Public Sector Accounting

(1)

(2)

‘Since the global economic crisis in 2008, governments have provided large amounts of public money for financial and economic interventions. These interventions have strained public budgets significantly and raise an issue of fiscal transparency and stability. Today, in 2014, the question of whether taxpayers money is spent wisely, is still very relevant. Responsive accountability, harmonised international accounting standards and adequate management information are an important prerequisite for answering this question. It is therefore with pleasure that I recommend reading this book.’

Ellen van Schoten,Secretary General Netherlands Court of Audit, the Netherlands

‘The book is an excellent introduction to public sector accounting. It ranges from theoretical concerns of several aspects of public sector accounting to empirical presentations of how public sector dilemmas unfold in diﬀerent settings around the world. I recommend this book as a good introduction for students of public sector accounting.’

Bino Catasus,Professor, Stockholm University, Sweden

‘Public sector accounting systems currently have signiﬁcant strains and stresses associated with existing social, cultural, economic and environmental challenges. This textbook presents signiﬁcant advances in the theoretical and practical understanding of public sector accounting in its context. The book provides a contemporary public sector accounting and auditing perspective that is geared to comprehend the current and future challenges and provide sign posts for students and public sector actors to strategically act on the many contemporary challenges.’

James Guthrie, Professor,Macquarie University, Australia and University of Bologna, Italy

(3)

This page intentionally left blank

(4)

As change sweeps across the public sector, a huge range of accounting and ﬁnancial management challenges are created. This textbook analyses the reforms that are being introduced to deal with these challenges and their global impact on the public sector.

Readers are provided with an international overview of government accounting, reporting, management control, cost accounting, budgeting and auditing. In explaining how innovative ﬁnancial management tools are utilized in the public sector, the authors address a number of emerging issues:

Harmonization trends in public ﬁnancial management and International Public Sector Accounting Standards (IPSAS)

Financial reporting and consolidated ﬁnancial statements in the public sector

Public sector management accounting and control methods Financial and performance auditing in the public sector

This concise and accessible textbook will be core reading for public sector accounting and ﬁnancial management students and will also be required reading for students of public management and administration more generally. Managers, accountants, consultants and auditors working in the public sector will alsoﬁnd the book a useful reference.

Tjerk Budding is Senior Lecturer in Public Management and Financial Accounting at VU University Amsterdam, the Netherlands.

Giuseppe Grossi is Professor of Public Management and Accounting at Kristianstad University, Sweden.

Torbjörn Tagesson is Professor of Accounting at Linköping University, Sweden.

(5)

This page intentionally left blank

(6)

Public Sector Accounting

Edited by

Tjerk Budding, Giuseppe Grossi

and Torbjörn Tagesson

(7)

by Routledge

2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge

711 Third Avenue, New York, NY 10017

Routledge is an imprint of the Taylor & Francis Group, an informa business

The right of Tjerk Budding, Giuseppe Grossi and Torbjörn Tagesson to be identiﬁed as editors of this work has been asserted by them in accordance with the Copyright, Designs and Patent Act 1988.

All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers.

Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identiﬁcation and explanation without intent to infringe.

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data

Budding, Tjerk.

Public sector accounting / Tjerk Budding, Giuseppe Grossi and Torbjörn Tagesson.

pages cm

Includes bibliographical references and index.

1. Finance, Public–Accounting. 2. Government business enterprises– Accounting. I. Tagesson, Torbjörn. II. Title.

HJ9733.B825 2014 657'.835–dc23

2014001438 ISBN: 978-0-415-68314-2 (hbk) ISBN: 978-0-415-68315-9 (pbk) ISBN: 978-1-315-84838-9 (ebk) Typeset in Times New Roman by Taylor & Francis Books

(8)

List of illustrations

Figures

1.1 Ends and means in public and private sector organizations 4

3.1 Structure around the IPSASB 29

3.2 Due process 30

3.3 Major steps in a conversion project 43

3.4 Accounting systems in local governments 54

3.5 Accounting systems in central governments 55

5.1 Key control object feasibility determinants 80

5.2 Simons’s control framework 81

5.3 Hofstede’s management control framework 84

5.4 Framework for performance measurement 89

6.1 The traditional two-stage cost allocation method versus activity-

based costing 107

9.1 The‘three Es’in relation to the value chain 166

Tables

3.1 Summary of all the advantages that the IPSAS can bring and all the current disadvantages and limitations that get in the way of

proper implementation 51

5.1 Diﬀerences between TPM, NPM and PV 88

5.2 Agency theory versus stewardship theory 97

7.1 Performance budgeting categories 129

9.1 A performance audit classiﬁcation scheme 171

Boxes

3.1 Overview of IPSAS 1–2 33

3.2 Overview of IPSAS 3–32 35

4.1 The European Commission’s global consolidation 69

4.2 Alternative approaches to IPSAS 71

5.1 The ten-step benchmarking process 93

(10)

5.2 Benchmarking in Swedish municipalities 95

5.3 Trust in Dutch central government 98

6.1 Cost allocation bases 106

6.2 Some evidence on the design of cost accounting systems in

governmental organizations 108

6.3 Some examples of the use of a capital charge 111

6.4 Bases for setting prices 113

6.5 Illustration of capital investment appraisal (project car

replacement) 116

6.6 The basic steps of cost-beneﬁt analysis (CBA) 117

7.1 Budgets in Dutch local government 124

7.2 Budgeting in times of austerity 125

7.3 Performance budgeting in four countries 131

7.4 PBB in the Swedish central government 131

7.5 The use of performance information in budgetary decision

making in Estonian central government 132

7.6 Accrual budgeting in the United Kingdom, Australia and New

Zealand 134

7.7 Participatory budgeting in Porto Alegre 139

7.8 Long-term council community plans in New Zealand 140

(11)

List of contributors

Tjerk Budding is Senior Lecturer in Public Management and Financial Accounting at the Zijlstra Centre for Public Control and Governance, an institute that is part of the VU University Amsterdam, the Netherlands, and he is also employed in the Department of Accounting of this university. He received his PhD in Business Administration in 2008 and is the author of several articles on management and ﬁnancial accounting topics in public sector organizations, which have been published in international accounting journals such as Financial Accountability & Management and Management Accounting Research.

Filip Casselis the author of several books and articles on auditing. He is a Bachelor of Business Administration and received his PhD in Philosophy of Science in 1984. He has been a Chartered Accountant and served as Audit Counsellor at the Swedish National Audit Oﬃce. He has been ad- viser to the European Court of Auditors, to the International Organisation of Supreme Audit Institutions (INTOSAI), and to the International Auditing and Assurance Standards Board (IAASB) regarding auditing standards.

