Abstract

This section reviews the role of accounting in budget system reform from the perspective of emerging economies who wish to adopt the OECD performance budgeting reforms.

This section reviews the role of accounting in budget system reform from the perspective of emerging economies who wish to adopt the OECD performance budgeting reforms.

Emerging economies and several economies in transition look to the OECD member countries as models for reforming their PEM systems. Accordingly, they seek to replicate the accounting reforms in the more advanced OECD countries—usually by moving government accounting from a cash to an accruals basis.88 In fact, this conversion has been fully achieved in only a handful of OECD countries, although others have had to modify their pure cash-based systems to modified accrual systems to accommodate accrual-based reports.89 Accrual-based reporting has received considerably more attention with the recent change in international government finance statistics (GFS) reporting standards which recommend adding accrual information to existing cash data and reporting cash data consistent with an accruals basis.90

Many emerging economies have too eagerly accepted this reorientation and have overlooked a number of important issues. This section examines one of the more important of these issues: the need to recognize the relationship between reforming the government’s accounting system and wider budget system reforms. First, moving to an accrual accounting system, given the costs involved, is perhaps only worthwhile in the context of wider public sector management reforms. Second, since the reform process inevitably takes time, it should be implemented in phases, and possible stages for moving to accrual accounting are described here. Third, many countries are constrained from moving in this direction in the near future and may require intermediate solutions for realizing some of the benefits afforded by accrual accounting in cash-based systems. Fourth, although accrual accounting systems are more comprehensive and provide a wealth of financial information, it is important not to overstate their benefits nor to overlook the typical requirements of budget management for supplementary information. Finally, this section reviews the approach taken by countries that have adopted the new accrual-based GFS reporting requirements, noting the difficulties of meeting the new requirements without adopting full accruals and describing possible stages for adopting the new international reporting requirements which parallel the phased move to accrual-based accounting.

Cash Versus Accrual Accounting

To understand the attraction of accrual over cash accounting, it is best to first clarify the differences between the two systems. The fundamental distinction is the so-called basis of accounting, which describes the basic measurement rules for when accountants register, or “recognize,” the effects of an entity’s transactions and is based on the timing of registering the transaction’s effects. In the accrual system, recognition occurs with the exchange of liabilities and/or assets, which is usually before the cash flow and closer to the actual economic impact of the transaction (Chan, 1998, pp. 362ff). In contrast, the cash basis, which is used in most traditional budget systems, records outlays and receipts only when they involve cash transactions. The simplicity of a cash-based system provides both advantages and disadvantages (Box 30).

Despite its simplicity, the use of cash accounts can present many problems in practice. Many of the problems arise not from the accounting system as such, but rather from its abuse. Cash accounting is often considered more objective and less subject to manipulation than accrual accounting, since it requires less judgment to record cash transactions than to recognize and measure assets and liabilities. However, cash accounting also requires judgment, for example, to determine whether transactions are on or off budget or the timing in which they are recorded, or recognized, in the government accounts. Also, one strength of cash accounting—that it can serve as a constitutional safeguard because the legislature must approve all monies spent and collected—can also be its principal weakness in countries with governance problems, particularly where there is political pressure to hide rather than reveal.

Pros and Cons of Cash-Based Accounting

Pros

  • Easily comprehended by users.

  • Allows judgment on compliance with budget appropriations, traditionally cash based.

  • Simple to implement, with ease of compilation facilitating reports that are timely, reliable, and comparable.

  • Costs are low due to the lower level of accounting skills required.

Cons

  • Limited scope, not good at showing the impact of transactions resulting in cash flows outside the current reporting period.

  • Cannot meet the demands for information on assets and liabilities, impact of current consumption of the stock of assets held by government, transactions in kind, and arrears.

  • Focuses solely on cash flows and ignores other resource flows which may also affect government’s ability to provide goods and services now and in the future (e.g., accumulated borrowings and other liabilities).

  • Limits accountability to use of cash, and ignores accountability for management of assets and liabilities.

Source: International Federation of Accountants (1998).

Apart from such practical problems, there are legitimate limitations and drawbacks to cash accounting which can only be resolved by ubiquitous “memoranda items.” In particular, to the extent that goods and services are not paid for and revenues are not collected during a particular year, carryovers in the form of payables (a liability) and receivables (an asset) should be reported in the balance sheet at year’s end. However, there is no full balance sheet in a cash system. In addition to the problem of identifying such arrears, there are a number of financial transactions, including on-lending operations and government loans to enterprises, among others, that are difficult to capture in cash accounts because the only ledger balance carried forward is the cash balance.91 There is no mechanism in the formal accounts to carry forward other parts of the ledger balances, in particular financial assets and liabilities, as opening balances in a new fiscal year. The accrual basis does account for these inter-period effects and, in doing so, provides a more comprehensive measurement of the government’s financial position.

Not surprisingly, adopting an accrual basis comes at the price of introducing considerably more complexity into the accounting process. For example, there is latitude in deciding the degree of accrual to be used (that is, in determining which assets and liabilities should be included and which should be excluded), and there is usually considerable subjectivity in applying the recognition criteria (for example, whether a contingent liability is to be recognized in the accounts or whether it is recorded off the balance sheet).92 Also, the recognition of revenues can be quite elastic: Should cash and current financial resources be included? noncurrent financial resources? Can a government recognize revenues as soon as it acquires a legal claim, that is, the moment a taxable transaction takes place, or should the government be treated like a business and recognize revenues only when they are “earned” or received? To avoid too much subjectivity, such questions must be answered according to well-defined government accounting standards.

Spending recognition is, of course, a critical aspect of budget management. The budget spending process goes through distinct stages: after the budget is approved and appropriations are determined, government agencies make commitments against these appropriations; goods are received and verified, at which point the obligation to pay is usually recognized; the payment order is issued and then eventually cashed; and the government’s account is debited. Some argue that a liability should be recognized at the commitment stage, when the government first takes command of resources, rather than at the verification stage, when goods and services are supplied. However, not all commitments are the same. Some commitments, such as wages, are converted into cash with minimal time lags; others, such as investment spending associated with large-scale, multiyear projects, involve considerable lags. Furthermore, it is necessary to recognize that not all commitments will be fulfilled, because not all contracts will be honored. As a result, for recognition purposes, the verification stage is generally preferred as the point when the liability is reliably created.93 The budget manager, however, must track all the stages of the spending process, and regardless of the basis of accounting (cash or accrual), sound budget management requires that attention be paid to accrual concepts, such as payables and contingent liabilities, and not just cash flows. Therefore, the speed at which commitments are made and goods received and verified is important for planning future cash needs, but the difference between outstanding orders due for payment and those overdue for payment is also very important.

Accounting Models for Different Management Needs

As argued earlier, accounting systems should serve management needs. Cash accounting has some advantages from a management viewpoint—especially for the central agencies of the MoF—when the principal objective is to enforce compliance with the annual budget law and the primary requirement is to prepare end-of-year accounts that show the amounts approved in the budget for detailed items of spending and the actual spending on those items. Traditional budget systems are thus more focused on inputs and the costs of those inputs, and cash accounting serves this orientation quite adequately.

As budget systems have evolved to meet stabilization requirements, they have had to accommodate adjustments to the approved budget that may be required during the financial year due to unforeseen changes in economic circumstances.94 Recognizing that government spending decisions have an impact on the economy before cash payments are made in turn highlights both the economic impact of budget expenditures and the need to monitor the different stages of spending. This has led to demands for noncash information—for example, commitments made, commitments coming due, and outstanding obligations to be met in cash. Thus cash accounting and reporting have been supplemented by what may be termed “modified cash accounting,” a term for which there is no authoritative definition and which is used here to signify cash accounting with some supplementary accrual information. These procedures are typically not regarded as long-term solutions, but rather as ad hoc and selective, arising from particular problems and avoiding the rigor of a well-constructed overall accounting framework.

Having ensured compliance with their budget systems and put in place improved mechanisms to ensure macroeconomic stabilization objectives, in the last thirty years OECD governments have turned to focus on efficiency and effectiveness objectives.95 In this environment, accrual accounting has certain attractions. The degree to which these countries have reoriented their accounting systems is summarized in Box 31. This shift did not arise because there was no need for cash accounting and reporting, but rather because the additional accrual information offered many advantages. Specifically, an accruals system can and must generate cash information, so that it is equally able to monitor short-term effects of fiscal policy. At the same time, an accrual system recognizes financial flows that do not result in cash flows—such as depreciation, transfers, write-offs of physical assets, and accrued interest—which are necessary to consider from an efficiency viewpoint because they indicate the full costs of providing government services and also allow a wider assessment of government operations.

There are four major advantages to accruals:

  • Improved resource allocation: Because of its ability to provide more comprehensive information on the costs of operations, accrual accounting allows decision makers to make better resource allocation choices. A common problem of cash accounting is a lack of good information on the full costs of providing services. For example, the cost of utilizing capital assets paid for in prior years (depreciation costs) is frequently ignored. Perhaps more important, where fixed asset values are based on current costs, the depreciation amount can also provide an indication of the future expenditure required to replace existing assets at the end of their useful lives and maintain current activity levels. It also can be difficult for the government to evaluate capital purchase proposals under cash accounting systems if neither the government nor the operating unit has good information about what assets are owned by agencies and therefore cannot judge whether there is any scope to finance a new asset by liquidating some existing assets. Although this information can be recorded in subsidiary ledgers under a cash system, it is an important focus in accrual accounting systems. Similarly, with accrual accounts the pensions of public servants are included as an expense and the additional liability is shown on the balance sheet. This can be important if annual cash outlays differ significantly from the accruing liabilities. In particular, if accruing liabilities significantly exceed cash payments, there could be questions about the sustainability of the non-pay-as-you-earn (non-PAYE) pension arrangements, in addition to broader issues of intergenerational equity.

  • Strengthened accountability: A side product of the availability of accrual information is greater precision in determining management performance. Managers are more accountable when they become responsible not only for cash inflows and outflows, but also assets and liabilities. With the introduction of accrual accounting, agencies need to more precisely specify performance criteria because the full resource costs of delivering services is an element of the financial and nonfinancial information used to manage the government and its spending agencies. One of the shortcomings of existing cash accounting regimes is that attempts to measure agency performance can be divorced from consideration of whether the agency involved can be held accountable for those results. Under accrual accounting, agencies account only for those public resources for which the government wants to hold them accountable. It is possible, for example, that resources administered by agencies on behalf of the central government need not be reported on departmental financial statements.

  • Enhanced transparency about the total resource costs of government activities: Accrual accounting provides a greater range of financial information on the operations of government and therefore has the potential to enhance transparency and improve fiscal responsibility. Governments generally have significant assets and liabilities, and the disclosure of this information is an essential element of fiscal transparency and accountability. This is facilitated by an accrual accounting framework, which requires a full statement of assets and liabilities and revenues and expenses and, most importantly, integrally links these with one another—the difference between revenues and expenses directly affects the net assets position, and movements in cash balances are reconciled to results of operations and movements in other assets and liabilities. This complete picture provides key information for macro fiscal management and also serves as a powerful tool for strategic planning and financial management. Noncash transactions, which are left out of cash accounting but which have an obvious economic impact, are routinely and systematically reported under an accrual framework. This would include such transactions as off-set arrangements, creation and settlement of liabilities (including payments due), assumption or settlement of debts of state-owned enterprises, and off-budget funding by donors. In this way, the true cost of government operations becomes transparent.

