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Accrual accounting and public sector reform : Northern Territory experience

Rkein, Ali (2008). Accrual accounting and public sector reform : Northern Territory experience. PhD Thesis, Charles Darwin University.

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Author Rkein, Ali
Title Accrual accounting and public sector reform : Northern Territory experience
Institution Charles Darwin University
Publication Date 2008
Thesis Type PhD
Subjects 1501 - Accounting, Auditing and Accountability
Abstract The reform of the public sector has been a continuing challenge for many governments around the world. In recent years, this reform has become dominated by such terms as ‘new public management’, ‘managerialism’, ‘marketisation’, ‘privatisation’ and ‘commercialisation’. These terms reflect a broadly-based commercial direction that governments started taking in response to reform’s pressures resulting from a perceived crisis of legitimacy, responsiveness, efficiency and accountability in public sectors. A significant feature of this commercial orientation was the adoption of private sector practices and economic market models by governments and public sector organisations. The underlying principle was competition. Governments believed that competition plays a major role in improving organisational performance, and by subjecting government organisations to relevant forms of competition they would become more cost conscious and results focused, leading to increased efficiency, effectiveness and accountability. In Australia, this commercial orientation has taken momentum with the introduction of the National Competition Policy, which advocated that to become more economic, efficient and effective, public sector organisations should operate on the same commercial principles as the private sector. In this regard, the policy required Australian governments to ensure competitive neutrality by eliminating resource allocation distortions arising out of government ownership, such as tax exemptions, regulatory advantages, discounted interest rates on loans, and cross-subsidization. Accounting has been a key element of this reform process, with a change being required as the traditional cash accounting system was not capable of providing the additional financial information that was needed as a result of the commercial orientation. In this regard, governments in Australia have introduced a commercial accounting system through the adoption of accrual-based accounting, budgeting and reporting practices. At first, the adoption of these practices started in organisations that provide business-like services and are in competition with private providers. At a later stage, Australian governments started also to introduce the practices into their whole public sector. While accrual accounting was believed to be useful in a competitive operating environment, this study aims to analyse its working in the Northern Territory of Australia where competition is very limited. The high cost of production resulting from a relatively small and dispersed population and the lack of economies of scale have resulted in a small private sector in the Territory. This has made the provision of many government services driven more by social imperatives than economic imperatives. In this regard, the study intends to assess the extent that commercial accounting practices have achieved their intended reform objectives. This study highlights a number of findings based on an assessment of the Northern Territory public sector’s responses overall, supported by more detailed analyses of accounting changes in two departments. First, the small private sector in the Northern Territory has not supported the creation of a competitive market for most government goods and services. Second, although accrual accounting has been able to provide full cost information, the heterogeneity of some government services has resulted in a questionable full cost figure. The use of full cost in pricing has not achieved its intended benefits because of the absence of competitive market pressures. Also, the use of cost information in benchmarking has been fragile, mainly because higher costs of services are the result of ‘capital cost disabilities’ that exist in the Northern Territory and may have nothing to do with performance efficiency. Third, this study shows that accrual budgeting has not been used properly and therefore it has failed to achieve its objectives. Finally, while accrual reporting has improved the completeness of the accounting information available, especially at the whole of government level, it has not changed much from cash reporting in discharging accountability at organisational and whole of government levels.

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