Public Sector Accounting 1
Challenges and benefits of Implementing Accrual
Accounting in the Malaysian Public Sector
Madam Razinah binti Hassan
NAME MATRIC CARD
Ariff Hazwan bin Kamarudin 2016331603
Izzat Haikal bin Shamsol 2016307139
Nurul Izzati binti Samsuddin 2016718343
Siti Fatimah Azzahra binti Muhamad 2016718269
TABLE OF CONTENT
1.0 Introduction of the Topic 2-3
2.0 Challenges of implementing Accrual Accounting 4-8
3.0 Benefits of implementing Accrual Accounting 9-11
4.0 Discussion of Accrual Accounting 12-14
5.0 Recommendation 15-16
6.0 Conclusion 17
7.0 References 18
8.0 Appendices 19
In the name of Allah, the Most Gracious, The Most Merciful
Praise be to Allah, Lord of the universe, who gives the blessing and strength to complete this project paper for this group assignment. Peace and prayers be upon His Final Prophet and messenger Muhammad, the ideal role model for human beings.
We would like to take this opportunity to thank our lecturer of Public Sector Accounting 1 (PSA) which is Madam Razinah binti Hassan, for her support and advice in completing this group assignment. We very appreciate what she done to explain about this assignment. May Allah reward her for all her efforts.
We would like to extend our deepest gratitude and special thanks to all who have directly and indirectly guided us in the writing of this project paper. We express our deepest appreciation to our beloved parents and family for their continuous encouragement are greatly appreciated.
Lastly, we would like to expend our warmest gratitude to our friends and colleague for helping in preparing our project paper. Without their support, we would not have completed this project paper successfully.
Introduction of the Topic
Currently, in the world of public sector accounting, there are many countries already reform their government accounting policies from the cash basis to the accrual basis accounting. Accrual accounting method is explained as recognition of revenue or expenses of a transaction that made by the government. Accrual accounting method, has been develop rapidly in Malaysia, which they already develop Government Financial and Management Accounting System (GFMAS) in order for them to adopting this accounting policies in the near future. Next, using the concept of accrual accounting it provide a better of corporate governance of managing the public fund to the government due to its better transparency than the existing cash basis accounting policy. It is because, accrual accounting concept that take into the consideration of the completeness of all transaction made by the government than the current cash basis accounting that has a lot of weaknesses. This is due that, cash basis accounting policy offer limited basis of for determining the fiscal strategy, limited product or services and has limited disincentives for fraud and corruption. Thus from there, by adopting accrual accounting it enhance the accountability and the reliability, also changes the behavioral of the government accounting reporting that make it parallel with the International Public Sector Accounting Standards (IPSAS).
Public sector are defines as the services being provided by and for the government either in term of delivery of goods through its all agencies or for the people that, generally act as from the function of economic and administrative in a nation. Meanwhile, government being classified as the body who has the authority and power to make and enforce law within the country. Meaning of that, government are responsible to serve the people in the country by developing the nation in term of its infrastructure to improve their standard of lives and providing services to the citizen. All of about things and expenditure made by the government are being recorded using the public sector accounting method.
Public sector accounting defines by as a process of recording, communicating, summarizing, analyzing and interpreting the government financial statement with detail that based on proper evidence with all the receipts, custody also the disbursement, in order to make sure the stewardship in all the public moneys and funds is entrusted properly. In Malaysia, by using the public sector accounting, the financial statement are required to be compliance with Federal Constitution 1957, Financial Procedure Act 1957, Government Accounting Standards, International Public Sector Accounting Standards and etc.
Currently in Malaysia, the government are in phase of transitioning from the cash basis to the accrual basis accounting to be adopted in the public sector. Cash basis accounting is based on the business transaction that can be recorded in the account only after the payment or cash has been made or received. For example, sales transaction only can be recorded only if the customer made a payment of it. If the goods already been sold, but the payment haven been received, the sales transaction cannot be recorded in the account.
Furthermore, accrual basis accounting is a concept of recording the business transaction on the events its occur. Explanation of that, the business transaction is being recorded even there is not payment or cash received by the others. For example, the sales transaction made by the company is already being recorded in the book, even
there is not payment or cash is received and the goods have be given to the customer.
Challenges of implementing Accrual Accounting
The change in accounting rules will impact the numbers and require the production of new data and a cultural shift in the mindsets of those involved. The impact will be even greater if consolidation and employee benefits are included ( PwC Global Survey on Accounting and Reporting by Central Government, 2013, p. 22).
