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The few countries that our group has picked are New Zealand, Australia, and SAARC countries, with India as the focus, in which their development in adoption of accrual accounting will be compared to Malaysia's.
2.0 Progress of adoption of accrual accounting
In New Zealand, many Government Trading Enterprises started taking initiative in adopting accrual accounting in 1980s (IFAC, 1996). New Zealand was the first country to fully adopt the accrual approach in 1992 (Buhr, 2010), with the State Sector Act 1988 and the Public Finance Act 1989 significantly contributing to the fully adoption of accrual accounting (Ball et al, 1999).
The initiative for the New Zealand to go for public sector reform was due to the financial and performance deficit in the public sector and the economic crisis faced by the nation (IFAC, 1997). Generally, the process of the reformation in New Zealand happened under a consistent and comprehensive framework which embraces all aspects of accounting, budgeting, reporting, parliamentary appropriations, performance specification and monitoring instead of viewing accrual accounting and other aspects as separate issues (Ball & Bradbury, 1998).
In Australia, the adoption of accrual accounting started during a period of broad economic reforms. There are pressure to improve the government's efficiency and fiscal performance during that period and these are the reasons that drove Australia to step towards accrual accounting (Champoux, 2006). Prior to that, the statutory authorities of the Commonwealth of Australia and the state of New South Wales (NSW) had already started adopting accrual accounting (Funnel and Cooper, 1998). In 1988, the election of conservative government in NSW, under the premiership of Nick Greiner put forward the process of adoption of accrual approach in Australia (Christensen, 2002).
Initially, the public sector of Australia was facing problems in its performance and management. These problems had forced the nation to undergo the public sector reformation. In 1984, the Financial Management Improvement Program was launched to increase the effectiveness and efficiency of administrative works (Guthrie, 1998). This program directly commercialized the public sector services and thus created forces to public sector to adopt a commercial style of accounting (Keating and Holmes, 1990). In financial year 2000, Australia succeeded in producing comprehensive accrual-based financial statements (Champoux, 2006)
SAARC refers to the South Asian Association for Regional Co-operation. The SAARC countries were aware of the advantages of the accrual accounting and are moving towards accruals for their public sector accounting system. In this report, we have picked India to represent the population of SAARC countries.
India started its adoption of accrual accounting in both central and local governments through the implementation of several pilot projects. Accrual accounting started in the state governments of Tamil Nadu, Uttar Pradesh, Karnataka and Maharashtra. In 2001, the Honorable Supreme Court of India recommended the transition to accrual accounting for the urban local bodies. This action had significantly contributed to the conversion process of urban local bodies (SAFA, 2006).
Several steps had been taken for the adoption of accrual accounting, which included the formation of Government Accounting Standards Advisory Board and the approval of national accounting manual based on the accrual accounting. In addition, the Institute of Chartered Accountants of India had issued a technical guidance on financial accounting and reporting for the urban local bodies (SAFA, 2006)
Malaysia has focused more on the management accounting and control initiatives rather than the financial accounting and reporting in its governmental accounting reformation. The aim was to enhance the effectiveness and efficiency of public sector management and the reformation in financial accounting and reporting was only treated as a by-product during the process (Saleh & Pendlebury, 2006).
An early move made by Malaysia was the alteration of its budgeting process. Malaysia originally adopted line item budget before moving to Programme Performance Budgeting System (PPBS) in 1968, and then to Modified Budgeting Systems (MBS) in the 1980s to increase government's efficiency in financial management (Dean, 1989). In 1992, the Micro Accounting System (MAS) was introduced to further enhance the government's management accounting (MAMPU, 2000).
In 2003, the Accountants General's Department (AGD) had proposed the accrual accounting migration conceptual plan. It was planned that accrual accounting would be adopted by 2008 and became part of support system for the Government Financial Management Accounting System (GFMAS) (AGD, 2003b).
3.0 Roles played by IPSAS & NPM in Adoption of Accrual Accounting
New Public Management
New Public Management (NPM) is the reformation of the public administrations and management to a more control based governance structure that put focus on outcomes. The main characteristics of NPM included delegation of powers, performance measurement and better accountability and transparency (FEE, 2007).
Generally, the substantive agenda of NPM can be grouped into four main elements, which are the elimination of conventional bureaucracy, the application of private sector management practices, increasing the competition and market signaling within the public sector, and reducing the public sector's size (Dass and Abbott, 2008).
The NPM had initiated the reformation of the public accounting practices, which included the need for adoption of accrual accounting. When accrual accounting is used, the accountability and transparency of public sector on its activities is increased (FEE, 2007).
International Public Sector Accounting Standards
International Public Sector Accounting Standard Board (IPSASB) played an important role as independent standard-setting body and developed the accrual basis International Public Sector Accounting Standards (IPSAS) (IPSASB, 2008). A revised study - "Transition to the Accrual Basis of Accounting: Guidance for Public Sector Entities", released in early 2011 has shown that most of the IPSASs are founded and formulated from International Financial Reporting Standards (IFRS). Besides, this Study also helps in disclose and present particular accrual basis information in financial report for public sector entities that adopted cash basis. The Study concentrates on implementation of accrual accounting in aspect of numerous and complicated technical, system and cultural issues that useful for public sector entities (IPSASB, 2002).
