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Module 4 Lecture Notes

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MODULE 4: MANAGEMENT ACCOUNTING IN THE PUBLIC SECTOR Lecture 1 - Accounting for the Control of the Public Sector Part 1: Public Sector (refer to Broadbent & Guthrie reading)

* Responsible for providing public services in UK (healthcare, education, pensions etc.)

* Various ways to conceptualise - ownership, funding, control, operation
- 'universal access for citizens rather than private provision through market' (B&G, 2008)

* Transition from 'public sector' - 'public services' through privatisation, corporatisation

'Domain of public service relies on perceived nature (and not ownership) of service and regulatory regime around it' - B&G (2008)
Determining domain of public service can be problematic as dependent on context Part 2: Role of Accounting

* Development of accounting into broader domain has 2 major implications: (1) Development of accounting system (2) Introduction of account system in more sectors of society
No longer just a collection of techniques which can be applied in any context
- Accounting thought now pervasive organisational concept that enables control
- Increased demand of financial information led to more rigorous approaches to financial reporting and disclosure - development of accounting standards Part 3: Role of Accounting in NPM

* NPM promotes: market, competition, resultsorientation, quantification, value-for-money -
commitment to managerialism & accountability

* Concept of performance central to NPM:
- Performance as task (judging in court, teaching of course - neutral!)
- Performance as quality of actions (competence e.g. high skilled doctor) and achievements (results e.g. patients treated) - not neutral as contains value judgement



Unbundling of PS into business-like units

More cost centre units

Contract based competitive provision with internal markets and contracts

More stress on cost identification, cost structure; cost data commercially confidential

Private sector style of management practice

Private sector accounting norms

Emphasis on visible hands-on top management

Fewer general procedural constraints; more use of financial data for management accountability

Explicit formal measurable standards; measures of performance and success

More performance indicators and audit

Part 4: Public Sector Accounting in the Age of Austerity (refer to Bracci et al, 2015) Austerity: Often used in reference to the contemporary public spending cuts - NPM reforms sought to shift focus from spending cuts to pursuit of efficiency & value-for-money
PS accounting systems used in debates to share/justify/resist austerity measures Nature of Contemporary Concerns with Austerity Proponents View:

Critics View:

Need for fiscal contraction

Ideologically driven nature of austerity claims

ECB bulletin provided legitimation of austerity through spending cuts, reduction of labour cost, privatization, reduction of welfare state

Negative social/economic consequences of measures, increased inequality - failed to achieve rhetorical aims

Should reduce debt and restore growth

Lost support among many economists

Changing Nature of PS Accounting Practices (1) Macro-data more prominent in driving public sector policy decisions (e.g. debt/GDP) (2) Emphasis on state of public finances at country level (rather than organisation level) (3) Marginalization of non-financial aspects of austerity (equity, fairness, social impacts)

Challenges of PS Accounting

* Budgets - more focus on budgets/financial reporting standards in framing scale, significance immediacy of austerity

* Measurement - more financial management & control practices of governments/PSOs

* Public Service Providers - implementing, defending themselves, mitigating blame for cuts

MODULE 4: MANAGEMENT ACCOUNTING IN THE PUBLIC SECTOR READING 1: Public Sector to Public Services (Broadbent & Guthrie, 2008) Defining Boundaries: What Constitutes Public Services?
The Domain of the Public Sector

* Renaming of public sector to public services
- Universality of access for citizens rather than private provision through a market
- Available for all members of the given society, in an equitable fashion

* Public sector previously comprised of organisation providing services to the public that were publicly funded, owned and operated - ownership and operation crucial
- Changes regarding privatisation & corporatisation made assumptions invalid
- Separation of purchasing & providing roles
- Change in what is considered essential

* Public sector included Public Institution Systems (provided healthcare/education) & Public Business Enterprises (utilities) The Domain of the Public Services

* Provision of public service organised in variety of ways - control achieved through different organisational and regulative mechanisms

* Element of government funding, ownership, public direction/regulation but no longer need for direct government ownership

* Changes in funding, governance, accountability for control & operation of public service

* Structural changes - more private sector involvement, PBE ownership transferred to shareholders from government - PBE subject to more financial reporting, regulatory frameworks to protect social good

* Regulation created to control pricing and protect public interest of privatised areas

