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Analysis, discussion and recommendations in relation to accounting in the public sector
In this part, adoption of accrual accounting by the public sector, the different natures of private and public sectors, issues related to accounting in the public sector and recommendations, and a specific study relating to accounting in local government sector will be presented.
The objectives of the adoption of accrual accounting are to enhance the effectiveness of the public sector and to be efficient and to be in line with the private sector (Hyndman 2011). There are debates relating to the reform and the termination of the cash accounting system for the public sector. The public sector is seen to be different in nature from the private sector. The public sector is to provide necessary services such as social welfare services and public goods to its citizens (Hong 1991). The government collects taxes to provide those special services that private sectors do not want to get involved in because of low marginal costs and other problems. Private sectors on the other hand can focus on one segment of special customers and can exclude others. Conservation of parks and cultural heritages might not concern the private sector as much as it does to the public sector. Defence services are to be provided by the public sector. Accounting principals and treatment of those public assets can be different from the private sector. Accounting reforms which some academics argue might not be suitable for the public sector stared from 1984 and the process of reviewing, adopting and implementing the new system continued till 2008 where the cash system was terminated (Barton 2009). The accrual accounting system helps improve resource management and financial forecasts. Problems created by some part of reforms had been solved over the years with experiences gained from the reforms. There were some criticisms as the reform was partly conducted for a political advantage rather than economic and efficient benefits. Overall, the government's operational efficiencies have been improved by the reform.
There are some concern that governmental departments should not be considered as separate reporting entities and it raises the question of the difference between administered items and controlled items. It also depends on who the public sector financial statements users are and the private sector financial reports users are. There are issues with the application of concept of control which can result in a single line (e.g. equity- in- income- of- associate account) or line by line consolidation accounting consequences. There are also some interpretation issues relating to the accountability, the agency relationship for administered items (AASB 1050) and what benefits mean in the public sector. Recommendations to solve these issues include the extra guidance of the board. AAS 29 is a special requirement for governmental departments to follow in relation its financial reporting requirements and their treatment of governmental assets and liabilities (Australian Accounting Standards Board 1998). AAS 27 (financial reporting by local governments) and AAS 31 (financial reporting by governments) (Australian Accounting Standards Board 1998) are particularly important for the public sector accounting.
A case study on local councils
The three Rs in the local government stand for roads, rates and rubbish which are the main services provided by local government. Blacktown council has some industrial estates and car park and development projects. They need the help of specialists, including financial advisors and accountants in interpreting legislations and in doing their businesses. There are over 150 councils in NSW and 560 Australia wide including 145,000 employees. They have 106.3 billion in infrastructure. Role of financial professionals involves financial reporting, financial management, investment, borrowings, property management, asset management, insurance and risk management.
Financial reports are prepared quarterly or annually. All the laws and guidelines particularly for local councils have to be followed accordingly. Budgets to be managed range from 10 millions to 500 millions. Revenue management includes rating debtors, debt recovery and fees and charges. Internal borrowing as opposed to external borrowing is favorable to many councils. Accountants have to deal with payroll (salaries and wages) which accounts for 43% of its budget. Professionals have to help in completing a project before the election so that elected council members can be reelected. Professionals have to deal with that. Moreover, different political parties have different priorities (Dalli 2014). The Green party has its own agenda which may be different from the Liberal party and the Labour Party. Change of leadership at the national and council level affects the way the councils are operated. Financial professionals need to adjust to those priorities. Their professional judgment may not always be aligned with political priorities sometimes (Hong 1991). Accountants' skills needed in local government involve financial analysis skills, skills involved in interpreting statutory laws, guidelines and standards, the technological skills, communication skills, negotiation skills, staff management skills, financial reporting skills and many other soft skills.
I largely use Macquarie University Library’s MultiSearch engine to find information in its databases. I picked full articles, journals and research papers. All these resources are reliable and authors are researchers or academics. They approach a problem by expressing different opinions and make reasonable judgments. A series of references at the end of those papers and their way of writing them make it to be academic and reliable. Besides that, the insight information on local government has been obtained from an executive manager from the Lane Cove Council in a seminar or a lecture. This information has also been supported by more research on it through research papers.
Australian Accounting Standards Board 1998, AAS 31 Financial Reporting by Governments, AASB, Canberra, viewed 14 April 2014, < http://www.aasb.gov.au >.
Australian Accounting Standards Board 1998, AAS 29 Financial Reporting by Government Departments, AASB, Canberra, viewed 13 April 2014, < http://www.aasb.gov.au >.
Barton, A 2009, 'The use and abuse of accounting in the public sector financial management reform program in Australia', Abacus Journal of Accounting, Finance and Business Studies, vol. 45, no. 2, pp. 221-248.
Dalli, C 2014, Week 6 Opportunity – Local Government, PowerPoint slides, Macquarie University, Sydney.
Hyndman, N 2011, ‘Accruals accounting in the public sector: A road not always taken’, Management accounting research, vol. 22, no. 1, pp. 36-45, viewed 11 April 2014, ScienceDirect Freedom Collection 2014 database.
Hong, H 1991, ‘Management Accounting in the Public Sector’, International Journal of Public Sector Management, vol. 4, no. 3, pp.5 – 17, viewed 11 April 2014, Emerald Backfiles database.