The IPSAS were developed in a way that converged with the IFRS to ease the adaptation of public sector context. The standards would be able to give direction and guidance for public sector entities which used accrual basis or in the process of adopting accrual accounting or changing from the cash to accrual basis (IPSASB, 2002). These standards would make the quality of financial report better and lead to greater assessment on the allocation of resource and further enable better decision making for public sector thus meliorate financial management, transparency and accountability (IPSASB, 2002).
During the adoption of accrual accounting, Malaysian government may refer to the Study which included 31 IPSAS as a guideline. Each standard was specific in particular accounting such as IPSAS 2 for Cash Flow Statements and IPSAS 17 for Property, Plant and Equipment (IPSASB, 2002). Moreover, the Study emphasize on general financial reporting issues related with accounting policies and reporting entities and financial statement elements which include the process to recognize, to measure and to disclose about revenues, expenses, assets and liabilities(IPSASB, 2002). IPSAS has provided a clear guideline and requirement in adopting accrual accounting for countries across the globe.
4.0 Challenges and Issues during the Adoption
New Zealand and Australia
New Zealand and Australia were both grouped together in as developed countries. After the implementation of the new accounting method, New Zealand and Australia both showed strong fiscal restraint. However, during the process of adoption, both countries faced identical issues and problems.
In both countries, future social insurance liability, pension for example, was left out and was funded by traditional cash-based measures. The explanations given being the exclusion of social insurance commitments in GAAP and that the amount is too hard to be predicted as the government can amend the benefits anytime in the future (Champoux, 2006).
Competent and knowledgeable staffs were another problems faced even by the developed countries. In New Zealand, there was no adequate training provided to the departmental financial officers. The steps taken were the replacement of compliance officers with professional staffs (Athukorala & Reid, 2003). Questions were also raised on the capacity of the government's technology system in managing the change process. Demand on IT specialists in both countries has increased in the process of reformation (Wynne, 2004).
Another issue being the cost and time needed to fully implement the accrual accounting method. New Zealand took six years to fully reform from cash to accrual accounting, starting from 1987 and succeeded in 1992, despite its small country size (Athukorala & Reid, 2003). New Zealand was facing economic crisis before decisions were made and it could be that the situation was one reason in driving the adoption in accrual accounting (Ouda, 2003).
The problems faced by the SAARC countries generally are due to the large population of people but with a relatively small number of professional accountants. Besides that, the SAARC countries also faced problems in the lack of accrual accounting and computer or information technology (IT) knowledge in the government sector (SAFA, 2006).
In India, the problems that hit them are, as mentioned above, the needs of introducing new accounting codes and IT system due to the lack of both of them. The complexity of accounting system will deepen from the adoption of accrual accounting and this posed challenge for the government to respond to the new technology requirement (Wynne, 2004). Next, the staffs are already oriented towards the current system and one problem is to re-orientate them to get use with the new system (GASAB, 2010).
Besides, there is also a conflict in deciding on following the IPSAS introduced by the IPSASB or the existing Indian Government Financial Reporting Standards (IGFRS). Another issue is creating the awareness and acceptance of accrual accounting over various departments (GASAB, 2010) and also the widespread areas in the country (SAFA, 2006).
As experienced by the three countries chosen in comparison with Malaysia, the problem of shortage of qualified and professional staffs also hit Malaysia. The barrier of availability of qualified and professionals was more serious in Malaysia (developing country). It was found that one reason is the incomparable salary level between the private and public sector which resulted in the imbalance of competencies and professionals between the two sectors (Saleh & Pendlebury, 2006).
Technological limitation was also viewed as a major constraint that has been holding us back from accrual accounting (Saleh & Pendlebury, 2006). In developing countries (Malaysia), IT capacity was a problem with limited infrastructure and communication and technological constraints (Athukorala & Reid, 2003). Again, developed countries (New Zealand & Australia) were not spared when it comes to technology limitation during the process of accrual accounting adoption and Malaysia is now having similar problem.
Cost and time were also a challenge here, as Malaysia will need some time before being able to fully implement accrual accounting, despite the fast growth rate and having a political stable economy in recent years. The transformation is a long term project which may take about eight to ten years for full implementation (Wynne, 2004). Besides, Malaysia's emphasis was placed on management accounting instead of financial accounting and reporting which was viewed only as a by-product (Saleh & Pendlebury, 2006). The mentality and culture in Malaysia would need a change as it will be tough to succeed without sufficient support (PUMA/SBO, 2002).
In conclusion, a few countries around the world had successfully implemented accrual accounting in the public sector and many other countries has started the adoption process. Though the benefits of accrual accounting were clear, there are many challenges and issues that will be faced during the implementation. With the major problems being the lack in accounting professionals and technology, many governments started providing incentives for government accountants to undertake the professional accounting qualifications, ACCA and ICAEW for example (Saleh & Pendlebury, 2006). Governments should also draw a time-bound plan of action in ensuring the efficiency of implementation in a timely manner (SAFA, 2006). With the guide provided by the IFAC and the few examples set, eventually Malaysia will be there, together with the countries which had successful in the full implementation of accrual accounting.