Transition to full implementation of accrual accounting in the public sector will significantly pose a number of challenges as experienced by early adopter’s countries such as New Zealand and Australia. Factors such as skills of manpower, management of government’s inventory and assets, change in mindsets of the people involved, continuous commitment from the senior management, IT systems and infrastructure and others.
Based on International Journal of Business Management (IJBN) by Noor Kaziemah Sariman, Rozaidi Mahadi, Rasid Mail and Raman Noordin, Faculty of Business, Economics and Accountancy, Universiti Malaysia Sabah, it is argued that the adoption of accrual accounting in the public sector is problematic. Accrual accounting is more complex and difficult to understand compared to cash accounting. One of the most and significant issues and challenges in implementing accrual accounting in the Malaysian public sector are the difficulties in valuing and recognising of assets especially heritage and military assets. These assets are difficult to identify because the acquisition costs are unknown, thereby making it harder to measure these assets in financial terms. Besides that, if there is no proper record of the assets poses a challenge as to provide accurate, relevant and detailed information about the government assets. This would make the identification, valuation and recognition process of the assets more challenging.
In addition, the adoption of accrual accounting in the public sector has shown that political commitment is essential in creating the support environment for the adoption to be taken seriously. The lack of political would result in an impossible adoption of accrual accounting in the public sector, for example, when the government has no interest or prefers not to share information with its public. This is evidenced in the experience in Indonesia who had several failures in the attempt to reform its public sector accounting due to lack of political support (Harun Robinson, 2010). The Indonesian government had no interest in good governance and was reluctant to embrace accountability and transparency under Suharto’s administration. Therefore, political commitment can be considered as a very important factor as they are the primary decision makers who make the adoption of accrual accounting in the public sector possible.
Other challenges is employee may not be fully equipped and skilled in dealing with the reform especially the employees who do not have accounting knowledge. Furthermore, shortage of qualified government accounting employees is specially significant in the developing countries. The accounting employees have an important role in the reform and without sufficient accounting knowledge, it will likely decelerate the implementation process. There are qualified and skilled accounting personnels from the private sector who understand accrual accounting but they do not necessarily understand and have adequate knowledge on the government’s practice of accounting and financial reporting. This is because the accounting education is usually focused on the commercial accounting, with less emphasis on the government accounting and financial reporting.
Another reason that caused failure towards accrual accounting implementation is associated with accrual accounting system. A successful adoption of accrual accounting requires capable and adequate computerized accounting system which can manage more complex information associated with accrual accounting such as depreciation accounts and accruals general ledgers which do not exist in the traditional cash accounting system. Based on previous experience of other countries, problem started to arise when they develop their accounting systems or made significant changes to an existing commercial system.
Based on Malaysian Journal of Business and Economics ( MJBE) Vol. 1 No. 2, December 2014, the move to accrual accounting has not been accepted universally as many have failed in implementing accrual accounting in their public sectors. There are significant discussions and arguments around the application of accrual accounting in public sector. One of the them is accrual accounting is unsuited to the public sector due to the differences in objectives and character of economic decisions making between public and private sector. Most government services are not evaluated based on profits earned or losses private sector. The accrual accounting standards have not been adequately suited to the unique environment of the public sector and the information generated might not be relevant to the needs of the public sector, thus making it difficult to be understood and interpreted.
In this journal, it is also mentioned that the major issue in the adoption of accrual accounting in the recognition and valuation of assets and liabilities. It is argued that heritage assets such as monuments and national parks, infrastructure assets, and military equipment should be actually be considered as liabilities because these assets are the subject of cash flows rather than inflows.
Apart from valuation and recognition issue, there is a concern in using two different systems which is maintaining cash budgeting after the introduction of accrual accounting. It is not recommended because of the compatibility problems that might arise with the information from the accounting and budgetary documents due to conflicting goals of the accrual and cash regimes.
Another challenge in shifting towards the accrual accounting in public sector is in regard to staffing or human competency. All staff whom are used to cash accounting might resist the new accounting system. Government accountants needs to be trained and improve their skills in accrual accounting as they have been trained for cash basis accounting. A cultural change such as re-education and retraining of staff are needed in order to ensure the success of implementing accrual accounting in public sector.
It is also argued that the costs of implementation will be much higher. The costs and benefits of the change are not necessarily well understood where it can result to an enormous wasted investment and a risk of losing financial control. According to IFAC (1996), the costs of developing information systems can be very costly as the governments need to adopt a number of new processes in the effort to move from a cash-based system to an accrual-based system. It is also involves human cost where the costs staff retraining and sometimes the recruitment of new staff can be costly to ensure successful transition. They added that these costs consist of acquisition of new computer hardware and system development cost which will require an investment of significant financial resources from the governments.
