements of the NCP are now
discussed below in turn.

Trade Practices Act 1974

In theory, the Trade Practices Act (TPA) sets out rules that promote
competition, thereby reducing anti-competitive conduct. Prior to the
introduction of NCP the majority of government businesses were not required
to abide by the TPA and therefore operated with significant advantages to
their private sector counterparts (e.g. tax exemption, department cross-
subsidies). The NCP redressed these disparities through an agreement with the
Commonwealth and State Governments which came into effect from July 21
1996 to extend the coverage of Part IV of the TPA to the unincorporated sector
 and government entities (Fels, 1999; Queensland Treasury Department, Public sector
undated b; McTaggart, 1996). The result of this that government entities reform
cannot demonstrate any anti-competitive conduct such as price fixing, resale implications
price fixing, third line forcing or primary boycotts in the provision of products
or services (ACCC, 1996).

Third-party access 309

The aim of third-party access is to promote competition by providing business
owners with access to significant infrastructure. More specifically, third-party
access reduces the ability of the owners of significant infrastructure to control
the market by preventing competitor access to their infrastructure. At present,
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third-party access has been applied at the Commonwealth and State Level of
Government (Queensland Treasury Department, undated c). According to the
Queensland Treasury Department, the purpose of third-party access to
infrastructure is to ensure that competition is not reduced in industries which
rely on monopolies in their production processes (McTaggart, 1996).

Prices oversight function

Similar to the other elements of NCP, the prices oversight function aims at
removing the significant advantage governments may operate under.
Specifically, the prices oversight functions' purpose is to control government
entities that are monopolies or near monopolies from over pricing their goods
and services (Queensland Treasury Department, undated d).

Structural reform
According to the Department of Treasury (Queensland Treasury Department,
undated e), structural reform refers to the restructuring of either individual
businesses or the market in which the businesses operate. Most of the
monopoly businesses in Australia are government owned. For instance, state
and local governments often own gas and electricity businesses. The purpose
of the structural reform is to introduce such markets to competition. In
conjunction with amendments to the TPA, the structural reform requires a
review of all government-owned monopolies. This means that monopolies are
assessed to determine the benefits to be gained from commercialization,
corporatisation or even privatization. The CPA specifies that each state or
territory government is free to decide on its own agenda for the reform of public
monopolies. The CPA requires that all governments, whether they are
commonwealth, state or local, investigate the following issues arising from the
possible structural reform of public monopolies. Firstly, business units are
required to operate according to industry regulation so new competitors
entering the market are not disadvantaged. In addition to this, a structural
change to monopoly businesses requires those businesses to determine
commercial objectives. Thirdly, the CPA requires governments to separate
monopoly elements from competitive elements. The structural reform also
requires the introduction of competitive neutrality. The fifth issue of concern is
 IJPSM the value of community service obligations. Finally, governments are required
14,4 to determine the appropriate financial relationship between the owner of the
public monopoly (whether it is government or private) and the public monopoly
in terms of tax implications, the rate of return required, dividends and the
appropriate capital structure (Queensland Treasury Department, undated e). In
Queensland these issues are being addressed in conjunction with the
310 corporatisation/commercialization process (Queensland Treasury Department,
1996a).

Competitive neutrality
The Queensland Treasury Department (undated c, p. 9) defined competitive
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neutrality as ``the process of identifying and, where appropriate, removing any

advantages (and disadvantages) that may accrue to a government business by
virtue of its government ownership''. Possible advantages resulting from
government ownership include: tax exemptions; regulatory advantages;
explicit or implicit government guarantees on debts; immunity from
bankruptcy; concessional interest rates on loans; and cross-subsidization.
However, there are also disadvantages to operating as a government entity.
These include limited markets, greater accountability obligations, reduced
managerial autonomy, requirements to comply with government wages,
employment and industrial relation policies and the fact that the government
provides many goods and services to the community that could not realistically
be provided by a private sector organisation without high costs to the
consumer (Independent Committee of Inquiry into a National Competition
Policy, 1993). The Independent Committee of Inquiry (1993, p. 297) stated that
where these disparities exist, there is a ``potential to reduce economic efficiency
and community welfare by distorting the allocation of resources''. The aim of
competitive neutrality therefore is to introduce measures to address the
disparities resulting from government ownership (Queensland Government,
1996d).
Following the efficiency arguments in favor of competitive neutrality there
are also three arguments, which suggest that introducing such an element
could be to the detriment of the Australian economy. Firstly, the
corporatisation of government monopolies could lead to service deterioration
and price increases. In addition to this, adopting a commercial focus suggests
that those business activities not providing an adequate rate of return on their
assets should be abandoned. This would mean that some of the essential
services provided by the government would cease to exist. Finally, with the
adoption of full cost pricing, governments may conclude that services are
costing more than they have been charging and therefore prices will increase
and access to those products will decrease (Queensland Government, 1996c).
The CPA states that each of the governments which agreed to national
competition should be free to set its own agenda for the implementation of
competitive neutrality. The Queensland Government suggests several means
through which competitive neutrality can be achieved: corporatisation;
 commercialization; and full cost pricing (Queensland Government, 1996c; Public sector
Queensland Treasury Department, undated f). Legislation passed in reform
Queensland in 1996 required that 17 of the largest councils conduct a cost/ implications
benefit analysis of their significant business activities to determine if they
would benefit from the reform of full cost pricing, commercialization or
corporatisation. These councils were chosen based on the fact that they
operated activities with a budget in excess of the type 1 and type 2 activity 311
threshold set out in the Local Government Act 1993 (Queensland Government,
1995; Queensland Government 1996a). Full cost pricing, commercialization and
corporatisation are further described below.
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Full cost pricing