* Using ownership as criteria no longer possible different in different jurisdictions/over time in same one

* Introduction of Public Private Partnerships and Private Finance Initiative expanded private sector involvement

* Privatisation linked with modernisation - linked with delegation of responsibility

* New systems of accountability (performance indicators, performance management systems) institutionalised to monitor risk & achievement

* PBE floated entire functions (becoming private), PPP/PFIs undertaken in particular projects (do not represent change of ownership, but change in provision of services)

* Public Services Accounting Research should be concerned with delivery of public services rather than with ownership and organisational structure of public sector


* Move to external reporting issues and the concern with public infrastructure
- NZ seen as leader in adoption of new public management approach - particularly attracted to private sector approach to public service delivery
- Concerns about applicability of private sector approaches in the public services as seen to be driven by different assumptions
- Issues related to treatment of infrastructure assets - introduction of capital charging to keep consistent with private sector
- One explanation for increased interest in applying private sector approaches is introduction of more private sector involvement in the public services - need comparable information for decision making
- Third-Way Thinking: Partnership between public and private organisations - structural change required accounting, auditing and accountability changes
- PPP/PFI promotes public service delivery by private sector; private sector contracted, funded by taxation revenue to deliver public service; partnership through sharing of risk
- Criticised as private sector makes profit from services such as health, education, police
- Need to explore whether the different elements that comprise the domain of the public services can be accounted for in the same manner

* Governance & Risk
- Financial scandals in private sector affected thinking & practice in public services
- Regulation such as Sarbanes Oxley Act (US), Combined Code (UK) come into place
- Research question extent to which governance of public services using framework from private sector principles is applicable: are the needs so shareholders in private sector and stakeholders in public centre the same?

* Performance Measurement & Management
- Understanding of how different stakeholders can be reassured that organisations are doing what is expected of them
- Concern where accounting systems imposed help to make transparent or obscure actions of organisation
- In response accountability systems closely concerned with performance developed
- Targets as likely to cause dysfunctions as to ensure intent outcomes in public services
- Mutation of MA technologies - move from controlling budget performance based on concern with inputs towards PM concerned with achieve desired output
- Areas of interest traced to growing interest in using business approaches and introduction of private sector as provider of public services Conclusions

* Significant omissions - range of locations could be more extensive, research looks specifically at policy aspects of technical agenda but doesn't consider context, gap in consideration of governance

* Need more coherent body of knowledge to effectively address legitimacy of concerns

* Must go beyond understanding and try to change the world

MODULE 4: MANAGEMENT ACCOUNTING IN THE PUBLIC SECTOR READING 2: Public Sector Accounting, Accountability and Austerity: More than Balancing the Books? (Bracci et al, 2015) Introduction

* Austerity often used in reference to public spending cuts but rationale is to 'restore balance in government finances and regain economic dynamism and competitiveness'

* NPM tried to shift policy focus from expenditure cuts to pursuit of efficiency and v-f-m

* Accounting presented as technical/neutral practice, used to justify cutbacks, representing them as economically/technically essential untainted by politics - calls for accounting scholars to investigate how accounting is implicated in policies of austerity

* Austerity poses new challenges to budgeting, measurement and reporting systems Austerity: Contemporary Concerns & Consequences

* Following outbreak of GFC, countries implemented stimulus measures but by 2010 measures replaced by austerity programs to reduce unsustainable debt

* Fiscal contraction of government (public spending cuts, reducing labour costs, privatisation, reducing welfare state) - expansionary impact of GDP

* However negative social/economic consequences of austerity - argued measures are political (i.e. pursuit of smaller state) rather than economic

* Miscommunication between opposing sides made debate long/inconclusive - for austerity argue on basis of morality/politics, against argue based on economic efficiency

* EU particularly stricken by austerity - justified by threat of government bankruptcy

* Argued that austerity failed to achieve its goals (debt reduction, increased GDP) while increasing inequality and injustice
- Increased poverty in Europe, further 15 - 25m living in poverty by 2025
- Emigration of young people in Baltic states and Ireland to find work
- Worsening safety, job satisfaction, negative emotional impact

* Austerity is complex and dynamic with uncertain and controversial outcomes Austerity and Transformations in Public Sector Accountability and Accounting