Johan Christiaens is Professor of Public Sector Accounting at Ghent University, Belgium. He earned his PhD in Applied Economic Sciences in 1997 and is the author of a number of papers on public sector accounting and auditing. He is a registered auditor and Director of the Accounting Research Public Sector (ARPS) University of Ghent, Ernst & Young (UGent-EY).

Giuseppe Grossi is Professor of Public Management and Accounting and Leader of the Research Environment on Governance, Regulation, Inter- nationalization and Performance (GRIP) at Kristianstad University, Sweden. He received his PhD in Business Administration in 2000 and is the author of several books and articles on accounting, public management and governance.

Simon Neytis StaﬀAssistant EY public sector and assistant ARPS UGent-EY.

(12)

Peter Öhman is Associate Professor of Business Administration at Mid Sweden University in Sundsvall, and Director of the Centre for Research on Economic Relations (CER). He received his PhD in Business Admin- istration in 2007 and is the author of several books and articles on accounting, auditing and public administration.

Martijn Schouteis Assistant Professor in Management Accounting at the VU University Amsterdam, the Netherlands. He received his PhD in Business Administration in 2009 and is the author of several articles on management accounting topics, which have been published in international accounting journals such asBehavioral Research in Accounting,The British Accounting Review, Journal of Business Finance & AccountingandJournal of Management Accounting Research.

Torbjörn Tagesson is Professor of Accounting at Linköping University, Sweden, and the Executive Director of the Swedish Council for Municipal Accounting. He received his PhD in Business Administration in 2002 and is the author of several books and articles on accounting, auditing and public administration.

(13)

Preface

This book has been written to provide readers with a discussion of different aspects of financial and management accounting in the public sector. The book provides relevant information and guidance needed for accountability and decision making in this context, and explains howfinancial management tools are implemented and used in the public sector. By inviting various authors with different perspectives and experience, we hope that the book will provide a multi-faceted picture of the various problems in thefield. However, this also means that the approaches and arguments presented in the different chapters sometimes differ, depending on the author’s position, view and con- ception of knowledge. Each chapter has been subject to a peer-review process;

however, each author is responsible for his own contribution(s).

In Chapter 1 Torbjörn Tagesson discusses the users and the legal and institutional prerequisites applicable to public sector entities.Chapter 2is also written by Torbjörn Tagesson, and in this chapter he discusses the standard- setting process and research approaches concerned with explaining accounting practice. Where Tagesson gives a quite sceptical view on harmonization and international standard setting, a more positive view is given by Johan Christiaens and Simon Neyt inChapter 3, where they describe the standards and standard-setting process by the International Public Sector Accounting Standards Board (IPSASB). Chapter 4, written by Giuseppe Grossi, intro- duces the diﬀerent consolidation theories and methods for public sector organizations. In Chapter 5Tjerk Budding provides an overview of management control theories and their application to the public sector. Chapter 6, co-authored by Tjerk Budding and Martijn Schoute, is about management accounting and deals with cost allocation, price setting and capital investment appraisal. Budgeting is the topic ofChapter 7, which is co-authored by Tjerk Budding and Giuseppe Grossi. In this chapter the authors deal with both traditional budgeting (such as incremental budgeting) and innovative forms of budgeting (such as performance budgeting, accrual budgeting and participatory budgeting). Auditing is the topic of Chapters 8 and 9. Chapter 8 is written by Filip Cassel and deals withﬁnancial auditing with a special focus on central government entities. Peter Öhman is the author of Chapter 9, dealing with performance auditing.

(14)

Acknowledgements

We are grateful to many individuals for their assistance in the preparation of this manuscript. These include: Tineke Yürümez-Kroon, Gilbert Rip and Curt Johansson (The Swedish National Financial Management Authority).

Furthermore, we greatly appreciate the support and assistance of Dominic Corti, Sinead Waldron and Terry Clague, all employed at Routledge.

(15)

List of abbreviations

AASB Australian Accounting Standards Board ABC activity-based costing

ADB Asian Development Bank

ARPS Accounting Research Public Sector BBRT Beyond Budgeting Round Table CBA cost-beneﬁt analysis

CEA cost-effectiveness analysis CFO chieffinancial officer

CFS consolidatedﬁnancial statement CPU central processing unit

DEA data envelopment analysis

EC European Commission

ED exposure draft

EPSAS European Public Sector Accounting Standards ESA European System of Accounts

EU European Union

FASAB Federal Accounting Standards Advisory Board FASB Financial Accounting Standards Board FEE Fédération des Experts Comptables Européens FRS Financial Reporting Standard

GAAP generally accepted accounting principles GASB Governmental Accounting Standards Board GPFR General Purpose Financial Reports

GPFS General Purpose Financial Statements

IAASB International Auditing and Assurance Standards Board IAS International Accounting Standards

IASB International Accounting Standards Board ICT information communications technology IFAC International Federation of Accountants IFRS International Financial Reporting Standards IMF International Monetary Fund

INTOSAI International Organisation of Supreme Audit Institutions IPSAS International Public Sector Accounting Standards

(16)

IPSASB International Public Sector Accounting Standards Board IRR internal rate of return

ISAs International Standards of Auditing

ISSAIs International Standards of Supreme Audit Institutions IT information technology

IT institutional theory ITC Invitation to Comment

LGA Local Government Act

MCA multi-criteria analysis

NATO North Atlantic Treaty Organization NBP National Benchmarking Project NPG New Public Governance

NPM New Public Management

NPV net present value

NZ IAS New Zealand International Accounting Standards OCMW oﬃcial centres for mutual welfare

OECD Organisation for Economic Co-operation and Development PAT positive accounting theory

PBB performance-based budgeting PIE public interest entities

PPBS planning programming budgeting system

PS public sector

PV public value

PBE Public Beneﬁt Entities

RAPM reliance on accounting performance measures R&D research and development

RPGs recommended practice guidelines SAI supreme audit institution

TDABC time-driven activity-based costing TPM Traditional Public Management

UN United Nations

UNESCO United Nations Educational, Scientiﬁc and Cultural Organization UNICEF United Nations Children’s Fund

WFP World Food Programme

XRB External Reporting Board ZBB zero-based budgeting

(17)

This page intentionally left blank

(18)

1 The conditions for and the users of public sector accounting

Torbjörn Tagesson

Learning objectives

To be aware of the speciﬁc conditions that apply to public sector accounting entities as a result of their legal and institutional prerequisites.

To have knowledge about potential and primary users of governmental ﬁnancial reporting.

Key words

The accruals assumption Externalities

Public goods Stakeholder

1.1 Introduction

The emergence of accounting and bookkeeping is often associated with Fra Luca Pacioli and the emerging trade in Italy during the ﬁfteenth century.

