Examining the Accrual Accounting Application in The Malaysians Local Government

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This paper propose a depth understanding and critical evaluation of the benefits and challanges of accrual accounting versus cash accounting aplication for budgeting and reporting in Municipal Council of Kota Kinabalu, a local government in Malaysia. Motivation of this paper is drawn on the potential benefits of accrual accounting in budgeting and financial reporting of a local government as empirically established in other countries. However, despite the success stories of accrual accounting aplication in other countries, it has yet to be fully replicated in Malaysia. The expected contribution of this paper are; (i) Critical evaluation of financial management and reporting practices of local government in Malaysia; (ii) Empirically analysing the benefits and limitations of cash versus accrual accounting application in budgeting and accounting transaction of a local government, the case of DBKK; and (iii) Contributing to enrich the literature and body of knowledge of local government accounting practices in Malaysia.

INTRODUCTION

Motivation for Research

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The government manages its financial economic activities through public accounting. Public accounting systems aim at authorizing and recording cash receipts and expenditures in respect of an agreed budget. In most countries, it is not consistently regulated. There are two types of approach in public sector's financial reporting which are cash accounting and accrual accounting. In Malaysia, cash and modified cash is the current basis adopted by the Malaysian government. Malaysian government has also made a move in implementing the accrual accounting for public sectors (Abdul Samad, 2001). This is because accrual basis of accounting generates better quality of financial information and this information is necessary for the discharge of accountability and better decision making by internal management (Sutcliffe, 2001). Moreover, the traditional cash accounting system adopted in many countries is perceived as no longer satisfactory (Abdul Samad, 2001).

Many countries like Australia, New Zealand and Canada have fully implemented this accounting reform in their government accounting. As for Malaysian context, according to Abdul Samad (2001), by looking at the experiences of the countries that had undergone reformation in the public sector, it could be concluded that the major demand for the push to accrual accounting is the growing demand for a greater transparency and better performances of the government sector and the companies controlled by the government.

The objective of this study is to investigate and critically evaluate the benefits and challanges of accrual accounting versus cash accounting aplication in Municipal Council of Kota Kinabalu (DBKK), a local government in Malaysia.

Arrangement of research proposal is as follows; the next section will discuss about the philosophical background related to Public Sector (PS) as well as accounting standards employed by them. This is follow by empirical analysis of cash vs. accrual budgeting and accounting application in PS. This expected to sheeds a light on identifying the potential research gaps. Following this is the research questions and contributions which are designed based on the identified research gaps. The final part of this paper summarises the research methodology and structure as well as research planning.

PHILOSOPHICAL BACKGROUND

Defining Public Sector in Malaysia

Public sector is part of the economy concerned with providing basic government services whether federal, state or local/municipal council (Fatimah et. al., 2008). Components of Public Sector in Malaysia is categorised into three tiers of government namely; federal government, state government and local government (Fatimah et. al., 2008). Public sector organisations exhibit a variety of social, economic, political and legal characteristics.

The federal government s the highest tier of the government, which comprises of the minsitries, departments and public enterprises. Ministris are the highest boy in the federal administratives followed by government department/agencies which responsibles for implementing government policies. While, a public enterprises can be classified eiher as a statutory or non-statutory bodies.

State government is the second tier of the government, which comprises of ministries (for Sabah and Sarawak only), department and public enterprises. The administrative mechniery of the State is headed by the State Secretary.

The local government is in the third tier of the government hierarchy in Malaysia. The local government is governed by the Local Governmen Act 1976. By virtue of Section 2 of this Act, local authority mean any City Council, Municipal Council or District Council. In Malaysia, the power of the decision making is transferred to the local authorities administer their respective areas. In respect to the accounting management, Section 9(2) states that the local authority shall furnish the State Authority with such returns, accounts and other information with respect to the property and activities of the local authority.

The Malaysian's Public Sector Accounting Theory and Practices

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Accounting has been generally defined as the system of identifying, classifying, recording, summarising, analysing and reporting of financial data and information of an organisation in accordance with the accepted principles, concepts, conventions, standards, and regulation (Fatimah et. al., 2008). Public sector accounting is different from private sector accounting. Accounting and financial reporting for public sector are based on distinctive concepts, standards and procedures designed to accomondate their environment and needs of their accounting information users (Fatimah et. al., 2008). In Malaysia, the public sector accounting system is designed to comply with the Federal Constitution, statutory and other legal requirements.

In general, the public sector uses fund accounting where seperate accounts are maintained for each fund so that limitations and resrictions placed on use of the resources allocated can be properly monitored. The government financial system and procedures can be devided into two categories namely financial procedures and non-financial procedures. The financial procedures related to the finance and accounting of public funds. While, the non-financial procedures on the aspects including finance and accounting.

The government financial system and procesures are based on; (i) Federal Constitution, (ii) Financial Procedure Act 1957, (iii) Treasury instructions, (iv) Treasury circulars, (v) Government Accounting Standards, and (vi) International Public Sector Accounting Standards (IPSASs).

The Government Accounting Standards (PPK) has been set p by the Accountant General Department since 2002. Its objective is to prescribe the standards and the basis for preparation of government financial statements in accordabce with the requirements of the Federal Constitution and the Financial Procedures Act 1957 (Revised 1972).

Local Government Accounting Principles ad Practices

Local Government Revenues

According to Section 39, Part V of the Local Government Act 1976, the revenue of local authority shall consist of:

All taxes, rates, rent, license fees, dues and other sums or charges payable to the local authority;

All charges of profits arising from any trade, services or undertaking carried on by the local authority;

All interest o any monies invested by the local authority and all income arising from or out of the property of the local authority;

All other revenue accruing to the local authority from the Federal or State government, statutory body, other local authority or other sources.