* NPM vs current era of austerity

* NPM - promoting principles of the market, encourage competition, result-oriented behaviour, quantification, emphasis on v-f-m - belief in managerialism; accountability

* Accruals accounting presented as tool to ensure better use of resources focusing attention on ex-ante budget appropriations and actual results - infusing public sector with private sector rationalism and managerialism

* Emphasis on state of public finance has marginalised 'non-financial' aspects of austerity (equity, fairness, social implications)

* Austerity reforms focused on reducing size of state but through differing means and with different accountability requirements than under NPM

MODULE 4: MANAGEMENT ACCOUNTING IN THE PUBLIC SECTOR Changing Roles of Auditors and Citizens and Changing Focus of Accountability

* Expected growing significance attached to official public sector auditing institutions however UK announced abolition of global recognised Audit Commission

* Replaced Audit Commission it with requirements for local governments to publish range of financial/performance information so citizens could hold them accountable

* Citizens put in uncomfortable position of having personal responsibility of evaluating local government services whilst local government are facing unprecedented financial cuts Accounting as a Constraint to Support or as a Buffer Again Austerity

* In some cases accounting systems used to support and advance austerity and in others partially buffering or resisting it

* At local government level, traditional budgetary accounting system appears to have left a certain degree of budget flexibility with local authorities enabling them to keep the level of social and political consensus high in short and medium term

* Organisational response to austerity was to adapt and conform to the dominant discourse in order to maintain resources The Case for Accruals Accounting and WGA

* Adoption of accruals accounting central in NPM agenda - fundamental tool to achieve private sector rationalism and managerialism

* Heavily emphasised in austerity, despite private sector accounting playing role in GFC

* 'Accruals accounting only generally accepted information system that provides a complete and reliable picture of the financial and economic position and performance of a government'

* European Public Sector Accounting Act to ensure harmonised, comparable financial reports across members states rather than adopting IFRS

* EPSAS though to provide more central control of public finances - strengthening broad based EU policy

* Greek failure to use EPSAS allowed Greek debt to be overstated while loss on its 'loans' was hidden increasing austerity

* Whole of Government Accounts (WGA) - provides data that can be used to hold government accountable for its spending choices - offers better picture of 'real' value of public debt and sustainability of pensions

* Critics claim politicians/officials misunderstand WGA reports; do not feel it is useful to help deliver improvement

* However benefit of catalytic, processual effects (improving internal accounting systems across different segments) Austerity and the Accounting Research Literature

* Accounting profession criticised for failing to anticipate the crises of banks and FI (e.g. claimed silence of auditors)

* Role and significant of 'fair value accounting' in GFC

* Extent to which accounting firms have contributed to increasingly inequitable distributions of income and wealth

* Impact of practices on economic modelling and interventions of policy makers

* Despite calls of accounting studies to explore social & organisational dynamics of GFC, little attention received

* Greek financial crisis - blame shifts from 'flaws in system' to bad players that failed to internalised capitalistic values

* Lack of research on MA practices in era of austerity


* Van der Kolk et al (2015): Austerity brought stronger reliance on constraining elements of MCS (stronger financial stability in ST) but detrimental effects on employee motivation

* Ferry and Ahrens (2015): Despite being financially weakened by budget cuts, Newcastle City Council able to retain considerable degree of political control through budgetary process that allowed it to 'divide and rule' but keep support of majority of grassroots groups by involving them in considerations

* Lapsley et al (2015): Adoption of austerity measures in Ireland, Greece and Spain initially made with legitimate purposes but then increasingly for reasons related to dependence on resources Concluding Thoughts: Accounting for Austerity

* Lack of research on austerity surprising, considering its significance in making past research outdated, if not irrelevant

* Current research offers 3 principal reflections: (1) No evidence that austerity works (2) Impact on public services is widely anticipate to be substantial (3) Despite scale of critiques of austerity and policies, alternative reform in short supply/
not easy to specify succinctly

* New research should demonstrate alternative accountings of austerity and its consequences - serve as reminder/voice of social conscience in terms of which is being secured/lost/devaluated under austerity

* Suggested topics for further research:
- Politics of austerity: the performativity of accounting
- Austerity and MA: view from inside the organisation
- Accounting for austerity: more than cuts and balancing budgets (social consequences)
- Alternative accounts of austerity: the scope for multi-disciplinary, radical thinking

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