However, the history of accounting dates back thousands of years. This is a fact that also applies to public sector accounting. Already Alexander the Great used accounting and bookkeeping in order to control and manage his client kings. The development of accounting goes hand in hand with social and economic development in society. In the same way as the separation of ownership and control had a major impact on the development of private sector accounting, public sector accounting has aﬀected but has also been inﬂuenced by the development of democracy. According to the famous sociologist C. Wright Mills,‘democracy implies that those who bear the consequences of decisions have enough knowledge –not to speak of power– to hold the decision-makers accountable’(Mills, 1957: 325).

Although institutional, contextual and legal prerequisites vary among different sectors of society and between diﬀerent countries, the starting point for accounting is basically the same. Accounting is about recording, recognizing, measuring and reporting economic events and transactions. Double-entry

(19)

bookkeeping is the usual method used for recording accounting transactions such as purchase or sale, respectively, money received or paid. Recognizing is about determination of when revenues and costs are earned or incurred. This separation between recording and recognition is known as the accruals assumption.¹ The accruals assumption requires that one can measure the value of economic events and transactions. This measurement problem is one of the most fundamental but also most difficult questions in accounting theory. An unequivocal answer cannot be given to this question, but one way to start is to discuss and determine/identify the users and their information needs. The users and their information needs are, of course, also crucial regarding form and content of the financial reporting that is based on the recording, recognition and measurement of economic events and transactions. Thus, based on the users and their information needs, one can deduce the purpose offinancial reporting, taking into account the specific conditions that apply to the accounting entity as a result of its legal and institutional prerequisites.

1.2 Speciﬁc conditions for public sector entities

Before discussing the users and their information needs, we will highlight some of the most important aspects that characterize public sector entities.

Although prerequisites may be partly different between different levels of public sector and different public sector entities, there are some unique characteristics that apply to the entire public sector and must be considered regarding its accounting andfinancial reporting.

Governmental organizations such as local and central government entities use common and public resources to provide public goods and services to citizens and users. According to Barton (1999), the existence of externalities and market failure form the basis for government provision of goods and services. By externalities,‘we mean situations where consumption benefits are shared and cannot be limited to particular consumers, or where economic activity results in social costs which are not paid for by the producer or the consumer who causes them’ (Musgrave and Musgrave, 1988: 42). The first type of externality, i.e. the sharing of consumption benefits, means that the use of a service or facility by one consumer does not mean that others are excluded from using and taking advantage of the benefits provided. Hence, in situations when a good or service is required, but the free-rider problem makes it unprofitable for private operators to provide the product or service, we need the government to provide it. Barton refers to these goods and services as‘pure public goods’. He exemplifies with citizens’access to the system of law, order and defence, broadcasting, street lighting, roads, public parks and so on. The situation where production of goods and services results in social costs that are not paid for by the producer or the consumer who causes them, e.g. pollution of water and air, is an example of impure or mixed public goods with a negative externality. In these situations government can try to use regulation, e.g. ‘green taxes’, in order to realign the private and social

(20)

costs, or they can choose to provide the good itself using a pricing structure that ensures the ability to recover some of the social costs (Barton, 1999).

There are also situations where social beneﬁts exceed private costs. Also in these situations government can choose to provide the service or goods themselves or to subsidize private provision of the good. Education and health services are such examples (Barton, 1999). In some cases governments also choose to regulate or provide private goods and services, when they are considered to be essential for the community. In rural areas this may include services relating to, for example, pharmacy, vehicle inspection, mail distribution and so on.

However, in many cases it concerns natural monopolies in the infrastructure and utilities sector such as railway, water and sewage, gas distribution, waste management, etc. As pointed out by Barton (1999), many of these operations also involve signiﬁcant externalities. Thus, in practice, it is not always easy to make a clear-cut distinction between private goods and public goods. What goods and services the governmental sector chooses to provide to its citizens vary between diﬀerent countries and political systems.

The powers of government and range of government activities are ultimately matters of political choice which may take many factors into consideration in addition to narrowly-deﬁned economic ones.

(Barton, 1999: 23) Whether the services are provided by the public sector because they are un- likely to be provided by other entities or because it is not considered appropriate for them to be provided through competitive market mechanisms on public policy grounds, it means that government services and goods in many cases are provided in a non-competitive environment (e.g. IPSASB, 2011) by using production means that have the character of public utilities that are not saleable on an open market.

The primary objective of public sector organizations is not to make a profit or generate return on capital, but to meet different political policy objectives and provide goods and services to citizens. In some countries, like Sweden, it is even forbidden for public organizations without specific statutory regulation to engage in businesses for profit. The right to levy taxes secures the obligations and commitments of public sector organizations. Besides revenues from tax, public sector activities are also financed by fees and grants, which are not retrieved from a free market, but are guaranteed by political decisions and regulation.

In relation to commercial enterprises, the structure in terms of means and ends are reversed to public sector organizations: while commercial enterprises run operations in order to generate resources and make a proﬁt, public sector organizations receive resources in order to run operations and activities (see Figure 1.1).

Thus, in contrast to private sector entities, the capital and revenue of which must rely on exchange transactions that are entered into voluntarily by its

(21)

Public sector organizations

Means Money

Ends/Goals Goods and services

Commercial enterprises

Goods and services

Money

stakeholders (e.g. IPSASB, 2011), public sector organizations have the character of mandatory associations, meaning that the relationship between the organization and its users is not always of a voluntary nature. Under public property rights, ownership cannot be concentrated or capitalized as in a limited company. One citizenship means one vote. This vote is personal and cannot be sold or purchased, at least not in a functioning democracy. This also means that there is no owner who can decide on dividends or with- drawals of capital. The meaning of equity is therefore diﬀerent in the public sector compared to the private sector. There are no owners who are the residual risk takers; instead, it is the economic and political freedom of action of future taxpayers and citizens that is at stake.

Considering the fact that governmental entities have no explicit owners and thus no current or potential investors, the objective of financial reporting in public sector entities is not to provide investors with information useful for forward-looking economic decision making. In the public sector the more future-oriented information is communicated through the budget. In many jurisdictions the budget is statutory and has a special legal significance. It is usually the basis for setting taxation levels and is a part of the process of obtaining legislative approval for spending and resource allocation (IPSASB, 2011), and decisions on the budget are key elements in the political management of governments. Hence, it is through the budget that the politicians communicate and articulate ideologies and future-oriented information to external stakeholders. In the light of the budget’s significance and specific role, ex-post accounting provides important accountability information and serves as an important tool in following up and evaluating if the public sector entities have met thefinancial objectives that were defined and set in the budget.

Thus, the link between budget andﬁnancial reporting provides conditions for Figure 1.1 Ends and means in public and private sector organizations

Source: Rådet för kommunal redovisning, 2011: 12

(22)

voters and other stakeholders to obtain knowledge in order to hold politicians responsible and accountable for their decisions.

1.3 Users

An organization can have many different stakeholders and consequently a wide range of users or potential users of financial reporting. To produce financial reports tailored to each individual stakeholder would not be eco- nomically viable or even possible. Legislators and standard setters have the task of ensuring a minimum level and balance various stakeholders’interests.

