Cash-based accounting and accrual accounting

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Laws and Regulations Involved

The transition from the cash-based accounting to accrual accounting involves the amendments on several current legislations which amendments would be sent to treasury legal adviser. In Malaysia, the amended legislations include the Financial Procedure Act 1957, Unclaimed Money Act 1965, Housing Loan Fund Act 1971 and the National Trust Fund Act 1988. Besides, Governmental Accounting Standards Advisory Council (GASAC) assists government in identifying and proposing the amendments the relevant legislations for Malaysian public sector in the Financial Procedure Act 1957. (Malaysia edition of Accounting and Business, 2013) On the other hand, while avoiding the use of legislation to regulate detailed administrative processes, the State Sector Act 1988 and Public Finance Act 1989 of New Zealand provided powerful signals as to the Government’s seriousness of intent, and therefore the likely permanence of the reforms. This removed any incentive to undertake changes slowly or in a manner that would facilitate easy reversion to the old system. (Implementing Accrual Accounting in Government: The New Zealand Experience, 1994)

Assistance and Support

In 2011, the collaboration between a team of professional accountants and Government Accounting Standards Advisory Council (GASAC) were to develop the appropriate accounting policies to the local public sector that are advisable in the context of Malaysian. As the implementation of the accrual accounting will impact the way government in preparing financial statements, thus, the government should provide training to the staff who is involved in preparing the financial statements. In Malaysia, there is the Malaysian Institute of Accountants (MIA) that governs the policies of accounting and also from private sectors such as Ernst and Young (E&Y), PricewaterhouseCoopers (PwC), KPMG and others. (Azhari, 2013) While on the other side, New Zealand gets support from the Society of Accountants in creating the environment and condition that are appropriate for the implementation of the accrual accounting system in public sector. Apart from the role play by Society of Accountant, Public Sector Accounting Committee (PSAC) was developed to provide professional guidelines for public sector accountants to improve governmental financial reporting. (Miah, 1991)

Conversion is Time Consuming

Based on previous experiences from countries that have implemented accrual accounting in their public sector, it takes a longer period of time to fully adopt the accrual accounting into their system. For example, in New Zealand, the process has reportedly taken ten years. On the other hand, the United Kingdom and Sweden are reported to take seven and eight years respectively (Irvine, 2011). For Malaysia, it is expected to take five years for the implementation of accrual accounting (Accrual Accounting Project Team of AGD, 2011). So far the government in Malaysia only gives a period of not more than 4 years, which is, in 2015 to fully implement accruals accounting in the public sector. This poses an interesting question of whether the period given by the Malaysian government is sufficient for the accountants of financial reporting to be prepared in implementing accruals accounting. Fortunately for Malaysia, says MIA president Datuk Mohd Nasir Ahmad, it can learn from the experiences of other countries. ‘In the case of the Slovak Republic for example, by undertaking awareness training, understanding the standards and with the parallel running of accounting systems, they were able to migrate within their stipulated timeframe,’ he says.

Lack of Trained Staff and Information Technology (IT) System Requirements

Meanwhile, according to Tickell (2010), low-skilled employees and insufficient infrastructure will impair the implementation of accruals accounting system compared to highly skilled employees. He also said that for a developing country, personnel training is required more rather than changing the accounting software due to lack of highly skilled human resources. Due to lack of qualified accountants operating the government accounts, employees with no accounting background might find it difficult to understand the procedure of accruals accounting concept (United Nations, 1984). Personnel with advanced knowledge in the government accounting are scarce, especially in developing countries (Ouda, 2004). This is supported by a study conducted by Saleh and Pendlebury (2006) and they found that for developing countries, such as Malaysia, a shortage of professionally qualified accountants in the public sector requires extensive training programme to educate the employees. However, they believe that the majority of the qualified accountants are attracted to greater incentives given by the private sector. Tickell (2010) added that even after the employees have been well trained and informed in accruals accounting, there is a chance that he or she will leave the public sector and go to the private sector for larger salaries, thus lead to shortage of staff in the public sector.

Cost of Conversion

Nur Jazlan Mohamed, the chairman of Public Accounts Committee (PAC) said that the implementation of the accrual accounting to replace the cash-based system in Malaysia will be costing RM 260 million, which will put a value to the assets and liabilities and reduce wastage from Jan 1 next year. Nur Jazlan said the RM260 million would include upgrading the system and training the users. He said the amount would be worth it because wastage amounting to billions could be avoided. The most frequently given reason was the cost of accounting reform.

Overall, the journey towards accrual accounting has been challenging. However, we are committed to it and believe the benefits it will bring us in terms of financial management will be worth the significant effort required. To achieve the full adoption of accrual accounting in the public sector, the government needs to investigate the preparedness of the accountants in implementing the accruals accounting. The government should set up a strategic implementation plan in order for the implementation process to run smoothly. One of the steps is to provide training to the accountants of financial reporting. Whether accountants are willing to participate in the training depends on the motivation from the top management to encourage their staff to learn about accruals accounting and the accountants' attitude in accepting the implementation of accrual accounting in public sector.

In addition, the government needs to provide comprehensive management training towards the departmental managers. Accrual accounting training programme should provide information such as the basic financial concepts underlying accrual based accounting, how accrual based accounting allows rooms for improvement, and general understanding of the accounting information system (Wynne, 2004). Each training module and the information provided should be adequate to train the public sector employees to be highly skilled workers. Besides, as mentioned by Salleh and Pendlebury (2006), the Malaysian government provides incentives for its accounting employees to obtain professional qualifications. This can be a motivation for the accountants to improve their knowledge. The non-accounting staff should be provided with other incentives because they are also part of the accounting team in the governmental financial reporting. Example of incentive is such as sending them to undergo a training programme on basic of accruals accounting.