  • A more comprehensive view of government’s impact on the economy: Similarly, because of the integrated nature of accrual accounts, differences between above- and below-the-line information in fiscal reports needed for fiscal management can be eliminated or significantly reduced. The cash flow statement clearly shows the reconciliation between the net cash flow and the change in the cash and bank balances as reported on the balance sheet. Moreover, the integrated framework can improve the quality of cash flow data, allowing for better quantification and tracking of the cash impact of government activities by classifying the flows as being related to operating, investing, and financial activities. For example, just as in the private sector, it is easier to see whether operating activities are generating a surplus or at least breaking even, whether operating surpluses are being plowed back into investments, and whether sales proceeds from investing activities are being utilized to retire debt or pay for operating activities.

OECD Practices: Reorienting toward Accruals-Based Accounting Systems

article image
Source: OECD (2003, Table 4.2).

Accrual Accounting as a Component of Wider Budget System Reform

The benefits to be derived from accrual accounting clearly can be wide-ranging and can affect resource decisions at different levels. For example, politicians can increase their control over resources through accrual reporting on a whole-of-government basis. Similarly, the central policymaking agencies can use more comprehensive and meaningful data to develop policies, to judge their sustainability in the longer term, and to undertake more comprehensive financial analysis of government operations. Accrual accounting is also useful for the management of assets, particularly nonfinancial assets and liabilities. Arguably, however, the main benefits of accrual accounting are to be seen at the operational level, where managers can use more complete information to make decisions, to enhance their accountability, and to assess their performance more comprehensively and consistently.96

The case for moving to accrual accounting seems compelling. However, a change in the accounting system should follow rather than lead more general budget system reforms. Indeed, gaining the full benefits of accrual accounting requires parallel changes in the PEM system.97 As explained, the new performance management reforms rest on this reformulated accountability framework.

While different countries have adopted their own interpretations of accountability and performance, two important features have emerged. The first is that performance is redefined in terms of outputs and outcomes. Accrual accounts give managers the means to focus on the resources used and the prices paid for those resources. In this way, accrual accounting is not an end in itself, but rather, a means of shifting the emphasis of the budgetary process away from cash inputs, toward outputs and outcomes. The expectation is that this not only will result in greater management efficiencies and hence better outcomes for governments and the communities they serve (Carlin and Guthrie, 2000, p. 3), but also will facilitate comparisons between government agencies and potential private sector (and voluntary) service providers. The latter has been the basis for the move to delegate, devolve, and divest from direct government provision of public services that has been the cornerstone of recent OECD budget reforms.

The second feature rests on a distinction between the purchasing and ownership interests. In the public sector, the government is typically both the owner of institutions and the purchaser of services from these institutions on behalf of its citizens. The information derived from accrual accounting makes this tension more explicit and forces the government to consider the trade-offs between its ownership and purchasing interests and to settle on a price for the use of its assets.

The implications of this general reorientation in budget management are far-reaching, and no consensus has yet been reached on the net benefits of many of these: specifically, the need for changes in financial reporting to ensure accountability, the need for parallel changes in the budget process, the need for greater emphasis on efficient asset management, and the need for parallel changes in the PEM system. These are examined turn.

Required Changes in Financial Reporting to Ensure Accountability

To strengthen the new performance accountability relationships, performance measures and reporting should mirror those of the private sector, and hence it is argued, government should adopt the private sector’s form of accounting. Under accrual accounting, reporting requirements for government are basically the same as for the private sector. Three main reports—statement of financial position, operating statement, and statement of cash flows—are supplemented by a number of other reports, including statements of objectives, service performance, commitments, contingent liabilities, and accounting practices. Often, the argument that the public sector should adopt generally accepted private sector accounting practices is taken too far, lending support to those that have taken a contrary view. They would argue that in the private sector, annual financial accounts identify the financial impact of a company on its individual shareholders. Accrual accounting is designed to put the focus on the bottom line—the concept of profit—and to satisfy the predominantly financial accountability of the management of a private sector company to its shareholders.98 In public sector organizations, the same concept, profit (or surplus), cannot be expected to govern decision making. For example, a surplus need not equate with good management, but only that the service was over-funded.99 Perhaps more important, for government there is a wider political accountability to the electorate and its elected representatives that should also guide financial reporting.100 In the government sector, financial information is primarily used for making political rather than economic decisions.

Accountability requirements for government do not preclude those applicable to the private sector, but are likely to be much broader. For the public sector, accountability requires that government accounts identify the financial consequences of government policies for individual citizens. Adopting a narrow financial viewpoint refocuses and dilutes the stewardship function of financial accounting in government and often can result in financial statements that do not include a comparison of actual income and expenditure with the amounts authorized in the annual budget—a crucial concept of the accountability framework for government. In the government sector, the budget-setting process is still seen as a fundamental aspect of financial control. A government’s financial accountability arises from the budget-setting process by which agreement is obtained on the level of taxation and the funding allocated to provide various services. Thus the budget outturn report is the prime document by which governments are held to account for the regularity and probity of their financial management. Unfortunately, both the Accounting Standards Board (2003) and the International Federation of Accountants (2003a, 2003b) have deemed the budget outturn reports one of the optional additional statements that public sector organizations produce.

Parallel Changes in the Budget Process

If accrual accounting is adopted, is there also a need to move government to accrual budgeting? Logically, the budgetary process should be consistent with the ex post reporting format.101 If this position is carried to its logical conclusion, there are two main budgetary implications of accrual accounting. First, ex ante and ex post performance information should be harmonized. Agencies should move both their ex post reporting and ex ante budgetary documentation to an accrual basis. This would require agencies to prepare prospective financial statements as well as prospective service performance (output) information for inclusion in the estimates. Second, the major budgetary constraint on agencies—the appropriation process—should be in a format that is consistent with the performance system. The appropriation process under an accrual budgetary regime would appropriate for:

  • the purchase of goods and services (outputs) from agencies, other government-owned entities, and private sector entities;102

  • capital injections to increase the government’s net asset holding in a department or agency; and

  • other payments of benefits and grants.

A handful of countries appropriate on an accrual basis, but having an accrual-based, performance-oriented PEM system does not necessarily imply accrual appropriations (Athukorala and Reid, 2003, pp. 51ff). It is conceivable that performance projections can be established on an accrual basis, the cash requirements assessed, and appropriations made accordingly for the cash required for the period.103 This approach, however, could result in dual, and potentially conflicting, performance objectives: on the one hand, accrual performance against accrual expectations, and, on the other, compliance with cash appropriations. In short, the appropriation process would determine, rather than reflect, the criteria for agency performance. Moreover, focusing on cash would again fail to give the legislature effective control over the true consumption of resources and negate one of the great advantages of moving to an accrual system.

Although accrual accounting records past events and provides more informed public reports on the true use of resources, it perhaps does not serve well for the discrete ex ante resource decisions that are taken in the course of budget approval. The budget is a system of authorization and control that benefits from the simplicity provided by recording resource costs up front, and arguably is more readily measured by cash. In this way, the essential budget process requirement is to include all costs for budget decision making. Apart from its direct costs, a program could be charged for its indirect costs, including support goods and services, joint costs such as building maintenance and security, and the costs of accruing employee pensions and retiree health care. Even for capital costs, some capital charge could be assigned, as well as some rent for the use of premises.

Greater Emphasis on Efficient Asset Management

The new performance-oriented accountability places more emphasis on efficient use of assets. However, the concept of government assets has not proved an easy one to accommodate in accounting principles designed for the private sector. The Accounting Standards Board adopted the private sector definition of an asset as “rights or other access to future economic benefits controlled by an entity as a result of past transactions or events” and then extended this to include future service potential. This concept is further stretched to include heritage assets. The fact is that definition of assets in government is very complex. Some public facilities may be provided by natural endowment or gift and so there is no equivalent of historical cost incurred by the purchase of these assets. Some facilities must be maintained and preserved for future public use, and there may be no private market available to realize the economic benefits from their use. Additionally, there may be restrictions imposed so that disposal of the facilities is prohibited or requires government/political approval.

Even so, too much can be made of these definition and valuation problems. Perhaps more significant is the focus on the maintenance of assets. In the private sector, the recognition and valuation of the company’s assets have a significant impact on the bottom-line profit that is reported. In the public sector, the valuation of assets is much less important; reporting the extent to which public sector capital assets are maintained is far more important than reporting their total value. Recognizing this, the U.K. Treasury adopted a cost-benefit trade-off in determining which assets are to be valued in its resource accounts. Nonoperating assets such as the crown jewels, Stonehenge, and paintings in the National Portrait Gallery are all given a nominal value, but new additions to the latter collection will be included in the balance sheet at their purchase price or value when acquired.

Parallel Changes Required in the PEM System

The most important implications of the move to an accrual-based accounting system are for the PEM system. Accounting for agency activities is probably best decentralized to the agencies themselves, and the central accounting functions of the MoF would then focus on provision of bookkeeping for payments and receipts of the core central government functions; consolidation of departmental information; promulgation of accounting policies for the government; and production of financial reports at the government level. Along with decentralization of the accounting function, there may also be a case for the delegation of asset management. The government’s investment of capital assets in agencies is usually significant. To improve the performance of capital assets, it could be argued, an agency should have the freedom to sell and buy those assets insofar as doing so would not increase the government’s total investment in the agency. The rationale is that it is difficult to hold agencies accountable for their performance if they do not have the delegated authority to meet the performance goals. With this delegated authority over assets, internal control and audit would also need to be decentralized (albeit with central oversight). Similarly, audit and finance regulations would most likely need amending. Agencies would provide new sets of financial statements under the accrual accounting system. The impact on the audit procedure needs to be carefully examined in the implementation process, not least because successful implementation of accrual accounting depends heavily on the willingness of the external auditor to support the move. Significant revisions are likely to be required in financial regulations to provide for accrual accounting policies and procedures, departmental reporting requirements and formats, and management of departmental assets and bank accounts. Last, but far from insignificant, is the need to upgrade computer and human resource capacities. Accrual accounting is more complicated than cash accounting and requires a heavier investment in computerization and skilled labor.

The change to public sector personnel policies is perhaps the most profound and revolutionary. At the same time that the above changes create demand for skilled labor, the agencies will be shifting to a mode of operating that has more in common with the private sector, which means that there will be greater opportunities for labor mobility between the public and private sectors—especially for workers with managerial and accounting skills. In fact, the new reforms not only present such possibilities, but also provide incentives to exploit them. For example, if agency heads are to be held much more tightly accountable for the performance of their departments, they will become much more interested in the quality of the staff assigned to assist them in this task. They are likely to want the major say in key appointments, and they may also want a freer hand in dismissing nonperforming staff. This could lead, and in some OECD countries has led, to fundamental changes in public sector employment arrangements.

