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Accounting in general is a sensitive subject that attracts almost everybody's attention whether in a public or private sector. Accounting has had a long far from trouble free relationship with law as well. In the UK, accounting has traditionally been viewed as being subordinate to law especially with the bankruptcy law that provides for accountants to become a separate occupational group and later a recognized profession (Napier and Noke 1992). As a result, there has existed tensions between the two professions of Law and accounting which phenomenon is likely to have led to the increasing complexity of the accounting regulatory task. (Meyer 1986).
According to the business dictionary, the "public sector" comprises of organisations which are not privately owned and operated. These are organisations whose control lies in the hands of the public and whose objectives involve the provision of services where profit is not the primary objective. Simply put, the "public sector" refers to that part of the national economy which is charged with the responsibility of providing basic goods and/or services that are either not, or cannot be, provided by the private sector. It consists of national and local governments, their agencies, and their chartered bodies. The public sector is one of the largest sectors of most economies; in the United States, for example, it accounts for about 20 percent of the entire economy (Business dictionary, 2012).
Public sector organizations or departments are established through Public Services Acts of Parliament for the interest of the general public who are the stakeholders. Public sector organisations are commonly known to provide services beyond the private means of people using them. They aim to provide benefits to everyone within socially acceptable norms and to achieve certain minimum standards of service. Public sector organisations also substitute central or local planning in place of consumer choice to ensure a consistent approach to certain practices or procedures to aid control of economic regulation in key areas within Central Government Departments (CGD), Public Corporations (PC), Local Authorities (LA), Health Authorities (HA), Local Health Boards (LHB) and Primary Care Trusts (PCT). Public sector financing comes mainly from different sources by government for example through taxation, borrowing, service fees and charges, shareholders, banks and banking services etc. Public sector organisations are regulated by the acts of parliament such as The Education Reform Act of 1988(ERA) and the National Health Service and Community Care Act of 1990(NHSCCA). These two were acts of parliament which involved major financial and accountability changes for educational and health institutions in the UK.
On the other hand, the private sector comprises organizations that are originated by private owners and are established through Company Acts e.g. The Companies Acts of 1985 and 1989. According to the business dictionary, "the private sector" is that part of national economy made up of private enterprises. It includes the personal sector (households) and corporate sector which makes up the largest part of most economies and is responsible for allocating most of the resources within an economy. Private enterprises operate on the basis of a free market capitalist system, they are business units or entities established, owned, and operated by private individuals mainly for profit, instead of by or for any government or its agencies (Business dictionary, 2012).Such companies are formed out of voluntary association and are organized to carry out commercial business and include joint partnerships, limited liability companies and corporations, public limited companies (PLCs) and sole proprietorships.
It follows that the differences in the nature of organization, formation and composition of the public and private sector organizations also determine differences in their needs and objectives for accounting including their decision making processes (Nutt 2005). Accounting regulation has had a long history dating as early as the 18th. Century, for example the French trade law of 1673 (of J. Savary) and 1807 (of Napoleon) which later became the model examples for improvement of the trade laws for European nations Trade laws (later known as company laws) are the origin of development of the accounting regulations of the European countries (D, Gulin et al).
Due to the different aims and objectives for the institution of public sector and of private sector organizations, there are remarkable differences in their approach to their accounting philosophy even for historical reasons in both sectors. Private sector accounting records are maintained to assess levels of profitability after a set period of trading. Public sector accounting records on the other hand are maintained to ensure that public servants (politicians, bureaucrats, officials) have been properly accountable to the general public for the funds they have used out of the funding sources, be it taxes or grants from others sources(Andrew Graham). Great emphasis is laid on accountability and stewardship of that which has been entrusted to the leaders of the public sector organizations and those in government whereas in the private sector, the philosophy of accounting for funds is mainly based on matching revenue and expense in order to measure profit which is their main purpose of existence and continuity. This leads to using accrual accounting which recognizes both revenues and expenses when they occur with the bottom line being profitability not the cash situation. Considering what accrual has developed in private organizations is simply attributed to the overall assessment of the financial condition of the organization. In the public sector, the focus on accountability is mainly for funds at hand which have lead to using a cash basis as it is more easily understood and more sensitive to annual budgetary approvals of the governing body. (Andrew Graham).
Notably, there are continuous developments and changes in the field of Public sector accounting requirements. Currently, in Japan for example there is a need to disclose stock information in addition to the standard information presented in budget and accounts statements. Previously, public sectors have prepared and disclosed their financial statements which include balance sheets and income statements based on business accounting methods. However; as a matter of policy, the governments now tend to prepare and disclose cost information along with the financial statements for the individual ministries, departments and governmental agencies. Public sector accounting is considered to have been developed based on the business accounting approach. As such, the objective of the accounting is to retrospectively review how assets and liabilities have changed as a result of past public finance operations (Ryosuke Tao June, 2012).
Lately, in a bid to better reflect the economic situation of the central government as a whole, the national accounting standards and other requirements have been improved and stock information (information on assets and liabilities) as well as cash flow information through budgets and annual accounts have now been disclosed broadly and methodically. In this context, the balance sheet and the statement of administrative costs have been prepared and disclosed in accordance with the approach adopted in the business accounting (Ryosuke Tao June, 2012). Private sector organizations focus on expenditure and income and assess profit for the period which will guide them in planning next strategies for marketing and trading for the next season, although they do pay considerable attention to stock which would include their assets and liabilities as well.
