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

Accrual Accounting in the Public Sector 187
Even proponents of accrual accounting recognize the accountability
problems inherent in mixing accrual accounting with the traditional cash
budgets presented to legislatures that result in one-year appropriations
being voted. Blöndal (2003) addresses the dilemma. He writes that accrual
accounting seems more attractive than accrual budgeting for two reasons:
First, an accrual budget is believed to risk budget discipline. The political
decision to spend money should be matched with when it is reported in the
budget. Only cash provides for that. If major capital projects, for example,
could be voted on with only the commensurate depreciation expense being
reported, there is fear that this would increase expenditures for such projects.
Second, and somewhat contradictory to the first reason, legislatures have often
shown resistance to the adoption of accrual budgeting. This resistance is often
due to the sheer complexity of accruals. In this context, it is noteworthy that
the legislatures in those countries that have adopted accrual budgeting generally
have a relatively weak role in the budget process. (Blöndal 2003: 44)
One of the key differences between cash and accrual accounting is the
need, under accrual, to form estimates of revenue and (especially) expense
relevant to the period in question. In contrast, cash accounting is based on
direct measurement. Both are susceptible to manipulation. In the case of
cash accounting, financial statements can be manipulated by managing the
timing of transactions. In the case of accrual accounting, the scope for
manipulation is inherent in the formation of estimates of revenue and
expense. Hepworth (2003: 38) has outlined concerns with manipulation of
financial statements under accrual accounting:
The main criticism of cash accounting is that cash accounts can be (and are)
manipulated to ensure certain cash outcomes are achieved. Exactly the same
criticism can be leveled at accrual accounting, which offers even greater scope
for manipulation.
He goes on to caution that the adoption of accrual accounting may lead
to greater financial control problems:
Accrual accounting (which requires that income and expenditure are recognized
as they are earned or incurred, not as with a cash basis of accounting,
when they are received or paid) will not solve underlying financial control
problems—it can only make them worse. This is because it leaves considerable
scope for judgment, and if financial control is not effective under a cash
accounting system, then it is likely to be even less effective under an accrualbased
system. (Hepworth 2003: 37)