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

198 Paul Boothe
The review of the literature on accrual accounting and the public
sector in the developing world produced a number of lessons. The main
thrust of the literature is to highlight the different policy environment
faced by developing countries. Developing countries face a number of
obstacles that are not found in the industrial world. For example, developing
countries are generally greatly constrained in the area of human
resources—in this case the large number of trained professionals required
to implement and operate a public sector accrual accounting system.
Another constraint is the lack of modern IT capacity, which forms the
basis of most accrual accounting systems.
Accrual accounting requires a significant number of sophisticated
judgments in areas such as revenue collection. In countries where revenue
collection is a problem and substantial arrears are normal, estimates of
accrued revenues may be significantly less informative than actual cash
collections. Furthermore, in countries faced with significant issues related to
governance, such judgments may, in fact, widen the scope for political
manipulation or corrupt practices. As Hepworth (2002: 8) explains,
“Governments are sovereign and therefore the temptation is to set in place
accrual rules that allow the system to be manipulated.”
In deciding whether to proceed with the adoption of accrual accounting
in the public sector, policy makers in developing countries should ask a
number of questions. The most fundamental is where such a change fits into
its priority list of public sector reforms. Is a move to accrual accounting a prerequisite
to other important reforms, or are other public sector reforms more
urgent or cost-effective? Allen and Tommasi (2001: 301) also underscore the
need for a benefit-cost approach to the decision to adopt accrual accounting:
A full accrual accounting system provides a framework for setting up asset and
inventory registers. However, assessing the value of all assets and recording
them correctly in the accounts need time, and many countries have more
urgent priorities. Thus, to improve asset management, it can be more costeffective
to begin with registering physical assets, rather than refining the
accounting system.
If the adoption of accrual accounting is set as a goal for public sector
reform in a developing country, it is important to ensure that the proper
groundwork is laid. The most important prerequisite is that a well-functioning
system of cash accounting be in place. As Allen and Tommasi (2001: 306) put
it,“A gradual approach to implementing accrual accounting can be considered