Based on the research article written by Azrina Hani Azmi and Nafsiah Mohamed, Accounting Research Institute & Faculty of Accountancy, Universiti Teknologi MARA, Malaysia. By applying the Luder’s Contigency Model to this study, it shows that the initiative has been taken by Malaysian Government to adopt full accrual accounting starting 1st January 2015. The initiative to change can be considered as a strong stimulus from government as the announcement to adopt accrual accounting has been set as national agenda. In this context, the person who prepares of information or accounting employees are willing to change as they are ready to change their mindset and implement accrual accounting. They believed that changing of government accounting system is a way to make government reporting and budgeting more transparent and efficient. The existence of strong stimulus for change at early stage of innovation process can be considered as successful. Thus, a strong stimulus would speed up the process of migration to accrual accounting. Based on the findings gathered by them, it shows that accounting employees in the MOE are ready to move to accrual accounting but there are challenges that need to be rectified before it can proceed. The finding from the questionnaire and interview shows that there are six common themes are based on training, knowledge, asset, system, top management and time frame. Findings for questionnaire and interview shows that the lack of training provided, difficulties in collection data of asset and the lack of knowledge become the top three of challenges in the implementation of accrual accounting.
The lack of knowledge may arise as accounting employees have different education background. Current accounting employees should have qualification and skills in dealing with successful implementation of accrual accounting. Without sufficient knowledge, accounting employees will not be able to read and understand the presentation of financial statement in accrual concept. Next, for the difficulties in collection data of asset is the government has certain types of assets that do not exist in private sector such as heritage assets, military assets and infrastructure asset. Thus, the challenges arise when government is required to value the asset and decide which is the best method for valuation as it will reflect the economy analysis. In addition, probability of current system to integrate with new system, lack of involvement and support from top management and insufficient time frame. For the probability of current system to integrate with the new system may due to insufficient capacity and availability of subsystems and functionalities required. The new accounting system must be able to integrate with the current accounting system. Thus, government should prioritize improvement on the existing basis of accounting and budgeting before initiating a step towards accrual. After that, the lack of involvement and support from top management would rise a conflict between members in the organization as the changes process was poorly managed (Irvine, 2011). An acceptance from accounting employees may not be positive as the top management themselves do not truly give support during the implementation process of accrual accounting. Thus, not only the accounting employees must get ready to change their mind set in accepting the changes, but the top management too, as the implementation of accrual accounting is a national policy which has been set by government. Lastly, insufficient time frame. It is considered as challenges if the implementation of accrual accounting is too drastic because it would become a burden to the person who prepare of the financial statement. This is because they need some time to fully understand the new concept of accounting system.
Benefits of implementing Accrual Accounting
There are many benefit of implementation accrual accounting in the Malaysian Public Sector. First, it can show precisely the true financial position of the public sector agencies. It is because this method can show exactly how much an organization earned rather than how much they have collected their revenue for an accounting period. This concept matches only those expenses, which have been accrued for the same period with the revenue earned.
One of the key objectives of moving from cash reporting to accruals is to make to the true cost of government more transparent. For example, accrual accounting will see the correct attribution of the pension costs of government employees to the time period when they are employed and accumulating their pension rights, rather than reporting this as an unrelated expenditure once they have retired under the cash system.
Next, accrual accounting has been accepted as a standard to measure performance in ways similar to those in the private sector. This basis has been accepted and practised throughout the world as the profit measured implies the level of success in a particular period. The cash basis on the other hand, only informs the users of accounting information the amount of cash inflows and outflows in a particular period, thus restricting them to measure the performance of the relevant government agencies and making inter-sector comparisons.
The presentation of both operating statement and statement of financial position would allow the calculation of performance indicators. These performance indicators could be compared with targets with other public sector entities and with private sector entities. This should result in more efficient public sector operations.
Accrual accounting will allow for a distinction to be made between capital and operating expenditure. This is important for an assessment of ‘inter-generational equity’ issues. Where there is no distinction between capital and operating expenditure, it is argued that the generation, which pays for non current assets, subsidies later generations, which receive the benefits from those assets. An accrual systems, which distinguishes between capital and operating expenditure and which charges depreciation on assets, would enable capital costs to be spread across generations provided that prices are set to cover the full cost of providing services.
Accrual accounting provides a more comprehensive accountability framework than the cash-based system. It focuses attention on the effects of decision made by government that may be favourable or otherwise. Accrual management framework also requires full financial implications to be considered in reaching a particular decision.