Full cost pricing, otherwise known as the full economic costs of operations, is
the first step towards achieving commercialization (see Figure 2). Full cost
pricing, according to Section 568 of the Local Government Act, ``means that
prices are charged for goods and services taking into account the full cost of
providing goods and services''. It is adopted where activities would benefit
from reform but not as a separate business unit. The main rationale for
adopting full cost pricing is to enable governments to make the full cost of
operations transparent, thereby enabling them to recover those costs. Full cost
pricing requires costs such as office rentals, payroll, subsidies, depreciation and
taxes to be accounted for.

Commercialization
Commercialization, according to the Commonwealth Department of Finance
(1996), is the ``introduction of a commercial financial framework into
government entities leading to corporatisation and/or a process by which
markets are established for selected public sector goods and services in order to
increase competitive pressures on suppliers''. Specifically, the Local
Government Act outlines the objectives of commercialization at a local
government level to be an improved economic performance and also an
increase in the local government's ability to carry out its responsibilities for
``good rule and government'' (Section 572). This is to be achieved through the
establishment of efficient and effective commercial business units and the
introduction of a framework for the operation and accountability of those units.
Commercialized entities are recognizable as separate business units within
government entities. In addition to providing goods on a full cost basis,
commercialized business units are encouraged to adopt a commercial
framework, or commercial principles similar to those of the private sector

Figure 2.
Stages of competitive
neutrality
 IJPSM (Fellew and Kelaher, 1991). Fellew and Kelaher (1991) contend that the adoption
14,4 of commercial management principles is fundamental to improved business
management. The underpinning principles of commercialization as set out in
the Local Government Act (see Section 576) are: clarity of objectives,
management autonomy and authority, accountability for performance and
competitive neutrality.
312 Several key areas are proving to be problematic in the commercialization
process. These include full cost pricing, the treatment of community service
obligations, and the elimination of disparities resulting from government
ownership (Local Government Finance Standard, 1994). Specifically, local
governments are faced with the problem of determining the extent to which
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competitive neutrality should be applied to their business units. This requires

them to decide the appropriate business structure, information systems, and
accountability systems of those commercialized units.
Dixon et al. (1996) claim that the extent to which business units
commercialize is dependent on five factors, including the recovery of costs, the
extent to which market competition is restricted or unrestricted, the adoption of
both commercial and non-commercial goals, the replacement of government
funding with consumer charging and the retention of revenue.
The Queensland Government has identified three stages of
commercialization: establishing a general business environment between
clients and service providers, partial commercialization and full
commercialization (Queensland Government, 1996c). In addition to NCP, the
Queensland government has also embarked on a competitive tendering reform,
which is also known as the purchaser/provider or specifier/provider reform. In
short, purchaser/provider arrangements are ``initiatives which distinguish
between a public sector purchaser who decides what will be produced and a
provider who may or may not be in the public sector, who delivers the agreed
outputs and outcomes'' (Commonwealth Department of Finance, 1996). This
reform has been linked to the stages of commercialization (Queensland
Government, 1996c).
The first stage of commercialization involves the identification of products
to be provided, costs, prices and performance standards (Queensland
Government, 1996c). The second stage is more complex. It involves the creation
of formal trading relationships or intragovernmental relationships between
departments. The second stage also involves the introduction of commercial
pricing principles. The advantage of the purchaser/provider reform at this
stage is that local governments are forced to specify desired outcomes and
requirements on the provider (Competitive Tendering and Contracting by
Public Sector Agencies, 1996).
Full commercialization of a business entity (stage 3) occurs when the
purchasers are free to adopt a competitive tender process. This involves the
local government paying an external or in-house provider a set fee for the
delivery of service for a specified period of time. The rationale behind such an
arrangement is that the competitive pressures generated through the tendering
 process will lead to the best value for money (Harris, 1998). Johnstone (1999) Public sector
suggests that such relationships are becoming more common as outsourcing reform
has the potential to provide significant reductions in cost to the taxpayer. Some implications
of the most common services contracted out by local government are auditing,
catering, cleaning, information technology, security, fleet management, courier
services, payroll and transport (Sciuilli, 1996). Other advantages noted from a
Competitive Tendering and Contracting Inquiry were outlined as increased 313
flexibility in service delivery, greater output focus, innovation and cost savings
(Kelaher, 1991a). More importantly, perhaps, is the fact that contracting out
encourages local government to focus on strategic issues instead of the day-to-
day-operations. There are, however, limitations to the contracting out process.
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Firstly, providers in the private sector may not be willing to comply with the
same public sector accountability standards imposed on government
departments. Additionally, considerable monitoring and contracting costs are
borne by government in the contracting out process.
Issues such as a comparison of costs between in-house bids and outsourcing
costs remain central to the purchaser/provider arrangement (Hazell, 1997). For
example, an in-house bid consists of determining all of the costs of providing
that service within the entity. This includes, for instance, wages, rent, and
service delivery costs. Thus, in-house bids under the purchaser/provider
arrangement are treated in the same manner as the external tender. It is
important to note, however, that there are possible advantages to an in-house
bid over its external counterparts. In particular, the purchaser is able to
monitor complex activities (Harris, 1998). The disadvantages of such an
arrangement also need to be considered before accepting in-house bids. In
addition to the risks inherent with keeping the activity within the council, the
local government is still responsible for the cost of failure to provide that
activity. Therefore, services should only be contracted out when it results in a
reduction in costs to the entity.

