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

Accrual Accounting in the Public Sector 199
once a country has a sound and robust cash accounting system in place.”
Hepworth (2002: 8) argues:
Accrual accounting is far more complex than cash accounting and it requires
the exercise of relatively sophisticated judgments. Therefore, the change should
only be attempted if the cash accounting system is working effectively and has
been doing so for some time.
Once an effective cash accounting system is in operation, an incremental
approach to accrual accounting can be made, moving to modified cash, to
modified accrual, and finally to full accrual as human resources and IT
capacity permit (Athukorala and Reid 2003). Allen and Tommasi (2001: 306)
lay out one possible transition path:
It [the transition to accrual accounts] might start with those areas of government
activity that require information on the value of physical assets, their uses,
and full costs (e.g., agencies that charge users for services provided). Taking into
account the need to strengthen fiscal management, transition countries should
focus first on implementing methods to better recognize financial liabilities in
their accounts.
In summary, in deciding whether to set accrual accounting as a goal of
public sector reform, policy makers in developing countries need to make a
hard-headed assessment of their institutional environment and capacities,
as well as of the benefits and costs of such a reform. Accounting regimes are
not an end in themselves. Rather, they are a tool to serve managers, elected
officials, and ultimately citizens as these individuals work to improve the
operation and governance of the public sector. It is on that basis that they
should be judged.
Notes
1. This section draws heavily on Graham (2007, chapter 4), who provides an accessible
review of the issues surrounding cash and accrual accounting in the public sector.
2. For a recent survey, see Alesina and Perotti (1999).
3. This section draws heavily on Boothe (2004).
4. It is useful at this point to define more precisely the terms cash and accrual accounting.
Until recently, many governments in industrial countries have used what
accountants call modified accrual accounting. Under this accounting regime, physical
capital is treated as an expenditure in the year it is constructed, and no depreciation
of the capital is charged as an expense in subsequent years. Because this chapter