Thus, financial reporting must meet the general and common information needs of potential external users who cannot demand reports tailored to meet their specific information needs. For public sector entities, this range of potential users can be wide–almost every person or company has some kind of relation or exchange with some public sector entity. Governments and public sector entities raise resources from taxpayers, subscribers, lenders and other public sector entities for their use of the provision of services and goods to citizens and other service recipients. In their consultation paper regarding the Conceptual Framework for General Purpose Financial Reports (GPFR) by Public Sector Entities (2008), the International Public Sector Accounting Standards Board (IPSASB) identifies three major groups of potential users:

Recipients of services or their representatives.

Providers of resources or their representatives.

Other parties, including special interest groups and their representatives.

The IPSASB particularly emphasizes that the legislature, which acts in the interests of members of the community, is a major user of GPFRs. Besides citizens, who both receive services from and provide resources to the public sector entities, there are a number of other potential users, for example subscribers, creditors, statisticians, the media, suppliers, other governmental entities and other organizations that rely on compensation or compete with governmental entities, etc. By providing a financial report of high quality, governmental entities can also satisfy some of the information needs of organizations and users that have the authority to require reports tailored to meet their own specific information needs – e.g. politicians, officials, auditors, regulators and oversight bodies, subcommittees of the legislature or other gov- erning bodies. The wide range of potential users and the broad definition reflects the diversity and heterogeneity of the stakeholders. To accommodate all potential users would involve extensive and almost impenetrable accounting and reporting. Thus, in their exposure draft from 2010, Conceptual Frame- work for General Purpose Financial Reporting by Public Sector Entities(phase 1), the IPSASB identifies citizens as primary users of GPFRs. Also this clar- ification and definition of primary users includes a wide range of users with different interests. The interest group citizens can be divided into different,

(23)

though overlapping, subgroups such as service recipients, voters, taxpayers, etc.

Among the subgroup voters, there may be different and conflicting interests, and therefore different information needs.

Summary

Compared to the private sector, the public sector diﬀers in organizational goals,ﬁnancing, ownership and users of accounting information:

Governmental organization entities use common and public resources to provide public goods and services to citizens and users.

The primary objective of public sector organizations is not to make a proﬁt or generate return on capital, but to meet diﬀerent political policy objectives and provide goods and services to citizens.

All obligations are secured by the power of taxation.

Public sector organizations have the character of mandatory associations, meaning that the relationship between the organization and its users is not always of a voluntary nature.

Public sector entities have no owners who are the residual risk takers;

instead, it is the economic and political freedom of action of future taxpayers and citizens that is at stake. The meaning of equity is therefore diﬀerent in the public sector compared with the private sector.

The budget plays a crucial role in the public sector: it is through the budget that the politicians communicate and articulate ideologies and future-oriented information to external stakeholders.

Accounting and ﬁnancial reporting provides important accountability information and serves as an important tool in following up and evaluating the budget.

Financial reporting must meet the general and common information needs of potential external users, who cannot demand reports tailored to meet their speciﬁc information needs.

Public sector accounting has a wide and heterogeneous range of users.

Citizens are considered to be the primary users.

Discussion questions

1 The IPSASB identiﬁes citizens as primary users of GPFRs. Is it reasonable to assume that citizens actually read GPFRs produced by public sector entities? If not, does it still make sense to design the GPFRs based on their information needs?

2 It is not always easy to make a clear-cut distinction between private goods and public goods. Give examples of goods and services that are not pure public goods, but which are produced by the public sector. Discuss the reason why these types of goods and services are produced by public sector entities.

(24)

3 In addition toﬁnancial information, what other information do you think is important in order to evaluate the achievement of a public sector entity?

Note

1 Many countries still use cash accounting for the public sector.

References

Barton, A. (1999)‘Public and Private Sector Accounting–The Non-identical Twins’, Australian Accounting Review9(2): 22–31.

IPSASB (International Public Sector Accounting Standards Board) (2008)Conceptual Framework for General Purposes Financial Reporting by Public Sector Entities (Consultation Paper, September 2008), Toronto: International Federation of Accountants.

——(2010)Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities (phase 1)(Exposure Draft, December 2010), Toronto: International Federation of Accountants.

——(2011) Key Characteristics of the Public Sector with Potential Implications for Financial Reporting (Exposure Draft, April 2011), Toronto: International Federation of Accountants.

Mills, C.W. (1957)The Power Elite, London: Oxford University Press.

Musgrave, R. and Musgrave, P. (1988)Public Finance in Theory and Practice, 5th edn, New York: McGraw-Hill.

Rådet för kommunal redovisning [The Swedish Council for Municipal Accounting]

(2011) Konceptuellt ramverk för ﬁnansiell rapportering i kommuner och landsting [Conceptual Framework for Financial Reporting in Municipalities and County Councils], Stockholm: Rådet för kommunal redovisning.

(25)

2 Accounting reforms, standard setting and compliance

Torbjörn Tagesson

Learning objectives

To be aware of the political aspects of accounting standard setting.

To understand that a common set of accounting standards does not automatically mean that comparability is achieved.

To understand how opportunistic behaviour and the relationship between agents and principals may aﬀect accounting practices.

To understand how institutional pressure may inﬂuence accounting practice and harmonization.

Key words

Accounting choice Accounting practice Accounting standards Decoupling

Eclectic

Institutional theory Isomorphism

Opportunistic behaviour Positive accounting theory

2.1 Introduction

The move to accounting on an accrual basis in the public sector began in the late 1980s and early 1990s. In many countries this accounting model wasﬁrst introduced in the local government sector and then at national government level (Lüder and Jones, 2003). In several of the countries that early introduced accounting on an accrual basis, this reform was part of a major administrative reform agenda often referred to as New Public Management (NPM). NPM is the collection of management and leadership practices gradually introduced in the public sector since the 1980s. NPM is a broad term for a variety of management ideas, often borrowed from the private sector, introducing ideas and

(26)

tools like competition, privatization, management by objectives, decentraliza- tion, etc., in the public sector (e.g. Hood, 1991, 1995). The NPM movement has its origins in a critique of the‘traditional’way of exerting control and management of public organizations and as a requirement for increased eﬃciency in the public sector. In recent years NPM has endured much criticism from both researchers and practitioners (e.g. Lapsley, 2009; Pollitt, 2009). No matter what is thought about the underlying assumptions and ideas of NPM, it is noted that several of the techniques and management tools are here to stay (e.g. Lapsley, 2008), including accounting on an accrual basis. However, various failures and criticisms are likely to improve and adjust the tools and techniques in order better to conform to public sector requirements and conditions.

