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Accruals in the Public Sector Are Here to Stay! Pursuing a Productive Debate

Dr. Martin Dees, Strategic Audit Advisor, Netherlands Court of Audit and Bram Faber, PhD student, Vrije Universiteit Amsterdam  | 

In recent times it has been stated that auditors are moving against accrual accounting for the public sector as they argue that the benefits of moving from the cash to the accrual basis of accounting do not outweigh the significant costs of these reforms[1].

We argue that this interpretation does not tell the entire story – to put it mildly. Reservations about the merits of accruals should be considered in the light of the overall positive experience with accruals confirmed by empirical research by the OECD[2] and viewpoints of managers and experts of Supreme Audit Institutions in the EU[3]. Most OECD and EU Member States have effectively moved to accrual accounts, or are on the move,[4] and most expressed satisfaction that the main reform objectives of transparency and accountability are being achieved. Accruals in the public sector is here to stay!

And we believe it is for a good reason: only accrual accounting is capable of telling the complete financial story of a government entity in a systematic and well-organized way. The same is true for accrual-based budgeting, as this improves cost information to decision makers and stimulates discipline for the purpose of budget execution. Completeness, coherence and connectivity: these are the unique selling points of accruals in our opinion.

Nevertheless, there is much room for improvement in the application of accruals in public sector financial management. Neither SAIs nor the OECD believe that the process of reforming accounts is over – even SAI-representatives from front-runner EU Member States believe that there are further challenges ahead.  

Increase standardization

A prominent challenge is harmonizing accounting treatment across different levels of the public sector within countries, and across countries. Although several EU Member States are well on their way with the implementation of accruals, a wide diversity of interpretations exists within and between countries.

This has given rise to an uneven playing field of early adopters and laggards where some have made significant progress in implementing accruals and others are still struggling to value fixed assets. And where early adopters are applying a diversity of measurement methods for tangible assets: from the required market value or replacement cost to the preferred historical cost which they argue limits the effects of price fluctuations and reduce the registration and valuation burden.

These diverse interpretations impede comparison and consolidation. Examples exist of the preparation of consolidated financial statements that took over two years to assemble. Consolidation could be done more timely when entities use the same accounting system, and timeliness is essential for financial information to be relevant.

The lack of a clear supranational vision on the topic has been criticized. A convincing and well-communicated EU vision and a plan for introduction and implementation of European Public Sector Accounting Standards (EPSAS), making use of the International Public Sector Accounting Standards (IPSAS) as a clear and representative point of reference, would help countries to move forward in a consistent way, thus improving the comparability of financial information and the accounting basis for EMU statistics.[5] Such a vision and plan seem absent at the moment.

Stimulate usage

A final point to note is the actual use of accrual-based financial information. Accrual-based budgeting, accounting and financial reporting are not mere technicalities. They enable decision makers – such as managers, ministers and members of parliament – to make well-informed decisions based on their consideration of all relevant financial information. Ex-post, they enable the same parties to discuss accountability meaningfully, based on complete, true and fair financial information, as a firm basis for discharge and learning.

The OECD report Getting added value out of accruals reforms argues that accrual accounts should be used by all stakeholders; however, accrual reforms are often rolled out by accountants and ignored by stakeholders. Most of the countries that have adopted accruals continue to use cash budgeting and most stakeholders continue to rely on cash-based information.

Accrual-based financial information is usually communicated in technical, expert concepts and language that is hard to understand for non-expert stakeholders. Instead, governments should aim to tell a story with their accrual accounts. An example is Australia’s simplification project, which is aimed at avoiding information overload, improving clarity, and considering the trade-off between preparation and audit costs and user information needs by asking the question: what types of information are actually used?

Today, we are at a turning point in the discussion regarding the basis of accounting for the public sector. It is prudent to consider carefully and respond to the critical arguments relating to accrual accounting; however, these arguments should not reverse time by questioning the need for and momentum of accrual accounting. Accrual accounting is here to stay. Consensus exists among OECD countries and SAIs regarding its added value. Nevertheless, it is important to continue to improve and solidify the completeness, timeliness, and reliability of accrual accounts. It helps to disclose meaningful stories, and in turn results in better decisions on the use of public resources, the quality of services, and the trust in government.

The authors would like to thank Maarten de Jong PhD and Alta Prinsloo for their valuable suggestions and comments.


[3] See reports by Peter Welch of two seminars for EU SAIs and the ECA on public sector financial reporting organized by The Netherlands Court of Auditors in ECA Journal No. 2 2018 (pp. 80, 81) and No. 2 2019 (pp. 180, 181).

[5] Economic and monetary union, abbreviated as EMU, refers to the economic and monetary integration of the 27 Member States of the EU. It involves three stages: (1) coordinating economic policy, (2) achieving economic convergence, and (3) adopting the euro.