Other benefits of implementing accrual accounting is fair presentation. The transparency of the financial statement and accountability of government can be show. It is because the governments are accountable to citizens, but increasingly also to other stakeholders, like the economy. Next, the decision making. It will be improved especially in areas with capital expenditure. For example, government interventions such as loans, asset purchase, nationalization and non-exchange transactions. Second, it also can strengthen the government financial management. By using accrual accounting we can identify non-bond types of debt more easily and the debt shifting is effectively prevented. Beside that, assets becomes more actively managed, leading to disinvestment or better usage. It also enhance long term fiscal sustainability and service performance. (Policy Discussion on International Public Sector Accounting Standards Medan, Indonesia; 28 June 2013)
Based on the article ‘The Advantages of Accrual Accounting’ written by Kyra Sheahan. The first benefit of accrual accounting for the performance of management is an accrual accounting is effective for financial management and monitoring activities. In an accrual accounting system, companies receive a more immediate reflection of how much money they have coming in, and what they can expect to see on future expense reports. With this type of recording methodology, business analyst can look for financial trends and compute current cash flows statements on a regular basis; keeping everybody as up-to-date as possible. Next, accuracy. Accrual accounting gives a truer depiction of their resources and financial responsibilities. This serves as a company advantage because according to Inc.com it allows business to properly mange the ebb and flow of financial activity. Income and debts can be more accurately assessed with the accrual accounting. After that, planning for the future. Cash accounting is an after the fact accounting style, while accrual accounting is done in real time. According to World Bank, accrual accounting makes it easy for business managers to plan the future. Since they do not have to wait for cash to be received to see what their profits are, professionals can strategize ways to improve sales or generate more revenue as they spot financial plateaus. This keeps a company progressive, which is crucial to viability.
Accountability has been the major motivation for governments to shift to accrual accounting as it is believed that accrual accounting will improve accountability (Chan, 2003).
Following the introduction of accrual accounting, there were significant improvements in assets management (Baboojee, 2011). The improved quality of information provided by accrual accounting help in decision making for assets acquisition.
Discussion of Accrual Accounting
The summary from the research study by Azrina Hani Azmi and Nafsiah Mohamed, Accounting Research Institute ; Faculty of Accountancy, Universiti Teknologi MARA, Malaysia is the study discovered that accounting employees in the MOE are ready for the implementation of accrual accounting as they are ready to move from cash accounting to accrual accounting. Accounting employees are also ready to change their mind set and implement accrual accounting as they believe the implementation of accrual accounting is a way to make government accounting more transparent and efficient. However, there are major concerns in moving towards accrual accounting. From the study, it shows that current accounting employees are not qualified and skilled in dealing with the implementation of accrual accounting. Most of the accounting employees were not exposed to the presentation of the financial statement used by private sector which is based on accrual accounting during the training. In addition, there is insufficient on-going in-house training and insufficient roadmap-approach provided by the top management and Accountant General Department respectively during the implementation process of accrual accounting. Furthermore, over reliance on external consultant would also become major concerns in moving towards accrual accounting as it results in high cost of budgeting. It can be said that transition to accrual accounting is not an easy process which requires several years to be fully achieved. Thus, all of the major concerns need to be taken into consideration and be rectified to ensure the successful of transition to accrual accounting.
Although accounting employees are ready for the implementation of accrual accounting, there are challenges which will hamper the process such as lack of training provided, lack of knowledge, difficulties in collection data of asset, probability of current system to inter-grate with the new system, lack of support from top management and insufficient time frame. If MOE does not overcome these challenges, the process of implementation of accrual accounting would not take off smoothly. Hence, it is vital for the Malaysian Government to monitors the progress of implementing accrual accounting in all ministries in order to provide an opportunity to demonstrate successful management of its resources. Applying the Luder’s Contigency Model to this study, it shows that there is a strong stimulus from government as the announcement to adopt accrual accounting has been set as a national agenda. Preparers of information or accounting employees are ready for the changes of accounting system as they believed the adoption of accrual accounting would result in better performance of government reporting and budgeting.
From Malaysian Journal of Business and Economics ( MJBE) Vol. 1 No. 2, December 2014, what we can summarized are the reforms in the two pioneer countries as a success while other researchers argued whether accrual accounting reforms are responsible for economic growth and the fiscal discipline of those countries. Nonetheless, the experiences of countries that have fully implemented accrual accounting such as New Zealand, Australia, United Kingdom and many more can assist any other county that is moving towards the accrual accounting adoption. Both countries can be said to be successful in achieving their objectives as they have demonstrated improved fiscal performance and better in managing their assets since the adoption of accrual accounting.
