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«The Effect of IPSAS on Reforming Governmental Financial Reporting: an International Comparison ID IRAS-2013-046.R1 Paper submitted for IRAS April ...»

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The Effect of IPSAS on Reforming Governmental Financial Reporting: an

International Comparison

ID IRAS-2013-046.R1

Paper submitted for IRAS April 2013, revised September 2013, revised November 2013,

accepted December 2013


Over the past 25 years significant New Public Management (NPM) reforms, particularly

towards accrual accounting, have characterized the public sector in many countries. The

diversity in public financial information systems created a need for harmonization, resulting in the elaboration of International Public Sector Accounting Standards (IPSAS). Despite their relevance, little is known on the adoption process of IPSAS. This study aims to examine to what extent IPSAS(-like) accrual accounting is adopted in central / local governments worldwide as well as to investigate which factors affect the differing level of their adoption.

Methodologically, a specific questionnaire constructed to obtain relevant information from local experts was sent worldwide to a sample of countries. The study reveals an important move to accrual accounting, particularly to IPSAS-accrual accounting whereby there still remains a level of reluctance mainly in central governments, especially in countries where businesslike accrual accounting has been developed.

Points for practitioners IPSAS have become the international reference for the development of public sector accounting systems worldwide. For this reason, IPSAS deserves the attention of accounting policy-makers, practitioners and scholars. The current study offers a comparative study of the level of adopting IPSASs worldwide as well as an explanation of the reasons behind the differing levels of adoption. The present study reveals that the transition towards IPSAS necessitates a long period of implementation whereby existing local business accounting regulations hinder jurisdictions to implement international standards. The explanatory findings are an input for reformers and legislators when designing and developing financial information reforms.

Keywords: Comparative public accounting, IPSAS, local government, central government accounting reform

1. Introduction One of the most important aspects of New Public Management (NPM) is the tendency of reforms in financial information systems. These changes are an essential element to improve the management and decision-making of government institutions, which is also called New Public Financial Management (NPFM) (Guthrie, Olson and Humphrey, 1999). The cornerstone of reforming financial information systems is the introduction of accrual accounting in the public sector, at the expense of traditional cash accounting systems (Lapsley, 1999). Several governments have been adopting and implementing accrual accounting systems. Different authors (Pina and Torres, 2003; Groot and Budding, 2008) emphasize the advantages of introducing accrual accounting in a governmental context. Accrual accounting as defined and introduced by NPM reforms, provides more and accurate information about government solvency, patrimonial goods and the costs of public services (Pina and Torres, 2003: 335).

Since the last decade the International Public Sector Accounting Standards Board (IPSASB), which used to be the Public Sector Committee (PSC) of the International Federation of Accountants (IFAC), has developed a set of International Public Sector Accounting Standards (IPSAS), in order to streamline and support these reforms.

Based on a former comparative study limited to the European situation (Christiaens et al. 2010) and on newly gathered evidence in countries worldwide this study aims to shed a light on the actual level of reforms of the financial information systems, particularly in the direction of the adoption of the IPSAS. Secondly and particularly for European countries, this paper compares to current situation with the level of adoption found in 2009 (Christiaens et al. 2010).

This paper attempts to contribute to the comparative studies in public sector accounting. Some authors, such as Benito, Brusca and Montesinos (2007), Brusca and Condor (2002), have made contributions to comparative accounting studies in the public sector. Most of them however focus on a small sample of countries or on a particular aspect of the accounting legislation.

There are also a few surveys mostly developed by consulting firms (e.g. Ernst & Young 2012, PWC 2013) presenting an international overview and highlighting current practices, but are not meant to serve a scientific purpose. It is the aim of this paper to compare the adoption of accounting systems, in relation to IPSAS, within a broader international context. Furthermore, while different papers only focus on the actual state of the adoption or implementation of an accounting system, this study also attempts to point to the reasons why governments choose for a specific accounting system.

Following this introduction, a theoretical explanation of accrual accounting reforms is given and literature on reasons creating differences in accounting practices is presented, as well as environmental characteristics of continents observed. Emphasis is placed on the efforts concerning the international harmonization of accounting standards. Chapter 3 and 4 provide the research objectives and the methodology of this paper. Next, the results are presented.

Finally, the main findings of this research paper are summarized.

2. What affects financial information systems: a literature review

The worldwide process of globalization in economic activity has pushed for globalization also in accounting principles and practices: it is a fact that in the private sector there is a demand for harmonization, as demonstrated by the enlarged adoption of IAS/IFRS and the convergence project of FASB/IASB (Nobes, 2011). The process of converging accounting standards aims to enhance the international comparability of financial statements, in order to satisfy the information needs of different kinds of stakeholders on international markets (Choi, 2003).

Nevertheless, as highlighted by the environmental theory (Choi and Mueller, 1992; Nobes and Parker 2004; Zeff, 2012), the application of accounting standards differs for different purposes.

Even in the public sector there is a growing interest toward a widespread adoption of generally accepted accounting principles, resulting in the unique IPSASs. These standards aim to improve the comparability at different governmental levels. For many years budgetary accounting has been the mainstream accounting and financial information system in the public sector (IFAC 2008; IFAC PSC 2000). Most of governments conceptually need budgetary accounting to manage budget appropriations, i.e. in the context of the yearly discussion and approval as well as follow up of their budgets to spend. During the last decades and driven by NPM many governments have reformed their accounting system towards accrual accounting.

The work made by the IPSASB has revived the discussion about harmonization in the public sector. Similarly to previous research in the business sector, certain studies (Brusca and Condor 2002; Pina and Torres, 2003) have demonstrated that the development of national accounting systems tends to be a function of different institutional attributes and environmental factors.