Corporatisation
Corporatised entities operate under an environment not unlike that of the
private sector. This implies that the advantages or disadvantages realized with
government ownership are eliminated. Corporatised entities operate under the
same principles as commercialized entities. That is, they operate according to
the following principles: clear and non-conflicting objectives, managerial
responsibility, authority and autonomy, effective performance monitoring by
the owner government, attained competitive neutrality and effective monopoly
regulation (Independent Committee of Inquiry, 1993). The aim of these
objectives is to increase the efficiency and effectiveness of business operations.
Specifically, a corporatised entity obtains most of its funding via the public
through principles such as user pays. Introducing commercial principles such
as user pays and the separate legal entity concept means that corporatised
entities are subject to whole range of corporate finance issues including the
capital structure, the commercial rate of return, the dividend policy, and asset
 IJPSM valuation (Queensland Government, 1996a). The Government Owned
14,4 Corporations Act (GOC Act) currently governs the corporatisation of
Queensland business activities (Queensland Government, 1996c).
The main difference between a corporatised entity and a commercialized
entity is that a corporatised entity is considered a separate legal entity, owned
by Council and supported by a corporate governance structure (Queensland
314 Government, 1996a). This means that the corporatised entity is under the
direction of its own board of directors.

Legislative review
The Queensland Department of Treasury claims the application of NCP will
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not remove entirely the existing operating advantages of government

entities entering commercialization or corporatisation. The CPA specifies
that a legislative review is necessary to determine if the advantages
exercised by government entities are in the public interest, and to determine
if the objective of the legislation can only be achieved through the
restriction of competition. Furthermore, the agreement suggests that the
review of legislation will not only identify the nature of restrictions but also
consider alternative solutions to achieving the same result (Queensland
Government, undated g). In keeping with the reform, state governments
have begun a review of State legislation. At a local government level any
State legislation that encourages anti-competitive conduct that is also
applied at a local government level (i.e. Local Government Act) is to be
reviewed, along with the State NCP Legislative Review (Queensland
Government, 1996a). Additionally, local laws are to be reviewed by their
respective councils (Queensland Government, 1996a; Queensland Treasury
Department, undated h). The time frame set for local governments to have
reviewed their local laws is June 1999. In summary, the National
Competition Policy elements are set out in Table I.

Government regulatory bodies

This section briefly discusses the Australian government regulatory bodies,
which shape the activities of public sector entities.

Australian competition and consumer commission

The Australian Competition and Consumer Commission (ACCC) emerged from
a merger between the Trade Practices Commission and the Prices Surveillance
Authority on 6 November, 1995. The purpose of this body is to enforce the
provisions of Part IV and Part V of the TPA and the Prices Surveillance Act
1983 to all levels of government (ACCC, 1999).