Preconditions for the Move to Accrual Accounting

The potential benefits of moving to an accrual-based system make it easy to appreciate why advocates of PEM best practices tend to include accrual accounting systems as an essential element.104 However, this does not imply that they advocate its universal and immediate application. Accrual accounting is difficult to divorce from other elements of wider and more fundamental budget system reforms, which is why, despite its obvious advantages, it is likely not to be readily adopted by governments.

For a large number of developing and transitional countries, a move to accrual accounting is of dubious relevance. Until basic compliance with the rule of law is established and some basic controls are in place to allow government spending to be adjusted to ensure some reasonable level of fiscal stability, the move from a centralized, traditional budget management model to a more decentralized model has inherent dangers and is perhaps to be discouraged. For countries with governance problems, the complexity of accrual accounting can be readily employed to hide and distort. Accrual accounting lends itself to creative accounting even more than cash-based systems. In many countries, the administrative capacity may be insufficient to undertake the major reforms implied by this move or to apply the required skills to make them work. Given the higher level of skills required, the move to accrual accounting should not be encouraged for countries that find cash accounting difficult.

Even more advanced middle-income countries may find daunting the costs and challenges of introducing accrual accounting. Much preparatory work is required to launch the new accounting system. Information bases need to be built up, including the purchase and pilot testing of new computer systems. This takes time, money, and a great amount of training for those preparing and using the new information. Complete and consistent accounting standards and practices need to be formulated. Existing assets must be identified and valued. In addition to the administrative challenge, it can be difficult to foster an understanding of the full implications of the new performance regime that usually accompanies such a move. For example, although government financial reports in an accrual regime may look similar to private sector financial reports, their analysis is different and this difference must be accommodated in the decision-making process. Doing this requires determining the most meaningful method of displaying the data in financial statements and defining the required reporting requirements.105 In sum, the investment required to introduce an accrual system and reform the budget management system to gain the full benefits from this new system may be too onerous for many middle-income countries.

Apart from the resource costs of introducing accrual systems, there are significant costs for their maintenance. The introduction of accrual accounting in the public sector is relatively recent, and the balance of benefits to costs is still subject to debate. It is perhaps ironic that this initiative to promote efficiency has not itself been subjected to such critical analysis.106 While the benefits of accrual-based accounts and reports are yet to be clearly demonstrated in practice, the costs of such reforms are clear and significant, and many are recurrent rather than being one-time. They include the increased costs of employing and training significantly more qualified accountants107 to serve both as preparers and as auditors of government accounts and to use and interpret the accounting information. Training is also often required for members of the legislature, the government, and the MoF. The organization, career structure, and training of auditing staff may need to be significantly strengthened. At the same time, there may be the need for comprehensive training of managers in various government agencies in the interpretation and use of accrual-based accounts.108

It is all too easy to overstate the case for accrual accounting by underestimating the substantial costs involved in its introduction and maintenance. Without adoption of the full-fledged performance budgeting system, based on a decentralized modern agency model of budget management, the main benefits of accrual accounting are likely to be at the agency or departmental level, not at an aggregate, government-wide level (Box 32). In the absence of a full accrual-based system, other changes in cash budgeting and accounting systems—albeit not so comprehensive—can be substituted at the agency level to send the correct signals to managers.

Usefulness of Accrual Accounting for Government Operating Units

  • Facilitates assessment of program performance by showing the full cost of programs.

  • Facilitates assessment of financial position by showing all resources and obligations.

  • Enhances the accountability of managers for their performance.

  • Acts as a spur to better management performance due to increased transparency.

  • Provides a wider range of information needed for decision making.

  • Enables more effective use to be made of a given level of resources.

  • Provides a more effective basis for decisions about such matters as user charging, identifying savings options to finance high-priority objectives, and workplace bargaining.

One example is the introduction of a capital charge. A typical weakness of traditional, cash-based budget systems is poor asset management. The introduction of a capital charge would foster the consideration of the total investment in assets and the recognition that such investment has an opportunity cost which can be captured in management decision making. Capital charging would thus help internalize the full costs of the delivery of goods and services and quantify the wider opportunity cost of the capital held by agencies. This could generate a number of efficiency benefits: facilitate the assessment of competitiveness of public delivery; enhance transparency in costing of public outputs; provide a basis for introducing user payments; and provide incentives for agencies to identify and dispose of underutilized or surplus assets.109 Alternative models for such a capital charge are shown in Box 33. Another possibility for introducing more realistic costing in agency outputs is the imputation of various overheads, such as workers’ compensation and pension costs (as recently introduced in the United States federal government).110 Thus, within a cash system it is possible to make departments pay for common services (e.g., accommodation, transportation) through internal charging and/or through the commercialization of the service provider.

Finally, accrual accounting supports good PEM but does not replace it.111 Essentially, moving from cash-based to accrual-based accounting requires a change in the recognition of a transaction. In the cash system, a transaction is recognized when cash is received or paid, and the financial result for a period is measured as the difference between cash received and cash disbursed. Under the accrual basis, the transaction adds to or subtracts from the government’s net worth, and so assets or liabilities are recognized when obligations are exchanged. As indicated, in terms of PEM, which views the spending process as a series of stages—appropriation, commitment, delivery verified, payment order prepared, and payment order executed—an accrual system records transactions near the verification stage and a cash system records them when the payment order is executed. However, a good manager will seek to monitor all stages of the spending process—indeed, good expenditure control starts with good commitment control. The internal accounting of transactions should therefore be able to record all stages of the spending process, not just the verification (or recognition of the obligation to pay) or the payment stage. Introducing accrual accounting may make this task easier but will not replace it.

A Five-Stage Transition to Accrual Accounting

The experience of OECD countries indicates that implementation of accrual accounting is not easy; it takes time and requires sustained political commitment. Moreover, it is possible to introduce many elements of performance-based budget management on a cash basis. Not surprisingly, therefore, it cannot be considered a top priority for most countries. When should countries attempt to move to accrual accounting? Accepting that the nature and speed of the progression is likely to differ among countries, and that the transitional steps may be unique to each government, it is possible to delineate five broad stages in a possible strategy for the reform of accounting systems.

Design of the Capital Use Charge

Net Assets

Charge is determined on total assets controlled by agencies less liabilities under their control.

Pros

  • Uses basic information available in accrual accounting and applies consistent valuation principles.

  • Identifies total cost of capital.

  • Allows fair comparison between public and private providers.

  • Gives agencies an appreciation of their cost of capital.

Cons

  • Relies heavily on the valuation base, which is usually not well developed in cash accounting regimes.

Capital Flow

Charge is levied on funds committed to new capital expenditure, net of asset sales.

Pros

  • Is easy to implement.

  • Can be linked with appraisal of capital projects.

Cons

  • Only covers flows of new capital expenditure and cannot adequately accommodate management of capital stock.

  • Cannot provide managers with information on full capital cost of outputs.

Debt Assignment

Debt is assigned to agencies based on the proportion of assets they control, and charge is applied to agencies’ proportion of the debt.

Pros

  • Provides incentives to reduce debt.

Cons

  • May underestimate capital use if agencies’ asset bases are not debt-funded.

  • Does not capture new capital funded from nondebt sources.

Debt Equity

Debt and equity are assigned to agencies and agencies are charged interest on their proportion of debt; in addition, a capital charge is made to the residual government equity after deducting the debt allocated to them.

Pros

  • Encourages focus on all assets and provides for full costing of outputs.

  • Is more in line with private sector practice.

  • Identifies the separate debt and equity elements of the asset base.

Cons

  • Is more sophisticated and requires substantial management skills and complementary information systems.

Stage One: Get Cash Accounting to Work Well

This will typically involve a two-pronged approach. First, purge the system of common abuses, and second, supplement the cash accounts with adjustments to improve fiscal reporting.

As suggested, some benefits of accrual accounting can be derived by adjusting the cash basis to include accrual data. For example, accrual accounting may better reflect emerging liabilities such as unfunded public service pensions, but multiyear cash-based expenditure plans equally highlight the problem. Similarly, most cash systems are weak in providing information on payment arrears. A logical step is to add systems that can generate information on commitments undertaken, bills payable, and bills due for payment.

Stage Two: Integrate Operating Accounts and Financial Asset and Liability Accounts to Move to Modified Accrual

Integrating asset and liability accounts and operating accounts is a significant step forward. It has the advantage of ensuring that all transactions are treated in a consistent, self-balancing framework. For example, the practice, say, of financing the recapitalization of banks by issuing government debt to build up a bank’s assets, without showing a corresponding deficit above the line, would be fully reflected in any form of accrual accounts. An acceptable second-best solution may be to propose an explicit standard for reporting such transactions, such as a memorandum item in the operating accounts of cash-based systems.

An essential element of this adjustment of cash accounts is to include payables and receivables:

  • Accounts payable: This allows for the recording of liabilities that have not resulted in the payment of cash in the current accounting period. It should include goods delivered but not paid for and agreements to pay subsidies and grants to the private sector.

  • Accounts receivable: This allows for the recording of revenue earned by the government that has not resulted in the receipt of cash, although it is sufficiently close to cash to be reasonably secured. It should include taxation and nontaxation revenues being processed, including credit sales of goods and services.

Stage two should be regarded as a reasonable target for most developing countries, because any movement to incorporate accrual concepts results in more useful information for fiscal policymakers. A system based on cash recording and reporting but with an integrated set of operating and financial asset and liability accounts would achieve the operational advantages of integration, while not involving the additional complexities of maintaining accounts on an accrual basis. Box 34 indicates some of the steps involved in moving to this stage.

Stage Three: Introduce More Elements of Accrual Recording and Move to a Partial Accrual Presentation in ex post Reporting

Additional elements of accrual accounting that could be recognized in this stage include the following:

  • Provisions for employee entitlements, such as pensions (linked to years of service and leave), as the employee earns them: Such entitlements have been generally shown to be a significant hidden cost of government which result in large unfunded demands on budget resources in future years. Recognition of the buildup in such demands through provisioning provides budget managers with useful early warnings of possible future problems in the cash funding of these entitlements and enables corrective action to be implemented.

  • Prepayments received by government: These receipts can range from deposits on the sale of assets to installment payments on the provision of government goods and services. Such receipts can be used to inflate the fiscal result for the current accounting period and consequently understate the fiscal result for future periods. However, because conditions have not been met for their recognition as government revenue, they should not be treated as revenues, but shown as financial transactions affecting assets and accounts receivable.

  • Interest payable: Interest on debt can be a significant drain on budget resources, and simply recording interest as it is paid may not provide adequate information on future trends in interest payments and whether they will place acceptable demands on budget finances. This is particularly the case with zero coupon bonds. This information would complement expenditure control and the level of funds held within the commercial agency banks.

Steps Involved in Moving to Modified Accruals

  1. Adopt a classification structure that facilitates the recording of revenues, expenses, assets, liabilities, and cash flows (see IMF, 2001a).

