Public Sector Governance and Accountability Series: Budgeting and ...

180 Paul Boothe
adopting a modified form of accrual.A small number of developing countries
had also followed suit.
However, the support for adoption of accrual accounting in the public
sector is by no means universal. Opponents express a number of concerns.
Some commentators wonder whether private sector–based accrual accounting,
in which the main focus is financial performance, is appropriate for the
public sector, whose main focus is democratic accountability. Others question
whether the sophisticated judgments regarding valuation that accrual
accounting demands actually broaden the scope for political manipulation.
Finally, some express doubt that the cost of moving to the more technically
demanding accrual system is justified by the benefits it brings over traditional
cash accounting.
One relatively new area of academic research is the study of fiscal institutions.
Although a good deal of work has been done on the properties of
fiscal rules, relatively little analysis has been done of the interaction of fiscal
rules and accounting regimes. In particular, it is interesting to consider how
the adoption of different accounting regimes changes the incentives faced by
budget makers in different fiscal environments and how it results in different
fiscal outcomes.
Beyond the debate over the benefits and costs of moving to accrual
accounting in industrial countries like the OECD member states, a parallel
debate is taking place in some developing countries over the adoption of
accrual accounting. Developing countries face a number of unique challenges.
Such challenges include the large number of competing priorities for public
sector reform. Developing countries face serious constraints in the area of
human resources and information technology (IT) capacity. They operate in
environments where even traditional cash accounting may not be well established.
Finally, they often struggle to overcome weak governance regimes and
combat corruption.
The purpose of this chapter is to examine the debate over the adoption
of accrual accounting in the public sector, with a particular focus on providing
guidance to policy makers in developing countries. The first section presents
a brief review of the workings of cash- and accrual-based accounting systems
in the public sector. The second section reviews the arguments for and
against adoption of accrual accounting in industrial countries. The third
focuses on the interaction between fiscal rules and accounting regimes. The
fourth section reviews the arguments for and against the adoption of accrual
accounting in developing countries. The chapter concludes by drawing some
lessons for policy makers.