National competition council

Recommended as part of NCP, the National Competition Council (NCC) was
established to advise governments on a variety of issues including pricing
matters, competitive neutrality matters, transition issues, the declaration of
 Supporting Public sector
agreement/ reform
Policy element Purpose Example legislation implications
1. Extension of To limit the anti- Coverage of part IV of Conduct Code
coverage of competitive conduct of the Trade Practice Act Agreement and
Trade business entities, is extended to the Competition Policy 315
Practices Act regardless of their unincorporated sector Reform Act
ownership (including the
professions), and state
and local governments
where they are carrying
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on a business
2. Third-party To provide a third party Access by a third party Competition
access with access, at ``fair'' to facilities such as principles
prices and conditions, to telecommunication agreement and
facilities that are essential cables, gas pipelines and Competition Policy
for competition (i.e. a railway tracks Reform Act
third party is someone
other than the owner/
supplier of the facilitate)
3. Prices To prevent the misuse of Introduction of Competition
oversight of monopoly powers of arrangements similar to principles
monopoly of Government business the former agreement and
near monopoly activities Commonwealth Prices Competition Policy
government Surveillance Authority Reform Act
businesses to state and local
government business
activities which exercise
monopoly powers
4. Structural To reform the structure of Division of Queensland Competition
reform Government-owned Electricity Commission principles
monopoly businesses to into separate generation agreement
facilitate competition and transmission
entities, to allow the
potential for competition
in electricity generation
5. Competitive To remove benefits (and Requirement for Competition
neutrality costs) which accrue to government business principles
government business activities to pay taxes agreement
activities as a result of (or tax equivalents); and
their public ownership removal of regulations
which provide special
advantages for
government business
activities when
Table I.
competing with the The elements of the
private sector National Competition
(continued) Policy
 IJPSM Supporting
14,4 agreement/
Policy element Purpose Example legislation

6. Legislative To review (and justify) (At a commonwealth Competition

review government business level) deregulation of principles
316 activities as a result of domestic aviation and agreement
their public ownership telecommunications
arrangements
(At a state level)
deregulation of various
state-based agricultural
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statutory marketing
arrangements
State reviews of
business regulations
7. NCP-related To further reform key Restructuring and/or National
reforms sectors of the economy introducing further Competition Policy
which are already subject competition into the and related reforms
to Council of Australian electricity, gas and
Government Reforms water and road
transport sectors

Table I. Source: McTaggart (1996)

access rights to facilities and regulatory restrictions on competition

(Independent Committee of Inquiry into a National Competition Policy,
1993).

Queensland Competition Authority

The Queensland Competition Authority (QCA) was established on the 30 June
1997 in accordance with the Queensland Competition Authority Act 1997
(Queensland Competition Authority, 1999). The QCA is a regulatory body
primarily established to perform the prices oversight function for both state
and local governments. The QCA also regulates third-party access and the
competitive neutrality of local governments (Queensland Government, 1996b;
1997).
At a local government level, the QCA's specific roles relate to assessing the
implementation of competition reforms to local government type 1 and type 2
business activities; assessing the implementation of the COAG water reforms,
including a two-part tariff and full cost recovery; and assessing councils'
compliance with other competition policy reforms (Queensland Competition
Authority, 1999). The Queensland Government has assigned $150 million as
incentive payments for those local government bodies which comply with the
competition policy requirements.
 The Local Government Act Public sector
Like many of the other states, the Queensland Government reviewed the reform
Local Government Act 1936 to overcome limitations and restrictions that implications
were preventing it from governing effectively (Wensing, 1997). The
Fitzgerald Inquiry originally recognized this need for change. Subsequently,
a new Local Government Act was introduced in 1993. In essence, the purpose
of the act is to reform government activities and to ensure that local 317
governments remain accountable to the community (Wensing, 1997).
Wensing (1997, p. 91) claims that the Local Government Act 1993 provides a
``framework for wider micro-economic reforms on local government to
improve its performance orientation, its accountability, and its relations with
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other spheres of government''. In addition to encompassing the National

Competition Policy requirements, the Act also prescribed a boundary review
of Local Councils. The result of this was the amalgamation of several
councils (Wensing, 1997). Vince (1997) claims that the purpose of the
amalgamation of councils is to create more efficient and effective
organizations. Further to this, she suggests that amalgamations are used to
redistribute resources and power and to provide the community with a wider
range of community facilities.