  2. Ensure that the general ledger is based on a double-entry system.

  3. Explore the best option for recording and reporting selected assets and liabilities.

  4. Generate and agree on trial balances.

  5. Establish a process for the reconciliation of assets and liabilities in the general ledger with subsidiary records, such as accounts receivable and payable and fixed assets.

  6. Similarly, reconcile accounts with independent third-party information where available (e.g., ledger balances with bank statements).

  7. Publish statements of contingent liabilities and outstanding commitments as part of budget documentation.

  8. Establish and train an asset valuation unit to develop appropriate valuation methods and value all government financial assets.

  9. Develop a statement of government financial assets (initially at historic cost, unless market valuation has been established), including investments in all parastatals and liabilities.

At the end of this stage of the move to accrual accounting, ex post reporting of the budget would include a partial balance sheet with selected financial assets and liabilities, and the adjusted cash flow operating statement would include some items on an accrual basis.

Stage Four: Recognize Nonfinancial Assets—Final Stage for Accrual Accounting

This transition from recognizing only financial assets to recognizing both financial and nonfinancial assets greatly complicates the accounting process. This requires that consistent valuation practices be applied to all government nonfinancial assets—many of which are not easily subject to a market-related assessment of value. Once this task has been completed, depreciation can be charged as an expense for each accounting period, thereby providing a better indication of the full costs of government operations. This stage has not proved easy, even for the most advanced OECD countries.

Only at this stage would full accrual ex post reporting be introduced to include:

  • operating statement of performance showing how revenues and expenses explain the movement in the net stock of assets;

  • balance sheet of financial position for the beginning and end of the accounting period; and

  • cash flow statement showing cash flows embodied in assets, liabilities, revenues, and expenses clearly distinguishing between operations, investment activities like loans, and advances and the financing of cash flows through the issue of government securities.

Stage Five: Move from Accrual Accounting to Accrual Accounting and Budgeting112

Accrual budgeting should be differentiated from accrual accounting. Only New Zealand, Australia, and Iceland have so far moved to a system where the budget is targeted, appropriated, and reported on an accruals basis. Others may report on an accruals basis ex post, but they budget (and also report ex post) on a cash basis. Logic may suggest that this final stage is required for introducing a performance-oriented system, but there has been a lot more resistance to this than to the move to accrual accounting. Undoubtedly, a major reason is the difficulty of implementing this final stage, notably the additional information required to prepare an accrual-based budget that shows projected cash flow (as existing budgets); projected revenues, expenses, and operating result in the operating statement; and projected assets, liabilities, and equity in the statement of financial position. The additional information required includes:

  • information included in the cash budgets currently prepared, namely, movements in cash and cash equivalents, cash being spent on purchase of assets and received for sale of assets, and estimated financing transactions;

  • estimated movements in inventories, receivables, payables, employee entitlements, and other liabilities; and

  • details of asset depreciation policies.

A second reason for the lack of enthusiasm for accrual budgeting, especially on the part of legislators, is the suspicion that the move carries the risk of loosening fiscal discipline. Cash gives a very clear matching of the political decision to spend and the actual amounts spent, but the methodological complexity of accruals is thought to undermine the ability to maintain this basic check on the executive.113

A third reason is the general lack of experience with accrual budgeting. Accrual budgeting has been neither well defined nor widely discussed in the general literature, and there is not adequate country experience to form a basis for guidelines in its use.

Preliminary Guidance for Accrual Accounting

The experience of countries with accrual accounting to date may be insufficient to create firm guidelines, but it does indicate some pointers on the way to establishing such guidelines.

Accrual Budgeting Can Take Place at Different Levels

First, it is possible to envisage accrual budgeting being applied at different levels of budget decision making, addressing three different objectives:

  • Macroeconomic stabilization: At the aggregate level, fiscal targets and/or rules could be specified in terms of accrual concepts such as net worth, the operating balance, net financial worth, and net lending/borrowing.

  • Resource allocation: Accrual concepts—particularly expense concepts—could be used for making decisions about resource allocation between agencies, specifically, in prioritizing agency budget bids and refining agency estimates, but perhaps also in determining legislative appropriations to agencies.

  • Internal resource use within agencies: As the basis of operationalizing a performance-based budget management system within an agency, accrual expense concepts could be incorporated into the product costing systems used for deciding resource allocation between different activities within individual agencies.

These three uses of accrual budgeting are, to a considerable degree, separable. That is, it would be possible to adopt an accrual budgeting approach at an aggregate level to address stabilization issues (specifying fiscal targets and/or rules) while having budget appropriations to agencies on a largely cash, or modified cash, basis. The decision to introduce accrual budgeting, therefore, cannot be made without considering its use. Instead, each country has to determine which uses of accrual budgeting make sense given its specific circumstances.

Accrual Budgeting Can Be on a Partial Basis

Just as for accrual accounting, budgeting can be on a partial or full accruals basis.

  • Macroeconomic stabilization: For this purpose, aggregate accrual budgeting on a partial accruals basis would involve either or both (i) using net lending/borrowing as one’s budget balance measure for fiscal policy purposes instead of the cash (or modified cash) budget balance, and (ii) setting targets/limits for net financial worth (instead of the narrower cash net debt measure). By contrast, aggregate accrual budgeting on a full accrual basis would set targets for the operating balance and/or net worth (quite possibly in addition to, rather than as substitutes for, partial accrual variables such as net financial worth).

  • Resource allocation: Resource allocation on a partial accruals basis would mean that agencies would bid for “current” budgets that would include not only cash expenses, but also those noncash expenses that create financial liabilities (obligations to make future payments, such as accruing leave and pension entitlements of civil servants). It might (or might not) also involve placing agency appropriations on the same basis. By contrast, budgetary resource allocation on a full accruals basis would involve taking the further step of including depreciation as a component of agency’s current budgets (as in Australia and New Zealand).114

  • Internal resource use within agencies: In the partial accruals approach to the internal allocation of costs of programs and their activities, agencies would be expected to include cash and most noncash expenses. Similarly, a full accruals performance budgeting system might also include depreciation when estimating program or output costs.

There Is a Logical Sequence for Introducing Accrual Budgeting

There is very limited experience on which to base good practice for accrual budgeting and even less on which to delineate the appropriate sequencing of accrual budgeting for emerging economies. International experience to date suggests the following tentative conclusions:

  • Most of the benefits of accrual budgetary resource allocation and accrual-based performance budgeting can be realized by placing them on a partial accruals basis. The advantages are less clear, even for advanced OECD countries, of moving these forms of budgeting to a full accruals basis.

  • For macro stabilization objectives, accrual budgeting could be generally applied at the aggregate level, based upon partial accrual concepts. Certainly, an accruals budget produces economic indicators that are of great importance for fiscal analysis. For example, it is much better for fiscal sustainability purposes to target net financial worth than to target net (let alone gross) debt, because net financial worth takes into account highly relevant forms of quasi-debt.115 This suggests that, at the time when countries are ready to move to partial accrual accounting (stage three), they should perhaps also formulate at least some of their fiscal targets/rules in partial accrual terms.

  • Aggregate accrual budgeting on a full accruals basis—in the sense of setting targets and/or rules for the net worth and operating balance—is a useful means of bringing a longer-run perspective to budgeting, particularly in the management of aggregate public investment. However, this is most relevant to more advanced countries with assured fiscal sustainability (in particular, no present or prospective debt problems), and therefore could wait until after stage four, when accrual accounting is more firmly entrenched and accrual concepts are also more acceptable to the legislature.

  • With respect to using accrual budgeting for resource allocation, a case could be made to move quickly after stage three to place agency budget bids and estimates on a partial accruals basis. This is because partial accrual accounting introduces noncash expenses which are variable costs and which are therefore as relevant to decision making as cash expenses. However, to make this move, for consistency it would be necessary also to place appropriations on a partial accruals basis. Similarly, the case could be made for partial accrual budgeting in an agency’s internal resource allocation decisions. Again, providing an incentive system for managers to productively employ accrual-based decisions would also imply making appropriations on a partial accruals basis. However, until a full performance budgeting framework is in place to enforce accountability, this move to partial accrual appropriations may prove dangerous.

  • The speed of moving to accrual budgeting should be linked to wider budget management reforms. Appropriating even on a partial accruals basis assumes a well-developed performance budgeting system. It means that agencies are given up front the funds to cover such accruing liabilities as depreciation and then are expected to reserve those funds to meet the relevant payments when they fall due.116 Unless performance management is well established, a more prudent option is for such funds to be held back by the MoF or other appropriate central bodies (e.g., civil service pension fund). But if the latter approach is followed, then placing appropriations on a partial accruals basis would remain something of a fiction—the reality would be that the portion of the appropriations that agencies were actually given would continue to be determined on a cash or modified cash basis. This suggests that moving appropriations even to a partial accruals basis for use in resource allocation and for internal agency budgeting is less pressing and perhaps should wait until accrual-based accounting and financial reporting are well established.

The GFSM 2001 Standard for Fiscal Reporting

With the publication of GFSM 2001 (IMF, 2001a), the IMF has “raised the bar” in terms of the international standards of reporting statistics for general government. The manual reorients the IMF’s prescribed fiscal reporting system to a format consistent with an accruals basis, harmonizing the GFS with other statistical systems—specifically, the 1993 revised System of National Accounts (SNA) and Balance of Payments (BOP) manuals. However, because GFSM 2001 is intended to serve a different purpose than SNA, the ways in which the data are recommended to be reported and most of the balancing items are different from the SNA and also different from the previous cash-based GFS analytical structure. GFSM 2001 continues to focus on the general government, but it also recognizes the usefulness of expanding the coverage of fiscal data to the public sector. Box 35 summarizes the key features of the GFSM 2001.

The GFSM 2001 presentation is similar in many respects to conventional accounting, having an operating (profit/loss) account, balance sheets, and cash flow statement. However, data is presented in a form suitable for time series analysis, and all data flows and balance sheet items are linked within an articulated set of accounts. GFSM 2001 also distinguishes clearly between economic flows that can be influenced by government (“transactions”), from those that occur independently of government decisions (“other economic flows”). For this reason, GFSM 2001 is much easier to use than normal accounting data for most data analysis purposes.

Countries converting to the GFSM 2001 reporting requirements could follow the transition path previously mapped out for the change from cash to accrual accounting. Countries unable to meet the previous GFS standards should perhaps not attempt the conversion, but countries that are able to meet the previous GFS standards are in a position to begin the conversion to the new GFSM 2001. Moreover, many of these countries have a substantial amount of accrual data in their national accounting standards which can be used to move GFS reporting closer to a full accrual basis. For example, many Latin American countries have a partial accruals system, with transactions recorded at the time that the exchange of obligations occurs and with generation of accounts payables and receivable. In addition, government agencies in many countries are often required to prepare balance sheets covering the assets and liabilities that they control, with depreciation of such assets also recorded. For most countries, however, the accounting for assets does not include common assets such as major infrastructure assets (roads, bridges, water supply), and for these countries, it would be opportune to adopt a “cash plus accruals” strategy based on the availability of such accrual-based data. For some countries, a move in this direction would be an important step in strengthening their cash-based systems. As noted, the conversion path to GFSM 2001 mirrors the path for making the transition from cash to accrual accounting.