Culture has been defined by Hofstede as ‘the collective programming of the mind which distinguishes the members of one human group from another’ (1980: 25). Also environmental factors - including legal systems, sources of external finance, taxation systems, and representation by professional accounting bodies, historical inflation, economic and political events – have been largely adopted to help in explaining international differences in accounting practices (Nobes and Parker, 2004: 17-31). Anyhow, most of the studies try to identify patterns and influential factors with reference to business accounting (Muller, 1967; Gray, 1988; Nobes 1998; Zeff, 2012) while very few studies examined the public sector (a synthesis in Baker and Barbu, 2007). Despite a large number of New Public Management (principles and criteria) reforms around the world different accounting systems are still spread world-wide. As the present study highlights, these NPM reforms tend to adopt accounting systems based on accruals as a tool to gain a wider accountability in a democratic system and in a free market (Chan, 2003).

Many scholars have highlighted how the implementation of accrual-based accounting systems, as an alternative to cash-based or obligation based systems would not be necessarily consistent with the main characteristic of public entities (Mack and Ryan, 2006; Christiaens and Rommel, 2008). On the other hand, it has also been pointed out (Fédération des Experts Comptables Européens, 2007; Christiaens et al., 2010) that cash-based accounting does not allow obtaining the necessary information in order to provide better support for planning and managing resources and more generally for decision-making processes, allowing greater comparability, even between different entities.

It has also been hypothesized that a significant boost toward harmonization can be derived from the financial market and rating agencies: nevertheless, according to Ingram (1983), this boost is effective especially for countries that largely approach financial markets, where a decrease in financial costs can cover the costs arising from a change in the accounting systems. This hypothesis, even if fascinating in our context, with a financial crisis affecting almost all countries, is difficult to test empirically. As already highlighted by Chan (2006), relevant citizens’ expertise and awareness as well as their socio-economic status can be relevant as well as the role played by politicians and managers in the plain adoption of accounting systems’ change.

Among organizational studies, scholars emphasized the existence of isomorphism trying to explain changes, especially the ones related to the international standardization (Burn and Scapens, 2000) inside neo-institutional theory (Meyer and Rowan, 1977). According to this approach, similar organizations tend to conform each other and they became more similar, in order to obtain institutional legitimacy. According to Powell and Di Maggio (1983), the adaptation process is stronger when the organization depends on external resources and, at the same time, has any certainty on their own goals. Essentially, while some scholars prefer to consider institutional factors, others give more relevance to behaviour and culture.

In relation with the adoption of IPSASs - more than for the adoption of single standard - the problem arising is the effective need of harmonization. Looking at the literature on the matter, it seems that accounting harmonization could not be avoided, it is self-explaining and somehow inherent to the idea that any transaction would be accounted for according with the same rules everywhere (Pina et al., 2009).

Different authors state that the international trend towards modernizing the financial information system is likely to continue during the following years (Lüder and Jones, 2003;

Grossi and Soverchia, 2011). An important stimulus in this evolution is the support of international organizations such as OECD, NATO, United Nations, the European Commission and Interpol. All these influential organizations promote sound financial management and accountability. Such “good practices” have a moral influence on different countries around the world. In addition, the International Organization of Supreme Audit Institutions (INTOSAI,

2005) promotes the use of IPSAS (Algemene Rekenkamer, 2003). In light of the above literature review, the present research aims to highlight differences in the adoption of (IPSASlike)) accrual accounting worldwide.

3. Research objective

Although the trend of adopting accrual based accounting systems in the public sector occurs, different systems are adopted. These differences are situated at three levels: (1) the content, (2) the timing of the adoption and (3) how accrual accounting will be applied. Both National (Carvalho et al., 2007) as well as international studies (Christiaens et al., 2010) showed that there is a great diversity in the way the accounting reforms are implemented in local governments within one country as well as in local governments between countries. Due to the non-enforceable mechanisms of IPSAS and the lack of penalty, many governments look at their own needs and do not fulfil all requirements prescribed by IPSAS. If each country adopts accrual accounting systems according to their own particular necessities, accrual accounting reforms will not be homogenous. It can be stated that, in spite of the international implementation of accrual accounting, the financial information systems in the public sector are still relatively divergent (Brusca and Condor, 2002; Lüder and Jones, 2003; Pina and Torres, 2003; Benito, Brusca and Montesinos., 2007; Carvalho et al., 2007; FEE, 2007).

There is also a significant diversity in the timing of the adoption process. Some countries are intensively investing in modernizing their accounting systems. Countries that lead the bunch are mainly Anglo-Saxon (Australia, New Zealand, the United Kingdom and the United States), while other countries choose a more conservative approach (OECD, 2002; Carlin, 2005; Van Der Hoek, 2005; Benito et al., 2007; Groot and Budding, 2008; Christiaens et al., 2010).

A third difference refers to the way in which accrual accounting is adopted. Some countries have a decentralized vision, which means that the accrual accounting reforms are first developed at the municipal level before they are introduced in the central government (e.g.

Sweden). Other jurisdictions impose the introduction of NPFM reforms in a more centralist way (e.g. New Zealand) (Olson, Guthrie and Humphrey, 1998; Guthrie, Olson, and Humphrey, 1999; Groot and Budding, 2008).

This study can be seen as a sequel to the comparative European study of Christiaens et al.

(2010) from a worldwide perspective. It is the aim of this paper to study the different levels of adopting accrual accounting across different countries. The focus is on the level to which accrual accounting is adopted. This study does not aim to focus on the content related differences of accrual accounting. This work has already been done by other authors such as Benito et al., 2007. Therefore the first research question is the following.

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