Government reform and changes to the accounting standards

The Public Sector Accounting Standards Board (PSASB) recognized the need
for uniform public sector standards to govern and drive the accounting
changes. In recent years they have responded to this need by developing three
specific standards for the public sector, namely AAS 27 ``Financial reporting by
local governments'', AAS 29 ``Financial reporting by government departments''
and AAS 31 ``Financial reporting by governments''. A second driver of
accounting change of local government has been the Local Government
Finance Standard 1994 which sets out specific provisions to govern local
government accounting procedures such as application of full cost pricing and
the return on capital. Section 32(1) of the Local Government Finance Standard
also reinforces AAS 27, by advising local governments to comply with the
Australian Accounting Standards, the Statement of Accounting Concepts and
the Statements of Accounting Practice.
AAS 27 ``Financial Reporting by Local Governments'' became operational as
of December 1990. It was introduced to local governments by the PSASB for
two reasons. Firstly, to improve the information provided for decision making
through the preparation of general purpose financial reports including an
operating statement, a statement of financial position, a statement of changes
in equity, and a statement of cash flows. Secondly, to make local governments
more accountable to the community through the disclosures of performance,
financial position, financing and investing and compliance (Parker, 1998). This
standard is in essence a replication of those applicable to the private sector. Due
to the unique characteristics of public sector assets, many of the requirements
of this standard are proving to be problematic and as such are highly
 IJPSM controversial. A key example of this is infrastructure. To date, managers have
14,4 voiced their dissatisfaction with the requirements for valuing land under roads,
dams and reservoirs and other public structures (for details on this issue, see
Hope, 1999; Hoque, 1999; Rowles et al., 1998).
Similar to AAS 27, AAS 29 ``Financial reporting by government
departments'' requires the preparation of general purpose finance reports by
318 those departments which are considered reporting entities (Parker, 1998). The
production of these statements also has a twofold effect; to make government
departments accountable to external users; and to provide useful information
for management decision-making purposes (Parker, 1998). AAS 29 became
operational in December 1993.
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Developed by members of the accounting profession and governments, AAS

31, ``Financial reporting by governments'', operates on a much broader scale
than AAS 27 and AAS 29, encompassing two tiers of government:
commonwealth; and state and territory. Micallef (1997) asserts that the
introduction of AAS 31 will put Australia at the forefront of public sector
reporting worldwide. As reporting entities, the commonwealth, state and
territory governments will be required to prepare accrual-based general
purpose financial reports to discharge their accountability and to improve the
decision-making ability of managers and other external users in the allocation
of resources (AAS 31 para. 3.2). The number of external users of financial
reports increases significantly at this level to include parliamentarians, the
public, providers of finance, the media and other analysts (AAS 31 para. 3.2).
Micallef (1997) claims that the introduction of AAS 31 will improve decision
making through the increased harmonization of reporting reforms across all
levels of government. Ultimately, this means that commonwealth and state
bodies will be able to compare information between governments and across
time. AAS 31 is applicable to those reporting periods ending on or after 30 June
1999.

Public sector reform implications for accounting

The introduction of NCP and other government reforms has had substantial
implications for accounting. Traditional accounting in the public sector
focused on inputs and the control of expenditure. The reform of the public
sector has changed the traditional role of accounting to one that is focussed
on accountability and the efficient allocation of resources. This implies that
accounting should concentrate upon outputs, performance measurement,
efficiency, cost saving, productivity and performance measurement
(Broadbent and Guthrie, 1992; Guthrie, 1995). This in turn requires that new
accounting technologies be employed such as planning program budgeting,
accrual accounting, performance indicators and annual reporting
mechanisms (Guthrie, 1995; Bishop, 1997). The following section describes
the motivations for public sector entities to change their accounting
systems.
 Accrual accounting Public sector
The government has moved from cash-based accounting to accrual accounting reform
in response to commercial principle adoption (Fellew and Kelaher, 1991). implications
Briefly, cash accounting requires the record of inflows and outflows of cash.
Conversely, accrual accounting requires revenue to be recognized in the period
in which economic benefits can be measured reliably. Likewise, expenses are
recognized when the consumption of goods is capable of reliable measurement 319
(Hoggett and Edwards, 1996, p. 113). There are several reasons why the move
to accrual accounting was inevitable. Firstly, accrual accounting offers the
benefits of improved accountability and improved resource management
(Funnell and Cooper, 1998; Ranby, 1997). This claim has been supported by
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evidence that suggests the cash system provides inadequate information for
the full costing of operations (Management Advisory Board, 1997). Accrual
accounting, on the other hand, is said to improve decision making by providing
information on the full cost of operations and the resources used to deliver
services to the public (Funnell and Cooper, 1998; Webster, 1998). This is
increasingly important for those business units which are commercializing to
enable them to recover the cost of products and services (Webster, 1998).
Finally, accrual accounting gives governments the opportunity to minimize
their costs through cost identification (Guthrie, 1999).
Limitations identified from the adoption of accrual accounting include the
fact that it can lead to the misallocation of resources and an inadequate
disclosure of the size of assets and liabilities. This reduces the organisation's
ability to account for the full cost of programs due to fluctuations in costs. More
importantly, perhaps, is the fact that accrual accounting enables organizations
to defer liabilities, such as long service leave, to future periods, therefore
burdening future taxpayers with these costs. By contrast, the government can
also charge the full costs of assets purchased during the year to the current
taxpayers instead of allocating these costs over the useful life of that asset
(Robson, 1988; Ryan, 1998).
The introduction of accrual accounting has many implications, including the
preparation of accrual financial reports, the operation of government entities
according to accrual management systems, the preparation of whole-of-
government financial reporting and preparation of accrual based budgets
(Guthrie, 1995; Pallot, 1994; Ryan, 1998).