Key Features of GFSM 2001

  • The revised GFS is strictly harmonized with the 1993 revised System of National Accounts (SNA). Therefore it is on a full accruals basis, covering transactions and other economic flows and providing complete balance sheets.

  • Since GFSM 2001 serves a different purpose than the SNA, the ways in which data are reported, and most of the balancing items, differ from the SNA. They are also very different from the previous cash GFS analytical structure.

  • The essential structure of GFSM 2001 is:

    Opening balance sheet + Transactions + Other economic flows = Closing balance sheet.

  • The balance sheet lists all government assets and liabilities, differentiated by type of asset/liability, identifying the accumulated resources available to government for the provision of services and the distribution of those resources by asset type.

  • Liabilities measure the constraints placed on government policies as a result of past events. The change between opening and closing balance sheets indicates whether the government improved or worsened its position as a result of economic events during the period.

  • The classification of the type of asset/liability distinguishes financial and nonfinancial assets as major categories, allowing separate investment (in real assets) and financing accounts to be provided.

  • A fundamental distinction is made between transactions that affect the net worth of the government—revenues and expenses—and those that do not. A subaccount for revenues and expenses (i.e., an operating account) provides an economic breakdown of these flows as well as (for expenses) a functional classification.

  • Other economic flows are all economic events affecting assets and liabilities that are not transactions (e.g., valuation changes); changes to assets from damage or loss due to natural disasters, wars, asset depletion or discovery; and debt write-off.

Source: IMF (2001a).

Stage One: Restructure Existing Cash Data

Without the need for additional data, the cash transactions are restructured. Those relating to the operations of government (tax and other current revenue, wages and salaries, purchases of goods and services, interest and other current payments) are included in a cash operating accounting.117 Purchases of nonfinancial assets are classified in an investment account, and changes in financial assets and liabilities would be shown in a separate financing account.

Recognition rules would be simplified. The rules for revenue recognition would stay very similar to those in the cash system, although tax revenues would be recognized on an accrual basis. In terms of expense categories, category No. 22 (“use of goods and services”) would not be used except to distinguish current expenditures from longer-lasting material assets acquisitions (Box 36). The latter assets would be subject to a 100 percent first-year depreciation rule to achieve a better correlation between budget “expenditure” under a cash basis and accrual-based “expense.”118 Category No. 23 (“consumption of fixed capital”), a periodic depreciation of fixed assets, would not be adopted at this stage.

There are four advantages to implementing this first stage. The first is the ease at which it can be done. Second, the generation of a cash operating account and a separate investment account distinguishes the government’s operating activity from its investment programs, which cause considerable problems in a pure cash-based GFS system. Third, although the cash operating statement excludes depreciation and may have significant timing problems, it provides a more useful measure of government operations than the previous cash-based GFS aggregates. Fourth, all changes in financial assets and liabilities are included in the financing account, eliminating distortions resulting from, for example, privatization proceeds.

Stage Two: Use Partial Accrual Data

Some elements of the statement of economic flows should be accommodated. Although other economic flows are typically not recorded in cash systems, these can be derived by subtracting transactions from the total of changes between the opening and closing balance sheets. While admittedly less useful than accrual recording of these flows, at least this gives a measure of the impact of revaluations and other changes in volume of government assets and liabilities which are implicit in the opening and closing balance sheets.

Most of these other economic flows involve revaluation of fixed and financial assets and liabilities at market rates. This can be substantially diluted during the early transition when these flows could be granted recognition only in some (illustrative) cases: for example, write-off of assets (if on the books) due to irretrievable losses; revaluation of financial assets/liabilities due to exchange rate fluctuations; recognition of windfall gains/losses of assets due to natural disasters or unforeseen accretion to wealth through discovery of new mineral assets; and permanent transfer of functions to a corporation or quasi-corporation without remuneration assets (i.e., by reclassification).119

There should be during this stage a progressive recognition of existing financial and nonfinancial assets. Consolidated government balance sheets covering a substantial proportion of real assets, as well as financial assets and liabilities, could also be provided. A possible transition path is as follows: First priority is given to financial assets including on-lending and then to easily quantifiable assets (government buildings and land). More difficult assets such as infrastructure assets would follow, but these can be avoided for an indefinite period during transition. Only in stage three would it be necessary to attempt to include mineral resources and other hard-to-define assets such as forest wealth, and finally (if at all), heritage assets.

This stage should also bring the replacement of cash transactions in the operating account by the corresponding accrual transactions. All liabilities should, of course, be recognized as soon as they arise. Even contingent liabilities (such as orders placed for supply) can be accommodated in accounts by opening account heads to capture accounts receivable in revenue and accounts payable in expense. Depreciation costs could also be included as expenses for those assets for which they are available.

At completion of this stage, it should be possible to switch over to GFSM 2001 classification structures and a GFSM 2001–compatible chart of accounts and to generate new fiscal reports without adopting full accrual accounting. Although the information available will not allow the full implementation of the GFSM 2001 framework, the changes implemented during this stage will provide enhanced analytical information. Even the use of partial accrual data will help get the maximum value from existing accounting systems, and undertaking this work will help identify those areas for which a modification of accounting standards will be required for the full implementation of GFSM 2001.

Stage Three: A Progressive Move to Full Accrual Data

At this stage, full introduction of accrual accounting for government cannot be avoided. GFSM 2001 recognizes that implementation of the fully integrated GFSM 2001 system will take time and will progress according to the circumstances of each country. In particular, it highlights the expectation that, ultimately, countries will have to revise their accounting systems to an accrual basis, as well as adopt the GFSM 2001 classification systems.

During the first two stages, as indicated, accrual accounting is not required. GFSM 2001 does admit that, because GFS is a statistical reporting system, it can differ in important respects from the underlying accounting system of a country from which GFS statistics are derived.120 Certainly, it is possible for a country to operate an accrual accounting system with national accounting standards and coding structures that differ from the GFSM 2001 classification structure (for example, Australia). Alternatively, a country could accept the GFSM 2001 accrual-based system but with very significant dilutions of the accrual concepts.121 The central point is that the migration of cash to accruals increasingly provides more useful information for fiscal policy formulation, execution, and monitoring. For example, accruals allow GFS analytical balances, such as net operating balance and net lending/borrowing, to be derived. In this way, putting even modified data in the GFSM 2001 framework would aid fiscal policy and analysis. At the same time, it is difficult to see how the full GFSM 2001 statistical reports could be derived from an accounting system that is not on an accruals basis. Moreover, to generate GFSM 2001 in-year reports for fiscal management purposes from current rather than historical data requires the integration of GFSM 2001 classifications into the government chart of accounts.

The implications are clear: if countries are to fully meet the new international fiscal reporting standards, they cannot avoid moving to an accrual-based government accounting system. The challenge then, as outlined here, is to ensure that the correct preconditions exist and that an orderly and properly sequenced transition path is formulated and followed.

Concluding Remarks

This section examined the essential role of accrual accounting as an underpinning for introducing budget system reforms and emphasized a number of points. First, the adoption of accrual accounting should be seen as an integral part of wider budget system reform. Accounting serves rather than leads budget system reform, and therefore, a country’s budget system model should determine the government’s accounting needs. The converse of this argument also holds: to be effective, and to derive maximum benefits from accrual accounting, other features of the budget management system must be in place. In any case, moving to an accrual accounting system typically necessitates parallel changes elsewhere in a country’s PEM system. Indeed, implementation of an accrual-based system for government accounting, given the costs involved, is perhaps only worthwhile in the context of an overall transformation of the management of the government sector. Accordingly, it is essential to appreciate the full ramifications of implementing accrual accounting.

Second, budget systems are not created overnight. They evolve by passing through distinct stages—from compliance to performance-oriented systems—and this transformation is accompanied by an accommodating evolution in accounting requirements. One can detect this parallel development of accounting requirements in the move from cash-based accounting to modified cash/modified accruals, and then to full accruals. Therefore, it is instructive to examine the typical path by which accounting systems evolve, so that countries contemplating the move can learn from the experiences of other countries and better plan their transition process.

Third, as budget systems have developed, they have adopted more comprehensive budget management objectives which have put increased demands on accounting systems. This development should be seen as one of accretion—adding to accounting requirements rather than substituting one accounting system for another. There has been a temptation to debate the relative virtues of cash versus accrual accounting, yet the two systems are not substitutes. Because accrual accounting allows the generation of cash accounts, the debate should focus on why there is a need for the increased information derived from accrual accounting. Particularly because the introduction of accrual accounting is hardly a costless exercise, it is important to recognize that there may be less onerous intermediate solutions or alternative ways of gaining some of the benefits afforded by accrual accounting.

Fourth, it must not be forgotten that accounting systems perform two central functions. The first is the need to account for the financial position of the government at a particular point in time, determined by legal requirements and directed to ensuring accountability for public funds. The second is the need for a day-to-day recording of transactions as a basis for the information systems that support management decision making. Fulfilling the requirements of budget managers usually necessitates more information than preparing the legal financial statements, and on an ongoing basis. Regardless of whether the accounting system is cash or accruals based, there is usually a need for budget managers to record each stage of the spending process and to be aware of other “off-balance-sheet” items such as contingent liabilities. From this viewpoint, accrual accounting systems are more comprehensive.

Finally, improved fiscal reporting requirements, such as those implied by the new GFSM 2001 standards, cannot be divorced from a parallel process of reform to the accounting system that underlies the generation of the basic data. From a statistical reporting standpoint, the accrual-based GFSM 2001 reporting requirements can be viewed as distinct from accounting requirements. However, ensuring the quality and comprehensiveness of the GFSM 2001 reports will ultimately necessitate a move to accrual accounting. In particular, if reports are to be generated within the budget year, and if these reports are to be useful for budget management as distinct from purely for statistical purposes, then full compliance with GFSM 2001 will require a supporting move to accrual accounting.

88

About half of OECD member countries have adopted accruals to some degree. There are great variations, however, in the extent of this movement: some reforms are limited to agency- and ministry-level financial reporting; some encompass the whole of government financial reporting; and some involve only budgeting. See OECD (2002a).

89

Such as those required by the Maastricht criteria.

90

The IMF’s standards for the reporting of GFS emphasize accrual concepts as a statistics standard and not as an accounting standard; the IMF standards are designed for macroeconomic analysis of fiscal data. See IMF (2001a).

91

Even government debt has to be recorded through subsidiary registers and balances carried forward.

92

Also, for example, generally accepted accounting principles leave off the balance sheet investment in human capital as well as projected receipts, the tax base, or the power to tax (all assets).

93

Hence, on an accrual basis, flows should be recorded when economic value is either exchanged or transferred (“economic transactions”) or created, extinguished, or transformed (“other economic flows”).

94

It is also argued that accruals improve the reporting of the underlying fiscal position by removing year-to-year variations arising from the timing of large cash receipts and payments. See IMF (2001b).