2.2 Standard setting

In order to codify and standardize particular accounting principles and rules, and to support the implementation of accrual-based accounting, several countries have established national standard-setting bodies. In the same manner as the scope and scale of the public sector differ between different counties, the structure, operation and authority of the national standard setters also differ. In some countries the standard-setting body is an internal or nearly internal governmental body, while in other countries the standard-setting body is external and private. Of course, when different countries use different accounting standards to regulate financial reporting, it is difficult to make comparisons between public sector organizations from different countries. The extent to which there is a need to make such international comparisons of public sector entities can be discussed. Although the situation and need is different compared with cross-listed international companies, one can assume that, with a greater element of supranationalism and international cooperation (e.g. the European Union (EU) and the World Bank), the need for comparability and international harmonization within the public sector will increase.

In the late 1990s the International Federation of Accountants (IFAC) established the International Public Sector Accounting Standards Board (IPSASB) to set internationally accepted accounting and ﬁnancial reporting standards for the public sector for application by governments of all levels and other international governmental organizations such as the European Commission, North Atlantic Treaty Organization (NATO), the United Nations (UN) and others. According to the IPSASB, their objective is:

to serve the public interest by developing high-quality accounting standards and other publications for use by public sector entities around the world in the preparation of general purposeﬁnancial reports.

(IPSASB, 2013: 10) Today the IPSASB has issued 32 International Public Sector Accounting Standards (IPSAS) using the accrual basis of accounting (as well as one

(27)

standard for jurisdictions using the cash basis of accounting before moving towards accrual accounting). The IPSASB’s impact has been limited to such an extent that only a few countries have fully implemented all the accrual- based IPSAS. However implicit, the IPSASB has had an impact by inﬂu- encing and inspiring national standard setters in their work. The main criticism levelled against the IPSASB is that their standards have not been adequately adapted to the speciﬁc needs of the public sector and that the standards are not comprehensive enough to meet all public sector accounting and reporting requirements. A proposal to introduce the IPSAS as regulatory frameworks for public sector accounting within the EU was rejected by the Parliament.

Instead, the possibility of developing EPSAS (European Public Sector Accounting Standards) is now being discussed. Presently there are many question marks. Will Germany and other countries that primarily still use cash accounting accept a directive stipulating EPSAS based on accrual accounting – i.e. will EPSAS actually be developed and implemented? How detailed and comprehensive will these possible EPSAS be? Who should have inﬂuence and decide the content and design of these standards?

The economic consequences of the accounting regulation makes the standard- setting process highly political. Influence over standard setting also allows indirect effect over how resources are distributed among different stakeholders in society. As pointed out by Gerboth:

the critical issues are not technical; they are political …Technical competence will be presumed and must be present, but an accounting rule- making body will not succeed on its technical competence but rather on its political competence … In the face of conﬂict between competing interests, rationality as well as prudence lies not in seekingﬁnal answers, but rather in compromise– essentially a political process.

(Gerboth, 1973: 479) Watts and Zimmerman emphasize the political aspects of accounting standard setting:

Rationales diﬀer (and are inconsistent) across accounting standards because a standard is the result of political action…We will observe the nature of accounting theory changing as political issues change.

Accounting theory will change contemporaneously with or lag political issues. We will not observe accounting theory generally leading political action…

(Watts and Zimmerman, 1979: 287–88) It is important to remember that Gerboth as well as Watts and Zimmerman address standard setting in general, implicit standard setting related to company accounting. However, the issue of accounting standard setting and

(28)

regulation is probably not less politically charged when it comes to regulating accounting of political institutions reporting. Regarding the development and quality of ﬁnancial accounting and regulation in the Swedish municipal sector, Brorström notes that:

To a certain point it seems like municipal accounting can be developed in accordance with generally accepted accounting principles, but when it encroaches on the space for political action, it stops.

(Brorström, 2007: 150, author’s translation)

2.3 Explaining and predicting accounting practice

Whether standard setting takes place at national or supranational level, a common set of standards does not automatically mean that comparability is achieved between the entities that must comply with the same standards. A critical factor is obviously whether standards are designed in a way that facilitate and enable comparability, i.e. it is not enough to do the same things, one also has to do the right things in order to achieve comparability. How- ever, even if the standards support comparability, it does not mean that comparability actually is achieved. Interpretation and application of accounting standards are critical factors that largely affect comparability and how the performance and financial position of the reporting entity is reflec- ted. As pointed out by Tay and Parker (1990), one has to distinguish between regulation and practice, i.e.de jure, which refers to legislation and accounting standards, and de facto, which refers to actual accounting practices of preparers. Bergevärnet al.(1995) make a similar distinction but refer to them as the norm system and the action system, respectively.

In the same manner as standard setters have to consider the context and political environment, the preparers–i.e. action system–have to consider not only the accounting standards and regulation but also its context. Thus, preparers do not always adapt to rules and expectations (Oliver, 1991), e.g. the normative and regulatory standards issued by standard setters. Depending on the situation and possible consequences, organizations and their agents may respond in a variety of ways, ranging from passive conformity, compromise and avoidance, to deﬁance and proactive manipulation (Oliver, 1991). In Oliver’s theory about how organizations strategically treat institutional pressure for change, political self-interest (cf. Downs, 1957; Zimmerman, 1977) plays a crucial role. According to Falkman and Tagesson (2008) and Collinet al.(2009), there are two main theories concerned with explaining accounting practice: positive accounting theory and institutional theory. Positive accounting theory (PAT) is based on the assumption of self-interest, while institutional theory (IT) is based on the assumption that organizations adapt to structures and processes in order to gain legitimacy and avoid uncertainty.

(29)

Positive accounting theory and an economic theory of democracy

According to the founders of PAT, ‘the only accounting theory that will provide a set of predictions that are consistent with observed phenomena is one based on self-interest’ (Watts and Zimmerman, 1979: 300). PAT is a theory that derives predictions about accounting choice from the wealth eﬀects the choice has on the agent and important stakeholders (Watts and Zimmerman, 1986). Thus, the agency problem assuming conﬂicting interests between the agent and the principals and the existence of information asymmetry, where the agent has an information advantage over the principals, are important assumptions. The theory assumes a clear correlation between companies’ accounting choices and their characteristics. In order to explain accounting choice in corporations, primarily three sets of variables have been used, namely ‘variables representing the manager’s incentives to choose accounting methods under bonus plans, debt contracts, and the political process’ (Watts and Zimmerman, 1990: 138). These three sets of variables are in line with the basic hypotheses presented by Watts and Zimmerman (1986, 1990).

The bonus plan hypothesis predicts that managers of ﬁrms with bonus plans are more likely to use accounting methods that increase current period reported income.

The debt/equity hypothesis predicts the higher theﬁrm’s debt/equity ratio, the more likely the manager is to use accounting methods that increase income.

The political cost hypothesis (also called the size hypothesis) predicts that largefirms are more likely than smallfirms to use accounting choices that reduce reported profits (size being a proxy for political attention).