Accrual financial reports

All three public sector standards AAS 27, AAS 29 and AAS 31 require general
purpose financial statements to be prepared on an accrual accounting basis. In
addition to this, local governments are also required to comply with the Local
Government Finance Standard 1994 which specifies the use of accrual
accounting to broaden the public accountability requirements (see Section 26).
Local Government will benefit from the preparation of conventional accounting
statements on an accrual basis through increased transparency and
accountability for the use of resources, improved information for the
 IJPSM monitoring of financial performance, and the improved management of
14,4 resources through the adoption of full cost pricing (see Paice, 1998).
The preparation of accrual financial statements means that organizations
are required to include their assets on the face of the balance sheet. This means
that entities need to take an inventory of their assets, asset values and use of
those assets. This information will be a valuable source in asset acquisition,
320 maintenance and replacement decisions, the measurement of the performance
of assets, the provision of internal and external benchmarking information and
also pricing decisions (Hope, 1999). Churchill (1992) suggests that the
preparation of a balance sheet will enable the organisation to manage its asset
base more effectively, increase the organization's ability to evaluate the mix of
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debt/equity funding of assets, evaluate working capital management and

allocate accountability for specific assets and liabilities. The downfall of
including assets on the face of the balance sheet is that governments are
struggling to value assets, especially heritage assets, infrastructure assets and
community assets. There are many concerns as to whether such assets even
meet the asset definition, recognition and measurement criteria set out in the
standards (Boreham, 1994, 1995; Burrit et al., 1996; Carnegie and Wolnizer
1997a, 1997b; Coleman, 1996; Falk and Neilson, 1993; Hone, 1997; Micallef and
Peirson, 1997; Tamlin, 1996; Walker 1995a, 1995b; Williams, 1996; Young,
1994). New valuation processes, such as the deprival value technique, have
been suggested as a means for valuing such assets. The deprival value
represents the value of the asset to the user. Assets assessed using the deprival
value technique are valued using one of three valuation techniques: current
market buying price, depreciated replacement/reproduction cost and current
market selling price. The technique used depends on several questions. Firstly,
does the asset contribute to meeting the organization's goals? Secondly, would
the asset be replaced if the organisation was deprived of that asset? Finally, in
what manner would the asset be replaced (Addicott, 1997)?
Guthrie (1999) claims that the introduction of accrual accounting in the
public sector requires a change in the existing information technologies and the
culture of the organisation. This means that considerable amounts of money
have to be invested into changing the MAS so that it can produce accrual
reports, and either training or recruiting individuals to support the new accrual
management accounting system.

Whole of government reporting

The Joint Committee of Public Accounts (1995, p. 194) defined whole-of-
government reporting as ``a form of general purpose financial reporting where
the financial statements of the various entities controlled by the government
are consolidated to show the financial activities and performance of the
government as a whole''.
The purpose of producing whole-of-government financial statements is to
provide the community with a much clearer picture of the government
operations and their use of resources. Whole-of-government reporting involves
 the preparation of the three conventional accounting statements: the balance Public sector
sheet, the profit and loss statement and the statement of cash flows. The whole- reform
of-government financial statements adopt a format similar to those of the implications
private sector, in that revenues and expenses are a reflection of financial
performance, assets and liabilities indicate the financial position and cash flows
show how activities are financed (Boxall, 1998).
321
Accrual budgeting
Accrual budgeting refers to the preparation of budgets according to accrual
concepts. To date, few governments in Australia have prepared budgets using
accrual accounting (Guthrie, 1999). Guthrie (1999, p. 145) suggests that the
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primary reason for this is the inconsistencies between measuring the full cost of
a program in inflated accrual terms when the cash allocated by governments is
in smaller absolute dollar amounts. Recommendations have, however, been
made by the National Commission of Audit (NCoA) for the Commonwealth
Government to adopt full accrual principles including accrual budgeting. The
NCoA suggests that commonwealth organizations should prepare operating
budgets, a capital budget, a budget of cash flows and a budgeted statement of
assets and liabilities. This recommendation was reinforced by the
commonwealth budgeting, reporting and accounting scoping study (COBRA)
in April 1997 and a timetable was set for its implementation (Funnell and
Cooper, 1998). In 1998-1999 a trial accrual budget was to be tested on selected
agencies. Over the 1999-2000 period it is expected the full accrual based
outcomes and outputs framework will be adopted and 2001-2002 will complete
the implementation of accrual budgeting. In Queensland, the Local Government
Finance Standard 1994 requires the preparation of budgets on an accrual basis.

