The ‘third hand’: Private sector consultants in public sector accounting change

Abstract

This paper explores the role of large private sector consulting firms in the promotion and implementation of public sector accrual accounting. By focusing on an early adopter of accrual accounting for its entire public sector, this research presents an analysis of the activities of large consulting firms in the process of a significant public sector accounting change. The role of consultants in the change is presented by analysing primary data extracted from archival sources and oral histories provided by a number of prominent actors classified as users of information (politicians), producers of information (bureaucrats) or accounting consultants. The role and impact of the consulting firms' actions can be better understood by applying concepts of non-coercive isomorphism and the interplay between self-interest and perceived public interest. The consulting firms are shown to have used phantom images to promote the case for accounting change. This was done with a zealous belief that bringing public sector accounting into line with private sector accounting was an inherently righteous objective.

Acknowledgements

The participation and generous donation of time by each of the interviewees in this research is gratefully acknowledged. Without their willing participation this research could not have taken place. This paper has also benefited from helpful comments by participants at the EIASM Conference on Accounting, Auditing and Management in Public Sector Reforms (Dublin, September 2002), two anonymous reviewers and Professors Sven Modell, Lee Parker and Peter Skærbæk.

Notes

1. At the same time as this case there were the beginnings of privatization, out-sourcing and administrative changes that have altered the face of the public sector. However, this paper does not try to unravel the relationship between accrual accounting and other changes in the public sector nor to understand cause and effect in the growth of public sector consultancy engagements.

2. The case here presents data relating to large consulting firms but does not relate to smaller firms that may also influence public sector accounting; Lapsley and Oldfield (2001) show that behaviour of small self-employed consultants may be different to the global consulting firms in a number of respects.

3. The demonizing literature on consultants is not confined to public sector consultancy. For example, Fincham notes ‘consultants are seen as a group that has gained an insidious power, unaccountable and unseen’ (1999, p. 336) and they ‘rank among the great folk devils of the business world. The scornful humour they attract … is anecdotal of a more marginalized status and of the constraints on the industry’ (p. 341). Part of the literature that portrays a demonized view of consultants is also characterized by a view of their clients as either being dopes or dupes in which they have no control (refer to Salaman, 2002, and Sturdy, 1997, for critiques of this literature).

4. Oliver (1992) also argues that institutional theory would be improved by giving attention to factors that cause erosion or discontinuance of established or institutionalized organizational practices, that is, deinstitutionalization.

5. Although not confined to the public sector, Sturdy (1997) also presents the viewpoint of consultants.

6. One interviewee declined the request to record the interview.

7. However, it was not possible to interview two important Arthur Andersen consultants, Messrs. Egol and Hunter.

8. The 1987 ASA/Andersen accrual accounting seminars received a number of newspaper reports and a television interview demonstrating the beginnings of general interest regarding public sector accounting. However, the level of interest was still rather low. For contemporaneous reports see also McGuinness (1988b), Moore (1988) and Soh (1992a).

9. Each group of interviewees confirmed that the Audit Commission report was important in solidifying the direction towards public sector accrual accounting. One interviewee also noted that the Commission explicitly decided to engage the services of each of the Big Six accounting firms in order to be even-handed in its treatment of them (‘each was given a slice of the action’; AC, Interview 10).

10. This recommendation was accepted by the Premier and Treasurer and resulted in the appointment of Big Six partners to the Treasurer's Accounting Advisory Panel which is discussed below.

11. It is important to reiterate the distinction between government trading enterprises and the general government sector here: accrual accounting was in use in government-owned NSW profit-making enterprises but it was not used in other government areas where the matching concept is rather problematic.

12. Organized by Arthur Andersen, NSW Treasury sent a study group to visit eight US jurisdictions to examine accrual accounting practice and it concluded: ‘The most important single factor to emerge from these visits is that no American State or municipality has moved to full accrual accounting’ (Nicholls and Scullion, 1988, p. 15).

13. These controversial matters were ones that the accounting profession and the standard-setters had not yet resolved (for example, treatment of heritage assets).

14. It may be argued that as more and more jurisdictions moved to accrual accounting this hypothesis of Oliver is now confirmed but that issue is an empirical one that is beyond the boundaries of this paper.

15. There was an inherent contradiction between the consultants' arguments that accrual accounting was in practice in other public sectors and its adoption would place the adopting jurisdiction at the forefront of public sector financial reform. However, this contradiction does not appear to have caused criticism or calls for clarification perhaps because the US-based jurisdictions were seen to be in a different orbit from Westminster-based jurisdictions such as NSW.

16. This paper has not attempted to study the effectiveness or success of the consultants' strategies since it is more interested in a critical perspective that adds to an understanding of the strategies. Further, as noted by Fincham and Clark (2002), assessing utility and effectiveness of consultancies is a fraught exercise.

17. However, it is unknown if sufficient time has passed to allow individuals and firms who were involved in the NSW case to have overcome their need for commercial confidentiality.

18. Specifically, the public sector nature of this case means that its applicability to the private sector is significantly reduced. The existing private sector literature on consultancy has a growing, critical, vein that deals with the question of why managers choose consultants but the public sector has an added factor that is clearly evident in this case: the role of dominant politicians that decide to take managerial discretion into their own hands and demand change (Mouritsen, 1994). In such instances, the literature that posits managers as being masters of their own destiny is of limited relevance.