InChapter 1, I emphasized that public sector organizations differ from private sector organizations regarding organizational goals,financing, ownership and users of accounting information. Another important difference, which also has implications for how PAT can be used in order to explain accounting choices in the public sector, is the principals’rationale for monitoring. In the public sector there is no existence of a capital market for residual claims that motivate individuals to monitor the agents (e.g. Zimmerman, 1977). Thus, even if voters have incentives to monitor the behaviour of the politicians, one cannot ignore that the high transaction costs associated with monitoring and the absence of capitalization under public property reduce the net benefits of monitoring the agent (Zimmerman, 1977). Still, it is reasonable to assume that both agents (i.e. politicians) and principals (i.e. voters and other stakeholders) are rational, evaluative individuals trying to maximize their own utility (Zimmerman, 1977). However, instead of assuming that the agent acts in order to maximize his own wealth, Downs argues that politicians in a democracy can be assumed to maximize the number of votes:

(30)

In eﬀect, it is an entrepreneur selling policies for votes instead of products for money. Furthermore, it must compete for votes with other parties, just as two or more oligopolists compete for sales in a market.

(Downs, 1957: 137) Thus, even if there are diﬀerences between public sector organizations and private sector organizations, the basic assumptions on which PAT is based – an existing agency problem, information asymmetry, conﬂicts of interest and utility maximizing individuals– are valid also for the public sector.

Politicians are the elected agents of the electorate and hence an agency problem exists. The interest of the principal (i.e., voters) and agent (i.e., politician) can diﬀer in a number of ways … The voters are the politician’s principals. The voters’welfare is tied to the actions of their agents (politicians) directly through the politician’s power to levy taxes and to determine the mix and quality of the services provided…

(Zimmerman, 1977: 188) Hence, the information asymmetry and conflicting interests are moral hazards, arising from the unobservability of the politicians’efforts in creating social welfare–that is, the politicians’problem to decide on how much effort to devote to create social welfare on behalf of the citizens (i.e., voters). Since effort is unobservable, the politicians may be tempted to shirk on effort or consume perquisites (e.g. Zimmerman, 1977). However, since the number of votes reflects political performance, it operates as an indirect measure of the politicians’efforts.

However, available resources are ultimately provided by the citizens (i.e., voters), against which politicians are responsible. As mentioned inChapter 1, politicians communicate through the budget and articulate their ideologies and ambitions. Ex-post accounting provides important accountability information. Thus, based on the notions of PAT it can be assumed that politicians will opportunistically select particular accounting methods whenever they believe that this will favour their chances of re-election (e.g. Downs, 1957;

Zimmerman, 1977; Blais and Nadeu, 1992; Copleyet al., 1995).

Hence, even if the conditions diﬀer between the public sector and the private sector, one can assume that opportunistic behaviour and the relationship between agents and principals aﬀect accounting practice. Even if the transaction costs associated with monitoring the agent are high (Zimmerman, 1977), one cannot ignore the principals’ incentives. According to Jensen and Payne (2005), citizens’ interest in municipal decisions, and thus information, can be explained by their level of economic input. Their economic input is related to two factors: income level (tax base) and tax rate. Thus, the higher the income, the higher the taxes paid (= economic input) and, therefore, the higher the interest in political decisions and the demand for information from public sector entities (e.g. Tagesson et al., 2013). Considering the assumption

(31)

that politicians try to maximize the number of votes (Downs, 1957) and seek re-election (Downs, 1957; Copley et al., 1995), a high tax rate can also be assumed to aﬀect the agents’needs and willingness to signal accountability to the voters (Wardet al., 1994). Thus, high tax rates aﬀect not only the principals’ information requirements but also the politicians’ need to convince the voters that the tax money is used in a responsible way (Tagessonet al., 2013).

Another important factor is political competition (Zimmerman, 1977;

Baber, 1983). Political candidates have incentive to monitor the majority and, according to Zimmerman (1977: 120),‘potential oﬃceholders therefore serve to restrain the deviation between voter and political interests’. Thus, in a competitive situation the requirements of monitoring increase (Baber, 1983), which also means that the political risk of deviating from regulation and standards increases. When there is strong competition for voters, the incentive for the ruling majority to report to voters and other stakeholders in order to signal that they are responsible in their actions increases (Copleyet al., 1995).

Zimmerman (1977) argues that politicians have incentive to reduce the cost of debt in order to free up resources and improve conditions for political action, which increases the politician’s welfare more than paying higher interest (the debt/equity hypothesis). That governments and political organizations are subject to scrutiny and demands from their creditors, and that this affects the conditions for political action, has been shown during the recent financial crisis in different EU countries.

A free press is usually seen as an important prerequisite for a functioning democracy. The press and mass media are also involved as intermediaries in the agency relationship between voters and politicians (Zimmerman, 1977).

The mass media and their journalists have economic interests in uncovering political scandals and other ills (Zimmerman, 1977). However, as pointed out by Zimmerman, there is other, better-selling and more easily documented news than uncovering inaccuracies in politicians’ accounting and reporting.

Still, the mass media are a factor that could put political pressure on governmental organizations. According to Falkman and Tagesson (2008), size is a factor that aﬀects media interest: large organizations are more closely scrutinized by the mass media than smaller organizations (the political cost hypothesis).

As mentioned in the previous section, tradition and imitation constitute two major concepts in institutional theory. However, Collinet al.(2009) argue that tradition, i.e. to do today what one did yesterday, as well as imitation can be regarded as a rational choice, and is therefore a valid explanation in line with the assumptions of PAT. In order to change policy, an entity has to engage in collecting information and ﬁnding alternatives and evaluating the economic consequences and eﬀects on the utility of agents and principals (Collinet al., 2009). These activities create what Luft and Shields (2002: 799) call ‘costs of thinking’. If the entity decides to change accounting policy, it must also have to count the costs of social innovation, ‘i.e., the necessary resources and activities to implement and motivate an accounting change’

(32)

(Collin et al., 2009: 148). Collin et al. (2009) also refer to Holthausen and Leftwich (1983), who argue that, if there are no apparent benefits infinding a specific accounting method, it is rational to copy the mainstream method. By following the mainstream method the entity does not have to spend resources in explaining its choice and thus avoids costs of social innovation and thinking (Collinet al., 2009).

Institutional theory

If PAT focuses on the allocation of scarce resources and the relationship between the agent and the principals, IT focuses on the organization and its problems associated with uncertainty, legitimacy and mobilization of resources. The theory is based on the assumption that organizations are inﬂuenced by pressure from their institutional environment and adopt the structures and/

or procedures that are considered legitimate and are regarded as the appropriate choice. The theory, which has its roots in organizational research, has

‘great relevance to accounting research’ (Carruthers, 1995: 313) and is, according to Dillard et al. (2004: 506), ‘increasingly being applied in accounting research to study the practice of accounting in organizations’.