Conclusions and future research

This paper has elaborated how various external institutions in the form of State
and Commonwealth agreements, the government legislation and the
introduction of new business principles such as the NCP have changed the
organizational culture of the Australian public sector. It has been discussed
that the Australian public sector has implemented the textbook accounting
systems required by the Australian Public Sector Accounting Standards.
Public sector entities now are required to prepare an annual report to satisfy
the requirements of the external institutions.

Future research
The discussion in this paper supports claims that there is a need for more
research in the public sector (Broadbent and Guthrie, 1992; Broadbent, 1999).
The administrative and financial reforms imposed on the public sector provide
a key opportunity to study several issues. Firstly, future research may focus on
the effects of the reform of the public sector at various levels of government: the
commonwealth, the state and the local. For example, in a local government
setting, has the reform resulted in a greater efficiency and effectiveness in the
 IJPSM use of publicly generated resources or is it merely a window dressing to
14,4 increase the legitimacy of local government operations?
To date, much of the public sector accounting literature has had a technical
focus. That is, it is concerned with accounting techniques employed by public
sector entities. The contemporary accounting literature suggests that
accounting is implicated in social and organizational practices. It has been
322 claimed that accounting is more than a technical phenomenon, that it is shaped
by inter-organizational forces (e.g. institutional, political and economic). Future
research may investigate in depth the operation of management control
systems at various settings to understand how accounting is implicated within
a public sector context. Using a longitudinal field study approach, future
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studies may also investigate the changes occurring at various public sector
entities. More specifically, the following issues can be investigated:
. What changes have occurred within the organization?
. Why have those changes occurred?
. Were the changes explicitly linked to the organization's strategy?
. Who promoted the change?
. How was the accounting systems developed to support the strategic
change?
. What were the roles of the accountants and other staff involved in the
change process?
. What problems had to be resolved?
. Was there any resistance to the change? ± if so, how did management
manage the resistance?
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5. Professor Ralph Adler, Dr Carolyn Stringer, Dr Paul Shantapriyan, Ali Rkein, Brian Andrew. 2012. Public
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sector commercial orientation and the social contract. Pacific Accounting Review 24:3, 292-313. [Abstract]
[Full Text] [PDF]
6. Samuel Nana Yaw SimpsonDevelopments in Public Sector Accounting Practices: The Ghanaian Experience
209-226. [Abstract] [Full Text] [PDF] [PDF]
7. Gordon Abekah-Nkrumah, Patrick NomoIn Pursuit of a Technical Need or Political Compromise:
Reforms of Public Financial Management Practices in Ghana's Health Sector 149-169. [Abstract] [Full
Text] [PDF] [PDF]
8. Helen Irvine. 2011. From go to woe. Accounting, Auditing & Accountability Journal 24:7, 824-847.
[Abstract] [Full Text] [PDF]
9. Zahirul Hoque, Carol Adams. 2011. THE RISE AND USE OF BALANCED SCORECARD
MEASURES IN AUSTRALIAN GOVERNMENT DEPARTMENTS. Financial Accountability &
Management 27:3, 308-334. [CrossRef]
10. Yeny Andriani, Ralph Kober, Juliana Ng. 2010. Decision Usefulness of Cash and Accrual Information:
Public Sector Managers’ Perceptions. Australian Accounting Review 20:2, 144-153. [CrossRef]
11. Kerry Jacobs. 2009. Beyond commercial in confidence: accounting for power privatisation in Victoria.
Accounting, Auditing & Accountability Journal 22:8, 1258-1283. [Abstract] [Full Text] [PDF]
12. Giuseppe Grossi. 2009. New development: Consolidated financial reporting as a stimulus for change in
Italian local government. Public Money & Management 29:4, 261-264. [CrossRef]
13. Professor Jan Bell, Professor Zahirul Hoque, Matthew Egan. 2009. Sydney water sector change and
industrial water management. Journal of Accounting & Organizational Change 5:2, 277-293. [Abstract]
[Full Text] [PDF]
14. Helen Irvine, Katie Lazarevski, Sara Dolnicar. 2009. STRINGS ATTACHED: NEW PUBLIC
