Editorial

How we measure and report on government finances: government debt, government spending and future spending (cuts), is important, particularly in the aftermath of the financial crisis. In this issue of Public Money & Management, we examine the theme of public sector accounting internationally, 13 years after a previous themed issue set out a global revolution in government accounting—the move to accrual accounting (Heald, 2003). The accruals basis is used increasingly in government accounting systems:governmentstatisticsformacroeconomic surveillance, government budgeting and government financial reporting. The financial crisis has led to initiatives (for example IMF, 2012) to improve and align all three government accounting systems, subsequently termed the ‘grand convergence’ (Heiling et al., 2013). However, there remains considerable variation in approach. We examine this continued diversity in accounting internationally in this PMM theme.

The financial crisis and austerity

Public sector accounting cannot be examined without regard to the political and economic context. The financial crisis in 2008 necessitated government bailouts of financial institutions and led to a huge rise in the levels of government debt and current deficits in many countries. Austerity places government debt reduction and the achievement of balanced budgets to the fore in government policy. But these important financial metrics can be measured in different ways—thus how to account has never been more topical. The two debate articles in this issue highlight this controversy. Caruana stylishly critiques the proposition that changing the accounting can ‘solve’ the Greek debt problem. Dabbicco and D'Amore take this further and briefly address the links between macroeconomic surveillance and general purpose financial reporting by governments—can general purpose financial reporting be used for fiscal monitoring? They set out a demanding research agenda to address problematic accounting issues, such as pension obligations. They also highlight two contextual difficulties in using government financial reporting for macroeconomic surveillance: the propensity for governments to manipulate the reported figures; and the legitimacy of the people who set the rules.

European accounting union?

The first four main papers in this issue are concerned with accounting within the European Union, where accounting is inextricably linked with economic and political union. Following the financial crisis, measures were taken to improve and standardize, within the EU, the measurement of government deficits and governmentdebtthroughthestatisticalreporting systems. After providing a useful overview of the systems for macroeconomic surveillance (statistical reporting systems), government budgeting and government financial reporting, Dasí et al. examine the standardized reporting of deficits. In particular, they investigate the effect of recent changes in how government deficits are measured under ESA 2010 on the reconciliation of the deficits with budgetary accounting. Although the statistical system is standardized throughout the EU to provide a consistent basis for Excessive Deficit Procedure (EDP), the 28 member states operate their own budgetary systems. Standardization in measuring deficits does not appear to have led to more uniformity in budgetary accounting by member states.

Government financial reporting is examined by Cohen and Karatzimas in the EU's most financially challenged member state: Greece. Their study suggests the decision-making was undertaken in an environment of ‘organized anarchy’ and there was a lack of effective monitoring by politicians and the fund providers—the Troika. The original ‘modified cash’ reforms became a unique construct of accounting standards under cash and accrual principles from International Financial Reporting Standards (IFRS) and International Public Sector Accounting Standards (IPSAS). The results were seen to favour the bureaucrats and the technical consultants. Subsequent to the study, in May 2015, the Greek government announced the intention to adopt IPSAS, perhaps influenced by an improved picture of Greek debt reported under IPSAS (Ball, 2015).

The financial crisis was a stimulus for proposals to harmonize government financial reportingwithintheEUthroughtheintroduction of European Public Sector Accounting Standards (EPSAS) and the possible use of financial reporting under EPSAS for macroeconomic surveillance. Pontoppidan and Brusca examine the first steps to harmonization through the development of EPSAS. They find limited stakeholder participation in the decision. The responses to the consultation were dominated by Germany—a country largely unsupportive of the use of IPSAS and formerly reluctant to adopt accrual accounting reform (Jones and Lüder, 2011). The development of EPSAS has many obstacles, including the lack of perceived value of more commercial style accounting for decision-making by governments; the protectionism of member states for their own national approach; and the substantial costs of implementing a new, comprehensive system of accounting.

Rossi et al. investigate the diversity in government accounting systems in 14 EU member states. Although the authors provide arguments in favour of harmonization, they acknowledge the existing diversity and propose a way forward, in which the benefits of harmonization can be obtained without obliging EU member states to necessarily abandon their current public sector accounting systems. They suggest that reporting under harmonized accounting standards could be additional to a member state's own reporting system. This would, of course, beg the question: how will decision-makers know which of the accounting systems to use?

