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Public administration has been undergoing significant reforms, in the past decades. The reforms are aimed at rectifying structural defects in the system that lead to improper allocation and use of resources and public management inefficiency.
The reform process in the various countries are based on the New Public Management (NPM) principles that proclaims: increased focus/efficiency in results, setting standards of productivity in terms if effectiveness and quality of service, orientation towards consumer citizens in terms of customer satisfaction and service quality, introduction and implementation of marketing mechanisms and focus in the reinforcement of strategic capacity (Robinson, 1998).
Introduction of the New Public Management (NPM) guidelines has seen the implementation of private instruments and principles in the public sector in order to improve effectiveness, efficiency and financial stability of state enterprises.
New Public Management is a term used to stress the accounting and economic orientation in the public sector reforms (Olson et al, 1998). NPM is aimed at the development of public enterprises, with the privatization of as many public owned utilities. NPM is abounding with terms/jargon such as- 'performance indicators', 'full costs', 'accrual accounts', 'delegated budgets' and the list goes on. Adopting the NPM involves also attempts of streamlining the public sector and reducing its costs. Often, the core public sector is reduced by the separation of units that produce utility-type services, like energy and water service production, into public companies or public enterprises, which in turn operate as accounting entities or profit centers on commercial lines.
A notable element of NPM is the endless list of financial management techniques, which are account based, being used in the pursuit of reforms. The driving force behind the reforms has been identified as the desire to reach greater financial awareness in the decision making process, in the public sector, in order to provide comprehensive information that enables individuals and groups to assess extents to which revenues meet full costs of public service provision (Guthrie et al 1999). Politicians, management consultants, financial institutions, international organizations, scholars and journalists have played a part in the implementation of these reforms.
The purpose of this research is to explore and analyze accrual accounting, intergenerational and interperiod equity measures in the public sector as a background to the NPM, highlighting the role of accounting and financial management as a basis for the reforms. The paper also determines whether the reforms have succeeded in attaining the goals of an increase in accountability and intergenerational equity.
Intergenerational/ Interperiod Equity
The sustainable development and intergenerational equity concepts are highlighted in the Brundtland report, contending that development is normally sustainable when it meets the present generation's requirements without compromising the future generation's abilities to meet their own needs (United Nations 1987).
Though a widely used term, intergenerational equity doesn't easily lend itself to a single common definition. The topic of intergenerational equity occurs in many contexts including: environmental issues including global warming, exhausting resources and climate change (OECD, 2001), issues related to expenses that are age related (Thompson, 2003), infrastructure provision and fiscal equity (McCrae and Aiken, 2000), and legal and social contexts (UN, 1987).
The common factor is the call for a partnership or balance between the present and future generations (Earth and Peace Education Associates, 2003), and the need for fairness in distribution (OECD, 2001, Warren, 2004). Thompson (2003) points out that the issue of intergenerational equity isn't a mere fiscal or technical economic question, but is a philosophical question that engages ethical concerns concerning justice and distributive fairness and the nature of moral obligations to the future generations (Auerbach et al 1994). Therefore, intergenerational equity cannot be defined to be achieving a fair and ethical cost balances and benefits between the present and future generations.
Need for intergenerational Equity and Accrual Accounting Measures
The requirement of intergenerational equity is often key for the fiscal stance of any government. Intergenerational equity has the basis that taxpayers should finance all current expenditure and sponsor in the financing of inherited productive assets with respect to how much benefit is received from the assets (Robinson, 1998). Intergenerational equity, as an abstract concept, is operationalized through interperiod equity. This requires that sufficient taxes and other revenues are collected in each fiscal period so as to cover costs incurred during that period in the provision of services (Robinson, 1998). All of this calls for balanced accounts and annual budgets. Controlling interperiod equity requires appropriate accounting and budgeting systems, including equity measures, which are in practice controversial and ambiguous.
Public budgeting and budgetary accounting are based traditionally on expenditure and revenue concepts, and the principle that annual expenditures should be covered by annual revenues, creating a balance in the budgets and accounts. In budgetary accounting, revenues and expenditure are equated largely with cash revenues and expenditure. Additionally, the degree of interperiod equity can be measured as a balance between cash revenues and cash expenditures that include long term capital investment, the lending and repayment of loans.
Most governments are obliged by law to balance operating budgets. This makes sure that, in any given period, expenditures are covered by revenues and that entity's constituents pay for what they receive (Bryman & Bell 2007). If an organization borrows to cover operating benefits, the benefit's cost enjoyed by today's citizens must be borne of tomorrow's citizens.
The concept requiring constituents to pay for received services without shifting the burden to their children has been traditionally labeled as intergenerational equity. In the recent years, the term 'interperiod equity' has been found and accepted to be more appropriate, emphasizing that entities shouldn't transfer costs to the future years, let alone future generations.
Accounting systems of governments must provide information on whether interperiod equity is being maintained. The concept applies only to the borrowing, not for capital, but for operating expenditures (Smith, 1996). For example, a government constructed highway produces benefits that run for more than one year. Thus, it's only fair incorporating related debt service costs right into the tuition charges or taxes of students or citizens receiving the benefits.
Constituents need the assurance that spending doesn't exceed the authorized amount and that expenditure and revenue estimates are reliable. The resulting financial reports and accounting system must be designed to provide that desired information. Managers, therefore, need an accounting system that informs them on whether they are on target in meeting budget projections and, more critically, a system that prevents any overspending or warns of its possibility to happen.
