The Effect of Accounting Regulation

“I wish to see the finances of the union as clear and intelligible as a merchant’s book…” – Thomas Jefferson.  Private and public sector accounting and accountability is an argument as old as the United States of America itself. The way governments manage their finances and reports has been a very controversial topic for many years. However the assumption that the public sector will be more efficient, transparent and credible if they were to take on business accounting standards, and it would be just as simple as following frameworks such as the Generally Accepted Accounting Principles (GAAP) is arguable.

There are many factors that need to be taken into account before attempting to make such an assumption. Although there are some truths to that and benefits that follow, it is not necessarily the whole picture. There are many questions one can ask themself, who are the public sector accountable to? And the differences in accountability held by the Public and private sector. What is the corporate and or mission strategy of the two sectors? And how do the key performance indicators reflect those strategies? And more importantly what are the challenges faced by the public sector in the adoption of these accounting standards.

The benefits of adopting Business accounting in the public sector

Accrual accounting is by far the most spoken of topic when it comes to the adoption of generally accepted accounting principles, as GAAP requires business firms to use accrual basis accounting as opposed to a cash basis. Accrual accounting allows for the recognition of revenue and expenses as they occur, which are the increases and decreases of net assets and can be managed much more efficiently, it also provides more insight into the financial and physical assets, liabilities and the transactions that take place, which can be seen on the statement of financial position. Cash basis accounting however, items are only taken into account when the payment is received or incurred and therefore there is no recognition for any real costs or benefits of the activity or output, which some entities may take advantage of by the continued deferral of payments.

The separation of managerial and financial accounting this allows public entities to regulate their management in a much more efficient and separate manner to their financial accounting. Where the entity has complete discretion when preparing budgets and cost structure in provision of management planning, and the entity is free to run its management financials as it perceives suitable. In contrast the external reports the entity generates for the public is highly regulated, which enriches the credibility of the entity and its financial statements.

Credibility is highly valued within the private sector, as stakeholders of the business really rely on the reports produced by the entities, however although there aren’t many users who depend on reports produced by the public sector, politicians within governments that have adopted forms of GAAP have come to find much value in credibility and it has become a very significant cultural institutional structure change and politicians find the standards largely reflect the economic material, which has allowed them to put more focus on the their real business rather than feel the need to play with the numbers as some governments do.

The difference between public and private accountability

The first concept you learn in accounting, is the importance of maximizing shareholder value, and that is one of the firm’s main goals, the main duty of managers within the public sector is to increase the returns on behalf of the shareholders of the firm. It is important for the firm to provide accurate reports showing accountability and the efficiency of the firm, to its stakeholders in order to better inform them and allow for enhanced decision making. In complete contrast Public sectors have no intention of generating profit let alone increasing it, public sectors cannot be characterised as one sole entity it is much more complicated, it comprise of many different establishments, including central government, local governments, and they can take forms of hospitals non for profit entities such as world vision, UNICEF and St John. All of these entities have varying goals and all have a variety of different forms of funding, purposes and of course accountability but one thing is for certain they are all seeking to achieve efficiency and effectiveness in the functions they are pursuing which can range from saving a life to ensuring public safety through the police force.