96

Hood (1991, 1995), described the New Public Management as centrally involving, first, a lessening or removing of differences between the public and private sector, and, second, a shift in emphasis from process accountability to accountability for results.

97

“As reporting is but one aspect of the whole management cycle (planning, short-term budgeting, implementation, performance monitoring and reporting), it is a truism that management planning and budgeting in the public sector should be undertaken using the same basis of accounting to ensure the benefits of reforms are achieved.” (Mellor, 1996)

98

The user of financial statements is assumed to be “the investor that has supplied risk capital in expectation of a financial return on capital.” Thus “the defining class of user for financials statements of public benefit entities is the funders and financial supports.” (Accounting Standards Board, 2003, p. 29)

99

As Chan (2003) puts it: “Governments uniquely provide public goods and finance them through taxation … These characteristics sever the link between service delivery and revenue recognition, making it impossible to match revenues and expenses.” (p. 5)

100

As articulated by U.S. Federal Accounting Standards Advisory Board (1993): “The Federal government derives its just powers from the consent of the governed. It therefore has a special responsibility to report on its actions and the results of those actions. These reports must accurately reflect the distinctive nature of the federal government and must provide information useful to the citizens, their elected representatives, federal executives and program managers.” (para. 8)

101

The use of accrual appropriations is now a feature of the Australian “accrual output budgeting” approach. For a description of the general outlines of the system, see, for example, Australian Department of Finance and Administration (1999).

102

Ideally, the appropriation for output purchases should be made on the basis of a contestable market price, with agencies invited to quote prices for the provision of the goods and services the government is contemplating buying and those prices compared to alternative quotations from private sector suppliers where available. In practice, this is likely to occur only in exceptional cases.

103

This is the approach of the recent French reforms; see France, Ministère de l’Economie, des Finances et de l’Industrie (2001).

104

The central role of accounting in the modernization of public sector management is discussed critically in Lapsley (1999). See also Guthrie (1998).

105

The GFSM 2001 (IMF, 2001a) prescribes a consistent framework for this purpose.

106

For example, in the United Kingdom, which took the decision to move to accruals in 1995, there has been no comprehensive cost-benefit study (Chow and Humphrey, 2003). As Likierman (2000) admits, “A full analysis will only be possible once the new systems have been working for a number of years” (p. 253). Concurrently, there is some evidence that accrual accounting has not produced the gains originally expected of it (Guthrie and Humphrey, 1999; Stanton and Stanton, 1998).

107

Wynne (2004) estimates that the number of qualified accountants working across the U.K. central government increased fourfold, from almost 600 in 1989 to 2,200 in 2003 (p. 13).

108

As recently recommended by the European Federation of Accountants (2003).

109

In Australia, some states have had years of experience operating capital charging regimes. See the discussion in Robinson (1998). See also Heald and Dowdall (1999).

110

As noted, there is a wider question about how national pay-as-you-go pension schemes are treated under accrual accounting. Present practice requires treating future public service pension costs as a liability and thus recognizing the emerging expense but not the future national pension costs. GFSM 2001 recognizes only liabilities for government employer pension schemes and not for social security, with contingent liabilities included only as a memorandum item.

111

As succinctly put by the OECD (2002a): “Accruals is not a ‘magic bullet’ for improving the performance of the public sector. It is simply a tool for getting better information about the true cost of government. It needs to be used effectively and in tandem with a number of other management reforms in order to achieve the desired improvement in decision-making in government.” (p. 11)

112

This section has benefited considerably based on the comments of Marc Robinson of the IMF’s FAD.

113

Blondal (2003) has made the point that “it is noteworthy that the legislatures in those countries that have adopted accrual budgeting generally have a relatively weak role in the budget process” (p. 44).

114

The drawback of including depreciation in current budget appropriations has been net capital appropriations, where the capital appropriation to agencies is expressed as gross capital expenditure minus depreciation—and with the depreciation component of the expenses appropriation being also available to fund capital expenditure.

115

As well as relevant financial assets such as the share portfolios of civil service pension funds, where such funding arrangements exist.

116

Agencies would receive a cash appropriation that would reflect their full operating costs. They would be expected to replenish their current assets from accumulated depreciation, and would have the authority to do so. But if managers are given freedom to improve performance, what is to stop the cash allowances for depreciation to be spent elsewhere than on replacing future capital assets? In this way, the MoF and the legislature may lose control over the acquisition of capital assets.

117

There are not many differences between the previous GFS classifications for expenditures and revenues and the expense and revenue classifications in GFSM 2001, although there could be confusion because an accrual-based “expense” is conceptually different from a cash-based “expenditure.” Certainly, when planning a new chart of accounts and designing future information systems, it may be expedient to begin by adopting the GFSM 2001 classifications.

118

Expenses are the consumption or loss of future economic benefits resulting in the reduction of assets or increases in liabilities. They contribute to an accrual fiscal indicator. Expenditures are above-the-line cash payments that contribute to a cash fiscal indicator.

119

Other specific examples are discussed in section 4.49 of GFSM 2001 (IMF, 2001a).

The Challenges and the Reform Agenda
  • Abrahams, M.D., and M.N.Reavely, 1998, “Activity-Based Costing: Illustrations from the State of Iowa,” Government Finance Review, Vol. 14, No. 2, pp. 1520.

    • Search Google Scholar
    • Export Citation
  • Accounting Standards Board (ASB), 2003, “Statement of Principles for Financial Reporting: Proposed Interpretation for Public Benefit Entities(London: ASB). Available at: http://frc.org.uk/asb/publications/documents.cfm?cat=3

    • Search Google Scholar
    • Export Citation
  • Allen, R.I.G., 1996, “Management Control in Modern Government Administration: An Introduction,” in Management Control in Modern Government Administration: Some Comparative Practices, SIGMA Paper No. 4 (Paris: Organization for Economic Cooperation and Development).

    • Search Google Scholar
    • Export Citation
  • Allen, R.I.G., and Daniel Tommasi, eds., 2001, Managing Public Expenditure: A Reference Book for Transition Countries (Paris: Organization for Economic Cooperation and Development, SIGMA Program).

    • Search Google Scholar
    • Export Citation
  • Allen R., S. Schiavo-Campo, and T.C. Garrity, 2004, Assessing and Reforming Public Management: A New Approach (Washington: World Bank).

  • Anderson, B., 2004, “Performance Budgeting and Performance Information in the United States,” paper presented to International Seminar on Performance Budgeting, Brasilia, Brazil, March (unpublished).

    • Search Google Scholar
    • Export Citation
  • Athukorala, S. Lakshman, and Barry Reid, 2003, Accrual Budgeting and Accounting in Government and Its Relevance for Developing Countries (Manila: Asian Development Bank).

    • Search Google Scholar
    • Export Citation
  • Auerbach, Alan J., Jagadeesh Gokhale, and Laurence J. Kotlikoff, 1991, “Generational Accounts: A Meaningful Alternative to Deficit Accounting,” in Tax Policy and the Economy, Vol. 5 (Cambridge, Massachusetts: MIT Press), pp. 55110.

    • Search Google Scholar
    • Export Citation
  • Auerbach, A.J., L.J., Kotlikoff, and W. Leibfritz, 1999, Generational Accounting around the World (Chicago: Chicago University Press).

  • Australian Department of Finance and Administration, 1999, Commonwealth Accrual Budgeting Guidelines (Canberra).

  • Australian National Audit Office, 1996, Performance Information Reviews (Canberra: Department of Finance).

  • Axelrod, D., 1995, Budgeting for Modern Government (New York: St. Martin’s Press, 2nd ed.).

  • Babunakis, M., 1976, Budgets: An Analytical and Procedural Handbook for Government and Nonprofit Organizations (Westport, Connecticut: Greenwood Press).

    • Search Google Scholar
    • Export Citation
  • Baldacci, E., and A. Corbacho, 2004, “Recent Experiments with Fiscal Responsibility Laws around the World—What Lessons Can Be Learned?FAD Draft Guidance Note (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Barrett, K., and R. Greene, 2000, “Truth in Measurement,” Governing (July), p. 86.

  • Baumol. William J., 1982, “Contestable Markets: An Uprising in the Theory of Industry Structure,” American Economic Review, Vol. 72, No. 1, pp. 115.

    • Search Google Scholar
    • Export Citation
  • Baumol. William J., J.C. Panzar, and R.D. Willig, 1982, Contestable Markets and the Theory of Industry Structure (New York: Harcourt Brace Jovanovich).

    • Search Google Scholar
    • Export Citation
  • Bellamy, S., and R. Kluvers, 1995, “Program Budgeting in Australian Local Government: A Study of Implementation and Outcomes,” Financial Accountability and Management, Vol. 11 (February), pp. 3956.

    • Search Google Scholar
    • Export Citation
  • Blondal, J.R., 2003, “Accrual Accounting and Budgeting: Key Issues and Recent Developments,” OECD Journal on Budgeting, Vol. 3., No. 1, pp. 5171.

    • Search Google Scholar
    • Export Citation
  • Boston, J., ed., 1995, The State under Contract (Wellington: Bridget Williams Books, Ltd.).

  • Boyne, G., and J. Law, 1991, “Accountability and Local Authority Annual Reports: The Case of Welsh District Councils,” Financial Accountability and Management, Vol. 7, No. 4, pp. 17994.

    • Search Google Scholar
    • Export Citation
  • Brace, P., R. Elkin, D.D. Robinson, and H.E. Steinberg, 1980, “Reporting of Service Efforts and Accomplishments,” FASB Research Report R09 (Norwalk, Connecticut: Financial Accounting Standards Board).

    • Search Google Scholar
    • Export Citation
  • Brook, P.J., and M. Petries, 2001, “Output-Based Aid: Precedents, Promises, and Challenges,” in Contracting for Public Services: Output-Based Aid and Its Applications, ed. by P.J. Brook and S.M. Smith (Washington: World Bank), pp. 311.

    • Search Google Scholar
    • Export Citation
  • Brook, P.J., and S.M. Smith, eds., 2001, Contracting for Public Services: Output-Based Aid and Its Applications (Washington: World Bank).

    • Search Google Scholar
    • Export Citation
  • Broom, C.A., 1995, “Performance-Based Government Models: Building a Track Record,” Public Budgeting and Finance, Vol. 15 (Winter), pp. 317.

    • Search Google Scholar
    • Export Citation
  • Brumby, J., 1999, “Budgeting Reforms in OECD Member Countries,” in Managing Government Expenditure, ed. by S. Schiavo-Campo and D. Tommasi (Manila: Asian Development Bank), pp. 34962.

    • Search Google Scholar
    • Export Citation
  • Brumby, J., 2005, “Budget Management Reform in China,” in Engaging the New World: Strategic Economic Studies in the Knowledge Economy, Employment, Health Care and Fiscal Governance, ed. by B. Grewal and M. Kumnick (Melbourne: Melbourne University Press, Melbourne).