According to Deegan (2009), there are two main dimensions of IT, relevant to accounting research. One dimension is the three mechanisms of institutional isomorphic change identiﬁed by DiMaggio and Powell (1983) in their classic article. The other dimension is decoupling (Meyer and Rowan, 1977), i.e. when formal practice is separated from the actual practice (e.g. Dillardet al., 2004).

The role of institutional isomorphism

Thus, IT assumes that organizations will apply structures and practices that are considered legitimate by other organizations within its organizational ﬁeld, which ultimately will lead to homogenization and harmonization around certain dominant norms. By organizational ﬁeld, DiMaggio and Powell mean ‘those organizations that, in the aggregate, constitute a recog- nized area of institutional life: key suppliers, resource and product consumers, regulatory agencies, and other organizations that produce similar services or products’(DiMaggio and Powell, 1983: 147).

DiMaggio and Powell (1983) identify three institutional mechanisms: 1) coercive isomorphism, attributed to the problem of legitimacy inﬂicted by pressure from external organizations upon which the organization is dependent; 2) mimetic isomorphism, a response to uncertainty by imitation and modelling successful concepts; and 3) normative isomorphism, which is associated with professionalization and primarily stems from members of a professional group’s collective struggle to deﬁne the conditions and methods of their work.

Coercive isomorphism is related to power (Tuttle and Dillard, 2007;

Deegan, 2009) and resource dependency (Carpenter and Feroz, 2001; Collin

(33)

et al., 2009). ‘Organizations can put pressure on the focal organization to behave and to structure itself in a certain way; otherwise the focal organization will not gain the needed resources or will suffer from sanctions’(Collinet al., 2009: 151). Therefore, coercive pressure can be exerted by organizations and stakeholders– like creditors, customers and owners –which directly and indirectly provide the organization with resources, as well as influence due to legislation. For example, supranational organizations like the International Monetary Fund (IMF) and the EU can put pressure on states and national governments to adopt certain structures and procedures. In the same way, national governments can put pressure on lower-level entities in the government sector, like municipalities and county councils, both directly through legislation but also indirectly by imposing requirements in connection with financing.

According to DiMaggio and Powell, ‘organizations are increasingly homo- geneous within given domains and increasingly organized around rituals of conformity to wider institutions’(DiMaggio and Powell, 1983: 150), and these institutions, depending on the situation, could be national or supranational institutions.

The mimetic mechanism is mainly related to uncertainty. In situations of ambiguity and uncertainty, organizations tend to mimic and model themselves after similar organizations, within their organizational ﬁeld, which they per- ceive to be legitimate or successful (DiMaggio and Powell, 1983). According to Collin et al. (2009), this mimetic behaviour is partly based on the same reasoning as the costs of thinking and social innovation, although the underlying cause is perhaps more legitimacy endeavour than cost reasons.

The normative isomorphism is related to professionalization, i.e. ‘the collective struggle of members of an occupation to deﬁne the conditions and methods of their work’(DiMaggio and Powell 1983: 152), and is performed mainly through professional groups promoting their competence in society (Collin et al., 2009). Professional groups and identities are mainly formed through formal education and professional association and networks (DiMag- gio and Powell, 1983). The normative isomorphism ‘relates to the pressures arising from group norms to adopt particular institutional practices[, e.g.] the professional expectation that accountants will comply with accounting standards’ (Deegan, 2009: 362). However, it is also a matter of relative power:

professionals must compromise with other groups (c.f. DiMaggio and Powell, 1983), for example auditors, regulators and not least politicians. In Falkman and Tagesson (2008: 280),‘6 out of 12 interviewedﬁnancial managers claimed that political standpoint, rather than accounting standards, was considered when the accounting treatment was decided upon’.

It is important to remember that the typology of isomorphism ‘is an ana- lytic one: the types are not always empirically distinct’ (DiMaggio and Powell, 1983: 150). Therefore, many scholars only distinguish between coercive and voluntary diﬀusion of institutional structures and practice (Modell, 2001; Oliver, 1991). However, even this division is not always possible to apply in the operationalization of factors into variables. For example, it is

(34)

quite common in studies on accounting choice and accounting practice that a correlation between auditor/auditﬁrm and the dependent variable is assumed.

As members of a professional group, auditors can be expected to putnorma- tive pressure on their clients (Falkman and Tagesson, 2008). Considering auditors’authority to decide whether an organization will receive a qualified auditor’s report or not, it is reasonable to assume that they also exertcoercive pressure on their clients (c.f. Tagesson and Eriksson, 2011). Thus, the ‘coercive tendency is reinforced by the professional group of auditors and accountants that support the observance of the regulations since it supports their profession and its extension, and because their professional attitude demands it’ (Collinet al., 2009: 155). Finally, there is also amimetic explan- ationwhy the auditfirm/auditor would affect accounting choice or accounting practice: ‘Culture and client portfolio may influence the audit habits of the professional auditors, and models of auditing may by coincidence be diffused by the auditor’(Tagesson and Eriksson, 2011: 227).

Carpenter and Feroz (2001) also point out that it is diﬃcult to distinguish and separate the three forms of isomorphic pressure, and they conclude that

‘the power and potency of the various institutional pressures for change may vary over time’ (Carpenter and Feroz, 2001: 573). In their study about four US state governments’decision to adopt generally accepted accounting principles (GAAP), they state:

Our evidence shows that an early decision to adopt GAAP can be understood in terms of coercive isomorphic pressures from credit mar- kets, while later adoption seems to be associated with the combined inﬂuence of normative and mimetic institutional pressures.

(Carpenter and Feroz, 2001: 588)

Decoupling

As pointed out earlier, it is important to distinguish between regulation and practice, i.e. the norm system and the action system (Bergevärnet al., 1995).

Daske et al. (2007) make a distinction between what they call serious and label adopters. Carmona and Trombetta explain the diﬀerence:

The distinction captured the idea that some adopters seriously modify theirfinancial reporting strategy after adoption (serious), whereas others use the flexibility of … standards to keep on using their usual financial reporting strategy under the new…label (label).

(Carmona and Trombetta, 2008: 458) The decoupling, i.e. the separation of the actual practice from the formal practice, can be done more or less consciously by the organization.

(35)

Even if an organization does not actively resist institutional change, institutional inertia and the existence of old institutionalized norms (e.g. Tolbert and Zucker, 1996; Seo and Creed, 2002), may delay the implementation of new rules and routines.

(Tagesson, 2007: 251) Oliver (1991) points out that organizations and their agents may strategically respond to institutional pressure in a variety of ways, ranging from passive conformity, compromise and avoidance, to deﬁance and proactive manipulation. ‘[D]ecoupling enables organizations to maintain standardized, legit- imating formal structures while their activities vary in response to practical considerations’(Meyer and Rowan, 1977: 357).