Within the EU there are mechanisms to ensure consistency in reporting statistical measures (particularly in relation to deficits and debt), but the research does not indicate a reduction in diversity in accounting or a willingness of member states to relinquish their own systems of reporting for their public sector. There is evidence that government financial reporting in member states is more IFRS- or IPSAS-based, but the ‘grand alignment’ is not advancing rapidly.

A wider view

USA: The progress of government accounting in the USA is outlined by Payne. She charts developments from over 25 years ago when the US federal government founded the Federal Accounting Standards Advisory Board (FASAB). Since 1999, under the oversight of the American InstituteofCertifiedPublicAccountants(AICPA), the FASAB has produced generally accepted accounting principles (GAAP) for the federal government. The US approach is not for the FASAB to adopt or adapt standards established for the private sector (or the state and local government sector), but for each standard-setter to serve a unique domain. However, consistent concepts are generally applied to analogous circumstances. Thus the standards are not common across the public and private sectors, but there is a level of consistency, the differences reflect underlying arrangements and user needs. FASAB's view of user needs has changed over the 25 years: initially serving the needs of managers to, more recently, the information needs of the public. Recent initiatives have sought to help people assess budgetary integrity and operating performance. Currently, the focus is on developing an open system where costs can be aggregated by programme and related to programme outcomes.

China: Chan (2003) saw the rise in government accounting internationally as fundamentally due to the greater demand for accountability in a democracy and market economy. However, he perceived ‘the proper balance between international norms and domestic practices arisingfromnational,politicalideology,economic system and culture’. Appropriately, in this issue, ChanexplainstheChinesegovernment'sdecision to adopt accrual accounting by referring to an ancient Chinese strategy of governing. He argues that it is necessary to craft a system of government accounting and reporting with Chinese characteristics. These characteristics include serving the governing party's agenda, balancing macroeconomic policy with organizational objectives and making small innovations while moving from the status quo to international norms.

New Zealand: While China is preserving the status quo but aspiring to best practice and introducing innovations, New Zealand, previously a world leader in moving central government to ‘full accruals’ accounting, has rethought its approach. From 1992, standard-setting for both the public and private sectors was carried out by one standards board which developed standards to be applied in both sectors, i.e. ‘sector-neutral’ standards. In 2002, New Zealand moved to require public sector organizations to adopt (modified) IFRS, but 10 years later the decision was taken for these entities to report according to (adapted) IPSAS. Cordery and Simpkins explain the influences that operated between 2002 and 2012 to change New Zealand to a process similar to Australia whereby sector-neutrality became transaction-neutrality. New Zealand found it impossible to retain pure IFRS and meet the needs of preparers and users of public sector bodies. The International Accounting Standards Board (IASB) was seen to be only interested in profit-orientated entities operating in international markets, preparers and users of these entities saw sector-neutrality as ‘a glass half-full’, but many public sector preparers observed a glass half-empty. Neutrality is still prized, but it is now considered within a framework of users’ needs. This seems in line with what Payne describes for the USA as consistent concepts applied to analogous circumstances with differences influenced by user needs.

Accounting fundamentals

Recognition of assets and liabilities: Recognition and measurement criteria are fundamental to financial statements. Irwin examines whether ‘fiscalillusions'havebeendispelledbyrecognizing previously unseen assets and liabilities on government balance sheets. Irwin is concerned largelywithfiscaltransparencyandhencebalance sheets produced under the Government Financial Statistics (GFS) system. His analysis is restricted to 28 advanced economies (not the 28 member states of the EU). As such, Irwin's paper takes a broader view than Dasí et al. in geographical coverage and changes to items included in GFS. His analysis shows that many countries have made good progress in recognizing some assets and liabilities but major liabilities, such as pensions for civil servants (often as large as reported debt), frequently remain unrecognized. He suggests implementation costs, the complexity of government activities and political preferences influence balance sheet omissions, whereas the lobbying by accounting professionals and the basis of EU debt and deficit rules encourage inclusions. He concludes that Heald's global revolution is unfinished (Heald, 2003).