However, it is important for developing countries such as Malaysia to consider the issues or challenges in implementing accrual accounting in order to ensure a successful of migration towards accrual accounting. In Malaysia, especially, the challenge to have sufficient qualified staff is likely to be of more importance compared to the developed countries. Still, it can be learned from past experiences that the change can be done but the journey towards the goal may not be easy. With the will of the government for Malaysia to be a developed country by 2020, the change is not impossible to be made.
In summary, based on the International Journal of Business Management (IJBM), the study has provided the adoption of accrual accounting from the perspective of federal and state governments in Malaysia, with an emphasis on the issues and challenges faced during the process, as well as strategies for the implementation. It can be concluded that the implementation of accrual accounting among different levels of governments in Malaysia does not have a huge difference. Majority of the issues and challenges are faced by federal and state governments, and similar strategies are used to tackle the issues and challenges. However, there is a major distinction that lies in the strategy used in deciding accrual accounting system to be used. The federal government appointed a consultant to assist them in developing the accrual accounting needed for the reform while Sabah’s state government took a distinct path by developing their own accrual accounting system using their own expertise. However, the successfulness of the accrual accounting reform in Malaysia has yet to be determined. It is hoped that federal government of Malaysia would be able to implement accrual accounting in the nearest time, which would be followed closely by the state governments. Thus, the issues and challenges mentioned by the employees must be dealt carefully for ensuring a successful outcome, as an effort to assist Malaysia in achieving its aspiration of becoming a developed nation.
As we discussed earlier in the discussion part, there are some recommendation that can be made to overcome the challenges to smoothly the process of the government on adopting accrual basis accounting from the cash basis in the public sector. The first recommendation that can be made are by providing a training program to all government personnel. Meaning of that, the accountant and the personnel of the government will have knowledge of accrual accounting. By that, the personnel of the public sector will have a better understanding to using the accrual concept of accounting in all the transaction of the government later. Effect of that, it will easier and faster the process of transition by the government on adopting the accrual accounting because, the employee of public sector familiarize with the system and the latest accounting procedure to be use in all the transaction.
Next, the recommendation that can overcome the difficulties on transitioning from cash basis to accrual basis in the public sector are by inviting pioneer country that already adopting this accounting standard. Meaning of that, we can invite a representative from the pioneer country such as New Zealand to guide us on the transitioning process to accrual accounting. It is because, New Zealand already using the accrual accounting basis on its public sector in the earlier of 1990s. From there, they already have a better understanding on using accrual accounting basis. By having their expertise in our country, they can be helping us on developing a better accounting software from the current we have. Furthermore, they also can be as a guidance to us on helping in the process of recognizing all the current transaction of the government from the cash basis to the accrual basis. In addition to that, it also will make all the accountant and government personnel of our country enjoying on job training and can gain experiences from the guidance of the pioneer country representative.
Lastly, another strategy should be emphasized to overcome the challenges, such as, the communication strategy. AGD has carried out a number of communication strategies to ensure federal and state employees are well informed about the change process. The communication strategy includes briefings, seminars, conference, workshops, and town hall sessions. Printed documents are also used during the change process such as quarterly bulletins (Fokus Akruan), pamphlets and posters. A website specifically for the accrual accounting implementation and FAQ help-desk are also established to help disseminate the latest information about the implementation. Surveys are also conducted to get the feedback from the employees involved in the change process. Moreover, the state governments are also consistently following the ongoing implementation process at federal level by engaging with several series of meetings and briefings with the federal government. Hence, the information on the change process will be delivered more effectively and it will maximize the dissemination of information.
For the conclusion, the cash basis and accrual basis of accounting method has its own benefits and disadvantages. It is due that cash basis is easy to implement either accrual basis accounting that involving more complex procedure. But, by using the accrual concept accounting, it will provide a better transparency and better stewardship of the government financial statement to the public. This is because the priority of the public sector accounting is to ensure the government is able to manage and safeguard the public money in order to provide a better services to the people in term of guarding the welfare of the people, but also to develop the country. Currently, the public sector accounting in the government of Malaysia are in the phase of transitioning its accounting method from cash basis to accrual basis. By transitioning the accounting concept to the accrual basis, the government are able to provide a better planning and services to be implement in the country and the people will gain more confidence in the government spending due to adopting the accounting concept that is more transparent and reliable that based on the standard the being used globally.
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