    • Search Google Scholar
    • Export Citation
  • Brunsson, K., 1995, “Puzzle Pictures: Swedish Budgetary Processes in Principle and Practice,” Financial Accountability and Management, Vol. 11, No. 2, pp. 11125.

    • Search Google Scholar
    • Export Citation
  • Burkhead, J., 1956, Government Budgeting (New York: John Wiley and Sons).

  • Carlin, T., and J. Guthrie, 2000, “A Review of Australian and New Zealand Experiences with Accrual Output-Based Budgeting,” paper presented to a conference of the International Public Management Network, Macquarie Graduate School of Management, Sydney, Australia, March 4–6.

    • Search Google Scholar
    • Export Citation
  • Carter, N., R. Klein, and P. Day, 1992, How Organizations Measure Success (London: Routledge).

  • Caulfield, Janice, 2003, “New Public Management in a Developing Country: Creating Executive Agencies in Tanzania,” in Unbundled Government: A Critical Analysis of the Global Trend to Agencies, Quangos and Contractualisation,” ed. by Christopher Pollitt and Colin Talbot (London: Routledge).

    • Search Google Scholar
    • Export Citation
  • Chan, J.L., 1998, “The Bases of Accounting for Budgeting and Financial Reporting,” in Handbook of Government Budgeting, ed. by R.T. Meyers (San Francisco: Jossey-Bass), pp. 35780.

    • Search Google Scholar
    • Export Citation
  • Chan, J.L., 2003, “Government Accounting: An Assessment of Theory, Purposes and Standards,” Public Money and Management, Vol. 23, No. 1, pp. 1320.

    • Search Google Scholar
    • Export Citation
  • Chow, D., and C. Humphrey, 2003, “Whole of Government Accounting: An Aide to Performance, Management and Accountability?9th Biennial CIGAR (Comparative International Government Accounting Research) Conference, Bodo, Norway, June 13–14.

    • Search Google Scholar
    • Export Citation
  • Clinton, Bill, and Al Gore, 1997, The Blair House Papers: National Performance Review (Washington: Government Printing Office).

  • Cooper, R., and R.S. Kaplan, 1999, Design of Cost Management Systems (Upper Saddle River, New Jersey: Prentice Hall, 2nd ed.).

  • Cullen M., and T. Mallard, 2003, Pre-Introduction: Parliamentary Briefing on Public Finance (State Sector Management) Bill, August (Wellington).

    • Search Google Scholar
    • Export Citation
  • Davenport, L.W., 1996, “Internal Service Fund Functions: Should They Be Required to Compete with Private Vendors?Government Finance Review (October), pp. 1113.

    • Search Google Scholar
    • Export Citation
  • Davis, G., B. Sullivan, and A. Yeatman, eds., 1997, The New Contractualism? (South Melbourne: Macmillan).

  • Dean, P.N., 1989, Government Budgeting in Developing Countries (London: Routledge).

  • Demsetz, Harold, 1968, “The Cost of Transacting,” Quarterly Journal of Economics, Vol. 82, pp. 3353.

  • Diamond, Jack, 1990, “Measuring Efficiency in Government: Techniques and Experience,” Chapter 9 in Government Financial Management: Issues and Country Studies, ed. by A. Premchand (Washington: International Monetary Fund), pp. 14266.

    • Search Google Scholar
    • Export Citation
  • Diamond, Jack, 2001, “Performance Budgeting: Managing the Reform Process,” paper presented at UN Workshop on Financial Management and Accountability, Rome, November.

    • Search Google Scholar
    • Export Citation
  • Diamond, Jack, 2002a, “The Micro Basis of Budget System Reform: The Case of Transitional Economies” (unpublished; Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Diamond, Jack, 2002b, “The Role of Internal Audit in Government Financial Management: An International Perspective,” IMF Working Paper 02/94 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Diamond, Jack, 2002c, “Performance Budgeting: Is Accrual Accounting Required?IMF Working Paper 02/240 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Diamond, Jack, 2002d, “The New Russian Budget System: A Critical Assessment and Future Reform,” IMF Working Paper 02/21 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Diamond, Jack, 2002e, “Budget System Reform in Transitional Economies: The Experience of Russia,” IMF Working Paper 02/22 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Diamond, Jack, 2002f, “The Strategy of Budget System Reform in Emerging Countries,” Public Finance and Management, Vol. 2, No. 3.

  • Diamond, Jack, 2003, From Program to Performance Budgeting: The Challenge for Emerging Countries, IMF Working Paper 03/169 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Diamond, Jack, 2004, “The Role of Internal Audit in Government Financial Management,” in Accounting and Accountability in Emerging and Transitional Economies 6, ed. by Trevor Hopper and Zahirul Hoque (New York: Elsevier), pp. 5580.

    • Search Google Scholar
    • Export Citation
  • Diamond, Jack, and P. Khemani, 2005, “Introducing Financial Management Information Systems in Developing Countries,” IMF Working Paper 05/196 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Diamond, Jack, and B.H. Potter, 2000, Setting Up Treasuries in the Baltics, Russia, and Other Countries of the Former Soviet Union, IMF Occasional Paper No. 198 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Dixon, G., 2002, “Thailand’s Hurdle Approach to Budget Reform,” Poverty Reduction and Economic Management (PREM) Note 73 (Washington: World Bank).

    • Search Google Scholar
    • Export Citation
  • Domberger, S., 1998, The Contracting Organization: A Strategic Guide to Outsourcing (New York: Oxford University Press).

  • Domberger, S., and P. Jensen, 1997, “Contracting Out by the Public Sector: Theory, Evidence, Prospects,” Oxford Review of Economic Policy, Vol. 13, pp. 6778.

    • Search Google Scholar
    • Export Citation
  • Domberger, S., and S. Rimmer, 1994, “Competitive Tendering and Contracting Out in the Public Sector: A Survey,” International Journal of Economics and Business, Vol. 1, No. 3, pp. 43953.

    • Search Google Scholar
    • Export Citation
  • Estela, M., 2000, “Strengthening the Integrity of a Tax Collection Agency: The Case of SUNAT in Peru,” paper prepared for a World Bank–Inter-American Development Bank seminar on “Radical Solutions for Fighting Corruption in the Public Sector,” November 2–3, Washington, D.C.

    • Search Google Scholar
    • Export Citation
  • European Commission, 1996, “Public Procurement in the European Union: Exploring the Way Forward,” Green Paper COM(96) 583 (Brussels).

    • Search Google Scholar
    • Export Citation
  • European Commission, 2004, “Public Finances in the European Monetary Union 2004” (Brussels).

  • European Federation of Accountants, 2003, “The Adoption of Accrual Accounting and Budgeting by Governments (Central, Federal, Regional and Local),” FEE Discussion Paper (Brussels). See: www.fee.be/.

    • Search Google Scholar
    • Export Citation
  • Fantone, Denise M., 2004, “Performance-Based Budgeting in the U.S.: A Congressional Perspective,” paper presented to Working Party of Senior Budget Officials (SBO), Organization for Economic Cooperation and Development, Paris, April 1–2.

    • Search Google Scholar
    • Export Citation
  • France, Ministère de l’Economie, des Finances et de l’Industrie, 2001, Public Finance Reform, No. 1 (Paris).

  • Garamfalvi, L., and W. Allan, 1994, “Value for Money Auditing, Evaluation, and Public Expenditure Management: Experience in Selected OECD Countries and Lessons for Italy” (unpublished; Washington: International Monetary Fund, Fiscal Affairs Department).

    • Search Google Scholar
    • Export Citation
  • Gearhart, J., 1999, “Activity-Based Management and Performance Measurement Systems,” Government Finance Review, pp. 1316.

  • Gill, D., 2002, “Signposting the Zoo—From Agencification to a More Principled Choice of Government Organisational Form,” OECD Journal on Budgeting, Vol. 2, No. 1, pp. 2779.

    • Search Google Scholar
    • Export Citation
  • Glyn, D., B. Sullivan, and A. Yeatman, eds., 1997, The New Contractualism (South Melbourne: MacMillan).

  • Gray, A., W.I. Jenkins, and B. Segsworth, 1993, Budgeting, Auditing and Evaluation: Functions and Integration in Seven Governments (New Brunswick, New Jersey: Transaction Publishers).

    • Search Google Scholar
    • Export Citation
  • Grindle, M.S., 1997, “Divergent Cultures? When Public Organizations Perform Well in Developing Countries,” World Development, Vol. 25, No. 4, pp. 48195.

    • Search Google Scholar
    • Export Citation
  • Groszyk, W., 2001, “Outcome-Focused Management in the United States,” OECD Journal on Budgeting, Vol.1, No. 4, pp. 12950.

  • Guthrie, J., 1998, “Application of Accrual Accounting in the Public Sector: Rhetoric or Reality?Financial Accountability and Management, Vol. 14, No. 1, pp. 119.

    • Search Google Scholar
    • Export Citation
  • Guthrie, J., O. Olson, and C. Humphrey, 1999, “Debating Developments in New Public Financial Management: The Limits of Global Theorising and Some New Ways Forward,” Financial Accountability and Management, Vol. 15, No. 3/4, pp. 20928.

    • Search Google Scholar
    • Export Citation
  • Harper, M., J. Arroyo, T. Bhattacharya, and T. Bulman, 2000, Public Services through Private Enterprise: Micro-Privatisation for Improved Delivery (London: Intermediate Technology Publications).

    • Search Google Scholar
    • Export Citation
  • Hatry, H.P., 1999, Performance Measurement (Washington: Urban Institute Press).

  • Heald, D., and A. Dowdall, 1999, “Capital Charging as a VFM Tool in Public Services,” Financial Accountability and Management, Vol. 15, No. 3/4, pp. 20928.

    • Search Google Scholar
    • Export Citation
  • Henderson, Simon, 2004, “The Challenges of Measuring Performance,” paper presented at “Performance Information in the Budget Process,” OECD/PUMA Senior Budget Officials (SBO) meeting, Organization for Economic Cooperation and Development, Paris, April 1–2.

    • Search Google Scholar
    • Export Citation
  • Henke, E.O., 1992, Introduction to Nonprofit Organization Accounting (Cincinnati, Ohio: South-Western Publishing Co.)

  • H.M. Treasury, 2004, The U.K. Government’s Public Service Agreement Framework, Better Public Services Team (London).

  • Hill, Alex, 2004, “The U.K. Government’s Public Service Agreement Framework” (unpublished; London: H.M. Treasury, Better Public Services Team).

    • Search Google Scholar
    • Export Citation
  • Hodge, G.A., 2000, Privatization: An International Review of Performance (Boulder, Colorado: Westview Press).

  • Hood, C., 1991, “A Public Management for All Seasons?Public Administration, Vol. 69, No. 1, pp. 319.

  • Hood, C., 1995, “The New Public Management in the 1980s: Variations on a Theme,” Accounting, Organization, and Society, Vol. 20, No. 2/3, pp. 93109.

    • Search Google Scholar
    • Export Citation
  • Hyndman, N.S., and R. Anderson, 1995, “The Use of Performance Information in External Reporting: An Empirical Study of U.K. Executive Agencies,” Financial Accountability and Management, Vol. 11, No. 1, pp. 117.