Measurement and adaptation the UK: Hodges examines accounting measurement. However, he does this by illustrating the difficulty of continuously adapting new updated international standards to changing circumstances (it was Heald's wish in 2003 to lock the UK government into just such a system). Hodges examines the conundrum of fair value measurement under the adoption of IFRS 13 Fair Value Measurement. The UK is a stalwart leader in IFRS for the public sector, problems are exacerbated when the standards are designed for profit-making entities operating in international capital markets (as noted by Cordery and Simpkins in the New Zealand context), but the issues are relevant also to IPSAS and GFS. The UK struggles to apply specific accounting standards, Hodges, as a member of the UK Financial Reporting Advisory Board (FRAB), is able to provide an interesting insight into the process. He argues that the resulting course of action, how the standard is applied, is often path dependant (related to past choices and the status quo). The illustration shows the varied approaches to accounting measurement considered by the FRAB, the exit price defined in IFRS 13 was considered to be only appropriate for surplus assets with no restrictions on their sale or assets not held for their service potential. The decision on how to adopt or adapt a standard can enable vastly different views of the balance sheet to be portrayed.

Conceptual frameworks: Conceptual frameworks could underpin public sector accounting and improveconsistencyandcoherenceindeveloping (or adapting) accounting standards (IPSASB, 2014; Brouwer et al., 2015). Ellwood and Newberry, in the final new development article, consider the role of conceptual frameworks. The IFRS Framework 2010 firmly establishes the objective of general purpose financial reporting as to meet the information needs of the business financier in making investment decisions; whereas the IPSASB (2014) states the objective of financial reporting as accountability and decision-making. Some doubt whether both objectives—accountability and decision-making—can be achieved (Whittington, 2008; Laughlin, 2012). What's more, although the IPSASB does recognize different purposes and users of general purpose financial reports from those of the IASB, it is not clear how these translate into different standards, particularly for similar transactions. For example Calmel (2014) argues convincingly for not following an IFRS approach for measuring government debt if taking a public sector user perspective. The lack of a clear, common understanding underlying the accounting can harm transparency and accountability. Newberry (2015) explains how ‘public accountability’, as currently defined in IFRS, would be contrary to the norms of democratic accountability traditionally required in public sector accounting. How the IPSASB can achieve its ambitious aims to serve the needs of service users and their representatives will provide an ongoing challenge and be of keen interest to researchers.

Public sector accounting internationally

Over the past decade, the level of accruals information in all three forms of government accounting information systems has consistently increased. Future growth is likely to be largely in non-OECD countries: Africa, Asia and Latin America (PwC, 2013). IPSAS often serve as a reference point in public sector accounting reform. This is encouraged by international organizations, such as the World Bank and the IMF, requiring financial management reform in their financial assistance and capacity development programmes. But Hepworth (2003; 2015) warns how the success of such reforms depends very heavily upon the political, administrative and cultural context prevailing in the developing country.

There is movement towards ‘grand convergence’. However, even in Europe, national diversity seems likely to remain, perhaps even with a further converged system overlaid. New Zealand, the original leader of sector-neutral accounting for government financial reporting, has moved away from that idea. New Zealand and the USA have separate accounting standards for each sector, but have some consistency by nature of transaction. User needs are claimed to be paramount. Where IFRS is adopted for public sector reporting, and to some extent IPSAS or EPSAS, considerable choice may be exercised by national governments in determining how to adapt an accounting standard. Conceptual frameworks are intended to form a conceptual underpinning and enhance the consistency and coherence of accounting in fulfilling user needs, but this is not assured.

Accounting is not an end in itself (Burchell et al., 1980), nor a neutral tool (Ellwood and Newberry, 2007). Public sector accounting systems serve different purposes and how they are constructed can have consequences (Ellwood and Garcia-Lacalle, 2012). Transparency and accountability are inevitably linked to culture and politics. Rossi et al. highlight the convergence ‘problem'withinEurope.Evenwherethereseems to be adherence to an accounting regime, when the accounting is studied more deeply (for example Hodges’ illustration of IFRS 13 implementation), the application of the standard may bear little resemblance to the original IFRS. Accountability to service users may be served better by reporting by programme, rather than by formats originally designed for investors in capital markets. There are difficulties in ensuring that accounting fits all levels of the public sector—a different form of accountability may be necessary for local or smaller entities than national governments. Public sector accounting internationally is very much intertwined with culture and politics. Much more research is necessary to establish the benefits and drawbacks of different public sector accounting approaches in different institutional settings. It is unlikely that governments will freely surrender control of public sector accounting to a body without common cultural and political understanding—and it is not clear that the case has been made adequately why they should.