The budget is an apt control device although it requires a complementary accounting and reporting system. Auditors plus other evaluators require a basis for assessing any organization's performance. State-of-the-art budgets have established that basis through indicating the amount that will be spent on specific activities and what the activities will achieve. A post-period assessment focuses on whether the entity meets its expenditure and revenue projections and whether expectations have been achieved (Thompson, 2003). Evaluators can assess the efficiency and effectiveness of organizations by comparing the inputs (like the dollar expenditures) without outcomes and outputs (results). The system of accounting should be designed to facilitate those comparisons, thereby ensuring that the organizational reports categorize expenditure and revenues that are consistent with the budget.
Government's financial reports should provide clear information about revenues and expenditure of both cash and other resources. Presence of an excess of expenditure over revenue is a signal for financial distress or poor performance in management. On the other hand, an excess in revenue over expenditure isn't necessarily a good thing. Governments must supplement their financial statements with other nonfinancial data that relate to the objectives so as to properly report on the accomplishments,
Presently, very few organizations have accounting and budgetary systems that measure and give adequate reports on non-monetary performance. However, standing-setting authorities have recognized the need for performance measures and have taken a step to ensure that the measures will be provided routinely.
Intergenerational/ Interperiod Equity in Pension Reforms
Most reform discussions begin with two issues: huge unfunded liabilities of the public sector retirement plans, and abuse in the system. Abuses are easy to fix on a prospective basis. On the other hand, unfunded liabilities are at a sunk cost. Making changes in the system for new hires will not get rid of actuarial deficiencies, and in a lot of states, the burden for these deficits fall on government employers because most of the public employees only pay a part of the plan's normal cost.
In their ongoing reforms, governments have addressed the issue of intergenerational equity. Most accountants call it 'interperiod equity' since focus is more on fiscal years than generations, though the concepts are more or less related. Intergenerational equity is the concept that today's taxpayers should be the ones to pay for today's services. This ensures that; we don't pay for the current operations with long term bonds, and that debt repayments like the highway bonds and school building bonds are aligned chronologically together with benefits derived from users, and finally that pension funds plus other deferred benefits are actuarially funded as opposed to . In other words, one generation should not overburden the next generation for the public services that they receive today.
Intergenerational equity is addressed when they make calculations of the pension's 'normal cost' and benefits. That is the amount of money that should be put aside every year to assure sufficient accumulated benefits for employees when they retire. In these calculations, actuaries study the plan designs in order to get the normal or expected age for retirement, and then calculate the likelihood of employees working for a full career (Thompson, 2003). The normal cost for any pension plan is shared between the employer and the employee. A lot of employers pay 5-10% payroll as normal cost of general employees, and 10-15% of payroll for more costly public safety workers retiring at an earlier age due to the work hazards. And that is just normal cost and not the total cost. Plans with less pension multipliers and higher retirement ages go on the low end of these ranges, and plans with early retirement ages and more rich benefit formulas tend towards the higher end. Also, there are plans that fall outside the general boundaries because of other various reasons
A stable public sector economy demands that sufficient taxes and revenues are collected so as to safeguard public expenditure. Tax revenues are vital in the financing of a public economy, although the models of tax levying cannot be indiscriminately multiplied, and there are limits on how taxation rates can be raised. Public services demand is greater than the available resources for their provision, meaning that the scarcity and unavailability of resources have been a serious problem in all economies.
The utilization of creative accounting is associated with the private sector, even though it can be realized even in public administration where the regulation and context offer favorable opportunities to indulge in it. This is mostly in the case where accounting practices are dependent on the public sector's own regulations contrary to the conventional accounting standards.
Attempts to solve the public finance problem have been made, including the adoption of private sector models, like in the case of New Public Management (NPM) that highlights the vital role of accounting and financial management as a basis for implementing reforms (Thompson, 2003).
The spread of NPM ideologies has influenced many governments to adopt business sector accounting models, not only in their public enterprises, but also in the public sector's core functions. With regards to financial accounting, evidence lies in the accrual-based financial accounting and reporting, including a system of income statements, comprehensive balance sheets and statements of financial inflows and outflows.
The heterogeneity experienced in accrual accounting applications may probably lead to some creative accounting solutions, specifically in the public sector. This may mislead users, with consequences that the information in accounting isn't sufficiently transparent, meaning that accounting doesn't fulfill its function of accountability (McCrae et al, 1994).
Based on the research project, commercial accrual-based accounting and accounting systems like cash based budgetary accounting in the public sector are neither justified as good or bad wholly. The application of accrual accounting in the public sector doesn't guarantee intergenerational equity, accountability or transparency, but instead creates new possibilities for creative accounting.
This is a contradiction of the basic idea of accounting as a means providing a true, reliable, and fair view of the whole financial situation of the accounting equity. Therefore, public sector accounting needs to be revised and further developed. Standards based on conventional principles of accounting are required to regulate accrual-based accounting in the public sector (Auerbach et al, 1994).
This is especially true concerning the fixed assets that are fair value based, such as assets of water utility and infrastructure. The revision ought to provide opportunities for creative accounting, especially when regulations are based on purposefully tailored national reforms.
Issues in intergenerational equity are philosophical questions that are not only related to technical or fiscal economic issues, but are also concerned with ethical issues of justice and distributive fairness. With the inability to see the future, decisions that have intergenerational consequences have a general basis on the best timely available information.
The imposed financial and administrative reforms in the public sector have provided a key opportunity for present and future development. It is evident that accounting and financial management are a basis for the reforms.
Although the research indicates the effect of the reforms on a broader perspective, future research will be able to focus on the effects of the reforms at different levels of government.