Major Study Finds Benefits of Accrual Accounting not Delivered to Members of Parliament

Ezzamel, M., Hyndman, N., Johnsen, A., & Lapsley, I. (2014). Reforming central government accounting: an evaluation of an accounting innovation, Critical Perspectives on Accounting, 25 (4/5): 409-422.

http://www.sciencedirect.com.ezproxy4.lib.le.ac.uk/science/journal/10452354

This is an important study of the introduction of accrual accounting in the Scottish Parliament as an example of the results of this reform introduced by the UK central government from 2001.  It was undertaken by four eminent professors in the field of public financial management who had direct access to parliamentarians as one was an expert advisor to the Finance Committee.  As a result, the authors had access to both documents in the public domain and privileged access to the accountability process of members of parliament.  The study included interviews with members of the first two Scottish parliaments from 1999 to 2007.  This covered the first five years of the introduction of the new accounting reforms and so went beyond the initial period which may have included both teething problems and enthusiasm for the reforms.

The authors conclusions are that the move to accrual accounting was part of the reforms of New Public Management and were not directly conducive to addressing the information needs of members of parliament, so they say that:

“there is evidence in this paper, particularly from government policy documents, which suggest that a major motive for this innovation was managerial... any privileging of the managerial interest group may have attenuated the position of parliamentarians.  (page 421)

Thus the move to accrual accounting did not lead to increased accountability. 

This study also confirms the view that one of the key beneficiaries of a move to accrual accounting are members of the accounting profession and especially the consulting firms (which explains why IFAC, the accounting institutes and the major accountancy firms are so keen to promote this type of reform).  The authors state that:

“there is a suggestion that the advancement of the case for accrual accounting by central government has given an opportunity to vested interests – management consultants and leading international accounting firms – to gain commercial opportunities (Christensen, 2002; Christensen and Parker, 2010).” (page 415)

The studies major concern is that the adoption of accrual accounting did not address the information needs of members of parliament and so was not able to increase their ability to hold the executive to account, as the following quotations demonstrate:

“this innovation did not connect with the focus of our study – parliamentarians. RAB [accrual accounting] had started life as an NPM type managerial reform. It was latterly re-branded as a useful tool for parliamentarians.” (page 416)

“expert advisers to Members of the Scottish Parliament express the view that only a minority of MSPs can challenge the financial information in a meaningful way.” (page 419)

The present system of RAB is too complex for parliamentarians who struggle to make effective use of it. (page 420)

There is evidence that Members of the Scottish Parliament are not confident in the handling of RAB-type information. However, in part this is a reflection of the sheer volume of information to which these Members of Parliament are exposed – information overload. (page 421)

The paper ends with the following important conclusion:

“The literature suggests elected members of parliament have limited financial expertise. This study suggested the RAB innovation was flawed with respect to parliamentarians, because, while, on the face of it, this form of accounting went beyond narrow financials, it failed to represent the parliamentarians’ interest in issues of activity, outcomes and of quality of service within its financial framework in a manner in which they could utilise this information effectively.” (page 421)

The paper also includes the following interesting quotations:

“The idea of externally induced innovation was advanced by Van de Ven (1986), who considered such induced innovations as potential valuable to successful organisations. However, he argued that induced innovation in poorly performing organisations may simply perpetuate poor performance.” (page 411)

Van de Ven AA. (1986) Central problems in the management of innovation. Management Science 1986;32(5):590–607.

‘‘In any discussion of the expenditure information provided by the government, there is at least one aspect on which there is agreement. It is difficult. Difficult to compile and difficult to understand. In part, the difficulties are due to the size and complexity of the government’s financial transactions. In part to the requirements of users, who differ greatly in what they want and in their experience and expertise. But there are many who have said that difficulties also arise because of the way information is presented.’’ (Likierman and Vass, 1984, p. 5) (page 414)

The paper includes the following reference that argued for the introduction of accrual accounting:

National Audit Office (NAO). Financial reporting to parliament, report by the comptroller and auditor general, July 1986. HMSO; 1986.   

However, subsequent reports from the NAO have suggested that many of the supposed benefits of accrual accounting have not actually been delivered.

The authors go on to quote one former Finance Minister as saying:

“I think the negotiation of the budget is just a nightmarish process as it involves the Parliament and the Ministers, so I suppose they [members of parliament] probably feel that they only really check that there is nothing fraudulent, and also maybe influence a bit at the margins. And that is probably fair. I think this is partly to do with the volume of the information and the complexity of it” (page 419)

They go on to emphasise the general incremental of budgets in the public sector, at least from the perspective of members of parliament:

“the incremental nature of budget setting in the public sector, in which all of the focus is on the size of the increment or ‘growth’ monies and the prioritisation of these resources.” (page 421)

The authors also indicate that whilst financial reporting to members of Parliament may be difficult, reporting the results of public sector expenditure are even more problematical:

“these MSPs displayed a high level of understanding of what RAB was seeking to achieve. They exhibited major concerns with the setting of targets, their relationship to policies and wider objectives and resources devoted to thematic priorities.  (page 421)