An eclectic approach towards the explanation and understanding of accounting choice and accounting practice

Both the choice of methodology and theoretical approach are questions that often evoke strong emotions and debate within the scientiﬁc community.

According to Collin et al. (2009), PAT studies tend to have a nomothetic orientation, using large samples and statistical testing, while studies using IT tend to have a more ideographic orientation, using case studies. According to Humphrey and Scapens (1996), there has been a reluctance to combine different social theories in accounting research and the single theoretical approach has been dominating. However, the use of mixed methods (e.g.

Falkman and Tagesson, 2008) as well as studies with a multi-theoretical or eclectic approach (e.g. Anessi-Pessina et al., 2008; Collin et al., 2009) are becoming more and more common and accepted within public sector accounting research.

A pragmatic way of relating to theory and methodology is to let the aim of the study determine both a methodological and theoretical approach. If the aim of the study is to test or develop a theory, it is of course natural to make use of a single theory approach. However, if the aim of the study is to explain or understand an empirical phenomenon, it could be fruitful to blend theories (Humphrey and Scapens, 1996) and look at them as complementary rather than competitive (e.g. Collin et al., 2009). According to Collin et al. (2009), who combined PAT and IT in order to explain the accounting choices of municipal corporations, the theories to a large extent created the same hypotheses even though they used diﬀerent logics. According to DiMaggio (1995),‘[t]he best theory often combines approaches to theorizing, and the act of combination requires compromise between competing and mutually incompatible values’ (DiMaggio, 1995: 396). Another advocate for the eclectic approach is Jacobs. His review paper, ‘Making Sense of Social Practice:

Theoretical Pluralism in Public Sector Accounting Research’, concludes with the following sentences:

(36)

This paper provides evidence that researchers do not have to be theoretically committed or theoretically pure to be held in high esteem in the academic community. Long live theoretical promiscuity.

(Jacobs, 2012: 18) Thus, even though theory development is important, there is also a need for analytical research that critically analyses empirical phenomena. Such research can beneﬁt from using an eclectic approach and also have a justiﬁcation in social science.

Summary

The move to accounting on an accrual basis in the public sector began in the late 1980s and early 1990s.

A proposal to introduce the IPSAS as regulatory frameworks for public sector accounting within the EU was rejected by the Parliament. Instead, the possibility of developing EPSAS is now being discussed.

The economic consequences of accounting regulation make the standard- setting process highly political.

Preparers do not always adapt to rules and expectations. Hence, even if the accounting standards support comparability, it does not mean that comparability actually is achieved.

There are two main theories concerned with explaining accounting practice:

positive accounting theory (PAT) and institutional theory (IT).

PAT is based on the assumption of self-interest. However, instead of assuming that the agent acts in order to maximize his own wealth, politicians in a democracy can be assumed to maximize the number of votes and opportunistically select particular accounting methods whenever they believe that this will favour their chances of re-election.

IT focuses on the organization and its problems associated with uncertainty, legitimacy and mobilization of resources. The theory is based on the assumption that organizations are inﬂuenced by pressure from their institutional environment and adopt the structures and/or procedures that are considered legitimate and are regarded as the appropriate choice.

The use of mixed methods as well as studies with a multi-theoretical or eclectic approach are becoming more and more common and accepted within public sector accounting research. A pragmatic way of relating to theory and methodology is to let the aim of the study determine both methodological and theoretical approach.

Discussion questions

1 Why might there be resistance to establishing common international accounting standards?

(37)

2 Why does the principals’rationale for monitoring the agent diﬀer between the private and the public sector?

3 According to IT, organizations will apply structures and practices that are considered legitimate by other organizations within their organizational ﬁeld. Why is it important for an organization to be perceived as legitimate?

Can you think of examples of public authorities/entities that have lost their legitimacy? What have been the consequences?

4 Argue for and against theoretical and methodological pluralism in accounting research.

References

Anessi-Pessina, E., Nasi, G. and Steccolini, I. (2008) ‘Accounting Reforms: Determi- nations of Local Governments’Choices’, Financial Accountability & Management 24(3): 321–42.

Baber, W.R. (1983) ‘Towards Understanding the Role of Auditing in the Public Sector’,Journal of Accounting and Economics5(3): 213–27.

Bergevärn, L.-E., Mellemvik, F. and Olson, O. (1995)‘Institutionalization of Munici- pal Accounting –A Comparative Study between Sweden and Norway’,Scandina- vian Journal of Management11(1): 25–41.

Blais, A. and Nadeau, R. (1992)‘The Electoral Budget Cycle’,Public Choice74(4):

389–403.

Brorström, B. (2007) ‘Den finansiella redovisningens utveckling och kvalitet’ [The Development and Quality of the Financial Reporting], in S. Siverbo (ed.) Demok- ratisk och effektiv styrning–En antologi om forskning i offentlig förvaltning[Demo- cratic and Effective Governance – An Anthology of Research in Public Administration], Lund: Studentlitteratur.

Carmona, S. and Trombetta, M. (2008) ‘On the Global Acceptance of IAS/IFRS Accounting Standards: The Logic and Implications of the Principle-based System’, Journal of Accounting and Public Policy27: 455–61.

Carpenter, V.L. and Feroz, E.H. (2001)‘Institutional Theory and Accounting Rule Choice:

An Analysis of Four US State Governments’Decisions to Adopt Generally Accepted Accounting Principles’,Accounting, Organizations and Society26(7–8): 565–96.

Carruthers, B.G. (1995) ‘Explaining Accounting, Ambiguity, and the New Institutionalism’,Accounting, Organizations and Society20(4): 313–28.

Collin, S.-O., Tagesson, T., Andersson, A., Cato, J. and Hansson, K. (2009)‘Explain- ing the Choice of Accounting Standards in Municipal Corporations’, Critical Perspectives on Accounting20(2): 141–74.

Copley, P.A., Gaver, J.J. and Gaver, K.M. (1995) ‘Simultaneous Estimation of the Supply and Demand of Diﬀerentiated Audits: Evidence from the Municipal Audit Market’,Journal of Accounting Research33(1): 137–55.

Daske, H., Hail, L., Leuz, C. and Verdi, R. (2007)‘Adopting a Label: Heterogeneity in the Economic Consequences of IFRS Adoptions’, Chicago GSB Research Paper No. 5, available at SSRN: papers.ssrn.com/sol3/papers.cfm?abstract_id=979650.

Deegan, C. (2009)Financial Accounting Theory, third edn, McGraw-Hill Australia.

Dillard, J.F., Rigsby, J.T. and Goodman, C. (2004)‘The Making and Remarking of Organization Context: Duality and the Institutionalization Process’, Accounting, Auditing & Accountability Journal17(4): 506–42.