MANAGEMENT, COMPETITIVE GRANT FUNDING AND SOCIAL CAPITAL. Financial
Accountability & Management 25:2, 225-252. [CrossRef]
15. Christine Ryan, Howard Mellett, Jodie Moll, Zahirul Hoque. 2008. New organizational forms and
accounting innovations. Journal of Accounting & Organizational Change 4:3, 243-269. [Abstract] [Full
Text] [PDF]
16. Katie Lazarevski, Helen Irvine, Sara Dolnicar. 2008. The Effect of Funding Changes on Public Sector
Nonprofit Organizations: The Case of Bushcare NSW. Journal of Nonprofit & Public Sector Marketing
20:2, 213-227. [CrossRef]
 17. Sandra Cohen. 2008. IDENTIFYING THE MODERATOR FACTORS OF FINANCIAL
PERFORMANCE IN GREEK MUNICIPALITIES. Financial Accountability & Management 24:3,
265-294. [CrossRef]
18. Zahirul Hoque. 2008. Measuring and reporting public sector outputs/outcomes. International Journal of
Public Sector Management 21:5, 468-493. [Abstract] [Full Text] [PDF]
19. Motsomi Marobela. 2008. New public management and the corporatisation of the public sector in
peripheral capitalist countries. International Journal of Social Economics 35:6, 423-434. [Abstract] [Full
Text] [PDF]
20. Eija M. Vinnari, Salme Näsi. 2008. CREATIVE ACCRUAL ACCOUNTING IN THE PUBLIC
SECTOR: ‘MILKING’ WATER UTILITIES TO BALANCE MUNICIPAL BUDGETS AND
ACCOUNTS. Financial Accountability & Management 24:2, 97-116. [CrossRef]
21. Yvonne Brunetto, Rod Farr‐Wharton. 2007. Service delivery by local government employees post‐ the
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implementation of NPM. International Journal of Productivity and Performance Management 57:1, 37-56.
[Abstract] [Full Text] [PDF]
22. Chandana Alawattage, Trevor Hopper, Danture Wickramasinghe, Godwin Awio, Stewart Lawrence, Deryl
Northcott. 2007. Community‐led initiatives: reforms for better accountability?. Journal of Accounting &
Organizational Change 3:3, 209-226. [Abstract] [Full Text] [PDF]
23. Chandana Alawattage, Trevor Hopper, Danture Wickramasinghe, Godwin Awio, Stewart Lawrence, Deryl
Northcott. 2007. Community‐led initiatives: reforms for better accountability?. Journal of Accounting &
Organizational Change 3:3, 209-226. [Abstract] [Full Text] [PDF]
24. Merry Herawaty, Zahirul Hoque. 2007. Disclosure in the annual reports of Australian government
departments. Journal of Accounting & Organizational Change 3:2, 147-168. [Abstract] [Full Text] [PDF]
25. Abu Kasim Nor-Aziah, Robert W. Scapens. 2007. Corporatisation and accounting change. Management
Accounting Research 18:2, 209-247. [CrossRef]
26. Sandra Cohen, Efrosini Kaimenaki, Yannis Zorgios. 2007. ASSESSING IT AS A KEY SUCCESS
FACTOR FOR ACCRUAL ACCOUNTING IMPLEMENTATION IN GREEK MUNICIPALITIES.
Financial Accountability & Management 23:1, 91-111. [CrossRef]
27. Bernardino Benito López, Francisco Bastida Albaladejo, Teresa García Valderrama. 2007. La consolidación
de cuentas en las entidades locales españolas: un estudio empírico. Spanish Journal of Finance and
Accounting / Revista Española de Financiación y Contabilidad 36:134, 351-388. [CrossRef]
28. Ralph Kober, Ian R. C. Eggleton. 2006. Using Quality of Life to Assess Performance in the Disability
Services Sector. Applied Research in Quality of Life 1:1, 63-77. [CrossRef]
29. Jane Conway, Margaret McMillan, Jenny Becker. 2006. Implementing workforce development in health
care: A conceptual framework to guide and evaluate health service reform. Human Resource Development
International 9:1, 129-139. [CrossRef]
30. Wendy James. 2006. A processual view of institutional change of the budget process within an Australian
government‐owned electricity corporation. International Journal of Public Sector Management 19:1, 5-39.
[Abstract] [Full Text] [PDF]
31. CARLY WEBSTER, ZAHIRUL HOQUE. 2005. Cost Information in the New Public-Sector
Environment: Cost Accounting Change in a State-Owned Hospital. Australian Accounting Review 15:37,
47-54. [CrossRef]
32. Bishnu Sharma. 2005. Local government organisation on its journey to becoming a learning organisation.
Business Process Management Journal 11:4, 388-402. [Abstract] [Full Text] [PDF]
 33. Umesh Sharma, Stewart Lawrence*. 2005. Public sector reform, global trends vs. local needs: the case of
a state rental organisation in Fiji. Journal of Accounting & Organizational Change 1:2, 141-164. [Abstract]
[Full Text] [PDF]
34. Zahirul Hoque. 2005. Securing institutional legitimacy or organizational effectiveness?. International
Journal of Public Sector Management 18:4, 367-382. [Abstract] [Full Text] [PDF]
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