Problem Statements

Malaysian government has also made a move in implementing the accrual accounting for

public sectors (Abdul Samad, 2001). This is because accrual basis of accounting generates better quality of financial information and this information is necessary for the discharge of accountability and better decision making by internal management (Sutcliffe, 2001). Moreover, the traditional cash accounting system adopted in many countries is perceived as no longer satisfactory (Abdul Samad, 2001). Lots of researches on accrual accounting have been carried out in western countries such as New Zealand, Australia, Finland, Greece, Denmark, Sweden and United States but few researches have been done in Malaysia on this area. Thus, this research is carried out to determine whether local authorities fully adopt the accrual accounting in recording the income and expenditures.

Research Questions

The main research question of this study is whether the local authorities of Kedah Darul

Aman fully adopt the accrual accounting approach in recording income and expenditures.

Thus, the following specific questions are related:

1) What is the current practice among local authorities in Kedah Darul Aman?

2) What are the problems faced by local authorities in adopting accrual accounting

approach?

RQ_1:

Understanding of accounting prnciples and practices of DBKK

RQ_2:

Investigation of current accounting systems used by DBKK

RQ_3:

Application of cash vs. accrual budgeting and accounting in DBKK

RQ_4:

Will accrual accounting improves the financial performance of DBKK?

Research Contributions

Critical evaluation of financial management and reporting practices of local government in Malaysia.

Empirically analysing the benefits and limitations of cash versus accrual accounting application in budgeting and accounting reporting of a local government.

Contributing to enrich the literature and body of knowledge of local government accounting practices in Malaysia.

LITERATURE REVIEW

This section will discussed the empirical findings of previous papers related to the application of Accrual Budgeting and Accounting in Government Sector all over the world. Specific attention will be focused on financial reporting in local government of Malaysia.

The Public Sector Accounting Principles and Practices: The World Views

Budgeting and Accounting Reporting in Government Sector

Cash Vs. Accrual Budgeting and Accounting Principles : Identifying The Research Gaps

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Traditionally, cash accounting in public sector focused on the control of expenditure. The reform of the public sector has changed the traditional role of accounting to one that is focused 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 (Hoque and Moll, 2001; Broadbent and Guthrie, 1992). This in turn requires that new accounting technologies be employed such as planning program budgeting, accrual accounting, performance indicators and annual reporting mechanism (Hoque and Moll, 2001). Accrual accounting if being adopted in public sector, provides a better quality of information and a better way of discharging accountability among the public sector managers.

Many countries like Australia, New Zealand and Canada have fully implemented this accounting reform in their government accounting. As for Malaysian context, according

to Abdul Samad (2001), by looking at the experiences of the countries that had undergone reformation in the public sector, it could be concluded that the major demand for the push to accrual accounting is the growing demand for a greater transparency and better performances of the government sector and the companies controlled by the government.

Accrual vs Cash

Cash accounting requires the record of inflows and outflows of cash. Accrual accounting

as defined by Federal Accounting Standards Advisory Board, the recognition of the financial effects of transactions, events and circumstances in the period(s) when (they) occur, regardless of when cash is received or paid. It also requires revenue to be recognized in the period in which economic benefits can be measured reliably. Like wise, expenses are recognized when the consumption of goods is capable of reliable measurement (Hoque and Moll, 2001).

The main advantage of the cash system is simplicity, objectivity and the need to assess the compliance with cash budgets. However there are limitations like the system does not disclosed a true financial and economic position of the entity, no performance indicator and information on cost of services provided available for performance evaluation and control purpose (Montesinos and Bargues, 1996). In addition, the cashbased system also does not provide sufficient information to assess the government financial requirements like cash and revenue requirement to pay for past debts as well as future services, besides fail to provide the government complete information on all that they owe (Hillier, 1996).

Advantages of accrual accounting in government

A number of researchers argue that cash based financial system and accrual accounting is both useful, however financial reports based on accrual accounting has its own advantages and significance to the modern government. Accrual accounting in government provides better quality financial information and more comprehensive. This allows a better way of discharging accountability (Abdul Samad, 2001; Sutcliffe, 2001; Hoque and Moll, 2001) by extending the assessment of financial performance beyond the application of cash (OECD, 1993) and supports a better decision making by internal management (OECD, 1993; Sutcliffe, 2001) by providing information on the full cost of operations and the resources used to deliver services to the public (Hoque and Moll, 2001).

RESEARCH METHODOLOGY

This research will need to employ a combination of qualitative and quantitative research techniques to investigates and clarifies the identified research questions. Summary of the research investigations and methodologies are as tabulated below:

No.

Research Questions

Methodology

Instruments

RQ_1

Understanding of accounting prnciples and practices of DBKK

Qualitative Technique

Structured interview and inspections of records/policies/circulars

RQ_2

Investigation of current accounting systems used by DBKK

Qualitative Technique

Structured interview and inspections of records/policies/circulars

RQ_3

Application of cash vs. accrual budgeting and accounting in DBKK

Qualitative Technique

Structured interview and inspections of records/policies/circulars

RQ_4

Will accrual accounting improves the financial performance of DBKK?

Quantitative Technique

Accounting Experiments - comparing the effects of cash versus accrual accounting on 10 years historical financial performance. Is there any different?

RESEARCH STRUCTURE

RESEARCH PLANNING

The Gantt-Chart

The Milestones