The laws, regulations and guidelines relating to accounting in private sector commercial organizations such as Zara stand in contrast to those governing Public sector service organizations such as the National Health Services (NHS) for the UK. Zara is part of the Inditex Group which is made up of more than 100 companies operating in textile design, manufacturing and distribution. The NHS is obliged to stick to its legal requirements stipulated in the NHS Acts. While drawing their accounting reports, the NHS has to show a "true and fair" view of the service in order to comply with public service policies. The NHS also has to make its accounts available to the public who are the stakeholders in a clear and summarised form in their annual report which are usually audited by 31st July and made ready for the annual report and Annual General meeting(AGM) by 30th Sept of the year being reported. This report has to bear the Certification by the Comptroller and Auditor General from the National Audit Office such as this one for the 2011/12 report where the comptroller states; "I certify that I have audited the financial statements of NHS Direct NHS Trust for the year ended 31 March 2012 under the National Health Service Act 2006. The financial statements comprise: the Statement of Comprehensive Income, the Statement of Financial Position, the Statement of Cash Flows, the Statement of Changes in Taxpayers' Equity; and the related notes. These financial statements have been prepared under the accounting policies set out within them. I have also audited the information in the Remuneration." (NHS Direct, 2011).
Zara on the contrary operates on purely commercial terms and with its global branches and franchises reporting results obtained during the trading period for example the 2011 financial year, which are written to reflect their performance mainly measured in terms of profits while at the same time being a demonstration of the strength of their chosen business model. In this period for example, the sales were reported to have increased significantly by 10% reaching 13,793 million Euros. (Inditex Annual report, 2011).
All NHS bodies are required to have written Standing Orders, Standing Financial Instructions (SFI's), and schemes of delegation which must all be approved by the Board. The standing orders spell out the rules and regulations which govern the administrative procedures of the Trust and its employees usually based on NHSE models. Whereas private sector commercial organizations like Zara are not subject to such standing orders except compliance to private company laws and regulations that relate to public safety, the environment and the like as stipulated by the Department of Trade and Industry Regulations.
Private commercial organizations adopt models and strategies that will ensure efficient business operations, competitiveness and maximum profits.
Owing to these differences in focus between Public and private sector organizations, A ''public-private difference'' stream of research, begun by Rainey, Backoff, and Levine (1976), initiated a study of the roles that public and private organizations have in our society. Using this framework, researchers have found that the demands placed on public and private organizations vary to the extent that different practices are recommended for each sector. (Paul C. Nutt, 2005).This impacts the style, format and accounting practices and reporting in these organizations and consequently their decision making processes.
In the Private sector, we will commonly come across varying formats for Profit & Loss Accounts, the balance Sheet and Cash flow as compared to the Revenue statements Balance Sheets and Cash flow in public reports. We also know that Public accounting is more of Stewardship accounting whereas in the Private it is ownership accounting. Generally, the reporting Style relates to and reflects fund accounting for public sector organizations as compared to entity accounting in private sector. These are done according to different Accounting policies for different objectives and needs; moreover the reporting bodies themselves are different. While the NHS reports to parliament which in effect is doing "social reporting" to the General Public in Public sector, in the private it is the managers doing "profit reporting" to shareholders. These two are therefore carry very significant differences.
Accounting information in the public sector performance assessment process is included in order give assurance that public business is conducted following proper standards and public money is used effectively by reporting on the annual accounts and to ensure that public servants have been properly accountable to the general public for the funds they have used out of the funding sources (Andrew Graham).
Other factors which would contribute to a comprehensive assessment performance would include: a concern for 'value for money' (VFM) in the evaluation processes. Concerns for what are known as the 'Three E's' (Economy, Efficiency, Effectiveness). Although the key to performance management is to break down the service process into three blocks: Inputs; Outputs and Outcomes. Outcomes are the hardest component of the service process to measure (Pollitt N.D, 2001). Outcomes are often ignored, but are the ultimate test of whether the organization is achieving its goals.
In a private corporation, the auditor will check the accounts and accounting records of the company and prepare a report for the company's shareholders. The report will say if the company's annual accounts have been properly prepared in harmony with the Companies Acts and if they give a true and fair view of the company's financial undertakings. The auditor will also consider if the information given in the directors' report is consistent with the annual accounts. If in the auditor's opinion, the accounts or directors' report does not comply with the Companies Act, the auditor will say so in the report. (UKincorp, 2012).Government auditing however is a cornerstone of good public sector governance. By providing impartial, neutral assessments of whether public resources are responsibly and efficiently managed to achieve planned results, public sector auditors help government organizations achieve accountability and honesty, improve operations, and inculcate confidence among citizens and stakeholders. (The Role of Auditing in Public Sector Governance).
Both the Public and Private sector organisations play different roles in every economy. Yes to an extent their roles can be said to be complimentary. It should be noted however that the two do exist and operate on different grounds and by different parameters for example, The buying behaviour of people defines the market for private enterprises while oversight bodies make up the market in public sector., competition among organisations is strife in the private sector whereas collaboration among entities that offer a given service is expected in the Public sector. Autonomy and flexibility in Private sector is only limited by law and the need for internal consensus, while Mandates and obligations so much limit autonomy and flexibility in the Public sector. These and many more factors including politics do influence the operations and indeed the role of accountability in the Private and Public sector organisations. It is vital to remember that public services do not occur in a space, they are influenced by their social environment and their communities and so are their requirements for accounting.
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