    • Search Google Scholar
    • Export Citation
  • Institute of Internal Auditors (IIA), 1999, Internal Audit Standards (Altamonte Springs, Florida: IIA).

  • Institute of Internal Auditors (IIA), 2001, “Consulting Implementation Standards,” Standards for the Professional Practice of Internal Auditing (Altamonte Springs, Florida: IIA, Internal Auditing Standards Board).

    • Search Google Scholar
    • Export Citation
  • International Federation of Accountants (IFAC), 1998, Guidelines for Governmental Financial Reporting (New York: IFAC, Public Sector Committee).

    • Search Google Scholar
    • Export Citation
  • International Federation of Accountants (IFAC), 2003a, Cash Basis International Public Sector Accounting Standards: Financial Reporting Under the Cash Basis of Accounting (New York: IFAC).

    • Search Google Scholar
    • Export Citation
  • International Federation of Accountants (IFAC), 2003b, Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities, Study 14 (New York: IFAC, 2nd ed.).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund, 2001a, Government Finance Statistics Manual 2001 (Washington).

  • International Monetary Fund, 2001b, Manual on Fiscal Transparency (Washington).

  • International Monetary Fund, 2001c, World Economic Outlook, October (Washington).

  • International Organization of Supreme Audit Institutions, 1995, “Auditing Standards,” adopted by Auditing Standards Committee at the XVth INTOSAI Congress, Cairo (Stockholm: INTOSAI). Available at: http://asc.rigsrevisionen.dk/composite-14.htm

    • Search Google Scholar
    • Export Citation
  • Jackson, P., and B. Palmer, 1989, First Steps in Measuring Performance in the Public Sector (London: Public Finance Foundation).

  • Jones, L.R., and J.L. McCaffery, 1997, “Implementing the Chief Financial Offices Act and the Government Performance and Results Act in the Federal Government,” Public Budgeting & Finance, Vol. 13, No. 1, pp. 3555.

    • Search Google Scholar
    • Export Citation
  • Joyce, P.G., 1993, “Using Performance Measures for Federal Budgeting: Proposals and Prospects,” Public Budgeting & Finance, Vol. 13, No. 4, pp. 115.

    • Search Google Scholar
    • Export Citation
  • Kaplan, R.S., and D.P. Norton, 1996, The Balanced Scorecard: Translating Strategy into Action (Boston: Harvard Business School Press).

  • Kaul, M., 1997, “New Public Administration, The Management Innovations in Government,” Public Administration and Development, Vol. 17, No. 1, pp. 1326.

    • Search Google Scholar
    • Export Citation
  • Kerf, M., R.D. Gary, T. Irwin, C. Levesque, R. Taylor, and M. Klein, 1999, “Concessions for Infrastructure: A Guide to Their Design and Award,” World Bank Technical Paper 399 (Washington: World Bank).

    • Search Google Scholar
    • Export Citation
  • Klein, M., So, J., and Shin, B., 1996, “Transaction Costs in Private Infrastructure Projects—Are They Too High? Viewpoint, No. 95 (Washington: World Bank, Private Sector Development Department).

    • Search Google Scholar
    • Export Citation
  • Kopits, G., 2001, “Fiscal Rules: Useful Policy Framework or Unnecessary Ornament,” IMF Working Paper 01/145 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Kopits, G., and J.D. Craig, 1998, Transparency in Government Operations, IMF Occasional Paper No. 158 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Kopits, G., and S. Symansky, 1998, Fiscal Policy Rules, IMF Occasional Paper No. 162 (Washington: International Monetary Fund).

  • Kotter, John P., 1995, “Leading Change: Why Transformation Efforts Fail,” Harvard Business Review, Vol. 73, No. 2, pp. 5967.

  • Kotter, John P., 1996, Leading Change (Boston: Harvard Business School Press).

  • Kotter, John P., and J.L. Heskett, 1992, Corporate Culture and Performance (New York: Free Press).

  • Kristensen, J.K., 2002, “Overview of Results Focused Management and Budgeting in OECD Member Countries,” paper presented at an expert meeting held by the Public Management Committee at Organization for Economic Cooperation and Development, Paris, February 11–12.

    • Search Google Scholar
    • Export Citation
  • Kristensen, J.K., W. Groszyk, and B. Bühler, 2002, “Outcome-Focused Management and Budgeting,” OECD Journal on Budgeting, Vol. 1, No. 4, pp. 129.

    • Search Google Scholar
    • Export Citation
  • Laking, R., 1996, “Public Management in the OECD: Some Questions for Developing Countries,” paper presented to the World Bank, Washington, D.C., May (unpublished; Victoria: University of Wellington).

    • Search Google Scholar
    • Export Citation
  • Laking, R., 2001, “Governance of the Wider State Sector: Principles for Control and Accountability of Delegated and Devolved Public Bodies,” paper presented at the Organization for Economic Cooperation and Development, Public Management Service (PUMA) Conference on “Devolving and Delegating Power to More Autonomous Public Bodies and Controlling Them: The Governance of Public Agencies and Authorities,” Bratislava, November. Available at: http://www.oecd.org/dataoecd/8/19/2730680.pdf

    • Search Google Scholar
    • Export Citation
  • Laking, R., 2005, “Agencies: Their Benefits and Risks,” OECD Journal on Budgeting, Vol. 4, No. 4, pp. 725.

  • Lapsley, I., 1999, “Accounting and the New Public Management: Instruments of Substantive Efficiency or a Rationalising Modernity?Financial Accountability and Management, Vol. 15, No. 3/4, pp. 201207.

    • Search Google Scholar
    • Export Citation
  • Larbi, G.A., 1998, “Institutional Constraints and Capacity Issues in Decentralizing Management in Public Services: The Case of Health in Ghana,” Journal of International Development, Vol. 10, No. 3, pp. 37786.

    • Search Google Scholar
    • Export Citation
  • Larsson, K., and J.S. Madsen, 1999, “Protecting the Financial Interests of the State and of the European Union,” Public Management Forum, Vol. 5, No. 6 (Paris: OECD), pp. 417.

    • Search Google Scholar
    • Export Citation
  • Leibenstein, H., 1966, “Allocative Efficiency vs. X-Efficiency,” American Economic Review, Vol. 56 (June), pp. 392415.

  • Lienert, Ian, and Moo-Kyung Jung, 2005, “The Legal Framework for Budget Systems, and International comparison,” OECD Journal on Budgeting, Special Issue, Vol. 4, No. 3.

    • Search Google Scholar
    • Export Citation
  • Likierman, A., 2000, “Changes to Managerial Decision-Taking in UK Central Government,” Management Accounting Research, Vol. 11, No. 2, pp. 25361.

    • Search Google Scholar
    • Export Citation
  • Maholland, L., and P. Muetz, 2002, “A Balanced Scorecard Approach to Performance Measurement,” Government Finance Review (April), pp. 1215.

    • Search Google Scholar
    • Export Citation
  • Martinez-Vazquez, J., and R. McNab, 2000, “The Tax Reform Experiment in Transitional Countries,” National Tax Journal, Vol. 53, No. 2 (June), pp. 27398.

    • Search Google Scholar
    • Export Citation
  • Mellor, T., 1996, “Why Governments Should Produce Better Balance Sheets,” Australian Journal of Public Administration, Vol. 55, No. 1, pp. 7881.

    • Search Google Scholar
    • Export Citation
  • Mikesell, J., 2003, Fiscal Administration: Analysis and Applications for the Public Sector (Belmont, California: Thomson/Wadsworth, 6th ed.).

    • Search Google Scholar
    • Export Citation
  • Organization for Economic Cooperation and Development (OECD), 1994, “Performance Management in Government: Performance Measurement and Results-Oriented Management,” Public Management Service (PUMA) Occasional Paper No. 3 (Paris).

    • Search Google Scholar
    • Export Citation
  • Organization for Economic Cooperation and Development (OECD), 1995, Budgeting for Results: Perspectives on Public Expenditure Management (Paris).

    • Search Google Scholar
    • Export Citation
  • Organization for Economic Cooperation and Development (OECD), 1996, “Managing Structural Deficit Reduction,” Public Management Service (PUMA) Occasional Paper No. 11 (Paris).

    • Search Google Scholar
    • Export Citation
  • Organization for Economic Cooperation and Development (OECD), 1997a, “Benchmarking, Evaluation and Strategic Management in the Public Sector,” paper presented at the 1996 Meeting of the Performance Management Network of the OECD’s Public Management Service (PUMA) (Paris).

    • Search Google Scholar
    • Export Citation
  • Organization for Economic Cooperation and Development (OECD), 1997b, “Best Practice Guidelines for Contracting out Government Services,” Public Management Service (PUMA) Occasional Paper No. 20 (Paris).

    • Search Google Scholar
    • Export Citation
  • Organization for Economic Cooperation and Development (OECD), 1999a, Performance Contracting: Lessons from Performance Contracting Case Studies (Paris).

    • Search Google Scholar
    • Export Citation
  • Organization for Economic Cooperation and Development (OECD), 1999b, “Managing Accountability in Intergovernmental Relationships,” Public Management Service, PUMA/RD (99) 4 (Paris).

    • Search Google Scholar
    • Export Citation
  • Organization for Economic Cooperation and Development (OECD), 2000, The OECD Outputs Manual, PUMA/SBO (2000)7 (Paris).

  • Organization for Economic Cooperation and Development (OECD), 2001, “Financial Management and Control of Public Agencies,” SIGMA Paper No. 32 (Paris).

    • Search Google Scholar
    • Export Citation
  • Organization for Economic Cooperation and Development (OECD), 2002a, “Accrual Accounting and Budgeting: Key Issues and Recent Developments, Twenty-Third Annual Meetings of OECD Senior Budget Officials, Washington, D.C., June 3–4,” Public Management Service, PUMA/SBO(2002)10 (Paris).

    • Search Google Scholar
    • Export Citation
  • Organization for Economic Cooperation and Development (OECD), 2002b, Distributed Public Governance: Agencies, Authorities, and Other Government Bodies (Paris).

    • Search Google Scholar
    • Export Citation
  • Organization for Economic Cooperation and Development (OECD), 2002c, Governing for Performance in the Public Sector, OECD/Germany High-Level Symposium, March 13–14, Berlin (Paris). Country reports available at: http://www.oecd.org/document/43/0,2340,en_2649_37457_1813355_1_1_1_37457,00.html

    • Search Google Scholar
    • Export Citation
  • Organization for Economic Cooperation and Development (OECD), 2003, OECD/World Bank Budget Practices and Procedures Survey (Paris).

  • Organization for Economic Cooperation and Development (OECD), 2004, “Public Sector Modernisation: Governing for Performance,” Policy Brief (Paris). Available at: http://www.oecd.org/dataoecd/52/44/33873341.pdf

    • Search Google Scholar
    • Export Citation
  • Osborne, D., and T. Gaebler, 1992, Reinventing Government (Reading, Massachusetts: Addison-Wesley).